Fair Value Measurements, Derivative Instruments and Hedging Activities and Financial Risks

9 Months Ended

Aug. 31, 2018

Fair Value Measurements, Derivative Instruments and Hedging Activities and Financial Risks

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 at the measurement date and is measured using inputs 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



	August 31, 2018								November 30, 2017
	Carrying Value		Fair Value						Carrying Value		Fair Value
(in millions)	Carrying Value		Level 1		Level 2		Level 3		Carrying Value		Level 1		Level 2		Level 3
Assets
Long-term other assets (a)	$	136	$	—	$	37	$	98	$	126	$	—	$	49	$	75
Total	$	136	$	—	$	37	$	98	$	126	$	—	$	49	$	75
Liabilities
Fixed rate debt (b)	$	5,308	$	—	$	5,463	$	—	$	5,588	$	—	$	5,892	$	—
Floating rate debt (b)	4,372		—		4,409		—		3,658		—		3,697		—
Total	$	9,680	$	—	$	9,872	$	—	$	9,246	$	—	$	9,589	$	—


(a)	Long-term other assets are comprised of notes receivable. The fair values of our Level 2 notes receivable 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 current market interest rates being applied to this debt.

Financial Instruments that are Measured at Fair Value on a Recurring Basis



	August 31, 2018						November 30, 2017
(in millions)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	526	$	—	$	—	$	395	$	—	$	—
Restricted cash	15		—		—		26		—		—
Marketable securities held in rabbi trusts (a)	6		—		—		97		—		—
Derivative financial instruments	—		5		—		—		15		—
Total	$	547	$	5	$	—	$	518	$	15	$	—
Liabilities
Derivative financial instruments	$	—	$	40	$	—	$	—	$	161	$	—
Total	$	—	$	40	$	—	$	—	$	161	$	—


(a)	The use of marketable securities held in rabbi trusts is restricted to funding certain deferred compensation and non-qualified U.S. pension plans.

Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis

Valuation of Goodwill and Trademarks



	Goodwill
(in millions)	NAA (a) Segment		EA (b) Segment			Total
At November 30, 2017	$	1,898	$	1,069		$	2,967
Foreign currency translation adjustment	—		(18		)	(18		)
At August 31, 2018	$	1,898	$	1,050		$	2,949

(a) North America & Australia (“NAA”)

(b) Europe & Asia (“EA”)



	Trademarks
(in millions)	NAA Segment		EA Segment			Total
At November 30, 2017	$	927	$	252		$	1,179
Foreign currency translation adjustment	—		(5		)	(5		)
At August 31, 2018	$	927	$	247		$	1,174

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. A change in the conditions, circumstances or strategy, may result in a need to recognize an impairment charge.

Derivative Instruments and Hedging Activities



(in millions)	Balance Sheet Location	August 31, 2018		November 30, 2017
Derivative assets
Derivatives designated as hedging instruments
Net investment hedges (a)	Prepaid expenses and other	$	5	$	3
Foreign currency zero cost collars (b)	Prepaid expenses and other	—		12
Total derivative assets		$	5	$	15
Derivative liabilities
Derivatives designated as hedging instruments
Net investment hedges (a)	Accrued liabilities and other	$	—	$	13
	Other long-term liabilities	13		17
Interest rate swaps (c)	Accrued liabilities and other	8		10
	Other long-term liabilities	13		17
		35		57
Derivatives not designated as hedging instruments
Fuel (d)	Accrued liabilities and other	6		95
	Other long-term liabilities	—		9
		6		104
Total derivative liabilities		$	40	$	161


(a)	At August 31, 2018 and November 30, 2017, we had foreign currency swaps totaling $160 million and $324 million, respectively, that are designated as hedges of our net investments in foreign operations with a euro-denominated functional currency. At August 31, 2018, this foreign currency swap settles in September 2019.


(b)	At August 31, 2018 and November 30, 2017, 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.

(c)

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 $422 million at August 31, 2018 and $479 million at November 30, 2017 of EURIBOR-based floating rate euro debt to fixed rate euro debt. At August 31, 2018, these interest rate swaps settle through March 2025.


(d)	At August 31, 2018 and November 30, 2017, 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.



	August 31, 2018
(in millions)	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	$	5	$	—	$	5	$	(5	)	$	—
Liabilities	$	40	$	—	$	40	$	(5	)	$	36

	November 30, 2017
(in millions)	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	$	(8	)	$	7
Liabilities	$	161	$	—	$	161	$	(8	)	$	153

The effective gain (loss) portions of our derivatives qualifying and designated as hedging instruments recognized in other comprehensive income were as follows:



	Three Months Ended August 31,						Nine Months Ended August 31,
(in millions)	2018			2017			2018			2017
Net investment hedges	$	3		$	(17	)	$	13		$	(33	)
Foreign currency zero cost collars – cash flow hedges	$	(1	)	$	17		$	(11	)	$	52
Interest rate swaps – cash flow hedges	$	1		$	1		$	5		$	5

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 August 31, 2018 and November 30, 2017, 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.

Financial Risks

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 manage fuel consumption through ship maintenance practices, modifying our itineraries and implementing innovative technologies. We are also adding new, more fuel efficient ships to our fleet and are strategically disposing of less fuel efficient 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 through the end of 2018.



	Three Months Ended August 31,						Nine Months Ended August 31,
(in millions)	2018			2017			2018			2017
Unrealized gains on fuel derivatives, net	$	8		$	65		$	90		$	134
Realized losses on fuel derivatives, net	(4		)	(57		)	(29		)	(153		)
Gains (losses) on fuel derivatives, net	$	4		$	7		$	61		$	(19	)

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 operations primarily utilize the U.S. dollar, Australian dollar, euro or sterling as their functional currencies. Our operations also have revenue and expenses denominated in non-functional currencies. Movements in foreign currency exchange rates will affect our financial statements.

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 $5.5 billion and $861 million of euro- and sterling-denominated debt, respectively, including the effect of foreign currency swaps, which provides an economic offset for our operations with euro and sterling 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 to manage foreign currency exchange rate risk for some of our ship construction payments. At August 31, 2018, for the following newbuild, we had foreign currency zero cost collars for a portion of euro-denominated shipyard payments. These collars are designated as cash flow hedges.



	Entered Into	Matures in	Weighted-Average Floor Rate		Weighted- Average Ceiling Rate
Nieuw Statendam	2016	November 2018	$	1.05	$	1.25

If the spot rate is between the ceiling and floor rates on the date of maturity, then we would not owe or receive any payments under these collars.

At August 31, 2018, our remaining newbuild currency exchange rate risk primarily relates to euro-denominated newbuild contract payments to non-euro functional currency brands, which represent a total unhedged commitment of $10.5 billion and relates to newbuilds scheduled to be delivered in 2019 through 2025.

The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise brands’ will be affected by foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations may affect our decision 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, issuance of new debt, amendment of existing debt or early retirement of existing debt.

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 August 31, 2018, 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. 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.