Print PagePART I
Item 1. Business
ENVIRONMENTAL COMPLIANCE
Product Environmental Compliance
Our engines are subject to extensive statutory and regulatory requirements that directly or indirectly impose standards governing emissions and noise. Our products comply with emissions standards that the EPA, the California Air Resources Board (CARB) and other state regulatory agencies, as well as other regulatory agencies around the world, have established for heavy-duty on-highway diesel and gas engines and off-highway engines produced through 2007. Our ability to comply with these and future emissions standards is an essential element in maintaining our leadership position in regulated markets. We have made and will continue to make, significant capital and research expenditures to comply with these standards. Failure to comply with these standards could result in adverse effects on our future financial results.
EPA Engine Certifications
New on-highway emissions standards came into effect in the U.S. on January 1, 2007. In December 2003, we announced that we would meet the 2007 U.S. EPA heavy-duty on-highway emissions standards by combining our existing cooled Exhaust Gas Recirculation (EGR) technology with particulate matter (PM) filters. Cooled EGR is the same technology that we have used since April 2002 and was selected after reviewing other aftertreatment technologies such as NOx adsorbers and selective catalytic reduction (SCR). Our experience with particulate filters and the availability of ultra-low-sulfur diesel fuel combine to give us the confidence in meeting these tough standards in the U.S. Additionally, while we believe the EGR/PM filter combination is the right solution for 2007 in the U.S., we have selected SCR as the right technology to meet on-highway Euro IV emissions standards and certain off-highway applications.
For 2010, the company announced that we will use an evolution of our proven 2007 solution to maintain power and torque with fuel economy and maintenance intervals comparable with today’s engines. Cummins will offer a complete lineup of on-highway engines to meet the near-zero emissions standards. Heavy-duty engines for EPA 2010 will not require NOx aftertreatment. NOx reduction will be achieved by an integrated technology solution comprised of the XPI High Pressure Common Rail fuel system, next-generation cooled Exhaust Gas Recirculation, advanced electronic controls, proven air handling and the Cummins Particulate Filter. In addition, we announced that we will expand the Heavy-Duty X platform to three displacements in 2010, with the introduction of an 11.9L engine and a 16L engine to complement our flagship 15L product. Cummins will enhance its Midrange on-highway product performance and reliability for EPA 2010 by adding SCR to our existing products to meet the near-zero EPA 2010 emissions standards. SCR is the right technology for Cummins medium-duty truck, bus and specialty-vehicle customers who want a simple and proven solution to meet their diverse power and duty cycle needs.
Emissions standards in international markets, including Europe and Japan, are becoming more stringent. We believe that our experience in meeting U.S. emissions standards leaves us well positioned to take advantage of opportunities in these markets as the need for emissions control capability grows.
In 1998, we and a number of other engine manufacturers entered into a consent decree with the EPA, the U.S. Department of Justice (DOJ) and CARB. To date, we have performed virtually all of the requirements of the consent decree and major portions of it have been formally terminated. The remaining requirements of the consent decree are on course to terminate within deadlines.
Federal and California regulations require manufacturers to report failures of emissions-related components to the EPA and CARB when the failure rate reaches a specified level. At higher failure rates, a product recall may be required. In 2007, we submitted seven reports to the EPA relating to six different defects affecting the EGR valve, diesel particulate filter, turbocharger, engine control module software for on-board diagnostic software, oxygen sensors and emission control labeling. The defect of on-board diagnostic software and oxygen sensors resulted in a campaign of approximately 83,000 engines.
We have completed fact-finding on three issues relating to potential noncompliance with various programs relating to certified engines. These issues were self-disclosed to the EPA and CARB: two involve use of various certification flexibility programs and one pertains to a provision of the consent decree. The resolution of these issues is not anticipated to be material in 2008.
Other Environmental Statutes and Regulations
During the last five years, expenditures for environmental control activities and environmental remediation projects at our facilities in the U.S. have not been a substantial portion of annual capital outlays and are not expected to be material in 2008. Except as follows, we believe we are in compliance in all material respects with laws and regulations applicable to our plants and operations.
In the U.S., pursuant to notices received from federal and state agencies and/or defendant parties in site environmental contribution actions, we have been identified as a Potentially Responsible Party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended or similar state laws, at approximately 17 waste disposal sites. Based upon our experiences at similar sites we believe that our aggregate future remediation costs will not be significant. We have established accruals that we believe are adequate for our expected future liability with respect to these sites.
In addition, we have four other sites where we are working with governmental authorities on remediation projects. The costs for these remediation projects are not expected to be material in 2008.