| Fair Value Measurements, Derivative Instruments and Hedging Activities | Fair Value Measurements, Derivative Instruments and Hedging Activities Fair Value Measurements Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and is classified in one of the following three categories: • Level 1 measurements are based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment. • Level 2 measurements are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or market data other than quoted prices that are observable for the assets or liabilities. • Level 3 measurements are based on unobservable data that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, certain estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange. Financial Instruments that are not Measured at Fair Value on a Recurring Basis The carrying values and estimated fair values and basis of valuation of our financial instrument assets and liabilities not measured at fair value on a recurring basis were as follows (in millions): February 28, 2017 November 30, 2016 Carrying Fair Value Carrying Fair Value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Assets Long-term other assets (a) $ 111 $ — $ 64 $ 46 $ 99 $ 1 $ 68 $ 31 Total $ 111 $ — $ 64 $ 46 $ 99 $ 1 $ 68 $ 31 Liabilities Fixed rate debt (b) $ 5,370 $ — $ 5,660 $ — $ 5,436 $ — $ 5,727 $ — Floating rate debt (b) 3,773 — 3,816 — 4,018 — 4,048 — Total $ 9,143 $ — $ 9,476 $ — $ 9,454 $ — $ 9,775 $ — (a) Long-term other assets are substantially all comprised of notes and other receivables. The fair values of our Level 2 notes and other receivables were based on estimated future cash flows discounted at appropriate market interest rates. The fair values of our Level 3 notes receivable were estimated using risk-adjusted discount rates. (b) The debt amounts above do not include the impact of interest rate swaps or debt issuance costs. The fair values of our publicly-traded notes were based on their unadjusted quoted market prices in markets that are not sufficiently active to be Level 1 and, accordingly, are considered Level 2. The fair values of our other debt were estimated based on appropriate market interest rates being applied to this debt. Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis Valuation of Goodwill and Other Intangibles The reconciliation of the changes in the carrying amounts of our goodwill was as follows (in millions): North America EAA (a) Total Balance at November 30, 2016 $ 1,898 $ 1,012 $ 2,910 Foreign currency translation adjustment — 1 1 Balance at February 28, 2017 $ 1,898 $ 1,013 $ 2,911 (a) Europe, Australia & Asia (“EAA”) At July 31, 2016, we performed our annual goodwill impairment reviews and no goodwill was impaired. The reconciliation of the changes in the carrying amounts of our other intangible assets not subject to amortization, which represent trademarks, was as follows (in millions): North America EAA Total Balance at November 30, 2016 $ 927 $ 279 $ 1,206 Foreign currency translation adjustment — 1 1 Balance at February 28, 2017 $ 927 $ 280 $ 1,207 At July 31, 2016, our cruise brands that have significant trademarks recorded include AIDA, P&O Cruises (Australia), P&O Cruises (UK) and Princess. As of that date, we performed our annual trademark impairment reviews for these cruise brands and no trademarks were impaired. The determination of our reporting unit goodwill and trademark fair values includes numerous assumptions that are subject to various risks and uncertainties. We believe that we have made reasonable estimates and judgments. If there is a change in the conditions, circumstances or strategy influencing fair values in the future, then we may need to recognize an impairment charge. The reconciliation of the changes in the net carrying amounts of our other intangible assets subject to amortization, which represent port usage rights and other amortizable intangibles, was as follows (in millions): Cruise Support EAA Tour and Other Segment Total Balance at November 30, 2016 $ 57 $ 12 $ — $ 69 Additions — — 4 4 Amortization (1 ) — — (1 ) Balance at February 28, 2017 $ 56 $ 12 $ 4 $ 72 Financial Instruments that are Measured at Fair Value on a Recurring Basis The estimated fair value and basis of valuation of our financial instrument assets and liabilities measured at fair value on a recurring basis were as follows (in millions): February 28, 2017 November 30, 2016 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Assets Cash and cash equivalents (a) $ 437 $ — $ — $ 603 $ — $ — Restricted cash 53 — — 60 — — Short-term investments (b) — — — — — 21 Marketable securities held in rabbi trusts (c) 94 3 — 93 4 — Derivative financial instruments — 13 — — 15 — Total $ 584 $ 16 $ — $ 756 $ 19 $ 21 Liabilities Derivative financial instruments $ — $ 321 $ — $ — $ 434 $ — Total $ — $ 321 $ — $ — $ 434 $ — (a) Cash and cash equivalents are comprised of cash and marketable securities with maturities of less than 90 days. (b) The fair value of the auction rate security included in short-term investments, as of November 30, 2016, was based on a broker quote in an inactive market, which is considered a Level 3 input. This auction-rate security was sold in December 2016. (c) At February 28, 2017, marketable securities held in rabbi trusts were comprised of Level 1 bonds, frequently-priced mutual funds invested in common stocks and money market funds and Level 2 other investments. Their use is restricted to funding certain deferred compensation and non-qualified U.S. pension plans. Derivative Instruments and Hedging Activities The estimated fair values of our derivative financial instruments and their location in the Consolidated Balance Sheets were as follows (in millions): Balance Sheet Location February 28, November 30, 2016 Derivative assets Derivatives designated as hedging instruments Net investment hedges (a) Prepaid expenses and other $ 9 $ 12 Other assets – long-term 4 3 Total derivative assets $ 13 $ 15 Derivative liabilities Derivatives designated as hedging instruments Net investment hedges (a) Accrued liabilities and other $ — $ 26 Interest rate swaps (b) Accrued liabilities and other 10 10 Other long-term liabilities 22 23 Foreign currency zero cost collars (c) Accrued liabilities and other 6 12 Other long-term liabilities 19 21 57 92 Derivatives not designated as hedging instruments Fuel (d) Accrued liabilities and other 161 198 Other long-term liabilities 103 144 264 342 Total derivative liabilities $ 321 $ 434 (a) We had foreign currency forwards totaling $11 million at February 28, 2017 and $456 million at November 30, 2016 that are designated as hedges of our net investments in foreign operations, which have a euro-denominated functional currency. At February 28, 2017 , these foreign currency forwards settle through July 2017. We also had foreign currency swaps totaling $289 million at February 28, 2017 and $291 million at November 30, 2016 that are designated as hedges of our net investments in foreign operations, which have a euro-denominated functional currency. At February 28, 2017 , these foreign currency swaps settle through September 2019. (b) We have euro interest rate swaps designated as cash flow hedges whereby we receive floating interest rate payments in exchange for making fixed interest rate payments. These interest rate swap agreements effectively changed $486 million at February 28, 2017 and $500 million at November 30, 2016 of EURIBOR-based floating rate euro debt to fixed rate euro debt. At February 28, 2017 , these interest rate swaps settle through March 2025. (c) At February 28, 2017 and November 30, 2016 , we had foreign currency derivatives consisting of foreign currency zero cost collars that are designated as foreign currency cash flow hedges for a portion of our euro-denominated shipbuilding payments. See “Newbuild Currency Risks” below for additional information regarding these derivatives. (d) At February 28, 2017 and November 30, 2016 , we had fuel derivatives consisting of zero cost collars on Brent crude oil (“Brent”) to cover a portion of our estimated fuel consumption through 2018. See “Fuel Price Risks” below for additional information regarding these derivatives. Our derivative contracts include rights of offset with our counterparties. We have elected to net certain of our derivative assets and liabilities within counterparties. The amounts recognized within assets and liabilities were as follows (in millions): February 28, 2017 Gross Amounts Gross Amounts Offset in the Balance Sheet Total Net Amounts Presented in the Balance Sheet Gross Amounts not Offset in the Balance Sheet Net Amounts Assets $ 14 $ (1 ) $ 13 $ (13 ) $ — Liabilities $ 322 $ (1 ) $ 321 $ (13 ) $ 308 November 30, 2016 Gross Amounts Gross Amounts Offset in the Balance Sheet Total Net Amounts Presented in the Balance Sheet Gross Amounts not Offset in the Balance Sheet Net Amounts Assets $ 15 $ — $ 15 $ (15 ) $ — Liabilities $ 434 $ — $ 434 $ (15 ) $ 419 The effective gain (loss) portions of our derivatives qualifying and designated as hedging instruments recognized in other comprehensive income (loss) were as follows (in millions): Three Months Ended February 28/29, 2017 2016 Net investment hedges $ 1 $ (13 ) Foreign currency zero cost collars – cash flow hedges $ 8 $ 10 Interest rate swaps – cash flow hedges $ 2 $ (3 ) There are no credit risk related contingent features in our derivative agreements, except for bilateral credit provisions within our fuel derivative counterparty agreements. These provisions require cash collateral to be posted or received to the extent the fuel derivative fair value payable to or receivable from an individual counterparty exceeds $100 million . At February 28, 2017 and November 30, 2016 , no collateral was required to be posted to or received from our fuel derivative counterparties. The amount of estimated cash flow hedges’ unrealized gains and losses that are expected to be reclassified to earnings in the next twelve months is not significant. We have not provided additional disclosures of the impact that derivative instruments and hedging activities have on our consolidated financial statements as of February 28, 2017 and November 30, 2016 and for the three months ended February 28/29, 2017 and 2016 where such impacts were not significant. Fuel Price Risks Substantially all of our exposure to market risk for changes in fuel prices relates to the consumption of fuel on our ships. We have Brent call options and Brent put options, collectively referred to as zero cost collars, that establish ceiling and floor prices and mitigate a portion of our economic risk attributable to potential fuel price increases. To maximize operational flexibility we utilized derivative markets with significant trading liquidity. Our zero cost collars are based on Brent prices whereas the actual fuel used on our ships is marine fuel. Changes in the Brent prices may not show a high degree of correlation with changes in our underlying marine fuel prices. We will not realize any economic gain or loss upon the monthly maturities of our zero cost collars unless the average monthly price of Brent is above the ceiling price or below the floor price. We believe that these zero cost collars will act as economic hedges; however, hedge accounting is not applied. Our unrealized and realized gains (losses), net on fuel derivatives were as follows (in millions): Three Months Ended February 28/29, 2017 2016 Unrealized gains (losses) on fuel derivatives, net $ 72 $ (145 ) Realized losses on fuel derivatives, net (45 ) (91 ) Gains (losses) on fuel derivatives, net $ 27 $ (236 ) At February 28, 2017 , our outstanding fuel derivatives consisted of zero cost collars on Brent as follows: Maturities (a) Transaction Barrels Weighted-Average Weighted-Average Fiscal 2017 (Q2 - Q4) February 2013 2,457 $ 80 $ 115 April 2013 1,521 $ 75 $ 110 January 2014 1,350 $ 75 $ 114 October 2014 765 $ 80 $ 113 6,093 Fiscal 2018 January 2014 2,700 $ 75 $ 110 October 2014 3,000 $ 80 $ 114 5,700 (a) Fuel derivatives mature evenly over each month within the above fiscal periods. Foreign Currency Exchange Rate Risks Overall Strategy We manage our exposure to fluctuations in foreign currency exchange rates through our normal operating and financing activities, including netting certain exposures to take advantage of any natural offsets and, when considered appropriate, through the use of derivative and non-derivative financial instruments. Our primary focus is to monitor our exposure to, and manage, the economic foreign currency exchange risks faced by our operations and realized if we exchange one currency for another. We currently only hedge certain of our ship commitments and net investments in foreign operations. The financial impacts of the hedging instruments we do employ generally offset the changes in the underlying exposures being hedged. Operational Currency Risks Our EAA segment operations generate significant revenues and incur significant expenses in their functional currencies, which subjects us to “foreign currency translational” risk related to these currencies. Accordingly, exchange rate fluctuations in their functional currencies against the U.S. dollar will affect our reported financial results since the reporting currency for our consolidated financial statements is the U.S. dollar. Any strengthening of the U.S. dollar against these foreign currencies has the financial statement effect of decreasing the U.S. dollar values reported for these segment’s revenues and expenses. Any weakening of the U.S. dollar has the opposite effect. Substantially all of our operations also have non-functional currency risk related to their international sales. In addition, we have a portion of our operating expenses denominated in non-functional currencies. Accordingly, we also have “foreign currency transactional” risks related to changes in the exchange rates for our revenues and expenses that are in a currency other than the functional currency. The revenues and expenses which occur in the same non-functional currencies create some degree of natural offset. Investment Currency Risks We consider our investments in foreign operations to be denominated in stable currencies. Our investments in foreign operations are of a long-term nature. We have $5.1 billion of euro-denominated debt, including the effect of foreign currency swaps, which provides an economic offset for our operations with euro functional currency. We also partially mitigate our net investment currency exposures by denominating a portion of our foreign currency intercompany payables in our foreign operations’ functional currencies. Newbuild Currency Risks Our shipbuilding contracts are typically denominated in euros. Our decision to hedge a non-functional currency ship commitment for our cruise brands is made on a case-by-case basis, considering the amount and duration of the exposure, market volatility, economic trends, our overall expected net cash flows by currency and other offsetting risks. We use foreign currency derivative contracts and have used non-derivative financial instruments to manage foreign currency exchange rate risk for some of our ship construction payments. At February 28, 2017, we had foreign currency zero cost collars that are designated as cash flow hedges for a portion of euro-denominated shipyard payments for the following newbuilds: Entered Into Matures in Weighted-Average Floor Rate Weighted- Average Ceiling Rate Majestic Princess 2015 March 2017 $ 1.07 $ 1.25 Carnival Horizon 2016 March 2018 $ 1.02 $ 1.25 Seabourn Ovation 2016 April 2018 $ 1.02 $ 1.25 Holland America Nieuw Statendam 2016 November 2018 $ 1.05 $ 1.25 If the spot rate is between the weighted-average ceiling and floor rates on the date of maturity, then we would not owe or receive any payments under these collars. At March 24, 2017 , our remaining newbuild currency exchange rate risk primarily relates to euro-denominated newbuild contract payments, which represent a total unhedged commitment of $5.6 billion and substantially relates to newbuilds to be delivered 2019 through 2022 to non-euro functional currency brands. The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise brands’ is expected to be affected by foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations may affect our desire to order new cruise ships. Interest Rate Risks We manage our exposure to fluctuations in interest rates through our debt portfolio management and investment strategies. We evaluate our debt portfolio to determine whether to make periodic adjustments to the mix of fixed and floating rate debt through the use of interest rate swaps and the issuance of new debt or the early retirement of existing debt. The composition of our debt, including the effect of foreign currency swaps and interest rate swaps, was as follows: February 28, 2017 November 30, 2016 Fixed rate 29 % 28 % Euro fixed rate 35 % 35 % Floating rate 15 % 14 % Euro floating rate 21 % 23 % Concentrations of Credit Risk As part of our ongoing control procedures, we monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. We seek to minimize these credit risk exposures, including counterparty nonperformance primarily associated with our cash equivalents, investments, committed financing facilities, contingent obligations, derivative instruments, insurance contracts and new ship progress payment guarantees, by: • Conducting business with large, well-established financial institutions, insurance companies and export credit agencies • Diversifying our counterparties • Having guidelines regarding credit ratings and investment maturities that we follow to help safeguard liquidity and minimize risk • Generally requiring collateral and/or guarantees to support notes receivable on significant asset sales, long-term ship charters and new ship progress payments to shipyards We currently believe the risk of nonperformance by any of our significant counterparties is remote. At February 28, 2017, our exposures under foreign currency and fuel derivative contracts and interest rate swap agreements were not material. We also monitor the creditworthiness of travel agencies and tour operators in Asia, Australia and Europe, which includes charter-hire agreements in Asia, and credit and debit card providers to which we extend credit in the normal course of our business prior to sailing. Our credit exposure also includes contingent obligations related to cash payments received directly by travel agents and tour operators for cash collected by them on cruise sales in Australia and most of Europe where we are obligated to honor our guests’ cruise payments made by them to their travel agents and tour operators regardless of whether we have received these payments. Concentrations of credit risk associated with these trade receivables, charter-hire agreements and contingent obligations are not considered to be material, principally due to the large number of unrelated accounts, the nature of these contingent obligations and their short maturities. We have not experienced significant credit losses on our trade receivables, charter-hire agreements and contingent obligations. We do not normally require collateral or other security to support normal credit sales. |
