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EPA Challenges Navistar Engine Claims

February 16, 2012

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The Environmental Protection Agency believes that Navistar violated engine certification requirements and may file a complaint that could lead to a fine. The agency signaled its intent in a certified letter to Navistar Jan. 30,
a copy of which was obtained by the British trade magazine, Commercial Motor.

Navistar yesterday confirmed the letter.

"Navistar acknowledges that it has received notice from U.S. EPA related to the use of 2009 transition engines," the company said in a statement. "We firmly believe our 2010 transition was appropriate, and we will continue our discussions and cooperation with the agency on this matter."

EPA contends in the letter that Navistar claimed it built engines in model year 2009 that were mostly assembled in 2010, which could be a violation of the Clean Air Act.

There are 7,600 engines in question. EPA says Navistar installed crankshafts but no other parts in 2009. The company designated them as model year 2009 engines even though it did not complete assembly until 2010. That means the engines are not covered under Navistar's certificate of conformity with emission requirements for 2009, the agency said.

"Please be advised that we reserve the right to file an administrative complaint or to refer this matter to the U.S. Department of Justice with a recommendation that a civil complaint be filed," the agency warned.

Stephen Volkmann, an equities analyst who follows equipment manufacturers for Jefferies & Co., said in a message to clients that although the action could lead to a large fine, it is more likely that the penalty will be smaller and the issue will be resolved as part of a bigger settlement between EPA and Navistar concerning 2010 emission standards.

The worst-case scenario would be a $37,500 fine per violation, for a total of $285 million, Volkmann said.

"A more likely case is that any fine would be smaller than worst case. We would also note that investigations take time, that (Navistar) has enough cash on its balance sheet to cover the maximum potential fine, and that (Navistar) had discussed its plans with the EPA prior to implementation."

Volkmann added that he believes the partial assembly of engines has been a longstanding practice by other manufacturers, as well as Navistar.

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