The major tobacco companies, once again, made their annual payments to the 46 states and territories under the Master Settlement Agreement (MSA), reinforcing the tobacco producers’ commitment to the MSA.
Under the MSA, signed in 1998, major cigarette producers will pay, in perpetuity, an amount equaling over $200 billion for tobacco-related health care costs. In return, states and territories that are part of the agreement agreed not to sue the companies for cigarette related public health costs.
Philip Morris USA, which accounts for half of the funds, made its full $3.5 billion payment. R.J. Reynolds, the second largest cigarette producer, paid $1.4 billion and deposited another $561.2 million into a special escrow account. The funds will remain in the account pending final determination of whether the states have diligently enforced the MSA. Lorillard, the third largest tobacco company, paid out $700 million to the states and placed $110.8 million in escrow. One smaller producer, General Tobacco, also reported that it made its annual contribution of $100 million.
Tobacco producers, including Philip Morris, assert that the MSA should have been more strictly enforced. The states maintain they have provided strong action to make the MSA work. A portion of each year’s payment may be escrowed pending resolution, but Philip Morris made its full payment anyway.
Commitment to the MSA
The MSA anticipates occasional disputes among the parties and provides for various means of dispute resolution. The determination of market share loss, and its causes, will take a number of years. Tobacco companies may wind up owing either the full amount predetermined by a formula, or somewhat less under certain circumstances. By making its full payment each year, Philip Morris indicates its strong commitment to the MSA and its enduring importance to the tobacco industry.
Bond issues backed by the receipt of tobacco settlement revenues are structured to meet a variety of scenarios including the potential receipt of more revenues than expected, as well as less. Rating agencies review these scenarios in depth prior to issuing ratings on the bonds and must be comfortable with various projections before a rating is issued.
To date, investors have been rewarded by this sector as tobacco companies generate strong profits. They have also witnessed the dismissal of much litigation. This week’s payments once again signal the tobacco producers’ and states’ commitment to making the MSA continue to work to the benefit of both
