Fair Value Measurements

9 Months Ended

Sep. 30, 2016

9.	Fair Value Measurements

The following tables detail the fair value of our financial assets and liabilities that are required to be measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015, respectively (in millions):

	Fair Value at Measurement Date Using
	Balance at September 30, 2016			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Fair Value Measurements on a Recurring Basis:
Assets
Foreign currency forward sale contracts⁽¹⁾	$	7		$	—	$	7		$	—
Liabilities
Foreign currency forward sale contracts ⁽¹⁾		(1	)		—		(1	)		—


	Fair Value at Measurement Date Using
	Balance at December 31, 2015			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Fair Value Measurements on a Recurring Basis:
Assets
Foreign currency forward sale contracts⁽¹⁾	$	17		$	—	$	17		$	—
Liabilities
Interest rate swap derivatives ⁽¹⁾		(1	)		—		(1	)		—
___________

(1)

These derivative contracts have been designated as hedging instruments.

Derivatives and Hedging

Interest rate swap derivatives designated as cash flow hedges. We have designated our floating-to-fixed interest rate swap derivative as a cash flow hedge. The purpose of the interest rate swap is to hedge against changes in cash flows (interest payments) attributable to fluctuations in variable rate debt. The derivative is valued based on the prevailing market yield curve on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the swap. Changes in the fair value of the derivative are recorded to other comprehensive income (loss) on the accompanying balance sheets. The hedge was fully effective as of September 30, 2016.

For the third quarter and year-to-date 2016, we recorded a gain of $1 million on our interest rate swap derivative designated as a cash flow hedge. The following table summarizes our outstanding contract (in millions):

Total Notional

Maturity

Swapped

All-in-

Transaction Date

Amount

Date

Index

Rate

November 2011 ⁽¹⁾

November 2016

Reuters BBSY

6.7

___________

(1)

The swap was entered into in connection with the A$86 million ($66 million) mortgage loan on the Hilton Melbourne South Wharf.

Foreign Investment Hedging Instruments. We have five foreign currency forward sale contracts that hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investment in foreign operations. These derivatives are considered hedges of the foreign currency exposure of a net investment in a foreign operation and are marked-to-market with changes in fair value recorded to other comprehensive income (loss) within the equity portion of our balance sheet. The foreign currency forward sale contracts are valued based on the forward yield curve of the foreign currency to U.S. dollar forward exchange rate on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the derivatives.

The following table summarizes our foreign currency forward sale contracts (in millions):

Currently Outstanding						Change in Fair Value - All Contracts
	Total
	Transaction Amount in		Total Transaction			Gain (Loss)					Gain (Loss)
Transaction Date	Foreign		Amount		Forward Purchase	Quarter ended September 30,					Year-to-date ended September 30,
Range	Currency		in Dollars		Date Range	2016			2015		2016			2015
May 2014-January 2016	€	100	$	118	May 2017-January 2018	$	(1	)	$	—	$	(2	)	$	10
November 2014	C$	25	$	22	November 2016	$	—		$	2	$	(1	)	$	3

In addition to the foreign currency forward sale contracts, we have designated a portion of the foreign currency draws on our credit facility as hedges of net investments in foreign operations. Changes in fair value of the designated credit facility draws are recorded to other comprehensive income (loss).

The following table summarizes the draws on our credit facility that are designated as hedges of net investments in foreign operations (in millions):

		Balance		Balance			Gain (Loss)							Gain (Loss)
		Outstanding		Outstanding in			Quarter ended September 30,							Year-to-date ended September 30,
Currency		US$		Foreign Currency			2016				2015			2016				2015
Canadian dollars ⁽¹⁾	$		35	C$	46	$		—		$		3	$		(2	)	$		4
Euros	$		87	€	77	$		(1	)	$		—	$		(3	)	$		7
Australian dollars	$		38	A$	50	$		(1	)	$		—	$		—		$		—
___________

(1)

We have drawn an additional $46 million on the credit facility in Canadian dollars, which draw has not been designated as a hedging instrument.

Other Liabilities

Fair Value of Other Financial Liabilities. We did not elect the fair value measurement option for any of our other financial liabilities. The fair values of secured debt and our credit facility are determined based on the expected future payments discounted at risk-adjusted rates. Senior notes are valued based on quoted market prices. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts.

The fair value of certain financial liabilities is shown below (in millions):

	September 30, 2016				December 31, 2015
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial liabilities
Senior notes (Level 1)	$	2,379	$	2,594	$	2,376	$	2,452
Credit facility (Level 2)		1,306		1,312		1,291		1,298
Mortgage debt and other, excluding capital leases (Level 2)		66		66		199		199

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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