UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2013~~2014


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-08940

ALTRIA GROUP, INC.

(Exact name of registrant as specified in its charter)



Virginia	13-3260245
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6601 West Broad Street, Richmond, Virginia	23230
(Address of principal executive offices)	(Zip Code)

804-274-2200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Name of each exchange on which registered
Common Stock, $0.33 ¹/3 par value	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) þ Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if smaller reporting company) Smaller operating company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨Yes þ No

As of June 30, ~~2013,~~2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately ~~$70~~$83 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.



Class	Outstanding at February ~~14, 2014~~13, 2015
Common Stock, $0.33 ¹/3 par value	~~1,992,853,529~~1,969,316,914 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of shareholders to be held on May ~~14, 2014,~~20, 2015, to be filed with the Securities and Exchange Commission on or about April ~~3, 2014~~9, 2015, are incorporated by reference into Part III hereof.



	TABLE OF CONTENTS
		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	4
Item 1B.	Unresolved Staff Comments	8
Item 2.	Properties	8
Item 3.	Legal Proceedings	9
Item 4.	Mine Safety Disclosures	9

PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
Item 6.	Selected Financial Data	12
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	3836
Item 8.	Financial Statements and Supplementary Data	3937
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~109~~107
Item 9A.	Controls and Procedures	~~109~~107
Item 9B.	Other Information	~~109~~107

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~109~~107
Item 11.	Executive Compensation	~~110~~108
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~110~~108
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~110~~108
Item 14.	Principal Accounting Fees and Services	~~111~~108

PART IV
Item 15.	Exhibits and Financial Statement Schedules	~~111~~109
Signatures		~~117~~114

~~Report of Independent Registered Public Accounting Firm on Financial Statement Schedule~~		~~S-1~~

~~Valuation and Qualifying Accounts~~		~~S-2~~

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Part I

Item 1. Business.

General Development of Business

▪General: Altria Group, Inc. is a holding company incorporated in the Commonwealth of Virginia in 1985. At December 31, ~~2013~~2014, Altria Group, Inc.’s ~~direct and indirect~~ wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged predominantly in the manufacture and sale of cigarettes ~~and certain smokeless tobacco products~~ in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and is a wholly-owned subsidiary of PM USA; and UST LLC (“UST”), which through its ~~direct and indirect~~ wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark LLC (“Nu Mark”), ~~an indirect~~a wholly-owned subsidiary ~~of Altria Group, Inc.,~~that is engaged in the ~~development~~manufacture and ~~marketing~~sale of innovative tobacco products, ~~for adult tobacco consumers.~~and Philip Morris Capital Corporation (“PMCC”), ~~another~~a wholly-owned subsidiary ~~of Altria Group, Inc.,~~that maintains a portfolio of finance assets, substantially all of which are leveraged ~~and direct finance~~ leases. ~~In addition,~~Other Altria Group, Inc. wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales, distribution and consumer engagement services to certain Altria Group, Inc. operating subsidiaries, and Altria Client Services Inc., which provides various support services, such as legal, regulatory, finance, human resources and external affairs, to Altria Group, Inc. and its subsidiaries.

At December 31, 2014, Altria Group, Inc. also held approximately ~~26.8%~~27% of the economic and voting interest of SABMiller plc (“SABMiller”) at ~~December 31, 2013~~, which Altria Group, Inc. accounts for under the equity method of accounting.

On January 6, 2009, Altria Group, Inc. acquired all of the outstanding common stock of UST. The transaction was valued at approximately $11.7 billion, which represented a purchase price of $10.4 billion and approximately $1.3 billion of UST debt, which together with acquisition-related costs and payments of approximately $0.6 billion, represented a total cash outlay of approximately $11 billion. This acquisition was financed with long-term borrowings. As a result of the acquisition, UST became an indirect wholly-owned subsidiary of Altria Group, Inc.

•▪Source of Funds: Because Altria Group, Inc. is a holding company, its access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At December 31, ~~2013~~2014, Altria Group, Inc.’s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their ~~common stock.~~equity interests. In addition, Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends.

Financial Information About Segments

businesses to Altria Group, Inc.’s consolidated results. ~~Prior years’ amounts have been reclassified to conform with the current year’s presentation.~~

Altria Group, Inc.’s chief operating decision maker reviews operating companies income to evaluate the performance of, and

allocate resources to, the segments. Operating companies income for the segments ~~excludes~~is defined as operating income before amortization of intangibles and general corporate ~~expenses and amortization of intangibles.~~expenses. Interest and other debt expense, net, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by Altria Group, Inc.’s chief operating decision maker. Net revenues and operating companies income (together with a reconciliation to earnings before income taxes) attributable to each such segment for each of the last three years are set forth in Note 15. Segment Reporting to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K (“Item 8”). Information about total assets by segment is not disclosed because such information is not reported to or used by Altria Group, Inc.’s chief operating decision maker. Segment goodwill and other intangible assets, net, are disclosed in Note 3.4. Goodwill and Other Intangible Assets, net to the consolidated financial statements in Item 8 (“Note 3”4”). The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies to the consolidated financial statements in Item 8 (“Note 2”).

The relative percentages of operating companies income (loss) attributable to each reportable segment and the all other category were as follows:


	2013		2012		2011		2014		2013		2012

Smokeable products	84.5	%	83.7	%	90.5	%	87.2	%	84.5	%	83.7	%
Smokeless products	12.2		12.5		13.6		13.4		12.2		12.5
Wine	1.4		1.4		1.4		1.7		1.4		1.4
All other	1.9		2.4		(5.5	)	(2.3	)	1.9		2.4
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

For items affecting the comparability of the relative percentages of operating companies income (loss) attributable to each reportable segment, see Note 15. Segment Reporting to the consolidated financial statements in Item 8 (“Note 15”).

Narrative Description of Business

Portions of the information called for by this Item are included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Operating Results by Business Segment of this Annual Report on Form 10-K.

Tobacco Space

Altria Group, Inc.’s tobacco operating companies include PM USA, USSTC and other subsidiaries of UST, Middleton and Nu Mark. ~~In addition,~~ Altria Group Distribution Company provides

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~~centralized~~ sales, distribution and consumer engagement services ~~for~~to Altria Group, Inc.’s tobacco operating companies.

The products of Altria Group, Inc.’s tobacco subsidiaries include smokeable tobacco products comprised of cigarettes manufactured and sold by PM USA and machine-made large

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cigars and pipe tobacco manufactured and sold by Middleton; smokeless tobacco products, substantially all of which are manufactured and sold ~~primarily~~ by USSTC; and innovative tobacco products, including ~~electronic cigarettes developed~~e-vapor products manufactured and ~~marketed~~sold by Nu Mark. Altria Group, Inc.’s tobacco subsidiaries believe that a significant number of adult tobacco consumers switch between tobacco categories or use multiple forms of tobacco products and that approximately 50% of adult smokers say they are interested in trying innovative tobacco products.

▪Cigarettes: PM USA is the largest cigarette company in the United States, with total cigarette shipment volume in the United States of approximately ~~129.3~~125.4 billion units in ~~2013,~~2014, a decrease of ~~4.1%~~3.0% from ~~2012.~~2013. Marlboro, the principal cigarette brand of PM USA, has been the largest-selling cigarette brand in the United States for over 35 years.

▪Cigars: Middleton is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco to customers, substantially all of which are located in the United States. Middleton sources ~~the production of~~ a portion of its cigars ~~overseas.~~from an importer through a third-party contract manufacturing arrangement. Total shipment volume for cigars was approximately ~~1.2~~1.3 billion units in ~~2013, a decrease~~2014, an increase of ~~3.2%~~6.1% from ~~2012.~~2013. Black & Mild is the principal cigar brand of Middleton.

▪Smokeless tobacco products: USSTC is the leading producer and marketer of moist smokeless tobacco (“MST”) products. The smokeless products segment includes the premium brands, Copenhagen and Skoal, value brands, Red Seal and Husky, and Marlboro Snus, a premium PM USA spit-free smokeless tobacco product. Substantially all of the smokeless tobacco products are manufactured and sold to customers in the United States. Total smokeless products shipment volume was ~~787.5~~793.3 million units in ~~2013,~~2014, an increase of ~~3.2%~~0.7% from ~~2012.~~2013.

▪Innovative tobacco products: Nu Mark participates in the e-vapor category and has developed and commercialized other innovative tobacco products. In addition, ~~Altria Group, Inc.’s tobacco subsidiaries have entered~~Nu Mark sources the production of its e-vapor ~~category.~~products through overseas contract manufacturing arrangements. In 2013, Nu Mark introduced MarkTen ~~electronic cigarettes~~e-vapor products in Indiana and Arizona. During 2014, Nu Mark ~~plans to expand~~expanded MarkTen ~~nationally beginning in the second quarter of 2014. On February 3,~~nationally. In April 2014, ~~Altria Group, Inc. announced~~ Nu ~~Mark’s entry into an agreement to acquire~~Mark acquired the e-vapor business of Green Smoke, Inc. and its affiliates (“Green Smoke”), which ~~have~~has been selling e-vapor products since 2009. For a further discussion of the acquisition of Green Smoke, see Note 3. Acquisition of Green Smoke to the consolidated financial statements in Item 8 (“Note 3”). Further, in December 2013, Altria Group, Inc.’s subsidiaries entered into a series of agreements with Philip Morris International Inc. (“PMI”) pursuant to which Altria Group, Inc.’s subsidiaries provide an exclusive license to PMI to sell Altria Group, Inc.’s subsidiaries’ e-vapor products outside the United States, and ~~PMI~~PMI’s subsidiaries provide an exclusive license to Altria Group, Inc.’s subsidiaries to sell two of PMI’s heated tobacco product technologies in the United States.

▪Distribution, Competition and Raw Materials: Altria Group, Inc.’s tobacco subsidiaries sell their tobacco products

principally to wholesalers (including distributors), large retail organizations, including chain stores, and the armed services.

The market for tobacco products is highly competitive, characterized by brand recognition and loyalty, with product

quality, taste, price, product innovation, marketing, packaging and distribution constituting the significant methods of competition. Promotional activities include, in certain instances and where permitted by law, allowances, the distribution of incentive items, price promotions and other discounts, including coupons, product promotions and allowances for new products.

In June 2009, the President of the United States of America signed into law the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”), which provides the United States Food and Drug Administration (“FDA”) with broad authority to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of cigarettes, cigarette tobacco and smokeless tobacco products; the authority to require disclosures of related information; and the authority to enforce the FSPTCA and related regulations. The ~~law also grants the FDA authority to extend its application, by regulation, to all other tobacco products, including cigars, pipe tobacco and electronic cigarettes. The~~ FSPTCA imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail. The law also grants the FDA ~~has indicated that it intends~~authority to ~~regulate cigars, electronic cigarettes and~~extend the FSPTCA application, by regulation, to all other tobacco products, ~~but it has not indicated a timeline~~including cigars, pipe tobacco and electronic cigarettes. In April 2014, the FDA issued proposed regulations for other tobacco products, which as proposed would include machine-made large cigars, e-vapor products (such as electronic cigarettes), pipe tobacco and chewable tobacco-derived nicotine products marketed and sold by some of our tobacco subsidiaries. The proposed regulations would impose the ~~issuance of final regulations.~~FSPTCA regulatory framework, including the foregoing measures, on products manufactured, marketed and sold by Nu Mark and Middleton with potentially wide-ranging impact on their businesses. PM USA and ~~a subsidiary of~~ USSTC are subject to quarterly user fees as a result of ~~this legislation,~~the FSPTCA, and the cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. PM USA, USSTC and other U.S. tobacco manufacturers have agreed to other marketing restrictions in the United States as part of the settlements of state health care cost recovery actions.

In the United States, under a contract growing program, PM USA purchases burley and flue-cured leaf tobaccos of various grades and styles directly from tobacco growers. Under the terms of this program, PM USA agrees to purchase the amount of tobacco specified in the grower contracts. PM USA also purchases a portion of its United States tobacco requirements through leaf merchants. In 2003, PM USA and certain other defendants reached an agreement with plaintiffs to settle a suit filed on behalf of a purported class of tobacco growers and quota-holders. The agreement includes a commitment by each settling manufacturer defendant, including PM USA, to purchase a certain percentage of its leaf requirements from U.S. tobacco growers over a period of at least 10 years. These quantities are subject to adjustment in accordance with the terms of the settlement agreement.

Tobacco production in the United States was historically subject to government controls, including the production control programs administered by the United States Department of Agriculture (the “USDA”). In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”), which applied to PM USA, Middleton and USSTC, was signed into law. ~~PM USA, USSTC, and Middleton are all subject to obligations imposed by FETRA.~~ FETRA eliminated the federal

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tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the 10-year buy-out, iswhich expired after the third quarter of 2014, was approximately $9.5 billion and ~~is being~~was paid ~~over 10 years~~ by manufacturers and importers of each kind of tobacco ~~product.~~product subject to federal excise tax (“FET”). The cost ~~is being~~was allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. As

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a result of FETRA, Altria Group, Inc.’s subsidiaries recorded ~~approximately $0.4 billion of~~ charges to cost of sales of approximately $0.3 billion during the year ended December 31, 2014 and approximately $0.4 billion for each of the years ended December 31, 2013 ~~2012~~ and ~~2011. Obligations imposed by FETRA expire after~~2012.

The quota buy-out and the ~~third quarter of 2014.~~

In February 2011, PM USA filed a lawsuit in federal court challenging the USDA’s method for calculating the 2011 and future tobacco product class shares that are used to allocate liability for the industry payments that fund the FETRA buy-out described above and used by the FDA to calculate the industry’s FDA user fees. PM USA asserts in this litigation that the USDA violated FETRA and its own regulations by failing to apply the most current federal excise tax (“FET”) rates enacted by Congress which became effective in April 2009, in calculating the class share allocations. PM USA has filed administrative appeals of its FETRA assessments beginning in fiscal year 2011 (all of which have been denied by the USDA) and has submitted a petition for rulemaking with the USDA (which petition was denied by the USDA in November 2011), in each case asserting that the USDA erroneously failed to base the FETRA class share allocations on the current FET rates. PM USA is appealing the USDA’s calculations methodology as well as the denialexpiration of the petition for rulemaking and the denial of its quarterly assessment challenges. The Cigar Association of America has joined the litigation as a defendant intervenor. In October 2012, the district court dismissed the case over PM USA’s objection and PM USA appealed. On November 20, 2013, the appellate court affirmed the district court’s decision.

~~The~~ quota buy-out did not have a material impact on Altria Group, Inc.’s ~~2013~~2014 consolidated results, and Altria Group, Inc. does not currently anticipate that the quota buy-out will have a material adverse impact on its consolidated results in 2014, when the obligations imposed by FETRA will expire.results.

USSTC purchases burley, dark fire-cured and air-cured tobaccos of various grades and styles from domestic tobacco growers under a contract growing program as well as from leaf merchants.

Middleton purchases burley and dark air-cured tobaccos of various grades and styles through leaf merchants. Middleton does not have a contract growing program.

Altria Group, Inc.’s tobacco subsidiaries believe there is an adequate supply of tobacco in the world markets to satisfy their current and anticipated production requirements. See Item 1A. Risk Factors of this Annual Report on Form 10-K (“Item 1A”) and Tobacco Space - Business Environment - Price, Availability and Quality of Agricultural Products in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion of risks associated with tobacco supply.

Wine

~~Altria Group, Inc. acquired UST and its premium wine business, Ste. Michelle, in January 2009.~~ Ste. Michelle is a producer of premium varietal and blended table wines. Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle, Columbia Crest and 14 Hands,and owns wineries

in or distributes wines from several other wine regions and foreign countries. Ste. Michelle’s total ~~2013~~2014 wine shipment volume of approximately ~~8.0~~8.4 million cases increased ~~5.0%~~4.8% from ~~2012~~2013.

Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley and Erath in Oregon. In addition, Ste. Michelle imports and markets Antinori, Torres and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States.

▪Distribution, Competition and Raw Materials: Key elements of Ste. Michelle’s strategy are expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers, and a focus on improving product mix to higher-priced, premium products.

Ste. Michelle’s business is subject to significant competition, including competition from many larger, well-established domestic and international companies, as well as from many smaller wine producers. Wine segment competition is primarily based on quality, price, consumer and trade wine tastings, competitive wine judging, third-party acclaim and advertising. Substantially all of Ste. Michelle’s sales occur through state-licensed distributors.

regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle’s wine business.

Ste. Michelle uses grapes harvested from its own vineyards or purchased from independent growers, as well as bulk wine purchased from other sources. Grape production can be adversely affected by weather and other forces that may limit production. At the present time, Ste. Michelle believes that there is a sufficient supply of grapes and bulk wine available in the market to satisfy its current and expected production requirements.

Financial Services Business

In 2003, PMCC ceased making new investments and began focusing exclusively on managing its portfolio of finance assets in order to maximize its operating results and cash flows from its existing lease portfolio activities and asset sales. For further information on PMCC’s finance assets, see Note 7. Finance Assets, net to the consolidated financial statements in Item 8 (“Note 7”).

Other Matters

▪Customers: The largest customer of PM USA, USSTC and Middleton, McLane Company, Inc., accounted for approximately 27% of Altria Group, Inc.’s consolidated net revenues for each of the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012. ~~These~~Substantially all of these net revenues were reported in the smokeable products and smokeless products segments.

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Sales to three distributors accounted for approximately ~~66%~~67% of net revenues for the wine segment for the year ended December 31, 2014 and 66% for each of the years ended December 31, ~~2013~~, ~~2012~~2013 and ~~2011~~2012.

▪Employees: At December 31, ~~2013~~2014, Altria Group, Inc. and its subsidiaries employed approximately 9,000 people.

▪Executive Officers of Altria Group, Inc.: The disclosure regarding executive officers is included in Item 10. Directors, Executive Officers and Corporate Governance - Executive Officers as of February ~~14, 2014~~13, 2015 of this Annual Report on Form 10-K.

▪Research and Development: Research and development expense for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 is set forth in Note 17. Additional Information to the consolidated financial statements in Item 8.

▪Intellectual Property: Trademarks are of material importance to Altria Group, Inc. and its operating companies, and are protected by registration or otherwise. In addition, as of December 31, ~~2013~~2014, the portfolio of over ~~600~~650 United States patents owned by Altria Group, Inc.’s businesses, as a whole, was material to Altria Group, Inc. and its tobacco businesses. However, no one patent or group of related patents was material to Altria Group, Inc.’s business or its tobacco businesses as of December 31, ~~2013~~2014. Altria Group, Inc.’s businesses also have proprietary secrets, technology, know-how, processes and other intellectual property rights that are protected by appropriate confidentiality measures. Certain trade secrets are material to Altria Group, Inc. and its tobacco and wine businesses.

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▪Environmental Regulation: Altria Group, Inc. and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States: The Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations. As discussed in Note 2, Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria Group, Inc. may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation costs or damages and the making of related

expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.’s consolidated results of operations, capital expenditures, financial position or cash flows.

Financial Information About Geographic Areas

Substantially all of Altria Group, Inc.’s net revenues are from sales generated in the United States for each of the last three fiscal years and substantially all of Altria Group, Inc.’s long-lived assets are located in the United States.

Available Information

Altria Group, Inc. is required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Investors may read and copy any document that Altria Group, Inc. files, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access Altria Group, Inc.’s SEC filings.

Altria Group, Inc. makes available free of charge on or through its website (www.altria.com) its Annual Report on

Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after Altria Group, Inc. electronically files such material with, or furnishes it to, the SEC. Investors can access Altria Group, Inc.’s filings with the SEC by visiting www.altria.com/secfilings.

The information on the respective websites of Altria Group, Inc. and its subsidiaries is not, and shall not be deemed to be, a part of this report or incorporated into any other filings Altria Group, Inc. makes with the SEC.

Item 1A. Risk ~~Factors.~~Factors

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our ~~operating~~ results of operations, our cash flows, our financial position and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.

We ⁽¹⁾ may from time to time make written or oral forward-looking statements, including earnings guidance and other

¹ This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among Altria Group, Inc. and its various operating subsidiaries or when any distinction is clear from the context.

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statements contained in filings with the SEC, in reports to security holders, ~~and in~~ press releases and investor webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “forecasts,” “intends,” “projects,” “goals,” “objectives,” “guidance,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions that may prove to be inaccurate. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. You should bear this in mind as you consider forward-looking statements and whether to invest in or remain invested in Altria Group, Inc.’s securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. ___________________________________________________

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We elaborate on these and other risks we face throughout this document, particularly in the “Business Environment” sections preceding our discussion of operating results of our subsidiaries’ businesses in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K (“Item 7”). You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time except as required by applicable law.

~~Tobacco-Related Litigation~~Unfavorable litigation outcomes could materially adversely affect the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or the businesses of one or more of its subsidiaries.

Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims may be raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband-related claims, patent infringement, employment matters, claims for contribution and claims of competitors and distributors.

in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts. Furthermore, in those cases where plaintiffs are successful, Altria Group, Inc. or its subsidiaries may also be required to pay interest and attorneys’ fees.

several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although we cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or the businesses of one or more of its subsidiaries, could be materially adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.

In certain litigation, PM USA faces potentially significant non-monetary remedies. For example, in the lawsuit brought by the United States Department of Justice, discussed in Note 18, the district court did not impose monetary penalties but ordered significant non-monetary remedies, including the issuance of “corrective statements” in various media.

Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty, and significant challenges remain.

It is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or the businesses of one or more of its subsidiaries, could be materially adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so. See Item 3. Legal Proceedings of this Annual Report on Form 10-K (“Item 3”), Note 18 and Exhibits 99.1 and 99.2 to this

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Annual Report on Form 10-K for a discussion of pending tobacco-related litigation.

Significant federal, state and local governmental actions, including actions by the FDA, and various private sector actions may continue to have an adverse impact on our tobacco subsidiaries’ businesses.

As described in Tobacco ~~Regulation and Control Action~~ Space - Business Environment in ~~the Public and Private Sectors~~Item 7,

~~Our tobacco subsidiaries face~~PM USA faces significant governmental and private sector ~~action,~~actions, including efforts aimed at reducing the incidence of tobacco use ~~restricting marketing~~ and advertising, imposing regulations on packaging, requiring warnings and disclosure of flavors or other ingredients, prohibiting the sale of tobacco products with certain characterizing flavors or other characteristics, requiring premarket authorization of certain tobacco products, limiting or prohibiting the sale of tobacco products by certain retail establishments and the sale of tobacco products in certain package sizes, andefforts seeking to hold ~~them~~PM USA responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke.

~~PM USA, USSTC and other Altria Group, Inc. subsidiaries are subject to regulation, and may become subject to additional regulation, by the FDA, as discussed in detail in~~ ~~Tobacco Space - Business Environment - FSPTCA and FDA Regulation~~ in Item 7. We cannot predict how the FDA will implement and enforce its statutory authority, including by promulgating additional regulations, taking other regulatory actions and pursuing possible investigatory or enforcement actions.

~~Governmental~~ These actions, combined with the diminishing social acceptance of ~~smoking and private actions to restrict~~ smoking, have resulted in reduced cigarette industry volume, and we expect that these factors will continue to reduce cigarette consumption levels.

Actions by the FDA, other federal, state or local governments or agencies, ~~and private sector entities, such as~~including those ~~which~~actions described in Tobacco Space - Business Environment in Item 7, may impact the consumer acceptability of tobacco products, limit adult tobacco consumer choices, delay or prevent the launch of new or modified tobacco

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products or products with claims of reduced risk, restrict communications to adult tobacco consumers, restrict the ability to differentiate tobacco products, create a competitive advantage or disadvantage for certain tobacco companies, impose additional manufacturing, labeling or packing requirements, require the recall or removal of tobacco products from the marketplace (including without limitation as a result of product contamination), interrupt manufacturing or otherwise significantly increase the cost of doing business, or restrict or prevent the use of specified tobacco products in certain locations or the sale of tobacco products by certain retail ~~establishments,~~establishments. Any one or more of these actions may have a material adverse impact on the business, consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its tobacco subsidiaries.

~~Excise Taxes~~Tobacco products are subject to substantial taxation, which could have an adverse impact on sales of the tobacco products of Altria Group, Inc.’s tobacco subsidiaries.

Tobacco products are subject to substantial excise taxes, and significant increases in tobacco product-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States at the state, federal and local levels. Tax increases are expected to continue to have an adverse impact on sales of the tobacco products of our tobacco subsidiaries through lower consumption levels and the potential shift in adult consumer purchases from the premium to the ~~non-~~

~~premium~~non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an adverse impact on the reported share performance of tobacco products of Altria Group, Inc.’s tobacco subsidiaries. For further discussion, see Tobacco Space - Business Environment - Excise Taxes in Item 7.

~~Increased Competition in~~Our tobacco businesses face significant competition and their failure to compete effectively could have an adverse effect on the ~~United States Tobacco Categories~~business of Altria Group, Inc.’s tobacco subsidiaries.

Each of Altria Group, Inc.’s tobacco subsidiaries operates in highly competitive tobacco categories. Settlements of certain tobacco litigation in the United States, among other factors, have resulted in substantial cigarette price increases. PM USA faces competition from lowest priced brands sold by certain United States and foreign manufacturers that have cost advantages because they are not parties to these settlements. These manufacturers may fail to comply with related state escrow legislation or may avoid escrow deposit obligations on the majority of their sales by concentrating on certain states where escrow deposits are not required or are required on fewer than all such manufacturers’ cigarettes sold in such states. Additional competition has resulted from diversion into the United States market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by third parties, the sale of cigarettes by third parties over the Internet and by other means designed to avoid collection of applicable taxes, and imports of foreign lowest priced brands. USSTC faces significant competition in the smokeless tobacco category and has

experienced consumer down-trading to lower-priced brands. In the cigar category, additional competition has resulted from increased imports of machine-made large cigars manufactured offshore.

~~New Product Technologies~~

Altria Group, Inc.’s subsidiaries continue to seek ways to develop and to commercialize new product technologies that may reduce the health risks associated with current tobacco products, while continuing to offer adult tobacco consumers (within and outside the United States) products that meet their taste expectations and evolving preferences. Potential solutions include tobacco-containing and nicotine-containing products that reduce or eliminate exposure to cigarette smoke and/or constituents identified by public health authorities as harmful. These efforts may include arrangements with, or investments in, third parties. Our subsidiaries may not succeed in their efforts. If they do not succeed, but one or more of their competitors does, our subsidiaries may be at a competitive disadvantage. Further, we cannot predict whether regulators, including the FDA, will permit the marketing or sale of such products with claims of reduced risk to consumers or whether consumers’ purchase decisions would be affected by such claims. Nor can we predict whether regulators will impose an unduly burdensome regulatory framework on such products. Any of these developments could adversely affect the commercial viability of any such new products.

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~~Adjacency Growth Strategy~~

Altria Group, Inc. and its subsidiaries have adjacency growth strategies involving moves and potential moves into complementary products or processes. We cannot guarantee that these strategies, or any products introduced in connection with these strategies, will be successful. For a related discussion, see ~~New Product Technologies~~ ~~above.~~

~~Tobacco Price, Availability and Quality~~

Any significant change in tobacco leaf prices, quality or availability could adversely affect our tobacco subsidiaries’ profitability and business. For a discussion of factors that influence leaf prices, availability and quality, see ~~Tobacco Space - Business Environment - Tobacco Price, Availability and Quality~~ ~~in Item 7~~.

~~Tobacco Key Facilities; Supply Security~~

Altria Group, Inc.’s tobacco subsidiaries face risks inherent in reliance on a few significant facilities and a small number of significant suppliers. A natural or man-made disaster or other disruption that affects the manufacturing operations of any of Altria Group, Inc.’s tobacco subsidiaries or the operations of any significant suppliers of any of Altria Group, Inc.’s tobacco subsidiaries could adversely impact the operations of the affected subsidiaries. An extended disruption in operations experienced by one or more Altria Group, Inc. subsidiaries or significant suppliers could have a material adverse effect on the business, the consolidated results of operations, cash flows and financial position of Altria Group, Inc.

~~Attracting and Retaining Talent~~

~~Our ability to implement our strategy of attracting and retaining the best talent~~ may be ~~impaired by the impact of decreasing social acceptance of tobacco usage and tobacco regulation and control actions. The tobacco industry competes for talent with the~~unsuccessful in anticipating changes in adult consumer ~~products industry and other companies that enjoy greater societal acceptance. As a result, we may be unable~~preferences, responding to ~~attract and retain the best talent.~~

~~Competition, Evolving Adult Consumer Preferences and Economic Conditions~~changes in consumer purchase behavior or managing through difficult economic conditions.

Each of our tobacco and wine subsidiaries is subject to intense competition and changes in adult consumer preferences. To be successful, they must continue to:

▪promote brand equity successfully;

▪~~anticipate and respond to new and evolving adult consumer preferences;~~

▪~~develop, manufacture, market and distribute products that appeal to adult consumers (including, where appropriate, through arrangements with, or investments in, third parties);~~


▪	anticipate and respond to new and evolving adult consumer preferences;


▪	develop, manufacture, market and distribute products that appeal to adult consumers (including, where appropriate, through arrangements with, or investments in, third parties);

▪improve productivity; and

▪~~protect or enhance margins through cost savings and price increases.~~


▪	protect or enhance margins through cost savings and price increases.

See Tobacco Space - Business Environment - Summary in Item 7 for additional discussion concerning evolving adult tobacco consumer preferences, including increased consumer awareness of, and expenditures on, ~~electronic cigarettes.~~e-vapor products. Continued growth of this product category could further contribute to reductions in cigarette consumption levels and cigarette industry sales volume and could adversely affect the growth rates of other tobacco products.

The willingness of adult consumers to purchase premium consumer product brands depends in part on economic conditions, which ~~can~~could have a material adverse effect on the business, consolidated results of operations, cash flows ~~and~~or financial position of Altria Group, Inc. and its subsidiaries. In periods of economic uncertainty, adult consumers may purchase more discount brands and/or, in the case of tobacco products, consider lower-priced tobacco products. Our tobacco and wine subsidiaries work to broaden their brand portfolios to compete effectively with lower-priced products.

Our financial services business (conducted through PMCC) holds investments in finance leases, principally in transportation (including aircraft), power generation and manufacturing equipment and facilities. Its lessees are also subject to intense competition and economic conditions. If parties to PMCC’s leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our earnings.

Altria Group, Inc.’s tobacco subsidiaries may be unsuccessful in developing and commercializing innovative tobacco products that may reduce the health risks associated with current tobacco products and that appeal to adult tobacco consumers.

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Altria Group, Inc.’s tobacco subsidiaries continue to develop and commercialize innovative tobacco products, including new product technologies that may reduce the health risks associated with current tobacco products, while continuing to offer adult tobacco consumers (within and outside the United States) products that meet their taste expectations and evolving preferences. Examples include tobacco-containing and nicotine-containing products that reduce or eliminate exposure to cigarette smoke and/or constituents identified by public health authorities as harmful. These efforts may include arrangements with, or investments in, third parties. Our tobacco subsidiaries may not succeed in these efforts, which would have an adverse effect on the ability to grow new revenue streams.

Further, we cannot predict whether regulators, including the FDA, will permit the marketing or sale of products with claims of reduced risk to consumers, the speed with which they may make such determinations or whether regulators will impose an unduly burdensome regulatory framework on such products. Nor can we predict whether adult tobacco consumers’ purchasing decisions would be affected by such claims if permitted. Adverse developments on any of these matters could negatively impact the commercial viability of such products.

If our tobacco subsidiaries do not succeed in their efforts to develop and commercialize innovative tobacco products or to obtain regulatory approval for the marketing or sale of products with claims of reduced risk, but one or more of their competitors do succeed, our tobacco subsidiaries may be at a competitive disadvantage.

Altria Group, Inc. and its subsidiaries’ ability to grow new revenue streams may be limited if our operating companies are unable to move successfully into complementary products or processes.

Altria Group, Inc. and its subsidiaries have adjacency growth strategies involving moves and potential moves into complementary products or processes. We cannot guarantee that these strategies, or any products introduced in connection with these strategies, will be successful. See the immediately preceding paragraph for a related discussion concerning new product technologies.

Significant changes in tobacco leaf price, availability or quality could have an adverse effect on the profitability and business of Altria Group, Inc.’s tobacco subsidiaries.

Any significant change in tobacco leaf prices, quality or availability could adversely affect our tobacco subsidiaries’ profitability and business. For further discussion, see Tobacco Space - Business Environment - Price, Availability and Qualityof Agricultural Products in Item 7.

Because Altria Group, Inc.’s tobacco subsidiaries rely on a few significant facilities and a small number of significant suppliers, an extended disruption at a facility or in service by a supplier could have a material adverse effect on the business, the consolidated results of operations, cash flows or

financial position of Altria Group, Inc. and its tobacco subsidiaries.

Altria Group, Inc.’s tobacco subsidiaries face risks inherent in reliance on a few significant facilities and a small number of significant suppliers. A natural or man-made disaster or other disruption that affects the manufacturing operations of any of Altria Group, Inc.’s tobacco subsidiaries or the operations of any significant suppliers of any of Altria Group, Inc.’s tobacco subsidiaries could adversely impact the operations of the affected subsidiaries. An extended disruption in operations experienced by one or more of Altria Group, Inc.’s subsidiaries or significant suppliers could have a material adverse effect on the business, the consolidated results of operations, cash flows or financial position of Altria Group, Inc. and its tobacco subsidiaries.

Altria Group, Inc. may be unable to attract and retain the best talent due to the impact of decreasing social acceptance of tobacco usage and tobacco control actions.

Our ability to implement our strategy of attracting and retaining the best talent may be impaired by the impact of decreasing social acceptance of tobacco usage and tobacco regulation and control actions. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, we may be unable to attract and retain the best talent.

Acquisitions or other events may adversely affect Altria Group, Inc.’s credit rating, and Altria Group, Inc. may not achieve its anticipated strategic or financial objectives.

Altria Group, Inc. from time to time considers ~~acquisitions. From time to time, we~~acquisitions and may engage in confidential acquisition negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement. Although we seek to maintain or improve our credit ratings over time, it is possible that completing a given acquisition or other event could impact our credit ratings or the outlook for those ratings. Furthermore, acquisition opportunities are limited, and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to acquire attractive businesses on favorable terms, that we will realize any of the anticipated benefits from an acquisition or that acquisitions will be quickly accretive to earnings.

~~Capital Markets~~Disruption and uncertainty in the debt capital markets could adversely affect Altria Group, Inc.’s access to the debt capital markets, earnings and dividend rate.

Access to the debt capital markets is important for us to satisfy our liquidity and financing needs. Disruption and uncertainty in the credit and debt capital markets and any resulting ~~tightening of~~adverse impact on credit availability, pricing and/or credit terms may negatively affect the amount of credit available to us and may also increase our costs and adversely affect our earnings or our dividend rate.

~~Exchange Rates~~

~~For purposes of financial reporting, the earnings of SABMiller are translated into U.S. dollars from various local currencies based on average exchange rates prevailing during a reporting~~

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~~period.~~Altria Group, Inc.’s reported earnings from and carrying value of its equity investment in SABMiller may be adversely affected by unfavorable foreign currency exchange rates and other factors.

For purposes of financial reporting, the earnings from and carrying value of our equity investment in SABMiller are translated into U.S. dollars from various local currencies. During times of a strengthening U.S. dollar against these currencies, our reported earnings from and carrying value of our equity ~~earnings~~investment in SABMiller will be reduced because the local currencies will translate into fewer U.S. dollars. The earnings from and carrying value of our equity investment in SABMiller are also subject to the risks encountered by SABMiller in its business.

~~Asset Impairment~~Altria Group, Inc. may be required to write down intangible assets, including goodwill, due to impairment, which would reduce earnings.

We periodically calculate the fair value of our ~~goodwill~~reporting units and ~~other~~ intangible assets to test for impairment. This calculation may be affected by several factors, including general economic conditions, regulatory developments, changes in category growth rates as a result of changing adult consumer preferences, success of planned new product introductions, competitive activity and tobacco-related taxes. If an impairment is determined to exist, we will incur impairment losses, which will reduce our earnings.

~~Wine - Competition; Grape Supply; Regulation~~Competition, unfavorable changes in grape supply and ~~Excise Taxes~~new governmental regulations or revisions to existing governmental regulations could adversely affect Ste. Michelle’s wine business.

Ste. Michelle’s business is subject to significant competition, including from many large, well-established domestic and international companies. The adequacy of Ste. Michelle’s grape supply is influenced by consumer demand for wine in relation to industry-wide production levels as well as by weather and crop conditions, particularly in eastern Washington. Supply shortages related to any one or more of these factors could increase production costs and wine prices, which ultimately may have a negative impact on Ste. Michelle’s sales. In addition, federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. New regulations or revisions to existing regulations, resulting in further restrictions or taxes on the manufacture and sale of alcoholic beverages, may have an adverse effect on Ste. Michelle’s wine business. For further discussion, see Wine Segment - Business Environment in Item 7.7.

~~Information Systems~~The failure of Altria Group, Inc.’s information systems to function as intended, or the penetration by outside parties intent on disrupting business processes, could result in significant costs, loss of revenue, assets or personal or other sensitive data and reputational harm.

Altria Group, Inc. and its subsidiaries use information systems to help manage business processes, collect and interpret business

data and communicate internally and externally with employees, investors, suppliers, trade customers, adult tobacco consumers and others. Many of these information systems are managed by third-party service providers. We have backup systems and business continuity plans in place and we take care to protect our systems and data from unauthorized access. Nevertheless, failure of our systems to function as intended, or penetration of our systems by outside parties intent on extracting or corrupting information or otherwise disrupting business processes, could result in loss of revenue, assets or personal or other sensitive data, cause damage to the reputation of our companies and their brands and result in legal challenges and significant remediation and other costs to Altria Group, Inc. and its subsidiaries.

~~Governmental Investigations~~Unfavorable outcomes of any governmental investigations could materially affect the businesses of Altria Group, Inc. and its subsidiaries.

From time to time, Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters. We

cannot predict whether new investigations may be commenced or the outcome of such investigations, and it is possible that our business could be materially adversely affected by an unfavorable outcome of future investigations.

~~International Business Operations~~Expanding international business operations subjects Altria Group, Inc. and its subsidiaries to various United States and foreign laws and regulations, and violations of such laws or regulations could result in reputational harm, legal challenges and/or significant costs.

While Altria Group, Inc. and its subsidiaries are primarily engaged in business activities in the United States, they do engage (directly or indirectly) in certain international business activities that are subject to various United States and foreign laws and regulations, such as the U.S. Foreign Corrupt Practices Act and other laws prohibiting bribery and corruption. Although we have a Code of Conduct and a compliance system designed to prevent and detect violations of applicable law, no system can provide assurance that it will always protect against improper actions by employees or third parties. Violations of these laws, or allegations of such violations, could result in reputational harm, legal challenges and/or significant costs.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The property in Richmond, Virginia that serves as the headquarters facility for Altria Group, Inc., PM USA, USSTC, Middleton, Nu Mark and certain other subsidiaries is under lease.

At December 31, ~~2013~~2014, the smokeable products segment used four manufacturing and processing facilities. PM USA owns and operates two tobacco manufacturing and processing facilities located in the Richmond, Virginia area that are used in the manufacturing and processing of cigarettes. Middleton owns and operates two manufacturing and processing facilities - one in King of Prussia, Pennsylvania and one in Limerick, Pennsylvania

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- that are used in the manufacturing and processing of cigars and pipe tobacco. In addition, PM USA owns a research and technology center in Richmond, Virginia that is leased to an affiliate, Altria Client Services Inc.

At December 31, ~~2013~~2014, the smokeless products segment used four smokeless tobacco manufacturing and processing facilities located in Franklin Park, Illinois; Hopkinsville, Kentucky; Nashville, Tennessee; and Richmond, Virginia, all of which are owned and operated by ~~a wholly-owned subsidiary of~~ USSTC.

At December 31, ~~2013~~2014, the wine segment used 11 wine-making facilities - seven in Washington, three in California and one in Oregon. All of these facilities are owned and operated by Ste. Michelle, with the exception of a facility that is leased by Ste. Michelle in Washington. In addition, in order to support the production of its wines, the wine segment used vineyards in Washington, California and Oregon which are leased or owned by Ste. Michelle.

The plants and properties owned or leased and operated by Altria Group, Inc. and its subsidiaries are maintained in good condition and are believed to be suitable and adequate for present needs.

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Item 3. Legal Proceedings.

The information required by this Item is included in Note 18 and Exhibits 99.1 and 99.2 to this Annual Report on Form 10-K. Altria Group, Inc.’s consolidated financial statements and accompanying notes for the year ended December 31, ~~2013~~2014 were filed on Form 8-K on January 30, ~~2014~~2015 (such consolidated financial statements and accompanying notes are also included in Item 8). The following summarizes certain developments in Altria Group, Inc.’s litigation since the filing of such Form 8-K. ~~Certain terms used below that are not defined in this Item have the meanings given to them in Note 18.~~

Recent Developments

Smoking and Health Litigation

▪~~Non-~~Tentative Agreement to Resolve Federal Engle Progeny Cases:

On February 25, 2015, PM USA, R.J. Reynolds Tobacco Company and Lorillard Tobacco Company reached a tentative agreement to resolve approximately 415 pending federal Engle progeny cases (the “Agreement”). Under the terms of the Agreement, PM USA will pay $42.5 million. PM USA will record a pre-tax provision of $42.5 million in the first quarter of 2015. Federal cases that were in trial as of February 25, 2015 and those that have previously reached final verdict are not included in the Agreement. Engle progeny lawsuits pending in Florida state courts are also not part of the Agreement.

The Agreement is conditioned on approval by all federal-court plaintiffs in the cases resolved by the Agreement or as the parties otherwise agree. On February 25, 2015, the U.S. District Court for the Middle District of Florida issued an order staying all upcoming federal trials pending final approval of the Agreement.

▪Engle Progeny Trial Results:

In ~~Schwarz~~Caprio, on February ~~10, 2014,~~24, 2015, a Broward County jury returned a partial verdict in favor of plaintiff and against PM

USA, R.J. Reynolds Tobacco Company, Lorillard Tobacco Company and Liggett Group LLC. The jury found against defendants on class membership allocating 25% of the fault to PM USA. The jury also found $559,172 in economic damages. The jury deadlocked with respect to the intentional torts, certain elements of compensatory damages and punitive damages.

In McKeever, on February 20, 2015, a Broward County jury returned a verdict in favor of plaintiff and against PM USA ~~opposed~~awarding approximately $5.78 million in compensatory damages and allocating 60% of the fault to PM USA (an amount of approximately $3.48 million). The jury also awarded plaintiff approximately $11.63 million in punitive damages. However, the jury found in favor of PM USA on the statute of repose defense to plaintiff’s ~~motion to certify PM USA’s appeal to~~intentional tort and punitive damages claims. The Florida Supreme Court is currently considering the ~~Oregon Supreme Court.~~

▪applicability of the statue of repose defense in Engle ~~Progeny Trial Results:~~progeny cases.

In ~~Reider~~McMannis, a Charlotte County jury returned a verdict in favor of PM USA on February 19, 2015.

In Landau, on February ~~25, 2014,~~19, 2015, a jury in the U.S. District Court for the Middle District of Florida ~~(Jacksonville) returned a verdict in the amount of zero damages and allocated 5% of the fault to PM USA.~~

In ~~R. Cohen, on February 24, 2014, the Florida Supreme Court stayed the appeal pending the outcome of the~~ ~~Hess~~ ~~case.~~

~~On February 20, 2014, the Florida Supreme Court scheduled oral argument of the~~ ~~Hess~~ ~~and~~ ~~Russo~~ ~~(formerly~~ ~~Frazier) cases for April 30, 2014 on the question of whether the statute of repose applies in~~ ~~Engle~~ ~~progeny cases.~~

In ~~Goveia, an Orange County jury~~ returned a verdict in favor of plaintiff and against PM USA, ~~and~~ R.J. Reynolds Tobacco Company ~~(“R.J. Reynolds”). On February 17, 2014, the jury awarded $850,000~~and Lorillard Tobacco Company awarding $100,000 in compensatory damages. ~~On February 18, 2014,~~One defendant settled the ~~jury awarded $2.25 million in punitive damages against each defendant.~~case.

In ~~Gonzalez,~~Sowers, a ~~Miami-Dade County~~ jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of PM USA on February ~~6, 2014.~~11, 2015.

In ~~Allen~~Boatright, on February ~~14, 2014,~~9, 2015, defendants filed a notice of appeal to the Florida ~~Supreme~~Second District Court ~~denied plaintiff’s notice to invoke the discretionary jurisdiction~~ of ~~the Florida Supreme Court.~~ Appeal.

In ~~Naugle~~, on February 13, 2014, the Florida Supreme Court denied each of PM USA’s and plaintiff’s notices to invoke the discretionary jurisdiction of the Florida Supreme Court for review of the original verdict.Medical Monitoring Cases

In ~~Barbanell~~, on February 13, 2014, the Florida Supreme Court denied PM USA’s notice to invoke the discretionary jurisdiction of the Florida Supreme Court. PM USA will record a provision of approximately $3.6 million for the judgment plus interest and associated costsTrial in the ~~first quarter of 2014.~~

~~Health Care Cost Recovery Litigation~~

▪~~Possible Adjustments in MSA Payments~~Donovan case is scheduled for ~~2003 - 2012:~~ On February 11, 2014, the Colorado state court denied Colorado’s motion to vacate the Stipulated Award issued by the arbitration panel in connection with the settlement of the 2003 - 2012 NPM Adjustments with certain signatory states.January 25, 2016.

“Lights/Ultra-Lights” Cases

~~In the~~ ~~Cabbat~~ ~~case, on February 3, 2014, PM USA filed its opposition to plaintiffs’ petition for review by the U.S. Court of Appeals for the Ninth Circuit of the trial court’s denial of class certification.~~

~~In the~~ ~~Aspinall~~ case, on February 7, 2014, the Massachusetts Superior Court denied plaintiffs’ motion for partial summary judgment on the remedies available and concluded that plaintiffs cannot obtain disgorgement of profits as an equitable remedy and their recovery is limited to actual damages or $25 per class member if they cannot prove actual damages greater than $25. On February 24, 2014, plaintiffs filed a motion asking the trial court to report the February 7, 2014 ruling to the Massachusetts Appeals Court for review.

~~In the~~ ~~Brown~~ case, on February 14, 2014, the trial court awarded PM USA $764,553 in costs and declined to issue sanctions against PM USA for alleged discovery violations. On February 24, 2014, plaintiffs appealed the costs award.

The re-trial in the Larsen case is scheduled to begin on ~~January 12, 2015.~~February 22, 2016.

In the Price case, on February 9, 2015, plaintiffs filed a new motion seeking recusal or disqualification of Justice Karmeier, one of the Illinois Supreme Court justices.

Item 4. Mine Safety Disclosures.

Not applicable.

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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The principal stock exchange on which Altria Group, Inc.’s common stock (par value $0.33 1/3 per share) is listed is the New York Stock Exchange. At February ~~14, 2014,~~13, 2015, there were approximately ~~78,000~~74,000 holders of record of Altria Group, Inc.’s common stock.

Performance Graph

The graph below compares the cumulative total shareholder return of Altria Group, Inc.’s common stock for the last five years with the cumulative total return for the same period of the S&P 500 Index and the Altria Group, Inc. Peer Group Index ⁽¹⁾. The graph assumes the investment of $100 in common stock and each of the indices as of the market close on December 31, ~~2008~~2009 and the reinvestment of all dividends on a quarterly basis.


Date	Altria Group, Inc.		Altria Group, Inc. Peer Group		S&P 500		Altria Group, Inc.		Altria Group, Inc. Peer Group		S&P 500
December 2008	$	100.00	$	100.00	$	100.00
December 2009	$	140.31	$	123.32	$	126.45	$	100.00	$	100.00	$	100.00
December 2010	$	187.90	$	140.08	$	145.49	$	133.92	$	113.38	$	115.06
December 2011	$	239.88	$	160.54	$	148.56	$	170.96	$	129.99	$	117.49
December 2012	$	268.11	$	177.76	$	172.32	$	191.08	$	141.36	$	136.27
December 2013	$	344.68	$	222.32	$	228.12	$	245.66	$	176.72	$	180.40
December 2014							$	330.43	$	198.76	$	205.08

Source: Bloomberg - “Total Return Analysis” calculated on a daily basis and assumes reinvestment of dividends as of the ex-dividend date.

⁽¹⁾The Altria Group, Inc. Peer Group consists of 1413 U.S.-headquartered consumer product companies that are competitors to Altria Group, Inc.’s tobacco operating companies subsidiaries or that have been selected on the basis of revenue or market capitalization: Campbell Soup Company, The Coca-Cola Company, Colgate-Palmolive Company, ConAgra Foods, Inc., General Mills, Inc., ~~H. J. Heinz Company,~~ The Hershey Company, Kellogg Company, Kimberly-Clark Corporation, Mondelēz International, Inc., Kraft Foods Group, Inc., Lorillard, Inc., PepsiCo, Inc. and Reynolds American Inc.

Note - On October 1, 2012, Kraft Foods Inc. (KFT) spun off Kraft Foods Group, Inc. (KRFT) to its shareholders and then changed its name from Kraft Foods Inc. to Mondelēz International, Inc. (MDLZ). ~~H. J. Heinz Company’s (HNZ) performance was tracked from December 31, 2008 through June 7, 2013, when it was acquired by Berkshire Hathaway Inc. and 3G Special Situations Fund III, L.P.~~

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Issuer Purchases of Equity Securities During the Quarter Ended December 31, ~~2013~~2014

Altria Group, Inc.’s Board of Directors (the “Board of Directors”), authorized a ~~$300 million~~$1.0 billion share repurchase program in ~~April 2013 and expanded it to $1.0 billion in August 2013 (as expanded, the “April 2013~~July 2014 (the “July 2014 share repurchase program”)., which Altria Group, Inc. expects to complete ~~this program~~ by the end of ~~the third quarter of 2014.~~2015. The timing of share repurchases under the ~~April 2013~~July 2014 share repurchase program depends upon marketplace conditions and other ~~factors. The April 2013 share repurchase~~factors, and the program remains subject to the discretion of the Board of Directors.

Altria Group, Inc.’s share repurchase activity for each of the three months in the period ended December 31, ~~2013,~~2014, was as follows:

Period
Total Number of Shares Purchased ⁽¹⁾
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs

October 1- October 31, 2013 267,431
$ 34.66
8,467,100
$ 700,143,797
November 1- November 30, 2013 3,832,583
$ 37.50
12,297,100
$ 556,516,997
December 1- December 31, 2013 2,688,135
$ 37.24
14,978,100
$ 456,685,481
For the Quarter Ended December 31, 2013 6,788,149
$ 37.28



Period	Total Number of Shares Purchased ⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs

October 1- October 31, 2014	543,248	$	45.88	543,000	$	752,882,710
November 1- November 30, 2014	2,112,000	$	49.25	2,112,000	$	648,865,971
December 1- December 31, 2014	2,873,672	$	50.45	2,585,000	$	518,341,843
For the Quarter Ended December 31, 2014	5,528,920	$	49.54

⁽¹⁾

The total number of shares purchased include (a) shares purchased under the ~~April 2013~~July 2014 share repurchase program (which totaled ~~264,000~~543,000 shares in October, ~~3,830,000~~2,112,000 shares in November and ~~2,681,000~~2,585,000 shares in December) and (b) shares withheld by Altria Group, Inc. in an amount equal to the statutory withholding taxes for holders who vested in restricted and deferred stock, ~~and used shares to pay all or a portion of the related taxes,~~ and forfeitures of restricted stock for which consideration was paid in connection with termination of employment of certain employees (which totaled ~~3,431~~248 shares in October ~~2,583 shares in November~~ and ~~7,135~~288,672 shares in December).


⁽²⁾	~~Aggregate number of shares purchased under the April 2013 share repurchase program as of the end of the period presented.~~

The other information called for by this Item is included in Note 20. Quarterly Financial Data (Unaudited) to the consolidated financial statements in Item 8.

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Item 6. Selected Financial Data.

(in millions of dollars, except per share and employee data)


	2013			2012			2011			2010			2009			2014			2013			2012			2011			2010
Summary of Operations:
Net revenues	$	24,466		$	24,618		$	23,800		$	24,363		$	23,556		$	24,522		$	24,466		$	24,618		$	23,800		$	24,363
Cost of sales	7,206			7,937			7,680			7,704			7,990			7,785			7,206			7,937			7,680			7,704
Excise taxes on products	6,803			7,118			7,181			7,471			6,732			6,577			6,803			7,118			7,181			7,471
Operating income	8,084			7,253			6,068			6,228			5,462			7,620			8,084			7,253			6,068			6,228
Interest and other debt expense, net	1,049			1,126			1,216			1,133			1,185			808			1,049			1,126			1,216			1,133
Earnings from equity investment in SABMiller	991			1,224			730			628			600			1,006			991			1,224			730			628
Earnings before income taxes	6,942			6,477			5,582			5,723			4,877			7,774			6,942			6,477			5,582			5,723
Pre-tax profit margin	28.4		%	26.3		%	23.5		%	23.5		%	20.7		%	31.7		%	28.4		%	26.3		%	23.5		%	23.5		%
Provision for income taxes	2,407			2,294			2,189			1,816			1,669			2,704			2,407			2,294			2,189			1,816
Net earnings	4,535			4,183			3,393			3,907			3,208			5,070			4,535			4,183			3,393			3,907
Net earnings attributable to Altria Group, Inc.	4,535			4,180			3,390			3,905			3,206			5,070			4,535			4,180			3,390			3,905
Basic EPS — net earnings attributable to Altria Group, Inc.	2.26			2.06			1.64			1.87			1.55
Diluted EPS — net earnings attributable to Altria Group, Inc.	2.26			2.06			1.64			1.87			1.54
Basic and Diluted EPS — net earnings attributable to Altria Group, Inc.																2.56			2.26			2.06			1.64			1.87
Dividends declared per share	1.84			1.70			1.58			1.46			1.32			2.00			1.84			1.70			1.58			1.46
Weighted average shares (millions) — Basic	1,999			2,024			2,064			2,077			2,066			1,978			1,999			2,024			2,064			2,077
Weighted average shares (millions) — Diluted	1,999			2,024			2,064			2,079			2,071			1,978			1,999			2,024			2,064			2,079
Capital expenditures	131			124			105			168			273			163			131			124			105			168
Depreciation	192			205			233			256			271			188			192			205			233			256
Property, plant and equipment, net	2,028			2,102			2,216			2,380			2,684			1,983			2,028			2,102			2,216			2,380
Inventories	1,879			1,746			1,779			1,803			1,810			2,040			1,879			1,746			1,779			1,803
Total assets	34,859			35,329			36,751			37,402			36,677			34,475			34,859			35,329			36,751			37,402
Long-term debt	13,992			12,419			13,089			12,194			11,185			13,693			13,992			12,419			13,089			12,194
Total debt	14,517			13,878			13,689			12,194			11,960			14,693			14,517			13,878			13,689			12,194
Total stockholders’ equity	4,118			3,170			3,683			5,195			4,072			3,010			4,118			3,170			3,683			5,195
Common dividends declared as a % of Basic EPS	81.4		%	82.5		%	96.3		%	78.1		%	85.2		%
Common dividends declared as a % of Diluted EPS	81.4		%	82.5		%	96.3		%	78.1		%	85.7		%
Common dividends declared as a % of Basic and Diluted EPS																78.1		%	81.4		%	82.5		%	96.3		%	78.1		%
Book value per common share outstanding	2.07			1.58			1.80			2.49			1.96			1.53			2.07			1.58			1.80			2.49
Market price per common share — high/low	38.58-31.85			36.29-28.00			30.40-23.20			26.22-19.14			20.47-14.50			51.67-33.80			38.58-31.85			36.29-28.00			30.40-23.20			26.22-19.14
Closing price per common share at year end	38.39			31.44			29.65			24.62			19.63			49.27			38.39			31.44			29.65			24.62
Price/earnings ratio at year end — Basic and Diluted	17			15			18			13			13			19			17			15			18			13
Number of common shares outstanding at year end (millions)	1,993			2,010			2,044			2,089			2,076			1,971			1,993			2,010			2,044			2,089
Approximate number of employees	9,000			9,100			9,900			10,000			10,000			9,000			9,000			9,100			9,900			10,000

The Selected Financial Data should be read in conjunction with Item 7 and Item 8.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of cautionary factors that may affect future results in Item 1A. ~~Risk Factors of this Annual Report on Form 10-K (“Item 1A”).~~

Description of the Company

At December 31, ~~2013~~2014, Altria Group, Inc.’s ~~direct and indirect~~ wholly-owned subsidiaries included PM USA, which is engaged predominantly in the manufacture and sale of cigarettes ~~and certain smokeless tobacco products~~ in the United States; Middleton, which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and is a wholly-owned subsidiary of PM USA; and UST, which through its ~~direct and indirect~~ wholly-owned subsidiaries, including USSTC and Ste. Michelle, is engaged in the manufacture and sale of smokeless tobacco products and wine. ~~Nu Mark, an indirect wholly-owned subsidiary of~~ Altria Group, Inc.,’s other operating companies included Nu Mark, a wholly-owned subsidiary that is engaged in the ~~development~~manufacture and ~~marketing~~sale of innovative tobacco products, ~~for adult tobacco consumers.~~and PMCC, ~~another~~a wholly-owned subsidiary ~~of Altria Group, Inc.,~~that maintains a portfolio of finance assets, substantially all of which are leveraged ~~and direct finance~~ leases. ~~In addition,~~Other Altria Group, Inc. ~~held approximately 26.8% of the economic~~wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales, distribution and ~~voting interest of SABMiller at~~ ~~December 31, 2013, which~~consumer engagement services to certain Altria Group, Inc. ~~accounts for under~~operating subsidiaries, and Altria Client Services Inc., which provides various support services, such as legal, regulatory, finance, human resources and external affairs, to Altria Group, Inc. and its subsidiaries. In addition, Nu Mark and Middleton use third-party contract manufacturing arrangements in the ~~equity method~~manufacture of ~~accounting.~~their products. Altria Group, Inc.’s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At December 31, ~~2013~~2014, Altria Group, Inc.’s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their ~~common stock. In addition,~~equity interests.

At December 31, 2014, Altria Group, Inc. also held approximately 27% of the economic and voting interest of SABMiller, which Altria Group, Inc. accounts for under the equity method of accounting. Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends.

~~Effective January 1, 2013,~~ Altria Group, Inc.’s reportable segments are smokeable products, smokeless products and wine. The financial services and the ~~alternative~~innovative tobacco products businesses ~~have been combined~~are included in an all other category due to the continued reduction of the lease portfolio of PMCC and the relative financial contribution of Altria Group, Inc.’s ~~alternative~~innovative tobacco products businesses to Altria Group, Inc.’s consolidated results. In addition, due to the continued reduction of the lease portfolio of PMCC, Altria Group, Inc.’s balance sheet accounts are no longer segregated by consumer products and financial services, and all balance sheet accounts are classified as either current or non-current. Prior years’ amounts have been reclassified to conform with the current year’s presentation.

Executive Summary

The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows.

Consolidated Results of Operations

The changes in Altria Group, Inc.’s net earnings and diluted earnings per share (“EPS”) attributable to Altria Group, Inc. for the year ended December 31, ~~2013~~2014, from the year ended December 31, ~~2012~~2013, were due primarily to the following:

(in millions, except per share data)
Net
Earnings

Diluted
EPS

For the year ended December 31, 2012 $ 4,180
$ 2.06
2012 Asset impairment, exit and implementation costs 35
0.01
2012 Tobacco and health judgments 4
—
2012 SABMiller special items (161 ) (0.08 )
2012 Loss on early extinguishment of debt 559
0.28
2012 PMCC leveraged lease benefit (68 ) (0.03 )
2012 Tax items ¹
(66 ) (0.03 )
Subtotal 2012 special items 303
0.15
2013 NPM Adjustment Items ²
427
0.21
2013 Asset impairment, exit and
implementation costs (7 ) —
2013 Tobacco and health judgments (14 ) (0.01 )
2013 SABMiller special items (20 ) (0.01 )
2013 Loss on early extinguishment of debt (678 ) (0.34 )
2013 Tax items 64
0.03
Subtotal 2013 special items (228 ) (0.12 )
Fewer shares outstanding —
0.03
Change in tax rate 69
0.03
Operations 211
0.11
For the year ended December 31, 2013 $ 4,535
$ 2.26

¹ ~~Excludes the tax impact included in the PMCC leveraged lease benefit.~~

² ~~Reflects the impact of the NPM Adjustment Settlement ($0.16) and the NPM Arbitration Panel Decision ($0.05).~~



(in millions, except per share data)	Net Earnings			Diluted EPS
For the year ended December 31, 2013	$	4,535		$	2.26
2013 NPM Adjustment Items	(427		)	(0.21		)
2013 Asset impairment, exit and implementation costs	7			—
2013 Tobacco and health litigation items	14			0.01
2013 SABMiller special items	20			0.01
2013 Loss on early extinguishment of debt	678			0.34
2013 Tax items	(64		)	(0.03		)
Subtotal 2013 special items	228			0.12
2014 NPM Adjustment Items	56			0.03
2014 Asset impairment, exit, integration and acquisition-related costs	(14		)	(0.01		)
2014 Tobacco and health litigation items	(28		)	(0.01		)
2014 SABMiller special items	(17		)	(0.01		)
2014 Loss on early extinguishment of debt	(28		)	(0.02		)
2014 Tax items	14			0.01
Subtotal 2014 special items	(17		)	(0.01		)
Fewer shares outstanding	—			0.03
Change in tax rate	86			0.04
Operations	238			0.12
For the year ended December 31, 2014	$	5,070		$	2.56

See the discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.


▪	Fewer Shares Outstanding: Fewer shares outstanding during ~~2013~~2014 compared with ~~2012~~2013 were due primarily to shares repurchased by Altria Group, Inc. under its share repurchase programs.


▪	Change in Tax Rate: The change in tax rate was due primarily to a reduction in certain consolidated tax benefits in 2013 resulting from the 2013 debt tender offer, and an increased recognition of foreign tax credits in ~~2013,~~2014 primarily associated with SABMiller dividends.


▪	Operations: The increase of $~~211~~238 million in operations shown in the table above was due primarily to the following:


▪	higher income from the smokeable products segment; and

▪~~higher income from the smokeable products~~lower interest and ~~smokeless products segments;~~other debt expense, net;

partially offset by:

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▪	higher investment spending in the innovative tobacco products businesses; and

▪lower ~~interest and other debt expense, net; and~~

▪~~higher earnings~~income from ~~Altria Group, Inc.’s equity investment in SABMiller (excluding special items).~~the financial services business.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.

~~2014~~2015 Forecasted Results

In January ~~2014,~~2015, Altria Group, Inc. forecasted that its ~~2014~~2015 full-year ~~reported~~adjusted diluted EPS growth rate is expected to be in the range of ~~$2.51~~7% to $2.58. This forecast includes estimated expenses of $0.01 per share as detailed in the table below, as compared with 2013 full-year reported diluted EPS of $2.26, which included $0.12 per share of net expenses, as detailed in the table below. Expected9% over 2014 full-year adjusted diluted ~~EPS, which excludes the expenses in the table below, represents a~~EPS. This forecasted growth rate ~~of 6% to 9% over 2013 full-year adjusted diluted EPS, which~~ excludes the net expenses in the table below.

Altria Group, Inc.’s core tobacco businesses are positioned to deliver income growth through their leading premium brands. Altria Group, Inc. also expects its 2014 earnings to benefit from lower interest expense, a lower effective tax rate and a reduction in shares from the April 2013 share repurchase program. However, Altria Group, Inc. plans to continue making disciplined and incremental investments to build its alternative products businesses and expects continued variability in gains from asset sales at PMCC. Finally, although some economic indicators are improving, adult tobacco consumers continue to face challenges.

The factors described in Item 1A represent continuing risks to this forecast.

Expense (Income), Net ~~Included in Reported~~Excluded from Adjusted Diluted EPS


	2014		2013			2015		2014
NPM Adjustment Items ¹	$	—	$	(0.21	)
Tobacco and health judgments	—		0.01
NPM Adjustment Items						$	—	$	(0.03	)
Asset impairment, exit, integration and acquisition-related costs						—		0.01
Tobacco and health litigation items ¹						0.02		0.01
SABMiller special items	0.01		0.01			—		0.01
Loss on early extinguishment of debt	—		0.34			—		0.02
Tax items	—		(0.03		)	—		(0.01		)
	$	0.01	$	0.12		$	0.02	$	0.01

¹ ~~Reflects~~The 2015 amount represents a provision that will be recorded by PM USA in the ~~impact~~first quarter of 2015 related to the ~~NPM Adjustment Settlement ($0.16) and the NPM Arbitration Panel Decision ($0.05).~~tentative agreement to resolve approximately 415 pending federal Engle progeny cases.

~~Adjusted diluted EPS is a~~See Item 3.

Altria Group, Inc. reports its financial ~~measure that is not consistent~~results in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Altria Group, Inc.’s management reviews certain financial results, including diluted EPS, on an adjusted basis, which ~~excludes~~exclude certain income and expense items that management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, SABMiller special items, certain ~~PMCC leveraged lease~~tax items, ~~certain tax items,~~charges associated with tobacco and health ~~judgments,~~litigation items, and settlements of, and determinations made in connection with, disputes with certain states and territories related to the ~~Non-Participating Manufacturer~~non-participating manufacturer (“NPM”) adjustment provision ~~(“NPM~~

~~Adjustment”)~~ under the 1998 Master Settlement Agreement (the “MSA”) for the years 2003-2012 (such settlements and determinations are referred to collectively as “NPM Adjustment Items” and are more fully described in Health Care Cost Recovery Litigation - NPM Adjustment Disputes in Note 18). Altria Group, Inc.’s management does not view any of these special items to be part of ~~its~~Altria Group, Inc.’s sustainable results as they may be highly variable, ~~and~~are difficult to predict and can distort underlying business trends and results. Altria Group, Inc.’s management believes ~~it is appropriate to disclose this non-GAAP~~that these adjusted financial ~~measure to~~measures provide useful

insight into underlying business trends and results and to provide a more meaningful comparison of year-over-year results. Adjusted financial measures are used by management and regularly provided to Altria Group, Inc.’s chief operating decision maker for planning, forecasting and evaluating business and financial performance, including allocating resources and evaluating results relative to employee compensation targets. ~~This information~~These adjusted financial measures are not consistent with U.S. GAAP, and should thus be considered as supplemental in nature and not considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP.

Altria Group, Inc.’s full-year adjusted diluted EPS guidance excludes the impact of certain income and expense items, including those items noted in the preceding paragraph. Altria Group, Inc.’s management cannot estimate on a forward-looking basis the impact of these items on Altria Group, Inc.’s reported diluted EPS because these items, which could be significant, are difficult to predict and may be highly variable. As a result, Altria Group, Inc. does not provide a corresponding U.S. GAAP measure for, or a reconciliation to, its adjusted diluted EPS guidance.

Discussion and Analysis

Critical Accounting Policies and Estimates

Note 2 includes a summary of the significant accounting policies and methods used in the preparation of Altria Group, Inc.’s consolidated financial statements. In most instances, Altria Group, Inc. must use an accounting policy or method because it is the only policy or method permitted under U.S. GAAP.

The preparation of financial statements includes the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. If actual amounts are ultimately different from previous estimates, the revisions are included in Altria Group, Inc.’s consolidated results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, between Altria Group, Inc.’s estimates and actual amounts in any year have not had a significant impact on its consolidated financial statements.

The following is a review of the more significant assumptions and estimates, as well as the accounting policies and methods, used in the preparation of Altria Group, Inc.’s consolidated financial statements:

▪Consolidation: The consolidated financial statements include Altria Group, Inc., as well as its wholly-owned and majority-owned subsidiaries. Investments in which Altria Group, Inc. exercises significant influence are accounted for under the equity method of accounting. All intercompany transactions and balances have been eliminated.

▪Revenue Recognition: Altria Group, Inc.’s businesses recognize revenues, net of sales incentives and sales returns, and including shipping and handling charges billed to

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customers, upon shipment ~~or delivery~~ of goods when title and risk of loss pass to customers. Payments received in advance of revenue recognition are deferred and recorded in other accrued

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liabilities until revenue is recognized. Altria Group, Inc.’s businesses also include excise taxes billed to customers in net revenues. Shipping and handling costs are classified as part of cost of sales.

▪Depreciation, Amortization, Impairment Testing and Asset Valuation: Altria Group, Inc. depreciates property, plant and equipment and amortizes its definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 25 years, and buildings and building improvements over periods up to 50 years. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.

Altria Group, Inc. reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Altria Group, Inc. performs undiscounted operating cash flow analyses to determine if an impairment exists. These analyses are affected by general economic conditions and projected growth rates. For purposes of recognition and measurement of an impairment for assets held for use, Altria Group, Inc. groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Altria Group, Inc. also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.

Goodwill and indefinite-lived intangible assets recorded by Altria Group, Inc. at December 31, ~~2013~~2014 relate primarily to the acquisitions of Green Smoke in 2014, UST in 2009 and Middleton in 2007. Altria Group, Inc. conducts a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require Altria Group, Inc. to perform an interim review. If the carrying value of goodwill exceeds its fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the implied fair value. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, which is determined using discounted cash flows, the intangible

asset is considered impaired and is reduced to fair value.

Goodwill and indefinite-lived intangible assets, by reporting unit at December 31, ~~2013~~2014 were as follows:

(in millions) Goodwill

Indefinite-Lived
Intangible Assets

Cigarettes $ —
$ 2
Smokeless products 5,023
8,801
Cigars 77
2,640
Wine 74
258
Total $ 5,174
$ 11,701



(in millions)	Goodwill		Indefinite-Lived Intangible Assets
Cigarettes	$	—	$	2
Smokeless products	5,023		8,801
Cigars	77		2,640
Wine	74		258
E-vapor	111		10
Total	$	5,285	$	11,711

During ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, Altria Group, Inc. completed its quantitative annual impairment test of goodwill and indefinite-lived intangible assets, and no impairment charges resulted.

At December 31, ~~2013, the estimated fair value of the smokeless products reporting unit, as well as~~2014, (i) the estimated fair values of the indefinite-lived intangible assets within the smokeless products, cigars and wine reporting units (except for the Skoal trademark in the smokeless products reporting unit and the Columbia Crest trademark in the wine reportingunit) substantially exceeded their carrying ~~values. In addition, at December 31, 2013,~~values, (ii) the carrying values of the Skoal and Columbia Crest trademarks were $3.9 billion and $54 million, respectively, and (iii) the estimated fair ~~values~~value of the ~~cigars trademarks (primarily~~ ~~Black & Mild~~) exceeded their carrying values by approximately 18%. Middleton continues to observe significant competitive activity, including higher levels of imported, low-priced machine-made large cigars. As a result, management concluded after the 2013 review that while the fair values for the cigars trademarks exceeded their carrying values, theysmokeless products reporting unit did not substantially exceed ~~their~~its carrying ~~values.~~value.

At December 31, 2014, the estimated fair value of the Skoal trademark exceeded its carrying value by approximately 17%, and the estimated fair value of the smokeless products reporting unit exceeded its carrying value by approximately 20%. In the smokeless products reporting unit, 2014 results for Skoal were impacted by strategies to enhance Skoal’s equity and targeted investments to narrow price gaps, which are expected to strengthen the brand over the long term. In addition, USSTC estimates that the smokeless products category volume growth rate slowed to approximately 2% for 2014 as compared to approximately 5.5% for 2013. USSTC continues to believe that the smokeless category’s growth rate is best determined over a longer time horizon and will continue to monitor industry volume closely.

In ~~2013,~~2014, Altria Group, Inc. used an income approach to estimate the fair values of its reporting units and its indefinite-lived intangible assets. The income approach reflects the discounting of expected future cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of those funds, the expected rate of inflation and the risks associated with realizing expected future cash flows. The average discount rate used in performing the valuations was approximately 10%.

In performing the ~~2013~~2014 discounted cash flow analysis, Altria Group, Inc. made various judgments, estimates and assumptions, the most significant of which were volume, income, growth rates and discount rates. The analysis incorporated assumptions used in Altria Group, Inc.’s long-term financial forecast and also included market participant assumptions regarding the highest and best use of Altria Group, Inc.’s indefinite-lived intangible assets. Assumptions are also

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made for perpetual growth rates for periods beyond the long-term financial forecast. Fair value calculations are sensitive to changes in these estimates and assumptions, some of which relate to broader macroeconomic conditions outside of Altria Group, Inc.’s control.

Although Altria Group, Inc.’s discounted cash flow analysis is based on assumptions that are considered reasonable and based on the best available information at the time that the discounted cash flow analysis is developed, there is significant

judgment used in determining future cash flows. The following factors have the most potential to impact expected future cash flows and, therefore, Altria Group, Inc.’s impairment conclusions: general economic conditions; federal, state and local regulatory developments; changes in category growth rates as a result of changing consumer preferences; success of planned new product introductions; competitive activity; and tobacco-related taxes.

While Altria Group, Inc.’s management believes that the estimated fair values of each reporting unit and indefinite-lived intangible asset are reasonable, actual performance in the short-term or long-term could be significantly different from

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forecasted performance, which could result in impairment charges in future periods.

For additional information on goodwill and other intangible assets, see Note 3.4.

▪Marketing Costs: Altria Group, Inc.’s businesses promote their products with consumer engagement programs, consumer incentives and trade promotions. Such programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives, event marketing and volume-based incentives. Consumer engagement programs are expensed as incurred. Consumer incentive and trade promotion activities are recorded as a reduction of revenues, a portion of which is based on amounts estimated as being due to customers and consumers at the end of a period, based principally on historical utilization and redemption rates. For interim reporting purposes, consumer engagement programs and certain consumer incentive expenses are charged to operations as a percentage of sales, based on estimated sales and related expenses for the full year.

▪Contingencies: As discussed in Note 18 and Item 3, legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. In 1998, PM USA and certain other U.S. tobacco product manufacturers entered into the MSA with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other U.S. tobacco product manufacturers had previously ~~settled~~entered into agreements to settle similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). PM USA’s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers’ domestic

cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM USA, USSTC and Middleton were also ~~entered into a trust agreement~~subject to ~~provide certain aid to U.S. tobacco growers and quota holders, but PM USA’s obligations under this trust expired on December 15, 2010 (these obligations had been offset by the~~payment obligations imposed ~~on PM USA~~ by FETRA. The FETRA ~~which expires~~payment obligations expired after the third quarter of ~~2014). USSTC and Middleton are also subject to obligations imposed by FETRA.~~2014. In addition, in June 2009, PM USA and ~~a subsidiary of~~ USSTC became subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. ~~The~~Payments under the State Settlement Agreements, FETRA and the FDA user fees ~~call for payments that~~ are based on variable factors, such as volume, market share and inflation, depending on the subject payment. Altria Group, Inc.’s subsidiaries account for the cost of the State Settlement Agreements, FETRA and FDA user fees as a component of cost of sales. As a result of the State Settlement Agreements, FETRA and FDA user fees, Altria Group, Inc.’s subsidiaries recorded approximately $4.9 billion, $4.4 billion ~~$5.1 billion~~ and ~~$5.0~~$5.1 billion of charges to cost of sales for the years ended December 31, 2014, 2013 ~~2012~~ and ~~2011,~~2012, respectively. The 2014 and 2013

~~amount~~ amounts included reductions to cost of sales of $43 million and $664 million, respectively, related to ~~certain~~the NPM Adjustment ~~items~~Items discussed further below and in Health Care Cost Recovery Litigation - ~~Possible Adjustments in MSA Payments for 2003 - 2012~~NPM Adjustment Disputes in Note 18. In addition, the 2014 amount included a decrease in the charge to cost of sales of approximately $100 million, reflecting the expiration of the obligations imposed by FETRA after the third quarter of 2014.

Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. ~~Except to the extent discussed in Note 18 and Item 3, at~~At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed in Note 18 and Item 3: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation defense costs are expensed as incurred and ~~are~~ included in marketing, administration and research costs on the consolidated statements of earnings.

▪Employee Benefit Plans: As discussed in Note 16. Benefit Plans to the consolidated financial statements in Item 8 (“Note 16”), Altria Group, Inc. provides a range of benefits to its employees and retired employees, including pensions, postretirement health care and postemployment benefits (primarily severance). Altria Group, Inc. records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions ~~such~~ as to discount rates, assumed rates of return on plan assets, mortality, compensation increases, turnover rates and health care cost trend rates. Altria Group, Inc. reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. Any effect of the modifications is generally amortized over future periods.

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Altria Group, Inc. recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive earnings (losses), net of deferred income taxes, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost.

At December 31, ~~2013~~2014, Altria Group, Inc.’s discount rate assumptions for its pension and postretirement plans ~~increased~~decreased to 4.1% and 4.0%, respectively, from 4.9% and 4.8%, respectively, ~~from 4.0% and 3.9%, respectively,~~ at December 31, ~~2012.~~2013. In addition, at December 31, 2014, Altria Group, Inc. updated its mortality assumptions to reflect longer life expectancy for its defined benefit pension plan and postretirement health care plan participants. Altria Group, Inc. presently anticipates ~~a decrease~~an increase of approximately ~~$146~~$100 million in its ~~2014~~2015 pre-tax pension and postretirement expense versus ~~2013,~~2014, not including amounts in each year, if any, related to termination, settlement and curtailment. This anticipated ~~decrease~~increase is due primarily to ~~lower amortization of unrecognized losses, which includes~~ the impact of the ~~higher~~updated mortality assumptions ($70 million). The impact of the lower discount rate ~~and~~was largely offset by the impact of higher ~~return~~than expected returns on plan ~~assets in 2013.~~assets. A 50 basis point decrease (increase) in Altria Group, Inc.’s discount rates would increase (decrease) Altria Group, Inc.’s pension and postretirement expense by

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approximately ~~$45~~$52 million. Similarly, a 50 basis point decrease (increase) in the expected return on plan assets would increase (decrease) Altria Group, Inc.’s pension expense by approximately ~~$32~~$34 million. See Note 16 for a sensitivity discussion of the assumed health care cost trend rates.

▪Income Taxes: Significant judgment is required in determining income tax provisions and in evaluating tax positions. Altria Group, Inc.’s deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Altria Group, Inc. records a valuation allowance when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.

Altria Group, Inc. recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on its consolidated statements of earnings.

As discussed in Note 14. Income Taxes to the consolidated financial statements in Item 8 (“Note 14”), Altria Group, Inc. recognized income tax benefits and charges in the consolidated statements of earnings during ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 as a result of various tax events.

▪Leasing: Substantially all of PMCC’s net revenues in ~~2013~~2014 related to income on leveraged leases and related gains on asset sales. Income ~~relating~~attributable to leveraged leases is initially

recorded ~~initially~~ as unearned income, which is included in the line item finance assets, net, on Altria Group, Inc.’s consolidated balance sheets and is subsequently recognized as revenue over the terms of the respective leases at constant after-tax rates of return on the positive net investment balances. As discussed in Note 7, PMCC lessees are affected by bankruptcy filings, credit rating changes and financial market conditions.

PMCC’s investment in leases is included in the line item finance assets, net, on the consolidated balance sheets as of December 31, ~~2013~~2014 and ~~2012~~2013. At December 31, ~~2013~~2014, PMCC’s

net finance receivables of approximately ~~$1.9~~$1.7 billion, in

~~leveraged leases,~~ which are included in finance assets, net, on

Altria Group, Inc.’s consolidated balance sheet, consisted of rents receivable ($~~4.2~~3.4 billion) and the residual value of assets under lease ($~~1.1~~0.8 billion), reduced by third-party nonrecourse debt ($~~2.8~~2.1 billion) and unearned income ($~~0.6~~0.4 billion). The repayment of the nonrecourse debt is collateralized by lease payments receivable and the leased property, and is nonrecourse to the general assets of PMCC. As required by U.S. GAAP, the third-party nonrecourse debt has been offset against the related rents receivable and has been presented on a net basis within finance assets, net, on Altria Group, Inc.’s consolidated balance sheets. Finance assets, net, of ~~$2.0~~$1.6 billion at December 31, ~~2013~~2014 also included ~~net finance receivables for direct finance leases and~~ an allowance for losses.

Estimated residual values represent PMCC’s estimate at lease inception as to the fair values of assets under lease at the end of the non-cancelable lease terms. The estimated residual values are reviewed annually by PMCC’s management, which includes analysis of a number of factors, including activity in the relevant industry. If necessary, revisions are recorded to reduce the residual values. ~~Such reviews~~In 2014 and 2012, PMCC’s annual review of estimated residual values resulted in a decrease of $8$63 million and $19 million, respectively, to unguaranteed residual values. These decreases in ~~2012~~unguaranteed residual values resulted in a reduction to PMCC’s net revenues of $26 million and ~~results of operations.~~$8 million in 2014 and 2012, respectively. There were no such adjustments in ~~2013 and 2011.~~2013.

PMCC considers rents receivable past due when they are beyond the grace period of their contractual due date. PMCC stops recording income (“non-accrual status”) on rents receivable when contractual payments become 90 days past due or earlier if management believes there is significant uncertainty of collectability of rent payments, and resumes recording income when collectability of rent payments is reasonably certain. Payments received on rents receivable that are on non-accrual status are used to reduce the rents receivable balance. Write-offs to the allowance for losses are recorded when amounts are deemed to be uncollectible. There were no rents receivable on non-accrual status at December 31, ~~2013~~2014.

To the extent that rents receivable due to PMCC may be uncollectible, PMCC records an allowance for losses against its finance assets. Losses on such leases are recorded when probable and estimable. PMCC regularly performs a systematic assessment of each individual lease in its portfolio to determine potential credit or collection issues that might indicate impairment. Impairment takes into consideration both the probability of default and the likelihood of recovery if

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default were to occur. PMCC considers both quantitative and qualitative factors of each investment when performing its assessment of the allowance for losses. For further discussion, see Note 7.

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Consolidated Operating Results

For the Years Ended December 31,
(in millions) 2013
2012
2011
Net Revenues:
Smokeable products $ 21,868
$ 22,216
$ 21,970
Smokeless products 1,778
1,691
1,627
Wine 609
561
516
All other 211
150
(313 )
Net revenues $ 24,466
$ 24,618
$ 23,800
Excise Taxes on Products:
Smokeable products $ 6,651
$ 6,984
$ 7,053
Smokeless products 130
113
108
Wine 22
21
20
Excise taxes on products $ 6,803
$ 7,118
$ 7,181
Operating Income:
Operating companies income (loss):
Smokeable products $ 7,063
$ 6,239
$ 5,737
Smokeless products 1,023
931
859
Wine 118
104
91
All other 157
176
(349 )
Amortization of intangibles (20 ) (20 ) (20 )
General corporate expenses (235 ) (229 ) (264 )
Changes to Mondelēz and PMI
tax-related receivables/payables
(22 ) 52
14
Operating income $ 8,084
$ 7,253
$ 6,068



	For the Years Ended December 31,
(in millions)	2014			2013			2012
Net Revenues:
Smokeable products	$	21,939		$	21,868		$	22,216
Smokeless products	1,809			1,778			1,691
Wine	643			609			561
All other	131			211			150
Net revenues	$	24,522		$	24,466		$	24,618
Excise Taxes on Products:
Smokeable products	$	6,416		$	6,651		$	6,984
Smokeless products	138			130			113
Wine	23			22			21
Excise taxes on products	$	6,577		$	6,803		$	7,118
Operating Income:
Operating companies income (loss):
Smokeable products	$	6,873		$	7,063		$	6,239
Smokeless products	1,061			1,023			931
Wine	134			118			104
All other	(185		)	157			176
Amortization of intangibles	(20		)	(20		)	(20		)
General corporate expenses	(241		)	(235		)	(229		)
Changes to Mondelēz and PMI tax-related receivables/payables	(2		)	(22		)	52
Operating income	$	7,620		$	8,084		$	7,253

As discussed further in Note 15, Altria Group, Inc.’s chief operating decision maker reviews operating companies income to evaluate the performance of, and allocate resources to, the segments. Operating companies income for the segments is defined as operating income before amortization of intangibles and general corporate expenses. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.

The following events that occurred during ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 affected the comparability of statement of earnings amounts.

•▪NPM Adjustment ~~Items~~:Items: For the ~~year~~years ended December 31, 2014 and 2013, pre-tax income for NPM Adjustment Items was recorded in Altria Group, Inc.’s consolidated statements of

earnings as follows:



(in millions)	2014		2013

Smokeable products segment	$	43	$	664
Interest and other debt expense, net	47		—
Total	$	90	$	664

The amounts shown in the table above for the smokeable products segment were recorded by PM USA ~~recorded pre-tax income~~as reductions to costs of ~~$664 million,~~sales, which increased operating companies income in the smokeable products segment. ~~This recording of pre-tax income resulted from the following:~~

a reduction to cost of sales of $519 million for the settlement of disputes with certain states and territories related to the NPM Adjustment under the MSA for the years 2003 - 2012 (“NPM Adjustment Settlement”); and

a reduction to cost of sales of $145 million for the September 11, 2013 diligent enforcement rulings of the arbitration panel presiding over the NPM Adjustment dispute for 2003 (“NPM Arbitration Panel Decision”).

For further discussion, ~~of these items (which are referred to collectively as the “NPM Adjustment Items”),~~ see Health Care Cost Recovery Litigation - ~~Possible Adjustments~~NPM Adjustment Disputes in ~~MSA Payments~~Note 18.

▪Tobacco and Health Litigation Items: For the years ended December 31, 2014, 2013 and 2012, pre-tax charges related to certain tobacco and health litigations items were recorded in Altria Group, Inc.’s consolidated statements of earnings as follows:



(in millions)	2014		2013		2012

Smokeable products segment	$	27	$	18	$	4
General corporate	15		—		—
Interest and other debt expense, net	2		4		1
Total	$	44	$	22	$	5

During the second quarter of 2014, Altria Group, Inc. and PM USA recorded an aggregate pre-tax charge of $31 million in marketing, administration and research costs for ~~2003~~the estimated costs of implementing the corrective communications remedy in connection with the federal government’s lawsuit against Altria Group, Inc. and PM USA. For further discussion, see Health Care Cost Recovery Litigation - ~~2012~~Federal Government Lawsuit in Note 18.

▪Asset Impairment, Exit, ~~Implementation~~Integration and ~~Integration~~Acquisition-Related Costs: ~~Altria Group, Inc.’s pre-tax~~Pre-tax asset impairment, exit, integration and ~~implementation~~acquisition-related costs for the years ended December 31, 2014, 2013 and 2012 were $21 million, $11 million and $61 million, respectively.

For 2014, these costs consisted primarily of integration and acquisition-related costs of $28 million related to the acquisition of Green Smoke, partially offset by a pre-tax gain of $10 million from the sale of PM USA’s Cabarrus, North Carolina manufacturing facility during the second quarter of 2014. For further discussion of the Green Smoke acquisition, see Note 3.

For 2012, these costs were primarily ~~related~~due to Altria Group, Inc.’s cost reduction program announced in ~~October~~ 2011 (the “2011 Cost Reduction Program”), which was substantially completed as of December 31, 2012. As of December 31, 2013, Altria Group, Inc. achieved its goal of delivering $400 million in annualized savings versus previously planned spending..

For a breakdown of ~~these~~asset impairment and exit costs by segment, see Note 4. ~~Asset Impairment, Exit, Implementation and Integration Costs~~ ~~in Item 8.~~15.

▪~~Tobacco and Health Judgments:~~ ~~See Note 18 for pre-tax charges related to tobacco and health judgments recorded in operating companies income in the smokeable products segment and related interest costs.~~

▪~~SABMiller Special Items:~~ Altria Group, Inc.’s earnings from its equity investment in SABMiller for 2013 included net pre-tax charges of $31 million, consisting of costs for SABMiller’s “business capability programme,” costs related to SABMiller’s economic and social development program in South Africa and asset impairment charges, partially offset by gains related to divestitures. Altria Group, Inc.’s earnings from its equity investment in SABMiller for 2012 included net pre-tax income of $248 million, consisting of gains resulting from SABMiller’s strategic alliance transactions with Anadolu Efes and Castel, partially offset by costs for SABMiller’s “business capability programme” and costs related to SABMiller’s acquisition of Foster’s Group Limited (“Foster’s”). Altria Group, Inc.’s earnings from its equity investment in SABMiller for 2011 included net pre-tax charges of $82 million, consisting of costs for SABMiller’s “business capability programme,” acquisition-related costs for SABMiller’s acquisition of Foster’s and asset impairment charges, partially offset by gains resulting from SABMiller’s hotel and gaming transaction and the disposal of a business in Kenya.

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▪PMCC Leveraged Lease ~~Benefit/Charge:~~Benefit: During the second quarter of 2012, Altria Group, Inc. entered into a closing agreement (the “Closing Agreement”) with the Internal Revenue Service (“IRS”) that conclusively resolved the federal income tax treatment for all prior and future tax years of certain leveraged lease transactions entered into by PMCC. As a result of the Closing Agreement, Altria Group, Inc. recorded a one-time net earnings benefit of $68 million during the second quarter of 2012 due primarily to lower than estimated interest on tax underpayments. During the second quarter of 2011, Altria Group, Inc. recorded a charge of $627 million related to the federal income tax treatment of these transactions (the “2011 PMCC Leveraged Lease Charge”). Approximately 50% of the charge ($315 million) represented a reduction in cumulative lease earnings recorded as of the date of the charge that will be recaptured over the remainder of the terms of the affected leases. The remaining portion of the charge ($312 million) primarily represented a permanent charge for interest on tax underpayments. For the years ended December 31, 2012See Note 7 and ~~2011, the benefit/charge associated with PMCC’s leveraged lease transactions was recorded in Altria Group, Inc.’s consolidated statements of earnings as follows:~~

(in millions) For the Year Ended December 31, 2012 For the Year Ended December 31, 2011
Net Revenues
Benefit for Income Taxes
Total
Net Revenues
(Benefit) Provision for Income Taxes
Total
Reduction to cumulative lease earnings $ 7
$ (2 ) $ 5
$ 490
$ (175 ) $ 315
Interest on tax underpayments —
(73 ) (73 ) —
312
312
Total $ 7
$ (75 ) $ (68 ) $ 490
$ 137
$ 627

~~See~~ Note 14 for a further discussion of the Closing Agreement.

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▪Loss on Early Extinguishment of Debt: During the fourth quarter of 2014, UST redeemed in full its $300 million (aggregate principal amount) 5.75% senior notes due 2018.

In addition, during the fourth quarter of 2013 and the third quarter of 2012, Altria Group, Inc. completed debt tender offers to purchase for cash certain of its senior unsecured notes in aggregate principal amounts of $2.1 billion and $2.0 billion, ~~respectively, of certain of its senior unsecured notes.~~ respectively.

As a result of ~~these~~the UST debt redemption and the Altria Group, Inc. debt tender offers, ~~Altria Group, Inc. recorded~~ pre-tax losses on early extinguishment of debt were recorded as follows:


(in millions)	2013		2012		2014		2013		2012

Debt tender premiums and fees	$	1,054	$	864
Premiums and fees					$	44	$	1,054	$	864
Write-off of unamortized debt discounts and debt issuance costs	30		10		—		30		10
Total	$	1,084	$	874	$	44	$	1,084	$	874

For further discussion, see Note 9.Long-Term Debt to the consolidated financial statements in Item 8 (“Note 9”).

▪SABMiller Special Items: Altria Group, Inc.’s earnings from its equity investment in SABMiller for 2012 included net pre-tax income of $248 million, consisting of gains resulting from SABMiller’s strategic alliance transactions with Anadolu Efes and Castel, partially offset by costs for SABMiller’s “business capability programme” and costs related to SABMiller’s acquisition of Foster’s Group Limited.

▪Tax Items: Tax items for 2014 included the reversal of tax accruals no longer required. Tax items for 2013 included the reversal of tax accruals no longer required and the recognition of previously unrecognized foreign tax credits primarily associated with SABMiller dividends. Excluding the tax impact included in the PMCC leveraged lease benefit, tax items for 2012 included the reversal of tax reserves and associated interest due primarily to the closure in 2012 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2004 - 2006 tax years. Tax items for 2011, excluding the tax impact included in the 2011 PMCC Leveraged Lease Charge, included the reversal of tax reserves and associated interest related to the expiration of statutes of limitations, closure of tax audits and the reversal of tax accruals no longer required. For further discussion, see Note 14.

2014 Compared with 2013

The following discussion compares consolidated operating results for the year ended December 31, 2014, with the year ended December 31, 2013.

Net revenues, which include excise taxes billed to customers, were essentially unchanged, due primarily to higher net revenues in all reportable segments, offset by lower gains on asset sales in the financial services business.

Excise taxes on products decreased $226 million (3.3%), due primarily to lower smokeable products shipment volume.

Cost of sales increased $579 million (8.0%), due primarily to higher NPM Adjustment Items in 2013.

Marketing, administration and research costs increased $199 million (8.5%), due primarily to higher investment spending in the innovative tobacco products businesses, lower reductions to the allowance for losses in the financial services

business and higher costs in the smokeable products segment.

Operating income decreased $464 million (5.7%), due primarily to lower operating results from the smokeable products segment (which reflected higher NPM Adjustment Items in 2013), higher investment spending in the innovative tobacco products businesses and lower income from the financial services business, partially offset by higher operating results from the smokeless products segment.

Interest and other debt expense, net, decreased $241 million (23.0%) due primarily to lower interest costs on debt as a result of debt maturities in 2013 and 2014, and debt refinancing activities during 2013, as well as interest income recorded in 2014 as a result of the NPM Adjustment Items.

Net earnings attributable to Altria Group, Inc. of $5,070 million increased $535 million (11.8%), due primarily to lower losses on early extinguishment of debt, lower interest and other debt expense, net, partially offset by lower operating income. Diluted and basic EPS attributable to Altria Group, Inc. of $2.56, each increased by 13.3% due to higher net earnings attributable to Altria Group, Inc. and fewer shares outstanding.

2013 Compared ~~With~~with 2012

The following discussion compares consolidated operating results for the year ended December 31, 2013, with the year ended December 31, 2012.

Net revenues, which include excise taxes billed to customers, decreased $152 million (0.6%), due primarily to lower net revenues from the smokeable products segment, partially offset by higher net revenues from the smokeless products and wine segments, and higher gains on asset sales in the financial services business.

Excise taxes on products decreased $315 million (4.4%), due primarily to lower smokeable products shipment volume.

Cost of sales decreased $731 million (9.2%), due primarily to ~~the~~ NPM Adjustment Items and lower smokeable products shipment volume, partially offset by higher per unit settlement charges.

Marketing, administration and research costs increased $39 million (1.7%), due primarily to spending related to the ~~alternative~~innovative tobacco products businesses and a postretirement benefit plan curtailment gain in 2012 related to the 2011 Cost Reduction Program, partially offset by lower spending in the smokeable products segment as a result of cost reduction initiatives.

Operating income increased $831 million (11.5%), due primarily to higher operating results from the smokeable products segment (which includes ~~the~~ NPM Adjustment Items) and higher operating results from the smokeless products segment, partially offset by changes to ~~Kraft Foods Inc. (now known as~~ Mondelēz International, Inc. (“Mondelēz”)) and PMI tax-related receivables/payables as discussed further in Note 14.

Interest and other debt expense, net, decreased $77 million (6.8%) due primarily to lower interest costs on debt as a result

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of debt refinancing activities related to the debt tender offer in 2012.

Earnings from Altria Group, Inc.’s equity investment in SABMiller decreased $233 million (19.0%), due primarily to

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SABMiller special items (which included gains of $342 million resulting from SABMiller’s strategic alliance transactions with Anadolu Efes and Castel in 2012)~~, partially offset by higher gains resulting from issuances of common stock by SABMiller in 2013.~~.

Altria Group, Inc.’s effective income tax rate decreased 0.7 percentage points to 34.7%, due primarily to an increased recognition of foreign tax credits in 2013 primarily associated with SABMiller dividends, and the resolution of various Mondelēz and PMI tax matters during 2013 and 2012, partially offset by the ~~PMCC~~ leveraged lease benefit recorded by PMCC during the second quarter of 2012.

Net earnings attributable to Altria Group, Inc. of $4,535 million increased $355 million (8.5%), due primarily to higher operating income, lower interest and other debt expense, net, and a lower income tax rate, partially offset by lower earnings from Altria Group, Inc.’s equity investment in SABMiller and higher losses on early extinguishment of debt. Diluted and basic EPS attributable to Altria Group, Inc. of $2.26, each increased by 9.7% due to higher net earnings attributable to Altria Group, Inc. and fewer shares outstanding.

~~2012 Compared With 2011~~

~~The following discussion compares consolidated operating results for the year ended~~ ~~December 31, 2012, with the year ended~~ ~~December 31, 2011~~.

Net revenues, which include excise taxes billed to customers, increased $818 million (3.4%), due to higher net revenues from the financial services business (which included the 2011 PMCC Leveraged Lease Charge), and the smokeable products, smokeless products and wine segments.

~~Excise taxes on products decreased $63 million (0.9%), due primarily to lower excise taxes for Middleton and lower smokeable products shipment volume.~~

~~Cost of sales increased $257 million (3.3%), due primarily~~

~~to higher per unit settlement charges and higher manufacturing costs.~~

Marketing, administration and research costs decreased $362 million (13.7%), primarily reflecting cost reduction initiatives, lower charges related to tobacco and health judgments, recoveries related to the American Airlines, Inc. bankruptcy filing in November 2011 and a decrease to the allowance for losses in the financial services business.

Operating income increased $1,185 million (19.5%), due primarily to: (i) higher operating results from the financial services business, which in 2011 included the 2011 PMCC Leveraged Lease Charge; (ii) higher operating results from the smokeable products and smokeless products segments, which included lower charges in 2012 related to the 2011 Cost Reduction Program and lower charges in the smokeable products segment related to tobacco and health judgments; and (iii) changes to Mondelēz and PMI tax-related receivables/payables as discussed further in Note 14.

Interest and other debt expense, net, decreased $90 million (7.4%) due primarily to lower interest costs in 2012 related to tobacco and health judgments, and lower interest costs on debt as a result of debt refinancing activities in 2012.

Earnings from Altria Group, Inc.’s equity investment in SABMiller increased $494 million (67.7%), due primarily to higher net gains in 2012 for SABMiller special items (which included gains resulting from SABMiller’s strategic alliance transactions with Anadolu Efes and Castel in 2012) and higher ongoing equity earnings.

Altria Group, Inc.’s effective income tax rate decreased 3.8 percentage points to 35.4% due primarily to a $312 million charge in 2011 that primarily represents interest on tax underpayments associated with the 2011 PMCC Leveraged Lease Charge, and a $73 million interest benefit recorded during 2012, resulting primarily from lower than estimated interest on tax underpayments related to the Closing Agreement with the IRS, partially offset by a reduction in certain consolidated tax benefits resulting from the 2012 debt tender offer and a higher tax provision in 2012 related to the Mondelēz and PMI tax matters.

Net earnings attributable to Altria Group, Inc. of $4,180 million increased $790 million (23.3%), due primarily to higher operating income, higher earnings from Altria Group, Inc.’s equity investment in SABMiller, a lower income tax rate and lower interest and other debt expense, net, partially offset by the loss on early extinguishment of debt related to the 2012 debt tender offer. Diluted and basic EPS attributable to Altria Group, Inc. of $2.06, each increased by 25.6% due to higher net earnings attributable to Altria Group, Inc. and fewer shares outstanding.

Operating Results by Business Segment

Tobacco Space

Business Environment

Summary

The United States tobacco industry faces a number of business and legal challenges that have adversely affected and may adversely affect the business and sales volume of our tobacco subsidiaries and our consolidated results of operations, cash flows ~~and~~or financial position. These challenges, some of which are discussed in more detail below, in Note 18, Item 1A and Item 3, include:


▪	pending and threatened litigation and bonding requirements;


▪	the requirement to issue “corrective statements” in various media in connection with the ~~Federal Government’s~~federal government’s lawsuit;


▪	restrictions and requirements imposed by the FSPTCA, ~~enacted in June 2009,~~ and restrictions and requirements that have been, and in the future ~~may~~will be, imposed by the FDA under this statute;

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▪	actual and proposed excise tax increases, as well as changes in tax structures and tax stamping requirements;


▪	bans and restrictions on tobacco use imposed by governmental entities and private establishments and employers;


▪	other federal, state and local government actions, including:


▪	increases in the minimum age to purchase tobacco products above the current federal minimum age of 18;


▪	restrictions on the sale of tobacco products by certain retail establishments, the sale of certain tobacco products with certain characterizing flavors and the sale of tobacco products in certain package sizes;


▪	additional restrictions on the advertising and promotion of tobacco products;


▪	other actual and proposed tobacco product legislation and regulation; and

▪~~governmental investigations;~~


▪	governmental investigations;


▪	the diminishing prevalence of cigarette smoking and increased efforts by tobacco control advocates and others (including ~~employers)~~employers and retail establishments) to further restrict tobacco use;


▪	~~price gaps and~~ changes in adult tobacco consumer purchase behavior, which is influenced by various factors such as economic conditions, excise taxes and price ~~gaps between premium and lowest price brands;~~gap relationships, may result in adult tobacco consumers switching to discount products or other lower priced tobacco products;


▪	competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation;

▪

illicit trade ~~practices, including the sale of counterfeit~~in tobacco products by third parties; the sale of tobacco products by third parties over the Internet and by other means designed to avoid the collection of applicable taxes; diversion into one market of products intended for sale in another; the potential assertion of claims and other issues relating to contraband shipments of tobacco products; ~~and the imposition of additional legislative or regulatory requirements related to illicit trade practices;~~ and


▪	potential adverse changes in tobacco leaf price, availability and quality.

In addition to and in connection with the foregoing, evolving adult tobacco consumer preferences pose challenges for Altria Group, Inc.’s tobacco subsidiaries. Our tobacco subsidiaries believe that a significant number of adult tobacco consumers switch between tobacco categories or use multiple forms of tobacco products and that approximately 50% of adult smokers say they are interested in trying innovative tobacco products. Altria Group, Inc.’s tobacco subsidiaries further believe that nearly all adult ~~tobacco consumer awareness~~smokers are aware of e-vapor products (such as electronic ~~cigarettes is high~~cigarettes) and

~~growing and estimate that~~ approximately 60% have tried them. Nu Mark estimates 2014 total consumer expenditures ~~for~~on e-vapor products ~~reached~~of approximately $1$2 billion ~~in the United States in 2013.~~ based on annualized sales information.

Altria Group, Inc. and its tobacco subsidiaries work to meet these evolving adult tobacco consumer preferences over time by developing, manufacturing, marketing and distributing products both within and outside the United States through innovation and adjacency growth strategies (including, where appropriate, arrangements with, or investments in, third parties). For example, Nu Mark entered the e-vapor category in 2013 with the introduction of MarkTen ~~electronic cigarettes~~e-vapor products into atwo lead ~~market in Indiana in August 2013 and expanded distribution~~markets. Nu Mark completed the national expansion of MarkTen ~~electronic cigarettes to Arizona~~products in December ~~2013. Nu Mark plans to expand~~ ~~MarkTen~~ ~~electronic cigarettes nationally beginning in the second quarter of~~ 2014. In addition, ~~on February~~as further discussed in Note 3, in April 2014, ~~Altria Group, Inc. announced~~ Nu ~~Mark’s entry into an agreement to acquire~~Mark completed the acquisition of the e-vapor business of Green ~~Smoke, Inc. and its affiliates.~~Smoke. See the discussions regarding new product technologies, adjacency growth strategy and evolving

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consumer preferences in Item 1A for certain risks associated with the foregoing discussion.

We have provided additional detail on the following topics below:

▪FSPTCA and FDA Regulation;

▪Excise Taxes;

▪International Treaty on Tobacco Control;

▪State Settlement Agreements;

▪Other Federal, State and Local Regulation and Activity;

▪Illicit ~~Trade;~~Trade in Tobacco Products;

▪~~Tobacco Price, Availability and Quality; and~~


▪	Price, Availability and Quality of Agricultural Products; and

▪Timing of Sales.

FSPTCA and FDA Regulation

▪The Regulatory Framework: The FSPTCA expressly establishes certain restrictions and prohibitions on our cigarette and smokeless tobacco businesses and authorizes or requires further FDA action. Under the FSPTCA, the FDA has broad authority to (1) to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of cigarettes, cigarette tobacco and smokeless tobacco products; (2) to require disclosures of related information; and (3) to enforce the FSPTCA and related regulations. The law also grants the FDA authority to extend the FSPTCA’s application, by regulation, to all other tobacco products, including cigars, pipe tobacco and electronic cigarettes. The FDA has indicated that it intends to regulate cigars, electronic cigarettes and other tobacco products, but it has not indicated a timeline for the issuance of final regulations.

Among other measures, the FSPTCA:

▪~~imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail;~~

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▪~~prohibits cigarettes with characterizing flavors other than menthol and tobacco;~~

▪~~bans descriptors such as “light,” “mild” or “low” or similar descriptors unless expressly authorized by the FDA;~~

▪~~requires extensive ingredient disclosure to the FDA and may require more limited public ingredient disclosure;~~

▪~~prohibits any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;~~

▪


▪	imposes restrictions on the advertising, promotion, sale and distribution of tobacco products, including at retail;


▪	bans descriptors such as “light,” “mild” or “low” or similar descriptors when used as descriptors of modified risk unless expressly authorized by the FDA;


▪	requires extensive product disclosures to the FDA and may require public disclosures;


▪	prohibits any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;


▪	imposes reporting obligations relating to contraband activity and grants the FDA authority to impose recordkeeping and other obligations to address illicit trade in tobacco products;


▪	changes the language of the cigarette and smokeless tobacco product health warnings, enlarges their size and requires the development by the FDA of graphic warnings for cigarettes, and gives the FDA the authority to require new warnings;

▪

authorizes the FDA to adopt product regulations and related actions, including imposing tobacco product standards that are appropriate for the protection of the public health (e.g., related to the use of menthol in ~~tobacco products;~~

▪changes the language of the cigarette and smokeless tobacco product health warnings, enlarges their size and requires the development by the FDA of graphic warnings for cigarettes, and gives the FDA the authority to require new warnings;

▪~~authorizes the FDA to adopt product regulations and related actions, including:~~

▪to impose tobacco product standards that are appropriate for the protection of the public health through a regulatory process, including, among other possibilities, restrictions on ingredients, constituents or other properties, performance or design criteria, as well as to impose testing, measurement, reporting and disclosure requirements;

▪to subject tobacco products that are modified or first introduced into the market after March 22, 2011 to application and premarket review and authorization requirements (the “New Product Application Process”) if the FDA does not find them to be “substantially equivalent” to products commercially marketed as of February 15, 2007, and to deny any such new product application, thus preventing the distribution and sale of any product affected by such denial;

▪to determine that certain existing tobacco products modified or introduced into the market for the first time between February 15, 2007 and March 22, 2011 are not “substantially equivalent” to products commercially marketed as of February 15, 2007, in which case the FDA could require the removal of such products or subject them to the New Product Application Process and, if any such applications are denied, prevent the continued distribution and sale of such products (see ~~FDA Regulatory Actions~~ ~~below);~~

▪~~to restrict or otherwise regulate menthol cigarettes, as well as other tobacco products with characterizing flavors (see~~ ~~TPSAC~~ ~~below);~~

▪~~to regulate~~cigarettes, nicotine yields and ~~to reduce or eliminate harmful~~other constituents or ~~harmful ingredients or other components of tobacco products;~~ingredients) and

▪~~to impose~~ imposing manufacturing standards for tobacco products; ~~and~~

▪~~equips the FDA with a variety of investigatory and enforcement tools, including the authority to inspect tobacco product manufacturing and other facilities.~~


▪	~~Implementation Timing, Rulemaking~~establishes pre-market review pathways for new and ~~Guidance:~~modified tobacco products, including:

▪

authorizing the FDA to subject tobacco products that would be modified or first introduced into the market after March 22, 2011 to application and pre-market review and authorization requirements (the “New Product Application Process”) if the FDA does not find them, as a manufacturer may contend, to be “substantially equivalent” to products commercially marketed as of February 15, 2007, and possibly to deny any such new product application, thereby preventing the distribution and sale of any product affected by such denial;

▪

authorizing the FDA to determine that certain existing tobacco products modified or introduced into the market for the first time between February 15, 2007 and March 22, 2011 are not “substantially equivalent” to products commercially marketed as of February 15, 2007, in which case the FDA could require the removal of such products or subject them to the New Product Application Process and, if any such applications are denied, prevent the continued distribution and sale of such products (see FDA Regulatory Actions below); and


▪	equips the FDA with a variety of investigatory and enforcement tools, including the authority to inspect tobacco product manufacturing and other facilities.

In April 2014, the FDA issued proposed regulations for other tobacco products, which as proposed would include machine-made large cigars, e-vapor products (such as electronic cigarettes), pipe tobacco and chewable tobacco-derived nicotine products marketed and sold by some of our tobacco subsidiaries. The proposed regulations would impose the FSPTCA regulatory framework, including the foregoing measures, on products manufactured, marketed and sold by Nu Mark and Middleton with potentially wide-ranging impact on their businesses. As discussed below in FDA Regulatory Actions - Proposed Deeming Regulations, Nu Mark and Middleton submitted comments on the proposed regulations in August 2014.

▪Implementation Timing, Rulemaking and Guidance: The implementation of the FSPTCA began in 2009 and will continue over time. ~~Some~~The provisions ~~took effect immediately, some provisions have taken effect since the enactment~~ of the FSPTCA ~~and other provisions will not take effect for some time. Those provisions~~ that require the FDA to take action through rulemaking generally involve consideration of public comment and, for some issues, scientific review. Altria Group, Inc.’s tobacco subsidiaries participate actively in processes established by the FDA to develop and implement the FSPTCA’s regulatory framework, including submission of comments to various FDA proposals and participation in public hearings and engagement sessions.

From time to time, the FDA also issues guidance for public comment, which may be issued in draft or final form. Such guidance, when finalized, is intended to represent the FDA’s current thinking on a particular topic and may be predictive of the FDA’s enforcement stance on that topic. Such guidance, even

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when finalized, is not intended to bind the FDA or the public or establish legally enforceable responsibilities. ~~Examples of current draft guidance include:~~

▪~~Draft Guidance for Industry and FDA Staff: Demonstrating the Substantial Equivalence of a New Tobacco Product: Responses to Frequently Asked Questions;~~

▪~~Draft Guidance for Industry: Modified Risk Tobacco Product Applications; and~~

▪~~Draft Guidance for Industry: Applications for Premarket Review of New Tobacco Products.~~

~~A complete set of guidance documents issued~~Altria Group, Inc.’s tobacco subsidiaries participate actively in processes established by the FDA ~~can be found on~~to develop and implement the ~~FDA’s website at www.fda.gov/TobaccoProductsGuidanceComplianceRegulatoryInformation. The information on this website is not, and shall not be deemed to be, part~~FSPTCA’s regulatory framework, including submission of ~~this report or incorporated into any other filings Altria Group, Inc. makes with the SEC.~~

~~PM USA and USSTC submit~~ comments to ~~the~~various FDA ~~on draft or final guidance when appropriate. In some cases, PM USA~~proposals and ~~USSTC may disagree with a particular interpretation by the FDA as expressed~~participation in ~~draft or final guidance~~public hearings and may communicate their position in writing to the FDA. For example, PM USA and USSTC communicated disagreement with FDA interpretations of the statute set forth in the “Draft Guidance for Industry and FDA Staff: Demonstrating the Substantial Equivalence of a New Tobacco Product: Responses to Frequently Asked Questions”

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regarding when a manufacturer must submit substantial equivalence reports. While PM USA and USSTC believe that all of their current products meet the statutory requirements of the FSPTCA, they cannot currently predict whether, when or how the FDA ultimately will apply its guidance or seek to enforce the law and regulations consistent with its guidance. As discussed below in ~~Investigations and Enforcement, FDA enforcement actions could have a material adverse effect on the business, financial position, cash flows and results of operations of Altria Group, Inc. and its tobacco subsidiaries.~~engagement sessions.

The implementation of the FSPTCA and related regulations and guidance also may have an impact on enforcement efforts by states, territories and localities of the United States of their laws and regulations as well as of the State Settlement Agreements discussed below (see State Settlement Agreements below). Such enforcement efforts may adversely affect our tobacco subsidiaries’ ability to market and sell regulated tobacco products in those states, territories and localities.

▪Impact on Our Business; Compliance ~~Costs:~~Costs and User Fees: Regulations imposed and other regulatory actions taken by the FDA under the FSPTCA could have a material adverse effect on the business, ~~financial position,~~consolidated results of operations, cash flows ~~and results of operations~~or financial position of Altria Group, Inc. and its tobacco subsidiaries in a number of different ways. For example, actions by the FDA could:

▪~~impact the consumer acceptability of tobacco products;~~

▪~~delay, discontinue or prevent the sale or distribution of existing, new or modified tobacco products;~~

▪~~limit adult consumer choices;~~

▪~~restrict communications to adult consumers;~~

▪~~create a competitive advantage or disadvantage for certain tobacco companies;~~

▪~~impose additional manufacturing, labeling or packaging requirements;~~

▪~~impose additional restrictions at retail;~~

▪~~result in increased illicit trade activities; or~~

▪~~otherwise significantly increase the cost of doing business.~~


▪	impact the consumer acceptability of tobacco products;


▪	delay, discontinue or prevent the sale or distribution of existing, new or modified tobacco products;


▪	limit adult tobacco consumer choices;


▪	impose restrictions on communications with adult tobacco consumers;


▪	create a competitive advantage or disadvantage for certain tobacco companies;


▪	impose additional manufacturing, labeling or packaging requirements;


▪	impose additional restrictions at retail;


▪	result in increased illicit trade in tobacco products; or


▪	otherwise significantly increase the cost of doing business.

The failure to comply with FDA regulatory requirements, even inadvertently, and FDA enforcement actions could also have a material adverse effect on the business, ~~financial position,~~consolidated results of operations, cash flows ~~and results of operations~~or financial position of Altria Group, Inc. and its tobacco subsidiaries.

The FSPTCA imposes fees on tobacco product manufacturers and importers to pay for the cost of regulation and other matters. The cost of the FDA user fee is allocated first among tobacco product categories subject to FDA regulation ~~according to a process set out in the statute, which relies, in part, on the allocation methodology set forth in FETRA,~~ and then among manufacturers and importers within each respective category

based on their relative market ~~shares. In May 2013,~~shares, all as prescribed by the statute and FDA ~~issued proposed regulations~~regulations. Payments for user fees are subject to ~~govern the allocation of the FDA user fee after the FETRA program concludes in 2014. An Altria Group, Inc. subsidiary filed comments on behalf of PM USA~~adjustment for several factors, including inflation, market share and ~~USSTC objecting to certain aspects of the proposed regulations.~~industry volume. For a discussion of the impact of the ~~State Settlement Agreements, the FETRA and~~ FDA user fee payments on Altria Group, Inc., see Financial Review - ~~Debt~~

Off-Balance Sheet Arrangements and ~~Liquidity~~Aggregate Contractual Obligations - Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation below. In addition, compliance with the FSPTCA’s regulatory requirements has resulted and will continue to result in additional costs for our tobacco businesses. The amount of additional compliance and related costs has not been material in any given quarter or year to date but could become material, either individually or in the aggregate, and will depend on the nature of the requirements imposed by the FDA.

▪Investigation and Enforcement: The FDA has a number of investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, ~~money~~monetary penalties, product withdrawals and recalls, and product seizures. The use of any of these investigatory or enforcement tools by the FDA could result in significant costs to the tobacco businesses of Altria Group, Inc. or otherwise have a material adverse effect on the business, ~~financial position,~~consolidated results of operations, cash flows ~~and results of operations~~or financial position of Altria Group, Inc. and its tobacco subsidiaries.

~~For example, in June 2010, the FDA issued a document request regarding changes to~~ ~~Marlboro~~ ~~Gold Pack cigarette packaging in connection with the FSPTCA’s ban of certain descriptors. PM USA submitted documents in response to the FDA’s request.~~

▪TPSAC


▪	The Role of the TPSAC: As required by the FSPTCA, the FDA has established a tobacco product scientific advisory committee (the “TPSAC”), which consists of voting and non-voting members, to provide advice, reports, information and recommendations to the FDA on scientific and health issues relating to tobacco products. ~~For example,~~

▪

Challenge to TPSAC Membership: In February 2011, Lorillard Tobacco Company (“Lorillard”) and R.J. Reynolds Tobacco Company (“R.J. Reynolds”) filed suit in the U.S. District Court for the District of Columbia against the United States Department of Health and Human Services and individual defendants (sued in their official capacities) asserting that the composition of the TPSAC ~~advises~~and the composition of the Constituents Subcommittee of the TPSAC violates several federal laws, including the Federal Advisory Committee Act, because four of the voting members of the TPSAC have financial and other conflicts (including service as paid experts for plaintiffs in tobacco litigation). In July 2014, the district court granted plaintiffs’ summary judgment motion, in part, and denied defendants’ summary judgment motion, ordering the FDA ~~about modified risk products (products marketed with reduced risk claims), good manufacturing practices,~~to reconstitute the ~~effects~~TPSAC and barring defendants from relying on the TPSAC report on menthol, discussed below. The FDA filed a notice of appeal to the ~~alteration~~U.S. Court of ~~nicotine yields from tobacco products and nicotine dependence thresholds. The~~ Appeals for the District of Columbia Circuit in September 2014.

▪

TPSAC ~~previously made reports and recommendations~~Action on Menthol: As mandated by the FSPTCA, in March 2011, the TPSAC submitted to the FDA a report on ~~menthol cigarettes, including~~ the impact of the use of menthol in cigarettes on the public health and related recommendations. The TPSAC report stated that “[m]enthol cigarettes have an adverse impact on public health in the ~~nature and impact of dissolvable tobacco products on~~United States.” The TPSAC report recommended, among other things, that the public health. The FDA may seek advice from the TPSAC about other safety, dependence or health issues relating to tobacco products, including tobacco product standards and applications to market new tobacco products.


▪	~~TPSAC Membership:~~ ~~Beginning in March 2010, PM USA and USSTC raised with the FDA their concerns that four~~“[r]emoval of

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the voting members of the TPSAC have financial and other conflicts (including services as paid experts for plaintiffs in tobacco litigation) that could hamper the full and fair consideration of issues by the TPSAC and requested that their appointments be withdrawn. PM USA and USSTC raised similar concerns related to the engagement of two TPSAC subcommittee consultants. The FDA declined PM USA’s and USSTC’s requests, stating that the FDA had satisfied itself, after inquiry, that the individuals in question did not have disqualifying conflicts of interest. In February 2011, Lorillard Tobacco Company (“Lorillard”) and R.J. Reynolds filed suit in the U.S. District Court for the District of Columbia against the United States Department of Health and Human Services and individual defendants (sued in their official capacities) asserting that the composition of the TPSAC and the composition of the Constituents Subcommittee of the TPSAC violates several federal laws, including the Federal Advisory Committee Act. In August 2012, the district court denied the government’s motion to dismiss the plaintiffs’ complaint. The government defendants filed their motion for summary judgment as to all claims in June 2013. Lorillard and R.J. Reynolds filed a cross-motion for summary judgment in July 2013.

▪~~TPSAC Action on Menthol:~~ As mandated by the FSPTCA, in March 2011, the TPSAC submitted to the FDA a report on the impact of the use of menthol in cigarettes on the public health and related recommendations. The TPSAC report stated that “[m]enthol cigarettes have an adverse impact on public health in the United States.” The TPSAC report recommended that the “[r]emoval of menthol cigarettes from the marketplace would benefit public health in the United States.” The TPSAC report noted the potential that any ban on menthol cigarettes could lead to an increase in contraband cigarettes and other potential unintended consequences and suggested that the FDA consult with appropriate experts on this matter. The TPSAC report also recommended that additional research could address gaps in understanding menthol cigarettes.

In March 2011, PM USA submitted a report to the FDA outlining its position that neither science nor other evidence demonstrates that regulatory actions or restrictions related to the use of menthol cigarettes are warranted. The report noted PM USA’s belief that significant restrictions on the use of menthol cigarettes would have unintended consequences detrimental to public health and society.

~~In July 2011, the TPSAC revised and approved its March 2011 report. The revisions were editorial in nature and did not change the substantive conclusions and recommendations of the TPSAC.~~

~~The FSPTCA does not set a deadline or required timeline for the FDA to act on the TPSAC’s report.~~ The FDA has stated that the ~~TPSAC’s~~TPSAC report is only a recommendation, and, that the FDA’s receipt of the TPSAC’s report will not have an immediate effect on the availability of menthol cigarettes. In January 2012, the FDA announced that it had evaluated scientific information on menthol and had drafted a report related to the impact of menthol

in ~~cigarettes on public health. The FDA indicated that it had sent its report to external scientists for peer review. In~~ July 2013, the FDA released its preliminary scientific evaluation on menthol, which states “that menthol cigarettes pose a public health risk above that seen with non-menthol cigarettes.” At the same time, the FDA also issued an advance notice of proposed rulemaking requesting comments on the FDA’s preliminary scientific evaluation and information that may inform potential regulatory actions regarding menthol in cigarettes or other tobacco products. OnIn November ~~22,~~ 2013, PM USA submitted comments to the FDA raising a number of concerns with the preliminary scientific evidence, including comments demonstrating that menthol cigarettes do not affect population harm differently than non-menthol cigarettes. PM USA also reiterated that significant restrictions on the use of menthol in cigarettes would have unintended consequences detrimental to public health and society. No future action can be taken by the FDA to regulate the manufacture, marketing or sale of menthol cigarettes (including a possible ban) until the completion of the rulemaking process. As noted above, the FDA is subject to a July 2014 court order that bars it from relying on the TPSAC report, although the FDA is currently appealing that order. At this time, it is unclear how the FDA plans to proceed while that appeal is pending.

▪Final Tobacco Marketing Rule: As required by the FSPTCA, the FDA re-promulgated in March 2010 ~~certain~~a wide range of advertising and promotion restrictions in substantially the same form as regulations that were previously adopted in 1996 (but never imposed on tobacco manufacturers due to a United States Supreme Court ruling) (the “Final Tobacco Marketing Rule”). The Final Tobacco Marketing Rule:


▪	bans the use of color and graphics in tobacco product labeling and advertising;


▪	prohibits the sale of cigarettes and smokeless tobacco to underage persons;


▪	restricts the use of non-tobacco trade and brand names on cigarettes and smokeless tobacco products;


▪	requires the sale of cigarettes and smokeless tobacco in direct, face-to-face transactions;


▪	prohibits sampling of cigarettes and prohibits sampling of smokeless tobacco products except in qualified adult-only facilities;


▪	prohibits gifts or other items in exchange for buying cigarettes or smokeless tobacco products;


▪	prohibits the sale or distribution of items such as hats and tee shirts with tobacco brands or logos; and


▪	prohibits brand name sponsorship of any athletic, musical, artistic or other social or cultural event, or any entry or team in any event.

Subject to the limitations described below, the Final Tobacco Marketing Rule took effect in June 2010. At the time of the re-promulgation of the Final Tobacco Marketing Rule, the FDA also issued an advance notice of proposed rulemaking regarding the

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so-called “1000 foot rule,” which would establish restrictions on the placement of outdoor tobacco advertising in relation to schools and playgrounds. PM USA and USSTC submitted comments on this advance notice.

Since enactment, several lawsuits have been filed challenging various provisions of the FSPTCA and the Final Tobacco Marketing Rule, including their constitutionality and the scope of the FDA’s authority thereunder. Altria Group, Inc. and its tobacco subsidiaries are not parties to any of these lawsuits. ~~In January 2010, in~~As a result of one such challenge (Commonwealth Brands), the U.S. District Court for the Western District of Kentucky struck down as unconstitutional, and enjoined enforcement of, the portion of the Final Tobacco Marketing Rule that bans the use of color and graphics in labeling and advertising and claims implying that a tobacco product is safer because of FDA regulation. The parties appealed and in March 2012, the U.S. Court of Appeals for the Sixth Circuit affirmed in part and reversed in part the district court’s decision. The Sixth Circuit affirmed the district court’s injunction against enforcement of the portion of the Final Tobacco Marketing Rule that bans the use of color and graphics in labeling and advertising. The Sixth Circuit reversed the injunction against enforcement of the prohibition on claims implying that a tobacco product is safer because of FDA regulation. The Sixth Circuit also held that the Final Tobacco Marketing Rule’s ban on consumer continuity programs violates the First Amendment and reversed the district court’s decision upholding the ban. The Sixth Circuit upheld the FSPTCA’s statutory requirements for enlarged textual and graphic warnings on cigarette packages and advertising, but did not rule upon the constitutionality of the nine graphic warnings actually selected by the FDA in its June 2011 final rule. In May 2012, the plaintiffs in ~~Commonwealth Brands~~ ~~filed a petition for rehearing and rehearing~~ ~~en banc, which the Sixth Circuit denied. In October 2012, the plaintiffs filed a petition for~~ ~~writ of certiorari~~ in the United States Supreme Court seeking further review of the Sixth Circuit’s decision upholding the FSPTCA’s new enlarged and expanded warning requirements that include graphic warnings, the FSPTCA’s restrictions on modified risk tobacco product claims and certain other provisions of the Final Tobacco Marketing Rule. The FDA did not file a petition for ~~writ ofcertiorari~~ ~~with the United States Supreme Court seeking further review of the Sixth Circuit’s decision. The FDA filed its opposition to the plaintiffs’ petition for~~ ~~writ of certiorari~~ ~~in March 2013. In April 2013, the United States Supreme Court denied plaintiffs’ petition for~~ ~~writ of certiorari.~~ ~~As a result of this litigation,~~ the portion of the Final Tobacco Marketing Rule that bans the use of color and graphics in labeling and advertising is unenforceable by the FDA. For a further discussion of the Final Tobacco Marketing Rule and the status of graphic warnings for cigarette packages and advertising, see FDA Regulatory Actions - ~~Graphics~~Graphic Warnings below.

In a separate ~~challenge to the Final Tobacco Marketing Rule in the U.S. District Court for the Eastern District of Virginia, Renegade Tobacco Company, Inc. and others have~~lawsuit that challenged the constitutionality of an FDA regulation that restricts tobacco

manufacturers from using the trade or brand name of a non-tobacco product on cigarettes or smokeless tobacco ~~products. In~~products, the case was dismissed without prejudice pursuant to a stipulation by which the FDA agreed not to enforce the current or any amended trade name rule against plaintiffs until at least 180 days after rulemaking on the amended rule concludes. This relief only applies to plaintiffs in the case. However, in May 2010, the ~~district court~~FDA issued ~~a stay in~~guidance on the ~~Renegade case pending~~use of non-tobacco trade and brand names applicable to all cigarette and smokeless tobacco product manufacturers. This guidance indicated the FDA’s ~~consideration of amendments~~intention not to commence enforcement actions under the ~~trade or brand name rule.~~regulation while it considers how to address the concerns raised by various manufacturers. In November 2011, the FDA proposed an amended rule, but ~~continues to exercise its discretion to enforce the original trade or brand name provisions of the Final Tobacco Marketing Rule according to FDA guidance~~has not yet issued ~~in May 2010. It is not possible to predict the outcome of any such litigation or its effect on the extent of the FDA’s authority to regulate tobacco products.~~

▪~~Contraband:~~ The FSPTCA imposes on manufacturers reporting obligations relating to knowledge of suspected contraband activity involving their brands and also grants the FDA the authority to impose certain recordkeeping and other obligations to address illicit trade in tobacco products. The FSPTCA also empowers the FDA to assess whether additional tools should be employed to track and trace tobacco products through the distribution chain.a final rule.


▪	FDA Regulatory Actions

▪

Graphic Warnings: In June 2011, as required by the FSPTCA, the FDA issued its final rule to modify the required warnings that appear on cigarette packages and in cigarette advertisements. The FSPTCA requires the warnings to consist of nine new textual warning statements accompanied by color graphics depicting the negative health consequences of smoking. The graphic health warnings will (i) be located beneath the cellophane, and comprise the top 50% of the front and rear panels of cigarette packages, and (ii) occupy 20% of a cigarette advertisement and be located at the top of the advertisement. After a legal challenge to the rule initiated by R.J. Reynolds, Lorillard and several other plaintiffs, in which plaintiffs prevailed both at the trial and federal appellate levels, the FDA decided not to seek further review of the U.S. Court of Appeals’ decision and announced its plans to propose a new graphic warnings rule in the future.

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of smoking. The graphic health warnings will (i) be located beneath the cellophane, and comprise the top 50% of the front and rear panels of cigarette packages and (ii) occupy 20% of a cigarette advertisement and be located at the top of the advertisement. After a legal challenge to the rule initiated by R.J. Reynolds, Lorillard and several other plaintiffs, in which plaintiffs prevailed both at the federal trial and appellate levels, the FDA decided not to seek further review of the U.S. Court of Appeals’ decision and announced its plans to propose a new graphic warnings rule in the future.

▪

Substantial Equivalence and Other New Product ~~Marketing Authorization Processes:~~Processes/Pathways: In January 2011, the FDA issued guidance concerning reports that manufacturers must submit for certain FDA-regulated tobacco products that the manufacturer modified or introduced for the first time into the market after February 15, 2007. These reports must be reviewed by the ~~agency~~FDA to determine if such tobacco products are “substantially equivalent” to products commercially available as of February 15, 2007. In general, in order to continue marketing these products sold before March 22, 2011, manufacturers of FDA-regulated tobacco products were required to send to the FDA a report demonstrating substantial equivalence by March 22, 2011. PM USA and USSTC submitted timely reports. PM USA and USSTC can continue marketing these products unless the FDA makes a determination that a specific product is not substantially equivalent. If the FDA ultimately makes such a determination, it could require the removal of such products or subject them to the New Product Application Process and, if any such applications are denied, prevent the continued distribution and sale of such products. While PM USA and USSTC believe that all of their current products meet the statutory requirements of the FSPTCA, they cannot predict whether, when or how the FDA ultimately will apply its guidance to their various respective substantial equivalence reports or seek to enforce the law and regulations consistent with its guidance.

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or subject them to the New Product Application Process and, if any such applications are denied, prevent the continued distribution and sale of such products. PM USA and USSTC believe all of their current products meet the statute’s requirements, but cannot predict when or how the FDA will respond to their substantial equivalence reports.

Manufacturers intending to introduce new products and certain modified products into the market after March 22, 2011 must submit a report to the FDA and obtain a “substantial equivalence order” from the ~~agency~~FDA before introducing the products into the market. If the FDA declines to issue a so-called “substantial equivalence order” for a product or if the manufacturer itself determines that the product does not meet the substantial equivalence requirements, the product would need to undergo the New Product Application Process.

The FDA began announcing its decisions on substantial equivalence reports in the second quarter of 2013. However, there are a significant number of substantial equivalence reports for which the FDA has not announced decisions. At this time, it is not possible to predict how long ~~agency~~ reviews by the FDA of ~~either~~ substantial equivalence reports or new product applications will take.

The FDA also published a final regulation in July 2011, establishing a process for requesting an exemption from the substantial equivalence requirements for certain minor modifications to tobacco additives. The final rule became effective in August 2011.

▪

Good Manufacturing Practices: In March 2013, the FDA published a notice announcing that it had established a public docket to obtain input by May 20, 2013 on the proposed Good Manufacturing Practice Regulations recommended to the FDA in January 2012 by a group of tobacco companies, including PM USA and USSTC. The FSPTCA requires that the FDA promulgate good manufacturing practice regulations for tobacco product manufacturers, but does not specify a timeframe for such regulations. In 2013, the FDA obtained input through a public docket on proposed Good Manufacturing Practice regulations recommended to the FDA by a group of tobacco companies, including PM USA and USSTC.

▪

Proposed Deeming Regulations: As noted above in FSPTCA and FDA Regulation - The Regulatory Framework, the FDA proposedregulations in April 2014 that would impose the FSPTCA regulatory framework on machine-made large cigars, e-vapor products (such as electronic cigarettes), pipe tobacco and chewable tobacco-derived nicotine products. Nu Mark and Middleton submitted comments on the proposed regulations in August 2014. Nu Mark’s submission covers a number of topics, including its perspective on (1) the guiding principles that the FDA should follow to help ensure successful implementation of the deeming regulation, (2) the potential for e-vapor products and other tobacco-derived nicotine products to reduce tobacco-related harm and (3) the establishment of product approval pathways that encourage innovation of potentially reduced harm products. Middleton’s comments covered its perspective on the overall regulation of cigars and on the use of the word “mild” in the Black & Mild brand name. The proposed regulations suggested that the FDA may apply the descriptor prohibition to cigars and pipe tobacco, which could potentially prohibit the use of the word “Mild” in the Black & Mild brand name. As reflected in the comments, Middleton believes neither the FDA’s regulatory authority nor the First or Fifth Amendments to the United States Constitution allow the FDA to ban words such as “mild” regardless of the context and that the FDA can only prohibit the word “mild” when used as a descriptor of modified risk.

Excise Taxes

Tobacco products are subject to substantial excise taxes in the United States. Significant increases in tobacco-related taxes or fees have been proposed or enacted (including with respect to e-vapor products) and are likely to continue to be proposed or enacted at the federal, state and local levels within the United States.

Federal, state and local excise taxes have increased substantially over the past decade, far outpacing the rate of inflation. ~~For~~By way of example, in 2009, the FET on cigarettes increased from $0.39 per pack to approximately $1.01 per pack, ~~and on July 1,~~in 2010, the New York state excise tax increased by $1.60 to $4.35 per ~~pack.~~pack and in October 2014, Philadelphia, Pennsylvania enacted a $2.00 per pack local cigarette excise tax. Between the end of 1998 and February ~~21, 2014,~~20, 2015, the weighted-average state and certain local cigarette excise taxes increased from $0.36 to ~~$1.47~~$1.49 per pack. During ~~2013, Massachusetts, Minnesota, Oregon and Puerto Rico enacted~~

~~legislation~~2014, Vermont was the only state to ~~increase their~~enact a cigarette ~~taxes.~~excise tax increase. As of February ~~21, 2014,~~20, 2015, no state has increased its cigarette excise tax in ~~2014.~~2015. The President’s ~~fiscal year 2014~~

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2015 Budget proposes significant increases in the FET for all tobacco products. The proposed budget would increase the FET on a pack of cigarettes by $0.94 per pack, raising the total FET to $1.95 per pack, and would also increase the tax on other tobacco products by a proportionate amount. It is not possible to predict whether this proposed FET increase will be enacted.

Tax increases are expected to continue to have an adverse impact on sales of the tobacco products of our tobacco subsidiaries through lower consumption levels and the potential shift in adult consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. Such shifts may have an adverse impact on the sales volume and reported share performance of tobacco products of Altria Group, Inc.’s tobacco subsidiaries.

A majority of states currently tax smokeless tobacco products using an ad valorem method, which is calculated as a percentage of the price of the product, typically the wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. Altria Group, Inc.’s subsidiaries support legislation to convert ad valorem taxes on smokeless tobacco to a weight-based methodology because, unlike the ad valorem tax, a weight-based tax subjects cans of equal weight to the same tax. As of February ~~21, 2014,~~20, 2015, the federal government, 22 states, Puerto Rico, ~~Washington, D.C.,~~ Philadelphia, Pennsylvania and Cook County, Illinois have adopted a weight-based tax methodology for smokeless tobacco.

International Treaty on Tobacco Control

The World Health Organization’s Framework Convention on Tobacco Control (the “FCTC”) entered into force in February 2005. As of February ~~21, 2014, 177~~20, 2015, 178 countries, as well as the European Community, have become parties to the FCTC. While the United States is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things: establish specific actions to prevent youth tobacco product use; restrict or eliminate all tobacco product advertising, marketing, promotion and sponsorship; initiate public education campaigns to inform the public about the health consequences of tobacco consumption and exposure to tobacco smoke and the benefits of quitting; implement regulations imposing product testing, disclosure and performance standards; impose health warning requirements on packaging; ~~and~~ adopt measures intended to combat tobacco product smuggling and counterfeit tobacco products, including tracking and tracing of tobacco products

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through the distribution ~~chain~~chain; and restrict smoking in public places.

There are a number of proposals currently under consideration by the governing body of the FCTC, some of which

call for substantial restrictions on the manufacture, marketing, distribution and sale of tobacco products. In addition, the Protocol to Eliminate Illicit Trade in Tobacco Products (the “Protocol”) was approved by the Conference of Parties to the FCTC in November 2012. It includes provisions related to the tracking and tracing of tobacco products through the distribution chain and numerous other provisions regarding the regulation of the manufacture, distribution and sale of tobacco products. The Protocol has not yet entered into force, but in any event will not apply to the United States until the Senate ratifies the FCTC and until the President signs, and the Senate ratifies, the Protocol. It is not possible to predict the outcome of these proposals or the impact of any FCTC actions on legislation or regulation in the United States, either ~~directly~~indirectly or as a result of the United States becoming a party to the FCTC, or whether or how these actions might indirectly influence FDA regulation and enforcement.

State Settlement Agreements

As discussed in Note 18, during 1997 and 1998, PM USA and other major domestic tobacco product manufacturers entered into the State Settlement Agreements. These settlements require participating manufacturers to make substantial annual payments, which are adjusted for several factors, including inflation, market share and industry volume. For a discussion of the impact of the State Settlement Agreements ~~FETRA and FDA user fee payments~~ on Altria Group, Inc., see Financial Review - ~~Debt~~Off-Balance Sheet Arrangements and ~~Liquidity~~Aggregate Contractual Obligations - Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation ~~below.~~below and Note 18. The State Settlement Agreements also place numerous requirements and restrictions on participating manufacturers’ business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement and free sampling (except in adult-only facilities). Restrictions are also placed on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also place prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.

In November 1998, USSTC entered into the Smokeless Tobacco Master Settlement Agreement (the “STMSA”) with the attorneys general of various states and United States territories to resolve the remaining health care cost reimbursement cases initiated against USSTC. The STMSA required USSTC to adopt

various marketing and advertising restrictions. USSTC is the only smokeless tobacco manufacturer to sign the STMSA.

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Other Federal, State and Local Regulation and Activity


▪	~~Federal, State and Local Laws~~

▪

~~State and Local Laws Addressing Certain Characterizing Flavors:~~ ~~In a number of states and localities, legislation has been~~

▪Federal, State and Local Regulation: A number of states and localities have enacted or proposed legislation that imposes restrictions on tobacco products (including innovative tobacco products, such as e-vapor products), such as legislation that (1) prohibits ~~or would prohibit~~ the sale of certain tobacco products with certain characterizing flavors. The legislation varies in terms of the type of tobacco products subject to prohibition, the conditions under which the sale of such products is or would be prohibited, and exceptions to the prohibitions. For example, a number of proposals would prohibit characterizing flavors in smokeless tobacco products, with no exception for mint- or wintergreen-flavored products.

~~Jurisdictions that have enacted restrictions on~~ certain tobacco products with certain characterizing flavors, ~~include Providence, RI, New York City, NY, Maine~~(2) requires the disclosure of health information separate from or in addition to federally-mandated health warnings and ~~New Jersey.~~ (3) restricts commercial speech or imposes additional restrictions on the marketing or sale of tobacco products (including proposals to ban all tobacco product sales or to increase the legal age to purchase tobacco products above the current federal minimum age requirement of 18). The legislation varies in terms of the type of tobacco products, the conditions under which such products are or would be restricted or prohibited, and exceptions to the restrictions or prohibitions. For example, a number of proposals involving characterizing flavors would prohibit smokeless tobacco products with characterizing flavors without providing an exception for mint- or wintergreen-flavored products.

Whether other states or localities will enact legislation in ~~this area,~~these areas, and the precise nature of such legislation if enacted, cannot be predicted. ~~See~~ ~~FSPTCA~~Altria Group, Inc.’s tobacco subsidiaries have challenged and ~~FDA Regulation~~ ~~above for a summary of the FSPTCA’s regulation of~~will continue to challenge certain ~~tobacco products with characterizing flavors.~~

▪

~~State and Local Laws Imposing Certain Speech Requirements or Other Restrictions:~~ In several jurisdictions, legislation or regulations have been enacted or proposed that would require the disclosure of health information separate from or in addition to federally-mandated health warnings or that would restrict commercial speech in certain respects or that would impose additional restrictions on the marketing or sale of tobacco products (including proposals to ban all tobacco product sales).state and local legislation, including through litigation. For example, in 2012, New York City attempted to require retailers selling tobacco products to display a sign depicting graphic images of the potential health consequences of smoking and urging smokers to quit. In litigation now concluded, a federal appeals court ruled that the ordinance was preempted by federal law.

In addition, on November 19, 2013, New York City enacted an ordinance prohibiting retailers from (1) honoring or accepting any “price reduction instrument” (including coupons), (2) offering a discount off the listed sales price of a tobacco product to a consumer or (3) offering consumers multi-pack or multi-product discounts on the sale of any tobacco product. The ordinance also bans sampling of tobacco products in ~~adult-only facilities. It also imposes a minimum retail sales price for cigarettes and little cigars and a minimum pack size for certain cigars. On~~ January ~~30,~~ 2014, PM USA, Middleton and a USSTC subsidiary, along with other tobacco product manufacturers and three trade associations representing New York City retailers, filed a lawsuit in the U.S. District Court for the Southern District of New York challenging the coupon/discount ban included in a recently-enacted New York City ordinance on the

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grounds that it violates the First Amendment and is preempted by federal and state law. In June 2014, the district court upheld the ordinance.

~~New York City also enacted~~▪Federal Tobacco Quota Buy-Out: In October 2004, FETRA, which applied to PM USA, Middleton and USSTC, was signed into law. FETRA eliminated the federal tobacco quota and price support program through an ~~ordinance on November 19, 2013 increasing the legal age to purchase tobacco products (including electronic cigarettes) from 18 to 21. The current federal minimum age requirement for the purchase~~industry-funded buy-out of tobacco ~~products is 18; four states have increased their state minimum age laws~~growers and quota holders. The cost of the 10-year buy-out, which expired after the third quarter of 2014, was approximately $9.5 billion and was paid by manufacturers and importers of each kind of tobacco product subject to 19 (Alabama, Alaska, New Jersey and Utah) and a number of localities have increased their minimum age laws above 18. In addition, a number of states have recently proposed increasing the legal age to 21.

▪

~~Federal Tobacco Quota Buy-Out:~~ ~~In October 2004, FETRA~~FET. The cost was signed into law. PM USA, Middleton and USSTC are subject to the requirements of FETRA. FETRA eliminated the federal tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the 10-year buy-out, which will end in 2014, is approximately $9.5 billion and is being paid by manufacturers and importers of each kind of tobacco product subject to FET. The cost is being allocated based on the relative market shares of manufacturers and importers of each kind of such tobacco product.

In February 2011, PM USA filed a lawsuit in the U.S. District Court for the Eastern District of Virginia challenging the USDA’s method for calculating the 2011 and future tobacco product class shares that are used to allocate liability for the industry payments that fund the FETRA buy-out described above. PM USA asserted in this litigation that the USDA violated FETRA, and imposed excessive FETRA assessments on PM USA, by failing to apply the most current FET rates enacted by Congress, which became effective in April 2009, in calculating the class share allocations. The Cigar Association of America has joined the litigation as a defendant intervenor. In October 2012, the district court denied PM USA’s motion for summary judgment, granted the defendants’ motion for summary judgment and dismissed the case. In December 2012, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit. Oral argument was held on September 19, 2013. On November 20, 2013, the Fourth Circuit affirmed the district court’s decision granting summary judgment.

For a discussion of the impact of ~~the State Settlement Agreements,~~ FETRA ~~and FDA user fee~~ payments on Altria Group, Inc., see Financial Review - ~~Debt~~Off-Balance Sheet Arrangements and ~~Liquidity~~Aggregate Contractual Obligations - Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation below. ~~We do not anticipate that~~Neither the quota buy-out ~~will have~~nor the expiration of the quota buy-out had a material ~~adverse~~ impact on our consolidated financial results in ~~2013 or~~ 2014.


▪	▪Health Effects of Tobacco Consumption and Exposure to Environmental Tobacco Smoke (“ETS”): It is the policy of Altria Group, Inc. and its tobacco subsidiaries to defer to the ~~judgment of public health authorities as to the content of warnings in advertisements and on product packaging regarding the health effects of tobacco consumption,~~

judgment of public health authorities as to the content of warnings in advertisements and on product packaging regarding the health effects of tobacco consumption, addiction and exposure to ETS. Altria Group, Inc. and its tobacco subsidiaries believe that the public should be guided by the messages of the United States Surgeon General and public health authorities worldwide in making decisions concerning the use of tobacco products.

Reports with respect to the health effects of smoking have been publicized for many years, including in a January 2014 United States Surgeon General report titled “The Health Consequences of Smoking - 50 Years of Progress” and in a June 2006 United States Surgeon General report on ETS titled “The Health Consequences of Involuntary Exposure to Tobacco Smoke.”

~~Many~~Most jurisdictions within the United States have restricted smoking in public places. ~~The pace and scope of public smoking bans have increased significantly.~~ Some public health groups have called for, and various jurisdictions have adopted or proposed, bans on smoking in outdoor places, in private apartments and in cars transporting minors. It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure and the impact of such research on regulation.

▪Other Legislation or Governmental Initiatives: In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, in recent years, legislation has been introduced or enacted at the state or local level to subject tobacco products to various reporting requirements and performance standards (such as reduced cigarette ignition propensity standards); establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities; restrict the sale of tobacco products in certain retail establishments and the sale of tobacco products in certain package sizes; require tax stamping of MST products; require the use of state tax stamps using data encryption technology; and further restrict the sale, marketing and advertising of cigarettes and other tobacco products. Such legislation may be subject to constitutional or other challenges on various grounds, which may or may not be successful.

It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented (and, if challenged, upheld) relating to the manufacturing, design, packaging, marketing, advertising, sale or use of tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that might materially adversely affect the business and volume of our tobacco subsidiaries and our consolidated results of operations and cash flows.

▪Governmental Investigations: From time to time, Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters. Altria Group, Inc. and its

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subsidiaries cannot predict whether new investigations may be commenced.

Illicit Trade in Tobacco Products

Illicit trade in tobacco products can have an adverse impact on the businesses of Altria Group, Inc. and its tobacco subsidiaries. Illicit trade can take many forms, including the sale of counterfeit tobacco products; the sale of tobacco products in the United States that are intended for sale outside the country; the sale of tobacco products over the Internet and by other means designed to avoid the collection of applicable taxes; and diversion into one taxing jurisdiction of tobacco products intended for sale in another. Counterfeit tobacco products, for example, are manufactured by unknown third parties in unregulated environments. Counterfeit versions of PM USA, USSTC or Middleton products can negatively affect adult tobacco consumer experiences with and opinions of those brands. Illicit trade in tobacco products also harms law-abiding wholesalers and retailers by depriving them of lawful sales and undermines the significant investment Altria Group, Inc.’s tobacco subsidiaries have made in legitimate distribution channels. Moreover, illicit trade in tobacco products results in federal, state and local governments losing tax revenues. Losses in tax revenues can cause such governments to take various actions, including increasing excise taxes; imposing legislative or regulatory requirements that may adversely impact Altria Group, Inc.’s consolidated results of operations and cash flows and the businesses of its tobacco subsidiaries; or asserting claims against manufacturers of tobacco products or members of the trade channels through which such tobacco products are distributed and sold.

Altria Group, Inc. and its tobacco subsidiaries ~~support appropriate regulations and enforcement measures~~devote significant resources to help prevent illicit trade in tobacco ~~products.~~products and to protect legitimate trade channels. For example, Altria Group, Inc.’s tobacco subsidiaries are engaged in a number of initiatives to help prevent illicit trade in ~~contraband~~ tobacco products, ~~including:~~including communication with wholesale and retail trade members regarding illicit trade in tobacco products and how they can help prevent such activities; enforcement of wholesale and retail trade programs and policies onthat address illicit trade in ~~contraband~~ tobacco products; engagement with and support of law enforcement and regulatory agencies; litigation to protect their trademarks; and support for a variety of federal and state legislative initiatives. Legislative initiatives to address illicit trade in ~~contraband~~ tobacco products are designed to protect the legitimate channels of distribution, impose more stringent penalties for the violation of illegal trade laws and provide additional tools for law enforcement. Regulatory measures and related governmental actions to prevent the illicit manufacture and trade of tobacco products continue to evolve as the nature of illicit tobacco products evolves. For example, in March 2010, the President signed into law the Prevent All Cigarette Trafficking (“PACT”) Act, which addresses illegal Internet sales by, among other things, imposing a series of restrictions and requirements on the delivery-sale of cigarettes and smokeless tobacco products and makes such products non-mailable to consumers through the United States Postal Service, subject to limited exceptions. The PACT Act has been the subject of ongoing lawsuits brought by certain Internet cigarette sellers. In one of these lawsuits, pending in the U.S. District Court for the District of Columbia, a preliminary injunction is currently in effect that prevents the implementation of certain portions of the PACT Act. On June 28, 2013, the U.S. Court of Appeals for the D.C. Circuit upheld the preliminary injunction and remanded the case to the trial court for further proceedings.

~~Tobacco~~

Price, Availability and Quality of Agricultural Products

Shifts in crops (such as those driven by economic conditions and adverse weather ~~patterns,~~patterns), government mandated prices and production control programs may increase or decrease the cost or reduce the supply or quality of tobacco and other agricultural products used to manufacture our products. As with other agriculture commodities, the price of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand and crop quality and availability can be influenced by variations in weather patterns, including those caused by climate change. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products and the cost of tobacco production could impact tobacco leaf prices and tobacco supply. Any significant change in ~~tobacco leaf prices,~~the price, quality or availability of tobacco leaf or other agricultural products used to manufacture our products could adversely affect our ~~tobacco~~ subsidiaries’ profitability and ~~business.~~businesses.

Timing of Sales

In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.

Operating Results

The following table summarizes operating results for the smokeable and smokeless products segments:

For the Years Ended December 31,
Net Revenues Operating Companies Income
(in millions) 2013
2012
2011
2013
2012
2011
Smokeable products $ 21,868
$ 22,216
$ 21,970
$ 7,063
$ 6,239
$ 5,737
Smokeless products 1,778
1,691
1,627
1,023
931
859
Total smokeable and smokeless products $ 23,646
$ 23,907
$ 23,597
$ 8,086
$ 7,170
$ 6,596

~~New Tracking Services~~

Effective in the first quarter of 2013, retail share results for cigarettes are based on a new tracking service, IRI/Management Science Associate Inc. (“MSAi”), and retail share results for cigars and smokeless products are based on a new tracking service, IRI InfoScan. These cost-effective new services measure retail share in stores representing trade classes selling a significant majority of the volume of the product being measured. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers reported through the Store Tracking Analytical Reporting System (“STARS”). Retail market share results reported using the new services cannot be meaningfully compared to retail market shares previously reported by Altria Group, Inc.’s tobacco companies under the previous services. Retail share results for 2012 and 2011 have been restated to reflect these new services.



	For the Years Ended December 31,
	Net Revenues						Operating Companies Income
(in millions)	2014		2013		2012		2014		2013		2012
Smokeable products	$	21,939	$	21,868	$	22,216	$	6,873	$	7,063	$	6,239
Smokeless products	1,809		1,778		1,691		1,061		1,023		931
Total smokeable and smokeless products	$	23,748	$	23,646	$	23,907	$	7,934	$	8,086	$	7,170

Smokeable Products Segment

The smokeable products segment’s operating companies income ~~and operating companies income margin grew~~decreased during ~~2013~~2014 due primarily to higher NPM Adjustment Items in 2013 and lower reported shipment volume, partially offset by higher pricing. PM ~~USA’s investments in the~~ ~~Marlboro~~ ~~brand architecture contributed to~~USA grew Marlboro’s and its total cigarette category retail share ~~growth~~ versus ~~2012.~~2013.

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The following table summarizes the smokeable products segment shipment volume performance:


	Shipment Volume			Shipment Volume
	For the Years Ended December 31,			For the Years Ended December 31,
(sticks in millions)	2013	2012	2011	2014	2013	2012
Cigarettes:
Marlboro	111,421	116,377	117,201	108,023	111,421	116,377
Other premium	7,721	8,629	9,381	7,047	7,721	8,629
Discount	10,170	9,868	8,556	10,320	10,170	9,868
Total cigarettes	129,312	134,874	135,138	125,390	129,312	134,874
Cigars:
Black & Mild	1,177	1,219	1,226	1,246	1,177	1,219
Other	21	18	20	25	21	18
Total cigars	1,198	1,237	1,246	1,271	1,198	1,237
Total smokeable products	130,510	136,111	136,384	126,661	130,510	136,111

Cigarettes shipment volume includes Marlboro; Other premium brands, such as Virginia Slims, Parliament and Benson & Hedges; and Discount brands, which include L&M and Basic. Cigarettes volume includes units sold as well as promotional units, but excludes units sold in Puerto Rico and U.S. Territories, to Overseas Military and by Philip Morris Duty Free Inc., none of which, individually or in the aggregate, is material to the smokeable products segment.

The following table summarizes the smokeable products segment retail share ~~performance.~~performance:


	Retail Share						Retail Share
	For the Years Ended December 31,						For the Years Ended December 31,
	2013		2012		2011		2014		2013		2012
Cigarettes:
Marlboro	43.7	%	43.6	%	43.0	%	43.8	%	43.7	%	43.6	%
Other premium	3.1		3.2		3.4		2.9		3.1		3.3
Discount	3.8		3.5		2.9		4.2		3.9		3.5
Total cigarettes	50.6	%	50.3	%	49.3	%	50.9	%	50.7	%	50.4	%
Cigars:
Black & Mild	29.2	%	30.5	%	30.5	%	28.6	%	28.9	%	29.9	%
Other	0.2		0.3		0.2		0.4		0.2		0.2
Total cigars	29.4	%	30.8	%	30.7	%	29.0	%	29.1	%	30.1	%

~~As previously discussed, effective in the first quarter of 2013, retail~~Retail share results for cigarettes are based on data from IRI/~~MSAi,~~Management Science Associate Inc., a tracking service that uses a sample of stores and certain wholesale shipments to project market share and depict share trends. Retail share results for cigars are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. Both services track sales in the Food, Drug and Mass Merchandisers (including Wal-Mart), Convenience, Military, Dollar Store and Club trade classes. For other trade classes selling cigarettes, retail share is based on shipments from wholesalers to retailers through ~~STARS.~~Store Tracking Analytical Reporting System (“STARS”). These services are not designed to capture sales through other

~~sales through other~~ channels, including the internet, direct mail and some illicitly tax-advantaged outlets. Retail share results for cigars are based on data for machine-made large cigars. Middleton defines machine-made large cigars as cigars made by machine that weigh greater than three pounds per thousand, except cigars sold at retail in packages of 20 cigars. Because the cigars service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is IRI’s standard practice to periodically refresh its services, which could restate retail share results that were previously released in these services.

PM USA and Middleton executed the following pricing and promotional allowance actions during ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012:

▪Effective November 16, 2014, PM USA reduced its wholesale promotional allowance on L&M by $0.07 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.07 per pack.

▪Effective May 11, 2014, PM USA reduced its wholesale promotional allowance on Marlboro and L&M by $0.06 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.06 per pack, except for Parliament, which PM USA increased by $0.11 per pack.

▪Effective December 1, 2013, PM USA reduced its wholesale promotional allowance on Marlboro and L&M by $0.07 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.07 per pack.

▪Effective June 10, 2013, PM USA reduced its wholesale promotional allowance on Marlboro and L&M by $0.06 per pack. In addition, PM USA increased the list price on all of its other cigarette brands by $0.06 per pack.

▪Effective December 3, 2012, PM USA increased the list price on all of its cigarette brands by $0.06 per pack.

▪Effective June 18, 2012, PM USA increased the list price on all of its cigarette brands by $0.06 per pack.

▪Effective March 14, 2012, Middleton reduced the list price on all of its untipped cigarillo brands by $0.39 per five-pack.

▪~~Effective December 12, 2011, PM USA increased the list price on all of its cigarette brands by $0.05 per pack. In addition, PM USA reduced its wholesale promotional allowance on~~ ~~L&M~~ ~~by $0.21 per pack from $0.55 to $0.34 per pack.~~

▪~~Effective December 5, 2011, Middleton executed various list price increases across substantially all of its cigar brands resulting in a weighted-average increase of approximately $0.12 per five-pack.~~

▪~~Effective July 8, 2011, PM USA increased the list price on all of its cigarette brands by $0.09 per pack.~~

The following discussion compares operating results for the smokeable products segment for the year ended December 31, ~~2013~~2014 with the year ended December 31, ~~2012~~2013.

Net revenues, which include excise taxes billed to customers, ~~decreased $348~~increased $71 million ~~(1.6%), due primarily to lower shipment volume ($1,046 million), partially offset by higher pricing.~~

~~Operating companies income increased $824 million (13.2%~~(0.3%), due primarily to higher pricing, partially offset by lower shipment volume ($~~765~~724 million).

Operating companies income decreased $190 million (2.7%), ~~the~~due primarily to higher NPM Adjustment Items in 2013 ($~~664~~621 million), lower shipment volume ($360 million) and ~~lower~~higher marketing, administration and research costs, partially offset by ~~lower~~

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~~shipment volume ($512 million), and~~ higher ~~per unit settlement charges.~~pricing.

Marketing, administration and research costs for the smokeable products segment include PM USA’s cost of

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administering and litigating product liability claims. Litigation defense costs are influenced by a number of factors, including the number and types of cases filed, the number of cases tried annually, the results of trials and appeals, the development of the law controlling relevant legal issues, and litigation strategy and tactics. For further discussion on these matters, see Note 18 and Item 3. For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, product liability defense costs for PM USA were $230 million, $247 million ~~$228 million~~ and ~~$272~~$228 million, respectively. The factors that have influenced past product liability defense costs are expected to continue to influence future costs. PM USA does not expect future product liability defense costs to be significantly different from product liability defense costs incurred in the last few years.

For 2014, total smokeable products reported shipment volume decreased 2.9% versus 2013. PM USA’s 2014 reported domestic cigarettes shipment volume decreased 3.0%, due primarily to the industry’s decline, partially offset by retail share gains. When adjusted for trade inventory changes and other factors, PM USA estimates that its 2014 domestic cigarettes shipment volume decreased approximately 3%, and that total industry cigarette volumes declined approximately 3.5%.

PM USA’s shipments of premium cigarettes accounted for 91.8% of its reported domestic cigarettes shipment volume for 2014, versus 92.1% for 2013.

Middleton’s reported cigars shipment volume for 2014 increased 6.1%, driven by Black & Mild’s performance in the tipped cigars segment, including Black & Mild Jazz.

Marlboro’s retail share for 2014 increased 0.1 share point versus 2013.

PM USA grew its total retail share for 2014 by 0.2 share points versus 2013, driven by Marlboro,and L&M in Discount, partially offset by share losses on other portfolio brands. In the fourth quarter of 2014, PM USA expanded distribution of Marlboro Menthol Rich Blue to 28 states, primarily in the eastern U.S., to enhance Marlboro’s position in the menthol segment.

In the machine-made large cigars category,Black & Mild’s retail share for 2014 declined 0.3 share points. In December 2014, Middleton announced the national expansion of Black & Mild Casino, a dark tobacco blend, in the tipped segment.

The following discussion compares operating results for the smokeable products segment for the year ended December 31, 2013 with the year ended December 31, 2012.

Net revenues, which include excise taxes billed to customers, decreased $348 million (1.6%), due primarily to lower shipment volume ($1,046 million), partially offset by higher pricing.

Operating companies income increased $824 million (13.2%), due primarily to higher pricing ($765 million), NPM Adjustment Items ($664 million) and lower marketing, administration and research costs, partially offset by lower shipment volume ($512 million), and higher per unit settlement charges.

For 2013, total smokeable products reported shipment

volume decreased 4.1% versus 2012. PM USA’s 2013 reported domestic cigarettes shipment volume decreased 4.1%, due primarily to the industry’s rate of decline, changes in trade inventories and other factors, partially offset by retail share gains. When adjusted for trade inventories and other factors, PM USA ~~estimates~~estimated that its 2013 domestic cigarettes shipment volume was down approximately 4%, which iswas consistent with the estimated category decline.

PM USA’s shipments of premium cigarettes accounted for 92.1% of its reported domestic cigarettes shipment volume for 2013, versus 92.7% for 2012.

Middleton’s reported cigars shipment volume for 2013 decreased 3.2% due primarily to changes in wholesale inventories and retail share losses.

Marlboro’s retail share for 2013 increased 0.1 share point versus 2012 behind investments in the Marlboro architecture. PM USA expanded Marlboro Edge distribution nationally in the fourth ~~quarter.~~quarter of 2013.

PM USA’s 2013 retail share increased 0.3 share points versus 2012, due to retail share gains by Marlboro, as well as L&M in Discount, partially offset by share losses on other portfolio brands. In 2013, L&M continued to gain retail share as the total discount segment was flat to declining versus 2012.

In the machine-made large cigars category, Black & Mild’s retail share for 2013 decreased ~~1.3~~1.0 share ~~points,~~point, driven by heightened competitive activity from low-priced cigar brands.

~~The following discussion compares operating results for the smokeable products segment for the year ended December 31, 2012 with the year ended December 31, 2011.~~

~~Net revenues, which include excise taxes billed to customers, increased $246 million (1.1%) due primarily to higher pricing ($404 million), which includes higher promotional investments behind~~ ~~Marlboro’s new brand architecture, partially offset by mix due to~~ ~~L&M’s volume growth in Discount and lower shipment volume.~~

Operating companies income increased $502 million (8.8%), due primarily to higher pricing ($405 million), which includes higher promotional investments, marketing, administration and research savings reflecting cost reduction initiatives ($162 million), lower restructuring charges ($155 million) and lower charges related to tobacco and health judgments ($94 million), partially offset by mix and lower shipment volume ($127 million), higher per unit settlement charges ($123 million) and higher manufacturing costs.

For 2012, total smokeable products reported shipment volume decreased 0.2% versus 2011. PM USA’s reported domestic cigarettes shipment volume declined 0.2% for 2012, due primarily to the industry’s rate of decline, partially offset by volume growth as a result of retail share gains and one extra shipping day. After adjusting for an extra shipping day and changes in trade inventories, PM USA’s 2012 domestic cigarettes shipment volume was estimated to be essentially

~~unchanged. After adjusting for an extra shipping day and changes in trade inventories, PM USA estimates total cigarette category volume for 2012 to be down approximately 3%.~~

~~PM USA’s shipments of premium cigarettes accounted for 92.7% of its reported domestic cigarettes shipment volume for 2012, down from 93.7% for 2011.~~

~~Middleton’s reported cigars shipment volume for 2012 decreased 0.7% due primarily to changes in trade inventories, partially offset by volume growth as a result of retail share gains.~~

~~Marlboro~~’s~~2012 retail share performance continued to benefitfrom the brand-building initiatives supporting~~ ~~Marlboro’s new architecture.~~ ~~Marlboro’s retail share for 2012 increased 0.6 share points versus 2011 to 43.6%.~~

~~PM USA’s 2012 retail share increased 1.0 share point versus 2011, reflecting retail share gains by~~ ~~Marlboro~~ ~~and by~~ ~~L&M~~ ~~in Discount. These gains were partially offset by share losses on other portfolio brands.~~

~~In the machine-made large cigars category,Black & Mild’s retail share for 2012 remained unchanged at 30.5%.~~

Smokeless Products Segment

~~The~~During 2014, the smokeless products ~~segment’s~~segment grew operating companies income ~~grew during 2013 driven primarily by higher shipment volume~~ and ~~higher pricing.~~expanded operating companies income margins. USSTC ~~grew~~also increased Copenhagen and Skoal’s combined retail share ~~and expanded operating companies income margin~~ versus ~~2012.~~2013.

The following table summarizes smokeless products segment shipment volume performance:

Shipment Volume
For the Years Ended December 31,
(cans and packs in millions) 2013
2012
2011
Copenhagen 426.1
392.5
354.2
Skoal 283.8
288.4
286.8
Copenhagen and Skoal
709.9
680.9
641.0
Other 77.6
82.4
93.6
Total smokeless products 787.5
763.3
734.6



	Shipment Volume For the Years Ended December 31,
(cans and packs in millions)	2014	2013	2012
Copenhagen	448.6	426.1	392.5
Skoal	269.6	283.8	288.4
Copenhagen and Skoal	718.2	709.9	680.9
Other	75.1	77.6	82.4
Total smokeless products	793.3	787.5	763.3

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Smokeless products shipment volume includes cans and packs sold, as well as promotional units, but excludes international volume, which is not material to the smokeless products segment. Other includes certain USSTC and PM USA smokeless products. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can-for-can basis. To calculate volumes of cans and packs shipped, ~~USSTC and PM USA have assumed that~~ one pack of snus, irrespective of the number of pouches in the pack, is assumed to be equivalent to one can of MST.

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The following table summarizes smokeless products segment retail share performance (excluding international volume):



	Retail Share For the Years Ended December 31,
	2014		2013			2012
Copenhagen	30.8	%	29.3	%		27.9	%
Skoal	20.4		21.4			22.5
Copenhagen and Skoal	51.2		50.7		��	50.4
Other	4.0		4.3			4.8
Total smokeless products	55.2	%	55.0	%		55.2	%

Retail Share
For the Years Ended December 31,
2013
2012
2011
Copenhagen 29.3 % 27.9 % 25.9 %
Skoal 21.4
22.5
23.0
Copenhagen and Skoal
50.7
50.4
48.9
Other 4.3
4.8
5.9
Total smokeless products 55.0 % 55.2 % 54.8 %

~~As previously discussed, effective in the first quarter of 2013, retail~~Retail share results for smokeless products are based on data from IRI InfoScan, a tracking service that uses a sample of stores to project market share and depict share trends. The service tracks sales in the Food, Drug and Mass Merchandisers (including Wal-Mart), Convenience, Military, Dollar Store and Club trade classes on the number of cans and packs sold. Smokeless products is defined by IRI as moist smokeless and spit-free tobacco products. Other includes certain USSTC and PM USA smokeless products. New types of smokeless products, as well as new packaging configurations of existing smokeless products, may or may not be equivalent to existing MST products on a can-for-can basis. ~~USSTC and PM USA have assumed that one~~One pack of snus, irrespective of the number of pouches in the pack, is assumed to be equivalent to one can of MST. All other products are considered to be equivalent on a can-for-can basis. Because this service represents retail share performance only in key trade channels, it should not be considered a precise measurement of actual retail share. It is IRI’s standard practice to periodically refresh its InfoScan services, which could restate retail share results that were previously released in this service.

USSTC ~~and PM USA~~ executed the following pricing actions during ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012:

▪Effective November 25, 2014, USSTC increased the list price on all its brands by $0.07 per can.

▪Effective May 11, 2014, USSTC increased the list price on all of its brands by $0.06 per can.

▪Effective December 8, 2013, USSTC increased the list price on all of its brands by $0.06 per can.

▪~~Effective December 1, 2013, PM USA increased the list price on~~ ~~Marlboro~~ ~~Snus tins and flip-top box (“FTB”) by $0.06 per tin or FTB.~~

▪~~Effective May 13, 2013, PM USA increased the list price on~~ ~~Marlboro~~ ~~Snus tins and FTB by $0.05 per tin or FTB.~~

▪Effective May 12, 2013, USSTC increased the list price on all of its brands by $0.05 per can.

▪Effective December 9, 2012, USSTC increased the list price on all of its brands by $0.05 per can.

▪Effective ~~December 3, 2012, PM USA increased the list price on~~ ~~Marlboro~~ ~~Snus tins and FTB by $0.05 per tin or FTB.~~

▪~~Effective June 18, 2012, PM USA increased the list price on~~ ~~Marlboro~~ ~~Snus tins and FTB by $0.05 per tin or FTB.~~

▪~~Effective~~ May 25, 2012, USSTC increased the list price on all of its brands by $0.05 per can.

▪~~Effective May 22, 2011, USSTC increased the list price on its MST brands by $0.10 per can and~~ ~~Skoal~~ ~~Snus by $0.31 per can.~~

▪~~Effective May 18, 2011, PM USA increased the list price on~~ ~~Marlboro~~ ~~Snus tins by $0.31 per tin.~~

The following discussion compares operating results for the smokeless products segment for the year ended December 31, ~~2013~~2014 with the year ended December 31, ~~2012~~2013.

Net revenues, which include excise taxes billed to customers, increased $31 million (1.7%), due primarily to higher pricing, which includes higher promotional investments, and higher

volume, partially offset by mix due to growth in popular priced products.

Operating companies income increased $38 million (3.7%), due primarily to higher pricing ($43 million), which includes higher promotional investments, and higher volume ($9 million), partially offset by product mix.

Reported domestic smokeless products shipment volume for 2014 increased 0.7% as volume growth for Copenhagen wasmostly offset by volume declines in Skoal and Other portfolio brands. Copenhagen and Skoal’s combined reported shipment volume increased 1.2% for 2014.

After adjusting for trade inventory changes and other factors, USSTC estimates that domestic smokeless products shipment volume grew approximately 2.5% for 2014. USSTC estimates that the smokeless products category volume grew approximately 2% for 2014 as compared to approximately 5.5% for 2013. USSTC continues to believe that the smokeless category’s growth rate is best determined over a longer time horizon and will continue to monitor industry volume closely.

Copenhagen and Skoal’s combined retail share increased 0.5 share points to 51.2% for 2014. Copenhagen’s retail shareincreased 1.5 share points, while Skoal’s retail share declined 1.0 share point.

Retail share for the smokeless products segment increased 0.2 share points to 55.2%, as retail share gains for Copenhagen were mostly offset by share losses for Skoal and Other portfolio brands.

The following discussion compares operating results for the smokeless products segment for the year ended December 31, 2013 with the year ended December 31, 2012.

Net revenues, which include excise taxes billed to customers, increased $87 million (5.1%), due primarily to higher shipment volume and higher pricing, which includes higher promotional investments, partially offset by mix due to growth in popular priced products.

Operating companies income increased $92 million (9.9%), due primarily to higher shipment volume ($39 million), higher pricing ($34 million), which includes higher promotional investments, lower restructuring charges ($25 million) and effective cost management, partially offset by mix.

Calendar differences affected reported domestic smokeless products shipment volume due to one less shipping day in 2013, representing approximately one full week of volume. ~~USSTC and PM USA’s 2013 combined reported~~Reported domestic smokeless products shipment volume for 2013 increased 3.2% versus 2012 due to volume growth for Copenhagen, partially offset by volume declines in Skoal and Other portfolio brands. Copenhagen and Skoal’s combined reported shipment volume increased 4.3% versus 2012.

After adjusting for calendar differences, trade inventory changes and other factors, USSTC ~~and PM USA estimate~~estimates that ~~their combined~~ domestic smokeless products shipment volume grew 5% for 2013, while smokeless products category volume grew approximately 5.5%.

Copenhagen and Skoal’s combined retail share increased 0.3 share points to 50.7% for 2013. Copenhagen’s retail share grew 1.4 share points, as the brand continued to benefit from products introduced over the past several years. Skoal’s 2013 retail share

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declined 1.1 share points, due primarily to competitive activity and Copenhagen’s performance.

~~USSTC and PM USA’s combined retail~~Retail share for the smokeless products segment decreased 0.2 share points versus 2012 as retail share losses for Skoal and Other portfolio brands were mostly offset by retail share gains for Copenhagen.

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~~The following discussion compares operating results for the smokeless products segment for the year ended December 31, 2012 with the year ended December 31, 2011.~~

Net revenues, which include excise taxes billed to customers, increased $64 million (3.9%) due primarily to higher pricing ($58 million) and higher shipment volume, partially offset by mix due to growth in products introduced in recent years at a lower, popular price.

Operating companies income increased $72 million (8.4%) versus the prior-year period due primarily to higher pricing ($46 million), which includes higher promotional investments, higher shipment volume, lower manufacturing costs ($22 million), lower restructuring charges and marketing, administration and research savings reflecting cost reduction initiatives, partially offset by growth in products introduced in recent years at a lower, popular price.

~~For 2012, USSTC and PM USA’s combined reported domestic smokeless products shipment volume grew 3.9% as volume growth on~~ ~~Copenhagen~~ ~~and~~ ~~Skoal~~ ~~was partially offset by volume declines on Other portfolio brands.~~

~~Copenhagen’s 2012 reported shipment volume grew 10.8% as the brand continued to benefit from products introduced in recent years, including the May 2012 expansion of~~ ~~Copenhagen~~ ~~Southern Blend into select geographies.~~ ~~Skoal’s 2012 reported shipment volume increased 0.6%.~~ ~~Skoal’s volume comparison was negatively impacted by the de-listing of seven~~ ~~Skoalstock-keeping units (“SKUs”) in the second quarter of 2011, partially offset by the growth of~~ ~~Skoal~~ ~~X-TRA.~~

After adjusting for changes in trade inventories and other factors, USSTC and PM USA estimate that their combined 2012 domestic smokeless products shipment volume grew approximately 5% versus 2011. USSTC and PM USA believe that the smokeless category’s 2012 volume grew at an estimated rate of approximately 5% versus 2011.

~~Copenhagen~~ ~~and~~ ~~Skoal’s combined retail share for 2012 increased 1.5 share points.~~ ~~Copenhagen’s 2012 retail share grew 2.0 share points as the brand continued to benefit from products introduced over the past several years.~~ ~~Skoal’s 2012 retail share declined 0.5 share points due primarily to the de-listing of seven SKUs in the second quarter of 2011, competitive activity and~~ ~~Copenhagen’s performance, partially offset by share gains on its~~ ~~Skoal~~ ~~X-TRA products.~~

~~USSTC and PM USA’s combined 2012 retail share increased 0.4 share points as gains by~~ ~~Copenhagen~~ ~~were partially offset by retail share losses for~~ ~~Skoal~~ ~~andOther portfolio brands.~~

Wine Segment

Business Environment

Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle, Columbia Crest and 14 Hands, and owns wineries in or distributes wines from several other wine regions and foreign countries. ~~As discussed in Note 18,~~ Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley and

Erath in Oregon. In addition, Ste. Michelle imports and markets Antinori, Torres and Villa Maria Estate wines and Champagne Nicolas Feuillatte in the United States. Key elements of Ste. Michelle’s strategy are expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers, and a focus on improving product mix to higher-priced, premium products.

Federal, state and local governmental agencies regulate the alcohol beverage industry through various means, including licensing requirements, pricing, labeling and advertising restrictions, and distribution and production policies. Further regulatory restrictions or additional excise or other taxes on the manufacture and sale of alcoholic beverages may have an adverse effect on Ste. Michelle’s wine business.

Operating Results

Ste. Michelle delivered higher net revenues and operating companies income in ~~2013 through~~2014 due primarily to higher ~~pricing and its focus on increasing distribution of premium brands.~~shipment volume.

The following table summarizes operating results for the wine segment:


	For the Years Ended December 31,						For the Years Ended December 31,
(in millions)	2013		2012		2011		2014		2013		2012
Net revenues	$	609	$	561	$	516	$	643	$	609	$	561
Operating companies income	$	118	$	104	$	91	$	134	$	118	$	104

The following table summarizes wine segment case shipment volume performance:


	Shipment Volume For the Years Ended December 31,			Shipment Volume For the Years Ended December 31,
(cases in thousands)	2013	2012	2011	2014	2013	2012
Chateau Ste. Michelle	2,753	2,780	2,522	3,035	2,753	2,780
Columbia Crest	1,785	1,716	2,055
Columbia Crest¹				1,032	1,031	858
14 Hands	1,374	1,024	774	1,662	1,374	1,024
Other	2,060	2,069	1,970
Other¹				2,622	2,814	2,927
Total wine	7,972	7,589	7,321	8,351	7,972	7,589

¹Two Vines is no longer sold under the Columbia Crest brand. Effective January 1, 2014, shipment volume for Two Vines is included in Other. Prior-period shipment volume for Columbia Crest and Other have been adjusted to reflect this change.

The following discussion compares operating results for the wine segment for the year ended December 31, 2014 with the year ended December 31, 2013.

Net revenues, which include excise taxes billed to customers, and operating companies income increased $34 million (5.6%) and $16 million (13.6%), respectively, due primarily to higher shipment volume.

For 2014, Ste. Michelle’s reported wine shipment volume increased 4.8% driven by increased volume of 14 Hands and Chateau Ste. Michelle, partially offset by declines in Other brands.

The following discussion compares operating results for the wine segment for the year ended December 31, 2013 with the year ended December 31, 2012.

Net revenues, which include excise taxes billed to customers, increased $48 million (8.6%), due to higher shipment volume, improved premium mix and higher pricing.

Operating companies income increased $14 million (13.5%), due to higher shipment volume, higher pricing and improved premium mix, partially offset by higher selling,

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general and administrative costs and higher manufacturing costs.

For 2013, Ste. Michelle’s reported wine shipment volume increased 5.0% due primarily to increased distribution of 14 Hands.

~~The following discussion compares operating results for the wine segment for the year ended~~ ~~December 31, 2012~~ ~~with the year ended~~ ~~December 31, 2011~~.

~~Net revenues, which include excise taxes billed to customers, increased $45 million (8.7%), due primarily to higher shipment volume, higher pricing and improved premium mix.~~

Operating companies income increased $13 million (14.3%), due primarily to higher pricing, improved premium mix, higher shipment volume and UST acquisition-related costs incurred in 2011, partially offset by costs related to Ste. Michelle’s sales force expansion and higher costs for select vintages incurred in 2012.

~~Ste. Michelle’s 2012 wine shipment volume increased 3.7% due primarily to the national expansion of select wines into off-premise channels.~~

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Financial Review

Net Cash Provided by Operating Activities

During 2014, net cash provided by operating activities was $4.7 billion compared with $4.4 billion during 2013. This increase was due primarily to the following:


▪	a voluntary $350 million contribution to Altria Group, Inc.’s pension plans during 2013;


▪	lower interest payments in 2014, resulting from debt maturities in 2013 and 2014, as well as debt refinancing activities in 2013; and


▪	higher earnings in 2014;

partially offset by:


▪	higher income tax payments in 2014, resulting primarily from the loss on early extinguishment of debt in 2013; and


▪	higher settlement payments during 2014, driven primarily by the impact of higher NPM Adjustment Items in 2013.

During 2013, net cash provided by operating activities was $4.4 billion compared with ~~$3.9~~$3.9 billion during 2012. This increase was due primarily to the following:


▪	lower settlement payments, which include the $483 million credit that PM USA received against its April 2013 MSA payment as a result of the NPM Adjustment ~~Settlement;~~Items;


▪	lower income tax payments, which include the Closing Agreement with the IRS that resulted in a payment for federal income tax and estimated interest of $456 million in 2012; and


▪	a lower voluntary contribution to Altria Group, Inc.’s pension plans in 2013 ($350 million in 2013 versus $500 million in 2012);

partially offset by:


▪	timing of spending related to inventory purchases and other working capital requirements.

During 2012, net cash provided by operating activities was $3.9 billion compared with $3.6 billion during 2011. This increase was due primarily to higher earnings in 2012 and higher income tax payments in 2011 associated with PMCC leveraged lease transactions, partially offset by the Closing Agreement with the IRS that resulted in a payment for federal income tax and estimated interest of $456 million in 2012, and a higher voluntary contribution to Altria Group, Inc.’s pension plans during 2012 ($500 million in 2012 versus $200 million in 2011).

Altria Group, Inc. had a working capital deficit at December 31, ~~2013~~2014 and ~~2012~~2013. Altria Group, Inc.’s management believes that it has the ability to fund these working capital deficits with cash provided by operating activities and/or short-term borrowings under its commercial paper program as discussed in the Debt and Liquidity section below.

Net Cash Provided by Investing Activities

During 2014, net cash provided by investing activities was $177 million compared with $602 million during 2013. This decrease was due primarily to the following:


▪	lower proceeds from asset sales in the financial services business during 2014; and


▪	Nu Mark’s acquisition of Green Smoke during 2014.

During 2013, net cash provided by investing activities was $602 million compared with ~~$920~~$920 million during 2012. This decrease was due primarily to lower proceeds from asset sales in the financial services business in ~~2013.~~

During 2012, net cash provided by investing activities was $920 million compared with $387 million during 2011. This increase was due primarily to higher proceeds from asset sales in the financial services business in 2012.2013.

Capital expenditures for ~~2013~~2014 increased ~~5.6%~~24.4% to $~~131~~163 million. Capital expenditures for ~~2014~~2015 are expected to be in the range of ~~$150~~$200 million to ~~$200~~$250 million, and are expected to be funded from operating cash flows. The increase in expected capital expenditures in 2015 compared with 2014 is due primarily to a new USSTC manufacturing facility.

Net Cash Used in Financing Activities

During 2014, net cash used in financing activities was $4.7 billion, essentially unchanged compared to 2013, which primarily reflected the following:


▪	higher repayments of debt in 2013 driven primarily by the repurchase of senior unsecured notes in connection with the 2013 debt tender offer; and


▪	higher premiums and fees in 2013 in connection with the 2013 debt tender offer;

offset by:


▪	debt issuances of $3.2 billion in 2013 used to repurchase senior unsecured notes in connection with the 2013 debt tender offer;

▪higher share repurchases during 2014; and

▪higher dividends paid during 2014.

During 2013, net cash used in financing activities was $4.7 billion compared with $5.2 billion during ~~2012.~~2012. This decrease was due primarily to the following:

▪debt issuances of $1.0 billion in May 2013; and

▪lower share repurchases during 2013;

partially offset by:


▪	higher repayments of debt at scheduled maturities in 2013; and

▪higher dividends paid during 2013.

~~During 2012, net cash used in financing activities was $5.2 billion compared with $3.0 billion during 2011. This increase was due primarily to the following:~~


▪	~~debt issuances of $1.5 billion during 2011;~~


▪	~~$600 million repayment of UST senior unsecured notes at scheduled maturity during 2012; and~~


▪	~~higher dividends paid during 2012;~~

~~partially offset by:~~

▪~~lower share repurchases during 2012.~~

Debt and Liquidity

Credit Ratings - Altria Group, Inc.’s cost and terms of financing and its access to commercial paper markets may be impacted by applicable credit ratings. Under the terms of certain of Altria Group, Inc.’s existing debt instruments, a change in a credit rating could result in an increase or a decrease of the cost of borrowings. For instance, as discussed in Note 9, the interest rate payable on certain of Altria Group, Inc.’s outstanding notes is subject to adjustment from time to time if the rating

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assigned to the notes of such series by Moody’s Investors Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“Standard & Poor’s”) is downgraded (or subsequently upgraded) as and to the extent set forth in the

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notes. The impact of credit ratings on the cost of borrowings under Altria Group, Inc.’s credit agreements is discussed below.

At December 31, ~~2013~~2014, the credit ratings and outlook for Altria Group, Inc.’s indebtedness by major credit rating agencies were:



	Short-term Debt	Long-term Debt	Outlook
Moody’s	P-2	Baa1	Stable
Standard & Poor’s¹	A-2	~~BBB~~BBB+	Stable
Fitch Ratings Ltd.	F2	BBB+	Stable

¹On March 12, 2014, Standard & Poor’s raised the long-term debt credit rating for Altria Group, Inc. to “BBB+” from “BBB”.

Credit Lines - From time to time, Altria Group, Inc. has short-term borrowing needs to meet its working capital requirements and generally uses its commercial paper program to meet those needs. At December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, Altria Group, Inc. had no short-term borrowings.

Altria Group, Inc.’s average daily short-term borrowings, peak short-term borrowings outstanding and weighted-average interest rate on short-term borrowings were as follows:


	For the Years Ended December 31,									For the Years Ended December 31,
(in millions)	2013			2012			2011			2014			2013			2012
Average daily short-term borrowings	$	37		$	8		$	68		$	35		$	37		$	8
Peak short-term borrowings outstanding	$	650		$	190		$	865		$	650		$	650		$	190
Weighted-average interest rate on short-term borrowings	0.34		%	0.42		%	0.40		%	0.27		%	0.34		%	0.42		%

Short-term borrowings were repaid with cash provided by operating activities. Peak borrowings were due primarily to payments related to State Settlement Agreements as further discussed in Tobacco Space - Business Environment, Off Balance Sheet Arrangements and Aggregate Contractual Obligations - Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation, and Note 18.

During the third quarter of ~~2013,~~2014, Altria Group, Inc. ~~amended and restated~~entered into an extension agreement (the “Extension Agreement”) to amend its $3.0 billion senior unsecured 5-year revolving credit agreement, ~~to extend~~dated as of August 19, 2013 (the “Credit Agreement”). The Extension Agreement extends the expiration date of the Credit Agreement from August 19, 2018 to August 19, ~~2018, with~~2019 pursuant to the terms of the Credit Agreement. All other terms and conditions of the Credit Agreement remain in full force and effect. The Credit Agreement contains an additional option, subject to certain conditions, for Altria Group, Inc. to extend the expiration date for ~~two~~an additional one-year ~~periods (as amended and restated, the “Credit Agreement”). All other terms of the Credit Agreement remain substantially the same.~~period.

Credit Agreement are expected to be based on the London Interbank Offered Rate (“LIBOR”) plus a percentage based on the higher of the ratings of Altria Group, Inc.’s long-term senior unsecured debt from Standard & Poor’s and Moody’s. The applicable percentage based on Altria Group, Inc.’s long-term senior

unsecured debt ratings at December 31, ~~2013~~2014 for borrowings under the Credit Agreement was 1.25%. The Credit Agreement does not include any other rating triggers, nor does it contain any provisions that could require the posting of collateral. At December 31, ~~2013, the~~2014, credit ~~line~~ available to Altria Group, Inc. under the Credit Agreement was $3.0 billion.

The Credit Agreement is used for general corporate purposes and to support Altria Group, Inc.’s commercial paper issuances. The Credit Agreement requires that Altria Group, Inc. maintain (i) a ratio of debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) of not more than 3.0 to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated interest expense of not less than 4.0 to 1.0, each calculated as of the end of the applicable quarter on a rolling four quarters basis. At December 31, ~~2013,~~2014, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated in accordance with the Credit Agreement, were ~~1.7~~1.8 to 1.0 and ~~8.4~~9.7 to 1.0, respectively.

Altria Group, Inc. expects to continue to meet its covenants associated with the Credit Agreement. The terms “consolidated EBITDA,” “debt” and “consolidated interest

expense,” as defined in the Credit Agreement, include certain adjustments. Exhibit 99.3 to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2013 sets forth the definitions of these terms as they appear in the Credit Agreement and is incorporated herein by reference.

Any commercial paper issued by Altria Group, Inc. and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 19. Condensed Consolidating Financial Information to the consolidated financial statements in Item 8 (“Note 19”).

Financial Market Environment - Altria Group, Inc. believes it has adequate liquidity and access to financial resources to meet its anticipated obligations and ongoing business needs in the foreseeable future. Altria Group, Inc. continues to monitor the credit quality of its bank group and is not aware of any potential non-performing credit provider in that group. Altria Group, Inc. believes the lenders in its bank group will be willing and able to advance funds in accordance with their legal obligations.

Debt - At December 31, ~~2013~~2014 and ~~2012~~2013, Altria Group, Inc.’s total debt was ~~$14.5~~$14.7 billion and ~~$13.9~~$14.5 billion, respectively.

As discussed in Note 9, on ~~October 31, 2013,~~November 14, 2014, Altria Group, Inc. issued ~~$1.4~~$1.0 billion aggregate principal amount of ~~4.0%~~2.625% senior unsecured long-term notes due 2024 and $1.8 billion aggregate principal amount of 5.375% senior unsecured long-term notes due 2044. Interest on these notes is payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group, Inc.’s general funds and were used to repurchase certain of its senior unsecured notes in connection with the 2013 debt tender offer and for other general corporate purposes.

~~In addition, on May 2, 2013, Altria Group, Inc. issued $350 million aggregate principal amount of 2.95% senior unsecured~~

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~~long-term notes due 2023 and $650 million aggregate principal amount of 4.50% senior unsecured long-term notes due 2043.~~2020. Interest on these notes is payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group, Inc.’s general funds and were used for general corporate purposes.

The obligations of Altria Group,

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Inc. under the notes are guaranteed by PM USA. For further discussion, see Note 19.

During the ~~fourth~~first quarter of ~~2013,~~2014, Altria Group, Inc. repaid in full at maturity senior unsecured notes ~~issued by Altria Group, Inc.~~ in the aggregate principal amount of ~~$1,459~~$525 million ~~matured and were repaid~~.

During the fourth quarter of 2014, UST redeemed in ~~full.~~full its $300 million (aggregate principal amount) 5.75% senior notes due 2018.

All of Altria Group, Inc.’s debt was fixed-rate debt at December 31, ~~2013~~2014 and ~~2012~~2013. The weighted-average coupon

interest rate on total debt was approximately 5.7% and

5.9% ~~and 7.2%~~ at December 31, ~~2013~~2014 and ~~2012~~2013, respectively. For further details on long-term debt, see Note 9.

In October ~~2011,~~2014, Altria Group, Inc. filed a registration statement on Form S-3 with the SEC, under which Altria Group, Inc. may offer debt securities or warrants to purchase debt securities from time to time over a three-year period

from the date of filing.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Altria Group, Inc. has no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations that are discussed below.

Guarantees and Other Similar Matters - As discussed in Note 18, Altria Group, Inc. had unused letters of credit obtained in the ordinary course of business, guarantees (including third-party guarantees) and a redeemable noncontrolling interest outstanding at December 31, ~~2013~~2014. From time to time, subsidiaries of Altria Group, Inc. also issue lines of credit to affiliated entities. In addition, as discussed in Note 19, PM USA has issued guarantees relating to Altria Group, Inc.’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.’s liquidity.

Aggregate Contractual Obligations - The following table summarizes Altria Group, Inc.’s contractual obligations at December 31, ~~2013~~2014:


	Payments Due										Payments Due
(in millions)	Total		2014		2015 - 2016		2017 - 2018		2019 and Thereafter		Total		2015		2016 - 2017		2018 - 2019		2020 and Thereafter
Long-term debt ⁽¹⁾	$	14,567	$	525	$	1,000	$	1,956	$	11,086	$	14,742	$	1,000	$	—	$	2,800	$	10,942
Interest on borrowings ⁽²⁾	11,824		808		1,609		1,560		7,847		11,091		826		1,586		1,425		7,254
Operating leases ⁽³⁾	282		54		84		54		90		322		56		93		55		118
Purchase obligations: ⁽⁴⁾
Inventory and production costs	3,122		976		1,030		722		394		2,938		1,001		1,037		517		383
Other	734		565		137		32		—		668		529		122		17		—
	3,856		1,541		1,167		754		394		3,606		1,530		1,159		534		383
Other long-term liabilities ⁽⁵⁾	2,339		162		350		351		1,476		2,641		152		327		329		1,833
	$	32,868	$	3,090	$	4,210	$	4,675	$	20,893	$	32,402	$	3,564	$	3,165	$	5,143	$	20,530

⁽¹⁾ Amounts represent the expected cash payments of Altria Group, Inc.’s long-term debt.

⁽²⁾ Amounts represent the expected cash payments of Altria Group, Inc.’s interest expense on its long-term debt. Interest on Altria Group, Inc.’s debt, which was all fixed-rate debt at December 31, ~~2013~~,2014, is presented using the stated coupon interest rate. Amounts exclude the amortization of debt discounts and premiums, the amortization of loan fees and fees for lines of credit that would be included in interest and other debt expense, net on the consolidated statements of earnings.

⁽³⁾ Amounts represent the minimum rental commitments under non-cancelable operating leases.

⁽⁴⁾ Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, storage and distribution) are commitments for projected needs to be used in the normal course of business. Other purchase obligations include commitments for marketing, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.

⁽⁵⁾ Other long-term liabilities consist of accrued postretirement health care costs and certain accrued pension costs. The amounts included in the table above for accrued pension costs consist of the actuarially determined anticipated minimum funding requirements for each year from ~~2014~~2015 through ~~2018.~~2019. Contributions beyond ~~2018~~2019 cannot be reasonably estimated and, therefore, are not included in the table above. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued postemployment costs, income taxes and tax contingencies, and other accruals. Altria Group, Inc. is unable to estimate the timing of payments for these items.

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The State Settlement Agreements and related legal fee payments, and payments for ~~tobacco growers and~~ FDA user fees, as discussed below and in Note 18 and Item 3, are excluded from the table above, as the payments are subject to adjustment for several factors, including inflation, market share and industry volume. Litigation escrow deposits, as discussed below and in Note 18, are also excluded from the table above since these deposits will be returned to PM USA should it prevail on appeal.

Payments Under State Settlement and Other Tobacco Agreements, and FDA Regulation - As discussed previously and in Note 18 and Item 3, PM USA has entered into State Settlement Agreements with the states and territories of the United ~~States.~~States that call for certain payments. PM USA, Middleton and USSTC were also ~~entered into a trust agreement~~subject to ~~provide certain aid to U.S. tobacco growers and quota holders, but PM USA’s obligations under this trust expired on December 15, 2010 (these obligations had been offset by the~~payment obligations imposed ~~on PM USA~~ by FETRA. The FETRA ~~which expires~~payment obligations expired after the third quarter of ~~2014). USSTC and Middleton are also subject to obligations imposed by FETRA.~~2014. In addition, in June 2009, PM USA and ~~a subsidiary of~~ USSTC became subject to quarterly user fees imposed by the FDA as a result of the FSPTCA. ~~The~~Payments under the State Settlement Agreements, FETRA and the FDA user fees ~~call for payments that~~ are based on variable factors, such as volume, market share and inflation, depending on the subject payment. Altria Group, Inc.’s subsidiaries account for the cost of the State Settlement Agreements, FETRA and FDA user fees as a component of cost of sales. As a result of the State Settlement Agreements, FETRA and FDA user fees, Altria Group, Inc.’s subsidiaries recorded approximately $4.9 billion, $4.4 billion ~~$5.1 billion~~ and ~~$5.0~~$5.1 billion of charges to cost of sales for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, respectively. The 2014 and 2013 ~~amount~~amounts included reductions to cost of sales of $43 million and $664 million, ~~related to~~respectively, for the NPM Adjustment ~~Items discussed below~~Items. In addition, the 2014 amount included a decrease in the charge to cost of sales of approximately $100 million, reflecting the expiration of the obligations imposed by FETRA after the third quarter of 2014.

In connection with the settlement of the NPM Adjustment disputes under the MSA for the years 2003-2012, the formula for allocating the revised NPM Adjustments applicable to the signatory states for 2013 and ~~under~~ ~~Health Care Cost Recovery Litigation - Possible Adjustments in MSA Payments for 2003 - 2012~~ ~~in Note 18.~~

~~Effective December 17, 2012, PM USA and~~subsequent years among the ~~other~~ tobacco product manufacturers that are original signatories ~~(the “OPMs”)~~ to the MSA as well as certain other participating manufacturers, entered into a term sheet with 17 states, the District of Columbia and Puerto Rico for settlement of the 2003 - 2012 NPM Adjustments with those states and territories. In March 2013, the arbitration panel in the NPM Adjustment arbitration issued a stipulated partial settlement and award (the “Stipulated Award”(“OPMs”) permitting the term sheet to proceed. An additional MSA state joined the term sheet in April 2013 (prior to the date of PM USA’s April 2013 MSA payment). Based on the identity of the signatory states that had joined the term sheet prior to the date of the April 2013 MSA payment, the reduction in PM USA’s MSA payment obligation was approximately $483 million, all of which PM USA received as a credit against its April 2013 MSA payment. Two additional MSA states joined the term sheet in May 2013 (after the date of PM USA’s April 2013 MSA payment), and as a result, PM USA expects to receive an additional credit of $36 million against its April 2014 MSA payment. All states and territories that have joined the term sheet are referred to collectively as the “signatory

states.” The term sheet also provides that the NPM Adjustment provision will be revised and streamlined as to the signatory states for years after 2012. In connection with the settlement, the formula for allocating among the OPMs the revised NPM Adjustments applicable in the future to the signatory states will behas been modified in a manner favorable to PM USA, although the extent to which it isremains favorable to PM USA will depend upon future developments. For a detailed discussion of settlements of, and determinations made in connection with disputes with certain ~~future events, including~~states and territories related to the ~~future relative market shares of the OPMs.~~

~~In September 2013, the arbitration panel presiding over the 2003~~ NPM Adjustment ~~dispute ruled that six of 15 states whose 2003 diligent enforcement claims were contested by~~provision under the ~~participating manufacturers and that had not joined~~MSA for the term sheet, did not diligently enforce laws during 2003 that require escrow payments from the cigarette manufacturers that have not signed the MSA. As a result of this ruling, PM USA is entitled to an NPM Adjustment for 2003, likely in the form of a credit against its April 2014 MSA payment, in the amount of $145 million, plus applicable interest on that amount.

~~As a result of these NPM Adjustment Items, PM USA recorded a reduction to cost of sales of $664 million in 2013.~~

~~As discussed under~~years 2003-2012, see Health Care Cost Recovery Litigation - ~~Possible Adjustments in MSA Payments for 2003 - 2012~~NPM Adjustment Disputes in Note 18, a number of non-signatory states have taken action in state court to vacate or modify the Stipulated Award or the diligent enforcement rulings of the arbitration panel. No assurance can be given that this litigation will be resolved in a manner favorable to PM USA.18.

Based on current agreements, ~~2013~~2014 market share and historical annual industry volume decline rates, the estimated amounts that Altria Group, Inc.’s subsidiaries may charge to cost of sales for payments related to State Settlement Agreements ~~FETRA~~ and FDA user fees approximate $5$4.6 billion in ~~2014~~2015 and ~~approximately $4.6 billion~~ each year thereafter. ~~These~~The decrease in these amounts ~~reflect~~compared with approximately $4.9 billion charged to cost of sales in 2014 reflects the expiration of obligations imposed

by FETRA after the third quarter of ~~2014, which will result in a decrease of approximately $100 million in 2014 and approximately $400 million starting in 2015.~~2014. These amounts exclude the potential impact of the revised and streamlined NPM Adjustment provision applicable to signatory states for years after ~~2012~~2014 discussed ~~above and also exclude the adjustments described below.~~above.

The estimated amounts due under the State Settlement Agreements ~~and FETRA~~ charged to cost of sales in each year would generally be paid in the following year. The amounts charged to cost of sales for FDA user fees are generally paid in the quarter in which the fees are incurred. As previously stated, the payments due under the terms of the State Settlement Agreements ~~FETRA~~ and FDA user fees are subject to adjustment for several factors, including volume, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The future payment amounts discussed above are estimates, and actual payment amounts will differ to the extent underlying assumptions differ from actual future results.

Litigation Escrow Deposits - With respect to certain adverse verdicts currently on appeal, to obtain stays of judgments pending appeals, as of December 31, ~~2013~~2014, PM USA had posted various forms of security totaling

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approximately ~~$27~~$61 million, the majority of which have been collateralized with cash deposits. These cash deposits are included in other assets on the consolidated balance sheet.

Although litigation is subject to uncertainty and an adverse outcome or settlement of litigation could have a material adverse effect on the financial position, cash flows or results of operations of PM USA, UST or Altria Group, Inc. in a particular fiscal quarter or fiscal year, as more fully disclosed in Note 18, Item 3 and Item 1A, management expects cash flow from operations, together with Altria Group, Inc.’s access to capital markets, to provide sufficient liquidity to meet ongoing business needs.

Equity and Dividends

As discussed in Note 11. Stock Plans to the consolidated financial statements in Item 8, during ~~2013~~2014 Altria Group, Inc. granted an aggregate of 1.4 million shares of restricted and deferred stock to eligible employees.

At December 31, ~~2013~~2014, the number of shares to be issued upon vesting of deferred stock was not significant. In addition, there were no stock options outstanding at December 31, ~~2013~~2014.

Dividends paid in ~~2013~~2014 and ~~2012~~2013 were approximately $~~3.6~~3.9 billion and ~~$3.4~~$3.6 billion, respectively, an increase of ~~6.2%~~7.8%, ~~primarily~~ reflecting a higher dividend rate, partially offset by fewer shares outstanding as a result of shares repurchased by Altria Group, Inc. under its share repurchase programs discussed below.

During the third quarter of ~~2013,~~2014, the Board of Directors approved aan ~~9.1%~~8.3% increase in the quarterly dividend rate to $~~0.48~~0.52 per common share versus the previous rate of $~~0.44~~0.48 per common share. Altria Group, Inc. expects to continue to maintain a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. The current annualized dividend rate is $~~1.92~~2.08 per Altria Group, Inc. common share. Future

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dividend payments remain subject to the discretion of the Board of Directors.

During 2014, 2013 ~~2012~~ and ~~2011~~2012 the Board of Directors authorized Altria Group, Inc. to repurchase shares of its outstanding common stock under ~~various~~several share repurchase programs.

Altria Group, Inc.’s total share repurchase activity was as follows:

For the Years Ended December 31,
2013 2012 2011
(in millions, except per share data)
Total number of shares repurchased 16.7
34.9
49.3
Aggregate cost of shares repurchased $ 600
$ 1,116
$ 1,327
Average price per share of shares repurchased $ 36.05
$ 32.00
$ 26.91



	For the Years Ended December 31,
	2014		2013		2012
	(in millions, except per share data)
Total number of shares repurchased	22.5		16.7		34.9
Aggregate cost of shares repurchased	$	939	$	600	$	1,116
Average price per share of shares repurchased	$	41.79	$	36.05	$	32.00

At December 31, ~~2013,~~2014, Altria Group, Inc. had approximately ~~$457~~$518 million remaining in the ~~April 2013~~July 2014 share repurchase program, which it expects to complete by the end of ~~the third quarter of 2014.~~2015. The timing of share repurchases under the ~~April 2013~~July 2014 share repurchase program depends upon marketplace conditions and other factors, and the program remains subject to the discretion of the Board of Directors.

For further discussion of Altria Group, Inc.’s share repurchase programs, see Note 1. Background and Basis of Presentation into the consolidated financial statements in Item 8.

Recent Accounting Guidance Not Yet Adopted

See Note 2for a discussion of recent accounting guidance issued but not yet adopted.

Contingencies

See Note 18 and Item 3 for a discussion of contingencies.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

At December 31, ~~2013~~2014 and ~~2012~~2013, the fair value of Altria Group, Inc.’s total debt was $~~16.1~~17.0 billion and $~~17.6~~16.1 billion, respectively. The fair value of Altria Group, Inc.’s debt is subject to fluctuations resulting from changes in market interest rates. A 1% increase in market interest rates at December 31, ~~2013~~2014 and ~~2012~~2013 would decrease the fair value of Altria Group, Inc.’s total debt by approximately $1.3 billion and $1.2 ~~billion.~~billion, respectively. A 1% decrease in market interest rates at December 31, ~~2013~~2014 and ~~2012~~2013 would increase the fair value of Altria Group, Inc.’s total debt by approximately $1.5 billion and $1.4 ~~billion.~~billion, respectively.

Interest rates on borrowings under the Credit Agreement are expected to be based on LIBOR plus a percentage based on the higher of the ratings of Altria Group, Inc.’s long-term senior unsecured debt from Standard & Poor’s and Moody’s. The applicable percentage based on Altria Group, Inc.’s long-term senior unsecured debt ratings at December 31, ~~2013~~2014 for borrowings under the Credit Agreement was 1.25%. At December 31, ~~2013~~2014, Altria Group, Inc. had no borrowings under the Credit Agreement.

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Item 8. Financial Statements and Supplementary Data.

Altria Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(in millions of dollars)

________________________


at December 31,	2013		2012		2014		2013
Assets
Cash and cash equivalents	$	3,175	$	2,900	$	3,321	$	3,175
Receivables	115		193		124		115
Inventories:
Leaf tobacco	933		876		991		933
Other raw materials	180		173		200		180
Work in process	394		349		429		394
Finished product	372		348		420		372
	1,879		1,746		2,040		1,879
Deferred income taxes	1,100		1,216		1,143		1,100
Other current assets	321		260		250		321
Total current assets	6,590		6,315		6,878		6,590

Property, plant and equipment, at cost:
Land and land improvements	291		292		293		291
Buildings and building equipment	1,308		1,276		1,323		1,308
Machinery and equipment	3,111		3,068		2,986		3,111
Construction in progress	107		114		153		107
	4,817		4,750		4,755		4,817
Less accumulated depreciation	2,789		2,648		2,772		2,789
	2,028		2,102		1,983		2,028

Goodwill	5,174		5,174		5,285		5,174
Other intangible assets, net	12,058		12,078		12,049		12,058
Investment in SABMiller	6,455		6,637		6,183		6,455
Finance assets, net	1,997		2,581		1,614		1,997
Other assets	557		442		483		557
Total Assets	$	34,859	$	35,329	$	34,475	$	34,859

See notes to consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Consolidated Balance Sheets (Continued)

(in millions of dollars, except share and per share data)


at December 31,	2013			2012			2014			2013
Liabilities
Current portion of long-term debt	$	525		$	1,459		$	1,000		$	525
Accounts payable	409			451			416			409
Accrued liabilities:
Marketing	512			568			618			512
Employment costs	255			184			186			255
Settlement charges	3,391			3,616			3,500			3,391
Other	1,007			1,093			925			1,007
Dividends payable	959			888			1,028			959
Total current liabilities	7,058			8,259			7,673			7,058

Long-term debt	13,992			12,419			13,693			13,992
Deferred income taxes	6,854			6,652			6,088			6,854
Accrued pension costs	212			1,735			1,012			212
Accrued postretirement health care costs	2,155			2,504			2,461			2,155
Other liabilities	435			556			503			435
Total liabilities	30,706			32,125			31,430			30,706
Contingencies (Note 18)
Redeemable noncontrolling interest	35			34			35			35
Stockholders’ Equity
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued)	935			935			935			935
Additional paid-in capital	5,714			5,688			5,735			5,714
Earnings reinvested in the business	25,168			24,316			26,277			25,168
Accumulated other comprehensive losses	(1,378		)	(2,040		)	(2,682		)	(1,378		)
Cost of repurchased stock (812,482,035 shares in 2013 and 796,221,021 shares in 2012)	(26,320		)	(25,731		)
Cost of repurchased stock (834,486,794 shares at December 31, 2014 and 812,482,035 shares at December 31, 2013)							(27,251		)	(26,320		)
Total stockholders’ equity attributable to Altria Group, Inc.	4,119			3,168			3,014			4,119
Noncontrolling interests	(1		)	2			(4		)	(1		)
Total stockholders’ equity	4,118			3,170			3,010			4,118
Total Liabilities and Stockholders’ Equity	$	34,859		$	35,329		$	34,475		$	34,859

See notes to consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Consolidated Statements of Earnings

(in millions of dollars, except per share data)


for the years ended December 31,	2013			2012			2011			2014			2013			2012
Net revenues	$	24,466		$	24,618		$	23,800		$	24,522		$	24,466		$	24,618
Cost of sales	7,206			7,937			7,680			7,785			7,206			7,937
Excise taxes on products	6,803			7,118			7,181			6,577			6,803			7,118
Gross profit	10,457			9,563			8,939			10,160			10,457			9,563
Marketing, administration and research costs	2,320			2,281			2,643			2,539			2,340			2,301
Changes to Mondelēz and PMI tax-related receivables/payables	22			(52		)	(14		)	2			22			(52		)
Asset impairment and exit costs	11			61			222			(1		)	11			61
Amortization of intangibles	20			20			20
Operating income	8,084			7,253			6,068			7,620			8,084			7,253
Interest and other debt expense, net	1,049			1,126			1,216			808			1,049			1,126
Loss on early extinguishment of debt	1,084			874			—			44			1,084			874
Earnings from equity investment in SABMiller	(991		)	(1,224		)	(730		)	(1,006		)	(991		)	(1,224		)
Earnings before income taxes	6,942			6,477			5,582			7,774			6,942			6,477
Provision for income taxes	2,407			2,294			2,189			2,704			2,407			2,294
Net earnings	4,535			4,183			3,393			5,070			4,535			4,183
Net earnings attributable to noncontrolling interests	—			(3		)	(3		)	—			—			(3		)
Net earnings attributable to Altria Group, Inc.	$	4,535		$	4,180		$	3,390		$	5,070		$	4,535		$	4,180
Per share data:
Basic and diluted earnings per share attributable to Altria Group, Inc.	$	2.26		$	2.06		$	1.64		$	2.56		$	2.26		$	2.06

See notes to consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Earnings

(in millions of dollars)

_______________________



for the years ended December 31,	2013			2012			2011			2014			2013			2012
Net earnings	$	4,535		$	4,183		$	3,393		$	5,070		$	4,535		$	4,183
Other comprehensive earnings (losses), net of deferred income taxes:
Currency translation adjustments	(2		)	—			(2		)	(2		)	(2		)	—
Benefit plans	1,141			(352		)	(251		)	(767		)	1,141			(352		)
SABMiller	(477		)	199			(150		)	(535		)	(477		)	199
Other comprehensive earnings (losses), net of deferred income taxes	662			(153		)	(403		)
Other comprehensive (losses) earnings, net of deferred income taxes										(1,304		)	662			(153		)

Comprehensive earnings	5,197			4,030			2,990			3,766			5,197			4,030
Comprehensive earnings attributable to noncontrolling interests	—			(3		)	(3		)	—			—			(3		)
Comprehensive earnings attributable to Altria Group, Inc.	$	5,197		$	4,027		$	2,987		$	3,766		$	5,197		$	4,027

See notes to consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in millions of dollars)

__________________


for the years ended December 31,	for the years ended December 31,	2013			2012			2011			for the years ended December 31,	2014			2013			2012
Cash Provided by (Used in) Operating Activities	Cash Provided by (Used in) Operating Activities										Cash Provided by (Used in) Operating Activities
Net earnings	Net earnings	$	4,535		$	4,183		$	3,393		Net earnings	$	5,070		$	4,535		$	4,183
Adjustments to reconcile net earnings to operating cash flows:	Adjustments to reconcile net earnings to operating cash flows:										Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization	Depreciation and amortization	212			225			253			Depreciation and amortization	208			212			225
Deferred income tax benefit	Deferred income tax benefit	(86		)	(929		)	(443		)	Deferred income tax benefit	(129		)	(86		)	(929		)
Earnings from equity investment in SABMiller	Earnings from equity investment in SABMiller	(991		)	(1,224		)	(730		)	Earnings from equity investment in SABMiller	(1,006		)	(991		)	(1,224		)
Dividends from SABMiller	Dividends from SABMiller	439			402			357			Dividends from SABMiller	456			439			402
PMCC leveraged lease charges		—			7			490
Asset impairment and exit costs, net of cash paid		(35		)	(73		)	178
Loss on early extinguishment of debt											Loss on early extinguishment of debt	44			1,084			874
IRS payment related to the Closing Agreement	IRS payment related to the Closing Agreement	—			(456		)	—			IRS payment related to the Closing Agreement	—			—			(456		)
Loss on early extinguishment of debt		1,084			874			—
Cash effects of changes:
Cash effects of changes, net of the effects from acquisition of Green Smoke:											Cash effects of changes, net of the effects from acquisition of Green Smoke:
Receivables, net	Receivables, net	78			202			(19		)	Receivables, net	(8		)	78			202
Inventories	Inventories	(133		)	33			24			Inventories	(184		)	(133		)	33
Accounts payable	Accounts payable	(76		)	(13		)	(92		)	Accounts payable	(5		)	(76		)	(13		)
Income taxes	Income taxes	(95		)	883			147			Income taxes	1			(95		)	883
Accrued liabilities and other current assets	Accrued liabilities and other current assets	(107		)	(14		)	21			Accrued liabilities and other current assets	(107		)	(107		)	(14		)
Accrued settlement charges	Accrued settlement charges	(225		)	103			(22		)	Accrued settlement charges	109			(225		)	103
Pension plan contributions	Pension plan contributions	(393		)	(557		)	(240		)	Pension plan contributions	(15		)	(393		)	(557		)
Pension provisions and postretirement, net	Pension provisions and postretirement, net	177			192			243			Pension provisions and postretirement, net	21			177			192
Other	Other	(9		)	47			21			Other	208			(44		)	(19		)
Net cash provided by operating activities	Net cash provided by operating activities	4,375			3,885			3,581			Net cash provided by operating activities	4,663			4,375			3,885

See notes to consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(in millions of dollars)

__________________


for the years ended December 31,	for the years ended December 31,	2013			2012			2011			for the years ended December 31,	2014			2013			2012
Cash Provided by (Used in) Investing Activities	Cash Provided by (Used in) Investing Activities										Cash Provided by (Used in) Investing Activities
Capital expenditures	Capital expenditures	$	(131	)	$	(124	)	$	(105	)	Capital expenditures	$	(163	)	$	(131	)	$	(124	)
Acquisition of Green Smoke, net of acquired cash											Acquisition of Green Smoke, net of acquired cash	(102		)	—			—
Proceeds from finance assets	Proceeds from finance assets	716			1,049			490			Proceeds from finance assets	369			716			1,049
Other	Other	17			(5		)	2			Other	73			17			(5		)
Net cash provided by investing activities	Net cash provided by investing activities	602			920			387			Net cash provided by investing activities	177			602			920
Cash Provided by (Used in) Financing Activities	Cash Provided by (Used in) Financing Activities										Cash Provided by (Used in) Financing Activities
Long-term debt issued	Long-term debt issued	4,179			2,787			1,494			Long-term debt issued	999			4,179			2,787
Long-term debt repaid	Long-term debt repaid	(3,559		)	(2,600		)	—			Long-term debt repaid	(825		)	(3,559		)	(2,600		)
Repurchases of common stock	Repurchases of common stock	(634		)	(1,082		)	(1,327		)	Repurchases of common stock	(939		)	(634		)	(1,082		)
Dividends paid on common stock	Dividends paid on common stock	(3,612		)	(3,400		)	(3,222		)	Dividends paid on common stock	(3,892		)	(3,612		)	(3,400		)
Issuances of common stock		—			—			29
Financing fees and debt issuance costs	Financing fees and debt issuance costs	(39		)	(22		)	(24		)	Financing fees and debt issuance costs	(7		)	(39		)	(22		)
Tender premiums and fees related to early extinguishment of debt		(1,054		)	(864		)	—
Premiums and fees related to early extinguishment of debt											Premiums and fees related to early extinguishment of debt	(44		)	(1,054		)	(864		)
Other	Other	17			6			38			Other	14			17			6
Net cash used in financing activities	Net cash used in financing activities	(4,702		)	(5,175		)	(3,012		)	Net cash used in financing activities	(4,694		)	(4,702		)	(5,175		)
Cash and cash equivalents:	Cash and cash equivalents:										Cash and cash equivalents:
Increase (decrease)	Increase (decrease)	275			(370		)	956			Increase (decrease)	146			275			(370		)
Balance at beginning of year	Balance at beginning of year	2,900			3,270			2,314			Balance at beginning of year	3,175			2,900			3,270
Balance at end of year	Balance at end of year	$	3,175		$	2,900		$	3,270		Balance at end of year	$	3,321		$	3,175		$	2,900
Cash paid: Interest		$	1,099		$	1,219		$	1,154			$	820		$	1,099		$	1,219
Income taxes	Income taxes	$	2,448		$	3,338		$	2,865		Income taxes	$	2,765		$	2,448		$	3,338

See notes to consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(in millions of dollars, except per share data)


	Attributable to Altria Group, Inc.																				Attributable to Altria Group, Inc.
	Common Stock		Additional Paid-in Capital			Earnings Reinvested in the Business			Accumulated Other Comprehensive Losses			Cost of Repurchased Stock			Non- controlling Interests			Total Stockholders’ Equity			Common Stock		Additional Paid-in Capital		Earnings Reinvested in the Business			Accumulated Other Comprehensive Losses			Cost of Repurchased Stock			Non- controlling Interests			Total Stockholders’ Equity
Balances, December 31, 2010	$	935	$	5,751		$	23,459		$	(1,484	)	$	(23,469	)	$	3		$	5,195
Balances, December 31, 2011																					$	935	$	5,674	$	23,583		$	(1,887	)	$	(24,625	)	$	3		$	3,683
Net earnings ^(a)(1)	—		—			3,390			—			—			1			3,391			—		—		4,180			—			—			—			4,180
Other comprehensive losses, net of deferred income taxes	—		—			—			(403		)	—			—			(403		)
Stock award activity	—		(77		)	—			—			171			—			94
Cash dividends declared ($1.58 per share)	—		—			(3,266		)	—			—			—			(3,266		)
Repurchases of common stock	—		—			—			—			(1,327		)	—			(1,327		)
Other	—		—			—			—			—			(1		)	(1		)
Balances, December 31, 2011	935		5,674			23,583			(1,887		)	(24,625		)	3			3,683
Net earnings ^(a)	—		—			4,180			—			—			—			4,180
Other comprehensive losses, net of deferred income taxes	—		—			—			(153		)	—			—			(153		)	—		—		—			(153		)	—			—			(153		)
Stock award activity	—		14			—			—			10			—			24			—		14		—			—			10			—			24
Cash dividends declared ($1.70 per share)	—		—			(3,447		)	—			—			—			(3,447		)	—		—		(3,447		)	—			—			—			(3,447		)
Repurchases of common stock	—		—			—			—			(1,116		)	—			(1,116		)	—		—		—			—			(1,116		)	—			(1,116		)
Other	—		—			—			—			—			(1		)	(1		)	—		—		—			—			—			(1		)	(1		)
Balances, December 31, 2012	935		5,688			24,316			(2,040		)	(25,731		)	2			3,170			935		5,688		24,316			(2,040		)	(25,731		)	2			3,170
Net earnings (losses) ^(a)	—		—			4,535			—			—			(3		)	4,532
Net earnings (losses)⁽¹⁾																					—		—		4,535			—			—			(3		)	4,532
Other comprehensive earnings, net of deferred income taxes	—		—			—			662			—			—			662			—		—		—			662			—			—			662
Stock award activity	—		26			—			—			11			—			37			—		26		—			—			11			—			37
Cash dividends declared ($1.84 per share)	—		—			(3,683		)	—			—			—			(3,683		)	—		—		(3,683		)	—			—			—			(3,683		)
Repurchases of common stock	—		—			—			—			(600		)	—			(600		)	—		—		—			—			(600		)	—			(600		)
Balances, December 31, 2013	$	935	$	5,714		$	25,168		$	(1,378	)	$	(26,320	)	$	(1	)	$	4,118		935		5,714		25,168			(1,378		)	(26,320		)	(1		)	4,118
Net earnings (losses) ⁽¹⁾																					—		—		5,070			—			—			(3		)	5,067
Other comprehensive losses, net of deferred income taxes																					—		—		—			(1,304		)	—			—			(1,304		)
Stock award activity																					—		21		—			—			8			—			29
Cash dividends declared ($2.00 per share)																					—		—		(3,961		)	—			—			—			(3,961		)
Repurchases of common stock																					—		—		—			—			(939		)	—			(939		)
Balances, December 31, 2014																					$	935	$	5,735	$	26,277		$	(2,682	)	$	(27,251	)	$	(4	)	$	3,010

~~(a)~~⁽¹⁾ Net earnings/losses attributable to noncontrolling interests for each of the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 exclude net earnings of $3 million ~~$3 million~~

~~and $2 million, respectively,~~ due to the redeemable noncontrolling interest related to Stag’s Leap Wine Cellars, which is reported in the mezzanine equity section in

the consolidated balance sheets at

December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012~~, respectively.~~. See Note 18.

See notes to consolidated financial statements.

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

Note 1. Background and Basis of Presentation

▪Background: At December 31, ~~2013~~2014, Altria Group, Inc.’s ~~direct and indirect~~ wholly-owned subsidiaries included Philip Morris USA Inc. (“PM USA”), which is engaged predominantly in the manufacture and sale of cigarettes ~~and certain smokeless tobacco products~~ in the United States; John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and is a wholly-owned subsidiary of PM USA; and UST LLC (“UST”), which through its ~~direct and indirect~~ wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (“USSTC”) and Ste. Michelle Wine Estates Ltd. (“Ste. Michelle”), is engaged in the manufacture and sale of smokeless tobacco products and wine. Altria Group, Inc.’s other operating companies included Nu Mark LLC (“Nu Mark”), ~~an indirect~~a wholly-owned subsidiary ~~of Altria Group, Inc.,~~that is engaged in the ~~development~~manufacture and ~~marketing~~sale of innovative tobacco products, ~~for adult tobacco consumers.~~and Philip Morris Capital Corporation (“PMCC”), ~~another~~a wholly-owned subsidiary ~~of Altria Group, Inc.,~~that maintains a portfolio of finance assets, substantially all of which are leveraged ~~and direct finance~~ leases. ~~In addition,~~Other Altria Group, Inc. ~~held approximately~~ ~~26.8%~~ ~~of the economic~~wholly-owned subsidiaries included Altria Group Distribution Company, which provides sales, distribution and ~~voting interest of SABMiller plc (“SABMiller”) at~~ ~~December 31, 2013, which~~consumer engagement services to certain Altria Group, Inc. ~~accounts for under the equity method of accounting.~~operating subsidiaries, and Altria Client Services Inc., which provides various support services, such as legal, regulatory, finance, human resources and external affairs, to Altria Group, Inc. and its subsidiaries. Altria Group, Inc.’s access to the operating cash flows of its wholly-owned subsidiaries consists of cash received from the payment of dividends and distributions, and the payment of interest on intercompany loans by its subsidiaries. At December 31, ~~2013~~2014, Altria Group, Inc.’s principal wholly-owned subsidiaries were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their ~~common stock. In addition,~~equity interests.

At December 31, 2014, Altria Group, Inc. also held approximately 27% of the economic and voting interest of SABMiller plc (“SABMiller”), which Altria Group, Inc. accounts for under the equity method of accounting. Altria Group, Inc. receives cash dividends on its interest in SABMiller if and when SABMiller pays such dividends.

▪

Dividends and Share Repurchases: During the third quarter of ~~2013,~~2014, Altria Group, Inc.’s Board of Directors (the “Board of Directors”) approved aan ~~9.1%~~8.3% increase in the quarterly dividend rate to $~~0.48~~0.52 per common share versus the previous rate of $~~0.44~~0.48 per common share. The current annualized dividend rate is $~~1.92~~2.08 per Altria Group, Inc. common share. Future dividend payments remain subject to the discretion of the Board of Directors.

In ~~January~~October 2011, the Board of Directors authorized a $1.0 billion ~~one-year~~ share repurchase program (the “January 2011 share repurchase program”). Altria Group, Inc. completed the January 2011 share repurchase program during the third quarter of 2011. Under the January 2011 share repurchase program, Altria Group, Inc. repurchased a total of ~~37.6 million~~ ~~shares of its common stock at an average price of~~ ~~$26.62~~ ~~per share.~~

~~The Board of Directors authorized a~~ ~~$1.0 billion~~ ~~share repurchase program in October 2011~~ and expanded it to $1.5 billion in October 2012 (as expanded, the “October 2011 share repurchase program”). During the first quarter of 2013, Altria Group, Inc. completed the October 2011 share repurchase program, under which Altria Group, Inc.

~~repurchase program. Under the October 2011 share repurchase program, Altria Group, Inc.~~ repurchased a total of 48.3 million shares of its common stock at an average price of $31.06 per share.

~~The~~In April 2013, the Board of Directors authorized a $300 million share repurchase program ~~in April 2013~~ and expanded it to $1.0 billion in August 2013 (as expanded, the “April 2013 share repurchase program”). During the third quarter of 2014, Altria Group, Inc. ~~expects to complete~~completed the April 2013 share repurchase program, ~~by the end of the third quarter of 2014. During 2013,~~under which Altria Group, Inc. repurchased ~~15.0~~a total of 27.1 million shares of its common stock at an average price of $36.97 per share.

In July 2014, the Board of Directors authorized a $1.0 billion share repurchase program (the “July 2014 share repurchase program”). During 2014, Altria Group, Inc. repurchased 10.4 million shares of its common stock (at an aggregate cost of approximately ~~$543~~$482 million, and at an average price of ~~$36.27~~$46.41 per share) under the ~~April 2013~~July 2014 share repurchase program. At December 31, ~~2013~~,2014, Altria Group, Inc. had approximately ~~$457~~$518 million remaining in the ~~April 2013~~July 2014 share repurchase program. The timing of share repurchases under ~~the April 2013 share repurchase~~this program depends upon marketplace conditions and other ~~factors. The April 2013 share repurchase~~factors, and the program remains subject to the discretion of the Board of Directors.

For the years ended December 31, 2014, 2013 ~~2012~~ and ~~2011,~~2012, Altria Group, Inc.’s total share repurchase activity was as follows:


		2013		2012		2011			2014		2013		2012
		(in millions, except per share data)							(in millions, except per share data)
Total number of shares repurchased	Total number of shares repurchased	16.7		34.9		49.3		Total number of shares repurchased	22.5		16.7		34.9
Aggregate cost of shares repurchased	Aggregate cost of shares repurchased	$	600	$	1,116	$	1,327	Aggregate cost of shares repurchased	$	939	$	600	$	1,116
Average price per share of shares repurchased	Average price per share of shares repurchased	$	36.05	$	32.00	$	26.91	Average price per share of shares repurchased	$	41.79	$	36.05	$	32.00

▪Basis of Presentation: The consolidated financial statements include Altria Group, Inc., as well as its wholly-owned and majority-owned subsidiaries. Investments in which Altria Group, Inc. exercises significant influence are accounted for under the equity method of accounting. All intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things, pension and benefit plan assumptions, lives and valuation assumptions for goodwill and other intangible assets, marketing programs, income taxes, and the allowance for losses and estimated residual values of finance leases. Actual results could differ from those estimates.

Effective January 1, 2013, Altria Group, Inc.’s reportable segments are smokeable products, smokeless products and wine. The financial services and the alternative products businesses have been combined in an all other category due to

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

the continued reduction of the lease portfolio of PMCC and the relative financial contribution of Altria Group, Inc.’s alternative products businesses to Altria Group, Inc.’s consolidated results. In addition, due to the continued reduction of the lease portfolio of PMCC, Altria Group, Inc.’s balance sheet accounts are no longer segregated by consumer products and financial services, and all balance sheet accounts are classified as either current or non-current.

~~Certain prior years’ amounts have been reclassified to conform with the current year’s presentation due primarily to Altria Group, Inc.’s revised reportable segments.~~

Effective January 2013, Altria Group, Inc. adopted new authoritative guidance that requires an entity to provide additional information by component concerning the amounts reclassified out of accumulated other comprehensive earnings/losses. Altria Group, Inc. has included the additional disclosures in Note 13. ~~Other Comprehensive Earnings/Losses.~~

Note 2. Summary of Significant Accounting Policies

▪Cash and Cash Equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.

▪Depreciation, Amortization, Impairment Testing and Asset Valuation: Property, plant and equipment are stated at historical costs and depreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods up to 25 years, and buildings and building improvements over periods up to 50 years. Definite-lived intangible assets are amortized over their estimated useful lives up to 25 years.

Altria Group, Inc. reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable. Altria Group, Inc. performs undiscounted operating cash flow analyses to determine if an impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, Altria Group, Inc. groups assets and liabilities at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. Altria Group, Inc. also reviews the estimated remaining useful lives of long-lived assets whenever events or changes in business circumstances indicate the lives may have changed.

Altria Group, Inc. conducts a required annual review of goodwill and indefinite-lived intangible assets for potential impairment, and more frequently if an event occurs or circumstances change that would require Altria Group, Inc. to perform an interim review. If the carrying value of goodwill exceeds its fair value, which is determined using discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, which is

determined using discounted cash flows, the intangible asset is considered impaired and is reduced to fair value. ~~During~~ ~~2013~~, ~~2012~~ ~~and~~ ~~2011, Altria Group, Inc. completed its quantitative annual impairment test of goodwill and indefinite-lived intangible assets, and no impairment charges resulted.~~

▪Employee Benefit Plans: Altria Group, Inc. provides a range of benefits to its employees and retired employees, including pensions, postretirement health care and postemployment benefits (primarily severance). Altria Group, Inc. records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions ~~such~~ as to discount rates, assumed rates of return on plan assets, mortality, compensation increases, turnover rates and health care cost trend rates.

Altria Group, Inc. recognizes the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheet and records as a component of other comprehensive

earnings (losses), net of deferred income taxes, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost.

▪Environmental Costs: Altria Group, Inc. is subject to laws and regulations relating to the protection of the environment. Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change.

Compliance with environmental laws and regulations, including the payment of any remediation and compliance costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.’s consolidated results of operations, capital expenditures, financial position or cash flows (see Note 18. Contingencies - Environmental Regulation).

▪Fair Value Measurements: Altria Group, Inc. measures certain assets and liabilities at fair value. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Altria Group, Inc. uses a fair value hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs used to measure fair value are:


Level 1	Unadjusted quoted prices in active markets for identical assets or liabilities.


Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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~~Altria Group, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~_________________________~~


Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value of substantially all of Altria Group, Inc.’s pension assets is based on observable inputs, including readily available quoted market prices, which meet the definition of a Level 1 or Level 2 input. For the fair value disclosure of the pension plan assets, see Note 16. ~~Benefit Plans~~.

▪Finance Leases: Income attributable to leveraged leases is initially recorded as unearned income and subsequently recognized as revenue over the terms of the respective leases at constant after-tax rates of return on the positive net investment balances. Investments in leveraged leases are stated net of related nonrecourse debt obligations.

Income attributable to direct finance leases is initially recorded as unearned income and subsequently recognized as revenue over the terms of the respective leases at constant pre-tax rates of return on the net investment balances.

Finance leases include unguaranteed residual values that represent PMCC’s estimates at lease inception as to the fair values of assets under lease at the end of the non-cancelable lease terms. The estimated residual values are reviewed annually by PMCC’s management. This review includes analysis of a number of factors, including activity in the relevant industry. If necessary, revisions are recorded to reduce the residual values. ~~Such reviews resulted in a decrease of $8 million in 2012 to PMCC’s net revenues and results of operations. There were no adjustments in 2013 and 2011.~~

PMCC considers rents receivable past due when they are

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

beyond the grace period of their contractual due date. PMCC stops recording income (“non-accrual status”) on rents receivable when contractual payments become 90 days past due or earlier if management believes there is significant uncertainty of collectability of rent payments, and resumes recording income when collectability of rent payments is reasonably certain. Payments received on rents receivable that are on non-accrual status are used to reduce the rents receivable balance. Write-offs to the allowance for losses are recorded when amounts are deemed to be uncollectible.

▪Guarantees: Altria Group, Inc. recognizes a liability for the fair value of the obligation of qualifying guarantee activities. See Note 18. Contingencies for a further discussion of guarantees.

▪Income Taxes: Significant judgment is required in determining income tax provisions and in evaluating tax positions.

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Altria Group, Inc. records a valuation allowance when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.

Altria Group, Inc. recognizes a benefit for uncertain tax positions when a tax position taken or expected to be taken in a

tax return is more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the provision for income taxes on its consolidated statements of earnings.

▪Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out (“LIFO”) method is used to determine the cost of substantially all tobacco inventories. The cost of the remaining inventories is determined using the first-in, first-out and average cost methods. It is a generally recognized industry practice to classify leaf tobacco and wine inventories as current assets although part of such inventory, because of the duration of the curing and aging process, ordinarily would not be used within one year.

▪Litigation Contingencies and Costs: Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when it is determined that an unfavorable outcome is probable and the amount of the loss can

be reasonably estimated. Litigation defense costs are expensed as incurred and included in marketing, administration and research costs on the consolidated statements of earnings.

▪Revenue Recognition: Altria Group, Inc.’s businesses recognize revenues, net of sales incentives and sales returns, and including shipping and handling charges billed to customers, upon shipment ~~or delivery~~ of goods when title and risk of loss pass to customers. Payments received in advance of revenue recognition are deferred and recorded in other accrued liabilities until revenue is recognized. Altria Group, Inc.’s businesses also include excise taxes billed to customers in net revenues. Shipping and handling costs are classified as part of cost of sales.

▪Stock-Based Compensation: Altria Group, Inc. measures compensation cost for all stock-based awards at fair value on date of grant and recognizes compensation expense over the service periods for awards expected to vest. The fair value of restricted stock and deferred stock is determined based on the number of shares granted and the market value at date of grant.

▪New Accounting Standards: In May 2014, the Financial Accounting Standards Board issued authoritative guidance for recognizing revenue from contracts with customers. The objective of this guidance is to establish principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. For Altria Group, Inc., the new guidance will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Altria Group, Inc. is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures.

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

Note 3. Acquisition of Green Smoke

In April 2014, Nu Mark acquired the e-vapor business of Green Smoke, Inc. and its affiliates (“Green Smoke”) for a total purchase price of up to approximately $130 million, which includes contingent consideration. The acquisition complements Nu Mark’s capabilities and enhances its competitive position by adding e-vapor experience, broadening product offerings and strengthening supply chain capabilities.

Green Smoke’s financial position and results of operations have been consolidated with Altria Group, Inc. as of April 1, 2014.

Pro forma results, as well as net revenues and net earnings for Green Smoke subsequent to the acquisition, have not been presented because the acquisition of Green Smoke is not material to Altria Group, Inc.’s consolidated results of operations.

The following amounts represent the fair value of identifiable assets acquired and liabilities assumed in the Green Smoke acquisition, which will be finalized during the first quarter of 2015:



(in millions)
Cash and cash equivalents	$	3
Inventory and other current assets	12
Indefinite-lived intangible asset - trademark	10
Definite-lived intangible assets	1
Current liabilities	(8		)
Other assets and liabilities, net	1
Total identifiable net assets	19
Total purchase price	130
Goodwill	$	111

Costs incurred to effect the acquisition, as well as integration costs, are being recognized as expenses in the periods in which the costs are incurred. For the year ended December 31, 2014, Altria Group, Inc. incurred $28 million of pre-tax integration and acquisition-related costs, consisting primarily of contract termination costs, transaction costs and inventory adjustments, which were included in Altria Group, Inc.’s consolidated statement of earnings.

Note 3.4. Goodwill and Other Intangible Assets, net

Goodwill and other intangible assets, net, by segment were as follows:


	Goodwill				Other Intangible Assets, net				Goodwill				Other Intangible Assets, net
(in millions)	December 31, 2013		December 31, 2012		December 31, 2013		December 31, 2012		December 31, 2014		December 31, 2013		December 31, 2014		December 31, 2013
Smokeable products	$	77	$	77	$	2,954	$	2,971	$	77	$	77	$	2,937	$	2,954
Smokeless products	5,023		5,023		8,836		8,839		5,023		5,023		8,833		8,836
Wine	74		74		268		268		74		74		268		268
Other									111		—		11		—
Total	$	5,174	$	5,174	$	12,058	$	12,078	$	5,285	$	5,174	$	12,049	$	12,058

Goodwill relates to Altria Group, Inc.’s 2014 acquisition of Green Smoke, 2009 acquisition of UST and 2007 acquisition of Middleton.

Other intangible assets consisted of the following:


	December 31, 2013				December 31, 2012				December 31, 2014				December 31, 2013
(in millions)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Indefinite-lived intangible assets	$	11,701	$	—	$	11,701	$	—	$	11,711	$	—	$	11,701	$	—
Definite-lived intangible assets	464		107		464		87		465		127		464		107
Total other intangible assets	$	12,165	$	107	$	12,165	$	87	$	12,176	$	127	$	12,165	$	107

Indefinite-lived intangible assets consist substantially of trademarks from Altria Group, Inc.’s 2009 acquisition of UST ($9.1 billion) and 2007 acquisition of Middleton ($2.6 billion). Definite-lived intangible assets, which consist primarily of customer relationships and certain cigarette trademarks, are amortized over periods up to 25 years. Pre-tax amortization expense for definite-lived intangible assets during each of the

years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, was $20 million. Annual amortization expense for each of the next five years is estimated to be approximately $20 million, assuming no additional transactions occur that require the amortization of intangible assets.

~~There~~During 2014, 2013 and 2012, Altria Group, Inc. completed its quantitative annual impairment test of goodwill and indefinite-

lived intangible assets, and no impairment charges resulted.

For the years ended December 31, 2014, 2013 and 2012, there have been no changes in goodwill and the gross carrying amount of other intangible assets ~~since~~except for the ~~acquisitions~~2014 acquisition of ~~UST~~Green Smoke. In addition, there were no accumulated impairment losses related to goodwill and ~~Middleton.~~other intangible assets, net at December 31, 2014 and 2013.

Note 5. Inventories

The cost of approximately 66% and 67% of inventories at December 31, 2014 and 2013, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.7 billion lower than the current cost of inventories at December 31, 2014 and 2013.

~~Note 4. Asset Impairment, Exit, Implementation and Integration Costs~~

~~Pre-tax asset impairment, exit, implementation and integration costs for the years ended December 31, 2013, 2012 and~~ ~~2011~~ ~~consisted of the following:~~

For the Year Ended December 31, 2013
(in millions)
Asset Impairment
and Exit Costs

Implementation
Costs

Total
Smokeable products $ 3
$ 1
$ 4
Smokeless products 3
—
3
All other 5
—
5
Total $ 11
$ 1
$ 12

For the Year Ended December 31, 2012
(in millions)
Asset Impairment
and Exit Costs

Implementation
(Gain) Costs

Total
Smokeable products $ 38
$ (10 ) $ 28
Smokeless products 22
6
28
General corporate 1
(1 ) —
Total $ 61
$ (5 ) $ 56

For the Year Ended December 31, 2011
(in millions)
Asset Impairment
and Exit Costs

Implementation
Costs

Integration
Costs

Total
Smokeable products $ 182
$ 1
$ —
$ 183
Smokeless products 32
—
3
35
General corporate 8
—
—
8
Total $ 222
$ 1
$ 3
$ 226

~~The pre-tax asset impairment, exit, implementation and integration costs for 2013, 2012 and 2011 shown above are primarily related to the cost reduction program discussed below.~~

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

▪~~2011 Cost Reduction Program:~~ In October 2011, Altria Group, Inc. announced a cost reduction program (the “2011 Cost Reduction Program”) for its tobacco and service company subsidiaries, reflecting Altria Group, Inc.’s objective to reduce cigarette-related infrastructure ahead of PM USA’s cigarettes volume declines. Since the inception of the 2011 Cost Reduction Program, Altria Group, Inc. incurred total net pre-tax charges of ~~$275 million~~ ~~as of~~ ~~December 31, 2013~~ ~~related to this program. The net pre-tax charges included employee separation costs, primarily severance, of~~ ~~$212 million~~ ~~and other net charges of~~ ~~$63 million~~. These other net charges included lease termination and asset impairments, partially offset by a curtailment gain related to amendments made to an Altria Group, Inc. postretirement benefit plan. Total pre-tax charges, net, incurred related to the 2011 Cost Reduction Program are complete. Substantially all of these charges have resulted or will result in cash expenditures.

~~Cash payments related to the 2011 Cost Reduction Program of $41 million,~~ ~~$135 million~~ ~~and $9 million were made during the years ended December 31, 2013, 2012 and 2011, respectively, for total cash payments of~~ ~~$185 million~~ ~~since inception.~~

~~The severance liability related to the 2011 Cost Reduction program was $37 million at December 31, 2012, substantially all of which was paid as of December 31, 2013.~~

~~Note 5. Inventories~~

~~The cost of approximately~~ ~~68%~~ ~~of inventories at~~ ~~December 31, 2013~~ ~~and~~ ~~2012, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately~~ ~~$0.7 billion~~ ~~and $0.6 billion lower than the current cost of inventories at~~ ~~December 31, 2013~~ ~~and~~ ~~2012, respectively.~~

Note 6. Investment in SABMiller

At December 31, ~~2013~~2014, Altria Group, Inc. held approximately ~~26.8%~~27% of the economic and voting interest of SABMiller. Altria Group, Inc. accounts for its investment in SABMiller under the equity method of accounting.

Pre-tax earnings from Altria Group, Inc.’s equity investment in SABMiller ~~consisted of~~were $1,006 million, $991 million and $1,224 million for the ~~following:~~

For the Years Ended December 31,
(in millions) 2013
2012
2011
Equity earnings $ 906
$ 1,181
$ 703
Gains resulting from issuances of common stock by SABMiller 85
43
27
$ 991
$ 1,224
$ 730

years ended December 31, 2014, 2013 and 2012, respectively. Altria Group, Inc.’s pre-tax earnings from its equity ~~earnings~~investment in SABMiller for the year ended December 31, 2012 included its share of pre-tax non-cash gains of $342 million resulting from SABMiller’s strategic alliance transactions with Anadolu Efes and Castel.

Summary financial data of SABMiller is as follows:


	At December 31,				At December 31,
(in millions)	2013		2012		2014		2013
Current assets	$	5,833	$	5,742	$	5,878	$	5,833
Long-term assets	$	48,460	$	51,733	$	43,812	$	48,460
Current liabilities	$	8,177	$	8,944	$	10,051	$	8,177
Long-term liabilities	$	20,315	$	22,000	$	14,731	$	20,315
Noncontrolling interests	$	1,202	$	1,105	$	1,241	$	1,202


	For the Years Ended December 31,						For the Years Ended December 31,
(in millions)	2013		2012		2011		2014		2013		2012
Net revenues	$	22,684	$	23,449	$	20,780	$	22,380	$	22,684	$	23,449
Operating profit	$	4,201	$	5,243	$	3,603	$	4,478	$	4,201	$	5,243
Net earnings	$	3,375	$	4,362	$	2,596	$	3,532	$	3,375	$	4,362

The fair value of Altria Group, Inc.’s equity investment in SABMiller is based on unadjusted quoted prices in active markets and is classified in Level 1 of the fair value hierarchy. The fair value of Altria Group, Inc.’s equity investment in SABMiller at December 31, ~~2013~~2014 and ~~2012~~2013, was $~~22.1~~22.5 billion and $~~19.8~~22.1 billion, respectively, as compared with its carrying value of $~~6.5~~6.2 billion and $~~6.6~~6.5 billion, respectively.

At December 31, ~~2013~~2014, Altria Group, Inc.’s earnings reinvested in the business on its consolidated balance sheet included approximately $~~2.7~~3.0 billion of undistributed earnings from its equity investment in SABMiller.

Note 7. Finance Assets, net

In 2003, PMCC ceased making new investments and began focusing exclusively on managing its portfolio of finance assets in order to maximize its operating results and cash flows from its existing lease portfolio activities and asset sales. Accordingly, PMCC’s operating companies income will fluctuate over time as investments mature or are sold.

At December 31, 2014, finance assets, net, of $1,614 million were comprised of investments in finance leases of $1,656 million, reduced by the allowance for losses of $42 million. At December 31, 2013, finance assets, net, of $1,997 million were comprised of investments in finance leases of $2,049 million, reduced by the allowance for losses of $52 million. At ~~December 31, 2012, finance assets, net, of~~ ~~$2,581 million~~ ~~were comprised of investments in finance leases of~~ ~~$2,680 million, reduced by the allowance for losses of~~ ~~$99 million~~.

During the second quarter of 2012, Altria Group, Inc. entered into a closing agreement (the “Closing Agreement”)

with the Internal Revenue Service (the “IRS”) that conclusively resolved the federal income tax treatment for all prior and future tax years of certain leveraged lease transactions entered into by PMCC. As a result of the Closing Agreement, Altria Group, Inc. recorded a one-time net earnings benefit of $68 million during the second quarter of 2012, due primarily to lower than estimated interest on tax underpayments. During the second quarter of 2011, Altria Group, Inc. recorded a charge of $627 million related to the federal income tax treatment of these transactions (the “2011 PMCC Leveraged Lease Charge”). Approximately 50% of the charge ($315 million) represented a reduction in cumulative lease earnings recorded as of the date of the

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~~Altria Group, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~_________________________~~

~~charge that will be recaptured over the remainder of the terms of the affected leases. The remaining portion of the charge~~

~~($312 million) primarily represented a permanent charge for interest on tax underpayments.~~

~~For the years ended December 31, 2012 and 2011, the benefit/charge associated with PMCC’s leveraged lease transactions~~underpayments, which was recorded ~~in Altria Group, Inc.’s consolidated statements of earnings~~ as follows:


																For the Year Ended December 31, 2012
(in millions)	For the Year Ended December 31, 2012								For the Year Ended December 31, 2011							Net Revenues		Benefit for Income Taxes			Total
	Net Revenues		Benefit for Income Taxes			Total			Net Revenues		(Benefit) Provision for Income Taxes			Total
Reduction to cumulative lease earnings	$	7	$	(2	)	$	5		$	490	$	(175	)	$	315	$	7	$	(2	)	$	5
Interest on tax underpayments	—		(73		)	(73		)	—		312			312		—		(73		)	(73		)
Total	$	7	$	(75	)	$	(68	)	$	490	$	137		$	627	$	7	$	(75	)	$	(68	)

See Note 14. Income Taxes for a further discussion of the Closing Agreement.

A summary of the net investments in finance leases, substantially all of which are leveraged leases, at December 31, ~~2013~~2014 and ~~2012~~2013, before allowance for losses ~~was~~is as follows:


	Leveraged Leases						Direct Finance Leases						Total
(in millions)	2013			2012			2013			2012			2013			2012			2014			2013
Rents receivable, net	$	1,423		$	2,378		$	72		$	116		$	1,495		$	2,494		$	1,241		$	1,495
Unguaranteed residual values	1,040			1,068			87			87			1,127			1,155			827			1,127
Unearned income	(572		)	(968		)	(1		)	(1		)	(573		)	(969		)	(412		)	(573		)
Investments in finance leases	1,891			2,478			158			202			2,049			2,680			1,656			2,049
Deferred income taxes	(1,376		)	(1,654		)	(64		)	(89		)	(1,440		)	(1,743		)	(1,135		)	(1,440		)
Net investments in finance leases	$	515		$	824		$	94		$	113		$	609		$	937		$	521		$	609

~~For leveraged leases, rents~~Rents receivable, net, represent unpaid rents, net of principal and interest payments on third-party nonrecourse debt. PMCC’s rights to rents receivable are subordinate to the third-party nonrecourse debtholders and the leased equipment is pledged as collateral to the debtholders. The repayment of the nonrecourse debt is collateralized by lease payments receivable and the leased property, and is nonrecourse to the general assets of PMCC. As required by U.S. GAAP, the third-party nonrecourse debt of ~~$2.8~~$2.1 billion and ~~$3.9~~$2.8 billion at December 31, ~~2013~~2014 and ~~2012~~2013, respectively, has been offset against the related rents receivable. There were no leases with contingent rentals in ~~2013~~2014 and ~~2012~~2013.

In 2014 and 2012, PMCC’s annual review of estimated residual values resulted in a decrease of $63 million and $19 million, respectively, to unguaranteed residual values. These decreases in unguaranteed residual values resulted in a reduction to PMCC’s net revenues of $26 million and $8 million in 2014 and 2012, respectively. There were no such adjustments in 2013.

At December 31, ~~2013~~2014, PMCC’s investments in finance leases were principally comprised of the following investment categories: aircraft (~~39%~~(39%), rail and surface transport (~~23%~~(25%), electric power (~~19%~~(21%), real estate (~~15%~~(10%) and manufacturing (4%(5%). There were no investments located outside the United States at ~~December 31, 2013 and 2012.~~

~~Rents receivable in excess of debt service requirements on third-party nonrecourse debt related to leveraged leases and rents receivable from direct finance leases at~~ ~~December 31, 2013~~ ~~were as follows:~~

(in millions) Leveraged Leases
Direct Finance Leases
Total
2014 $ 92
$ 45
$ 137
2015 229
—
229
2016 53
—
53
2017 81
—
81
2018 170
—
170
Thereafter 798
27
825
Total $ 1,423
$ 72
$ 1,495

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

December 31, 2014 and 2013.

Rents receivable in excess of debt service requirements on third-party nonrecourse debt at December 31, 2014 were as follows:



(in millions)
2015	$	229
2016	48
2017	68
2018	154
2019	181
Thereafter	561
Total	$	1,241

Included in net revenues for the years ended December 31, 2014, 2013, ~~2012~~ and ~~2011~~2012 were leveraged lease revenues of $80 million, $209 million ~~$149~~and $149 million, ~~and~~ ~~$(314) million~~, which includes a reduction to cumulative lease earnings of $490 million as a result of the 2011 PMCC Leveraged Lease Charge, respectively, and direct finance lease revenues of $1 million for each of the years ended December 31, 2013, 2012 and 2011. respectively. Income tax expense (benefit), excluding interest on tax underpayments, on leveraged lease revenues for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 was $30 million, $80 million ~~$54~~and $54 million, ~~and~~ ~~$(112) million~~, respectively.

Income from investment tax credits on leveraged leases ~~and initial direct and executory costs on direct finance leases, were~~was not significant during ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012.

PMCC maintains an allowance for losses that provides for estimated credit losses on its investments in finance leases. PMCC’s portfolio consists substantially of leveraged ~~and direct finance~~ leases to a diverse base of lessees participating in a wide variety of industries. Losses on such leases are recorded when probable and estimable. PMCC regularly performs a systematic assessment of each individual lease in its portfolio to determine potential credit or collection issues that might indicate impairment. Impairment takes into consideration both the probability of default and the likelihood of recovery if default were to occur. PMCC considers both quantitative and qualitative factors of each investment when performing its assessment of the allowance for losses.

Quantitative factors that indicate potential default are tied most directly to public debt ratings. PMCC monitors ~~all~~ publicly available information on its obligors, including financial statements and credit rating agency reports. Qualitative factors that indicate the likelihood of recovery if default were to occur include, but are not limited to, underlying collateral value, other forms of credit support, and legal/structural considerations impacting each lease. Using ~~all~~ available information, PMCC calculates potential losses for each lease in its portfolio based on its default and recovery ~~assumption~~rating assumptions for each lease. The aggregate of these potential losses forms a range of potential losses which is used as a guideline to determine the adequacy of PMCC’s allowance for losses.

PMCC assesses the adequacy of its allowance for losses relative to the credit risk of its leasing portfolio on an ongoing basis. During 2014, 2013 and 2012, PMCC determined that its allowance for losses exceeded the amount required based on management’s assessment of the credit quality and size of PMCC’s leasing portfolio. As a result, PMCC reduced its

allowance for losses by $10 million, $47 million and $10 million for the years ended December 31, 2014, 2013 and 2012, respectively. These decreases to the allowance for losses were recorded as a reduction to marketing, administration and research costs on Altria Group, Inc.’s consolidated statements of earnings. PMCC believes that, as of December 31, ~~2013~~2014, the allowance for losses of ~~$52~~$42 million was adequate. PMCC continues to monitor economic and credit conditions, and the individual situations of its lessees and their respective industries, and may increase or decrease its allowance for losses if such conditions change in the future.

The activity in the allowance for losses on finance assets for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 was as follows:


(in millions)	2013			2012			2011		2014			2013			2012
Balance at beginning of year	$	99		$	227		$	202	$	52		$	99		$	227
(Decrease) increase to allowance	(47		)	(10		)	25
Decrease to allowance									(10		)	(47		)	(10		)
Amounts written-off	—			(118		)	—		—			—			(118		)
Balance at end of year	$	52		$	99		$	227	$	42		$	52		$	99

~~During~~ ~~2013~~ ~~and 2012, PMCC determined that its allowance for losses exceeded the amount required based on management’s assessment of the credit quality and size of PMCC’s leasing portfolio.~~ As a result, for the years ended December 31, 2013 and 2012, PMCC reduced its allowance for losses by $47 million and $10 million, respectively. These decreases to the allowance for losses were recorded as a reduction to marketing, administration and research costs on Altria Group, Inc.’s consolidated statements of earnings.

The net increase to PMCC’s allowance for losses of $25 million in 2011 was comprised of a $60 million increase to the allowance for losses during the fourth quarter of 2011 related to American Airlines, Inc.’s (“American”) bankruptcy filing in November 2011. This increase to the allowance for losses was partially offset by a $35 million reduction to the allowance for losses recorded during the third quarter of 2011, when PMCC determined that its allowance for losses exceeded the amount required based on management’s assessment of the credit quality of PMCC’s leasing portfolio at that time, including reductions in exposure to below investment grade lessees. The net increase to the allowance for losses was recorded as an increase to marketing, administration and research costs on Altria Group, Inc.’s consolidated statement of earnings.

~~In addition, as~~ a result of developments related to the American Airlines, Inc. (“American”) bankruptcy filing in 2011, PMCC wrote off $118 million of the related investment in finance lease balance against its allowance for losses during 2012. Also during 2012, PMCC recorded $34 million of pre-tax income primarily related to recoveries from the sale of bankruptcy claims on, as well as the sale of aircraft under, its leases to American. During the first quarter of 2013, PMCC sold its remaining interest in the American aircraft leases.

All PMCC lessees were current on their lease payment obligations as of December 31, ~~2013~~2014.

The credit quality of PMCC’s investments in finance leases as assigned by Standard & Poor’s Ratings Services (“Standard & Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”) at December 31, ~~2013~~2014 and ~~2012~~2013 was as follows:

(in millions) 2013
2012
Credit Rating by Standard & Poor’s/Moody’s:
“AAA/Aaa” to “A-/A3” $ 464
$ 961
“BBB+/Baa1” to “BBB-/Baa3” 927
938
“BB+/Ba1” and Lower 658
781
Total $ 2,049
$ 2,680

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~~Altria Group, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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(in millions)	2014		2013
Credit Rating by Standard & Poor’s/Moody’s:
“AAA/Aaa” to “A-/A3”	$	417	$	464
“BBB+/Baa1” to “BBB-/Baa3”	833		927
“BB+/Ba1” and Lower	406		658
Total	$	1,656	$	2,049

Note 8. Short-Term Borrowings and Borrowing Arrangements

At December 31, ~~2013~~2014 and December 31, ~~2012~~2013, Altria Group, Inc. had no short-term borrowings. The credit line available to Altria Group, Inc. at December 31, ~~2013~~2014 under the Credit Agreement (as defined below) was $3.0 billion.

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

pursuant to the terms of the Credit Agreement. All other terms and conditions of the Credit Agreement remain in full force and effect. The Credit Agreement contains an additional option, subject to certain conditions, for Altria Group, Inc. to extend the expiration date for ~~two~~an additional one-year ~~periods (as amended and restated, the “Credit Agreement”). All other terms of the Credit Agreement remain substantially the same.~~period.

The Credit Agreement provides for borrowings up to an aggregate principal amount of $3.0 billion. Pricing for interest and fees under the Credit Agreement may be modified in the event of a change in the rating of Altria Group, Inc.’s long-term senior unsecured debt. Interest rates on borrowings under the Credit Agreement are expected to be based on the London Interbank Offered Rate (“LIBOR”) plus a percentage based on the higher of the ratings of Altria Group, Inc.’s long-term senior unsecured debt from Standard & Poor’s and Moody’s. The applicable percentage based on Altria Group, Inc.’s long-term senior unsecured debt ratings at December 31, ~~2013~~2014 for borrowings under the Credit Agreement was 1.25%. The Credit Agreement does not include any other rating triggers, nor does it contain any provisions that could require the posting of collateral.

The Credit Agreement is used for general corporate purposes and to support Altria Group, Inc.’s commercial paper issuances. The Credit Agreement requires that Altria Group, Inc. maintain (i) a ratio of debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) of not more than 3.0 to 1.0 and (ii) a ratio of consolidated EBITDA to consolidated interest expense of not less than 4.0 to 1.0, each calculated as of the end of the applicable quarter on a rolling four quarters basis. At December 31, ~~2013~~2014, the ratios of debt to consolidated EBITDA and consolidated EBITDA to consolidated interest expense, calculated in accordance with the Credit Agreement, were ~~1.7~~1.8 to 1.0 and ~~8.4~~9.7 to 1.0, respectively. Altria Group, Inc. expects to continue to meet its covenants associated with the Credit Agreement. The terms “consolidated EBITDA,” “debt” and “consolidated interest expense,” as defined in the Credit Agreement, include certain adjustments.

Any commercial paper issued by Altria Group, Inc. and borrowings under the Credit Agreement are guaranteed by PM USA as further discussed in Note 19. Condensed Consolidating Financial Information.

Note 9. Long-Term Debt

At December 31, ~~2013~~2014 and ~~2012,~~2013, Altria Group, Inc.’s long-term debt consisted of the following:


(in millions)	2013		2012		2014		2013
Notes, 2.85% to 10.20%, interest payable semi-annually, due through 2044^(a)	$	14,475	$	13,836
Notes, 2.625% to 10.20%, interest payable semi-annually, due through 2044⁽¹⁾					$	14,651	$	14,475
Debenture, 7.75%, interest payable semi-annually, due 2027	42		42		42		42
	14,517		13,878		14,693		14,517
Less current portion of long-term debt	525		1,459		1,000		525
	$	13,992	$	12,419	$	13,693	$	13,992

^(a)(1)Weighted-average coupon interest rate of ~~5.9%~~5.7% and ~~7.2%~~5.9% at December 31, ~~2013~~2014 and ~~2012,~~2013, respectively.

Aggregate maturities of long-term debt are as follows:


(in millions)	Altria Group, Inc.		UST		Total Long-Term Debt
2014	$	525	$	—	$	525
2015	1,000		—		1,000		$	1,000
2018	1,656		300		1,956		1,656
2019	1,144		—		1,144		1,144
2020							1,000
2021	1,500		—		1,500		1,500
Thereafter	8,442		—		8,442		8,442

Altria Group, Inc.’s estimate of the fair value of its debt is based on observable market information derived from a third party pricing source and is classified in Level 2 of the fair value hierarchy. The aggregate fair value of Altria Group, Inc.’s total long-term debt at December 31, ~~2013~~2014 and ~~2012~~2013, was $~~16.1~~17.0 billion and $~~17.6~~16.1 billion, respectively, as compared with its carrying value of $~~14.5~~14.7 billion and $~~13.9~~14.5 billion, respectively.

▪Altria Group, Inc. Senior Notes: On ~~October 31, 2013,~~November 14, 2014, Altria Group, Inc. issued ~~$1.4~~$1.0 billion aggregate principal amount of ~~4.0%~~2.625% senior unsecured long-term notes due ~~2024 and $1.8 billion aggregate principal amount of 5.375% senior unsecured long-term notes due 2044.~~2020. Interest on these notes is payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group, Inc.’s general funds and were used to repurchase certain of its senior unsecured notes in connection with the 2013 debt tender offer described below and for other general corporate purposes.

On May 2, 2013, Altria Group, Inc. issued $350 million aggregate principal amount of 2.95% senior unsecured long-term notes due 2023 and $650 million aggregate principal amount of 4.50% senior unsecured long-term notes due 2043. Interest on

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~~Altria Group, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~_________________________~~

these notes is payable semi-annually. The net proceeds from the issuance of these senior unsecured notes were added to Altria Group, Inc.’s general funds and were used for general corporate purposes.

The notes of Altria Group, Inc. are senior unsecured obligations and rank equally in right of payment with all of Altria Group, Inc.’s existing and future senior unsecured indebtedness. Upon the occurrence of both (i) a change of control of Altria Group, Inc. and (ii) the notes ceasing to be rated investment grade by each of Moody’s, Standard & Poor’s and Fitch Ratings Ltd. within a specified time period, Altria Group, Inc. will be required to make an offer to purchase the notes at a price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest to the date of repurchase as and to the extent set forth in the terms of the notes.

With respect to $~~4,725 million~~4.2 billion aggregate principal amount of Altria Group, Inc.’s senior unsecured long-term notes issued in 2009 and 2008, the interest rate payable on each series of notes is subject to adjustment from time to time if the rating assigned to the notes of such series by Moody’s or Standard & Poor’s is downgraded (or subsequently upgraded) as and to the extent set forth in the terms of the notes.

During the ~~fourth~~first quarter of ~~2013,~~2014, Altria Group, Inc. repaid in full at maturity senior unsecured notes ~~issued by Altria Group, Inc.~~ in the aggregate principal amount of $~~1,459~~525 million ~~matured and were repaid in full.~~.

The obligations of Altria Group, Inc. under the notes are guaranteed by PM USA as further discussed in Note 19. Condensed Consolidating Financial Information.


▪	~~Debt Tender Offers for Altria Group, Inc. Senior Notes:~~

▪Debt Redemption and Tender Offers: During the fourth quarter of 2014, UST redeemed in full its $300 million (aggregate principal amount) 5.75% senior notes due 2018.

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During the fourth quarter of 2013 and the third quarter of 2012, Altria Group, Inc. completed debt tender offers to purchase for cash certain of its senior unsecured notes in aggregate principal amounts of $2.1 billion and $2.0 billion, ~~respectively, of certain of its senior unsecured notes.~~respectively. Details of these debt tender offers were as follows:



(in millions)	2013		2012
Notes Purchased
9.95% Notes due 2038	$	818	$	—
10.20% Notes due 2039	782		—
9.70% Notes due 2018	293		1,151
9.25% Notes due 2019	207		849
Total	$	2,100	$	2,000

As a result of the UST debt redemption and the ~~associated~~Altria Group, Inc. debt tender offers, pre-tax losses on early extinguishment of debt were recorded ~~by Altria Group, Inc. were~~ as follows:

(in millions) 2013
2012

Notes Purchased
9.95% Notes due 2038 $ 818
$ —
10.20% Notes due 2039 782
—
9.70% Notes due 2018 293
1,151
9.25% Notes due 2019 207
849
Total $ 2,100
$ 2,000

Pre-tax Loss On Early Extinguishment of Debt
Debt tender premiums and fees $ 1,054
$ 864
Write-off of unamortized debt discounts and debt issuance costs 30
10
Total $ 1,084
$ 874



(in millions)	2014		2013		2012
Premiums and fees	$	44	$	1,054	$	864
Write-off of unamortized debt discounts and debt issuance costs	—		30		10
Total	$	44	$	1,084	$	874

Note 10. Capital Stock

At December 31, ~~2013,~~2014, Altria Group, Inc.’s had 12 billion shares of authorized common ~~stock were~~ ~~12 billion~~;stock; issued, repurchased and outstanding shares of common stock were as follows:



	Shares Issued	Shares Repurchased		Shares Outstanding
Balances, December 31, 2011	2,805,961,317	(761,542,032	)	2,044,419,285
Stock award activity	—	181,011		181,011
Repurchases of common stock	—	(34,860,000	)	(34,860,000	)
Balances, December 31, 2012	2,805,961,317	(796,221,021	)	2,009,740,296
Stock award activity	—	391,899		391,899
Repurchases of common stock	—	(16,652,913	)	(16,652,913	)
Balances, December 31, 2013	2,805,961,317	(812,482,035	)	1,993,479,282
Stock award activity	—	447,840		447,840
Repurchases of common stock	—	(22,452,599	)	(22,452,599	)
Balances, December 31, 2014	2,805,961,317	(834,486,794	)	1,971,474,523

Shares Issued

Shares
Repurchased

Shares
Outstanding

Balances, December 31, 2010 2,805,961,317
(717,221,651 ) 2,088,739,666
Stock award activity —
5,004,502
5,004,502
Repurchases of
common stock
—
(49,324,883 ) (49,324,883 )
Balances, December 31, 2011 2,805,961,317
(761,542,032 ) 2,044,419,285
Stock award activity —
181,011
181,011
Repurchases of
common stock
—
(34,860,000 ) (34,860,000 )
Balances, December 31, 2012 2,805,961,317
(796,221,021 ) 2,009,740,296
Stock award activity —
391,899
391,899
Repurchases of
common stock
—
(16,652,913 ) (16,652,913 )
Balances, December 31, 2013 2,805,961,317
(812,482,035 ) 1,993,479,282

At December 31, ~~2013~~2014, ~~45,843,751~~45,070,039 shares of common stock were reserved for stock-based awards under Altria Group, Inc.’s stock plans, and 10 million shares of serial preferred stock, $1.00 par value, were authorized. No shares of serial preferred stock have been issued.

Note 11. Stock Plans

Under the Altria Group, Inc. 2010 Performance Incentive Plan (the “2010 Plan”), Altria Group, Inc. may grant to eligible employees stock options, stock appreciation rights, restricted stock, restricted and deferred stock units, and other stock-based awards, as well as cash-based annual and long-term incentive awards. Up to 50 million shares of common stock may be issued under the 2010 Plan. In addition, Altria Group, Inc. may grant up to one million shares of common stock to members of the Board of Directors who are not employees of Altria Group, Inc. under the Stock Compensation Plan for Non-Employee Directors (the “Directors Plan”). Shares available to be granted under the 2010 Plan and the Directors Plan at December 31, ~~2013~~2014, were ~~45,254,733~~44,518,983 and ~~534,576~~477,785, respectively.

▪Restricted and Deferred Stock: Altria Group, Inc. may grant shares of restricted stock and deferred stock to eligible employees. During the vesting period, these shares include nonforfeitable rights to dividends or dividend equivalents and may not be sold, assigned, pledged or otherwise encumbered. Such shares are subject to forfeiture if certain employment

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conditions are not met. Shares of restricted stock and deferred stock generally vest three years after the grant date.

The fair value of the shares of restricted stock and deferred stock at the date of grant is amortized to expense ratably over the restriction period, which is generally three years. Altria Group, Inc. recorded pre-tax compensation expense related to restricted stock and deferred stock granted to employees for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 of $4946 million, $4649 million and $4746 million, respectively. The deferred tax benefit recorded related to this compensation expense was $1918 million, $1819 million and $18 million for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, respectively. The unamortized compensation expense related to Altria Group, Inc. restricted stock and deferred stock was $58 million at December 31, ~~2013~~2014 and is expected to be recognized over a weighted-average period of approximately two years.

Altria Group, Inc.’s restricted stock and deferred stock activity was as follows for the year ended December 31, ~~2013~~2014:



	Number of Shares		Weighted-Average Grant Date Fair Value Per Share
Balance at December 31, 2013	5,332,862		$	27.77
Granted	1,441,880		36.75
Vested	(2,187,921	)	23.10
Forfeited	(74,910	)	32.47
Balance at December 31, 2014	4,511,911		32.83

Number of
Shares

Weighted-Average
Grant Date Fair Value
Per Share

Balance at December 31, 2012 6,581,983
$ 23.55
Granted 1,443,460
33.76
Vested (2,573,491 ) 20.35
Forfeited (119,090 ) 27.61
Balance at December 31, 2013 5,332,862
27.77

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The weighted-average grant date fair value of Altria Group, Inc. restricted stock and deferred stock granted during the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 was $4953 million, $5349 million and $5453 million, respectively, or $~~33.76~~36.75, $~~28.77~~33.76 and

$~~24.34~~28.77 per restricted or deferred share, respectively. The total fair value of Altria Group, Inc. restricted stock and deferred stock vested during the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 was $8986 million, $8189 million and $5681 million, respectively.

▪Stock Options: Altria Group, Inc. has not granted stock options since 2002, and there have been no stock options outstanding since February 29, 2012. The total intrinsic value of options exercised during the year ended December 31, 2012 was insignificant. ~~The total intrinsic value of options exercised during the year ended December 31, 2011 was~~ ~~$37 million~~.

Note 12. Earnings per Share

Basic and diluted earnings per share (“EPS”) were calculated using the following:


	For the Years Ended December 31,									For the Years Ended December 31,
(in millions)	2013			2012			2011			2014			2013			2012
Net earnings attributable to Altria Group, Inc.	$	4,535		$	4,180		$	3,390		$	5,070		$	4,535		$	4,180
Less: Distributed and undistributed earnings attributable to unvested restricted and deferred shares	(12		)	(13		)	(13		)	(12		)	(12		)	(13		)
Earnings for basic and diluted EPS	$	4,523		$	4,167		$	3,377		$	5,058		$	4,523		$	4,167
Weighted-average shares for basic and diluted EPS	1,999			2,024			2,064			1,978			1,999			2,024

Since February 29, 2012, there have been no stock options outstanding. For the 2012 ~~and~~ ~~2011~~ ~~computations,~~computation, there were no antidilutive stock options.

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Note 13. Other Comprehensive Earnings/Losses

The following tables set forth the changes in each component of accumulated other comprehensive losses, net of deferred income taxes, attributable to Altria Group, Inc.:


(in millions)	Currency Translation Adjustments			Benefit Plans			SABMiller			Accumulated Other Comprehensive Losses			Currency Translation Adjustments			Benefit Plans			SABMiller				Accumulated Other Comprehensive Losses
Balances, December 31, 2010	$	4		$	(1,811	)	$	323		$	(1,484	)
Other comprehensive losses before reclassifications	(2		)	(634		)	(249		)	(885		)
Deferred income taxes	—			249			87			336
Other comprehensive losses before reclassifications, net of deferred income taxes	(2		)	(385		)	(162		)	(549		)

Amounts reclassified to net earnings	—			219			18			237
Deferred income taxes	—			(85		)	(6		)	(91		)
Amounts reclassified to net earnings, net of deferred income taxes	—			134			12			146

Other comprehensive losses, net of deferred income taxes	(2		)	(251		)	(150		)	(403		)
Balances, December 31, 2011	2			(2,062		)	173			(1,887		)	$	2		$	(2,062	)	$	173			$	(1,887	)
Other comprehensive (losses) earnings before reclassifications	—			(815		)	303			(512		)	—			(815		)	303				(512		)
Deferred income taxes	—			315			(106		)	209			—			315			(106		)		209
Other comprehensive (losses) earnings before reclassifications, net of deferred income taxes	—			(500		)	197			(303		)	—			(500		)	197				(303		)

Amounts reclassified to net earnings	—			241			3			244			—			241			3				244
Deferred income taxes	—			(93		)	(1		)	(94		)	—			(93		)	(1		)		(94		)
Amounts reclassified to net earnings, net of deferred income taxes	—			148			2			150			—			148			2				150

Other comprehensive (losses) earnings, net of deferred income taxes	—			(352		)	199			(153		)	—			(352		)	199			⁽¹⁾	(153		)

Balances, December 31, 2012	2			(2,414		)	372			(2,040		)	2			(2,414		)	372				(2,040		)
Other comprehensive (losses) earnings before reclassifications	(2		)	1,559			(740		)	817			(2		)	1,559			(740		)		817
Deferred income taxes	—			(609		)	259			(350		)	—			(609		)	259				(350		)
Other comprehensive (losses) earnings before reclassifications, net of deferred income taxes	(2		)	950			(481		)	467			(2		)	950			(481		)		467

Amounts reclassified to net earnings	—			311			6			317			—			311			6				317
Deferred income taxes	—			(120		)	(2		)	(122		)	—			(120		)	(2		)		(122		)
Amounts reclassified to net earnings, net of deferred income taxes	—			191			4			195			—			191			4				195

Other comprehensive (losses) earnings, net of deferred income taxes	(2		)	1,141			(477		)	662			(2		)	1,141			(477		)	⁽¹⁾	662
Balances, December 31, 2013	$	—		$	(1,273	)	$	(105	)	$	(1,378	)	—			(1,273		)	(105		)		(1,378		)
Other comprehensive losses before reclassifications													(2		)	(1,411		)	(881		)		(2,294		)
Deferred income taxes													—			550			308				858
Other comprehensive losses before reclassifications, net of deferred income taxes													(2		)	(861		)	(573		)		(1,436		)

Amounts reclassified to net earnings													—			154			59				213
Deferred income taxes													—			(60		)	(21		)		(81		)
Amounts reclassified to net earnings, net of deferred income taxes													—			94			38				132

Other comprehensive losses, net of deferred income taxes													(2		)	(767		)	(535		)	⁽¹⁾	(1,304		)
Balances, December 31, 2014													$	(2	)	$	(2,040	)	$	(640	)		$	(2,682	)

⁽¹⁾For the years ended December 31, 2014, 2013 and 2012, Altria Group, Inc.’s proportionate share of SABMiller’s other comprehensive earnings/losses consisted primarily of currency translation adjustments.

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Notes to Consolidated Financial Statements

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The following table sets forth pre-tax amounts by component, reclassified from accumulated other comprehensive losses to net earnings:


	For the Years Ended December 31,									For the Years Ended December 31,
(in millions)	2013			2012			2011			2014			2013			2012
Benefit Plans: ^(a)(1)
Net loss	$	346		$	302		$	226		$	187		$	346		$	302
Prior service cost/credit	(35		)	(61		)	(7		)	(33		)	(35		)	(61		)
	311			241			219			154			311			241
SABMiller ^(b)(2)	6			3			18			59			6			3
Pre-tax amounts reclassified from accumulated other comprehensive losses to net earnings	$	317		$	244		$	237		$	213		$	317		$	244

^(a)(1)Amounts are included in net defined benefit plan costs. For further details, see Note 16. Benefit Plans.

^(b)(2) Amounts are included in earnings from equity investment in SABMiller. For further information on Altria Group, Inc.’s equity investment in SABMiller, see Note 6. Investment in SABMiller.

Note 14. Income Taxes

Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012:


(in millions)	2013			2012			2011			2014			2013			2012
Earnings before income taxes:
United States	$	6,929		$	6,461		$	5,568		$	7,763		$	6,929		$	6,461
Outside United States	13			16			14			11			13			16
Total	$	6,942		$	6,477		$	5,582		$	7,774		$	6,942		$	6,477
Provision for income taxes:
Current:
Federal	$	2,066		$	2,870		$	2,353		$	2,350		$	2,066		$	2,870
State and local	423			348			275			480			423			348
Outside United States	4			5			4			3			4			5
	2,493			3,223			2,632			2,833			2,493			3,223
Deferred:
Federal	(77		)	(920		)	(458		)	(124		)	(77		)	(920		)
State and local	(9		)	(9		)	15			(5		)	(9		)	(9		)
	(86		)	(929		)	(443		)	(129		)	(86		)	(929		)
Total provision for income taxes	$	2,407		$	2,294		$	2,189		$	2,704		$	2,407		$	2,294

Altria Group, Inc.’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the year 2007 and forward, with years 2007 to 2009 currently under examination by the IRS as part of a routine audit conducted in the ordinary course of business. State jurisdictions have statutes of limitations generally ranging from three to four years. Certain of Altria Group, Inc.’s state tax returns are currently under examination by various states as part of routine audits conducted in the ordinary course of business.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 was as follows:


(in millions)	2013			2012			2011			2014			2013			2012
Balance at beginning of year	$	262		$	381		$	399		$	227		$	262		$	381
Additions based on tax positions related to the current year	15			15			22			15			15			15
Additions for tax positions of prior years	35			170			71			29			35			170
Reductions for tax positions due to lapse of statutes of limitations	(1		)	(16		)	(39		)	(2		)	(1		)	(16		)
Reductions for tax positions of prior years	—			(102		)	(67		)	—			—			(102		)
Settlements	(84		)	(186		)	(5		)	(11		)	(84		)	(186		)
Balance at end of year	$	227		$	262		$	381		$	258		$	227		$	262

Unrecognized tax benefits and Altria Group, Inc.’s consolidated liability for tax contingencies at December 31, ~~2013~~2014 and ~~2012~~2013, were as follows:


(in millions)	2013			2012			2014			2013
Unrecognized tax benefits — Altria Group, Inc.	$	188		$	156		$	228		$	188
Unrecognized tax benefits — Mondelēz	9			9			—			9
Unrecognized tax benefits — PMI	30			97			30			30
Unrecognized tax benefits	227			262			258			227
Accrued interest and penalties	48			66			57			48
Tax credits and other indirect benefits	(14		)	(20		)	(17		)	(14		)
Liability for tax contingencies	$	261		$	308		$	298		$	261

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Notes to Consolidated Financial Statements

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The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, ~~2013~~2014 was $207 million, along with $51 million affecting deferred taxes. However, the impact on net earnings at December 31, 2014 would be $177 million, as a result of the net receivable from Altria Group, Inc.’s former subsidiary, Philip Morris International Inc. (“PMI”), of $30 million discussed below. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2013 was $212 million, along with $15 million affecting deferred taxes. However, the impact on net earnings at December 31, 2013 would be $173 million, as a result of net receivables from Altria Group, Inc.’s former subsidiaries Kraft Foods Inc. (now known as Mondelēz International, Inc. (“Mondelēz”)) and ~~Philip Morris International Inc. (“PMI”)~~PMI of $9 million and $30 ~~million, respectively, discussed below. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at December 31, 2012 was~~ ~~$242 million, along with~~ ~~$20 million~~ ~~affecting deferred taxes. However, the impact on net earnings at December 31, 2012 would be~~ ~~$136 million, as a result of receivables from Mondelēz and PMI of~~ ~~$9 million~~ ~~and~~ ~~$97~~ million, respectively, discussed below.

Under tax sharing agreements entered into in connection with the 2007 and 2008 spin-offs between Altria Group, Inc. and its former subsidiaries Mondelēz and PMI, respectively, Mondelēz and PMI are responsible for their respective pre-spin-off tax obligations. Altria Group, Inc., however, remains severally liable for Mondelēz’s and PMI’s pre-spin-off federal tax obligations pursuant to regulations governing federal consolidated income tax returns, and continues to include the pre-spin-off federal income tax reserves of ~~Mondelēz and~~ PMI of~~$9 million~~ ~~and~~ $30 million~~, respectively,~~ in its liability for uncertain tax positions. Altria Group, Inc. also includes corresponding receivables/payables from/to ~~Mondelēz and~~ PMI in its other assets and other liabilities on Altria Group, Inc.’s consolidated balance sheet at December 31, ~~2013~~2014. As of December 31, 2014, there are no remaining pre-spin-off tax reserves related to Mondelēz.

During 2014 and 2013, Altria Group, Inc. recorded a net tax ~~benefit~~benefits of $2 million and $22 million, respectively, for Mondelēz tax matters, primarily relating to the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2007-2009 tax years.

During 2012, Altria Group, Inc. recorded an additional income tax provision of $52 million for Mondelēz and PMI tax matters, primarily as a result of the closure in August 2012 of the IRS audit of Altria Group, Inc. and its consolidated subsidiaries’ 2004-2006 tax years (“IRS 2004-2006 Audit”).

~~During 2011,~~The net tax benefits of $2 million and $22 million for the ~~IRS,~~years ended December 31, 2014 and 2013, respectively, were offset by the recording of corresponding net payables to Mondelēz, ~~and Altria Group, Inc. executed~~which were recorded as a ~~closing agreement that resolved certain Mondelēz tax matters arising out of the IRS’s examination of~~decrease to operating income on Altria Group, Inc.’s consolidated ~~federal income tax returns~~statements of earnings for the years ended ~~2004-2006. As a result of this closing agreement~~December 31, 2014 and ~~the resolution of various other Mondelēz tax matters, during 2011, Altria Group, Inc. recorded an~~2013, respectively. The additional income tax provision ~~and associated interest~~ of ~~$14 million~~.

~~The net tax benefit of $22~~$52 million for the year ended December 31, ~~2013~~2012 was offset by increases to the ~~recording of a~~ corresponding ~~net payable to~~receivables from Mondelēz and PMI, which ~~was~~were recorded as ~~a decrease~~increases to operating income on Altria Group, Inc.’s consolidated statement of earnings for the year ended December 31, 2013. The additional income tax provisions of $52 million and $14 million for the years ended December 31, 2012 and 2011, respectively, were offset by increases to the corresponding receivables from Mondelēz and PMI, which were recorded as increases to

~~operating income on Altria Group, Inc.’s consolidated statements of earnings for the years ended December 31, 2012 and 2011, respectively.~~2012. Due to these offsets, the Mondelēz and PMI tax matters had no impact on Altria Group, Inc.’s net earnings for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012.

Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision. At December 31, 2014, Altria Group, Inc. had $57 million of accrued interest and penalties, of which approximately

$7 million related to PMI, for which PMI is responsible under its tax sharing agreement. At December 31, 2013, Altria Group, Inc. had $48 million of accrued interest and penalties, of which approximately $2 million and $6 million related to Mondelēz and PMI, respectively, for which Mondelēz and PMI are responsible under their respective tax sharing agreements. At ~~December 31, 2012, Altria Group, Inc. had~~ ~~$66 million~~ ~~of accrued interest and penalties, of which approximately~~ ~~$2 million~~ ~~and~~ ~~$18 million~~ ~~related to Mondelēz and PMI, respectively.~~ The corresponding receivables/payables from/to Mondelēz and PMI ~~are~~were included in assets and liabilities on Altria Group, Inc.’s consolidated balance sheets at December 31, ~~2013~~2014 and ~~2012~~2013.

For the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, Altria Group, Inc. recognized in its consolidated statements of earnings $514 million, $~~(88)~~5 million and $~~496~~(88) million, respectively, of gross interest expense (income) associated with uncertain tax ~~positions, which in 2011 primarily relates to the 2011 PMCC Leveraged Lease Charge.~~positions.

Altria Group, Inc. is subject to income taxation in many jurisdictions. Uncertain tax positions reflect the difference between tax positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions with the relevant tax authorities may take many years to complete, and such timing is not entirely within the control of Altria Group, Inc. It is reasonably possible that within the next 12 months certain examinations will be resolved, which could result in a decrease in unrecognized tax benefits of approximately $~~120~~139 million, a portion of which would relate to the unrecognized tax benefits of ~~Mondelēz and~~ PMI, for which Altria Group, Inc. is indemnified by ~~Mondelēz and~~ PMI under ~~their respective~~its tax sharing ~~agreements.~~agreement.

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012:


	2013		2012		2011		2014		2013		2012
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
State and local income taxes, net of federal tax benefit	3.8		3.5		3.8		4.0		3.8		3.5
Uncertain tax positions	0.7		(0.7	)	5.5		0.5		0.7		(0.7	)
SABMiller dividend benefit	(2.0	)	(0.1	)	(2.0	)	(2.3	)	(2.0	)	(0.1	)
Domestic manufacturing deduction	(2.7	)	(2.0	)	(2.4	)	(2.4	)	(2.7	)	(2.0	)
Other	(0.1	)	(0.3	)	(0.7	)	—		(0.1	)	(0.3	)
Effective tax rate	34.7	%	35.4	%	39.2	%	34.8	%	34.7	%	35.4	%

The tax provision in 2014 included net tax benefits of (i) $14 million from the reversal of tax accruals no longer required that was recorded during the third quarter of 2014 ($19 million), partially offset by additional tax provisions recorded during the fourth quarter of 2014 ($5 million); and (ii) $2 million for Mondelēz tax matters discussed above.

The tax provision in 2013 included net tax benefits of (i) $39 million from the reversal of tax accruals no longer required that

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was recorded during the third quarter of 2013 ($25 million) and fourth quarter of 2013 ($14 million); (ii) $25 million related to the recognition of previously unrecognized foreign tax credits primarily associated with SABMiller dividends that were recorded during the fourth quarter of 2013; and (iii) $22 million

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for Mondelēz tax matters discussed above. The tax provision in 2013 also included a reduction in certain consolidated tax benefits resulting from the 2013 debt tender offer that is discussed further in Note 9. Long-Term Debt.

The tax provision in 2012 included (i) a $73 million interest benefit resulting primarily from lower than estimated interest on tax underpayments related to the Closing Agreement; (ii) the reversal of tax reserves and associated interest of $53 million due primarily to the closure of the IRS 2004-2006 Audit that was recorded during the third quarter of 2012; and (iii) an additional tax provision of $52 million related to the resolution of various Mondelēz and PMI tax matters. These amounts are primarily reflected in uncertain tax positions shown in the table above. The 2012 SABMiller dividend benefit and domestic manufacturing deduction shown in the table above includes a reduction in consolidated tax benefits resulting from the 2012 debt tender offer that is discussed further in Note 9. Long-Term Debt.

In addition, as a result of the Closing Agreement, Altria Group, Inc. paid, in June 2012, $456 million in federal income taxes and related estimated interest on tax underpayments. The tax component of these payments represents an acceleration of federal income taxes that Altria Group, Inc. would have otherwise paid over the lease terms of the subject lease transactions. Altria Group, Inc. previously paid a total of approximately $1.1 billion ($945 million in 2010) in federal income taxes and interest with respect to these transactions. Altria Group, Inc. treated the $1.1 billion paid to the IRS as deposits for financial reporting purposes pending the ultimate outcomes of the litigation and did not include such amounts in the supplemental disclosure of cash paid for income taxes on the consolidated statements of cash flows in the years paid. During the years ended December 31, 2012 and 2011, Altria Group, Inc. relinquished its right to seek refunds of the deposits and included approximately $750 million and $362 million, respectively, in the supplemental disclosure of cash paid for income taxes on the consolidated statements of cash flows.

The tax provision in 2011 included a $312 million charge that primarily represents a permanent charge for interest, net of income tax benefit, on tax underpayments, associated with the 2011 PMCC Leveraged Lease Charge. The tax provision in 2011 also included tax benefits of $77 million primarily attributable to the reversal of tax reserves and associated interest related to the expiration of statutes of limitations, closure of tax audits and the reversal of tax accruals no longer required. These amounts are primarily reflected in uncertain tax positions shown in the table above.

For further discussion of the Closing Agreement, ~~and the 2011 PMCC Leveraged Lease Charge,~~ see Note 7. Finance Assets, net.

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following at December 31, ~~2013~~2014 and ~~2012~~2013:


(in millions)	2013			2012			2014			2013
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	934		$	1,109		$	1,054		$	934
Settlement charges	1,338			1,419			1,379			1,338
Accrued pension costs	33			549			410			33
Net operating losses and tax credit carryforwards	331			208			357			331
Total deferred income tax assets	2,636			3,285			3,200			2,636
Deferred income tax liabilities:
Property, plant and equipment	(462		)	(475		)	(468		)	(462		)
Intangible assets	(3,848		)	(3,787		)	(3,915		)	(3,848		)
Investment in SABMiller	(2,135		)	(2,198		)	(2,039		)	(2,135		)
Finance assets, net	(1,424		)	(1,706		)	(1,123		)	(1,424		)
Other	(190		)	(167		)	(190		)	(190		)
Total deferred income tax liabilities	(8,059		)	(8,333		)	(7,735		)	(8,059		)
Valuation allowances	(195		)	(184		)	(211		)	(195		)
Net deferred income tax liabilities	$	(5,618	)	$	(5,232	)	$	(4,746	)	$	(5,618	)

At December 31, ~~2013~~2014, Altria Group, Inc. had estimated gross state tax net operating losses of $~~553~~512 million that, if unused, will expire in ~~2014~~2015 through ~~2033~~,2034, state tax credit carryforwards of $6862 million that, if unused, will expire in ~~2014~~2015 through 2017,, and foreign tax credit carryforwards of $~~261~~324 million that, if unused, will expire in 2020 through ~~2023~~.2024. Realization of these benefits is dependent upon various factors such as generating sufficient taxable income in the applicable states and receiving sufficient amounts of lower-taxed foreign dividends from SABMiller. A valuation allowance of $~~195~~211 million has been established for these benefits that more-likely-than-not will not be realized.

Note 15. Segment Reporting

The products of Altria Group, Inc.’s subsidiaries include smokeable products comprised of cigarettes manufactured and sold by PM USA and machine-made large cigars and pipe tobacco manufactured and sold by Middleton; smokeless products, substantially all of which are manufactured and sold by ~~or on behalf of USSTC and PM USA;~~USSTC; and wine produced and/or distributed by Ste. Michelle. The products and services of these subsidiaries constitute Altria Group, Inc.’s reportable segments of smokeable products, smokeless products and wine. The financial services and the ~~alternative~~innovative tobacco products businesses are included in all other.

~~As discussed in Note 1.~~ ~~Background and Basis of Presentation, beginning with the first quarter of 2013, Altria Group, Inc. revised its reportable segments. Prior years’ segment data have been recast to conform with the current year’s segment presentation.~~

Altria Group, Inc.’s chief operating decision maker reviews operating companies income to evaluate the performance of, and allocate resources to, the segments. Operating companies income

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for the segments ~~excludes~~is defined as operating income before amortization of intangibles and general corporate ~~expenses and amortization of intangibles.~~expenses. Interest and other debt expense, net, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they

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are excluded from the measure of segment profitability reviewed by Altria Group, Inc.’s chief operating decision maker. Information about total assets by segment is not disclosed because such information is not reported to or used by Altria Group, Inc.’s chief operating decision maker. Segment goodwill and other intangible assets, net, are disclosed in Note 3.4. Goodwill and Other Intangible Assets, net. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies.

Segment data were as follows:


	For the Years Ended December 31,									For the Years Ended December 31,
(in millions)	2013			2012			2011			2014			2013			2012
Net revenues:
Smokeable products	$	21,868		$	22,216		$	21,970		$	21,939		$	21,868		$	22,216
Smokeless products	1,778			1,691			1,627			1,809			1,778			1,691
Wine	609			561			516			643			609			561
All other	211			150			(313		)	131			211			150
Net revenues	$	24,466		$	24,618		$	23,800		$	24,522		$	24,466		$	24,618
Earnings before income taxes:
Operating companies income (loss):
Smokeable products	$	7,063		$	6,239		$	5,737		$	6,873		$	7,063		$	6,239
Smokeless products	1,023			931			859			1,061			1,023			931
Wine	118			104			91			134			118			104
All other	157			176			(349		)	(185		)	157			176
Amortization of intangibles	(20		)	(20		)	(20		)	(20		)	(20		)	(20		)
General corporate expenses	(235		)	(229		)	(264		)	(241		)	(235		)	(229		)
Changes to Mondelēz and PMI tax-related receivables/payables	(22		)	52			14			(2		)	(22		)	52
Operating income	8,084			7,253			6,068			7,620			8,084			7,253
Interest and other debt expense, net	(1,049		)	(1,126		)	(1,216		)	(808		)	(1,049		)	(1,126		)
Loss on early extinguishment of debt	(1,084		)	(874		)	—			(44		)	(1,084		)	(874		)
Earnings from equity investment in SABMiller	991			1,224			730			1,006			991			1,224
Earnings before income taxes	$	6,942		$	6,477		$	5,582		$	7,774		$	6,942		$	6,477

The smokeable products segment included net revenues of $~~21,308~~21,363 million, $~~21,615~~21,308 million and $~~21,403~~21,615 million for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, respectively, related to cigarettes and net revenues of $~~560~~576 million, $~~601~~560 million and $~~567~~601 million for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, respectively, related to cigars.

PM USA, USSTC and Middleton’s largest customer, McLane Company, Inc., accounted for approximately 27% of Altria Group, Inc.’s consolidated net revenues for each of the years

ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012. ~~These~~Substantially all of these net revenues were reported in the smokeable products and smokeless products segments. Sales to three distributors accounted for approximately ~~66%~~67% of net revenues for the wine segment for the year ended December 31, 2014 and 66% for each of the years ended December 31, ~~2013~~, ~~2012~~2013 and ~~2011~~2012.

Details of Altria Group, Inc.’s depreciation expense and capital expenditures were as follows:



	For the Years Ended December 31,
(in millions)	2014		2013		2012
Depreciation expense:
Smokeable products	$	112	$	113	$	125
Smokeless products	22		25		26
Wine	30		30		27
General corporate and other	24		24		27
Total depreciation expense	$	188	$	192	$	205
Capital expenditures:
Smokeable products	$	49	$	39	$	48
Smokeless products	40		32		36
Wine	46		42		30
General corporate and other	28		18		10
Total capital expenditures	$	163	$	131	$	124

For the Years Ended December 31,
(in millions) 2013
2012
2011
Depreciation expense:
Smokeable products $ 113
$ 125
$ 145
Smokeless products 25
26
31
Wine 30
27
25
Corporate and other 24
27
32
Total depreciation expense $ 192
$ 205
$ 233
Capital expenditures:
Smokeable products $ 39
$ 48
$ 46
Smokeless products 32
36
24
Wine 42
30
25
Corporate and other 18
10
10
Total capital expenditures $ 131
$ 124
$ 105

~~Items affecting the~~The comparability of ~~net revenues and/or~~ operating companies income for the reportable segments ~~were as follows:~~was affected by the following:

▪Non-Participating Manufacturer (“NPM”) Adjustment Items: For the ~~year~~years ended December 31, 2014 and 2013, ~~PM USA recorded~~ pre-tax income for NPM adjustment items was recorded in Altria Group, Inc.’s consolidated statements of earnings as follows:



(in millions)	2014		2013
Smokeable products segment	$	43	$	664
Interest and other debt expense, net	47		—
Total	$	90	$	664

~~$664 million, which increased operating companies income in the smokeable products segment. This recording of pre-tax income~~These adjustments resulted from the ~~following:~~


▪	~~a reduction to cost of sales of~~ ~~$519 million~~ ~~for the~~ settlement ~~of disputes with certain states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (the “MSA”) for the years 2003 - 2012; and~~


▪	~~a reduction to cost of sales of~~ ~~$145 million~~ ~~for the September 11, 2013 diligent enforcement rulings of the arbitration panel presiding over the NPM adjustment dispute for 2003.~~

~~For further discussion~~ of, ~~these items (which~~and determinations made in connection with, disputes with certain states and territories related to the NPM adjustment provision under the 1998 Master Settlement Agreement (the “MSA”) for the years 2003-2012 (such settlements and determinations are referred to collectively as ~~the~~ “NPM Adjustment Items”~~), see~~ and are more fully described in~~Possible Adjustments in MSA Payments for 2003~~ Health Care Cost Recovery Litigation - ~~2012~~NPM Adjustment Disputes, in Note 18. ~~Contingencies.~~

▪Contingencies~~Tobacco and Health Judgments:~~) ~~See Note 18.~~. ~~Contingencies~~ The amounts shown in the table above for ~~pre-tax charges related~~the smokeable products segment were recorded by PM USA as reductions to ~~tobacco and health judgments recorded in~~cost of sales, which increased operating companies income in the smokeable products segment.

▪~~Asset Impairment, Exit, Implementation~~Tobacco and ~~Integration Costs:~~Health Litigation Items: ~~See Note 4.~~ ~~Asset Impairment, Exit, Implementation~~For the years ended December 31, 2014, 2013 and ~~Integration Costs~~ ~~for a breakdown~~2012, pre-tax charges related to certain tobacco and health litigation items were recorded in Altria Group, Inc.’s consolidated statements of ~~these costs by segment.~~earnings as follows:



(in millions)	2014		2013		2012
Smokeable products segment	$	27	$	18	$	4
General corporate	15		—		—
Interest and other debt expense, net	2		4		1
Total	$	44	$	22	$	5

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During the second quarter of 2014, Altria Group, Inc. and PM USA recorded an aggregate pre-tax charge of $31 million in marketing, administration and research costs for the estimated costs of implementing the corrective communications remedy in connection with the federal government’s lawsuit against Altria Group, Inc. and PM USA. For further discussion, see Health Care Cost Recovery Litigation - Federal Government’s Lawsuit in Note 18. Contingencies.

▪Asset Impairment and Exit Costs: Asset impairment and exit costs for the years ended December 31, 2014, 2013 and 2012 were as follows:



(in millions)	2014			2013		2012
Smokeable products	$	(6	)	$	3	$	38
Smokeless products	5			3		22
General corporate and other	—			5		1
	$	(1	)	$	11	$	61

During 2014, PM USA sold its Cabarrus, North Carolina manufacturing facility for approximately $66 million in connection with the previously completed manufacturing optimization program associated with PM USA’s closure of the manufacturing facility in 2009. As a result, during 2014, PM USA recorded a pre-tax gain of $10 million.

The pre-tax asset impairment and exit costs for the year ended December 31, 2012 were due primarily to Altria Group, Inc.’s cost reduction program announced in 2011 (the “2011 Cost Reduction Program”).

Note 16. Benefit Plans

Subsidiaries of Altria Group, Inc. sponsor noncontributory defined benefit pension plans covering the majority of all employees of Altria Group, Inc. However, employees hired on or after a date specific to their employee group are not eligible to participate in these noncontributory defined benefit pension plans but are instead eligible to participate in a defined contribution plan with enhanced benefits. This transition for new hires occurred from October 1, 2006 to January 1, 2008. In addition, effective January 1, 2010, certain employees of UST and Middleton who were participants in noncontributory defined benefit pension plans ceased to earn additional benefit service under those plans and became eligible to participate in a defined contribution plan with enhanced benefits. Altria Group, Inc. and its subsidiaries also provide health care and other benefits to the majority of retired employees.

The plan assets and benefit obligations of Altria Group, Inc.’s pension plans and the benefit obligations of Altria Group, Inc.’s postretirement plans are measured at December 31 of each year.

Pension Plans

▪Obligations and Funded Status: The projected benefit obligations, plan assets and funded status of Altria Group, Inc.’s pension plans at December 31, ~~2013~~2014 and ~~2012~~2013, were as follows:


(in millions)	2013			2012			2014			2013
Projected benefit obligation at beginning of year	$	7,924		$	6,965		$	7,137		$	7,924
Service cost	86			79			68			86
Interest cost	314			344			345			314
Benefits paid	(410		)	(420		)	(410		)	(410		)
Actuarial (gains) losses	(784		)	956
Actuarial losses (gains)							1,190			(784		)
Other	7			—			—			7
Projected benefit obligation at end of year	7,137			7,924			8,330			7,137
Fair value of plan assets at beginning of year	6,167			5,275			7,077			6,167
Actual return on plan assets	927			755			615			927
Employer contributions	393			557			15			393
Benefits paid	(410		)	(420		)	(410		)	(410		)
Fair value of plan assets at end of year	7,077			6,167			7,297			7,077
Funded status at December 31	$	(60	)	$	(1,757	)	$	(1,033	)	$	(60	)

Amounts recognized in Altria Group, Inc.’s consolidated balance sheets at December 31, ~~2013~~2014 and ~~2012~~2013, were as follows:


(in millions)	2013			2012			2014			2013
Other assets	$	173		$	—		$	—		$	173
Other accrued liabilities	(21		)	(22		)	(21		)	(21		)
Accrued pension costs	(212		)	(1,735		)	(1,012		)	(212		)
	$	(60	)	$	(1,757	)	$	(1,033	)	$	(60	)

The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $~~6.8~~7.9 billion and $~~7.5~~6.8 billion at December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

At December 31, 2014, the accumulated benefit obligations were in excess of plan assets for all pension plans. For plans with accumulated benefit obligations in excess of plan assets at December 31, 2013, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $299 million, $261 million and $66 million, respectively. These amounts were primarily related to plans for salaried employees that cannot be funded under IRS regulations. ~~At December 31, 2012, the accumulated benefit obligations were in excess of plan assets for all pension plans.~~

The following assumptions were used to determine Altria Group, Inc.’s benefit obligations under the plans at December 31:


	2013		2012		2014		2013
Discount rate	4.9	%	4.0	%	4.1	%	4.9	%
Rate of compensation increase	4.0		4.0		4.0		4.0

The discount rates for Altria Group, Inc.’s plans were developed from a model portfolio of high-quality corporate bonds with durations that match the expected future cash flows of the benefit obligations.

At December 31, 2014, Altria Group, Inc. updated its mortality assumptions to reflect longer life expectancy for its pension plan participants, resulting in an increase of $401 million to the projected benefit obligation at December 31, 2014.

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▪Components of Net Periodic Benefit Cost: Net periodic pension cost consisted of the following for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012:



(in millions)	2014			2013			2012
Service cost	$	68		$	86		$	79
Interest cost	345			314			344
Expected return on plan assets	(518		)	(493		)	(442		)
Amortization:
Net loss	147			271			224
Prior service cost	10			10			10
Termination and settlement	—			7			21
Net periodic pension cost	$	52		$	195		$	236

(in millions) 2013
2012
2011
Service cost $ 86
$ 79
$ 74
Interest cost 314
344
351
Expected return on plan assets (493 ) (442 ) (422 )
Amortization:
Net loss 271
224
171
Prior service cost 10
10
14
Termination, settlement and curtailment 7
21
41
Net periodic pension cost $ 195
$ 236
$ 229

Termination ~~settlement~~ and ~~curtailment~~settlement shown in the table above primarily include charges related to the 2011 Cost Reduction Program. ~~For more information on the 2011 Cost Reduction Program, see Note 4.~~ ~~Asset Impairment, Exit, Implementation and Integration Costs~~.

The amounts included in termination ~~settlement~~ and ~~curtailment~~settlement in the table above were comprised of the following changes:


(in millions)	2013		2012		2011		2013		2012
Benefit obligation	$	1	$	—	$	39	$	1	$	—
Other comprehensive earnings/losses:
Net loss	6		21		—		6		21
Prior service cost	—		—		2
	$	7	$	21	$	41	$	7	$	21

For the pension plans, the estimated net loss and prior service cost that are expected to be amortized from accumulated other comprehensive losses into net periodic benefit cost during ~~2014~~2015 are $~~153~~237 million and $107 million, respectively.

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The following weighted-average assumptions were used to determine Altria Group, Inc.’s net pension cost for the years ended December 31:


	2013		2012		2011		2014		2013		2012
Discount rate	4.0	%	5.0	%	5.5	%	4.9	%	4.0	%	5.0	%
Expected rate of return on plan assets	8.0		8.0		8.0		8.0		8.0		8.0
Rate of compensation increase	4.0		4.0		4.0		4.0		4.0		4.0

Altria Group, Inc. sponsors deferred profit-sharing plans covering certain salaried, non-union and union employees. Contributions and costs are determined generally as a percentage of earnings, as defined by the plans. Amounts charged to expense for these defined contribution plans totaled $8082 million, $8180 million and $~~106~~$81 million in ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, respectively.

▪Plan Assets: Altria Group, Inc.’s pension plans investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Altria Group, Inc. believes that it implements the investment strategy in a prudent and risk-controlled manner, consistent with the fiduciary requirements of the Employee Retirement Income Security Act of 1974, by investing retirement plan assets in a well-diversified mix of equities, fixed income and other securities that reflects the impact of the demographic mix of plan participants on the benefit obligation using a target asset allocation between equity securities and fixed income investments of 55%/45%. The composition of Altria Group, Inc.’s plan assets at December 31, ~~2013~~2014 was broadly characterized as an allocation between equity securities (~~60%~~55%), corporate bonds (~~26%~~33%), U.S. Treasury and foreign government securities (7%) and all other types of investments (7%5%). Virtually all pension assets can be used to make monthly benefit payments.

Altria Group, Inc.’s pension plans investment objective is accomplished by investing in U.S. and international equity index strategies that are intended to mirror indices such as the Standard & Poor’s 500 Index, Russell Small Cap Completeness Index, Research Affiliates Fundamental Index (“RAFI”) Low Volatility U.S. Index, and Morgan Stanley Capital International (“MSCI”) Europe, Australasia, and the Far East (“EAFE”) Index. Altria Group, Inc.’s pension plans also invest in actively managed international equity securities of large, mid and small cap companies located in developed and emerging markets, as well as long duration fixed income securities that primarily include corporate bonds of companies from diversified industries. The allocation to below investment grade securities represented ~~18%~~19% of the fixed income holdings or 7%9% of total plan assets at December 31, ~~2013~~2014. The allocation to emerging markets represented 4%5% of the equity holdings or 3%2% of total plan assets at December 31, ~~2013~~2014. The allocation to real estate and private equity investments was immaterial at December 31, ~~2013.~~2014.

Altria Group, Inc.’s pension plans risk management practices include ongoing monitoring of asset allocation, investment performance and investment managers’ compliance with their investment guidelines, periodic rebalancing between equity and debt asset classes and annual actuarial re-measurement of plan liabilities.

Altria Group, Inc.’s expected rate of return on pension plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. The forward-looking estimates are consistent with the overall long-term averages exhibited by returns on equity and fixed income securities.

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The fair values of Altria Group, Inc.’s pension plan assets by asset category were as follows:

Investments at Fair Value as of December 31, 2014



(in millions)	Level 1		Level 2		Level 3		Total
Common/collective trusts:
U.S. large cap	$	—	$	1,870	$	—	$	1,870
U.S. small cap	—		442		—		442
International developed markets	—		79		—		79
U.S. and foreign government securities or their agencies:
U.S. government and agencies	—		296		—		296
U.S. municipal bonds	—		124		—		124
Foreign government and agencies	—		281		—		281
Corporate debt instruments:
Above investment grade	—		1,765		—		1,765
Below investment grade and no rating	—		527		—		527
Common stock:
International equities	1,000		—		1		1,001
U.S. equities	556		—		—		556
Registered investment companies	63		113		—		176
Other, net	74		91		15		180
Total investments at fair value, net	$	1,693	$	5,588	$	16	$	7,297

Investments at Fair Value as of December 31, 2013



(in millions)	Level 1		Level 2		Level 3		Total
Common/collective trusts:
U.S. large cap	$	—	$	1,971	$	—	$	1,971
U.S. small cap	—		546		—		546
International developed markets	—		159		—		159
U.S. and foreign government securities or their agencies:
U.S. government and agencies	—		226		—		226
U.S. municipal bonds	—		127		—		127
Foreign government and agencies	—		275		—		275
Corporate debt instruments:
Above investment grade	—		1,371		1		1,372
Below investment grade and no rating	—		380		—		380
Common stock:
International equities	1,050		—		1		1,051
U.S. equities	506		—		—		506
Registered investment companies	159		137		—		296
Other, net	108		47		13		168
Total investments at fair value, net	$	1,823	$	5,239	$	15	$	7,077

(in millions) Level 1
Level 2
Level 3
Total
Common/collective trusts:
U.S. large cap $ —
$ 1,971
$ —
$ 1,971
U.S. small cap —
546
—
546
International developed markets —
159
—
159
U.S. and foreign government securities or their agencies:
U.S. government and agencies —
226
—
226
U.S. municipal bonds —
127
—
127
Foreign government and agencies —
275
—
275
Corporate debt instruments:
Above investment grade —
1,371
1
1,372
Below investment grade and no rating —
380
—
380
Common stock:
International equities 1,050
—
1
1,051
U.S. equities 506
—
—
506
Registered investment companies 159
137
—
296
Other, net 108
47
13
168
Total investments at fair value, net $ 1,823
$ 5,239
$ 15
$ 7,077

Level 3 holdings and transactions were immaterial to total plan assets at December 31, 2014 and 2013.

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Notes to Consolidated Financial Statements

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~~Investments at Fair Value as ofDecember 31, 2012~~

(in millions) Level 1
Level 2
Level 3
Total
Common/collective trusts:
U.S. large cap $ —
$ 1,566
$ —
$ 1,566
U.S. small cap —
499
—
499
International developed markets —
179
—
179
Long duration fixed income —
494
—
494
U.S. and foreign government securities or their agencies:
U.S. government and agencies —
625
—
625
U.S. municipal bonds —
71
—
71
Foreign government and agencies —
311
—
311
Corporate debt instruments:
Above investment grade —
714
—
714
Below investment grade and no rating —
391
—
391
Common stock:
International equities 759
—
—
759
U.S. equities 300
—
—
300
Registered investment companies 128
50
—
178
Other, net 25
41
14
80
Total investments at fair value, net $ 1,212
$ 4,941
$ 14
$ 6,167

~~Level 3 holdings and transactions were immaterial to total plan assets at~~ ~~December 31, 2013~~ ~~and~~ ~~2012~~.

For a description of the fair value hierarchy and the three levels of inputs used to measure fair value, see Note 2. Summary of Significant Accounting Policies.

Following is a description of the valuation methodologies used for investments measured at fair value.

▪

Common/Collective Trusts: Common/collective trusts consist of funds that are intended to mirror indices such as Standard & Poor’s 500 Index, Russell Small Cap Completeness Index ~~State Street Global Advisor’s Fundamental Index~~ and MSCI EAFE Index. They are valued on the basis of the relative interest of each participating investor in the fair value of the underlying assets of each of the respective common/collective trusts. The underlying assets are valued based on the net asset value (“NAV”) as provided by the investment account manager.

~~assets are valued based on the net asset value (“NAV”) as provided by the investment account manager.~~

▪

U.S. and Foreign Government Securities: U.S. and foreign government securities consist of investments in Treasury Nominal Bonds and Inflation Protected Securities ~~investment grade municipal securities~~ and ~~unrated or non-investment grade~~ municipal securities. Government securities are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. ~~In addition, matrix~~Matrix pricing, yield curves and indices are used when broker quotes are not available.


▪	Corporate Debt ~~Instruments:~~Instruments: Corporate debt instruments are valued at a price that is based on a compilation of primarily observable market information, such as broker quotes. ~~In addition, matrix~~Matrix pricing, yield curves and indices are used when broker quotes are not available.


▪	Common ~~Stock:~~Stock: Common stocks are valued based on the price of the security as listed on an open active exchange on last trade date.

▪

Registered Investment ~~Companies:~~Companies: Investments in mutual funds sponsored by a registered investment company are valued based on exchange listed prices and are classified in Level 1. Registered investment company funds that are designed specifically to meet Altria Group, Inc.’s pension plans investment strategies, but are not traded on an active market, are valued based on the NAV of the underlying securities as provided by the investment account manager and are classified in Level 2.

▪Cash Flows: Altria Group, Inc. makes contributions to the pension plans to the extent that the contributions are tax deductible and pays benefits that relate to plans for salaried employees that cannot be funded under IRS regulations. Currently, Altria Group, Inc. anticipates making employer contributions to its pension plans of approximately $20 million to

$50 million in ~~2014~~2015 based on current tax law. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.

The estimated future benefit payments from the Altria Group, Inc. pension plans at December 31, ~~2013~~2014, were as follows:


(in millions)
2014	$	414
2015	416		$	422
2016	421		426
2017	429		434
2018	434		440
2019-2023	2,257
2019			440
2020-2024			2,306

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~~Notes to Consolidated Financial Statements~~

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Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011:~~2012:


(in millions)	2013			2012			2011			2014			2013			2012
Service cost	$	18		$	18		$	34		$	15		$	18		$	18
Interest cost	99			115			139			107			99			115
Amortization:
Net loss	51			40			39			22			51			40
Prior service credit	(45		)	(45		)	(21		)	(43		)	(45		)	(45		)
Termination and curtailment	—			(26		)	(4		)
Curtailment										—			—			(26		)
Net postretirement health care costs	$	123		$	102		$	187		$	101		$	123		$	102

~~Termination and~~The curtailment gain shown in the table above ~~are~~resulted from plan amendments made to an Altria Group, Inc. postretirement plan during 2012 related to the 2011 Cost Reduction Program. ~~For further information on the 2011 Cost Reduction Program, see Note 4.~~ ~~Asset Impairment, Exit, Implementation and Integration Costs.~~

The ~~amounts included~~curtailment gain was recorded as a reduction to prior service credit in ~~termination and curtailment shown in the table above were comprised of the following changes:~~

(in millions) 2012
2011
Accrued postretirement health care costs $ —
$ 11
Other comprehensive earnings/losses:
Prior service credit (26 ) (15 )
$ (26 ) $ (4 )
other comprehensive earnings/losses.

For the postretirement benefit plans, the estimated net loss and prior service credit that are expected to be amortized from accumulated other comprehensive losses into net postretirement health care costs during ~~2014~~2015 are $2946 million and $~~(43)~~(39) million, respectively.

The following assumptions were used to determine Altria Group, Inc.’s net postretirement cost for the years ended December 31:


	2013		2012		2011		2014		2013		2012
Discount rate	3.9	%	4.9	%	5.5	%	4.8	%	3.9	%	4.9	%
Health care cost trend rate	7.5		8.0		8.0		7.0		7.5		8.0

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Altria Group, Inc.’s postretirement health care plans are not funded. The changes in the accumulated postretirement benefit obligation at December 31, ~~2013~~2014 and ~~2012~~2013, were as follows:


(in millions)	2013			2012			2014			2013
Accrued postretirement health care costs at beginning of year	$	2,663		$	2,505		$	2,317		$	2,663
Service cost	18			18			15			18
Interest cost	99			115			107			99
Benefits paid	(138		)	(135		)	(132		)	(138		)
Actuarial (gains) losses	(327		)	160
Actuarial losses (gains)							306			(327		)
Other	2			—			—			2
Accrued postretirement health care costs at end of year	$	2,317		$	2,663		$	2,613		$	2,317

The current portion of Altria Group, Inc.’s accrued postretirement health care costs of $~~162~~152 million and $~~159~~162 million

at December 31, ~~2013~~2014 and ~~2012~~2013, respectively, is included in other accrued liabilities on the consolidated balance sheets.

The Patient Protection and Affordable Care Act (“PPACA”), as amended by the Health Care and Education Reconciliation Act of 2010, was signed into law in March 2010. The PPACA mandates health care reforms with staggered effective dates from 2010 to 2018, including the imposition of an excise tax on high cost health care plans effective in 2018. The additional accumulated postretirement liability resulting from the PPACA, which is not material to Altria Group, Inc., has been included in Altria Group, Inc.’s accumulated postretirement benefit obligation at December 31, ~~2013~~2014 and ~~2012~~2013. Given the complexity of the PPACA and the extended time period during which implementation is expected to occur, future adjustments to Altria Group, Inc.’s accumulated postretirement benefit obligation may be necessary.

The following assumptions were used to determine Altria Group, Inc.’s postretirement benefit obligations at December 31:


	2013		2012		2014		2013
Discount rate	4.8	%	3.9	%	4.0	%	4.8	%
Health care cost trend rate assumed for next year	7.0		7.5		7.0		7.0
Ultimate trend rate	5.0		5.0		5.0		5.0
Year that the rate reaches the ultimate trend rate	2018		2018		2019		2018

At December 31, 2014, Altria Group, Inc. updated its mortality assumptions to reflect longer life expectancy for its postretirement health care plan participants, resulting in an increase of $110 million to the accrued postretirement health care costs at December 31, 2014.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have had the following effects as of December 31, ~~2013~~2014:


	One-Percentage-Point Increase		One-Percentage-Point Decrease		One-Percentage-Point Increase		One-Percentage-Point Decrease
Effect on total of service and interest cost	6.8	%	(6.0	)%	6.3	%	(5.4	)%
Effect on postretirement benefit obligation	6.7		(5.8	)	7.2		(6.0	)

Altria Group, Inc.’s estimated future benefit payments for its postretirement health care plans at December 31, ~~2013~~2014, were as follows:


(in millions)
2014	$	162
2015	168		$	152
2016	171		157
2017	171		158
2018	169		158
2019-2023	774
2019			155
2020-2024			722

Postemployment Benefit Plans

Altria Group, Inc. sponsors postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs

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~~Notes to Consolidated Financial Statements~~

~~_________________________~~

consisted of the following for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011:~~2012:

(in millions) 2013
2012
2011
Service cost $ 1
$ 1
$ 1
Interest cost 1
1
2
Amortization of net loss 18
17
16
Other (17 ) (7 ) 121
Net postemployment costs $ 3
$ 12
$ 140

For the year ended December 31, 2011, “other” postemployment cost shown in the table above primarily reflects incremental severance costs related to the 2011 Cost Reduction Program. For further information on the 2011 Cost Reduction Program, see Note 4. ~~Asset Impairment, Exit, Implementation and Integration Costs~~.



(in millions)	2014		2013			2012
Service cost	$	1	$	1		$	1
Interest cost	1		1			1
Amortization of net loss	18		18			17
Other	2		(17		)	(7		)
Net postemployment costs	$	22	$	3		$	12

For the postemployment benefit plans, the estimated net loss that is expected to be amortized from accumulated other comprehensive losses into net postemployment costs during ~~2014~~2015 is approximately $1619 million.

Altria Group, Inc.’s postemployment benefit plans are not funded. The changes in the benefit obligations of the plans at

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Notes to Consolidated Financial Statements

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December 31, ~~2013~~2014 and ~~2012~~2013, were as follows:



(in millions)	2014			2013
Accrued postemployment costs at beginning of year	$	65		$	149
Service cost	1			1
Interest cost	1			1
Benefits paid	(30		)	(65		)
Actuarial losses (gains) and assumption changes	30			(4		)
Other	2			(17		)
Accrued postemployment costs at end of year	$	69		$	65

(in millions) 2013
2012
Accrued postemployment costs at beginning of year $ 149
$ 270
Service cost 1
1
Interest cost 1
1
Benefits paid (65 ) (143 )
Actuarial (gains) losses and
assumption changes
(4 ) 27
Other (17 ) (7 )
Accrued postemployment costs at
end of year
$ 65
$ 149

The accrued postemployment costs were determined using a weighted-average discount rate of ~~3.7%~~3.0% and ~~2.4%~~3.7% in ~~2013~~2014 and ~~2012~~2013, respectively, an assumed weighted-average ultimate annual turnover rate of 0.5% in ~~2013~~2014 and ~~2012~~2013, assumed compensation cost increases of 4.0% in ~~2013~~2014 and ~~2012~~2013, and assumed benefits as defined in the respective plans. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.

Comprehensive Earnings/Losses

The amounts recorded in accumulated other comprehensive losses at December 31, ~~2013~~2014 consisted of the following:


(in millions)	Pensions			Post- retirement			Post- employment			Total			Pensions			Post- retirement			Post- employment			Total
Net loss	$	(1,691	)	$	(539	)	$	(128	)	$	(2,358	)	$	(2,637	)	$	(823	)	$	(122	)	$	(3,582	)
Prior service (cost) credit	(33		)	307			—			274			(23		)	264			—			241
Deferred income taxes	673			90			48			811			1,037			218			46			1,301
Amounts recorded in accumulated other comprehensive losses	$	(1,051	)	$	(142	)	$	(80	)	$	(1,273	)	$	(1,623	)	$	(341	)	$	(76	)	$	(2,040	)

The amounts recorded in accumulated other comprehensive losses at December 31, ~~2012~~2013 consisted of the following:

(in millions) Pensions

Post-
retirement

Post-
employment

Total
Net loss $ (3,186 ) $ (917 ) $ (169 ) $ (4,272 )
Prior service (cost) credit (36 ) 354
—
318
Deferred income taxes 1,254
221
65
1,540
Amounts recorded in accumulated other comprehensive losses $ (1,968 ) $ (342 ) $ (104 ) $ (2,414 )



(in millions)	Pensions			Post- retirement			Post- employment			Total
Net loss	$	(1,691	)	$	(539	)	$	(128	)	$	(2,358	)
Prior service (cost) credit	(33		)	307			—			274
Deferred income taxes	673			90			48			811
Amounts recorded in accumulated other comprehensive losses	$	(1,051	)	$	(142	)	$	(80	)	$	(1,273	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2014 were as follows:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	147		$	22		$	18		$	187
Prior service cost/credit	10			(43		)	—			(33		)
Deferred income taxes	(61		)	8			(7		)	(60		)
	96			(13		)	11			94
Other movements during the year:
Net loss	(1,093		)	(306		)	(12		)	(1,411		)
Deferred income taxes	425			120			5			550
	(668		)	(186		)	(7		)	(861		)
Total movements in other comprehensive earnings/losses	$	(572	)	$	(199	)	$	4		$	(767	)

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Notes to Consolidated Financial Statements

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The movements in other comprehensive earnings/losses during the year ended December 31, 2013 were as follows:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	271		$	51		$	18		$	340
Prior service cost/credit	10			(45		)	—			(35		)
Other expense:
Net loss	6			—			—			6
Deferred income taxes	(111		)	(2		)	(7		)	(120		)
	176			4			11			191
Other movements during the year:
Net loss	1,218			327			23			1,568
Prior service cost/credit	(7		)	(2		)	—			(9		)
Deferred income taxes	(470		)	(129		)	(10		)	(609		)
	741			196			13			950
Total movements in other comprehensive earnings/losses	$	917		$	200		$	24		$	1,141

The movements in other comprehensive earnings/losses during the year ended December 31, 2012 were as follows:



(in millions)	Pensions			Post- retirement			Post- employment			Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss	$	224		$	40		$	17		$	281
Prior service cost/credit	10			(45		)	—			(35		)
Other expense (income):
Net loss	21			—			—			21
Prior service cost/credit	—			(26		)	—			(26		)
Deferred income taxes	(99		)	12			(6		)	(93		)
	156			(19		)	11			148
Other movements during the year:
Net loss	(643		)	(161		)	(11		)	(815		)
Deferred income taxes	249			63			3			315
	(394		)	(98		)	(8		)	(500		)
Total movements in other comprehensive earnings/losses	$	(238	)	$	(117	)	$	3		$	(352	)

~~The movements in other comprehensive earnings/losses during the year ended~~ ~~December 31, 2011~~ ~~were as follows:~~

(in millions) Pensions

Post-
retirement

Post-
employment

Total
Amounts reclassified to net earnings as components of net periodic benefit cost:
Amortization:
Net loss $ 171
$ 39
$ 16
$ 226
Prior service cost/credit 14
(21 ) —
(7 )
Deferred income taxes (72 ) (7 ) (6 ) (85 )
113
11
10
134
Other movements during the year:
Net loss (672 ) (188 ) (40 ) (900 )
Prior service cost/credit 2
264
—
266
Deferred income taxes 262
(27 ) 14
249
(408 ) 49
(26 ) (385 )
Total movements in other comprehensive earnings/losses $ (295 ) $ 60
$ (16 ) $ (251 )

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~~Notes to Consolidated Financial Statements~~

~~_________________________~~

Note 17. Additional Information


	For the Years Ended December 31,									For the Years Ended December 31,
(in millions)	2013			2012			2011			2014			2013			2012
Research and development expense	$	153		$	136		$	128		$	167		$	153		$	136
Advertising expense	$	7		$	6		$	5		$	30		$	7		$	6
Interest and other debt expense, net:
Interest expense	$	1,053		$	1,128		$	1,220		$	857		$	1,053		$	1,128
Interest income	(4		)	(2		)	(4		)	(49		)	(4		)	(2		)
	$	1,049		$	1,126		$	1,216		$	808		$	1,049		$	1,126
Rent expense	$	49		$	49		$	63		$	52		$	49		$	49

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Notes to Consolidated Financial Statements

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Minimum rental commitments and sublease income under non-cancelable operating leases in effect at December 31, ~~2013~~2014, were as follows:


(in millions)	Rental Commitments		Sublease Income		Rental Commitments		Sublease Income
2014	$	54	$	3
2015	45		5		$	56	$	5
2016	39		5		52		5
2017	29		4		41		4
2018	25		5		31		4
2019					24		4
Thereafter	90		23		118		20
	$	282	$	45	$	322	$	42

The activity in the allowance for discounts and allowance for returned goods for the years ended December 31, 2014, 2013 and 2012 was as follows:



(in millions)	2014						2013						2012
	Discounts			Returned Goods			Discounts			Returned Goods			Discounts			Returned Goods
Balance at beginning of year	$	—		$	41		$	—		$	42		$	—		$	54
Charged to costs and expenses	599			179			610			150			619			114
Deductions ⁽¹⁾	(599		)	(174		)	(610		)	(151		)	(619		)	(126		)
Balance at end of year	$	—		$	46		$	—		$	41		$	—		$	42

⁽¹⁾ Represents the recording of discounts and returns for which allowances were created.

Note 18. Contingencies

Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees. Various types of claims may be raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors or distributors.

Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related and other litigation are or can be significant and, in certain cases, range in the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. In certain cases, plaintiffs claim that defendants’ liability is joint and several. In such cases, Altria Group, Inc. or its subsidiaries may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Altria Group, Inc. or its subsidiaries under certain circumstances may have to pay more than their proportionate share of any bonding- or judgment-related amounts.

~~amounts.~~ Furthermore, in those cases where plaintiffs are successful, Altria Group, Inc. or its subsidiaries may also be required to pay interest and attorneys’ fees.

Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 4546 states and Puerto Rico limit the dollar amount of bonds or require no bond at all. As discussed below, however, tobacco litigation plaintiffs have challenged the constitutionality of Florida’s bond cap statute in several cases and plaintiffs may challenge state bond cap statutes in other jurisdictions as well. Such challenges may include the applicability of state bond caps in federal court. Although Altria Group, Inc. cannot predict the outcome of such challenges, it is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome of one or more such challenges.

Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except to the extent discussed elsewhere in this Note 18. Contingencies: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related

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Notes to Consolidated Financial Statements

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cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.

Altria Group, Inc. and its subsidiaries have achieved substantial success in managing litigation. Nevertheless, litigation is subject to uncertainty and significant challenges remain. It is possible that the consolidated results of operations, cash flows or financial position of Altria Group, Inc., or one or more of its subsidiaries, could be materially

affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. Each of the companies has defended, and will continue to defend, vigorously against litigation challenges. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so.

Overview of Altria Group, Inc. and/or PM USA Tobacco-Related Litigation

▪Types and Number of Cases: Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs; (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding; (iii) health care cost recovery cases brought by governmental (both domestic and foreign) plaintiffs seeking

reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits; (iv) class action suits alleging that the uses of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment, breach of warranty or violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”); and (v) other tobacco-related litigation described below. Plaintiffs’ theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and “Lights/Ultra Lights” cases are discussed below.

The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in some instances, Altria Group, Inc. as of December 31, 2014, December 31, 2013, ~~December 31, 2012~~ and December 31, ~~2011~~2012.


Type of Case	Number of Cases Pending as of December 31, 2013	Number of Cases Pending as of December 31, 2012	Number of Cases Pending as of December 31, 2011	Number of Cases Pending as of December 31, 2014	Number of Cases Pending as of December 31, 2013	Number of Cases Pending as of December 31, 2012
Individual Smoking and Health Cases⁽¹⁾	67	77	82	67		77
Smoking and Health Class Actions and Aggregated Claims Litigation ⁽²⁾	6	7		5	6	7
Health Care Cost Recovery Actions ⁽³⁾	1			1
“Lights/Ultra Lights” Class Actions	15	14	17	12	15	14
Tobacco Price Cases	1

⁽¹⁾ Does not include ~~2,572~~2,558 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action in Florida, which was settled in 1997 (Broin). The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. Also, does not include individual smoking and health cases brought by or on behalf of plaintiffs in Florida state and federal courts following the decertification of the Engle case (discussed below in Smoking and Health Litigation - Engle Class Action).

⁽²⁾ Includes as one case the 600 civil actions (of which 346 were actions against PM USA) that were to be tried in a single proceeding in West Virginia (In re: Tobacco Litigation). The West Virginia Supreme Court of Appeals has ruled that the United States Constitution did not preclude a trial in two phases in this case. Issues related to defendants’ conduct and whether punitive damages are permissible were tried in the first phase. Trial in the first phase of this case began in April 2013. In May 2013, the jury returned a verdict in favor of defendants on the claims for design defect, negligence, failure to warn, breach of warranty, and concealment and declined to find that the defendants’ conduct warranted punitive damages. Plaintiffs prevailed on their claim that ventilated filter cigarettes should have included use instructions for the period 1964 - 1969. The second phase, if any, will consist of individual trials to determine liability and compensatory damages on that claim only. In ~~July 2013, plaintiffs filed a renewed motion for judgment as a matter of law and a motion for a new trial. Also in July 2013, defendants filed a motion for judgment notwithstanding the verdict. In~~ August 2013, the trial court denied all post-trial motions. The trial court entered final judgment onin October ~~28, 2013. On~~2013 and, in November ~~26,~~ 2013, plaintiffs filed their notice of appeal to the West Virginia Supreme Court of Appeals. On November 3, 2014, the West Virginia Supreme Court of Appeals affirmed the final judgment. Plaintiffs filed a petition for rehearing with the West Virginia Supreme Court of Appeals, which the court denied on January 8, 2015.

⁽³⁾ See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below.

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▪International Tobacco-Related Cases: As of January 27, ~~2014,~~2015, PM USA is a named defendant in ~~Israel in~~ ~~one~~ ~~“Lights” class action. PM USA is a named defendant in~~ ~~nine~~ten health care cost recovery actions in Canada, ~~seven~~eight of which also name Altria Group, Inc. as a defendant. PM USA and Altria Group, Inc. are also named defendants in seven smoking and health class actions filed in various Canadian provinces. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

▪Tobacco-Related Cases Set for Trial: As of January 27, ~~2014, 51~~ 2015, 57Engle progeny cases and ~~four~~three individual smoking and health cases against PM USA are set for trial in ~~2014.~~2015. Cases against other companies in the tobacco industry are also scheduled for trial in ~~2014.~~2015. Trial dates are subject to change.

▪Trial Results: Since January 1999, excluding the Engle progeny cases (separately discussed below), verdicts have been returned in 56 smoking and health, “Lights/Ultra Lights” and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 38 of the 56 cases. These 38 cases were tried in Alaska (1), California (6), Florida (10), Louisiana (1), Massachusetts (1), Mississippi (1), Missouri (3), New Hampshire (1), New Jersey (1), New York (5), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2) and West Virginia (2). A motion for a new trial was granted in one of the cases in Florida and in the case in Alaska. In the Alaska case (Hunter), the trial court withdrew its order for a new trial upon PM USA’s motion for reconsideration. ~~Plaintiff’s notice~~Oral argument of plaintiff’s appeal of this ruling ~~remains pending.~~occurred in September 2014. See Types and

Number of Cases above for a discussion of the trial results in In re: Tobacco Litigation (West Virginia consolidated cases).

Of the 18 non-Engle progeny cases in which verdicts were returned in favor of plaintiffs, 1415 have reached final resolution. A verdict against defendants in one health care cost recovery case (Blue Cross/Blue Shield) was reversed and all claims were dismissed with prejudice. In addition, a verdict against defendants in a purported “Lights” class action in Illinois (Price) was reversed and the case was dismissed with prejudice in December ~~2006. The~~2006, but plaintiff in ~~Price~~ is seeking to ~~reopen the judgment dismissing this case and to~~ reinstate the ~~original verdict.~~verdict, which an intermediate appellate court ordered in April 2014. PM USA filed a petition for leave to appeal, which automatically stayed the April 2014 order. In September 2014, the Illinois Supreme Court granted PM USA’s motion for leave to appeal. See “Lights/Ultra Lights” Cases - The Price Case below for a discussion of developments in Price.

As of January 27, ~~2014,~~2015, 5070 state and federal Engle progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court’s Engle decision. ~~Twenty-five~~Thirty-six verdicts were returned in favor of plaintiffs and 2534 verdicts were returned in favor of PM USA. See Smoking and Health Litigation - Engle Progeny Trial Court Results below for a discussion of these verdicts.

▪Judgments Paid and Provisions for Tobacco and Health Litigation (Including Engle Progeny Litigation):

After exhausting all appeals in those cases resulting in adverse verdicts associated with tobacco-related litigation, since October 2004, PM USA has paid in the aggregate judgments (and related costs and fees) totaling approximately $~~261~~266 million and interest totaling approximately $~~142~~144 million as of December 31, ~~2013~~.2014. These amounts include payments for Engle progeny judgments (and related costs and fees) totaling approximately $~~7.8~~13.8 million and interest totaling approximately $~~900,000~~2.5 million.

The changes in Altria Group, Inc.’s accrued liability for tobacco and health judgments, including related interest costs, for the periods specified below were as follows:


	For the Years Ended December 31,									For the Years Ended December 31,
	2013			2012			2011			2014			2013			2012
	(in millions)									(in millions)
Accrued liability for tobacco and health judgments at beginning of period	$	—		$	122		$	30		$	3		$	—		$	122
Pre-tax charges for tobacco and health judgments	18			4			98			11			18			4
Pre-tax charges for related interest costs	4			1			64			2			4			1
Pre-tax charges related to implementation of corrective communications remedy pursuant to the federal government’s lawsuit										31			—			—
Payments	(19		)	(127		)	(70		)	(8		)	(19		)	(127		)
Accrued liability for tobacco and health judgments at end of period	$	3		$	—		$	122		$	39		$	3		$	—

The accrued liability for tobacco and health ~~judgments,~~litigation, including related interest costs, was included in ~~other accrued~~ liabilities on Altria Group, Inc.’s consolidated balance sheets. Pre-tax charges for tobacco and health judgments and corrective communications were included in marketing, administration and research costs on Altria Group, Inc.’s consolidated statements of earnings. Pre-tax charges for related interest costs were included in interest and other debt expense, net on Altria Group, Inc.’s consolidated statements of earnings.

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▪Security for Judgments: To obtain stays of judgments pending current appeals, as of December 31, ~~2013~~,2014, PM USA has posted various forms of security totaling approximately $2761 million, the majority of which has been collateralized with cash deposits that are included in other assets on the consolidated balance sheet.

Smoking and Health Litigation

▪Overview: Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health cases seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk,

comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.

▪Non-Engle Progeny Trial Results: Summarized below are the non-Engle progeny smoking and health cases pending during ~~2013~~2014 or ~~2014~~2015 in which verdicts were returned in favor of plaintiffs and against PM USA. Charts listing the verdicts for plaintiffs in the Engle progeny cases can be found in Smoking and Health Litigation - Engle Progeny Trial Court Results below.

▪

Mulholland: In July 2013, a jury in the U.S. District Court for the Southern District of New York returned a verdict in favor of plaintiff and awarded $5.5 million in compensatory damages against PM USA. In August 2013, after taking into account a prior recovery by the plaintiff against third parties, the court entered final judgment in the amount of $4.9 million. In September 2013, PM USA filed a renewed motion for judgment as a matter of law and plaintiff moved to modify the amount of the judgment. In December 2013, the trial court denied the parties’ post-trial motions. In January 2014, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit, plaintiff cross-appealed and ~~awarded~~ ~~$5.5 million~~ ~~in compensatory damages against PM USA. In~~ ~~August 2013, after taking into account a prior recovery by the plaintiff against third parties, the court entered final judgment in the amount of~~ ~~$4.9 million~~. In September 2013, PM USA filed a renewed motion for judgment as a matter of law and plaintiff moved to modify the amount of the judgment. On December 9, 2013, the trial court denied the parties’ post-trial motions. On January 7, 2014, PM USA filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit and on January 21, 2014, plaintiff cross appealed. On January 24, 2014, PM USA posted a bond in the amount of $5.5 million. On January 7, 2015, the U.S. Court of Appeals for the Second Circuit affirmed the trial court’s decision. In the fourth quarter of 2014, PM USA recorded a provision on its consolidated balance sheet in the amount of approximately $5 million for the judgment plus interest and paid this amount on January 21, 2015.

▪

~~D. Boeken: This litigation has concluded. In~~ ~~August 2011, a California jury returned a verdict in favor of plaintiff, awarding~~ ~~$12.8 million~~ ~~in compensatory damages against PM USA. PM USA’s motions for judgment notwithstanding the verdict and for a new trial were denied in October 2011. PM USA appealed and posted a bond in the amount of~~ ~~$12.8 million~~ in ~~November 2011~~. In July 2013, the California Court of Appeal affirmed the judgment. PM USA sought a petition for rehearing, which the California Court of Appeal denied in July 2013. In the third quarter of 2013, PM USA recorded a pre-tax provision of $12.8 million related to damages and costs and ~~$2.8 million~~ ~~related to interest. In~~ ~~September 2013, PM USA paid an amount of approximately~~ ~~$15.6 million~~ ~~in satisfaction of the judgment and associated~~

Schwarz:In March 2002, an Oregon jury awarded $168,500 in compensatory damages and $150 million in punitive damages against PM USA. In May 2002, the trial court reduced the punitive damages award to $100 million. In May 2006, the Oregon Court of Appeals affirmed the compensatory damages verdict, reversed the award of punitive damages and remanded the case to the trial court for a second trial to determine the amount of punitive damages, if any. In June 2006, plaintiff petitioned the Oregon Supreme Court to review the portion of the court of appeals’ decision reversing and remanding the case for a new trial on punitive damages. In June 2010, the Oregon Supreme Court affirmed the court of appeals’ decision and remanded the case to the trial court for a new trial limited to the question of punitive damages. In December 2010, the Oregon Supreme Court reaffirmed its earlier ruling and awarded PM USA approximately $500,000 in costs. In March 2011, PM USA filed a claim against the plaintiff for its costs and disbursements on appeal, plus interest. Trial on the amount of punitive damages began in January 2012. In February 2012, the jury awarded plaintiff $25 million in punitive damages. In September 2012, PM USA filed a notice of appeal from the trial court’s judgment with the Oregon Court of Appeals. Oral argument at the Oregon Court of Appeals occurred in September 2014.

▪

~~Schwarz: In~~ ~~March 2002, an Oregon jury awarded~~ ~~$168,500~~ ~~in compensatory damages and~~ ~~$150 million~~ ~~in punitive damages against PM USA. In~~ ~~May 2002, the trial court reduced the punitive damages award to~~ ~~$100 million~~. In May 2006, the Oregon Court of Appeals affirmed the compensatory damages verdict, reversed the award of punitive damages and remanded the case to the trial court for a second trial to determine the amount of punitive damages, if any. In June 2006, plaintiff petitioned the Oregon Supreme Court to review the portion of the court of appeals’ decision reversing and remanding the case for a new trial on punitive damages. In June 2010, the Oregon Supreme Court affirmed the court of appeals’ decision and remanded the case to the trial court for a new trial limited to the question of punitive damages. In ~~December 2010, the Oregon Supreme Court reaffirmed its earlier ruling and awarded PM USA approximately~~ ~~$500,000~~ ~~in costs. In March 2011, PM USA filed a claim against the plaintiff for its costs and disbursements on appeal, plus interest. Trial on the amount of punitive damages began in January 2012. In~~ ~~February 2012, the jury awarded plaintiff~~ ~~$25 million~~ in punitive damages. In September 2012, PM USA filed a notice of appeal from the trial court’s judgment with the Oregon Court of Appeals. On January 27, 2014, plaintiff filed a motion to certify the appeal to the Oregon Supreme Court.

See Health Care Cost Recovery Litigation - Federal Government’s Lawsuit below for a discussion of the verdict and post-trial developments in the United States of America healthcare cost recovery case.

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▪Engle Class ~~Action~~Action:

In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA appealed.

In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into an interest-bearing escrow account that, regardless of the outcome of the judicial review, was to be paid to the court and the court was to determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.

In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The

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court further declared the following Phase I findings are entitled to res judicata effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that defendants were negligent. The court also reinstated compensatory damages awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiff’s claim was barred by the statute of limitations. In February 2008, PM USA paid approximately $3 million, representing its share of compensatory damages and interest, to the two individual plaintiffs identified in the Florida Supreme Court’s order.

In August 2006, PM USA sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury

findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the Florida Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking clarification of the applicability of the statute of limitations to non-members of the decertified class. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In January 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Florida Third District Court of Appeal or by the Florida

Supreme Court. In February 2007, the Florida Third District Court of Appeal denied defendants’ motion. In May 2007, defendants’ motion for a partial stay of the mandate pending the completion of appellate review was denied by the Florida Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States

Supreme Court. In October 2007, the United States Supreme Court denied defendants’ petition. In November 2007, the United States Supreme Court denied defendants’ petition for rehearing from the denial of their petition for writ of certiorari.

In February 2008, the trial court decertified the class, except for purposes of the May 2001 bond stipulation, and formally vacated the punitive damages award pursuant to the Florida Supreme Court’s mandate. In April 2008, the trial court ruled that certain defendants, including PM USA, lacked standing with respect to allocation of the funds escrowed under the May 2001 bond stipulation and would receive no credit at that time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former Engle class members.

In May 2008, the trial court, among other things, decertified the limited class maintained for purposes of the May 2001 bond stipulation and, in July 2008, severed the remaining plaintiffs’ claims except for those of Howard Engle. The only remaining plaintiff in the Engle case, Howard Engle, voluntarily dismissed his claims with prejudice.

▪Engle Progeny Cases: The deadline for filing Engle progeny cases, as required by the Florida Supreme Court’s Engledecision, expired in January 2008. As of ~~December 31, 2013~~,January 27, 2015, approximately 3,200 state court cases were pending against PM USA or Altria Group, Inc. asserting individual claims by or on behalf of approximately ~~4,400~~4,200 state court plaintiffs. Furthermore, as of

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~~December 31, 2013,~~ January 27, 2015, approximately ~~1,200~~700 cases were pending against PM USA in federal district court asserting individual claims by or on behalf of a similar number of federal court plaintiffs. Most of these federal cases are pending in the U.S. District Court for the Middle District of Florida. Because of a number of factors, including, but not limited to, docketing delays, duplicated filings and overlapping dismissal orders, these numbers are estimates.~~The U.S. District Court for the Middle District of Florida (Jacksonville) dismissed~~ ~~521~~ ~~and~~ ~~306~~ ~~Engle~~ ~~progeny cases with prejudice in January 2013 and in June 2013, respectively. In February 2013, plaintiffs appealed the January dismissal to the U.S Court of Appeals for the Eleventh Circuit.~~

▪~~Federal~~ ~~Engle~~ ~~Progeny Cases:~~ ~~Three federal district courts (in the~~ ~~Merlob~~, ~~B. Brown~~ ~~and~~ ~~Burr~~ ~~cases) ruled in 2008 that the findings in the first phase of the~~ ~~Engle~~ ~~proceedings cannot be used to satisfy elements of plaintiffs’ claims, and two of those rulings (B. Brown~~ ~~and~~ ~~Burr~~) were certified by the trial court for interlocutory review. The certification in both cases was granted by the U.S. Court of Appeals for the Eleventh Circuit and the appeals were consolidated. In February 2009, the appeal in ~~Burr~~ was dismissed for lack of prosecution, and, in September 2012, the district court dismissed the case on statute of limitations grounds. Plaintiff is appealing the dismissal. In July 2010, the Eleventh Circuit ruled in ~~B. Brown~~ ~~that, as a matter of Florida law, plaintiffs do not have an unlimited right to use the findings from the original~~ ~~Engle~~ ~~trial to meet their burden of establishing the elements of their claims at trial. The Eleventh Circuit did not reach the issue of whether the use of the~~ ~~Engle~~ findings violates defendants’ due process rights. Rather, the court held that plaintiffs may only use the findings to establish those specific facts, if any, that they demonstrate with a reasonable degree of certainty were actually decided by the original ~~Engle~~ ~~jury. The Eleventh Circuit remanded the case to the district court to determine what specific factual findings the~~ ~~Engle~~ ~~jury actually made.~~

~~After the remand of~~ ~~B. Brown,~~ ~~the Eleventh Circuit’s ruling on Florida state law was superseded by state appellate rulings (discussed below and in~~ ~~Appeals of Engle Progeny Verdicts), which initially included~~ ~~Martin, an~~ ~~Engle~~ ~~progeny case against R.J. Reynolds Tobacco Company (“R.J. Reynolds”) in Escambia County, and~~ ~~J. Brown,~~ an ~~Engle~~ ~~progeny case against R.J. Reynolds in Broward County. More recently, the Eleventh Circuit’s ruling on Florida state law has been superseded by the Florida Supreme Court’s decision in~~ ~~Douglas, discussed below.~~

~~Following~~ ~~Martin~~ ~~and~~ ~~J. Brown, in the~~ ~~Waggoner~~ ~~case, the U.S. District Court for the Middle District of Florida (Jacksonville) ruled in December 2011 that application of the~~ ~~Engle~~ ~~findings to establish the wrongful conduct elements of plaintiffs’ claims consistent with~~ ~~Martin~~ or ~~J. Brown~~ ~~did not violate defendants’ due process rights. PM USA and the other defendants sought appellate review of the due process ruling. In February 2012, the district court denied the motion for~~

~~interlocutory appeal, but did apply the ruling to all active pending federal~~ ~~Engle~~ ~~progeny cases. As a result, R.J. Reynolds appealed the rulings in the~~ ~~Walker~~ ~~and~~ ~~Duke~~ cases to the Eleventh Circuit, which, in September 2013, rejected the due process defense and affirmed the underlying judgments. In October 2013, R.J. Reynolds filed a petition for rehearing or rehearing ~~en banc~~. Thereafter, the Eleventh Circuit vacated its decision and substituted a new opinion on October 31, 2013. On November 7, 2013, the Eleventh Circuit denied R.J. Reynolds’ initial petition for rehearing and, on November 13, 2013, R.J. Reynolds filed a petition for rehearing ~~en banc~~ ~~or panel rehearing of the substituted decision, which was denied on January 6, 2014.~~

~~Most of the~~ ~~Engle~~ ~~progeny cases pending against PM USA in the U.S. District Court for the Middle District of Florida (Jacksonville) asserting individual claims by or on behalf of approximately~~ ~~1,200~~ ~~plaintiffs remain stayed. There are currently approximately~~ ~~750~~ active cases pending in federal court, including cases that became active in August 2013 and in January 2014. In January 2013, the district court ordered the parties to negotiate an aggregate settlement mediation of all pending cases. In April 2013, the mediators reported to the district court that the cases have not been resolved and that the parties have not agreed to a mechanism for settlement. In July 2013, the district court issued an order transferring, for case management purposes, all the Middle District of Florida Engle progeny cases to a judge presiding in the District of Massachusetts. The ~~district court~~order directed that the cases will remain in the Middle District of Florida and that such judge will be designated a judge of that district for purposes of managing the cases. The U.S. District Court for the Middle District of Florida dismissed a significant number of cases, of which approximately 750 were appealed by plaintiffs to the U.S. Court of Appeals for the Eleventh Circuit. In September 2014, the Eleventh Circuit affirmed those dismissals. All remaining cases pending in the Middle District of Florida have been activated or are scheduled to be activated by May 2015.

▪~~Florida Bond Cap Statute:~~ ~~In June 2009, Florida amended its existing bond cap statute by adding a~~ ~~$200 million~~ ~~bond cap that applies to all state~~ Engle ~~progeny lawsuits in the aggregate~~Progeny Trial Results: As of January 27, 2015, 70 federal and ~~establishes individual bond caps for individual~~ ~~Engle~~ ~~progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs in three~~ state Engle progeny cases ~~against R.J. Reynolds~~involving PM USA have resulted in ~~Alachua County, Florida (Alexander~~, ~~Townsend~~ ~~and~~ ~~Hall) and one case in Escambia County (Clay) challenged the constitutionality of the bond cap statute. The Florida Attorney General intervened in these cases in defense of the constitutionality of the statute.~~

~~Trial court rulings were rendered in~~ ~~Clay~~, ~~Alexander~~, ~~Townsend~~ ~~and~~ ~~Hall~~ ~~rejecting the plaintiffs’ bond cap statute challenges in those cases. The plaintiffs unsuccessfully appealed these rulings. In~~ ~~Alexander~~, ~~Clay~~ ~~and~~ ~~Hall, the District Court of Appeal for the First District of Florida affirmed the trial court decisions and certified the decision in~~ ~~Hall~~ ~~for appeal to~~verdicts since the Florida Supreme Court ~~but declined to certify the question of the constitutionality of the bond cap statute in~~ ~~Clay~~ ~~and~~ ~~Alexander. The Florida Supreme Court granted review of the~~ ~~Hall~~ ~~decision, but, in September 2012, the court dismissed the appeal as moot. In October 2012, the~~

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~~Florida Supreme Court denied the plaintiffs’ rehearing petition. In August 2013, in~~ ~~Calloway~~, discussed further below, plaintiff filed a motion in the trial court to determine the sufficiency of the bond posted by defendants on the ground that the bond cap statute is unconstitutional, which was denied. No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to ~~Engle~~ progeny cases tried in federal court. However, in April 2013, PM USA, R.J. Reynolds and Lorillard Tobacco Company (“Lorillard”) filed a motion in the U.S. District Court for the Middle District of Florida (Jacksonville) to have the court apply the Florida bond cap statute to all federal ~~Engle~~ ~~progeny cases. In August 2013, the court denied the motion without prejudice on the grounds that it was premature to adjudicate such issue.~~

▪~~Engle~~ ~~Progeny Trial Results:~~ ~~As of January 27, 2014,~~ 50 ~~federal and state~~ ~~Engle~~ ~~progeny cases involving PM USA have resulted in verdicts since the Florida Supreme Court~~ Engle decision. ~~Twenty-five~~Thirty-six verdicts were returned in favor of plaintiffs.

~~Twenty-five~~Thirty-four verdicts were returned in favor of PM USA (Gelep, Kalyvas, Gil de Rubio, Warrick, Willis, Russo (formerly Frazier), C. Campbell, Rohr, Espinosa, Oliva, Weingart, Junious, Szymanski, Gollihue, McCray, Denton, Hancock, Wilder, D. Cohen, LaMotte, J. Campbell, Dombey, Haldeman, Jacobson, Blasco, Gonzalez, Reider, Banks, Surico, Davis, Baum, Bishop, Starbuck and ~~Blasco~~Vila). ~~While~~In addition, there have been a number of mistrials, only some of which have resulted in new trials as of January 27, 2015. The juries in theReider and Banks cases returned zero damages verdicts in favor of PM USA. The juries in the Weingart and Hancock cases returned verdicts against PM

USA awarding no damages, but the trial court in each case granted an additur. In the Russo case (formerly Frazier), however, the Florida

Third District Court of Appeal reversed the judgment in defendants’ favor in April 2012 and remanded the case for a new trial. Defendants sought review of the case in the Florida Supreme Court, which was granted in September 2013. Oral argument ~~is scheduled for~~occurred in April ~~10,~~ 2014 in the Florida Supreme ~~Court. In addition, there have been a number~~Court on the question of ~~mistrials, only some~~whether the statute of ~~which have resulted~~repose applies in ~~new trials as of January 27, 2014.~~

In ~~Lukacs, a case that was tried to verdict before the Florida Supreme Court~~ Engle ~~decision, the Florida Third District Court of Appeal in March 2010 affirmed~~ ~~per curiam~~ ~~the trial court decision without issuing an opinion. Under Florida procedure, further review of a~~ ~~per curiam~~ affirmance without opinion by the Florida Supreme Court is generally prohibited. Subsequently in 2010, after defendants’ petition for rehearing with the Court of Appeal was denied, defendants paid the judgment.progeny cases.

The charts below list the verdicts and post-trial developments in ~~the~~certain Engle progeny cases ~~that were pending during 2013 or 2014~~ in which verdicts were returned in favor of plaintiffs (including ~~Weingart~~ ~~and~~ Hancock, where the ~~verdicts~~verdict originally ~~were~~was returned in favor of PM USA). The first chart lists such cases that are ~~currently pending;~~pending as of January 27, 2015; the second chart lists such cases that were pending in 2014, but that are now concluded.

Currently-Pending Cases

Plaintiff: ~~Cuculino~~Brown

Date: January ~~17,~~2015

Verdict:

On January 21, 2015, a jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA awarding plaintiff approximately $8.3 million in compensatory damages and $9 million in punitive damages.

Plaintiff: Allen

Date: November 2014

Verdict:

On ~~January 17,~~November 26, 2014, a Duval County jury returned a verdict against PM USA and R.J. Reynolds Tobacco Company (“R.J. Reynolds”) awarding plaintiff approximately $3.1 million in compensatory damages and allocating 6% of the fault to PM USA. The jury also awarded approximately $7.76 million in punitive damages against each defendant. This was a retrial of a 2011 trial that awarded plaintiff $6 million in compensatory damages and $17 million in punitive damages against each defendant.

Post-Trial Developments:

On December 9, 2014, defendants filed various post-trial motions, including motions to set aside the verdict and motions for a new trial.

Plaintiff: Perrotto

Date: November 2014

Verdict:

On November 21, 2014, a Palm Beach County jury returned a verdict against PM USA, R.J. Reynolds, Lorillard Tobacco Company (“Lorillard”) and Liggett Group LLC (“Liggett Group”) awarding plaintiff approximately $4.1 million in compensatory damages and allocating 25% of the fault to PM USA (an amount of approximately $1.02 million).

Post-Trial Developments:

On December 4, 2014, the court entered final judgment. On December 5, 2014, plaintiff filed a motion for a new trial. On December 8, 2014, defendants filed various post-trial motions, including motions to set aside the verdict and motions for a new trial.

Plaintiff: Boatright

Date: November 2014

Verdict:

On November 10, 2014, a Polk County jury returned a verdict against PM USA and Liggett Group awarding plaintiff $15 million in compensatory damages and allocating 85% of the fault to PM USA (an amount of $12.75 million). On November 12, 2014, the jury

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awarded plaintiff approximately $19.7 million in punitive damages against PM USA and $300,000 in punitive damages against Liggett Group.

Post-Trial Developments:

On November 25, 2014, PM USA filed various post-trial motions. On January 20, 2015, the court denied PM USA’s motions for a new trial and for remittitur, but agreed to reduce the compensatory damages award by the jury’s assessment of comparative fault.

Plaintiff: Kerrivan

Date: October 2014

Verdict:

A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA and R.J. Reynolds awarding plaintiff $15.8 million in compensatory damages and allocating 50% of the fault to PM USA. The jury also awarded plaintiff $25.3 million in punitive damages and allocated $15.7 million to PM USA.

Post-Trial Developments:

The trial court entered final judgment awarding plaintiff $15.8 million in compensatory damages and $25.3 million in punitive damages. On December 11, 2014, defendants filed various post-trial motions, including a renewed motion for judgment or for a new trial. Plaintiff agreed to waive the bond for the appeal.

Plaintiff: Lourie

Date: October 2014

Verdict:

A Hillsborough County jury returned a verdict against PM USA, R.J. Reynolds and Lorillard awarding plaintiff approximately $1.37 million in compensatory damages and allocating 27% of the fault to PM USA (an amount of approximately $370,000).

Post-Trial Developments:

On October 27, 2014, defendants filed a motion for judgment in accordance with their motion for directed verdict and a motion for a new trial. The court denied defendants’ post-trial motions on November 3, 2014 and, on November 6, 2014, entered final judgment. On November 7, 2014, defendants filed a notice of appeal to the Florida Second District Court of Appeal. On November 7, 2014, PM USA posted a bond in the amount of $370,318.

Plaintiff: Berger

Date: September 2014

Verdict:

A jury in the U.S. District Court for the Middle District of Florida returned a verdict against PM USA awarding plaintiff $6.25 million in compensatory damages and $20.76 million in punitive damages.

Post-Trial Developments:

The court entered final judgment against PM USA in September 2014. In October 2014, the court entered an order scheduling post-trial motions and confirming that plaintiff agreed to waive bond for appeal. Also in October 2014, PM USA filed a motion for a new trial or, in the alternative, remittitur of the jury’s damages awards.

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Plaintiff: Harris

Date: July 2014

Verdict:

The U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding approximately $1.73 million in compensatory damages and allocating 15% of the fault to PM USA.

Post-Trial Developments:

Defendants filed motions for a defense verdict because the jury’s findings indicated that plaintiff was not a member of the Engle class. On December 18, 2014, the court entered final judgment in favor of plaintiff. On January 15, 2015, defendants filed a renewed motion for judgment as a matter of law or, in the alternative, a motion for a new trial. Defendants also filed a motion to alter or amend the final judgment.

Plaintiff: Griffin

Date: June 2014

Verdict:

A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA awarding approximately $1.27 million in compensatory damages and allocating 50% of the fault to PM USA (an amount of approximately $630,000).

Post-Trial Developments:

The court entered final judgment against PM USA in July 2014. In August 2014, PM USA filed a motion to amend the judgment to reduce plaintiff’s damages by the amount paid by collateral sources, which the court denied in September 2014. In October 2014, PM USA posted a bond in the amount of $640,543 and filed a notice of appeal to the U.S. District Court of Appeals for the Eleventh Circuit.

Plaintiff: Burkhart

Date: May 2014

Verdict:

A jury in the U.S. District Court for the Middle District of Florida returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Lorillard awarding $5 million in compensatory damages and allocating fault among the defendants as follows: 15% to PM USA, 25% to R.J. Reynolds and 10% to Lorillard. The court declined defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault, imposing joint and several liability. The jury also awarded plaintiff $2.5 million in punitive damages, allocating $750,000 to PM USA.

Post-Trial Developments:

In July 2014, defendants filed post-trial motions, including a renewed motion for judgment or, alternatively, for a new trial or remittitur of the damages awards, which the court denied in September 2014. In October 2014, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit.

Plaintiff: Bowden

Date: March 2014

Verdict:

A Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $5 million in compensatory damages and allocated 30% of the fault to PM USA (an amount of $1.5 million).

Post-Trial Developments:

The court entered final judgment against defendants in March 2014.In April 2014, defendants filed post-trial motions, including motions for a new trial and to set aside the verdict. In May 2014, the court denied defendants’ post-trial motions. In June 2014, defendants filed a notice of appeal to the Florida First District Court of Appeal, and PM USA posted a bond in the amount of $1.5 million.

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Plaintiff: Goveia

Date:February 2014

Verdict:

An Orange County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $850,000 in compensatory damages and allocated 35% of the fault against each defendant (an amount of $297,500). The jury also awarded $2.25 million in punitive damages against each defendant.

Post-Trial Developments:

In February 2014, defendants filed post-trial motions, including motions to set aside the verdict and for a new trial. In April 2014, the court denied defendants’ motions and entered final judgment against defendants. In April 2014, defendants filed a notice of appeal to the Florida Fifth District Court of Appeal. In May 2014, PM USA posted a bond in the amount of $2.5 million.

Plaintiff: Cuculino

Date: January 2014

Verdict:

A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded plaintiff ~~$12,500,000~~$12.5 million in compensatory damages and allocated 40% of the fault to PM USA (an amount of ~~$5,000,000)~~$5 million).

Post-Trial Developments:

OnIn January ~~27,~~ 2014, the court entered final judgment against PM USA, and PM USA filed post-trial motions, including motions to set aside the verdict and for a new trial. In March 2014 and April 2014, the court denied PM USA’s post-trial motions. Also in April 2014, PM USA filed a notice of appeal to the Florida Third District Court of Appeal, plaintiff cross-appealed and PM USA posted a bond in the amount of $5 million.

Plaintiff: Rizzuto

Date: August 2013

Verdict:

~~In August 2013, a~~A Hernando County jury returned a verdict in favor of plaintiff and against PM USA and Liggett ~~Group LLC (“Liggett Group”).~~Group. The jury awarded plaintiff $~~12,550,000~~12.55 million in compensatory damages.

Post-Trial Developments:

In September 2013, defendants filed post-trial motions, including ~~motions~~a motion to ~~set aside the verdict and for a new trial. Also in~~reduce damages. In September 2013, the court granted a remittitur in part on economic damages, which the court reduced from $2.55 million to $1.1 million for a total award of $11.1 million in compensatory damages. The court declined defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault, imposing joint and several liability for the compensatory damages. The court denied all other motions except for defendants’ motion for a juror interview, which was granted. OnIn October ~~24,~~ 2013, defendants filed a notice of appeal to the Florida Fifth District Court of Appeal, which ordered resolution of the juror issue prior to appeal. OnIn December ~~10,~~ 2013,

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subsequent to the juror interview, the court entered an order that granted no relief with respect to the alleged misconduct of the juror. Plaintiff agreed to waive the bond for the appeal.

Plaintiff: Skolnick

Date: June 2013

Verdict:

~~In June 2013, a~~A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $~~2,555,000~~2.555 million in compensatory damages and allocated 30% of the fault to each defendant (an amount of $766,500).

Post-Trial Developments:

In June 2013, defendants and plaintiff filed post-trial motions. The court entered final judgment against defendants in July 2013. OnIn November ~~15,~~ 2013, the trial court denied plaintiff’s post-trial motion and, onin December 4, 2013, denied defendants’ post-trial motions. ~~On December 16, 2013, defendants~~Defendants filed a notice of appeal to the Florida Fourth District Court of Appeal, and onplaintiffs cross-appealed in December ~~23, 2013, plaintiffs cross-appealed. On~~2013. Also in December ~~19,~~ 2013, PM USA posted a bond in the amount of $766,500.

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Plaintiff: Starr-Blundell

Date: June 2013

Verdict:

~~In June 2013, a~~A Duval County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded plaintiff $500,000 in compensatory damages and allocated 10% of the fault to each defendant (an amount of $50,000).

Post-Trial Developments:

In June 2013, the defendants filed a motion to set aside the verdict and to enter judgment in accordance with their motion for directed verdict or, in the alternative, for a new trial, which was denied onin October ~~29,~~ 2013. OnIn November ~~27,~~ 2013, final judgment was entered in favor of plaintiff affirming the compensatory damages award. OnIn December ~~12,~~ 2013, plaintiff filed a notice of appeal to the Florida First District Court of ~~Appeal and, on December 13, 2013, defendants cross appealed.~~Appeal. Plaintiff agreed to waive the bond for the appeal.

Plaintiff: Ruffo

Date: May 2013

Verdict:

~~In May 2013, a~~A Miami-Dade County jury returned a verdict in favor of plaintiff and against PM USA and Lorillard. The jury awarded plaintiff $~~1,500,000~~1.5 million in compensatory damages and allocated 12% of the fault to PM USA (an amount of $180,000).

Post-Trial Developments:

In May 2013, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict, which the trial court denied in October 2013 and entered final judgment in favor of plaintiff. OnIn October ~~24,~~ 2013, PM USA and Lorillard appealed to the Florida Third District Court of ~~Appeal. On October 25, 2013,~~Appeal, and PM USA posted a bond in the amount of $180,000. On November 19, 2014, the Florida Third District Court of Appeal affirmed the final judgment. In the fourth quarter of 2014, PM USA recorded a provision on its consolidated balance sheet of approximately $193,000 for the judgment plus interest.

Plaintiff: Graham

Date: May 2013

Verdict:

~~In May 2013, a~~A jury in the U.S. District Court for the Middle District of Florida ~~(Jacksonville)~~ returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $2.75 million in compensatory damages and allocated 10% of the fault to PM USA (an amount of $275,000).

Post-Trial Developments:

In June 2013, defendants filed several post-trial motions, including motions for judgment as a matter of law and for a new trial, which the trial court denied in September 2013. In October 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh ~~Circuit. Also, in~~ ~~October 2013~~,Circuit, and PM USA posted a bond in the amount of $277,750.

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Plaintiff: Searcy

Date: April 2013

Verdict:

~~In April 2013, a~~A jury in the U.S. District Court for the Middle District of Florida ~~(Orlando)~~ returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $6 million in compensatory damages (allocating 30% of the fault to each defendant) and $10 million in punitive damages against each defendant.

Post-Trial Developments:

In June 2013, the trial court entered final judgment declining defendants’ request to reduce the compensatory damages award by the jury’s assessment of comparative fault and imposing joint and several liability for the compensatory damages. In July 2013, defendants filed various post-trial motions, including motions requesting reductions in damages. In September 2013, the district court reduced the compensatory damages award to $1 million and the punitive damages award to $1.67 million against each defendant. The district court denied all other post-trial motions. Plaintiffs filed a motion to reconsider the district court’s remittitur and, in the alternative, to certify the issue to the U.S. Court of Appeals for the Eleventh Circuit, both of which the court denied onin October ~~28,~~ 2013. OnIn November ~~15,~~ 2013, defendants filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit. OnIn December ~~16,~~ 2013, defendants filed an

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amended notice of appeal after the district court corrected a clerical error in the final judgment, ~~defendants filed an amended notice of appeal. On December 3, 2013,~~and PM USA posted a bond in the amount of approximately $2.2 million.

Plaintiff: Buchanan

Date: December 2012

Verdict:

~~In December 2012, a~~A Leon County jury returned a verdict in favor of plaintiff and against PM USA and Liggett Group. The jury awarded $5.5 million in compensatory damages and allocated 37% of the fault to each of the defendants (an amount of approximately $2 million).

Post-Trial Developments:

In December 2012, defendants filed several post-trial motions, including motions for a new trial and to set aside the verdict. In March 2013, the trial court denied all motions and entered final judgment against PM USA and Liggett Group refusing to reduce the compensatory damages award by plaintiff’s comparative fault and holding PM USA and Liggett Group jointly and severally liable for $5.5 million. In April 2013,, defendants filed a notice of appeal to the Florida First District Court of Appeal, and PM USA posted a bond in the amount of $2.5 million.

~~Plaintiff:~~ ~~Lock~~

~~Date:October 2012~~

~~Verdict:~~

~~A Pinellas County jury returned a verdict in favor~~In July 2014, the Florida First District Court of ~~plaintiff and against PM USA and R.J. Reynolds. The jury awarded~~ ~~$1.15 million~~ ~~in compensatory damages and allocated~~ 9%Appeal affirmed the judgment, but certified to the Florida Supreme Court the issue of the ~~fault to each~~statute of repose, which is currently before the ~~defendants (an amount of~~court in ~~$103,500~~).

~~Post-Trial Developments:~~

In November 2012, defendants filed several post-trial motions, including motions for a new trial, to set aside the verdict and to reduce the damages award by the amount of economic damages paid by third parties. In January 2013, the trial court orally denied all post-trial motions. In ~~February 2013, the trial court entered final judgment. PM USA’s portion of the damages was~~ ~~$103,500~~Hess. In ~~March 2013,~~August 2014, defendants filed a notice to invoke the discretionary jurisdiction of ~~appeal to~~ the Florida ~~Second District~~Supreme Court. In September 2014, the Florida Supreme Court ~~of Appeal. In~~ ~~March 2013, PM USA posted bonds in~~stayed the ~~amount~~case pending the outcome of ~~$103,500~~Hess.

Plaintiff: Hancock

Date: August 2012

Verdict:

A Broward County jury returned a verdict in the amount of zero damages and allocated 5% of the fault to each of the defendants (PM USA and R.J. Reynolds). The trial court granted an additur of approximately $110,000, which is subject to the jury’s comparative fault finding.

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~~finding.~~

Post-Trial Developments:

In August 2012, defendants moved to set aside the verdict and to enter judgment in accordance with their motion for directed verdict. Defendants also moved to reduce damages, which motion the court granted. The trial court granted defendants’ motion to set off the damages award by the amount of economic damages paid by third parties, which will reduce further any final award. In October 2012, the trial court entered final judgment. PM USA’s portion of the damages was approximately $700. In November 2012, both sides filed notices of appeal to the Florida Fourth District Court of Appeal.

Plaintiff: Calloway

Date: May 2012

Verdict:

A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds, Lorillard and Liggett Group. The jury awarded approximately $21 million in compensatory damages and allocated 25% of the fault against PM USA, but the trial court ruled that it will not apply the comparative fault allocations because the jury found against each defendant on the intentional tort claims. The jury also awarded approximately $17 million in punitive damages against PM USA, approximately $17 million in punitive damages against R.J. Reynolds, approximately $13 million in punitive damages against Lorillard and approximately $8 million in punitive damages against Liggett Group.

Post-Trial Developments:

In May and June 2012, defendants filed motions to set aside the verdict and for a new trial. In August 2012, the trial court denied the remaining post-trial motions and entered final judgment, reducing the total compensatory damages award to $16.1 million but leaving undisturbed the separate punitive damages awards. In September 2012, PM USA posted a bond in an amount of $1.5 million and defendants filed a notice of appeal to the Florida Fourth District Court of Appeal. In August 2013, plaintiff filed a motion to determine the sufficiency of the bond in the trial court on the ground that the bond cap statute is unconstitutional, which the court denied.

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Plaintiff: Hallgren

Date: January 2012

Verdict:

A Highland County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded approximately $2 million in compensatory damages and allocated 25% of the fault to PM USA (an amount of approximately $500,000). The jury also awarded $750,000 in punitive damages against each of the defendants.

Post-Trial Developments:

The trial court entered final judgment in March ~~2012~~.2012. In April 2012, PM USA posted a bond in an amount of approximately $1.25 million. In May 2012, defendants filed a notice of appeal to the Florida Second District Court of Appeal. In October 2013, the Second District Court of Appeal affirmed the ~~judgment, but certified the question of availability of punitive damages on plaintiff’s negligence and strict liability claims to the Florida Supreme Court as a matter of public importance. On~~judgment. In November ~~18,~~ 2013, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.

~~Plaintiff:~~ ~~Allen~~

~~Date:April 2011~~

~~Verdict:~~

~~A Duval County jury returned a verdict in favor of plaintiffs and against PM USA and R.J. Reynolds. The jury awarded a total of~~ ~~$6 million~~ ~~in compensatory damages and allocated~~ ~~15%~~ ~~of the fault to PM USA (an amount of~~ ~~$900,000). The jury also awarded~~ ~~$17 million~~ ~~in punitive damages against each of the defendants.~~

~~Post-Trial Developments:~~

In ~~May 2011, the trial court entered final judgment. In October 2011, the trial court granted defendants’ motion for~~ ~~remittitur, reducing the punitive damages award against PM USA to~~ ~~$2.7 million, and denied defendants’ remaining post-trial motions. PM USA filed a notice of appeal to the Florida First District Court of Appeal and posted a bond in the amount of~~ ~~$1.25 million~~ in

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~~November 2011~~. In May 2013, the First District Court of Appeal reversed and remanded the case for a new trial on the basis that the trial court erred in failing to submit the question of addiction causation to the jury. In June ~~2013, the plaintiff filed a motion for rehearing or rehearing~~ ~~en banc, which the First District Court of Appeal denied in July 2013. In August 2013, plaintiff filed a notice to invoke the discretionary jurisdiction of~~2014, the Florida Supreme ~~Court. In~~ ~~October 2013~~,Court stayed the ~~$1.25 million bond was returned to PM USA as a result of~~case pending the ~~First District Court of Appeal’s remand for a new trial.~~

~~Plaintiff:~~ ~~Tullo~~

~~Date:April 2011~~

~~Verdict:~~

~~A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA, Lorillard and Liggett Group. The jury awarded a total~~outcome of ~~$4.5 million~~Russo ~~in compensatory damages and allocated~~(presenting the same statute of repose issue as ~~45%~~Hess) ~~of the fault to PM USA (an amount of~~ ~~$2,025,000~~).

~~Post-Trial Developments:~~

In ~~April 2011, the trial court entered final judgment. In~~ ~~July 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and posted a~~ ~~$2 million~~ ~~bond. In August 2013, the Fourth District Court of Appeal affirmed the judgment. In October 2013, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court.~~

Plaintiff: Kayton (formerly Tate)

Date:July 2010

Verdict:

A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded $8$8 million in compensatory damages and allocated 64% of the fault to PM USA (an amount of approximately ~~$5.1 million~~)$5.1 million). The jury also awarded approximately ~~$16.2~~$16.2 million in punitive damages against PM USA.

Post-Trial Developments:

In August 2010,, the trial court entered final judgment, and PM USA filed its notice of appeal and posted a $5$5 million bond. In November 2012, the Florida Fourth District Court of Appeal reversed the punitive damages award and remanded the case for a new trial on plaintiff’s conspiracy claim. Upon retrial, if the jury finds in plaintiff’s favor on that claim, the original $16.2 million punitive damages award will be reinstated. PM USA filed a motion for rehearing, which was denied in January 2013. In January 2013, plaintiff and defendant each filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. ~~PM USA filed a motion to stay the mandate, which was denied in March 2013. The Fourth District issued its mandate in April 2013.~~ In June 2013, ~~plaintiff moved to consolidate with~~the Florida Supreme Court stayed the appeal pending the outcome of Hess ~~and~~ ~~R. Cohen, which PM USA did not oppose, but on October 30, 2013, plaintiff withdrew the motion for consolidation~~.

Plaintiff: Putney

Date: April 2010

Verdict:

A Broward County jury returned a verdict in favor of plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded approximately $15.1 million in compensatory damages and allocated 15% of the fault to PM USA (an amount of approximately $2.3 million). The jury also awarded $2.5 million in punitive damages against PM USA.

Post-Trial Developments:

In August 2010, the trial court entered final judgment. PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and, in November 2010, posted a $1.6 million bond. In June 2013, the Fourth District Court of Appeal reversed and remanded the case for further proceedings, holding that the trial court erred in (1) not reducing the compensatory damages award as excessive and (2) not instructing the jury on the ~~statute-of-repose~~statute of repose in connection with plaintiff’s conspiracy claim that resulted in the $2.5 million punitive damages award. In July 2013, plaintiff filed a motion for rehearing, which the Fourth District Court of Appeal denied in August 2013. In September 2013, both parties filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court. OnIn December ~~31,~~ 2013, the Florida Supreme Court stayed the appeal pending the outcome of the Hess case.

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Plaintiff: R. Cohen

Date: March 2010

Verdict:

A Broward County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $10 million in compensatory damages and allocated 33 1/3% of the fault to PM USA (an amount of approximately $3.3 million). The jury also awarded a total of $20 million in punitive damages, assessing separate $10 million awards against each defendant.

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Post-Trial Developments:

In July 2010,, the trial court entered final judgment and, in August 2010, PM USA filed its notice of appeal. In October 2010, PM USA posted a $2.5 million bond. In September 2012, the Florida Fourth District Court of Appeal affirmed the compensatory damages award but reversed and remanded the punitive damages verdict. The Fourth District returned the case to the trial court for a new jury trial on plaintiff’s fraudulent concealment claim. If the jury finds in plaintiff’s favor on that claim, the $10 million punitive damages award against each defendant will be reinstated. In January 2013, plaintiff and defendants each filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In February 2013, the Fourth District granted defendants’ motion to stay the mandate. In March 2013, plaintiff filed a motion for review of the stay order with the Florida Supreme Court, which was denied in April 2013. In June 2013, plaintiff moved to consolidate with Hess and Kayton,, which defendants did not oppose, but onin October ~~30,~~ 2013, plaintiff withdrew the motion for consolidation.In February 2014, the Florida Supreme Court stayed the appeal pending the outcome of the Hess case.

Plaintiff: Naugle

Date: November 2009

Verdict:

A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately $56.6 million in compensatory damages and $244 million in punitive damages. The jury allocated 90% of the fault to PM USA.

Post-Trial Developments:

In March 2010, the trial court entered final judgment reflecting a reduced award of approximately $13 million in compensatory damages and $26 million in punitive damages. In April 2010, PM USA filed its notice of appeal and posted a $5 million bond. In August 2010, upon the motion of PM USA, the trial court entered an amended final judgment of approximately $12.3 million in compensatory damages and approximately $24.5 million in punitive damages to correct a clerical error. In June 2012, the Fourth District Court of Appeal affirmed the amended final judgment. In July 2012, PM USA filed a motion for rehearing. In December 2012, the Fourth District withdrew its prior decision, reversed the verdict as to compensatory and punitive damages and returned the case to the trial court for a new trial on the question of damages. In December 2012, plaintiff filed a motion for rehearing en banc or for certification to the Florida Supreme Court, which was denied in January 2013. In February 2013, plaintiff and PM USA each filed a notice to invoke the discretionary jurisdiction of the Florida Supreme ~~Court. In May 2013,~~Court, which the Florida Supreme Court ~~consolidated the parties’ petitions and ordered PM USA to show cause as to why the Florida Supreme Court’s decision~~denied in ~~Douglas~~ ~~is not controlling in this case. PM USA filed its response to the order in June 2013.~~February 2014. Upon retrial on the question of damages, in October 2013, the new jury awarded approximately $3.7 million in compensatory damages and $7.5 million in punitive damages. OnIn October ~~28,~~ 2013, PM USA filed post-trial motions, ~~and gave notice of the results of the retrial to the Florida Supreme Court. On January 8, 2014,~~which the trial court ~~granted~~denied in April 2014. In May 2014, PM ~~USA’s post-trial motion to interview one of the jurors in the case. On January 13, 2014, the trial court granted~~USA filed a ~~stay in the proceedings so that plaintiff could seek emergency appellate review of the court’s decision to grant the juror interview.~~

~~Plaintiff:~~ ~~Barbanell~~

~~Date:August 2009~~

~~Verdict:~~

~~A Broward County jury returned a verdict in favor of plaintiff, awarding~~ ~~$5.3 million~~ ~~in compensatory damages. The judge had previously dismissed the punitive damages claim. In~~ ~~September 2009, the trial court entered final judgment and awarded plaintiff~~ ~~$1.95 million~~ ~~in actual damages. The judgment reduced the jury’s $5.3 million award of compensatory damages due to the jury allocating~~ ~~36.5%~~ ~~of the fault to PM USA.~~

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~~Post-Trial Developments:~~

A notice of appeal ~~was filed by PM USA in~~ ~~September 2009, and PM USA posted a~~ ~~$1.95 million~~ ~~bond. In February 2012,~~to the ~~Florida~~ Fourth District Court of Appeal ~~reversed the judgment, holding that the statute of limitations barred plaintiff’s claims. In October 2012, on motion for rehearing, the Fourth District withdrew its prior decision~~ and ~~affirmed the trial court’s judgment. In November 2012,~~plaintiff cross-appealed. Also in May 2014, PM USA filed a ~~notice to invoke the jurisdiction of the Florida Supreme Court. In December 2012,~~rider with the Florida Supreme Court ~~granted a partial stay pending its disposition of~~to make the previously-posted ~~J. Brown~~Naugle ~~case against R.J. Reynolds and~~bond applicable to the ~~Fourth District issued its mandate. In April 2013, the Florida Supreme Court ordered PM USA to show cause as to why the Florida Supreme Court’s decision in~~ retrial judgment.~~Douglas~~ ~~is not controlling in this case. In May 2013, defendants submitted their response arguing that the statute of limitations is not controlled by~~ ~~Douglas~~;~~also in May 2013, plaintiff submitted a response arguing the appeal should be dismissed.~~

Plaintiff: Hess

Date: February 2009

Verdict:

A Broward County jury found in favor of plaintiff and against PM USA. The jury awarded $3 million in compensatory damages and $5 million in punitive damages. In June 2009, the trial court entered final judgment and awarded plaintiff $1.26 million in actual damages and $5 million in punitive damages. The judgment reduced the jury’s $3 million award of compensatory damages due to the jury allocating 42% of the fault to PM USA.

Post-Trial Developments:

PM USA filed a notice of appeal to the Florida Fourth District Court of Appeal in July 2009. In May 2012, the Fourth District reversed and vacated the punitive damages award on the basis that it was barred by the statute of repose and affirmed the judgment in all other respects, upholding the compensatory damages award of $1.26 million. In June 2012, both parties filed rehearing motions with the Fourth District, which were denied in September 2012. In October 2012, PM USA and plaintiff filed notices to invoke the Florida Supreme Court’s discretionary jurisdiction. In the first quarter of 2013,, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $3.2 million for the judgment plus interest and associated costs. In June 2013, the Florida Supreme Court accepted jurisdiction of plaintiff’s petition for review, but declined to accept jurisdiction of PM USA’s petition. ~~Also~~Oral argument was heard in ~~June 2013, plaintiff moved to consolidate with~~ ~~R. Cohen~~ ~~and~~ ~~Kayton, which PM USA did not oppose, but on October 30, 2013, plaintiff withdrew the motion for consolidation~~.

~~Concluded Cases~~

~~Plaintiff:~~ ~~Douglas~~

~~Date:March 2010~~

~~Verdict:~~

~~A Hillsborough County jury returned a verdict~~April 2014 in ~~favor of the plaintiff and against PM USA, R.J. Reynolds and Liggett Group. The jury awarded~~ ~~$5 million~~ ~~in compensatory damages. Punitive damages were dismissed prior to trial. The jury allocated~~ ~~18%~~ ~~of the fault to PM USA, resulting in an award of~~ ~~$900,000~~.

~~Post-Trial Developments:~~

In ~~June 2010, PM USA filed its notice of appeal and posted a~~ ~~$900,000~~ ~~bond. In March 2012, the Florida Second District Court of Appeal issued a decision affirming the judgment and upholding the use of the~~ ~~Engle~~ ~~jury findings but certified to~~ the Florida Supreme Court on the ~~question~~statute of ~~whether granting~~ ~~res judicata~~ ~~effect to the~~ ~~Engle~~ jury findings violates defendants’ federal due process rights. In April 2012, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In May 2012, the Florida Supreme Court accepted jurisdiction of the case. In March 2013, the Florida Supreme Court affirmed the final judgment entered in favor of the plaintiff and issued its mandate in April 2013. In the ~~first quarter of 2013, PM USA recorded a provision on its condensed consolidated balance sheet of approximately~~ ~~$2.2 million~~ ~~for the judgment plus interest and associated costs. PM USA filed its petition for~~ ~~writ of certiorari~~ to the United States Supreme Court in August 2013, which the court denied in October 2013. PM USA paid the judgment plus interest and associated costs in the amount of approximately $2.2 million on October 31, 2013. On December 23, 2013, PM USA paid additional associated costs of approximately $500,000.repose question.

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~~Plaintiff:~~ ~~Hatziyannakis~~

~~Date:February 2011~~

~~Verdict:~~

~~A Broward County jury returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately~~ ~~$270,000~~ ~~in compensatory damages and allocated~~ ~~32%~~ ~~of the fault to PM USA (an amount of approximately~~ ~~$86,000~~).

~~Post-Trial Developments:~~

~~In January 2013, the Florida Fourth District Court of Appeal affirmed~~ ~~per curiam~~ ~~the trial court’s decision without issuing an opinion. In the~~ ~~first quarter of 2013, PM USA recorded a provision on its condensed consolidated balance sheet of approximately~~ ~~$174,000~~ ~~for the judgment plus interest and associated costs. In~~ ~~August 2013, PM USA paid the judgment plus interest and associated costs in the amount of~~ ~~$178,000~~.

~~Plaintiff:Giddens~~

~~Date:March 2013~~

~~Verdict:~~

~~In March 2013, a jury in the U.S. District Court for the Middle District of Florida (Fort Myers) returned a verdict in favor of plaintiff and against PM USA. The jury awarded approximately~~ ~~$80,000~~ ~~in compensatory damages and allocated~~ 7% ~~of the fault to PM USA (an amount of~~ ~~$5,600~~).

~~Post-Trial Developments:~~

In ~~March 2013, the U.S. District Court for the Middle District of Florida (Fort Myers) entered its final judgment against PM USA in the amount of~~ ~~$5,600, plus post-judgment interest. In April 2013, the parties entered into an agreement not to pursue any appeal or cost claims and PM USA will not be required to pay the judgment.~~

~~Plaintiff:~~ ~~Weingart~~

~~Date:July 2011~~

~~Verdict:~~

~~A Palm Beach County jury returned a verdict in the amount of~~ ~~zero~~ ~~damages and allocated~~ 3% ~~of the fault to each of the defendants (PM USA, R.J. Reynolds and Lorillard).~~

~~Post-Trial Developments:~~

In ~~September 2011, the trial court, on plaintiff’s motion, concluded that an~~ ~~additur~~ of ~~$150,000~~ ~~is required for plaintiff’s pain and suffering. The trial court entered final judgment and, since PM USA was allocated 3% of the fault, its portion of the damages was~~ ~~$4,500. In October 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal. In February 2013, the Florida Fourth District Court of Appeal affirmed~~ ~~per curiam~~ ~~the trial court’s decision. In the~~ ~~first quarter of 2013, PM USA recorded a provision on its condensed consolidated balance sheet of approximately~~ ~~$50,000~~ ~~for the judgment plus interest and associated costs. In~~ ~~June 2013, PM USA paid an amount of approximately~~ ~~$50,000~~ ~~in satisfaction of the judgment and associated costs.~~

~~Plaintiff:~~ ~~Piendle~~

~~Date:August 2010~~

~~Verdict:~~

~~A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded~~ ~~$4 million~~ ~~in compensatory damages and allocated~~ ~~27.5%~~ ~~of the fault to PM USA (an amount of approximately~~ ~~$1.1 million). The jury also awarded~~ ~~$90,000~~ ~~in punitive damages against PM USA.~~

~~Post-Trial Developments:~~

~~In June 2012, the Florida Fourth District Court of Appeal affirmed~~ ~~per curiam~~ ~~the trial court’s decision without issuing an opinion. In the~~ ~~third quarter of 2012, PM USA recorded a provision on its condensed consolidated balance sheet of approximately~~ ~~$2.7 million~~ ~~for the judgment plus interest and associated costs and paid such amount in~~ ~~November 2012. In the~~ ~~first quarter of 2013, PM USA paid related fees in the amount of approximately~~ ~~$100,000~~.

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Concluded Cases

Plaintiff: Tullo

Date:April 2011

Verdict:

A Palm Beach County jury returned a verdict in favor of plaintiff and against PM USA, Lorillard and Liggett Group. The jury awarded a total of $4.5 million in compensatory damages and allocated 45% of the fault to PM USA (an amount of $2.025 million).

Post-Trial Developments:

In April 2011, the trial court entered final judgment. In July 2011, PM USA filed its notice of appeal to the Florida Fourth District Court of Appeal and posted a $2 million bond. In August 2013, the Fourth District Court of Appeal affirmed the judgment. In October 2013, defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court, which declined jurisdiction in September 2014. In the third quarter of 2014, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $3.9 million for the judgment plus interest and associated costs and paid this amount in October 2014.

Plaintiff: Barbanell

Date:August 2009

Verdict:

A Broward County jury returned a verdict in favor of plaintiff and against PM USA, awarding $5.3 million in compensatory damages. The judge had previously dismissed the punitive damages claim. In September 2009, the trial court entered final judgment and awarded plaintiff $1.95 million in actual damages. The judgment reduced the jury’s compensatory damages award due to the jury allocating 36.5% of the fault to PM USA.

Post-Trial Developments:

A notice of appeal was filed by PM USA in September 2009. In February 2012, the Florida Fourth District Court of Appeal reversed the judgment, holding that the statute of limitations barred plaintiff’s claims. In October 2012, on motion for rehearing, the Florida Fourth District Court of Appeal withdrew its prior decision and affirmed the trial court’s judgment. In November 2012, PM USA filed a notice to invoke the jurisdiction of the Florida Supreme Court, which the Florida Supreme Court denied. In the first quarter of 2014, PM USA recorded a provision on its condensed consolidated balance sheet of approximately $3.6 million for the judgment plus interest and associated costs. In March 2014, PM USA filed a petition for writ of certiorari with the United States Supreme Court, which was denied in June 2014. Also in June 2014, PM USA paid the judgment plus interest and associated costs in the amount of approximately $3.6 million.

Plaintiff: Lock

Date:October 2012

Verdict:

A Pinellas County jury returned a verdict in favor of plaintiff and against PM USA and R.J. Reynolds. The jury awarded $1.15 million in compensatory damages and allocated 9% of the fault to each of the defendants (an amount of $103,500).

Post-Trial Developments:

In November 2012, defendants filed several post-trial motions, including motions for a new trial, to set aside the verdict and to reduce the damages award by the amount of economic damages paid by third parties. In January 2013, the trial court orally denied all post-trial motions. In February 2013, the trial court entered final judgment. In March 2013, defendants filed a notice of appeal to the Florida Second District Court of Appeal. In March 2014, PM USA paid the judgment plus interest and associated costs in the amount of approximately $140,000.

▪~~Appeals of~~ Engle Progeny ~~Verdicts:~~Appellate Issues: ~~Plaintiffs~~Three Florida federal district courts (in the Merlob, B. Brown and Burr cases) ruled in ~~various~~2008 that the findings in the first phase of the Engle ~~progeny~~proceedings cannot be used to satisfy elements of plaintiffs’

claims, and two of those rulings (B. Brown and Burr) were certified by the trial court for interlocutory review. The certification in both cases ~~have appealed adverse rulings or verdicts~~was granted by the U.S. Court of Appeals for the Eleventh Circuit and the appeals were

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consolidated. The appeal in ~~some cases, PM USA has cross-appealed. PM USA’s appeals~~Burr was dismissed for lack of ~~adverse verdicts are discussed in~~prosecution, and the ~~charts above.~~case was ultimately dismissed on statute of limitations grounds.

~~Since~~In July 2010, the Eleventh Circuit ruled in B. Brown that, as a matter of Florida law, plaintiffs do not have an unlimited right to use the findings from the original Engle trial to meet their burden of establishing the elements of their claims at trial. The Eleventh Circuit did not reach the issue of whether the use of the Engle findings violates defendants’ due process rights. Rather, the court held that plaintiffs may only use the findings to establish those specific facts, if any, that they demonstrate with a reasonable degree of certainty were actually decided by the original Engle jury. The Eleventh Circuit remanded the case to the district court to determine what specific factual findings the Engle jury actually made.

After the remand of B. Brown ~~(discussed above under the heading~~ ~~Federal Engle Progeny Cases~~), several state appellate rulings ~~have~~ superseded the Eleventh Circuit’s ruling on Florida state law. These cases include Martin, an ~~Engle~~ ~~progeny~~a case against R.J. Reynolds in Escambia County, and J. Brown, an ~~Engle~~ ~~progeny~~a case against R.J. Reynolds in Broward County. In ~~Martin, the Florida First District Court of Appeal rejected the~~ ~~B. Brown~~ ~~ruling as a matter of state law and upheld the use of the~~ ~~Engle~~ ~~findings to relax plaintiffs’ burden of proof. R.J. Reynolds had sought Florida Supreme Court review in that case but, in July 2011, the Florida Supreme Court declined to hear the appeal. In~~ December 2011, petitions for writ of certiorari were filed with the United States Supreme Court by R.J. Reynolds in Campbell, Martin, Gray and Hall and by PM USA and Liggett Group in Campbell. The United States Supreme Court denied defendants’ certiorari petitions in March 2012.

In ~~J. Brown, the Florida Fourth District Court of Appeal also rejected the~~ ~~B. Brown~~ ~~ruling as a matter of state law and upheld the use of the~~ ~~Engle~~ ~~findings to relax plaintiffs’ burden of proof. However, the Fourth District expressly disagreed with the First District’s~~ ~~Martin~~ ~~decision by ruling that~~ ~~Engle~~ ~~progeny plaintiffs must prove legal causation on their claims. In addition, the~~ ~~J. Brown~~ ~~court expressed concerns that using the~~ ~~Engle~~ ~~findings to reduce plaintiffs’ burden may violate defendants’ due process rights. In October 2011, the Fourth District denied R.J. Reynolds’ motion to certify~~ ~~J. Brown~~ ~~to the Florida Supreme Court for review. R.J. Reynolds is seeking review of the case by the Florida Supreme Court.~~

In Douglas, in March 2012, the Florida Second District Court of Appeal issued a decision affirming the judgment of the trial court in favor of the plaintiff and upholding the use of

the Engle jury findings with respect to strict liability claims but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings

violates defendants’ federal due process rights. In March 2013, the Florida Supreme Court affirmed the final judgment entered in favor of plaintiff upholding the use of the Engle jury findings with respect to strict liability and negligence claims. PM USA filed its petition for writ of certiorari with the United States Supreme Court in August 2013, which the court denied in October 2013.

InMeanwhile, in the ~~Koballa~~Waggoner ~~, in October 2012,~~case, the ~~Florida Fifth~~U.S. District Court for the Middle District of ~~Appeal issued a decision affirming the judgment of the trial court~~Florida ruled in ~~favor of the plaintiff and upholding the use~~December 2011 that application of the Engle ~~jury~~ findings to establish the wrongful conduct elements of plaintiffs’ claims consistent with ~~respect~~Martin or J. Brown did not violate defendants’ due process rights. PM USA and the other defendants sought appellate review of the due process ruling. In February 2012, the district court denied the motion for interlocutory appeal, but did apply the ruling to ~~negligence, concealment~~all active pending federal Engle progeny cases. As a result, R.J. Reynolds appealed the rulings in the Walker and ~~conspiracy claims but, like~~ ~~Douglas~~Duke cases to the Eleventh Circuit, which, in September 2013, rejected the due process defense and affirmed the underlying judgments. In October 2013, R.J. Reynolds filed a petition for rehearing or rehearing en banc. Thereafter, the Eleventh Circuit vacated its decision and substituted a new opinion. In November 2013, the Eleventh Circuit denied R.J. Reynolds’ initial petition for rehearing. R.J. Reynolds filed a petition for rehearing en banc or panel rehearing of the

substituted decision, which was denied in January 2014. In March 2014, R.J. Reynolds filed petitions for writ of certiorari to the United States Supreme Court in the Walker and Duke cases, as well as in J. Brown. Defendants filed petitions for writ of certiorari in eight other Engle progeny cases that were tried in Florida state courts, including one case, Barbanell, ~~certified~~in which PM USA is the defendant. In these eight petitions, defendants asserted questions similar to those in Walker, Duke and J. Brown. In June 2014, the United States Supreme Court denied defendants’ petitions for writ of certiorari in all 11 cases.

In Graham, an Engle progeny case against PM USA and R.J. Reynolds on appeal to the Eleventh Circuit Court of Appeals, defendants argued that the Engle progeny plaintiffs’ product liability claims are impliedly preempted by federal law. Oral argument was heard on November 20, 2014.

In Soffer, an Engle progeny case against R.J. Reynolds, the Florida First District Court of Appeal held that Engle progeny plaintiffs can recover punitive damages only on their intentional tort claims. In February 2014, the Florida Supreme Court accepted jurisdiction over plaintiff’s appeal from the ~~question~~Florida First District Court of ~~whether granting~~Appeal’s holding and heard oral argument on December 4, 2014.

In ~~res judicata~~Ciccone, an Engle progeny case against R.J. Reynolds, the Florida Fourth District Court of Appeal held that Engle ~~effect to~~progeny plaintiffs could establish class membership by showing that they developed symptoms during the Engle ~~jury findings violates defendants’ federal due process rights.~~ class period that could, in hindsight, be attributed to their smoking-related disease. The court certified a conflict with Castleman, a Florida First District Court of Appeal decision, which held that manifestation requires Engle progeny plaintiffs to have been aware during the class period that they had a disease caused by smoking in order to establish class membership. The Florida Supreme Court accepted jurisdiction in the Ciccone case in June 2014 and heard oral argument on December 4, 2014.

▪Florida Bond Statute: In ~~November~~June 2009, Florida amended its existing bond cap statute by adding a

~~2012,~~$200 million bond cap that applies to all state Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. Plaintiffs in three state Engle progeny cases against R.J. Reynolds ~~filed an~~in Alachua County, Florida (Alexander, Townsend and Hall) and one case in Escambia County (Clay) challenged the constitutionality of the bond cap statute. The Florida Attorney General intervened in these cases in defense of the constitutionality of the statute.

Trial court rulings were rendered in Clay, Alexander, Townsend and Hall rejecting the plaintiffs’ bond cap statute challenges in those cases. The plaintiffs unsuccessfully appealed these rulings. In Alexander, Clay and Hall, the District Court of Appeal for the First District of Florida affirmed the trial court decisions and certified the decision in Hall for appeal to the Florida Supreme Court, but declined to

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certify the question of the constitutionality of the bond cap statute in Clay and Alexander. The Florida Supreme Court granted review of the Hall decision, but, in September 2012, the court ~~entered~~dismissed the appeal as moot. In October 2012, the Florida Supreme Court denied the plaintiffs’ rehearing petition. In August 2013, in Calloway, discussed further below, plaintiff filed a ~~stay~~motion in the ~~case pending resolution~~trial court to determine the sufficiency of the bond posted by defendants on the ground that the bond cap statute is unconstitutional, which was denied.

No federal court has yet addressed the constitutionality of the bond cap statute or the applicability of the bond cap to ~~Douglas~~Engle ~~case.~~progeny cases tried in federal court. However, in April 2013, PM USA, R.J. Reynolds and Lorillard filed a motion in the U.S. District Court for the Middle District of Florida to have the court apply the Florida bond cap statute to all federal Engle progeny cases. In August 2013, the court denied the motion without prejudice on the grounds that it was premature to adjudicate such issue.

Other Smoking and Health Class Actions

Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.

Class certification has been denied or reversed by courts in 59 smoking and health class actions involving PM USA in Arkansas (1), California (1), the District of Columbia (2), Florida (2), Illinois (3), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1).

As of January 27, ~~2014,~~2015, PM USA and Altria Group, Inc. are named as defendants, along with other cigarette manufacturers, in seven class actions filed in the Canadian provinces of Alberta, Manitoba, Nova Scotia, Saskatchewan, British Columbia and Ontario. In Saskatchewan, British Columbia (two separate cases) and Ontario, plaintiffs seek class certification on behalf of individuals who suffer or have suffered from various diseases, including chronic obstructive pulmonary disease, emphysema, heart disease or cancer, after smoking defendants’ cigarettes. In the actions filed in Alberta, Manitoba and Nova Scotia, plaintiffs seek certification of classes of all individuals who smoked defendants’ cigarettes. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

Medical Monitoring Class Actions

~~Two~~ ~~purported~~In medical monitoring ~~class~~ actions, ~~are pending against PM USA. These two cases were brought in New York (Caronia, filed in January 2006 in~~plaintiffs seek to recover the ~~U.S. District Court~~cost for, or otherwise the ~~Eastern District~~implementation of, ~~New York) and Massachusetts (Donovan, filed in December 2006 in the U.S. District Court~~court-supervised programs for ~~the District of Massachusetts)~~ongoing medical monitoring purportedly on behalf of ~~each state’s respective residents who: are age 50 or older; have smoked the~~ ~~Marlboro~~ ~~brand for 20 pack-years or more; and have neither been diagnosed with lung cancer nor are under investigation by~~ a ~~physician for suspected lung cancer.~~class of individual plaintiffs. Plaintiffs in these cases seek to impose liability under various product-based causes of action and the creation of a ~~court-~~

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~~supervised~~court-supervised program providing members of the purported class Low Dose CT (“LDCT”) scanning in order to identify and diagnose lung cancer. Plaintiffs in these cases do not seek punitive ~~damages. Two other~~damages, although plaintiffs in Donovan have indicated they may seek to treble any damages awarded. The future defense of these cases ~~(California (Xavier~~)may be negatively impacted by evolving medical standards and ~~Florida (Gargano)) were dismissed in 2011.~~practice.

In ~~Caronia~~, in February 2010, the district court granted in part PM USA’s summary judgment motion, dismissing plaintiffs’ strict liability and negligence claims and certain other claims, granted plaintiffs leave to amend their complaint to allege aOne medical monitoring ~~cause of~~class action ~~and requested further briefing on~~is currently pending against PM USA’s summary judgment motion as to plaintiffs’ implied warranty claim and, if plaintiffs amend their complaint, their medical monitoring claim. In March 2010, plaintiffs filed their amended complaint and PM USA moved to dismiss the implied warranty and medical monitoring claims. In January 2011, the district court granted PM USA’s motion, dismissed plaintiffs’ claims and declared plaintiffs’ motion for class certification moot in light of the dismissal of the case. The plaintiffs appealed that decision to the U.S. Court of Appeals for the Second Circuit. In May 2013, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of plaintiffs’ traditional negligence, strict liability and breach-of-warranty claims on the grounds of statute of limitations and the widespread knowledge regarding the risks of cigarette smoking, but certified to the New York State Court of Appeals the following questions: (1) whether New York would recognize an independent claim for medical monitoring, (2) if so, what would be the elements of such a claim, and (3) what would be the statute of limitations applicable to such a claim and when would it be triggered. In May 2013, the New York Court of Appeals accepted the certified questions and, on December 17, 2013, answered the first question ruling that New York law does not allow for an independent cause of action for medical monitoring.

USA. In Donovan, filed in December 2006 in the U.S. District Court for the District of Massachusetts, plaintiffs purportedly brought the action on behalf of the state’s residents who are: age 50 or older; have smoked the Marlboro brand for 20 pack-years or more; and have neither been diagnosed with lung cancer nor are under investigation by a physician for suspected lung cancer. The Supreme Judicial Court of Massachusetts, in answering questions certified to it by the district court, held in October 2009 that under certain circumstances state law recognizes a claim by individual smokers for medical monitoring despite the absence of an actual injury. The court also ruled that whether or not the case is barred by the applicable statute of limitations is a factual issue to be determined by the trial court. The case was remanded to federal court for further proceedings. In June 2010, the district court granted in part the plaintiffs’ motion for class certification, certifying the class as to plaintiffs’ claims for breach of implied warranty and violation of the Massachusetts Consumer Protection Act, but denying certification as to plaintiffs’ negligence claim. In July 2010, PM USA petitioned the U.S. Court of Appeals for the First Circuit for appellate review of the class certification decision. The petition was denied in September 2010. As a remedy, plaintiffs have proposed a 28-year medical monitoring program with an approximate cost of $190 million. In June 2011, plaintiffs filed various motions for partial summary judgment and to strike affirmative defenses, which the district court

denied in March 2012 without prejudice. In October 2011, PM USA filed a motion for class decertification, which motion was denied in March 2012. In February 2013, the district court amended the class definition to extend to individuals who satisfy the class membership criteria through February 26, 2013, and to exclude any individual who was not a Massachusetts resident as of February 26, 2013. OnIn January 6, 2014, plaintiffs renewed their previously filed motions for partial summary judgment ~~motions~~and to strike affirmative defenses. In December 2014, the court issued its rulings on plaintiffs’ previously-filed motions, granting and denying the motions in part. A trial date has not been set.

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Other medical ~~standards~~monitoring cases previously brought against PM USA include Caronia, filed in January 2006 in the U.S. district court for the Eastern District of New York. In January 2011, the district court dismissed plaintiffs’ implied warranty and ~~practices could have an impact~~medical monitoring claims and declared plaintiffs’ motion for class certification moot in light of the dismissal of the case. The plaintiffs appealed to the U.S. Court of Appeals for the Second Circuit. In May 2013, the Second Circuit affirmed the dismissal of plaintiffs’ traditional negligence, strict liability and breach of warranty claims on the ~~defense~~grounds of statute of limitations and the widespread knowledge regarding the risks of cigarette smoking, but certified certain questions to the New York State Court of Appeals, including whether New York would recognize an independent claim for medical monitoring. In May 2013, the New York Court of Appeals accepted the certified questions and, in December 2013, ruled that New York law does not allow for an independent cause of action for medical monitoring. The Second Circuit affirmed the district court’s dismissal of the entire case in April 2014, including the so-called independent claim for medical monitoring, ~~claims. For example, the first publication of the findings of the National Cancer Institute’s National Lung Screening Trial (NLST)~~and issued its mandate in ~~June 2011 reported a 20% reduction~~May 2014. Two other cases (California (Xavier) and Florida (Gargano)) were dismissed in lung cancer deaths among certain long-term smokers receiving LDCT Scanning for lung cancer. Since then, various public health organizations have begun to develop new lung cancer screening guidelines. Also, a number of hospitals have advertised the availability of screening programs and some insurance companies now cover screening for some individuals. Other studies in this area are ongoing. On December 30, 2013, the United States Preventative Services Task Force issued a recommendation that LDCT scanning be classified as a Class B screening for certain heavy smokers. As such, the LDCT scanning would be considered an “Essential Health Benefit” for those smokers under the Affordable Care Act.2011.

Health Care Cost Recovery Litigation

▪Overview: In the health care cost recovery litigation, governmental entities seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.

The claims asserted include the claim that cigarette manufacturers were “unjustly enriched” by plaintiffs’ payment of health care costs allegedly attributable to smoking, as well as claims of indemnity, negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state anti-racketeering statutes.

Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, “unclean hands” (namely,

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that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit and statutes of limitations. In addition, defendants argue that they should be entitled to “set off” any alleged damages to the extent the plaintiffs

benefit economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by “standing in the shoes” of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.

Although there have been some decisions to the contrary, most judicial decisions in the United States have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and eight state appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five circuit courts of appeals. In 2011, in the health care cost recovery case brought against PM USA and other defendants by the City of St. Louis, Missouri and approximately 40 Missouri hospitals, a verdict was returned in favor of defendants.

Individuals and associations have also sued in purported class actions or as private attorneys general under the Medicare as Secondary Payer (“MSP”) provisions of the Social Security Act to recover from defendants Medicare expenditures allegedly incurred for the treatment of smoking-related diseases. Cases were brought in New York (2), Florida (2) and Massachusetts (1). All were dismissed by federal courts.

In addition to the cases brought in the United States, health care cost recovery actions have also been brought against tobacco industry participants, including PM USA and Altria Group, Inc., in Israel (dismissed), the Marshall Islands (dismissed) and Canada (9), and other entities have stated that they are considering filing such actions.

In September 2005, in the first of several health care cost recovery cases filed in Canada, the Canadian Supreme Court ruled that legislation passed in British Columbia permitting the lawsuit is constitutional, and, as a result, the case, which had previously been dismissed by the trial court, was permitted to proceed. PM USA’s and other defendants’ challenge to the British Columbia court’s exercise of jurisdiction was rejected by the Court of Appeals of British Columbia and, in April 2007, the Supreme Court of Canada denied review of that decision. In December 2009, the Court of Appeals of British Columbia ruled that certain defendants

can proceed against the Federal Government of Canada as third parties on the theory that the Federal Government of Canada negligently misrepresented to defendants the efficacy of a low tar tobacco variety that the Federal Government of Canada developed and licensed to defendants. In May 2010, the Supreme Court of Canada granted leave to the Federal Government of Canada to appeal this decision and leave to

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defendants to cross-appeal the Court of Appeals’ decision to dismiss claims against the Federal Government of Canada based on other theories of liability. In July 2011, the Supreme Court of Canada dismissed the third-party claims against the Federal Government of Canada.

Since the beginning of 2008, the Canadian Provinces of British Columbia, New Brunswick, Ontario, Newfoundland and Labrador, Quebec, Alberta, Manitoba, Saskatchewan and Prince Edward Island have brought health care reimbursement claims against cigarette manufacturers. PM USA is named as a defendant in the British Columbia and Quebec cases, while both Altria Group, Inc. and PM USA are named as defendants in the New Brunswick, Ontario, Newfoundland and Labrador, Alberta, Manitoba, Saskatchewan and Prince Edward Island cases. The Province of Nova Scotia and the territory of Nunavut have enacted similar legislation or are in the process of enacting similar legislation. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

▪Settlements of Health Care Cost Recovery Litigation:In November 1998,, PM USA and certain other United States tobacco product manufacturers entered into the MSA with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously entered into agreements to settle similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements require that the original participating manufacturers make annual payments of approximately ~~$9.4~~$9.4 billion,, subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the original participating manufacturers are required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of ~~$500 million~~.$500 million. For the years ended December 31, 2014, 2013~~, 2012~~ and ~~2011,~~2012, the aggregate amount recorded in cost of sales with respect to the State Settlement Agreements and the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) was approximately $4.6 billion, $4.2 billion ~~$4.9 billion~~ and ~~$4.8~~$4.9 billion, respectively. The 2014 and 2013 ~~amount includes reductions~~amounts include a reduction to cost of sales of ~~$664~~approximately $43 million and $664 million, respectively, related to the NPM Adjustment ~~Items~~disputes discussed below.

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The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.

▪~~Possible Adjustments in MSA Payments for 2003 - 2012:~~NPM Adjustment Disputes: ~~Pursuant to the provisions of the MSA,~~ PM USA ~~and the other~~is participating in proceedings regarding potential downward adjustments (the “NPM Adjustment”) to MSA payments made by manufacturers that are ~~original~~ signatories to the MSA (the ~~“Original Participating Manufacturers”~~“participating manufacturers” or “PMs”) for 2003-2012. The

NPM Adjustment is a reduction in MSA payments that applies if the PMs collectively lose at least a specified level of market share to non-participating manufacturers (“NPMs”) between 1997 and the year at issue, subject to certain conditions and defenses. The independent auditor appointed under the MSA calculates the maximum amount, if any, of the NPM Adjustment for any year in respect of which such NPM Adjustment is potentially applicable.

2003-2012 NPM Adjustment Disputes - Settlement with 24 States and Territories:PM USA has settled the NPM Adjustment disputes for the years 2003-2012 with 24 of the 52 MSA states and territories (the 24 states and territories are referred to as the “signatory states,” and the remaining MSA states and territories are referred to as the “non-signatory states”). Pursuant to the settlement, PM USA expects to receive a total of at least $599 million for 2003-2012. Of this total, PM USA has already received $579 million in the form of reductions to its MSA payments in 2013 or 2014 and expects to receive the remaining $20 million as a reduction to its MSA payment due in April 2015.

PM USA recorded $519 million of the $599 million as a reduction to cost of sales that increased its reported pre-tax earnings by $483 million and $36 million in the first quarter of 2013 and second quarter of 2013, respectively. The remainder of the $599 million consists of $80 million attributable to two states that joined the settlement after having been found subject to the 2003 NPM Adjustment by an arbitration panel in the third quarter of 2013, as discussed below. As a result of the arbitration panel’s findings, however, PM USA had already recorded $54 million in pre-tax earnings in respect of those two states for the 2003 NPM Adjustment before they joined the settlement, leaving an additional $26 million to be recorded when they joined the settlement. The $54 million already recorded consisted of $37 million recorded as a reduction to cost of sales and $17 million recorded as interest income. Because the $80 million settlement recovery would all be recorded as a reduction to cost of sales, upon these two states’ joinder of the settlement in the second quarter of 2014, a further $43 million reduction to cost of sales while also recording a $17 million reduction in interest income to reverse the earlier recording of interest income in that amount. The result was a net increase in reported pre-tax earnings of $26 million in the second quarter of 2014.

In addition, the settlement provides that the NPM Adjustment provision will be revised and streamlined as to the signatory states for the years after 2012. Under the revised provision, the 2013 and 2014 NPM Adjustments are “transition years,” for which the PMs receive specified payments. PM USA has already received $35 million for the 2013 transition year pursuant to this revised provision in the form of a reduction to its MSA payments in 2014, resulting in a reduction to cost of sales in the first quarter of 2014. PM USA also expects to receive an additional $3 million for the 2013 transition year as a result of the two additional states

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joining the settlement in the form of a reduction to its MSA payment due in April 2015. PM USA will also receive a payment for the 2014 transition year, in an amount subsequently to be calculated, in the form of a reduction to its MSA payment due in April 2015. PM USA, R.J. Reynolds and Lorillard (the “original participating manufacturers” or “OPMs”) have agreed that the amounts they receive under the settlement for the transition years and subsequent years will be allocated among them pursuant to a formula that modifies the MSA allocation formula in a manner favorable to PM USA, although the extent to which it remains favorable to PM USA will depend upon future developments.

Many of the non-signatory states objected to the settlement before the arbitration panel hearing the 2003 NPM Adjustment dispute. In March 2013, the panel issued a stipulated partial settlement and award (the “Stipulated Award”) rejecting the objections and permitting the settlement to proceed. Fourteen of the non-signatory states filed motions in their state courts to vacate and/or modify the Stipulated Award in whole or part. Decisions by the Pennsylvania, Missouri and Maryland courts on such motions, and the subsequent appeals of those rulings, are ~~participating~~discussed below. One state’s motion was denied without an appeal by the state. Another state’s motions remain pending in ~~proceedings~~its state trial court. As for the remaining states, rulings rejecting their motions to vacate the Stipulated Award are on appeal by the respective states, or the motions have been voluntarily dismissed or stayed pending further state action.

2003-2013 NPM Adjustment Disputes - Continuing Disputes with Non-Signatory States:PM USA has continued to pursue the NPM Adjustments for 2003 and subsequent years with respect to ~~claims for downward adjustments to~~ the ~~amounts paid by them to the states and territories that are parties to~~non-signatory states. Under the MSA, ~~for each of the years 2003 - 2012. The proceedings relate to an adjustment based on the collective loss of market share~~once all conditions for the ~~relevant~~NPM Adjustment for a particular year ~~by all participating manufacturers who~~ are ~~subject to the payment obligations and marketing restrictions of the MSA to NPMs who are not subject to such obligations and restrictions (the “NPM Adjustment”).~~

As part of these proceedings, an independent economic consulting firm is required to determine whether the disadvantages of the MSA were a “significant factor” contributing to the participating manufacturers’ collective loss of market share for the year in question. If the firm determines that the disadvantages of the MSA were such a “significant factor,”met, each state may avoid ~~a downward adjustment~~an NPM Adjustment to its share of the ~~participating manufacturers’ annual~~PMs’ MSA payments for that year by establishing that it diligently enforced a qualifying escrow statute during the entirety of that year. Such a state’s share of the ~~downward adjustment~~NPM Adjustment would then be reallocated to any states that are found not to have ~~established such diligent enforcement.~~

~~An independent economic consulting firm determined~~diligently enforced for that year. For 2003-2012, all conditions for the ~~disadvantages of~~NPM Adjustment have been met, either by determination or agreement among the ~~MSA were such a significant factor for each of the years 2003 - 2006. Following the firm’s determination for 2006, the OPMs and the states agreed that the states would not contest that~~parties. For 2013, one condition (that the disadvantages of the MSA were a ~~significant factor~~“significant factor” contributing to the ~~participating manufacturers’~~PMs’ collective loss of market ~~share~~share) potentially remains in dispute; however, proceedings as to the “significant factor” issue for 2013 cannot be commenced until April 2015.

2003 NPM Adjustment. With one exception (Montana), the ~~years 2007 - 2012 (the “significant factor agreement”). This agreement has become effective for 2007 - 2010 and will become effective for 2011 and 2012 on February 1, 2014 and 2015, respectively.~~

~~Once a significant factor determination in favor~~courts have ruled that the states’ claims of ~~the participating manufacturers for a particular year has been made, or the significant factor agreement has become effective for a particular year,~~diligent enforcement are to be submitted to arbitration. PM USA has the right under the MSA to pay the disputed amount of the NPM Adjustment for that year into a disputed payments account (the “DPA”) or withhold the amount altogether. PM USA made its full MSA payment due in each year from 2006 - 2010 to the states (subject to a right to recoup the NPM Adjustment amount in the form of a credit against future MSA payments), even though it had the right to deduct the disputed amounts of the 2003 - 2007 NPM Adjustments from such MSA payments.

~~PM USA paid its share of the amount of the disputed 2008, 2009~~ and ~~2010 NPM Adjustments into the DPA in connection with its MSA payments due in 2011, 2012 and 2013, respectively.~~

An independent auditor appointed under the MSA (the “Independent Auditor”) is required to calculate the maximum amount, if any, of PM USA’s share of the NPM Adjustment for any year in respect of which such NPM Adjustment is potentially applicable. In accordance with such provisions, the Independent Auditor has calculated the following approximate amounts as PM USA’s maximum potential share of the NPM Adjustments for the years 2003 - 2012 (such amounts are exclusive of interest or earnings to which PM USA believes it would be entitled):

(in millions)
PM USA Potential
Adjustment

2003 $ 337
2004 388
2005 181
2006 154
2007 185
2008 250
2009 205
2010 203
2011 159
2012 199

~~As discussed more fully below, PM USA has~~other PMs entered into ~~a settlement~~an agreement with 22most of the 52 states and territories that are parties to the MSA, resolving those states’ respective shares of the amounts set forth in the table above for each of 2003 - 2012. For that and other reasons discussed below, the amounts of the 2003 - 2012 NPM Adjustments that remain potentially available to PM USA from the MSA states and territories ~~that have not joined such settlement are lower than the maximum amounts calculated by the Independent Auditor and reflected in the table above.~~

~~Following~~concerning the 2003 “significant factor” determination, 38 states filed actions in their respective state courts seeking a declaration that the state diligently enforced its escrow statute during 2003. The participating manufacturers responded to these actions by filing motions to compel arbitration in accordance with the terms of the MSA, including filing motions to compel arbitration in 11 MSANPM Adjustment, under which such states and territories would receive a partial liability reduction of 20% for the 2003 NPM Adjustment in the event the arbitration panel determined that they did not ~~file declaratory judgment actions. Courts in all but one of the 46 MSA states, as well as courts in the District of Columbia and Puerto Rico, have ruled that the question of whether a state had~~

diligently ~~enforced its escrow statute~~enforce during ~~2003 is subject to arbitration.~~2003. The Montana state courts ~~have~~ ruled that ~~the~~Montana may litigate its diligent enforcement claims ~~of that state may be litigated~~ in state court, rather than in arbitration. In June 2012, the ~~participating manufacturers~~PMs and Montana entered ~~into~~ a consent decree pursuant to which Montana would not be subject to the 2003 NPM Adjustment.

The 2003 arbitration was conducted from July 2010 to September 2013. Following discovery, the PMs determined no longer to contest the 2003 diligent enforcement claims of 14 of the non-signatory states in the arbitration. In the Stipulated Award, the arbitration panel ruled that the total 2003 NPM Adjustment would be reduced pro rata by the aggregate allocable share of the signatory states (at the relevant time, approximately 46%) to determine the maximum amount of the 2003 NPM Adjustment potentially available from the non-signatory states whose diligent enforcement claims the PMs continued to contest (the “pro rata judgment reduction”).

In September 2013, the arbitration panel issued rulings regarding the 15 contested states and territories that had not as of that time joined the settlement, ruling that six of them (Indiana, Kentucky, Maryland, Missouri, New Mexico and Pennsylvania) did not diligently enforce during 2003 and that nine of them did. Based on this ruling, the PMs are entitled to receive from the six non-diligent states the entire 2003 NPM Adjustment remaining after the pro rata judgment reduction. PM USA believes it is entitled to receive an NPM Adjustment for 2003 based on this ruling, after reflecting the 20% partial liability reduction noted above, of approximately $145 million. PM USA recorded this $145 million as a reduction to cost of sales, which increased its reported pre-tax earnings in the third quarter of 2013. In addition PM USA believes it would be entitled to interest on this amount of approximately $89 million. PM USA recorded $64 million of this amount as interest income, which reduced interest and other debt expense, net in the first quarter of 2014, but did not yet record the remaining $25 million based on its assessment of a certain dispute concerning interest discussed below.

After PM USA recorded these amounts, two of the six non-diligent states (Indiana and Kentucky) joined the settlement and became signatory states. Those two states account for (i) $37 million of the $145 million NPM Adjustment for 2003 that PM USA recorded and (ii) $17 million of the interest that PM USA recorded. PM USA will retain those amounts from the two states, plus receive additional amounts as part of the settlement recoveries for the 2003-2012 NPM Adjustment disputes described above. The remaining four states account for approximately (i) $108 million of the $145 million 2003 NPM Adjustment that PM USA recorded and (ii) $66 million of the $89 million of interest to which PM USA believes it would be entitled on the $145 million (and $47 million of the $64 million of interest that PM USA recorded). Each of these four states has filed a motion in its state court to (i) vacate the panel’s ruling as to its diligence and (ii) to modify the pro rata judgment reduction and to substitute a reduction method more favorable to the state. These four states have also raised a dispute concerning the independent auditor’s

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~~pursuant to which Montana will not be subject to the 2003 NPM Adjustment.~~

~~PM USA,~~calculation of interest. In addition, one of the other OPMs ~~and approximately 25 other MSA-participating manufacturers entered into an agreement regarding arbitration with 45 MSA states and territories~~has raised a dispute concerning the ~~2003 NPM Adjustment. The agreement provides for~~allocation of the interest and disputed payments account earnings among the OPMs.

In April 2014, a ~~partial liability reduction of 20% for the 2003 NPM Adjustment for states that entered into the agreement by January 30, 2009 and are determined in~~Pennsylvania state trial court denied Pennsylvania’s motion to vacate the arbitration panel’s ruling that Pennsylvania had not ~~to have~~ diligently enforced, but granted Pennsylvania’s motion to modify, with respect to Pennsylvania, the pro rata judgment reduction. In May 2014, a ~~qualifying escrow statute during 2003. The partial liability reduction will reduce the amount of PM USA’s 2003 NPM Adjustment by that percentage.~~

~~The selection of~~Missouri state trial court ruled similarly on Missouri’s motions. In July 2014, a Maryland state trial court denied both Maryland’s motion to vacate the arbitration ~~panel for~~panel’s ruling that Maryland had not diligently enforced and Maryland’s motion to vacate or modify the ~~2003 NPM Adjustment was completed in July 2010. Following~~pro rata judgment reduction. PM USA is appealing the ~~completion of discovery,~~Pennsylvania and Missouri decisions modifying the ~~participating manufacturers determined~~pro rata judgment reduction. Maryland is appealing its court’s decision declining to ~~continue~~modify the pro rata judgment reduction. Maryland and Missouri each is appealing its court’s ruling denying its motion to ~~contest~~vacate the ~~2003 diligent enforcement claims of 33 states, the District of Columbia and Puerto Rico (the “contested states”) and~~arbitration panel’s diligence ruling as to ~~no longer contest such claims by 12 states and four U.S. territories (the “non-contested states”).~~that state. The ~~non-contested states’ share of any such NPM Adjustment, along with the shares of any states found~~motions filed by the ~~arbitration panel to have diligently enforced during 2003, will be reallocated~~fourth state, New Mexico, remain pending in ~~accordance with the MSA to those states found by the panel not to have diligently enforced during 2003.~~its state trial court.

Effective December 17, 2012, prior to the completion of the 2003 arbitration, PM USA, the other OPMs and certain other participating manufacturers entered into a term sheet (the “Term Sheet”) with 17 MSA states, the District of Columbia and Puerto Rico for settlement of the 2003 - 2012 NPM Adjustments with those states and territories. An additional MSA state joined the Term Sheet in April 2013 (prior to the date of PM USA’s April 2013 MSA payment), and ~~two~~ ~~more MSA states joined the Term Sheet in May 2013 (after the date of PM USA’s April 2013 MSA payment). (These~~ 20 states, the District of Columbia and Puerto Rico are collectively referred to as the “signatory states,” and the states and territories that have not joined the Term Sheet are collectively referred to as the “non-signatory states.”)

~~In March 2013, the arbitration panel in the NPM Adjustment arbitration issued a stipulated partial settlement and award (the “Stipulated Award”) permitting the Term Sheet to proceed.~~ As a result ~~the number of contested states in the 2003 arbitration was reduced from 35 to the~~ 15 ~~contested states that did not join the Term Sheet. As part~~ of the ~~Stipulated Award, the arbitration panel ruled that~~Pennsylvania state trial court ruling, the total ~~2003 NPM Adjustment claim is to be reduced pro rata by the aggregate allocable share of the signatory states (currently approximately~~ ~~46%) to determine the maximum amount~~2014 MSA payment credit PM USA received on account of the 2003 NPM Adjustment ~~potentially available~~ from the ~~15 remaining contested~~four states ~~although any~~was reduced from $108 million to $79 million, and the interest PM USA received from the four states was $48 million rather than the $66 million in interest to which PM USA believes it would be entitled from those four states. If PM USA is successful in judicial review of ~~those states may seek~~the Pennsylvania trial court ruling, it will recover the difference ($29 million of 2003 NPM Adjustment and $18 million in interest (subject to the separate interest disputes referenced above)), with interest, as a ~~more favorable reduction method as~~credit against a subsequent MSA payment. If PM USA is not successful on judicial review of the Pennsylvania trial court ruling, it would need to ~~it for~~reverse $29 million of the 2003 NPM Adjustment ~~through review in its state court. Following the issuance~~and part of the ~~Stipulated Award, 14~~interest that it recorded. Because the Missouri state trial court ruling post-dated PM USA’s April 2014 MSA payment, that ruling did not reduce the credit that PM USA received against that payment. If PM USA is not successful on judicial review of the ~~non-signatory states, including 12~~Missouri court’s ruling, it will be required to return approximately $12 million of the ~~15 remaining contested states~~

~~described above, filed motions in their state MSA courts to vacate and/or modify portions or all~~2003 NPM Adjustment and $7 million of the ~~Stipulated Award. In October 2013, the Idaho state court denied Idaho’s motion~~interest it received (in each case subject to vacate the Stipulated Award, although Idaho has appealed this ruling. On November 1, 2013, Massachusetts dismissed its motion to vacate the Stipulated Award. Many of the remaining motions seek a more favorable reduction method than the pro rata reduction orderedconfirmation by the ~~arbitration panel~~independent auditor), plus applicable interest, and would need to make corresponding reversals to amounts previously recorded. In connection with the Missouri appeal, PM USA has posted a bond in the ~~Stipulated Award. Additional non-signatory states may also take action in state court to vacate~~amount of $22 million. In addition, the other litigation and disputes discussed above could further reduce PM USA’s recovery on the 2003 NPM Adjustment or ~~modify the Stipulated Award, although~~recovery of interest and potentially require PM USA ~~believes that the statutory deadline for the filing of such motions has now passed.~~to return amounts previously received and/or reverse amounts previously recorded. No assurance can be given that ~~this~~PM USA’s appeals of the Pennsylvania and Missouri state trial court rulings, or the other litigation ~~or any other such attempts by other non-signatory states~~and disputes discussed above, will be resolved in a manner favorable to PM ~~USA, nor can PM USA predict the remedy that might be ordered if any such litigation were to be resolved unfavorably to PM~~ USA.

The Term Sheet provides for the OPMs to receive reductions to their MSA payments in an amount equal to 46% of the signatory states’ aggregate allocable share of the OPMs’ aggregate 2003 - 2012 NPM Adjustments plus interest. The OPMs have agreed that, subject to certain conditions, PM USA will receive approximately ~~28%~~ of such reductions (which is the maximum percentage allocation of the total 2003 - 2012 NPM Adjustments to which PM USA was entitled under the MSA); R.J. Reynolds will receive approximately 60% of such reductions; and Lorillard will receive approximately 12% of such reductions. Based on the identity of the signatory states on April 15, 2013, the reduction in PM USA’s April 2013 MSA payment obligation was approximately ~~$483 million~~.

PM USA received all of its approximately $483 million reduction with respect to the signatory states that had joined the Term Sheet prior to the date of the April 2013 MSA payment through a credit against that MSA payment. PM USA expects to receive an additional ~~$36 million~~ credit to be applied to its April 2014 MSA payment as a result of the two additional states that joined the Term Sheet after the date of the 2013 MSA payment. R.J. Reynolds and Lorillard are expected to receive their respective reductions over a five-year period. PM USA recorded the $483 million, which it received as a credit against its April 2013 MSA payment as a reduction to cost of sales that increased its reported pre-tax earnings in the first quarter of 2013, and recorded the additional $36 million credit that it expects to receive in April 2014 as a reduction to cost of sales, which increased its reported pre-tax earnings in the second quarter of 2013.

~~As part of the settlement, each of the signatory states that had joined the Term Sheet prior to the date of the April 2013 MSA payment is to receive its portion of over~~ ~~$4.7 billion~~ ~~from the DPA. In this context, PM USA authorized release to the signatory states of their allocable share of the~~ ~~$658 million~~ ~~that PM USA has paid into the DPA (plus the accumulated earnings thereon), which amounted to approximately~~ ~~$272 million. In addition, PM USA authorized release of additional funds from the DPA to the two signatory states that joined the Term Sheet after the date of~~

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~~the April 2013 MSA payment in an amount of approximately~~ ~~$22 million~~. Furthermore, PM USA will deposit the signatory states’ allocable share of its portion of the 2011 - 2012 NPM Adjustments into the DPA in connection with its April 2014 - 2015 MSA payments and then, following such deposit, authorize the release of such share to the signatory states as provided in the Stipulated Award.

The Term Sheet also provides that the NPM Adjustment provision will be revised and streamlined as to the signatory states for years after 2012. In connection with the settlement, the formula for allocating among the OPMs the revised NPM Adjustments applicable in the future to the signatory states will be modified in a manner favorable to PM USA, although the extent to which it is favorable to PM USA will depend upon certain future events, including the future relative market shares of the OPMs.

~~In September 2013, the arbitration panel for the 2003 NPM Adjustment issued awards ruling that~~ ~~six~~ of the 15 contested states that had not joined the Term Sheet did not diligently enforce their respective escrow statutes during 2003. Based on this ruling, the participating manufacturers are entitled to the entire 2003 NPM Adjustment remaining after the pro rata reduction ordered in light of the Term Sheet by the arbitration panel in the Stipulated Award. Based on the pro rata reduction method specified by the panel as described above and the 20% partial liability reduction applicable to signatories of the agreement regarding arbitration described above, PM USA is entitled to an NPM Adjustment for 2003, likely in the form of a credit against its April 2014 MSA payment, in the amount of approximately ~~$145 million~~. PM USA also is entitled to interest on that amount, although a potential dispute has been raised as to how interest and earnings are to be allocated among the OPMs. PM USA recorded the $145 million credit that it expects to receive as a reduction to cost of sales, which increased its reported pre-tax earnings in the third quarter of 2013. This credit will be applied only to the non-diligent states. All six non-diligent states have filed motions in their state courts to vacate the panel’s rulings as to their diligence. Furthermore, as noted above, all six non-diligent states had already filed motions in their state courts to vacate and/or modify the Stipulated Award seeking a more favorable reduction method as to them than the pro rata reduction ordered by the panel in the Stipulated Award. While PM USA intends to contest these motions vigorously, no assurance can be giv~~en that one or~~ more of these states will not be successful in vacating the panel’s ruling that it was not diligent and/or in seeking to have a more favorable reduction method applied as to it. If one or more states are successful with respect to any such motions, the amount of the 2003 NPM Adjustment to which PM USA is entitled could be lower than the amount described above.

~~PM USA continues to reserve all rights regarding the NPM Adjustments with respect to the non-signatory states and intends to continue to pursue vigorously the disputed~~

2004-2013 NPM Adjustments ~~for 2004 - 2012 against them. No proceedings to determine~~. Proceedings regarding state diligent enforcement claims for ~~2004 - 2012~~2004-2013 have not yet been scheduled. PM USA believes that the MSA requires ~~state~~these claims ~~of diligent enforcement for 2004 - 2012~~ to be determined in a ~~national~~multi-state arbitration, although a number of non-signatory states have filed motions in their state courts contending ~~or have reserved rights to contend,~~ that ~~such~~the claims ~~for those years~~ are to be determined ~~either~~ in separate arbitrations for ~~each state~~individual states or ~~in state court on a state-by-state basis.~~that there is no arbitrable dispute for 2004. No assurance can be given as to ~~if and~~ when proceedings for ~~2004 - 2012~~2004-2013 will be scheduled or the precise form those proceedings will take.

The ~~amounts~~independent auditor has calculated that PM USA’s share of the maximum potential NPM Adjustments for these years is (exclusive of interest or earnings): $388 million for 2004, -$181 million for 2005, $154 million for 2006, $185 million for 2007, $250 million for 2008, $211 million for 2009, $219 million for 2010, $165 million for 2011, $207 million for 2012 ~~set forth in the table above~~and $215 million for 2013. These maximum amounts will be reduced ~~in light of~~by a judgment reduction to reflect the ~~Term Sheet to determine~~settlement with the ~~maximum amount of such adjustments potentially available from the non-signatory~~signatory states. The ~~Stipulated Award did not specify the~~judgment reduction method applicable to the ~~2004 - 2012~~2004-2013 NPM Adjustments has not yet been determined. In addition, these maximum amounts may also be further reduced by other developments, including agreements that may be entered in the future, disputes that may arise or recalculation of the NPM Adjustment ~~claims.~~

~~The~~ amounts ~~in the table above may be recalculated~~ by the ~~MSA’s Independent Auditor if it receives information that~~independent auditor. Finally, PM USA’s recovery of these amounts, even as reduced, is different from or in addition to the information on which it based these calculations, including, among other things, if it receives revised sales volumes from any participating manufacturer. Disputes among the manufacturers could also reduce the foregoing amounts.dependent upon subsequent determinations of non-signatory states’ diligent enforcement claims. The availability and ~~the precise~~ amount of any NPM Adjustment for ~~2004 - 2012 obtained through such proceedings (as opposed to~~2004-2013 from the ~~Term Sheet)~~non-signatory states will not be finally determined ~~until later~~ in ~~2014 or thereafter.~~the near term. There is no ~~certainty~~assurance that the OPMs and other MSA-participating manufacturers ~~would~~will ultimately receive any adjustment from the non-signatory states as a result of these ~~proceedings, and the amount~~proceedings. PM USA’s receipt of ~~any adjustment received for a year could be less than the amount for that year listed above (even as reduced in light~~amounts on account of the ~~Term Sheet). If the OPMs do receive such an adjustment through these proceedings (apart~~2003 NPM Adjustment and interest from ~~the Term Sheet), the adjustment amount would be allocated among the OPMs pursuant to the MSA’s provisions. It is expected~~non-signatory states does not provide any assurance that PM USA ~~would~~will receive ~~its share of~~ any ~~adjustments~~NPM Adjustment amounts (or associated interest or earnings) for 2004 ~~- 2007 likely in the form of a credit against future MSA payments and its share of~~or any ~~adjustment for 2008 - 2010 in the form of either a withdrawal from the DPA or a combination of a credit against future MSA payments and a withdrawal from the DPA.~~subsequent year.

▪Other Disputes Related to MSA Payments: In addition to the disputed NPM Adjustments described above, MSA states and ~~participating manufacturers,~~PMs, including PM USA, conducted another arbitration to resolve certain other disputes related to the calculation of the participating manufacturers’ payments under the MSA. PM USA disputed the method by which ounces of “roll your own” tobacco had been converted to cigarettes for purposes of calculating the downward volume adjustments to its MSA ~~payments. PM USA believed that, for the years 2004 - 2012, the use of an incorrect conversion method resulted~~payments, but in ~~excess MSA payments by PM USA in those years of approximately~~ ~~$92 million~~ ~~in the aggregate. In~~

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February 2013, the arbitration panel issued a ruling in favor of the MSA states. ~~Consequently, PM USA will not receive any credit against its future MSA payments on account of this dispute.~~ This same arbitration panel also issued a ruling in the dispute over whether the “adjusted gross” or the “net” number of cigarettes on which federal excise tax is paid is the correct methodology for calculating MSA payments due from certain subsequent participating manufacturers. ~~It is unclear precisely which past and future MSA payments may be affected by this ruling.~~ PM USA ~~also~~ does not currently have access to the data ~~that would be~~ necessary to determine the

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magnitude and the direction of the effects of this ruling on past and future MSA payments from such ~~effects, if any.~~

subsequent participating manufacturers.

▪Other MSA-Related Litigation: Since the MSA’s inception, NPMs and/or their distributors or customers have filed a number of challenges to the MSA and related legislation. They have named as defendants the states and their officials, in an effort to enjoin enforcement of important parts of the MSA and related legislation, and/or participating manufacturers, in an effort to obtain damages. To date, no such challenge has been successful, and the U.S. Courts of Appeals for the Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth and Tenth Circuits have affirmed judgments in favor of defendants in 16 such cases.

▪Federal Government’s Lawsuit: In 1999, the United States government filed a lawsuit in the U.S. District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including Altria Group, Inc., asserting claims under three federal statutes, namely the Medical Care Recovery Act (“MCRA”), the MSP provisions of the Social Security Act and the civil provisions of RICO. Trial of the case ended in June 2005. The lawsuit sought to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants’ fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans’ health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleged that such costs total more than $20 billion annually. It also sought what it alleged to be equitable and declaratory relief, including disgorgement of profits that arose from defendants’ allegedly tortious conduct, an injunction prohibiting certain actions by defendants, and a declaration that defendants are liable for the federal government’s future costs of providing health care resulting from defendants’ alleged past tortious and wrongful conduct. In September 2000, the trial court dismissed the government’s MCRA and MSP claims, but permitted discovery to proceed on the government’s claims for relief under the civil provisions of RICO.

The government alleged that disgorgement by defendants of approximately $280 billion is an appropriate ~~remedy. In May 2004,~~remedy and the trial court ~~issued an order denying defendants’ motion for partial summary judgment limiting the~~

~~disgorgement remedy.~~agreed. In February 2005, however, a panel of the U.S. Court of Appeals for the District of Columbia Circuit held that disgorgement is not a remedy available to the government under the civil provisions of ~~RICO and entered summary judgment in favor of defendants with respect to the disgorgement claim.~~RICO. In ~~July~~October 2005, ~~the government petitioned~~ the United States Supreme Court ~~for further review of the Court of Appeals’ ruling that disgorgement is not an available remedy, and in October 2005, the Supreme Court~~ denied the ~~petition.~~government’s petition for writ of certiorari.

In June 2005, the government filed with the trial court its proposed final judgment seeking remedies of approximately $14 billion, including $10 billion over a five-year period to fund a national smoking cessation program and $4 billion over a 10-year period to fund a public education and counter-marketing campaign. Further, the government’s proposed remedy would have required defendants to pay additional

monies to these programs if targeted reductions in the smoking rate of those under 21 were not achieved according to a prescribed timetable. The government’s proposed remedies also included a series of measures and restrictions applicable to cigarette business operations, including, but not limited to, restrictions on advertising and marketing, potential measures with respect to certain price promotional activities and research and development, disclosure requirements for certain confidential data and implementation of a monitoring system with potential broad powers over cigarette operations.

In August 2006, the federal trial court entered judgment in favor of the government. The court held that certain defendants, including Altria Group, Inc. and PM USA, violated RICO and engaged in seven of the eight “sub-schemes” to defraud that the government had alleged. Specifically, the court found that:


▪	defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking;


▪	defendants hid from the public that cigarette smoking and nicotine are addictive;


▪	defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction;


▪	defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes;


▪	defendants falsely denied that they intentionally marketed to youth;


▪	defendants publicly and falsely denied that ETS is hazardous to non-smokers; and


▪	defendants suppressed scientific research.

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The court did not impose monetary penalties on defendants, but ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes”; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising

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or promotional material, including “lights,” “ultra lights” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “light” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure on defendants’ public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the Federal Trade Commission (“FTC”) for a period of 10 years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the United States; and (ix) payment of the government’s costs in bringing the action.

Defendants appealed and, in May 2009, a three judge panel of the Court of Appeals for the District of Columbia Circuit issued a per curiam decision largely affirming the trial court’s judgment against defendants and in favor of the government. Although the panel largely affirmed the remedial order that was issued by the trial court, it vacated the following aspects of the order:


▪	its application to defendants’ subsidiaries;


▪	the prohibition on the use of express or implied health messages or health descriptors, but only to the extent of extraterritorial application;


▪	its point-of-sale display provisions; and


▪	its application to Brown & Williamson Holdings.

The Court of Appeals panel remanded the case for the trial court to reconsider these four aspects of the injunction and to reformulate its remedial order accordingly.

Furthermore, the Court of Appeals panel rejected all of the government’s and intervenors’ ~~cross appeal~~cross-appeal arguments and refused to broaden the remedial order entered by the trial court. The Court of Appeals panel also left undisturbed its prior holding that the government cannot obtain disgorgement as a permissible remedy under RICO.

In July 2009, defendants filed petitions for a rehearing before the panel and for a rehearing by the entire Court of Appeals. Defendants also filed a motion to vacate portions of the trial court’s judgment on the grounds of mootness because

of the passage of the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”), granting the U.S. Food and Drug Administration (the “FDA”) broad authority over the regulation of tobacco products. In September 2009, the Court of Appeals entered three per curiam rulings. Two of them denied defendants’ petitions for panel rehearing or for rehearing en ~~banc.~~ banc.In the third per curiam decision, the Court of Appeals denied defendants’ suggestion of mootness and motion for partial vacatur. In February 2010, PM USA and Altria Group, Inc. filed their certiorari petitions with the United States Supreme Court. In addition, the federal government and the intervenors filed their own certiorari petitions, asking the court to reverse an earlier Court of Appeals decision and hold that civil RICO allows the trial court to order disgorgement as well as other equitable relief, such as smoking cessation remedies, designed to redress continuing consequences of prior RICO violations. In June 2010, the United States Supreme Court denied all of the parties’ petitions. In July 2010, the Court of Appeals issued its mandate lifting the stay of the trial court’s judgment and remanding the case to the trial court. As a result of the mandate, except for those matters remanded to the trial court for further proceedings, defendants are now subject to the injunction discussed above and the other elements of the trial court’s judgment.

In February 2011, the government submitted its proposed corrective statements and the trial court referred issues relating to a document repository to a special master. Defendants filed a response to the government’s proposed corrective statements and filed a motion to vacate the trial court’s injunction in light of the FSPTCA, which motion was denied in June 2011. Defendants appealed the trial court’s ruling to the U.S. Court of Appeals for the District of Columbia Circuit. In July 2012, the Court of Appeals

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affirmed the district court’s denial of defendants’ motion to vacate the district court’s injunction.

Remaining issues pending include: (i) the ~~specifics relating to~~content of the court-ordered corrective ~~statements~~communications and (ii) the requirements related to point-of-sale signage. In November 2012, the district court issued its order specifying the content of the corrective ~~statements~~communications described above. The district court’s order ~~requires that~~required the parties to engage in negotiations with the special master regarding implementation of the corrective ~~statements remedy.~~communications remedy for television, newspapers, cigarette pack onserts and websites. In January 2013, defendants filed a notice of appeal from the order on the content and vehicles of the corrective ~~statements~~communications and a motion to hold the appeal in abeyance pending completion of the negotiations, which the U.S. Court of Appeals granted in February 2013. OnIn January ~~10,~~ 2014, the parties submitted a motion for entry of a consent order in the district court, setting forth their agreement on the implementation details of the corrective communications remedy. The agreement provides that the “trigger date” for implementation is after the appeal on the content of the communications has been exhausted. Also in January 2014,

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the district court convened a hearing and ordered further briefing. A number of amici who sought modification or rejection of the agreement for a variety of reasons were given leave to appear: National Newspaper Publishers Association, National Association of Black Owned Broadcasters, Inc., National Association for the Advancement of Colored People, The Little Rock Sun Community Newspaper, Turner Broadcasting System, Inc., The CW Network, LLC, Univision Communications Inc., Radio One, Inc., TV One, LLC, Interactive One, LLC, Fox Broadcasting Company, Viacom Inc. and A&E Television Networks, LLC. In April 2014, the parties filed an amended proposed consent order and accompanying submission in the district court seeking entry of a revised agreement on the implementation details of the corrective communications remedy. In June 2014, the district court approved the April 2014 proposed consent order. Also in June 2014, defendants filed a notice of appeal of the consent order solely for the purpose of perfecting the U.S. Court of Appeals’ jurisdiction over the pending appeal relating to the content and vehicles of the corrective communications and, in July 2014, defendants moved to consolidate this appeal with the appeal filed in January 2013. The U.S. Court of Appeals granted the motion to consolidate in August 2014. Oral argument is scheduled for February 23, 2015.

In the second quarter of 2014, Altria Group, Inc. and PM USA recorded provisions on each of their respective balance sheets totaling $31 million for the estimated costs of implementing the corrective communications remedy. This estimate is subject to change due to several factors, including the outcome of the appeal on the content of the corrective communications, though Altria Group, Inc. and PM USA do not expect any change in this estimate to be material.

The consent order approved by the district court in June 2014 did not address the requirements related to point-of-sale signage. In May 2014, the district court ordered further briefing by the parties on the issue of corrective statements on point-of-sale signage, which was completed in June 2014.

In December 2011, the parties to the lawsuit entered into an agreement as to the issues concerning the document repository. Pursuant to this agreement, PM USA agreed to deposit an amount of approximately $3.1 million into the district court in installments over a five-year period.

“Lights/Ultra Lights” Cases

▪Overview: Plaintiffs in certain pending matters seek certification of their cases as class actions and allege, among other things, that the uses of the terms “Lights” and/or “Ultra Lights” constitute deceptive and unfair trade practices, common law or statutory fraud, unjust enrichment or breach of warranty, and seek injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria Group, Inc. or its subsidiaries, on behalf of individuals who purchased and consumed various

brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury and damages, the statute of limitations, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. As of ~~December 31, 2013~~,January 27, 2015, a total of 1512 such ~~cases are pending in the United States.~~ ~~Three~~ ~~of these cases are pending in U.S. federal courts as discussed below. The other~~ cases are pending in various U.S. state courts. ~~In addition, a purported “Lights” class action is pending against PM USA in Israel (El-Roy~~).

In El-Roy, ~~hearings on plaintiffs’ motion for~~a purported “Lights” class ~~certification were held~~action in ~~November and December 2008, and an additional hearing on class certification was held in November 2011. In November 2012,~~Israel, the trial court denied

the plaintiffs’ motion for class certification and ordered the plaintiffs to pay defendants approximately $100,000 in ~~attorney~~attorneys’ fees. Plaintiffs in that case ~~have~~ noticed an appeal. Oral argument at the Israel Supreme Court occurred on November 17, 2014, and the same day plaintiffs agreed to accept judgment against them in return for trial costs. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

▪The Good Case: In May 2006, a federal trial court in Maine granted PM USA’s motion for summary judgment in Good, a purported “Lights” class action, on the grounds that plaintiffs’ claims are preempted by the Federal Cigarette Labeling and Advertising Act (“FCLAA”) and dismissed the case. In December 2008, the United States Supreme Court ruled that plaintiffs’ claims are not barred by federal preemption. Although the Court rejected the argument that the FTC’s actions were so extensive with respect to the descriptors that the state law claims were barred as a matter of federal law, the Court’s decision was limited: it did not address the ultimate merits of plaintiffs’ claim, the viability of the action as a class action or other state law issues. The case was returned to the federal court in Maine and consolidated with other federal cases in the multidistrict litigation proceeding discussed below. In June 2011, the plaintiffs voluntarily dismissed the case without prejudice after the district court denied plaintiffs’ motion for class certification, concluding the litigation.

▪Federal Multidistrict Proceeding and Subsequent Developments: Since the December 2008 United States Supreme Court decision in Good, and through January 27, ~~2014,~~2015, 26 purported “Lights” class actions were served upon PM USA and, in certain cases, Altria Group, Inc. These cases were filed in 15 states, the U.S. Virgin Islands and the District of Columbia. All of these cases either were filed in federal court or were removed to federal court by PM USA and were transferred and consolidated by the Judicial Panel on Multidistrict Litigation (“JPMDL”) before the U.S. District Court for the District of Maine for pretrial proceedings (“MDL proceeding”).

In November 2010, the district court in the MDL proceeding denied plaintiffs’ motion for class certification in four cases, covering the jurisdictions of California, the District of Columbia, Illinois and Maine. These jurisdictions

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were selected by the parties as sample cases, with two selected by plaintiffs and two selected by defendants. Plaintiffs sought appellate review of this decision but, in February 2011, the U.S. Court of Appeals for the First Circuit denied plaintiffs’ petition for leave to appeal. Later that year, plaintiffs in 13 cases voluntarily dismissed without prejudice their cases. In April 2012, the JPMDL remanded the remaining four cases (Phillips, Tang, Wyatt and Cabbat) back to the federal district courts in which the suits originated. These cases were ultimately resolved in a manner favorable to PM USA.

In Tang, which was pending in the U.S. District Court for the Eastern District of New York, the plaintiffs voluntarily

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dismissed the case without prejudice in July 2012, concluding the litigation.

In Phillips, which ~~is now~~was pending in the U.S. District Court for the Northern District of Ohio, ~~defendants filed in June 2012 a motion~~following the district court’s denial of class certification, PM USA made an offer of judgment to resolve the case for ~~partial judgment on the pleadings on plaintiffs’ class action consumer sales practices claims~~$6,000, which plaintiff accepted, and ~~a motion for judgment on the pleadings on plaintiffs’ state deceptive trade practices claims. In March 2013,~~ the court ~~granted defendants’ motions, dismissing with prejudice~~dismissed the associated claims. In April 2013, defendants filed a motion for judgment on the pleadings on the class component of plaintiffs’ claims for fraud and unjust enrichment. If defendants’ motion is successful, the only remaining claims that could potentially be pursued on a class-wide basis would be claims for implied and express warranty. Plaintiffs filed a motion for class certification in August 2013, which the court heard on October 30, 2013. On November 5, 2013, the district court, upon agreement of the parties, dismissed Altria Group, Inc. without prejudice. PM USA is now the sole defendant in the case.

In Cabbat, ~~which is pending in~~ the U.S. District Court for the District of Hawaii denied plaintiffs’ class certification motion in January 2014. After plaintiffs ~~amended their complaint~~were unsuccessful in obtaining appellate review, in July 2012, adding a claim for unjust enrichment and dropping their claims for breach of express and implied warranty. Plaintiffs filed a motion for class certification in April 2013, which the trial court denied on January 6, 2014. On January 13, 2014, the ~~trial~~parties filed, and the court ~~vacated the trial date of February 10, 2014. A new trial date has not been set. On January 21, 2014, plaintiffs petitioned the U.S. Court of Appeals~~approved, a stipulation for ~~the Ninth Circuit for appellate review of the class certification decision.~~

dismissal with prejudice. In Wyatt, ~~which is pending in~~ the U.S. District Court for the Eastern District of Wisconsin ~~plaintiffs filed a motion for~~denied plaintiffs’ class certification ~~in January 2013, which the court denied~~motion in August 2013. ~~Also~~After plaintiffs were unsuccessful in ~~August 2013, plaintiffs filed a petition~~obtaining appellate review, PM USA made an offer of judgment to resolve the case for ~~appeal to the U.S. Court of Appeals for the Seventh Circuit,~~$1,000, which ~~the court denied~~plaintiff accepted in September ~~2013. In October 2013, plaintiffs filed a motion in the~~2014. The district court ~~seeking reconsideration of~~dismissed the ~~denial of class certification.~~case in October 2014.

▪“Lights” Cases Dismissed, Not Certified or Ordered De-Certified: ~~To date,~~As of January 27, 2015, in addition to the federal district court in the MDL proceeding, 18 courts in 19 “Lights” cases have refused to certify class actions, dismissed class action allegations, reversed prior class certification decisions or have entered judgment in favor of PM USA.

Trial courts in Arizona, Hawaii, Illinois, Kansas, New Jersey, New Mexico, Ohio, Tennessee, Washington and Wisconsin have refused to grant class certification or have dismissed plaintiffs’ class action allegations. Plaintiffs voluntarily dismissed a case in Michigan after a trial court dismissed the claims plaintiffs asserted under the Michigan Unfair Trade and Consumer Protection Act.

Several appellate courts have issued rulings that either affirmed rulings in favor of Altria Group, Inc. and/or PM

USA or reversed rulings entered in favor of plaintiffs. In Florida, an intermediate appellate court overturned an order by a trial court that granted class certification in Hines. The Florida Supreme Court denied review in January 2008. The Supreme Court of Illinois ~~has~~ overturned a judgment that awarded damages to a certified class in the Price case. See The Price Case below for further discussion. In Louisiana, the U.S. Court of Appeals for the Fifth Circuit dismissed a purported “Lights” class action ~~brought in Louisiana federal court~~ (Sullivan) on the grounds that plaintiffs’ claims were preempted by the FCLAA. In New York, the

U.S. Court of Appeals for the Second Circuit overturned a ~~decision by a New York~~ trial court decision in Schwab that granted plaintiffs’ motion for certification of a nationwide class of all U.S. residents that purchased cigarettes in the United States that were labeled “Light” or “Lights.” In July 2010, plaintiffs in Schwab voluntarily dismissed the case with prejudice. In Ohio, the Ohio Supreme Court overturned class certifications in the Marrone and Phillips cases. Plaintiffs voluntarily dismissed without prejudice both cases in August 2009, but refiled in federal court as the Phillips case(discussed ~~above).~~above. The Supreme Court of Washington denied a motion for interlocutory review filed by the plaintiffs in the Davies case that sought review of an order by the trial court that refused to certify a class. Plaintiffs subsequently voluntarily dismissed the Davies case with prejudice. In August 2011, the U.S. Court of Appeals for the Seventh Circuit affirmed the Illinois federal district court’s dismissal of “Lights” claims brought against PM USA in the Cleary case. In Curtis, a certified class action, in May 2012, the Minnesota Supreme Court affirmed the trial court’s entry of summary judgment in favor of PM USA, concluding this litigation.

In Lawrence, in August 2012, the New Hampshire Supreme Court reversed the trial court’s order to certify a class and subsequently denied plaintiffs’ rehearing petition. In October 2012, the case was dismissed after plaintiffs filed a motion to dismiss the case with prejudice, concluding this litigation.

▪State Trial Court Class Certifications: State trial courts have certified classes against PM USA in several jurisdictions. Over time, several such cases have been dismissed by the courts at the summary judgment stage. Certified class actions remain pending at the trial or appellate level in California (Brown), Massachusetts (Aspinall), Missouri (Larsen) and Arkansas (Miner). Significant developments in these cases include:

Aspinall: In August 2004, the Massachusetts Supreme Judicial Court affirmed the class certification order. In August 2006, the trial court denied PM USA’s motion for summary judgment and granted plaintiffs’ cross-motion for summary judgment on the defenses of federal preemption and a state law exemption to Massachusetts’ consumer protection statute. On motion of the parties, the trial court subsequently reported its decision to deny summary judgment to the appeals court for review and stayed further proceedings pending completion of the appellate review. In March 2009, the Massachusetts Supreme Judicial Court affirmed the order denying summary judgment to PM USA and granting the plaintiffs’ cross-motion. In January 2010, plaintiffs moved for partial summary judgment as to liability claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Health Care Cost Recovery Litigation - Federal Government’s Lawsuit described above). In March 2012, the trial court denied plaintiffs’ motion. In February 2013, the trial court, upon agreement of the parties, dismissed without

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prejudice plaintiffs’ claims against Altria Group, Inc. PM USA is now the sole defendant in the case. In September 2013, the case was transferred to the Business Litigation Session of the Massachusetts Superior Court. Also in September 2013, plaintiffs filed a motion for partial summary judgment on the scope of remedies available in the case, which the Massachusetts Superior Court denied in February 2014, concluding that plaintiffs cannot obtain disgorgement of profits as an equitable remedy and that their recovery is limited to actual damages or $25 per class member if they cannot prove actual damages greater than $25. Plaintiffs filed a motion asking the trial court to report its February 2014 ruling to the Massachusetts Appeals Court for review, which the trial court denied. In March 2014, plaintiffs petitioned the Massachusetts Appeals Court for review of the ruling, which the appellate court denied. Trial is scheduled to begin October 19, 2015.

Brown: In June 1997, plaintiffs filed suit in California state court alleging that domestic cigarette manufacturers, including PM USA and others, violated California law regarding unfair, unlawful and fraudulent business practices. In May 2009, the California Supreme Court reversed an earlier trial court decision that decertified the class and remanded the case to the trial court. At that time, the class consisted of individuals who, at the time they were residents of California, (i) smoked in California one or more cigarettes manufactured by PM USA that were labeled and/or advertised with the terms or phrases “light,” “medium,” “mild,” “low tar,” and/or “lowered tar and nicotine,” but not including any cigarettes labeled or advertised with the terms or phrases “ultra light” or “ultra low tar,” and (ii) who were exposed to defendant’s marketing and advertising activities in California. Plaintiffs are seeking restitution of a portion of the costs of “light” cigarettes purchased during the class period and injunctive relief ordering corrective communications. In September 2012, at the plaintiffs’ request, the trial court dismissed all defendants except PM USA from the lawsuit. Trial began in April 2013. In May 2013 the plaintiffs redefined the class to include California residents who smoked in California one or more of defendant’s Marlboro Lights cigarettes between January 1, 1998 and April 23, 2001, and who were exposed to defendant’s marketing and advertising activities in California. In June 2013, PM USA filed a motion to decertify the class. Trial concluded in July 2013. In September 2013, the court issued a final Statement of Decision, in which the court found that PM USA violated California law, but that plaintiffs had not established a basis for relief. On this basis, the court granted judgment for PM USA. The court also denied PM USA’s motion to decertify the class. In October 2013, the court entered final judgment in favor of PM USA. In November 2013, plaintiffs moved for a new trial, which the court denied. In December 2013, plaintiffs filed a notice of appeal and PM USA filed a conditional cross-appeal. In February 2014, the trial court

awarded PM USA $764,553 in costs. Also in February 2014, plaintiffs appealed the costs award.

Larsen: In August 2005, a Missouri Court of Appeals affirmed the class certification order. In December 2009, the trial court denied plaintiffs’ motion for reconsideration of the period during which potential class members can qualify to become part of the class. The class period remains 1995-2003. In June 2010, PM USA’s motion for partial summary judgment regarding plaintiffs’ request for punitive damages was denied. In April 2010, plaintiffs moved for partial summary judgment as to an element of liability in the case, claiming collateral estoppel from the findings in the case brought by the Department of Justice (see Health Care Cost Recovery Litigation - Federal Government’s Lawsuit described above). The plaintiffs’ motion was denied in December 2010. In June 2011, PM USA filed various summary judgment motions challenging the plaintiffs’ claims. In August 2011, the trial court granted PM USA’s motion for partial summary judgment, ruling that plaintiffs could not present a damages claim based on allegations that Marlboro Lights are more dangerous than Marlboro Reds. The trial court denied PM USA’s remaining summary judgment motions. Trial in the case began in September 2011 and, in October 2011, the court declared a mistrial after the jury failed to reach a verdict. In January 2014, the trial court reversed its prior ruling granting partial summary judgment against plaintiffs’ “more dangerous” claim and allowed plaintiffs to pursue that claim. In October 2014, PM USA filed motions to decertify the class and for partial summary judgment on plaintiffs’ “more dangerous” claim. A trial date has not been set.

Miner:In June 2007, the United States Supreme Court reversed the lower court rulings in Miner (formerly known as Watson) that denied plaintiffs’ motion to have the case heard in a state, as opposed to federal, trial court. The Supreme Court rejected defendants’ contention that the case must be tried in federal court under the “federal officer” statute. Following remand, the case was removed again to federal court in Arkansas and transferred to the MDL proceeding discussed above. In November 2010, the district court in the MDL proceeding remanded the case to Arkansas state court. In December 2011, plaintiffs voluntarily dismissed their claims against Altria Group, Inc. without prejudice. In March 2013, plaintiffs filed a class certification motion. In November 2013, the trial court granted class certification. The certified class includes those individuals who, from November 1, 1971 through June 22, 2010, purchased Marlboro Lights, including Marlboro Ultra Lights, for personal consumption in Arkansas. PM USA filed a notice of appeal of the class certification ruling to the Arkansas Supreme Court in December 2013. Oral argument is scheduled for February 12, 2015.

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▪Other Developments: In Oregon (Pearson), a state court denied plaintiffs’ motion for interlocutory review of the trial court’s refusal to certify a class. In February 2007, PM USA filed a motion for summary judgment based on federal preemption and the Oregon statutory exemption. In September 2007, the district court granted PM USA’s motion based on express preemption under the FCLAA, and plaintiffs appealed this dismissal and the class certification denial to the Oregon Court of Appeals. Argument was held in April 2010. In June 2013, the Oregon Court of Appeals reversed the trial court’s denial of class certification and remanded to the trial court for further consideration of class certification. In July 2013, PM USA filed a petition for reconsideration with the Oregon Court of Appeals, which was denied in August 2013. PM USA filed its petition for review to the Oregon Supreme Court onin October ~~25,~~ 2013, which the court accepted on

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in January ~~16,~~ 2014. Oral argument ~~is scheduled for~~occurred in June ~~23,~~ 2014.

In December 2009, the state trial court in Carroll (formerly known as Holmes) (pending in Delaware) denied PM USA’s motion for summary judgment based on an exemption provision in the Delaware Consumer Fraud Act. In January 2011, the trial court allowed the plaintiffs to file an amended complaint substituting class representatives and naming Altria Group, Inc. and PMI as additional defendants. In ~~July 2011, the parties stipulated to the dismissal without prejudice of Altria Group, Inc. and PMI. In~~ February 2013, the trial court approved the parties’ stipulation to the dismissal without prejudice of Altria Group, Inc. and ~~PMI.~~PMI, leaving PM USA ~~is now~~as the sole defendant in the case.

▪The Price Case: Trial in Price commenced in state court in Illinois in January 2003 and, in March 2003, the judge found in favor of the plaintiff class and awarded $7.1 billion in compensatory damages and $3.0 billion in punitive damages against PM USA. In December 2005, the Illinois Supreme Court reversed the trial court’s judgment in favor of the plaintiffs. In November 2006, the United States Supreme Court denied plaintiffs’ petition for writ of certiorari and, in December 2006, the Circuit Court of Madison County enforced the Illinois Supreme Court’s mandate and dismissed the case with prejudice.

In December 2008, plaintiffs filed with the trial court a petition for relief from the final judgment that was entered in favor of PM USA. Specifically, plaintiffs sought to vacate the judgment entered by the trial court on remand from the 2005 Illinois Supreme Court decision overturning the verdict on the ground that the United States Supreme Court’s December 2008 decision in Good demonstrated that the Illinois Supreme Court’s decision was “inaccurate.” PM USA filed a motion to dismiss plaintiffs’ petition and, in February 2009, the trial court granted PM USA’s motion on the basis that the petition was not timely filed. In March 2009, the Price plaintiffs filed a notice of appeal with the Fifth Judicial District of the Appellate Court of Illinois. In February 2011, the intermediate appellate court ruled that the petition was timely filed and reversed the trial court’s dismissal of the plaintiffs’ petition and, in September 2011, the Illinois

Supreme Court declined PM USA’s petition for review. As a result, the case was returned to the trial court for proceedings on whether the court should grant the plaintiffs’ petition to reopen the prior judgment. In February 2012, plaintiffs filed an amended petition, which PM USA opposed. Subsequently, in responding to PM USA’s opposition to the amended petition, plaintiffs asked the trial court to reinstate the original judgment. The trial court denied plaintiffs’ petition in December 2012. In January 2013, plaintiffs filed a notice of appeal with the Fifth Judicial District. In January 2013, PM USA filed a motion asking the Illinois Supreme Court to immediately exercise its jurisdiction over the appeal. In February 2013, the Illinois Supreme Court denied PM USA’s

motion. Oral argument on plaintiffs’ appeal to the Fifth Judicial District was heard in October 2013.In April 2014, the Fifth Judicial District reversed and ordered reinstatement of the original $10.1 billion trial court judgment against PM USA. In May 2014, PM USA filed in the Illinois Supreme Court a petition for a supervisory order and a petition for leave to appeal. The filing of the petition for leave to appeal automatically stayed the Fifth District’s mandate pending disposition by the Illinois Supreme Court. Also in May 2014, plaintiffs filed a motion seeking recusal of Justice Karmeier, one of the Illinois Supreme Court justices, which PM USA opposed. In September 2014, the Illinois Supreme Court granted PM USA’s motion for leave to appeal and took no action on PM USA’s motion for a supervisory order. Justice Karmeier denied plaintiffs’ motion seeking his recusal.

In June 2009, the plaintiff in an individual smoker lawsuit (Kelly) brought on behalf of an alleged smoker of “Lights” cigarettes in Madison County, Illinois state court filed a motion seeking a declaration that his claims under the Illinois Consumer Fraud Act are not (i) barred by the exemption in that statute based on his assertion that the Illinois Supreme Court’s decision in Price is no longer good law in light of the decisions by the United States Supreme Court in Good and Watson, and (ii) preempted in light of the United States Supreme Court’s decision in Good. In September 2009, the court granted plaintiff’s motion as to federal preemption, but denied it with respect to the state statutory exemption.

▪~~State Trial Court Class Certifications:~~ State trial courts have certified classes against PM USA in several jurisdictions. Over time, several such cases have been dismissed by the courts at the summary judgment stage. Certified class actions remain pending at the trial or appellate level in California (~~Brown), Massachusetts (Aspinall),~~ ~~Missouri (Larsen) and Arkansas (Miner). Significant developments in these cases include:~~

▪

~~Aspinall~~: In August 2004, the Massachusetts Supreme Judicial Court affirmed the class certification order. In August 2006, the trial court denied PM USA’s motion for summary judgment and granted plaintiffs’ cross-motion for summary judgment on the defenses of federal preemption and a state law exemption to Massachusetts’ consumer protection statute. On motion of the parties, the trial court subsequently reported its decision to deny summary judgment to the appeals court for review and stayed further proceedings pending completion of the appellate review. In March 2009, the Massachusetts Supreme Judicial Court affirmed the order denying summary judgment to PM USA and granting the plaintiffs’ cross-motion. In January 2010, plaintiffs moved for partial summary judgment as to liability claiming collateral estoppel from the findings in the case brought by the Department of Justice (see ~~Health Care Cost Recovery Litigation - Federal Government’s Lawsuit~~ described above). In March 2012, the trial court denied plaintiffs’ motion. In February 2013, the trial court, upon agreement of the parties, dismissed without prejudice plaintiffs’ claims against Altria Group, Inc. PM USA is now the sole defendant in the case. In September 2013, the case was transferred to the Business Litigation Session of the Massachusetts Superior Court. Also in September 2013, plaintiffs filed a motion for partial summary

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~~judgment on the scope of remedies available in the case.~~

▪

~~Brown~~: In June 1997, plaintiffs filed suit in California state court alleging that domestic cigarette manufacturers, including PM USA and others, violated California law regarding unfair, unlawful and fraudulent business practices. In May 2009, the California Supreme Court reversed an earlier trial court decision that decertified the class and remanded the case to the trial court. The class consists of individuals who, at the time they were residents of California, (i) smoked in California one or more cigarettes manufactured by PM USA that were labeled and/or advertised with the terms or phrases “light,” “medium,” “mild,” “low tar,” and/or “lowered tar and nicotine,” but not including any cigarettes labeled or advertised with the terms or phrases “ultra light” or “ultra low tar,” and (ii) who were exposed to defendant’s marketing and advertising activities in California. Plaintiffs are seeking restitution of a portion of the costs of “light” cigarettes purchased during the class period and injunctive relief ordering corrective communications. In September 2012, at the plaintiffs’ request, the trial court dismissed all defendants except PM USA from the lawsuit. Trial began in April 2013. In May 2013 the plaintiffs redefined the class to include California residents who smoked in California one or more of defendant’s ~~Marlboro~~ Lights cigarettes between January 1, 1998 and April 23, 2001, and who were exposed to defendant’s marketing and advertising activities in California. In June 2013, PM USA filed a motion to decertify the class. Trial concluded in July 2013. In September 2013, the court issued a final Statement of Decision, in which the court found that PM USA violated California law, but that plaintiffs had not established a basis for relief. On this basis, the court granted judgment for PM USA. The court also denied PM USA’s motion to decertify the class. In October 2013, the court entered final judgment in favor of PM USA. PM USA filed a motion seeking $766,321 in costs as the prevailing party. On October 30, 2013, plaintiffs filed a motion for sanctions seeking to offset PM USA’s claimed costs in light of alleged discovery violations and, on November 8, 2013, filed a motion requesting the court deny or reduce such costs. On November 8, 2013, plaintiffs moved for a new trial, which the court denied on December 12, 2013. On December 13, 2013, plaintiffs filed a notice of appeal and, on January 2, 2014, PM USA filed a conditional cross appeal.

▪

~~Larsen~~: In August 2005, a Missouri Court of Appeals affirmed the class certification order. In December 2009, the trial court denied plaintiffs’ motion for reconsideration of the period during which potential class members can qualify to become part of the class. The class period remains 1995 - 2003. In June 2010, PM USA’s motion for partial summary judgment regarding plaintiffs’ request for punitive damages was denied. In April 2010, plaintiffs moved for partial summary judgment as to an element of liability in the case, claiming collateral estoppel from the findings in the case brought by the Department of Justice (see ~~Federal Government’s Lawsuit~~ described above). The plaintiffs’ motion was denied in December 2010. In June 2011, PM USA filed various summary judgment motions challenging the plaintiffs’ claims. In August 2011, the trial court granted PM USA’s motion for partial summary judgment, ruling that plaintiffs could not present a damages claim based on allegations that ~~Marlboro~~ ~~Lights are more dangerous than~~ ~~Marlboro~~ Reds. The trial court denied PM USA’s remaining summary judgment motions. Trial in the case began in September 2011 and, in October 2011 the court declared a mistrial after the jury failed to reach a verdict. On January 27, 2014, the trial court reversed its prior ruling granting partial summary judgment against plaintiffs’ “more dangerous” claim and allowed plaintiffs to pursue that claim. Currently, there is no scheduled trial date.

▪

~~Miner:~~ ~~In June 2007, the United States Supreme Court reversed the lower court rulings in~~ ~~Miner~~ ~~(formerly known as~~ ~~Watson~~) that denied plaintiffs’ motion to have the case heard in a state, as opposed to federal, trial court. The Supreme Court rejected defendants’ contention that the case must be tried in federal court under the “federal officer” statute. The case was removed to federal court in Arkansas and the case was transferred to the MDL proceeding discussed above. In November 2010, the district court in the MDL proceeding remanded the case to Arkansas state court. In December 2011, plaintiffs voluntarily dismissed their claims against Altria Group, Inc. without prejudice. In March 2013, plaintiffs filed a class certification motion. On November 8, 2013, the trial court granted class certification. The certified class includes those individuals who, from November 1, 1971 through June 22, 2010, purchased ~~Marlboro Lights, including~~ ~~Marlboro~~ ~~Ultra Lights, for personal consumption in Arkansas. PM USA filed a notice of appeal of the class certification ruling to the Arkansas Supreme Court on December 2, 2013.~~

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~~Notes to Consolidated Financial Statements~~

~~_________________________~~

Certain Other Tobacco-Related Litigation

▪Tobacco Price Case: One case remains pending in Kansas (Smith) in which plaintiffs allege that defendants, including PM USA and Altria Group, Inc., conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs’ motion for class certification was granted. In March 2012, the trial court granted defendants’ motions for summary judgment. Plaintiffs sought the trial court’s reconsideration of its decision, but in June 2012, the trial court denied plaintiffs’ motion for reconsideration. Plaintiffs ~~have~~ appealed the decision, and defendants ~~have~~ cross-appealed the trial court’s class certification decision, to the Court of Appeals of Kansas. ~~Oral argument occurred on December 11, 2013.~~In July 2014, the Court of Appeals affirmed the entry of summary judgment in favor of defendants. Plaintiffs filed a

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petition for review in the Kansas Supreme Court in August 2014.

▪Ignition Propensity Cases: PM USA and Altria Group, Inc. are currently facing litigation alleging that a fire caused by cigarettes led to individuals’ deaths. In a Kentucky case (Walker), the federal district court denied plaintiffs’ motion to remand the case to state court and dismissed plaintiffs’ claims in February 2009. Plaintiffs subsequently filed a notice of appeal. In October 2011, the U.S. Court of Appeals for the Sixth Circuit reversed the portion of the district court decision that denied remand of the case to Kentucky state court and remanded the case to Kentucky state court. The Sixth Circuit did not address the merits of the district court’s dismissal order. Defendants’ petition for rehearing with the Sixth Circuit was denied in December 2011. Defendants filed a renewed motion to dismiss in state court in March 2013. Based on new evidence, in June 2013, defendants removed the case for a second time to the U.S. District Court for the Western District of Kentucky and re-filed their motion to dismiss in June 2013. In July 2013, plaintiffs filed a motion to remand the case to Kentucky state ~~court.~~court, which was granted in March 2014.

▪False Claims Act Case: PM USA is a defendant in a qui tam action filed in the U.S. District Court for the District of Columbia (United States ex rel. Anthony Oliver) alleging violation of the False Claims Act in connection with sales of cigarettes to the U.S. military. The relator contends that PM USA violated “most favored customer” provisions in government contracts and regulations by selling cigarettes to non-military customers in overseas markets at more favorable prices than it sold to the U.S. military exchange services for resale on overseas military bases in those same markets. The relator has dropped Altria Group, Inc. as a defendant and has dropped claims related to post-MSA price increases on cigarettes sold to the U.S. military. In July 2012, PM USA filed a motion to dismiss, which was granted on jurisdictional grounds in June 2013, and the case was dismissed with prejudice. In July 2013, the relator appealed the dismissal to the U.S. Court of Appeals for the ~~D.C.~~District of Columbia Circuit. Oral argument occurred in May 2014. In August 2014, the Court of Appeals reversed the jurisdictional issue and remanded the case to the district court for further proceedings, including consideration of PM USA’s alternative grounds for dismissal. On October 28, 2014, PM USA filed a second motion to dismiss in the U.S. District Court for the District of Columbia for lack of subject matter jurisdiction based on issues left unresolved by the opinion of the Court of Appeals for the District of Columbia Circuit.

▪Argentine Grower Cases: PM USA and Altria Group, Inc. are named as defendants in ~~five~~six cases (Hupan, Chalanuk,

Rodriguez Da Silva, Aranda, Taborda and ~~Taborda~~Biglia) filed in Delaware state court against multiple defendants by the parents of Argentine children born with alleged birth defects. Plaintiffs in these cases allege that they grew tobacco in

Argentina under contract with Tabacos Norte S.A., an alleged subsidiary of PMI, and that they and their infant children were exposed directly and in utero to hazardous herbicides and pesticides used in the production and cultivation of tobacco. Plaintiffs seek compensatory and punitive damages against all defendants. ~~Altria Group, Inc. and PM USA are in discussions with PMI regarding indemnification for these cases pursuant to the Distribution Agreement between Altria Group, Inc. and PMI. See~~ ~~Guarantees and Other Similar Matters~~ ~~below for a discussion of the Distribution Agreement.~~ In December 2012, Altria Group, Inc. and certain other defendants were dismissed from the Hupan, Chalanuk and Rodriguez Da Silva cases. Altria Group, Inc. and certain other defendants were dismissed from Aranda ~~and~~, Taborda and Biglia in May 2013, ~~and~~ October 2013 and February 2014, respectively. The three remaining defendants in the ~~five~~six cases are PM USA, Philip Morris Global Brands Inc. (a subsidiary of PMI) and Monsanto Company. Following discussions regarding indemnification for these cases pursuant to the Distribution Agreement between PMI and Altria Group, Inc.,PMI and PM USA have agreed to resolve conflicting indemnity demands after final judgments are entered. See Guarantees and Other Similar Matters below for a discussion of the Distribution Agreement. In April 2014, all three defendants in the Hupan case filed motions to dismiss for failure to state a claim, and PM USA and Philip Morris Global Brands filed separate motions to dismiss based on the doctrine of forum non conveniens. All proceedings in the other five cases are currently stayed pending the court’s resolution of the motions to dismiss filed in Hupan.

UST Litigation

Claims related to smokeless tobacco products generally fall within the following categories:

First, UST and/or its tobacco subsidiaries ~~has~~have been named in certain actions in West Virginia (See In re: Tobacco Litigation above) brought by or on behalf of individual plaintiffs against cigarette manufacturers, smokeless tobacco manufacturers and other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. Included among the plaintiffs are five individuals alleging use of USSTC’s smokeless tobacco products and alleging the types of injuries claimed to be associated with the use of smokeless tobacco products. USSTC, along with other non-cigarette manufacturers, has remained severed from such proceedings since December 2001.

Second, UST and/or its tobacco subsidiaries has been named in a number of other individual tobacco and health suits over time. Plaintiffs’ allegations of liability in these cases are based on various theories of recovery, such as negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of implied warranty, addiction and breach of consumer protection statutes. Plaintiffs seek various forms of relief, including compensatory and punitive damages, and certain equitable relief, including but not limited to disgorgement. Defenses raised in these cases include lack of causation, assumption of the risk, comparative fault and/or contributory negligence, and statutes of limitations. USSTC is currently named in one such action in ~~Florida (Vassallo~~).

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Florida (Vassallo). In December 2014, the court entered a scheduling order setting trial to commence in the first quarter of 2016.

Environmental Regulation

Altria Group, Inc. and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States: The Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria Group, Inc. are involved in several matters subjecting them to potential costs of remediation and natural resource damages under Superfund or other laws and regulations. Altria Group, Inc.’s subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations.

Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change. Other than those amounts, it is not possible to reasonably estimate the cost of any environmental remediation and compliance efforts that subsidiaries of Altria Group, Inc. may undertake in the future. In the opinion of management, however, compliance with environmental laws and regulations, including the payment of any remediation costs or damages and the making of related expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.’s consolidated results of operations, capital expenditures, financial position or cash flows.

Guarantees and Other Similar Matters

In the ordinary course of business, certain subsidiaries of Altria Group, Inc. have agreed to indemnify a limited number of third parties in the event of future litigation. At December 31, ~~2013~~,2014, Altria Group, Inc. and certain of its subsidiaries (i) had $66 million of unused letters of credit obtained in the ordinary course of business; (ii) were ~~also~~ contingently liable for $32 million of guarantees, consisting primarily of surety bonds, related to their own ~~performance, consisting primarily~~performance; and (iii) had a redeemable noncontrolling interest of ~~surety bonds.~~$35 million recorded on

its consolidated balance sheet. In addition, from time to time, subsidiaries of Altria Group, Inc. issue lines of credit to

affiliated entities. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.’s liquidity.

Under the terms of a distribution agreement between Altria Group, Inc. and PMI (the “Distribution Agreement”), entered into as a result of Altria Group, Inc.'s’s 2008 spin-off of its former subsidiary PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria Group, Inc. and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. Altria Group, Inc. does not have a related liability recorded on its consolidated balance sheet at December 31, ~~2013~~2014 as the fair value of this indemnification is insignificant.

As more fully discussed in Note 19. Condensed Consolidating Financial Information, PM USA has issued guarantees relating to Altria Group, Inc.’s obligations under its outstanding debt securities, borrowings under the Credit Agreement and amounts outstanding under its commercial paper program.

Redeemable Noncontrolling Interest

In September 2007, Ste. Michelle completed the acquisition of Stag’s Leap Wine Cellars through one of its consolidated subsidiaries, Michelle-Antinori, LLC (“Michelle-Antinori”), in which Ste. Michelle holds an 85% ownership interest with a 15% noncontrolling interest held by Antinori California (“Antinori”). In connection with the acquisition of Stag’s Leap Wine Cellars, Ste. Michelle entered into a put arrangement with Antinori. The put arrangement, as later amended, provides Antinori with the right to require Ste. Michelle to purchase its 15% ownership interest in Michelle-Antinori at a price equal to Antinori’s initial investment of $27 million. The put arrangement became exercisable onin September ~~11,~~ 2010 and has no expiration date. As of December 31, ~~2013~~,2014, the redemption value of the put arrangement did not exceed the noncontrolling interest balance. Therefore, no adjustment to the value of the redeemable noncontrolling interest was recognized on the consolidated balance sheet for the put arrangement.

The noncontrolling interest put arrangement is accounted for as mandatorily redeemable securities because redemption is outside of the control of Ste. Michelle. As such, the redeemable noncontrolling interest is reported in the mezzanine equity section on the consolidated balance sheets at December 31, ~~2013~~2014 and ~~2012.~~2013.

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Note 19. Condensed Consolidating Financial Information

PM USA, which is a ~~wholly-owned~~100% owned subsidiary of Altria Group, Inc., has guaranteed Altria Group, Inc.’s obligations under its outstanding debt securities, borrowings under its Credit Agreement and amounts outstanding under its commercial paper program (the “Guarantees”). Pursuant to the Guarantees, PM USA fully and unconditionally guarantees, as primary obligor, the payment and performance of Altria Group, Inc.’s obligations under the guaranteed debt instruments (the “Obligations”), subject to release under certain customary circumstances as noted below.

The Guarantees provide that PM USA guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of PM USA under the Guarantees is absolute and unconditional irrespective of: any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, Altria Group, Inc. or PM USA.

The obligations of PM USA under the Guarantees are limited to the maximum amount as will not result in PM USA’s obligations under the Guarantees constituting a fraudulent transfer or conveyance, after giving effect to such maximum amount and all other contingent and fixed liabilities of PM USA that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the ~~Guarantees, result in PM USA’s obligations under the Guarantees not constituting a fraudulent transfer or conveyance.~~Guarantees. For this

purpose, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.

PM USA will be unconditionally released and discharged from the Obligations upon the earliest to occur of:

▪the date, if any, on which PM USA consolidates with or merges into Altria Group, Inc. or any successor;

▪the date, if any, on which Altria Group, Inc. or any successor consolidates with or merges into PM USA;

▪the payment in full of the Obligations pertaining to such Guarantees; and

▪the rating of Altria Group, Inc.’s long-term senior unsecured debt by Standard & Poor’s of A or higher.

At December 31, ~~2013~~2014, the respective principal ~~wholly-owned~~100% owned subsidiaries of Altria Group, Inc. and PM USA were not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their ~~common stock.~~equity interests.

The following sets forth the condensed consolidating balance sheets as of December 31, ~~2013~~2014 and ~~2012~~2013, condensed consolidating statements of earnings and comprehensive earnings for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012, and condensed consolidating statements of cash flows for the years ended December 31, ~~2013~~2014, ~~2012~~2013 and ~~2011~~2012 for Altria Group, Inc., PM USA and Altria Group, Inc.’s other subsidiaries that are not guarantors of Altria Group, Inc.’s debt instruments (the “Non-Guarantor Subsidiaries”). The financial information is based on Altria Group, Inc.’s understanding of the Securities and Exchange Commission (“SEC”) interpretation and application of Rule 3-10 of SEC Regulation S-X.

The financial information may not necessarily be indicative of results of operations or financial position had PM USA and the Non-Guarantor Subsidiaries operated as independent entities. Altria Group, Inc. and PM USA account for investments in their subsidiaries under the equity method of accounting.

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Condensed Consolidating Balance Sheets

(in millions of dollars)

____________________________


at December 31, 2013	Altria Group, Inc.		PM USA		Non- Guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
at December 31, 2014												Altria Group, Inc.		PM USA		Non- Guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets
Cash and cash equivalents	$	3,114	$	1	$	60	$	—		$	3,175	$	3,281	$	3	$	37	$	—		$	3,321
Receivables	—		11		104		—			115		—		6		118		—			124
Inventories:
Leaf tobacco	—		564		369		—			933		—		616		375		—			991
Other raw materials	—		121		59		—			180		—		132		68		—			200
Work in process	—		3		391		—			394		—		4		425		—			429
Finished product	—		141		231		—			372		—		134		286		—			420
	—		829		1,050		—			1,879		—		886		1,154		—			2,040
Due from Altria Group, Inc. and subsidiaries	590		3,253		1,706		(5,549		)	—		568		3,535		1,279		(5,382		)	—
Deferred income taxes	2		1,133		26		(61		)	1,100		—		1,190		9		(56		)	1,143
Other current assets	109		125		105		(18		)	321		54		101		122		(27		)	250
Total current assets	3,815		5,352		3,051		(5,628		)	6,590		3,903		5,721		2,719		(5,465		)	6,878
Property, plant and equipment, at cost	2		3,269		1,546		—			4,817		—		3,112		1,643		—			4,755
Less accumulated depreciation	2		2,168		619		—			2,789		—		2,091		681		—			2,772
	—		1,101		927		—			2,028		—		1,021		962		—			1,983
Goodwill	—		—		5,174		—			5,174		—		—		5,285		—			5,285
Other intangible assets, net	—		2		12,056		—			12,058		—		2		12,047		—			12,049
Investment in SABMiller	6,455		—		—		—			6,455		6,183		—		—		—			6,183
Investment in consolidated subsidiaries	11,227		2,988		—		(14,215		)	—		10,665		2,775		—		(13,440		)	—
Finance assets, net	—		—		1,997		—			1,997		—		—		1,614		—			1,614
Due from Altria Group, Inc. and subsidiaries	4,790		—		—		(4,790		)	—		4,790		—		—		(4,790		)	—
Other assets	157		455		218		(273		)	557		148		541		121		(327		)	483
Total Assets	$	26,444	$	9,898	$	23,423	$	(24,906	)	$	34,859	$	25,689	$	10,060	$	22,748	$	(24,022	)	$	34,475

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Condensed Consolidating Balance Sheets (Continued)

(in millions of dollars)

____________________________


at December 31, 2013	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
at December 31, 2014																Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Liabilities
Current portion of long-term debt	$	525		$	—		$	—		$	—		$	525		$	1,000		$	—		$	—		$	—		$	1,000
Accounts payable	26			106			277			—			409			18			118			280			—			416
Accrued liabilities:
Marketing	—			464			48			—			512			—			505			113			—			618
Employment costs	94			10			151			—			255			18			10			158			—			186
Settlement charges	—			3,386			5			—			3,391			—			3,495			5			—			3,500
Other	302			531			253			(79		)	1,007			321			400			287			(83		)	925
Dividends payable	959			—			—			—			959			1,028			—			—			—			1,028
Due to Altria Group, Inc. and subsidiaries	4,487			473			589			(5,549		)	—			4,414			402			566			(5,382		)	—
Total current liabilities	6,393			4,970			1,323			(5,628		)	7,058			6,799			4,930			1,409			(5,465		)	7,673
Long-term debt	13,692			—			300			—			13,992			13,693			—			—			—			13,693
Deferred income taxes	1,867			—			5,260			(273		)	6,854			1,754			—			4,661			(327		)	6,088
Accrued pension costs	197			—			15			—			212			233			—			779			—			1,012
Accrued postretirement health care costs	—			1,437			718			—			2,155			—			1,608			853			—			2,461
Due to Altria Group, Inc. and subsidiaries	—			—			4,790			(4,790		)	—			—			—			4,790			(4,790		)	—
Other liabilities	176			130			129			—			435			196			151			156			—			503
Total Liabilities	22,325			6,537			12,535			(10,691		)	30,706			22,675			6,689			12,648			(10,582		)	31,430
Contingencies
Redeemable noncontrolling interest	—			—			35			—			35			—			—			35			—			35
Stockholders’ Equity
Common stock	935			—			9			(9		)	935			935			—			9			(9		)	935
Additional paid-in capital	5,714			3,310			10,328			(13,638		)	5,714			5,735			3,310			10,688			(13,998		)	5,735
Earnings reinvested in the business	25,168			282			1,498			(1,780		)	25,168			26,277			402			995			(1,397		)	26,277
Accumulated other comprehensive losses	(1,378		)	(231		)	(981		)	1,212			(1,378		)	(2,682		)	(341		)	(1,623		)	1,964			(2,682		)
Cost of repurchased stock	(26,320		)	—			—			—			(26,320		)	(27,251		)	—			—			—			(27,251		)
Total stockholders’ equity attributable to Altria Group, Inc.	4,119			3,361			10,854			(14,215		)	4,119			3,014			3,371			10,069			(13,440		)	3,014
Noncontrolling interests	—			—			(1		)	—			(1		)	—			—			(4		)	—			(4		)
Total stockholders’ equity	4,119			3,361			10,853			(14,215		)	4,118			3,014			3,371			10,065			(13,440		)	3,010
Total Liabilities and Stockholders’ Equity	$	26,444		$	9,898		$	23,423		$	(24,906	)	$	34,859		$	25,689		$	10,060		$	22,748		$	(24,022	)	$	34,475

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Condensed Consolidating Balance Sheets

(in millions of dollars)

____________________________


at December 31, 2012	Altria Group, Inc.		PM USA		Non- Guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
at December 31, 2013												Altria Group, Inc.		PM USA		Non- Guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets
Cash and cash equivalents	$	2,862	$	—	$	38	$	—		$	2,900	$	3,114	$	1	$	60	$	—		$	3,175
Receivables	101		7		85		—			193		—		11		104		—			115
Inventories:
Leaf tobacco	—		512		364		—			876		—		564		369		—			933
Other raw materials	—		127		46		—			173		—		121		59		—			180
Work in process	—		3		346		—			349		—		3		391		—			394
Finished product	—		117		231		—			348		—		141		231		—			372
	—		759		987		—			1,746		—		829		1,050		—			1,879
Due from Altria Group, Inc. and subsidiaries	834		3,424		1,171		(5,429		)	—		590		3,253		1,706		(5,549		)	—
Deferred income taxes	—		1,246		16		(46		)	1,216		2		1,133		26		(61		)	1,100
Other current assets	—		193		175		(108		)	260		109		125		105		(18		)	321
Total current assets	3,797		5,629		2,472		(5,583		)	6,315		3,815		5,352		3,051		(5,628		)	6,590
Property, plant and equipment, at cost	2		3,253		1,495		—			4,750		2		3,269		1,546		—			4,817
Less accumulated depreciation	2		2,073		573		—			2,648		2		2,168		619		—			2,789
	—		1,180		922		—			2,102		—		1,101		927		—			2,028
Goodwill	—		—		5,174		—			5,174		—		—		5,174		—			5,174
Other intangible assets, net	—		2		12,076		—			12,078		—		2		12,056		—			12,058
Investment in SABMiller	6,637		—		—		—			6,637		6,455		—		—		—			6,455
Investment in consolidated subsidiaries	9,521		3,018		—		(12,539		)	—		11,227		2,988		—		(14,215		)	—
Finance assets, net	—		—		2,581		—			2,581		—		—		1,997		—			1,997
Due from Altria Group, Inc. and subsidiaries	4,500		—		—		(4,500		)	—		4,790		—		—		(4,790		)	—
Other assets	136		530		141		(365		)	442		157		455		218		(273		)	557
Total Assets	$	24,591	$	10,359	$	23,366	$	(22,987	)	$	35,329	$	26,444	$	9,898	$	23,423	$	(24,906	)	$	34,859

Table of Contents

Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

Condensed Consolidating Balance Sheets (Continued)

(in millions of dollars)

____________________________


at December 31, 2012	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
at December 31, 2013																Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Liabilities
Current portion of long-term debt	$	1,459		$	—		$	—		$	—		$	1,459		$	525		$	—		$	—		$	—		$	525
Accounts payable	4			155			292			—			451			26			106			277			—			409
Accrued liabilities:
Marketing	—			526			42			—			568			—			464			48			—			512
Employment costs	27			10			147			—			184			94			10			151			—			255
Settlement charges	—			3,610			6			—			3,616			—			3,386			5			—			3,391
Other	469			506			272			(154		)	1,093			302			531			253			(79		)	1,007
Dividends payable	888			—			—			—			888			959			—			—			—			959
Due to Altria Group, Inc. and subsidiaries	3,965			409			1,055			(5,429		)	—			4,487			473			589			(5,549		)	—
Total current liabilities	6,812			5,216			1,814			(5,583		)	8,259			6,393			4,970			1,323			(5,628		)	7,058
Long-term debt	12,120			—			299			—			12,419			13,692			—			300			—			13,992
Deferred income taxes	2,034			—			4,983			(365		)	6,652			1,867			—			5,260			(273		)	6,854
Accrued pension costs	235			—			1,500			—			1,735			197			—			15			—			212
Accrued postretirement health care costs	—			1,759			745			—			2,504			—			1,437			718			—			2,155
Due to Altria Group, Inc. and subsidiaries	—			—			4,500			(4,500		)	—			—			—			4,790			(4,790		)	—
Other liabilities	222			178			156			—			556			176			130			129			—			435
Total Liabilities	21,423			7,153			13,997			(10,448		)	32,125			22,325			6,537			12,535			(10,691		)	30,706
Contingencies
Redeemable noncontrolling interest	—			—			34			—			34			—			—			35			—			35
Stockholders’ Equity
Common stock	935			—			9			(9		)	935			935			—			9			(9		)	935
Additional paid-in capital	5,688			3,321			10,272			(13,593		)	5,688			5,714			3,310			10,328			(13,638		)	5,714
Earnings reinvested in the business	24,316			314			943			(1,257		)	24,316			25,168			282			1,498			(1,780		)	25,168
Accumulated other comprehensive losses	(2,040		)	(429		)	(1,891		)	2,320			(2,040		)	(1,378		)	(231		)	(981		)	1,212			(1,378		)
Cost of repurchased stock	(25,731		)	—			—			—			(25,731		)	(26,320		)	—			—			—			(26,320		)
Total stockholders’ equity attributable to Altria Group, Inc.	3,168			3,206			9,333			(12,539		)	3,168			4,119			3,361			10,854			(14,215		)	4,119
Noncontrolling interests	—			—			2			—			2			—			—			(1		)	—			(1		)
Total stockholders’ equity	3,168			3,206			9,335			(12,539		)	3,170			4,119			3,361			10,853			(14,215		)	4,118
Total Liabilities and Stockholders’ Equity	$	24,591		$	10,359		$	23,366		$	(22,987	)	$	35,329		$	26,444		$	9,898		$	23,423		$	(24,906	)	$	34,859

Table of Contents

Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

Condensed Consolidating Statements of Earnings and Comprehensive Earnings

(in millions of dollars)

_____________________________



for the year ended December 31, 2014	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net revenues	$	—		$	21,298		$	3,267		$	(43	)	$	24,522
Cost of sales	—			6,722			1,106			(43		)	7,785
Excise taxes on products	—			6,358			219			—			6,577
Gross profit	—			8,218			1,942			—			10,160
Marketing, administration and research costs	231			1,889			419			—			2,539
Changes to Mondelēz & PMI tax-related receivables/payables	2			—			—			—			2
Asset impairment and exit costs	—			(6		)	5			—			(1		)
Operating (expense) income	(233		)	6,335			1,518			—			7,620
Interest and other debt expense (income), net	614			(46		)	240			—			808
Loss on early extinguishment of debt	—			—			44			—			44
Earnings from equity investment in SABMiller	(1,006		)	—			—			—			(1,006		)
Earnings before income taxes and equity earnings of subsidiaries	159			6,381			1,234			—			7,774
(Benefit) provision for income taxes	(119		)	2,381			442			—			2,704
Equity earnings of subsidiaries	4,792			244			—			(5,036		)	—
Net earnings	5,070			4,244			792			(5,036		)	5,070
Net earnings attributable to noncontrolling interests	—			—			—			—			—
Net earnings attributable to Altria Group, Inc.	$	5,070		$	4,244		$	792		$	(5,036	)	$	5,070


Net earnings	$	5,070		$	4,244		$	792		$	(5,036	)	$	5,070
Other comprehensive losses, net of deferred income taxes	(1,304		)	(110		)	(642		)	752			(1,304		)
Comprehensive earnings	3,766			4,134			150			(4,284		)	3,766
Comprehensive earnings attributable to noncontrolling interests	—			—			—			—			—
Comprehensive earnings attributable to Altria Group, Inc.	$	3,766		$	4,134		$	150		$	(4,284	)	$	3,766

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

Condensed Consolidating Statements of Earnings and Comprehensive Earnings

(in millions of dollars)

_____________________________



for the year ended December 31, 2013	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net revenues	$	—		$	21,231		$	3,269	$	(34	)	$	24,466
Cost of sales	—			6,281			959		(34		)	7,206
Excise taxes on products	—			6,553			250		—			6,803
Gross profit	—			8,397			2,060		—			10,457
Marketing, administration and research costs	223			1,837			280		—			2,340
Changes to Mondelēz and PMI tax-related receivables/payables	25			(3		)	—		—			22
Asset impairment and exit costs	—			3			8		—			11
Operating (expense) income	(248		)	6,560			1,772		—			8,084
Interest and other debt expense, net	643			2			404		—			1,049
Loss on early extinguishment of debt	1,084			—			—		—			1,084
Earnings from equity investment in SABMiller	(991		)	—			—		—			(991		)
(Loss) earnings before income taxes and equity earnings of subsidiaries	(984		)	6,558			1,368		—			6,942
(Benefit) provision for income taxes	(488		)	2,406			489		—			2,407
Equity earnings of subsidiaries	5,031			216			—		(5,247		)	—
Net earnings	4,535			4,368			879		(5,247		)	4,535
Net earnings attributable to noncontrolling interests	—			—			—		—			—
Net earnings attributable to Altria Group, Inc.	$	4,535		$	4,368		$	879	$	(5,247	)	$	4,535


Net earnings	$	4,535		$	4,368		$	879	$	(5,247	)	$	4,535
Other comprehensive earnings, net of deferred income taxes	662			198			910		(1,108		)	662
Comprehensive earnings	5,197			4,566			1,789		(6,355		)	5,197
Comprehensive earnings attributable to noncontrolling interests	—			—			—		—			—
Comprehensive earnings attributable to Altria Group, Inc.	$	5,197		$	4,566		$	1,789	$	(6,355	)	$	5,197

Table of Contents

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Notes to Consolidated Financial Statements

_________________________

Condensed Consolidating Statements of Earnings and Comprehensive Earnings

(in millions of dollars)

_____________________________

for the year ended December 31, 2013
Altria
Group, Inc.

PM USA

Non-
Guarantor
Subsidiaries

Total
Consolidating
Adjustments

Consolidated
Net revenues $ —
$ 21,231
$ 3,269
$ (34 ) $ 24,466
Cost of sales —
6,281
959
(34 ) 7,206
Excise taxes on products —
6,553
250
—
6,803
Gross profit —
8,397
2,060
—
10,457
Marketing, administration and research costs 223
1,837
260
—
2,320
Changes to Mondelēz & PMI tax-related receivables/payables 25
(3 ) —
—
22
Asset impairment and exit costs —
3
8
—
11
Amortization of intangibles —
—
20
—
20
Operating (expense) income (248 ) 6,560
1,772
—
8,084
Interest and other debt expense, net 643
2
404
—
1,049
Loss on early extinguishment of debt 1,084
—
—
—
1,084
Earnings from equity investment in SABMiller (991 ) —
—
—
(991 )
(Loss) earnings before income taxes and equity earnings of subsidiaries (984 ) 6,558
1,368
—
6,942
(Benefit) provision for income taxes (488 ) 2,406
489
—
2,407
Equity earnings of subsidiaries 5,031
216
—
(5,247 ) —
Net earnings 4,535
4,368
879
(5,247 ) 4,535
Net earnings attributable to noncontrolling interests —
—
—
—
—
Net earnings attributable to Altria Group, Inc. $ 4,535
$ 4,368
$ 879
$ (5,247 ) $ 4,535

Net earnings $ 4,535
$ 4,368
$ 879
$ (5,247 ) $ 4,535
Other comprehensive earnings, net of deferred income taxes 662
198
910
(1,108 ) 662
Comprehensive earnings 5,197
4,566
1,789
(6,355 ) 5,197
Comprehensive earnings attributable to noncontrolling interests —
—
—
—
—
Comprehensive earnings attributable to
Altria Group, Inc.
$ 5,197
$ 4,566
$ 1,789
$ (6,355 ) $ 5,197



for the year ended December 31, 2012	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net revenues	$	—		$	21,531		$	3,110		$	(23	)	$	24,618
Cost of sales	—			7,067			893			(23		)	7,937
Excise taxes on products	—			6,831			287			—			7,118
Gross profit	—			7,633			1,930			—			9,563
Marketing, administration and research costs	210			1,867			224			—			2,301
Changes to Mondelēz and PMI tax-related receivables/payables	(52		)	—			—			—			(52		)
Asset impairment and exit costs	1			59			1			—			61
Operating (expense) income	(159		)	5,707			1,705			—			7,253
Interest and other debt expense (income), net	705			(3		)	424			—			1,126
Loss on early extinguishment of debt	874			—			—			—			874
Earnings from equity investment in SABMiller	(1,224		)	—			—			—			(1,224		)
(Loss) earnings before income taxes and equity earnings of subsidiaries	(514		)	5,710			1,281			—			6,477
(Benefit) provision for income taxes	(196		)	2,100			390			—			2,294
Equity earnings of subsidiaries	4,498			218			—			(4,716		)	—
Net earnings	4,180			3,828			891			(4,716		)	4,183
Net earnings attributable to noncontrolling interests	—			—			(3		)	—			(3		)
Net earnings attributable to Altria Group, Inc.	$	4,180		$	3,828		$	888		$	(4,716	)	$	4,180


Net earnings	$	4,180		$	3,828		$	891		$	(4,716	)	$	4,183
Other comprehensive losses, net of deferred income taxes	(153		)	(117		)	(242		)	359			(153		)
Comprehensive earnings	4,027			3,711			649			(4,357		)	4,030
Comprehensive earnings attributable to noncontrolling interests	—			—			(3		)	—			(3		)
Comprehensive earnings attributable to Altria Group, Inc.	$	4,027		$	3,711		$	646		$	(4,357	)	$	4,027

~~100~~

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~~Altria Group, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~_________________________~~

~~Condensed Consolidating Statements of Earnings and Comprehensive Earnings~~

~~(in millions of dollars)~~

~~_____________________________~~

for the year ended December 31, 2012
Altria
Group, Inc.

PM USA

Non-
Guarantor
Subsidiaries

Total
Consolidating
Adjustments

Consolidated
Net revenues $ —
$ 21,531
$ 3,110
$ (23 ) $ 24,618
Cost of sales —
7,067
893
(23 ) 7,937
Excise taxes on products —
6,831
287
—
7,118
Gross profit —
7,633
1,930
—
9,563
Marketing, administration and research costs 210
1,867
204
—
2,281
Changes to Mondelēz and PMI tax-related receivables/payables (52 ) —
—
—
(52 )
Asset impairment and exit costs 1
59
1
—
61
Amortization of intangibles —
—
20
—
20
Operating (expense) income (159 ) 5,707
1,705
—
7,253
Interest and other debt expense (income), net 705
(3 ) 424
—
1,126
Loss on early extinguishment of debt 874
—
—
—
874
Earnings from equity investment in SABMiller (1,224 ) —
—
—
(1,224 )
(Loss) earnings before income taxes and equity earnings of subsidiaries (514 ) 5,710
1,281
—
6,477
(Benefit) provision for income taxes (196 ) 2,100
390
—
2,294
Equity earnings of subsidiaries 4,498
218
—
(4,716 ) —
Net earnings 4,180
3,828
891
(4,716 ) 4,183
Net earnings attributable to noncontrolling interests —
—
(3 ) —
(3 )
Net earnings attributable to Altria Group, Inc. $ 4,180
$ 3,828
$ 888
$ (4,716 ) $ 4,180

Net earnings $ 4,180
$ 3,828
$ 891
$ (4,716 ) $ 4,183
Other comprehensive losses, net of deferred
income taxes
(153 ) (117 ) (242 ) 359
(153 )
Comprehensive earnings 4,027
3,711
649
(4,357 ) 4,030
Comprehensive earnings attributable to noncontrolling interests —
—
(3 ) —
(3 )
Comprehensive earnings attributable to
Altria Group, Inc.
$ 4,027
$ 3,711
$ 646
$ (4,357 ) $ 4,027

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~~Altria Group, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~_________________________~~

~~Condensed Consolidating Statements of Earnings and Comprehensive Earnings~~

~~(in millions of dollars)~~

~~_____________________________~~

for the year ended December 31, 2011
Altria
Group, Inc.

PM USA

Non-
Guarantor
Subsidiaries

Total
Consolidating
Adjustments

Consolidated
Net revenues $ —
$ 21,330
$ 2,496
$ (26 ) $ 23,800
Cost of sales —
6,883
823
(26 ) 7,680
Excise taxes on products —
6,846
335
—
7,181
Gross profit —
7,601
1,338
—
8,939
Marketing, administration and research costs 186
2,164
293
—
2,643
Changes to Mondelēz and PMI tax-related receivables/payables (14 ) —
—
—
(14 )
Asset impairment and exit costs 8
200
14
—
222
Amortization of intangibles —
—
20
—
20
Operating (expense) income (180 ) 5,237
1,011
—
6,068
Interest and other debt expense, net 698
61
457
—
1,216
Earnings from equity investment in SABMiller (730 ) —
—
—
(730 )
(Loss) earnings before income taxes and equity earnings of subsidiaries (148 ) 5,176
554
—
5,582
(Benefit) provision for income taxes (199 ) 1,930
458
—
2,189
Equity earnings of subsidiaries 3,339
153
—
(3,492 ) —
Net earnings 3,390
3,399
96
(3,492 ) 3,393
Net earnings attributable to noncontrolling interests —
—
(3 ) —
(3 )
Net earnings attributable to Altria Group, Inc. $ 3,390
$ 3,399
$ 93
$ (3,492 ) $ 3,390

Net earnings $ 3,390
$ 3,399
$ 96
$ (3,492 ) $ 3,393
Other comprehensive losses, net of deferred
income taxes
(403 ) (36 ) (209 ) 245
(403 )
Comprehensive earnings (losses) 2,987
3,363
(113 ) (3,247 ) 2,990
Comprehensive earnings attributable to noncontrolling interests —
—
(3 ) —
(3 )
Comprehensive earnings attributable to
Altria Group, Inc.
$ 2,987
$ 3,363
$ (116 ) $ (3,247 ) $ 2,987

~~102~~100

Table of Contents

Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

Condensed Consolidating Statements of Cash Flows

(in millions of dollars)

_____________________________


for the year ended December 31, 2013	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
for the year ended December 31, 2014																Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash Provided by Operating Activities
Net cash provided by operating activities	$	4,520		$	4,192		$	387		$	(4,724	)	$	4,375		$	4,924		$	4,451		$	707		$	(5,419	)	$	4,663
Cash Provided by (Used in) Investing Activities
Capital expenditures	—			(31		)	(100		)	—			(131		)	—			(44		)	(119		)	—			(163		)
Acquisition of Green Smoke, net of acquired cash																—			—			(102		)	—			(102		)
Proceeds from finance assets	—			—			716			—			716			—			—			369			—			369
Other	—			—			17			—			17			—			70			3			—			73
Net cash (used in) provided by investing activities	—			(31		)	633			—			602
Net cash provided by investing activities																—			26			151			—			177
Cash Provided by (Used in) Financing Activities
Long-term debt issued	4,179			—			—			—			4,179			999			—			—			—			999
Long-term debt repaid	(3,559		)	—			—			—			(3,559		)	(525		)	—			(300		)	—			(825		)
Repurchases of common stock	(634		)	—			—			—			(634		)	(939		)	—			—			—			(939		)
Dividends paid on common stock	(3,612		)	—			—			—			(3,612		)	(3,892		)	—			—			—			(3,892		)
Changes in amounts due to/from Altria Group, Inc. and subsidiaries	432			240			(672		)	—			—			(411		)	(351		)	762			—			—
Financing fees and debt issuance costs	(39		)	—			—			—			(39		)	(7		)	—			—			—			(7		)
Tender premiums and fees related to early extinguishment of debt	(1,054		)	—			—			—			(1,054		)
Premiums and fees related to early extinguishment of debt																—			—			(44		)	—			(44		)
Cash dividends paid to parent	—			(4,400		)	(324		)	4,724			—			—			(4,124		)	(1,295		)	5,419			—
Other	19			—			(2		)	—			17			18			—			(4		)	—			14
Net cash used in financing activities	(4,268		)	(4,160		)	(998		)	4,724			(4,702		)	(4,757		)	(4,475		)	(881		)	5,419			(4,694		)
Cash and cash equivalents:
Increase	252			1			22			—			275
Increase (decrease)																167			2			(23		)	—			146
Balance at beginning of year	2,862			—			38			—			2,900			3,114			1			60			—			3,175
Balance at end of year	$	3,114		$	1		$	60		$	—		$	3,175		$	3,281		$	3		$	37		$	—		$	3,321

~~103~~

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Notes to Consolidated Financial Statements

_________________________

Condensed Consolidating Statements of Cash Flows

(in millions of dollars)

_____________________________


for the year ended December 31, 2012	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
for the year ended December 31, 2013																Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash Provided by Operating Activities
Net cash provided by operating activities	$	3,063		$	4,200		$	549		$	(3,927	)	$	3,885		$	4,520		$	4,192		$	387		$	(4,724	)	$	4,375
Cash Provided by (Used in) Investing Activities
Capital expenditures	—			(35		)	(89		)	—			(124		)	—			(31		)	(100		)	—			(131		)
Proceeds from finance assets	—			—			1,049			—			1,049			—			—			716			—			716
Other	—			—			(5		)	—			(5		)	—			—			17			—			17
Net cash (used in) provided by investing activities	—			(35		)	955			—			920			—			(31		)	633			—			602
Cash Provided by (Used in) Financing Activities
Long-term debt issued	2,787			—			—			—			2,787			4,179			—			—			—			4,179
Long-term debt repaid	(2,000		)	—			(600		)	—			(2,600		)	(3,559		)	—			—			—			(3,559		)
Repurchases of common stock	(1,082		)	—			—			—			(1,082		)	(634		)	—			—			—			(634		)
Dividends paid on common stock	(3,400		)	—			—			—			(3,400		)	(3,612		)	—			—			—			(3,612		)
Changes in amounts due to/from Altria Group, Inc. and subsidiaries	1,128			(475		)	(653		)	—			—			432			240			(672		)	—			—
Financing fees and debt issuance costs	(22		)	—			—			—			(22		)	(39		)	—			—			—			(39		)
Tender premiums and fees related to early extinguishment of debt	(864		)	—			—			—			(864		)
Premiums and fees related to early extinguishment of debt																(1,054		)	—			—			—			(1,054		)
Cash dividends paid to parent	—			(3,690		)	(237		)	3,927			—			—			(4,400		)	(324		)	4,724			—
Other	7			—			(1		)	—			6			19			—			(2		)	—			17
Net cash used in financing activities	(3,446		)	(4,165		)	(1,491		)	3,927			(5,175		)	(4,268		)	(4,160		)	(998		)	4,724			(4,702		)
Cash and cash equivalents:
(Decrease) increase	(383		)	—			13			—			(370		)
Increase																252			1			22			—			275
Balance at beginning of year	3,245			—			25			—			3,270			2,862			—			38			—			2,900
Balance at end of year	$	2,862		$	—		$	38		$	—		$	2,900		$	3,114		$	1		$	60		$	—		$	3,175

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

Condensed Consolidating Statements of Cash Flows

(in millions of dollars)

_____________________________


for the year ended December 31, 2011	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments				Consolidated
for the year ended December 31, 2012																	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash Provided by Operating Activities
Net cash provided by operating activities	$	3,515		$	3,719		$	226		$	(3,879	)		$	3,581		$	3,063		$	4,200		$	549		$	(3,927	)	$	3,885
Cash Provided by (Used in) Investing Activities
Capital expenditures	—			(26		)	(79		)	—				(105		)	—			(35		)	(89		)	—			(124		)
Proceeds from finance assets	—			—			490			—				490			—			—			1,049			—			1,049
Other	—			1			1			—				2			—			—			(5		)	—			(5		)
Net cash (used in) provided by investing activities	—			(25		)	412			—				387			—			(35		)	955			—			920
Cash Provided by (Used in) Financing Activities
Long-term debt issued	1,494			—			—			—				1,494			2,787			—			—			—			2,787
Long-term debt repaid																	(2,000		)	—			(600		)	—			(2,600		)
Repurchases of common stock	(1,327		)	—			—			—				(1,327		)	(1,082		)	—			—			—			(1,082		)
Dividends paid on common stock	(3,222		)	—			—			—				(3,222		)	(3,400		)	—			—			—			(3,400		)
Issuances of common stock	29			—			—			—				29
Changes in amounts due to/from Altria Group, Inc. and subsidiaries	441			(28		)	(413		)	—				—			1,128			(475		)	(653		)	—			—
Financing fees and debt issuance costs	(24		)	—			—			—				(24		)	(22		)	—			—			—			(22		)
Premiums and fees related to early extinguishment of debt																	(864		)	—			—			—			(864		)
Cash dividends paid to parent	—			(3,666		)	(213		)	3,879				—			—			(3,690		)	(237		)	3,927			—
Other	41			—			(3		)	—				38			7			—			(1		)	—			6
Net cash used in financing activities	(2,568		)	(3,694		)	(629		)	3,879				(3,012		)	(3,446		)	(4,165		)	(1,491		)	3,927			(5,175		)
Cash and cash equivalents:													��
Increase	947			—			9			—				956
(Decrease) increase																	(383		)	—			13			—			(370		)
Balance at beginning of year	2,298			—			16			—				2,314			3,245			—			25			—			3,270
Balance at end of year	$	3,245		$	—		$	25		$	—			$	3,270		$	2,862		$	—		$	38		$	—		$	2,900

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Altria Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

_________________________

Note 20. Quarterly Financial Data (Unaudited)


	2013 Quarters										2014 Quarters
(in millions, except per share data)	1st		2nd			3rd		4th			1st		2nd		3rd		4th
Net revenues	$	5,528	$	6,305		$	6,553	$	6,080		$	5,517	$	6,256	$	6,491	$	6,258
Gross profit	$	2,674	$	2,554		$	2,821	$	2,408		$	2,256	$	2,603	$	2,674	$	2,627
Net earnings	$	1,385	$	1,266		$	1,396	$	488		$	1,175	$	1,262	$	1,397	$	1,236
Net earnings attributable to Altria Group, Inc.	$	1,385	$	1,266		$	1,396	$	488		$	1,175	$	1,262	$	1,397	$	1,236
Per share data:
Basic and diluted EPS attributable to Altria Group, Inc.	$	0.69	$	0.63		$	0.70	$	0.24		$	0.59	$	0.64	$	0.71	$	0.63
Dividends declared	$	0.44	$	0.44		$	0.48	$	0.48		$	0.48	$	0.48	$	0.52	$	0.52
Market price — high	$	35.47	$	37.61		$	37.48	$	38.58		$	38.38	$	43.38	$	46.20	$	51.67
— low	$	31.85	$	34.08		$	33.12	$	34.23		$	33.80	$	37.13	$	40.26	$	44.59

	2012 Quarters										2013 Quarters
(in millions, except per share data)	1st		2nd			3rd		4th			1st		2nd		3rd		4th
Net revenues	$	5,647	$	6,487		$	6,242	$	6,242		$	5,528	$	6,305	$	6,553	$	6,080
Gross profit	$	2,202	$	2,494		$	2,484	$	2,383		$	2,674	$	2,554	$	2,821	$	2,408
Net earnings	$	1,195	$	1,226		$	657	$	1,105		$	1,385	$	1,266	$	1,396	$	488
Net earnings attributable to noncontrolling interests	—		(1		)	—		(2		)
Net earnings attributable to Altria Group, Inc.	$	1,195	$	1,225		$	657	$	1,103		$	1,385	$	1,266	$	1,396	$	488
Per share data:
Basic and diluted EPS attributable to Altria Group, Inc.	$	0.59	$	0.60		$	0.32	$	0.55		$	0.69	$	0.63	$	0.70	$	0.24
Dividends declared	$	0.41	$	0.41		$	0.44	$	0.44		$	0.44	$	0.44	$	0.48	$	0.48
Market price — high	$	31.00	$	34.60		$	36.29	$	34.25		$	35.47	$	37.61	$	37.48	$	38.58
— low	$	28.00	$	30.74		$	32.72	$	30.01		$	31.85	$	34.08	$	33.12	$	34.23

During ~~2013~~2014 and ~~2012~~2013, the following pre-tax charges or (gains) were included in net earnings attributable to Altria Group, Inc.:


	2013 Quarters											2014 Quarters
(in millions)	1st			2nd			3rd			4th		1st			2nd			3rd			4th
NPM Adjustment Items	$	(483	)	$	(36	)	$	(145	)	$	—	$	(64	)	$	(26	)	$	—		$	—
Tobacco and health judgments, including accrued interest	6			—			16			—
PMCC decrease to allowance for losses	(20		)	(27		)	—			—
Asset impairment, exit and implementation costs	1			1			—			10
Tobacco and health litigation items, including accrued interest												4			31			4			5
Asset impairment, exit, integration and acquisition-related costs												2			(1		)	15			5
Loss on early extinguishment of debt	—			—			—			1,084		—			—			—			44
SABMiller special items	15			(4		)	14			6		9			23			(42		)	35
	$	(481	)	$	(66	)	$	(115	)	$	1,100	$	(49	)	$	27		$	(23	)	$	89

	2012 Quarters											2013 Quarters
(in millions)	1st			2nd			3rd			4th		1st			2nd			3rd			4th
Reduction to cumulative lease earnings related to the Closing Agreement	$	—		$	7		$	—		$	—
Tobacco and health judgments, including accrued interest	—			1			3			1
PMCC decrease to allowance for losses and recoveries	—			(11		)	(33		)	—
NPM Adjustment Items												$	(483	)	$	(36	)	$	(145	)	$	—
Tobacco and health litigation items, including accrued interest												6			—			16			—
Asset impairment, exit and implementation costs	4			25			11			16		1			1			—			10
Loss on early extinguishment of debt	—			—			874			—		—			—			—			1,084
SABMiller special items	(309		)	26			19			16		15			(4		)	14			6
	$	(305	)	$	48		$	874		$	33	$	(461	)	$	(39	)	$	(115	)	$	1,100

As discussed in Note 14. Income Taxes, Altria Group, Inc. has recognized income tax benefits and charges in the consolidated statements of earnings during ~~2013~~2014 and ~~2012~~2013 as a result of various tax events.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Altria Group, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows, present fairly, in all material respects, the financial position of Altria Group, Inc. and its subsidiaries at December 31, ~~2013~~2014 and ~~2012,~~2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2013~~2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Altria Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2013,~~2014, based on criteria established in Internal Control - Integrated Framework ~~(1992)~~(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Altria Group, Inc.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on Altria Group, Inc.’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Richmond, Virginia

January 30, ~~2014~~2015

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Report of Management On Internal Control Over Financial Reporting

Management of Altria Group, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of ~~1934.~~1934, as amended. Altria Group, Inc.’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:

n pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Altria Group, Inc.;

n provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;

n provide reasonable assurance that receipts and expenditures of Altria Group, Inc. are being made only in accordance with the authorization of management and directors of Altria Group, Inc.; and

n provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.

Management assessed the effectiveness of Altria Group, Inc.’s internal control over financial reporting as of December 31, ~~2013.~~2014. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework ~~(1992)~~(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of Altria Group, Inc.’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on this assessment, management determined that, as of December 31, ~~2013,~~2014, Altria Group, Inc. maintained effective internal control over financial reporting.

PricewaterhouseCoopers LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of Altria Group, Inc. included in this report, has audited the effectiveness of Altria Group, Inc.’s internal control over financial reporting as of December 31, ~~2013,~~2014, as stated in their report herein.

January 30, ~~2014~~2015

~~108~~

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

Altria Group, Inc. carried out an evaluation, with the participation of Altria Group, Inc.’s management, including Altria Group, Inc.’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Altria Group, Inc.’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, Altria Group, Inc.’s

Chief Executive Officer and Chief Financial Officer concluded

that Altria Group, Inc.’s disclosure controls and procedures are effective. There have been no changes in Altria Group, Inc.’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, Altria Group, Inc.’s internal control over financial reporting.

The Report of Independent Registered Public Accounting Firm and the Report of Management on Internal Control over Financial Reporting are included in Item 8.

Item 9B. Other Information.

None.

Part III

Except for the information relating to the executive officers set forth in Item 10, ~~and the information relating to equity compensation plans set forth in Item 12,~~ the information called for by Items 10-14 is hereby incorporated by reference to Altria Group, Inc.’s definitive proxy statement for use in connection with its Annual Meeting of Shareholders to be held on May ~~14, 2014~~20, 2015 that will be filed with the SEC on or about April ~~3, 2014~~9, 2015 (the “proxy statement”), and, except as indicated therein, made a part hereof.

Item 10. Directors, Executive Officers and Corporate Governance.

Refer to “Proposals Requiring Your Vote - Proposal 1 - Election of Directors,” “Ownership of Equity Securities of the Company - Section 16(a) Beneficial Ownership Reporting Compliance” and “Board and Governance Matters - Committees of the Board of Directors” sections of the proxy statement.

Executive Officers as of February ~~14, 2014:~~13, 2015:



Name	Office	Age
Martin J. Barrington	Chairman of the Board and Chief Executive Officer	6061
David R. Beran	President and Chief Operating Officer	5960
James E. Dillard III	Senior Vice President, Regulatory Affairs and Chief Innovation Officer, Altria Client Services Inc.	51
Ivan S. Feldman	Vice President and Controller	4748
Clifford B. Fleet	President and Chief Executive Officer, Philip Morris USA Inc.	4344
Michael B. French	Senior Vice President and Chief Marketing ~~and Innovation~~ Officer, Altria Client Services Inc.	5960
William F. Gifford, Jr.	Senior Vice President, Strategy and Business Development	4344
Louanna O. Heuhsen	Vice President, Corporate Governance and Associate General Counsel	6364
Craig A. Johnson	President and Chief Executive Officer, Altria Group Distribution Company	6162
Denise F. Keane	Executive Vice President and General Counsel	6162
Salvatore Mancuso	Treasurer and Senior Vice President, Investor Relations and Accounting	4849
John R. Nelson	Executive Vice President and Chief Technology Officer	6162
Brian W. Quigley	President and Chief Executive Officer, U.S. Smokeless Tobacco Company LLC	4041
W. Hildebrandt Surgner, Jr.	Corporate Secretary and Senior Assistant General Counsel	4849
Charles N. Whitaker	Senior Vice President, Human Resources & Compliance and Chief Compliance Officer	4748
Howard A. Willard III	Executive Vice President and Chief Financial Officer	5051

All of the above-mentioned officers have been employed by Altria Group, Inc. or its subsidiaries in various capacities during the past five years, except for Mr. French, who joined Altria Client Services Inc. in 2012 after having served as Senior

Vice President, Corporate Strategy at Brown Forman Corporation,

one of the leading American-owned companies in the wine and spirits business, from March 2007 until May 2011. From May

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2011 until joining Altria Client Services Inc., Mr. French worked as a private marketing and strategy consultant.

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~~Effective November 16, 2013,~~On January 30, 2015, Altria Group, Inc. announced that Mr. ~~Gifford, previously~~Beran will retire as President and Chief Operating Officer effective March 1, 2015. Altria Group, Inc. further announced that Mr. Willard will become Executive Vice President and Chief Operating Officer of ~~PM USA, was appointed~~Altria Group, Inc. and Mr. Gifford will become Executive Vice President and Chief Financial Officer of Altria Group, Inc. effective immediately upon Mr. Beran’s retirement.

Effective March 1, 2015, Daniel J. Bryant will become Vice President and Treasurer of Altria Group, Inc. effective March 1, 2015. Mr. Bryant, age 45, currently serves as Assistant Treasurer of Altria Group, Inc., a position he has held since November 2013. Since 1995, he has been employed by Altria Group, Inc. or its subsidiaries in various finance positions.

Effective March 1, 2015, Mr. Whitaker will become Senior Vice President, ~~Strategy & Business Development~~Human Resources, Compliance and Information Services and Chief Compliance Officer of Altria Group, Inc.

Effective ~~November 16, 2013,~~March 1, 2015, Mr. Mancuso ~~previously Vice President and Treasurer, Finance and Strategy of Altria Group, Inc., was appointed Treasurer and~~will become Senior Vice President, ~~Investor Relations~~Strategy, Planning and Accounting of Altria Group, Inc.

Effective ~~November 16, 2013,~~March 1, 2015, Mr. ~~Fleet was appointed President and~~Barrington will become Chairman of the Board, Chief Executive Officer and President of ~~PM USA. Since 1995,~~Altria Group, Inc.

Effective December 1, 2014, Mr. ~~Fleet~~Dillard, Senior Vice President, Regulatory Affairs, Altria Client Services Inc. was appointed to the additional position of Chief Innovation Officer. Mr. Dillard has ~~been continuously employed by~~held the position of Senior Vice President, Regulatory Affairs since 2009. Prior to Altria Group, Inc.’s ~~businesses or its subsidiaries~~acquisition of UST in ~~various positions including~~2009, Mr. Dillard served as Senior Vice President, Manufacturing, ~~Sales, Investor Relations, Strategy & Business Development~~Science and ~~Brand Management.~~Technology for USSTC. He joined USSTC in December 2001.

Mr. Whitaker’s wife and Mr. Surgner’s wife are first cousins.

Codes of Conduct and Corporate Governance

Altria Group, Inc. has adopted the Altria Code of Conduct for Compliance and Integrity, which complies with requirements set forth in Item 406 of Regulation S-K. This Code of Conduct applies to all of its employees, including its principal executive

officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Altria Group, Inc. has also adopted a code of business conduct and ethics that applies to the members of its Board of Directors. These documents are available free of charge on Altria Group, Inc.’s website at www.altria.com.

In addition, Altria Group, Inc. has adopted corporate governance guidelines and charters for its Audit, Compensation and Nominating, Corporate Governance and Social Responsibility Committees and the other committees of the Board of Directors. All of these documents are available free of charge on Altria Group, Inc.'s’s website at www.altria.com.

Any waiver granted by Altria Group, Inc. to its principal executive officer, principal financial officer or controller under the Code of Conduct, and certain amendments to the Code of Conduct, will be disclosed on Altria Group, Inc.'s’s website at www.altria.com within the time period required by applicable rules.

The information on the respective websites of Altria Group, Inc. and its subsidiaries is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings Altria Group, Inc. makes with the SEC.

Item 11. Executive Compensation.

Refer to “Executive Compensation,” “Compensation Committee Matters - Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Matters - Compensation Committee Report for the Year Ended December 31, ~~2013,~~2014,” and “Board and Governance Matters - Directors - ~~Compensation of Directors”~~Director Compensation” sections of the proxy statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

~~The number of shares to be issued upon exercise or vesting and the number of shares remaining available for future issuance under Altria Group, Inc.’s equity compensation plans at~~ ~~December 31, 2013, were as follows:~~




	~~Number of Shares~~ ~~to be Issued upon~~ ~~Exercise of~~ ~~Outstanding~~ ~~Options and Vesting of~~ ~~Deferred Stock~~ ~~(a)~~	~~Weighted Average~~ ~~Exercise Price of~~ ~~Outstanding~~ ~~Options~~ ~~(b)~~	~~Number of Shares~~ ~~Remaining Available for~~ ~~Future Issuance Under Equity~~ ~~Compensation~~ ~~Plans~~ ~~(c)~~
~~Equity compensation plans approved by shareholders~~ ⁽¹⁾	~~54,442~~ ⁽²⁾	$—	~~45,789,309~~ ⁽³⁾


⁽¹⁾	The following plans have been approved by Altria Group, Inc. shareholders and have shares referenced in column (a) or column (c): the 2010 Performance Incentive Plan and the Stock Compensation Plan for Non-Employee Directors.


⁽²⁾	~~Represents 54,442 shares of deferred stock.~~


⁽³⁾	Includes 45,254,733 shares available under the 2010 Performance Incentive Plan and 534,576 shares available under the Stock Compensation Plan for Non-Employee Directors, and excludes shares reflected in column (a).

Refer to “Ownership of Equity Securities of the ~~Company - Directors~~Company” and ~~Executive Officers” and “Ownership of Equity Securities of the Company - Certain Other Beneficial Owners”~~“Equity Compensation Plan Information” sections of the proxy statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Refer to “Related Person Transactions and Code of Conduct” and “Board and Governance Matters - Directors - Director Independence Determinations” sections of the proxy statement.

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Item 14. Principal Accounting Fees and Services.

Refer to “Audit Committee Matters - Independent Registered Public Accounting Firm’s Fees” and “Audit Committee Matters - Pre-Approval Policy” sections of the proxy statement.

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Part IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Index to Consolidated Financial Statements ~~and Schedules~~



	Page
Consolidated Balance Sheets at December 31, ~~2013~~2014 and ~~2012~~2013	3937

Consolidated Statements of Earnings for the years ended December 31, 2014, 2013 ~~2012~~ and ~~2011~~2012	4139

Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2014, 2013 ~~2012~~ and ~~2011~~2012	4240

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 ~~2012~~ and ~~2011~~2012	4341

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 ~~2012~~ and ~~2011~~2012	4543

Notes to Consolidated Financial Statements	4644

Report of Independent Registered Public Accounting Firm	~~107~~105

Report of Management on Internal Control Over Financial Reporting	~~108~~106

~~Report of Independent Registered Public Accounting Firm on Financial Statement Schedule~~	~~S-1~~

~~Financial Statement Schedule - Valuation and Qualifying Accounts~~	~~S-2~~

Schedules ~~other than those listed above~~ have been omitted either because such schedules are not required or are not applicable.

In accordance with Regulation S-X Rule 3-09, the financial statements of SABMiller for its fiscal years ended March 31, 2015 (unaudited), March 31, 2014 (unaudited), ~~2013~~ and ~~2012 (unaudited),~~2013, will be filed by amendment within six months after SABMiller’s fiscal year ended March 31, ~~2014.~~2015.

(b) The following exhibits are filed as part of this Annual Report on Form 10-K:



	2.1		Distribution Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as Mondelēz International, Inc.), dated as of January 31, 2007. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 31, 2007 (File No. 1-08940).

	2.2		Distribution Agreement by and between Altria Group, Inc. and Philip Morris International Inc., dated as of January 30, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 30, 2008 (File No. 1-08940).

	2.3		Agreement and Plan of Merger by and among UST Inc., Altria Group, Inc., and Armchair Merger Sub, Inc., dated as of September 7, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on September 8, 2008 (File No. 1-08940).

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~~Table of Contents~~



	2.4		Amendment No. 1 to the Agreement and Plan of Merger, dated as of September 7, 2008, by and among UST Inc., Altria Group, Inc., and Armchair Merger Sub, Inc., dated as of October 2, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on October 3, 2008 (File No. 1-08940).

	3.1		Articles of Amendment to the Restated Articles of Incorporation of Altria Group, Inc. and Restated Articles of Incorporation of Altria Group, Inc. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-08940).

	3.2		Amended and Restated By-laws of Altria Group, Inc., effective ~~on the date of the 2013 Annual Meeting of Shareholders.~~August 21, 2014. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on ~~February 26, 2013~~August 21, 2014 (File No. 1-08940).

109

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	4.1		Indenture between Altria Group, Inc. and The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, dated as of December 2, 1996. Incorporated by reference to Altria Group, Inc.’s Registration Statement on Form S-3/A filed on January 29, 1998 (No. 333-35143).

	4.2		First Supplemental Indenture to Indenture, dated as of December 2, 1996, between Altria Group, Inc. and The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as Trustee, dated as of February 13, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on February 15, 2008 (File No. 1-08940).

	4.3		Indenture among Altria Group, Inc., as Issuer, Philip Morris USA Inc., as Guarantor, and Deutsche Bank Trust Company Americas, as Trustee, dated as of November 4, 2008. Incorporated by reference to Altria Group, Inc.’s Registration Statement on Form S-3 filed on November 4, 2008 (No. 333-155009).

	4.4		5-Year Revolving Credit Agreement, dated as of June 30, 2011, among Altria Group, Inc. and the Initial Lenders named therein and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on June 30, 2011 (File No. 1-08940).

	~~4.5~~		Amended and Restated 5-Year Revolving Credit Agreement, dated as of August 19, 2013, among Altria Group, Inc. and the Initial Lenders named therein and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on August 23, 2013 (File No. 1-08940).

	4.5		Extension Agreement, effective August 19, 2014, among Altria Group, Inc. and the lenders party thereto and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on August 21, 2014 (File No. 1-08940).

	4.6		The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its consolidated subsidiaries to the Commission upon request.

	10.1		Comprehensive Settlement Agreement and Release related to settlement of Mississippi health care cost recovery action, dated as of October 17, 1997. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940).

	10.2		Settlement Agreement related to settlement of Florida health care cost recovery action, dated August 25, 1997. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on September 3, 1997 (File No. 1-08940).

	10.3		Comprehensive Settlement Agreement and Release related to settlement of Texas health care cost recovery action, dated as of January 16, 1998. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 28, 1998 (File No. 1-08940).

	10.4		Settlement Agreement and Stipulation for Entry of Judgment regarding the claims of the State of Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940).

	10.5		Settlement Agreement and Release regarding the claims of Blue Cross and Blue Shield of Minnesota, dated as of May 8, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 1-08940).

~~112~~

~~Table of Contents~~



	10.6		Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order regarding the settlement of the Mississippi health care cost recovery action, dated as of July 2, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No. 1-08940).

	10.7		Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the settlement of the Texas health care cost recovery action, dated as of July 24, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No. 1-08940).

	10.8		Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree regarding the settlement of the Florida health care cost recovery action, dated as of September 11, 1998. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 1998 (File No. 1-08940).

110

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	10.9		Master Settlement Agreement relating to state health care cost recovery and other claims, dated as of November 23, 1998. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on November 25, 1998, as amended by Form 8-K/A filed on December 24, 1998 (File No. 1-08940).

	10.10		Stipulation and Agreed Order Regarding Stay of Execution Pending Review and Related Matters, dated as of May 7, 2001. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on May 8, 2001 (File No. 1-08940).

	10.11		Term Sheet effective December 17, 2012, between Philip Morris USA Inc., the other participating manufacturers, and various states and territories for settlement of the 2003 - 2012 Non-Participating Manufacturer Adjustment with those states. Incorporated by reference to Altria Group, Inc.’s Current Report on From 8-K filed on December 18, 2012 (File No. 1-08940).

	10.12		Employee Matters Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as Mondelēz International, Inc.), dated as of March 30, 2007. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940).

	10.13		Tax Sharing Agreement by and between Altria Group, Inc. and Kraft Foods Inc. (now known as Mondelēz International, Inc.), dated as of March 30, 2007. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on March 30, 2007 (File No. 1-08940).

	10.14		Intellectual Property Agreement by and between Philip Morris International Inc. and Philip Morris USA Inc., dated as of January 1, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940).

	10.15		Employee Matters Agreement by and between Altria Group, Inc. and Philip Morris International Inc., dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940).

	10.16		Tax Sharing Agreement by and between Altria Group, Inc. and Philip Morris International Inc., dated as of March 28, 2008. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on March 28, 2008 (File No. 1-08940).

	10.17		Guarantee made by Philip Morris USA Inc., in favor of the lenders party to the 5-Year Revolving Credit Agreement, dated as of June 30, 2011, among Altria Group, Inc., the lenders named therein, and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents, dated as of June 30, 2011. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on June 30, 2011 (File No. 1-08940).

	10.18		Financial Counseling Program. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-08940).*

	10.19		Benefit Equalization Plan, effective September 2, 1974, as amended. ~~Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-08940).~~*

	10.20		Form of Employee Grantor Trust Enrollment Agreement. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-08940).*

~~113~~

~~Table of Contents~~



	10.21		Form of Supplemental Employee Grantor Trust Enrollment Agreement. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-08940).*

	10.22		Automobile Policy. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940).*

	10.23		Supplemental Management Employees’ Retirement Plan of Altria Group, Inc., effective as of October 1, 1987, as amended and in effect as of January 1, 2012. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2012 (File No. 1-08940).*

	10.24		Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996, as amended effective October 1, 2012. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-08940).*

	~~10.25~~		Grantor Trust Agreement by and between Altria Client Services Inc. and Wells Fargo Bank, National Association, dated February 23, 2011. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 1-08940).*

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Table of Contents



	~~10.26~~10.25		Long-Term Disability Benefit Equalization Plan, effective as of January 1, 1989, as amended. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 1-08940).*

	~~10.27~~10.26		Survivor Income Benefit Equalization Plan, effective as of January 1, 1985, as amended and in effect as of January 1, 2010. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2011 (File No. 1-08940).*

	~~10.28~~		2000 Stock Compensation Plan for Non-Employee Directors, as amended and restated as of March 1, 2003. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-08940).*

	~~10.29~~10.27		2005 Performance Incentive Plan, effective on May 1, 2005. Incorporated by reference to Altria Group, Inc.’s definitive proxy statement filed on March 14, 2005 (File No. 1-08940).*

	~~10.30~~10.28		Deferred Fee Plan for Non-Employee Directors, as amended and restated effective October 1, 2012. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-08940).*

	~~10.31~~10.29		Stock Compensation Plan for Non-Employee Directors, as amended and restated effective ~~October 1, 2012.~~January 29, 2014. Incorporated by reference to Altria Group, Inc.’s ~~Annual~~Quarterly Report on Form ~~10-K~~10-Q for the ~~year~~period ended ~~December~~March 31, ~~2012~~2014 (File No. 1-08940).*

	~~10.32~~10.30		2010 Performance Incentive Plan, effective on May 20, 2010. Incorporated by reference to Altria Group, Inc.’s definitive proxy statement filed on April 9, 2010 (File No. 1-08940).*

	~~10.33~~10.31		Kraft Foods Inc. (now known as Mondelēz International, Inc.) Supplemental Benefits Plan I (including First Amendment adding Supplement A), as amended and restated effective as of January 1, 1996. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 1-08940).*

	~~10.34~~10.32		Form of Indemnity Agreement. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on October 30, 2006 (File No. 1-08940).

	~~10.35~~10.33		Form of Restricted Stock Agreement, dated as of December 31, 2009. Incorporated by reference to Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-08940).*

	~~10.36~~		Form of Restricted Stock Agreement, dated as of January 26, 2010. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 28, 2010 (File No. 1-08940).*

	~~10.37~~10.34		Form of Restricted Stock Agreement, dated as of January 25, 2011. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 27, 2011(File No. 1-08940).*

	~~10.38~~10.35		Form of Deferred Stock Agreement, dated as of January 25, 2011. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 27, 2011 (File No. 1-08940).*

~~114~~

~~Table of Contents~~




	~~10.39~~10.36		Form of Restricted Stock Agreement, dated as of January 25, 2012. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 27, 2012 (File No. 1-08940).*

	~~10.40~~10.37		Form of Restricted Stock Agreement, dated as of May 16, 2012. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on May 17, 2012 (File No. 1-08940).*

	~~10.41~~10.38		Form of Restricted Stock Agreement, dated as of January 29, 2013. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 31, 2013 (File No. 1-08940).*

	~~10.42~~10.39		Form of Deferred Stock Agreement, dated as of January 29, 2013. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2013 (File No. 1-08940).*

	~~10.43~~10.40		Form of Restricted Stock Agreement, dated as of January 28, 2014. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 30, 2014 (File No. 1-08940).*

	10.41		Form of Deferred Stock Agreement, dated as of January 28, 2014. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 (File No. 1-08940).*

	10.42		Form of Executive Confidentiality and Non-Competition Agreement. Incorporated by reference to Altria Group, Inc.’s Current Report on Form 8-K filed on January 27, 2011 (File No. 1-08940).*

	~~10.44~~10.43		Time Sharing Agreement between Altria Client Services Inc. and Martin J. Barrington, dated as of July 25, 2012. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2012 (File No. 1-08940).*

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Table of Contents



	~~10.45~~10.44		Time Sharing Agreement between Altria Client Services Inc. and David R. Beran, dated as of July 25, 2012. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2012 (File No. 1-08940).*


	12		Statements regarding computation of ratios of earnings to fixed charges.

	21		Subsidiaries of Altria Group, Inc.

	23		Consent of independent registered public accounting firm.

	24		Powers of attorney.

	31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	99.1		Certain Litigation Matters.

	99.2		Trial Schedule for Certain Cases.

	99.3		Definitions of Terms Related to Financial Covenants Included in Altria Group, Inc.’s Amended and Restated 5-Year Revolving Credit Agreement, dated as of August 19, 2013. Incorporated by reference to Altria Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2013 (File No. 1-08940).

	101.INS		XBRL Instance Document.

	101.SCH		XBRL Taxonomy Extension Schema.

	101.CAL		XBRL Taxonomy Extension Calculation Linkbase.

	101.DEF		XBRL Taxonomy Extension Definition Linkbase.

	101.LAB		XBRL Taxonomy Extension Label Linkbase.

~~115~~

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	101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

* Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.

~~116~~113

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




	ALTRIA GROUP, INC.

	By:	/s/ MARTIN J. BARRINGTON
		(Martin J. Barrington Chairman of the Board and Chief Executive Officer)

Date: February ~~26, 2014~~25, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:



Signature		Title	Date

/s/ MARTIN J. BARRINGTON (Martin J. Barrington)		Director, Chairman of the Board and Chief Executive Officer	February ~~26, 2014~~25, 2015

/s/ HOWARD A. WILLARD III (Howard A. Willard III)		Executive Vice President and Chief Financial Officer	February ~~26, 2014~~25, 2015

/s/ IVAN S. FELDMAN (Ivan S. Feldman)		Vice President and Controller	February ~~26, 2014~~25, 2015

* GERALD L. BALILES, JOHN T. CASTEEN III, DINYAR S. DEVITRE, THOMAS F. FARRELL II, THOMAS W. JONES, DEBRA J. KELLY-ENNIS W. LEO KIELY III, KATHRYN B. MCQUADE, GEORGE MUÑOZ, NABIL Y. SAKKAB		Directors

*By:	/s/ MARTIN J. BARRINGTON (MARTIN J. BARRINGTON ATTORNEY-IN-FACT)		February ~~26, 2014~~25, 2015

~~117~~

~~Report of Independent Registered Public Accounting Firm on Financial Statement Schedule~~

~~To the Board of Directors and Stockholders of Altria Group, Inc.:~~

Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated January 30, 2014 appearing in this Annual Report on Form 10-K of Altria Group, Inc. also included an audit of the financial statement schedule appearing on Page S-2 of this Annual Report on Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

~~/s/ PricewaterhouseCoopers LLP~~

~~Richmond, Virginia~~

~~January 30, 2014~~

114

~~S-1~~

~~Altria Group, Inc. and Subsidiaries~~

~~Valuation and Qualifying Accounts~~

~~For the Years Ended December 31, 2013, 2012 and 2011~~

~~(in millions)~~

Col. A Col. B Col. C Col. D Col. E
Additions
Description Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Deductions Balance at End of Period
(a)
2013:

Allowance for discounts $ —
$ 610
$ —
$ 610
$ —
Allowance for returned goods 42
150
—
151
41
Allowance for losses on finance assets 99
(47 ) —
—
52
$ 141
$ 713
$ —
$ 761
$ 93

2012:

Allowance for discounts $ —
$ 619
$ —
$ 619
$ —
Allowance for returned goods 54
114
—
126
42
Allowance for losses on finance assets 227
(10 ) —
118
99
$ 281
$ 723
$ —
$ 863
$ 141

2011:

Allowance for discounts $ —
$ 602
$ —
$ 602
$ —
Allowance for returned goods 46
102
—
94
54
Allowance for losses on finance assets 202
25
—
—
227
$ 248
$ 729
$ —
$ 696
$ 281

Notes:
(a) Represents charges for which allowances were created

~~S-2~~



	For the Year Ended December 31, 2013
(in millions)	Asset Impairment and Exit Costs		Implementation Costs		Total
Smokeable products	$	3	$	1	$	4
Smokeless products	3		—		3
All other	5		—		5
Total	$	11	$	1	$	12



	Number of Shares		Weighted-Average Grant Date Fair Value Per Share
Balance at December 31, 2012	6,581,983		$	23.55
Granted	1,443,460		33.76
Vested	(2,573,491	)	20.35
Forfeited	(119,090	)	27.61
Balance at December 31, 2013	5,332,862		27.77



(in millions)	PM USA Potential Adjustment
2003	$	337
2004	388
2005	181
2006	154
2007	185
2008	250
2009	205
2010	203
2011	159
2012	199



Col. A	Col. B					Col. C			Col. D		Col. E
			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expenses				Charged to Other Accounts		Deductions		Balance at End of Period
									(a)
2013:

Allowance for discounts	$	—	$	610			$	—	$	610	$	—
Allowance for returned goods	42		150				—		151		41
Allowance for losses on finance assets	99		(47		)		—		—		52
	$	141	$	713			$	—	$	761	$	93


2012:

Allowance for discounts	$	—	$	619			$	—	$	619	$	—
Allowance for returned goods	54		114				—		126		42
Allowance for losses on finance assets	227		(10		)		—		118		99
	$	281	$	723			$	—	$	863	$	141


2011:

Allowance for discounts	$	—	$	602			$	—	$	602	$	—
Allowance for returned goods	46		102				—		94		54
Allowance for losses on finance assets	202		25				—		—		227
	$	248	$	729			$	—	$	696	$	281

Notes:
(a) Represents charges for which allowances were created