Investments in Equity Securities

9 Months Ended

Sep. 30, 2019

Investments [Abstract]

Investment

Investments in Equity Securities:

Altria’s investments consisted of the following:

	Carrying Amount
	September 30, 2019		December 31, 2018
	(in millions)
ABI	$	17,950	$	17,696
JUUL	8,305		12,800
Cronos (1)	1,091		—
Total	$	27,346	$	30,496

⁽¹⁾ Includes investment in Acquired Common Shares ($673 million), the Cronos warrant ($315 million) and the Fixed-price Preemptive Rights ($103 million) as discussed further below.

Earnings from equity investments accounted for under the equity method of accounting consisted of the following:

	For the Nine Months Ended September 30,				For the Three Months Ended September 30,
	2019		2018		2019		2018
	(in millions)
ABI	$	640	$	759	$	252	$	189
Cronos (1)	226		—		81		—
Total	$	866	$	759	$	333	$	189

⁽¹⁾ Represents Altria’s share of Cronos’s earnings, substantially all of which relate to the change in fair value of Cronos’s derivative financial instruments associated with the issuance of additional shares.

Investment in ABI

At September 30, 2019, Altria had a 10.1% economic and voting interest in ABI, consisting of 185 million restricted shares of ABI (the “Restricted Shares”) and 12 million ordinary shares of ABI. Altria accounts for its investment in ABI under the equity method of accounting because Altria has the ability to exercise significant influence over the operating and financial policies of ABI, including having active representation on ABI’s Board of Directors (“ABI Board”) and certain ABI Board committees. Through this representation, Altria participates in ABI policy making processes.

In September 2019, ABI completed its initial public offering of a minority stake of its Asia Pacific subsidiary, Budweiser Brewing Company APAC Limited. Consistent with the one-quarter lag for reporting ABI’s results in Altria’s financial results,

in the fourth quarter of 2019, Altria will record the financial statement impact, which has not yet been determined, related to this transaction.

Altria reviews its investment in ABI for impairment by comparing the fair value of its investment to its carrying value. If the carrying value of Altria’s investment exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired and impairment is recognized in the period identified. The factors used to make this determination include the duration and magnitude of the fair value decline, ABI’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in ABI until recovery.

The fair value of Altria’s equity investment in ABI is based on (i) unadjusted quoted prices in active markets for ABI’s ordinary shares and was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. Altria may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. In the event the pledgee or security interest holder forecloses on the Restricted Shares, the relevant Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share.

The fair value of Altria’s equity investment in ABI at September 30, 2019 and December 31, 2018 was $18.8 billion and $13.1 billion, respectively, compared with its carrying value of $18.0 billion and $17.7 billion, respectively. At September 30, 2019, the fair value of Altria’s equity investment in ABI exceeded its carrying value by 4%. The fair value of Altria’s equity investment in ABI was less than its carrying value by 26% at December 31, 2018. Based on Altria’s evaluation of the factors identified above, Altria concluded that, at December 31, 2018 the decline in fair value of its investment in ABI below its carrying value was temporary and, therefore, did not record any impairment.

Investment in JUUL

In December 2018, Altria, through a wholly-owned subsidiary, purchased shares of JUUL’s non-voting Class C-1 Common Stock for an aggregate price of $12.8 billion, which will convert automatically to shares of voting Class C Common Stock upon antitrust clearance, and for no additional payment a security convertible into additional shares of Class C-1 Common Stock or Class C Common Stock, as applicable, upon settlement or exercise of certain JUUL convertible securities (the “JUUL Transaction”). At September 30, 2019, Altria owned 35% of the issued and outstanding capital stock of JUUL.

Upon Share Conversion, Altria will possess 35% of JUUL’s outstanding voting power, except to the extent that Altria’s percentage ownership has decreased, and have the right to designate one-third of the members of the JUUL Board of Directors, subject to proportionate downward adjustment if Altria’s percentage ownership falls below 30%.

Altria received a broad preemptive right to purchase JUUL shares, exercisable each quarter upon dilution, to maintain its ownership percentage and is subject to a standstill restriction under which it may not acquire additional JUUL shares above its 35% interest. Furthermore, Altria agreed not to sell or transfer any of its JUUL shares until December 20, 2024.

At September 30, 2019, Altria accounted for its investment in JUUL as an investment in an equity security. Since the JUUL shares do not have a readily determinable fair value, Altria has elected to measure its investment in JUUL at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There have been no upward or downward adjustments to the carrying value of Altria’s investment in JUUL resulting from observable price changes in orderly transactions since the JUUL Transaction through September 30, 2019.

Altria reviews its investment in JUUL for impairment by performing a qualitative assessment of impairment indicators. If a qualitative assessment indicates that Altria’s investment in JUUL may be impaired, a quantitative assessment is performed. If the quantitative assessment indicates the fair value of the investment is less than its carrying value, the investment is written down to its fair value.

Altria performed its qualitative assessment of potential impairment indicators for its investment in JUUL as part of the preparation of its financial statements for the period ended September 30, 2019 and determined that indicators of impairment exist, including recent significant adverse changes in both the e-vapor regulatory environment and the industry in which JUUL operates. While there was no single determinative event or factor, Altria considered in totality the following indicators of impairment: the increased likelihood of a United States Food and Drug Administration compliance policy prohibiting the sale of certain flavored e-vapor products in the U.S. market without a pre-market authorization; various e-vapor bans put in place by

certain states and cities in the U.S. and in certain international markets, coupled with the increased potential for additional bans in the future; and the impact of heightened adverse publicity, including recent news reports and public health advisories concerning vaping-related lung injuries and deaths. Given the existence of these indicators, Altria performed a valuation of its investment in JUUL as of September 30, 2019 and determined that the fair value of its investment is $8.3 billion, which is less than its carrying value of $12.8 billion by approximately 35%. As a result, Altria recorded a non-cash pre-tax charge of $4.5 billion reported as impairment of JUUL equity securities in its condensed consolidated statements of earnings for the nine and three months ended September 30, 2019. The impairment charge was due primarily to lower e-vapor volume assumptions in the U.S. and international markets and a delay in achieving margin performance, as compared to the assumptions at the time of the JUUL Transaction. These assumption changes are a result of the factors discussed above.

Altria used an income approach to estimate the fair value of its investment in JUUL. The income approach reflects the discounting of projected future cash flows for the U.S. and international markets 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 projected future cash flows. Projected future cash flows in the U.S. were based on a range of scenarios that consider various potential regulatory and market outcomes.

In determining the fair value of its investment in JUUL, Altria made various judgments, estimates and assumptions, the most significant of which were volume, operating margins, discount rates and perpetual growth rates. Additionally, Altria made significant assumptions regarding the likelihood and extent of various potential regulatory actions and continued adverse public perception impacting the e-vapor category and specifically JUUL, as well as expectations of the future state of the e-vapor category. All significant inputs used in the valuation are classified in Level 3 of the fair value hierarchy.

Upon Share Conversion, Altria expects to account for its investment in JUUL under the equity method of accounting. See Note 1. Background and Basis of Presentation for a discussion of the status of antitrust clearance.

Investment in Cronos

In March 2019, Altria, through a subsidiary, completed its acquisition of:

▪ 149.8 million newly issued common shares of Cronos (“Acquired Common Shares”), which represented a 45% economic and voting interest;

▪ anti-dilution protections to purchase Cronos common shares, exercisable each quarter upon dilution, to maintain its ownership percentage. Certain of the anti-dilution protections provide Altria the ability to purchase additional Cronos common shares at a per share exercise price of CAD $16.25 upon the occurrence of specified events (“Fixed-price Preemptive Rights”). Based on Altria’s assumptions as of September 30, 2019, Altria estimates the Fixed-price Preemptive Rights will allow Altria to purchase up to an additional approximately 37 million common shares of Cronos; and

▪ a warrant providing Altria the ability to purchase up to an additional 10% of common shares of Cronos (approximately 76 million common shares at September 30, 2019) at a per share exercise price of CAD $19.00, which expires on March 8, 2023.

The total purchase price for the Acquired Common Shares, Fixed-price Preemptive Rights and warrant (collectively, “Investment in Cronos”) was CAD $2.4 billion (USD $1.8 billion). Upon full exercise of the Fixed-price Preemptive Rights, to the extent such rights become available, and the warrant, Altria would own a maximum of 55% of the outstanding common shares of Cronos.

In accounting for the acquisition of these assets as of the date of closing, the Fixed-price Preemptive Rights and warrant were recorded at each of their fair values using Black-Scholes option-pricing models, based on the assumptions described in Note 6. Financial Instruments. In addition, a deferred tax liability related to the Fixed-price Preemptive Rights and warrant was recorded. The residual of the purchase price was allocated to the Acquired Common Shares. Accordingly, the CAD $2.4 billion (USD $1.8 billion) purchase price was recorded in USD as follows:

▪ $1.2 billion to the warrant;

▪ $0.5 billion to the Fixed-price Preemptive Rights;

▪ $0.4 billion to the Acquired Common Shares; and

▪ $0.3 billion to a deferred tax liability.

For a discussion of derivatives related to Altria’s Investment in Cronos, including Altria’s accounting for changes in the fair value of these derivatives, see Note 6. Financial Instruments.

At September 30, 2019, Altria had an approximate 45% economic and voting interest in Cronos, which Altria accounts for under the equity method of accounting. Altria reports its share of Cronos’s results using a one-quarter lag because Cronos’s results are not available in time for Altria to record them in the concurrent period.

Altria nominated four directors, including one director who is independent from Altria, who serve on Cronos’s seven-member Board of Directors.