REG - Carnival PLC - Final Results <Origin Href="QuoteRef">CCL.L</Origin> - Part 2
30/01/2017 14:40
- Part 2: For the preceding part double click ID:nRSd4902Va
agreement for a 1,440-passenger capacity ship, which was chartered to an
unrelated entity from January 2015 through March 2025. Under this agreement, ownership of the ship will be transferred to
the buyer in March 2025. We are recognizing the charter revenue for this agreement over the term of the agreement.
During the second quarter of 2014, an 830-passenger capacity ship was sold and we recognized a $37 million gain as a
reduction in other ship operating expenses.
See Note 11 - "Fair Value Measurements, Derivative Instruments and Hedging Activities" for a discussion regarding ship
impairments.
NOTE 5 - Other Assets
We have a 40% noncontrolling interest in Grand Bahama Shipyard Ltd. ("Grand Bahama"), a ship repair and maintenance
facility. Grand Bahama provided services to us of $58 million in 2016, $33 million in 2015 and $41 million in 2014.
NOTE 6 - Unsecured Debt
Long-term debt and short-term borrowings consisted of the following (in millions):
November 30, 2016 November 30,
Interest Rates Maturities Through 2016 2015
Long-Term Debt
Export Credit Facilities
Fixed rate 2.4% to 5.0% 2027 $ 941 $ 1,032
Euro fixed rate 3.8% to 4.5% 2025 233 261
Floating rate 1.6% to 2.1% 2026 793 688
Euro floating rate 0.0% to 0.8% 2027 1,649 1,864
Bank Loans
Euro fixed rate 0.6% to 3.9% 2021 612 160
Floating rate 1.3% to 1.8% 2021 800 800
Euro floating rate 0.4% to 0.8% 2021 319 212
Private Placement Notes
Fixed rate -% 2016 - 42
Euro fixed rate 7.3% 2018 51 130
Publicly-Traded Notes
Fixed rate 1.9% to 7.2% 2028 1,717 2,219
Euro fixed rate 1.1% to 1.9% 2022 1,857 1,324
Other 5.5% to 7.3% 2030 25 25
Short-Term Borrowings
Euro floating rate commercial paper (0.1)% 2017 451 -
Euro floating rate bank loans 0.9% 2017 6 30
Total Debt 9,454 8,787
Less short-term borrowings (457 ) (30 )
Less current portion of long-term debt (640 ) (1,344 )
Total Long-term Debt $ 8,357 $ 7,413
The debt table does not include the impact of our foreign currency and interest rate swaps. The composition of our debt,
including the effect of foreign currency swaps and interest rate swaps, was as follows:
November 30,
2016 2015
Fixed rate 28 % 32 %
Euro fixed rate 35 % 28 %
Floating rate 14 % 18 %
Euro floating rate 23 % 22 %
Substantially all of our fixed rate debt can be called or prepaid by incurring additional costs. In addition, substantially
all of our debt agreements, including our main revolving credit facility, contain one or more financial covenants that
require us, among other things, to maintain minimum debt service coverage and minimum shareholders' equity and to limit our
debt to capital and debt to equity ratios and the amounts of our secured assets and secured and other indebtedness.
Generally, if an event of default under any debt agreement occurs, then pursuant to cross default acceleration clauses,
substantially all of our outstanding debt and derivative contract payables (see Note 11 - "Fair Value Measurements,
Derivative Instruments and Hedging Activities") could become due, and all debt and derivative contracts could be
terminated. At November 30, 2016, we were in compliance with all of our debt covenants.
The interest rates on some of our debt, and in the case of our main revolver its commitment fees, fluctuate based on the
applicable rating of senior unsecured long-term securities of Carnival Corporation or Carnival plc.
We use the net proceeds from our borrowings for general corporate purposes and purchases of new ships. At November 30,
2016, the scheduled annual maturities of our debt were as follows (in millions):
Fiscal
2017 2018 2019 2020 2021 Thereafter Total
Short-term borrowings $ 457 $ 457
Long-term debt 640 $ 2,071 $ 1,595 $ 1,303 $ 1,082 $ 2,306 8,997
$ 1,097 $ 2,071 $ 1,595 $ 1,303 $ 1,082 $ 2,306 $ 9,454
Subsequent to November 30, 2016, we entered into an approximately $800 million export credit facility, which may be drawn
in euro or U.S. dollars in 2021 and will be due in semi-annual installments through 2033. The interest rate on this export
credit facility can be fixed or floating, at our discretion.
Debt issuance costs are generally amortized to interest expense using the straight-line method, which approximates the
effective interest method, over the term of the debt. In addition, all debt issue discounts are amortized to interest
expense using the effective interest rate method over the term of the notes.
Committed Ship Financings
We have unsecured euro and U.S. dollar long-term export credit committed ship financings. These commitments, if drawn at
the time of ship delivery, are generally repayable semi-annually over 12 years. We have the option to cancel each one at
specified dates prior to the underlying ship's delivery date.
Revolving Credit Facilities
At November 30, 2016, we had $2.9 billion of total revolving credit facilities comprised of a $2.6 billion ($1.9 billion,
E500 million and £169 million) multi-currency revolving credit facility that expires in 2021 (the "Facility") and a $300
million revolving credit facility that expires in 2020. A total of $2.4 billion of this capacity was available for drawing,
which is net of outstanding commercial paper. The Facility currently bears interest at LIBOR/EURIBOR plus a margin of 30
basis points ("bps"). The margin varies based on changes to Carnival Corporation's and Carnival plc's long-term senior
unsecured credit ratings. We are required to pay a commitment fee of 35% of the margin per annum on any undrawn portion. We
will also incur an additional utilization fee of 10 bps, 20 bps or 40 bps if equal to or less than one-third, more than
one-third or more than two-thirds of the Facility, respectively, is drawn on the total amount outstanding.
NOTE 7 - Commitments
Ship Commitments
At November 30, 2016, including ship construction contracts entered into through January 19, 2017, we had 19 ships under
contract for construction. The estimated total future commitments, including the contract prices with the shipyards, design
and engineering fees, capitalized interest, construction oversight costs and various owner supplied items, are $1.4 billion
in 2017, $2.6 billion in 2018, $3.4 billion in 2019, $3.3 billion in 2020, $2.4 billion in 2021 and $1.6 billion in 2022.
Operating Leases, Port Facilities and Other Commitments
Rent expense under our operating leases, primarily for office and warehouse space, was $67 million in 2016, $70 million in
2015 and $63 million in 2014.
At November 30, 2016, minimum amounts payable for our operating leases, with initial or remaining terms in excess of one
year, and for the annual usage of port facilities and other non-cancelable contractual commitments with remaining terms in
excess of one year, were as follows (in millions):
Fiscal
2017 2018 2019 2020 2021 Thereafter Total
Operating leases $ 47 $ 42 $ 38 $ 36 $ 30 $ 198 $ 391
Port facilities and other 228 195 117 108 102 875 1,625
$ 275 $ 237 $ 155 $ 144 $ 132 $ 1,073 $ 2,016
NOTE 8 - Contingencies
Litigation
In the normal course of our business, various claims and lawsuits have been filed or are pending against us. Most of these
claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability, net of any insurance
recoverables, is typically limited to our self-insurance retention levels. Management believes the ultimate outcome of
these claims and lawsuits will not have a material impact on our consolidated financial statements.
Contingent Obligations - Lease Out and Lease Back Type ("LILO") Transactions
At November 30, 2016, we had estimated contingent obligations totaling $366 million, excluding termination payments as
discussed below, to participants in LILO transactions for two of our ships. At the inception of these leases, we paid the
aggregate of the net present value of these obligations to a group of major financial institutions, who agreed to act as
payment undertakers and directly pay these obligations. As a result, these contingent obligations are considered
extinguished and neither the funds nor the contingent obligations have been included in our Consolidated Balance Sheets.
In the event that we were to default on our contingent obligations and assuming performance by all other participants, we
estimate that we would, as of November 30, 2016, be responsible for a termination payment of $13 million. In January 2016,
we exercised our options to terminate, at no cost, the LILO transactions on January 1, 2017 for one ship and January 1,
2018 for the second ship.
In advance of the termination dates, if the credit rating of one of the financial institutions who is directly paying the
contingent obligations falls below AA-, or below A- for the other financial institution, then we will be required to
replace the applicable financial institution with another financial institution whose credit rating is at least AA or meets
other specified credit requirements. In such circumstances, we would incur additional costs, although we estimate that they
would not be significant to our consolidated financial statements. The financial institution payment undertaker subject to
the AA- credit rating threshold has a credit rating of AA, and the financial institution subject to the A- credit rating
threshold has a credit rating of A+. If our credit rating, which is A-, falls below BBB, we will be required to provide a
standby letter of credit for $27 million, or, alternatively, provide mortgages for this aggregate amount on these two
ships.
Contingent Obligations - Indemnifications
Some of the debt contracts that we enter into include indemnification provisions obligating us to make payments to the
counterparty if certain events occur. These contingencies generally relate to changes in taxes or changes in laws which
increase lenders' costs. The indemnification clauses are often standard contractual terms and were entered into in the
normal course of business. There are no stated or notional amounts included in the indemnification clauses, and we are not
able to estimate the maximum potential amount of future payments, if any, under these indemnification clauses. We have not
been required to make any material payments under such indemnification clauses in the past and we do not believe a request
for material future indemnification payments is probable.
NOTE 9 - Taxation
A summary of our principal taxes and exemptions in the jurisdictions where our significant operations are located is as
follows:
U.S. Income Tax
We are primarily foreign corporations engaged in the business of operating cruise ships in international transportation.
We also own and operate, among other businesses, the U.S. hotel and transportation business of Holland America Princess
Alaska Tours through U.S. corporations.
Our North American cruise ship businesses and certain ship-owning subsidiaries are engaged in a trade or business within
the U.S. Depending on its itinerary, any particular ship may generate income from sources within the U.S. We believe that
our U.S. source income and the income of our ship-owning subsidiaries, to the extent derived from, or incidental to, the
international operation of a ship or ships, is currently exempt from U.S. federal income and branch profit taxes.
Our domestic U.S. operations, principally the hotel and transportation business of Holland America Princess Alaska Tours,
are subject to federal and state income taxation in the U.S.
In general, under Section 883 of the Internal Revenue Code, certain non-U.S. corporations (such as our North American
cruise ship businesses) are not subject to U.S. federal income tax or branch profits tax on U.S. source income derived
from, or incidental to, the international operation of a ship or ships. Applicable U.S. Treasury regulations provide in
general that a foreign corporation will qualify for the benefits of Section 883 if, in relevant part, (i) the foreign
country in which the foreign corporation is organized grants an equivalent exemption to corporations organized in the U.S.
in respect of each category of shipping income for which an exemption is being claimed under Section 883 (an "equivalent
exemption jurisdiction") and (ii) the foreign corporation meets a defined publicly-traded corporation stock ownership test
(the "publicly-traded test"). Subsidiaries of foreign corporations that are organized in an equivalent exemption
jurisdiction and meet the publicly-traded test also benefit from Section 883. We believe that Panama is an equivalent
exemption jurisdiction and that Carnival Corporation currently satisfies the publicly-traded test under the regulations.
Accordingly, substantially all of Carnival Corporation's income is exempt from U.S. federal income and branch profit
taxes.
Regulations under Section 883 list certain activities that the Internal Revenue Service ("IRS") does not consider to be
incidental to the international operation of ships and, therefore, the income attributable to such activities, to the
extent such income is U.S. source, does not qualify for the Section 883 exemption. Among the activities identified as not
incidental are income from the sale of air transportation, transfers, shore excursions and pre- and post-cruise land
packages to the extent earned from sources within the U.S.
We believe that the U.S. source transportation income earned by Carnival plc and its Italian resident subsidiary currently
qualifies for exemption from U.S. federal income tax under applicable bilateral U.S. income tax treaties.
Carnival Corporation and Carnival plc and certain of their subsidiaries are subject to various U.S. state income taxes
generally imposed on each state's portion of the U.S. source income subject to U.S. federal income taxes. However, the
state of Alaska imposes an income tax on its allocated portion of the total income of our companies doing business in
Alaska and certain of their subsidiaries.
UK and Australian Income Tax
Cunard, P&O Cruises (UK) and P&O Cruises (Australia) are divisions of Carnival plc and have elected to enter the UK tonnage
tax under a rolling ten-year term and, accordingly, reapply every year. Companies to which the tonnage tax regime applies
pay corporation taxes on profits calculated by reference to the net tonnage of qualifying ships. UK corporation tax is not
chargeable under the normal UK tax rules on these brands' relevant shipping income. Relevant shipping income includes
income from the operation of qualifying ships and from shipping related activities.
For a company to be eligible for the regime, it must be subject to UK corporation tax and, among other matters, operate
qualifying ships that are strategically and commercially managed in the UK. Companies within UK tonnage tax are also
subject to a seafarer training requirement.
Our UK non-shipping activities that do not qualify under the UK tonnage tax regime remain subject to normal UK corporation
tax. Dividends received from subsidiaries of Carnival plc doing business outside the UK are generally exempt from UK
corporation tax.
P&O Cruises (Australia) and all of the other cruise ships operated internationally by Carnival plc for the cruise segment
of the Australian vacation region are exempt from Australian corporation tax by virtue of the UK/Australian income tax
treaty.
Italian and German Income Tax
In early 2015, Costa and AIDA re-elected to enter the Italian tonnage tax regime through 2024 and can reapply for an
additional ten-year period beginning in early 2025. Companies to which the tonnage tax regime applies pay corporation
taxes on shipping profits calculated by reference to the net tonnage of qualifying ships.
Most of Costa's and AIDA's earnings that are not eligible for taxation under the Italian tonnage tax regime will be taxed
at an effective tax rate of 5.5%.
Substantially all of AIDA's earnings are exempt from German income taxes by virtue of the Germany/Italy income tax treaty.
Income and Other Taxes in Asian Countries
Substantially all of our brands' income from their international operation in Asian countries is exempt from local
corporation tax by virtue of relevant income tax treaties.
Other
We recognize income tax benefits for uncertain tax positions, based solely on their technical merits, when it is more
likely than not to be sustained upon examination by the relevant tax authority. The tax benefit to be recognized is
measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate resolution. All
interest expense related to income tax liabilities is included in income tax expense. Based on all known facts and
circumstances and current tax law, we believe that the total amount of our uncertain income tax position liabilities and
related accrued interest are not significant to our financial position.
We do not expect to incur income taxes on future distributions of undistributed earnings of foreign subsidiaries and,
accordingly, no deferred income taxes have been provided for the distribution of these earnings. In addition to or in place
of income taxes, virtually all jurisdictions where our ships call impose taxes, fees and other charges based on guest
counts, ship tonnage, passenger capacity or some other measure, and these taxes, fees and other charges are included in
commissions, transportation and other costs and other ship operating expenses.
NOTE 10 - Shareholders' Equity
Carnival Corporation's Articles of Incorporation authorize its Board of Directors, at its discretion, to issue up to 40
million shares of preferred stock. At November 30, 2016 and 2015, no Carnival Corporation preferred stock had been issued
and only a nominal amount of Carnival plc preference shares had been issued. Our Boards of Directors have authorized,
subject to certain restrictions, the repurchase of up to an aggregate of $1.0 billion of Carnival Corporation common stock
and/or Carnival plc ordinary shares (the "Repurchase Program"). On January 28, 2016 and on June 27, 2016, the Boards of
Directors approved modifications of the Repurchase Program authorization that increased the remaining authorized
repurchases at the time of each approval by $1.0 billion. The Repurchase Program does not have an expiration date and may
be discontinued by our Boards of Directors at any time. Our repurchases under the Repurchase Program were as follows (in
millions):
Carnival Corporation Carnival plc
Number of Shares Repurchased Dollar Amount Paid for Shares Repurchased Number of Shares Repurchased Dollar Amount Paid for Shares Repurchased
2016 47.8 $2,264 0.7 $35
2015 5.3 $276 - -
In 2014, there were no repurchases of Carnival Corporation common stock or Carnival plc ordinary shares under the
Repurchase Program. From December 1, 2016 through January 19, 2017, we repurchased 0.2 million shares of Carnival plc
ordinary shares for approximately $10 million under the Repurchase Program. At January 19, 2017, the remaining Carnival
Corporation availability under the Repurchase Program was $389 million.
In addition to the Repurchase Program, the Boards of Directors authorized, in January 2017, the repurchase of up to 22.0
million Carnival plc ordinary shares and, in February 2016, the repurchase of up to 26.9 million shares of Carnival
Corporation common stock under the Stock Swap ("Stock Swap") programs described below. Under the Stock Swap programs, we
sell shares of Carnival Corporation common stock or Carnival plc ordinary shares and use a portion of the net proceeds to
purchase an equivalent number of Carnival plc ordinary shares or shares of Carnival Corporation common stock, as
applicable. We use the Stock Swap programs in situations where we can obtain an economic benefit because either Carnival
Corporation common stock or Carnival plc ordinary shares are trading at a price that is at a premium or discount to the
price of Carnival plc ordinary shares or Carnival Corporation common stock. Any realized economic benefit under the Stock
Swap programs is used for general corporate purposes, which could include repurchasing additional stock under the
Repurchase Program.
Carnival plc ordinary share repurchases under both the Repurchase Program and the Stock Swap programs require annual
shareholder approval. The existing shareholder approval is limited to a maximum of 21.5 million ordinary shares and is
valid until the earlier of the conclusion of the Carnival plc 2017 annual general meeting or July 13, 2017. At January 19,
2017, the remaining availability under the Stock Swap programs was 22.0 million Carnival plc ordinary shares and 26.0
million shares of Carnival Corporation common stock. At January 19, 2017, the remaining Carnival plc availability under the
Repurchase Program was 20.6 million ordinary shares.
During 2016 and 2015, under the Stock Swap programs, Carnival Investments Limited ("CIL"), a subsidiary of Carnival
Corporation, sold 0.9 million and 5.1 million of Carnival plc ordinary shares for net proceeds of $40 million and $264
million, respectively. Substantially all of the net proceeds from these sales were used to purchase 0.9 million shares in
2016 and 5.1 million shares in 2015 of Carnival Corporation common stock. Carnival Corporation sold these Carnival plc
ordinary shares owned by CIL only to the extent it was able to repurchase shares of Carnival Corporation common stock in
the U.S. on at least an equivalent basis. During 2016 and 2015, there were no sales of Carnival Corporation common stock or
repurchases of Carnival plc ordinary shares under the Stock Swap program. During 2014, there were no sales or repurchases
of Carnival Corporation common stock or Carnival plc ordinary shares under the Stock Swap programs.
Accumulated other comprehensive loss was as follows (in millions):
November 30,
2016 2015
Cumulative foreign currency translation adjustments, net $ (2,266 ) $ (1,591 )
Unrecognized pension expenses (120 ) (82 )
Unrealized losses on marketable securities (3 ) (3 )
Net losses on cash flow derivative hedges (65 ) (65 )
$ (2,454 ) $ (1,741 )
During 2016 and 2015, $7 million and $13 million of unrecognized pension expenses were reclassified out of accumulated
other comprehensive loss, of which $4 million and $8 million were included in payroll and related expenses and $3 million
and $5 million were included in selling and administrative expenses, respectively.
During 2016, our Board of Directors declared a 17% dividend increase to holders of Carnival Corporation common stock and
Carnival plc ordinary shares from $0.30 per share to $0.35 per share. On October 20, 2016, our Board of Directors declared
a $0.35 per share dividend ($254 million) for the fourth quarter of fiscal 2016 for shareholders of record on November 25,
2016, which was paid on December 16, 2016.
NOTE 11 - Fair Value Measurements, Derivative Instruments and Hedging Activities
Fair Value Measurements
U.S. accounting standards establish a fair value hierarchy prioritizing the inputs used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This hierarchy requires
entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs
used to measure fair value are as follows:
• 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.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between independent and knowledgeable market participants. When quoted prices are not readily available, our own
assumptions are set to reflect those that we believe market participants would use in pricing the asset or liability.
The fair value measurement of a financial asset or financial liability reflects the nonperformance risk of both parties to
the contract. Therefore, the fair value measurement of our financial instruments reflects the impact of our counterparty's
creditworthiness for asset positions and our creditworthiness for liability positions. Creditworthiness did not have a
significant impact on the fair values of our financial instruments at November 30, 2016 and 2015. 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):
November 30, 2016 November 30, 2015
Carrying Fair Value Carrying Fair Value
Value Value
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Assets
Cash and cash equivalents (a) $ 256 $ 256 $ - $ - $ 647 $ 647 $ - $ -
Restricted cash (b) 41 41 - - 7 7 - -
Long-term other assets (c) 99 1 68 31 119 1 87 31
Total $ 396 $ 298 $ 68 $ 31 $ 773 $ 655 $ 87 $ 31
Liabilities
Fixed rate debt (d) $ 5,436 $ - $ 5,727 $ - $ 5,193 $ - $ 5,450 $ -
Floating rate debt (d) 4,018 - 4,048 - 3,594 - 3,589 -
Total $ 9,454 $ - $ 9,775 $ - $ 8,787 $ - $ 9,039 $ -
(a) Cash and cash equivalents are comprised of cash on hand and at November 30, 2015 also included a money market
deposit account and time deposits. Due to their short maturities, the carrying values approximate their fair values.
(b) Restricted cash is comprised of a money market deposit account and at November 30, 2016 also included funds
held in escrow.
(c) 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.
(d) Debt does not include the impact of interest rate swaps. 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.
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 that are measured at
fair value on a recurring basis were as follows (in millions):
November 30, 2016 November 30, 2015
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Assets
Cash equivalents (a) $ 347 $ - $ - $ 748 $ - $ -
Restricted cash (b) 19 - - 22 - -
Short-term investments (c) - - 21 - - -
Marketable securities held in rabbi trusts (d) 93 4 - 105 8 -
Derivative financial instruments (e) - 15 - - 29 -
Long-term other asset (c) - - - - - 21
Total $ 459 $ 19 $ 21 $ 875 $ 37 $ 21
Liabilities
Derivative financial instruments (e) $ - $ 434 $ - $ - $ 625 $ -
Total $ - $ 434 $ - $ - $ 625 $ -
(a) Cash equivalents are comprised of money market funds.
(b) Restricted cash is substantially all comprised of money market funds.
(c) The fair value of auction rate security included in short-term investments and long-term other asset was based
on a broker quote in an inactive market, which is considered a Level 3 input. During fiscal 2016, there were no purchases
or sales pertaining to this auction-rate security. This auction-rate security was sold in December 2016.
(d) At November 30, 2016 and 2015, 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.
(e) See "Derivative Instruments and Hedging Activities" section below for detailed information regarding our
derivative financial instruments.
We measure our derivatives using valuations that are calibrated to the initial trade prices. Subsequent valuations are
based on observable inputs and other variables included in the valuation models such as interest rate, yield and commodity
price curves, forward currency exchange rates, credit spreads, maturity dates, volatilities and netting arrangements. We
use the income approach to value derivatives for foreign currency options and forwards, interest rate swaps and fuel
derivatives using observable market data for all significant inputs and standard valuation techniques to convert future
amounts to a single present value amount, assuming that participants are motivated, but not compelled to transact.
Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis
Impairments of Ships
As a result of the 2014 bareboat charter/sale agreement for a 1,440-passenger capacity ship, we performed a ship impairment
review and recognized a $31 million impairment charge in other ship operating expenses during the fourth quarter of 2014.
The estimated fair value of the ship was substantially all determined based on the expected collectability of the bareboat
charter payments, which is considered a Level 3 input. See Note 4 - "Property and Equipment" for a discussion regarding
ship sales.
Due to the expected absorption of Ibero Cruises' ("Ibero") operations into Costa in 2014, and certain ship specific facts
and circumstances, such as size, age, condition, viable alternative itineraries and historical operating cash flows, we
performed an undiscounted future cash flow analysis of a 1,490-passenger capacity ship as of May 31, 2014. The principal
assumptions used in our undiscounted cash flow analysis consisted of forecasted future operating results, including net
revenue yields and net cruise costs including fuel prices, and the estimated residual value, which are all considered Level
3 inputs. Based on its undiscounted cash flow analysis, we determined that the net carrying value for the ship exceeded its
estimated undiscounted future cash flows. Accordingly, we then estimated the May 31, 2014 fair value of this ship based on
its discounted future cash flows and recognized a $22 million ship impairment charge in other ship operating expenses
during 2014.
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 Total
Segment Segment
Balance at November 30, 2014 $ 1,898 $ 1,229 $ 3,127
Foreign currency translation adjustment - (117 ) (117 )
Balance at November 30, 2015 1,898 1,112 3,010
Foreign currency translation adjustment - (100 ) (100 )
Balance at November 30, 2016 $ 1,898 $ 1,012 $ 2,910
At July 31, 2016, we performed our annual goodwill impairment reviews, which included performing a qualitative assessment
for AIDA, Carnival Cruise Line, Cunard, P&O Cruises (UK) and Princess. Qualitative factors such as industry and market
conditions, macroeconomic conditions, changes to the weighted-average cost of capital ("WACC"), overall financial
performance, changes in fuel prices and capital expenditures were considered in the qualitative assessment to determine how
changes in these factors would affect each of these cruise brands' estimated fair values. Based on our qualitative
assessments, we determined it was more-likely-than-not that each of these cruise brands' estimated fair values exceeded
their carrying values and, therefore, we did not proceed to the two-step quantitative goodwill impairment reviews.
As of July 31, 2016, we also performed our annual goodwill impairment reviews for Costa, Holland America Line and P&O
Cruises (Australia). As part of our periodic process, we did not perform a qualitative assessment but instead proceeded
directly to step one of the two-step quantitative goodwill impairment review and compared each of Costa's, Holland America
Line's and P&O Cruises (Australia)'s estimated fair value to the carrying value of their allocated net assets. Their
estimated fair values were based on discounted future cash flow analyses. The principal assumptions used in our cash flow
analyses consisted of:
• Forecasted operating results, including net revenue yields and net cruise costs including fuel prices
• Capacity changes, including the expected rotation of vessels into, or out of, Costa, Holland America Line and P&O
Cruises (Australia)
• WACC of market participants, adjusted for the risk attributable to the geographic regions in which Costa, Holland
America Line and P&O Cruises (Australia) operate
• Capital expenditures, proceeds from forecasted dispositions of ships and terminal values, which are all considered
Level 3 inputs
Based on the discounted cash flow analyses, we determined that each of Costa's, Holland America Line's and P&O Cruises
(Australia)'s estimated fair value significantly exceeded their carrying value and, therefore, we did not proceed to step
two of the impairment reviews.
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
Segment Segment
Balance at November 30, 2014 $ 927 $ 338 $ 1,265
Foreign currency translation adjustment - (31 ) (31 )
Balance at November 30, 2015 927 307 1,234
Foreign currency translation adjustment - (28 ) (28 )
Balance at November 30, 2016 $ 927 $ 279 $ 1,206
At July 31, 2016, our cruise brands that had significant trademarks recorded included 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,
which included performing a qualitative assessment for AIDA, P&O Cruises (UK) and Princess. Qualitative factors such as
industry and market conditions, macroeconomic conditions, changes to the WACC, changes in royalty rates and overall
financial performance were considered in the qualitative assessment to determine how changes in these factors would affect
the estimated fair value for AIDA's, P&O Cruises (UK)'s and Princess' recorded trademarks. Based on our qualitative
assessment, we determined it was more likely-than-not that the estimated fair value for AIDA's, P&O Cruises (UK)'s and
Princess's recorded trademarks exceeded their carrying value and, therefore, none of these trademarks were impaired.
As of July 31, 2016, we did not perform a qualitative assessment for P&O Cruises (Australia)'s trademarks but instead
proceeded directly to the quantitative trademark impairment reviews. Our quantitative assessment included estimating P&O
Cruises (Australia)'s trademarks fair value based upon a discounted future cash flow analysis, which estimated the amount
of royalties that we are relieved from having to pay for use of the associated trademarks, based upon forecasted cruise
revenues and a market participant's royalty rate. The royalty rate was estimated primarily using comparable royalty
agreements for similar industries. Based on our quantitative assessment, we determined that the estimated fair values for
P&O Cruises (Australia)'s trademarks significantly exceeded their carrying values and, therefore, none of these 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 or circumstances 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, was as follows (in millions):
Cruise Support EAA Total
Segment Segment
Balance at November 30, 2015 (a) $ 62 $ 12 $ 74
Additions - 1 1
Amortization (3 ) (1 ) (4 )
Foreign currency translation adjustment (2 ) - (2 )
Balance at November 30, 2016 $ 57 $ 12 $ 69
(a) See "Note 2 - Summary of Significant Accounting Policies"
Derivative Instruments and Hedging Activities
We utilize derivative and non-derivative financial instruments, such as foreign currency forwards, options and swaps,
foreign currency debt obligations and foreign currency cash balances, to manage our exposure to fluctuations in certain
foreign currency exchange rates. We use interest rate swaps to manage our interest rate exposure to achieve a desired
proportion of fixed and floating rate debt. In addition, we have fuel derivatives settling in 2017 and 2018 to mitigate a
portion of the risk to our future cash flows attributable to potential fuel price increases, which we define as our
"economic risk." Our policy is to not use any financial instruments for trading or other speculative purposes.
All derivatives are recorded at fair value. The changes in fair value are recognized currently in earnings if the
derivatives do not qualify as effective hedges, or if we do not seek to qualify for hedge accounting treatment, such as for
our fuel derivatives. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative
are offset against the changes in the fair value of the underlying hedged item. If a derivative is designated as a cash
flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of
AOCI until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable. If a
derivative or a non-derivative financial instrument is designated as a hedge of our net investment in a foreign operation,
then changes in the fair value of the financial instrument are recognized as a component of AOCI to offset a portion of the
change in the translated value of the net investment being hedged, until the investment is sold or substantially
liquidated. We formally document hedging relationships for all derivative and non-derivative hedges and the underlying
hedged items, as well as our risk management objectives and strategies for undertaking the hedge transactions.
We classify the fair values of all our derivative contracts as either current or long-term, depending on the maturity date
of the derivative contract. The cash flows from derivatives treated as hedges are classified in our Consolidated Statements
of Cash Flows in the same category as the item being hedged. Our cash flows related to fuel derivatives are classified
within investing activities.
The estimated fair values of our derivative financial instruments and their location in the Consolidated Balance Sheets
were as follows (in millions):
November 30,
Balance Sheet Location 2016 2015
Derivative assets
Derivatives designated as hedging instruments
Net investment hedges (a) Prepaid expenses and other $ 12 $ 14
Other assets - long-term 3 13
Interest rate swaps (b) Prepaid expenses and other - 2
Total derivative assets $ 15 $ 29
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 11
Other long-term liabilities 23 27
Foreign currency zero cost collars (c) Accrued liabilities and other 12 -
Other long-term liabilities 21 26
92 64
Derivatives not designated as hedging instruments
Fuel (d) Accrued liabilities and other 198 227
Other long-term liabilities 144 334
342 561
Total derivative liabilities $ 434 $ 625
(a) At November 30, 2016 and 2015, we had foreign currency forwards totaling $456 million and $43 million,
respectively, that are designated as hedges of our net investments in foreign operations, which have a euro-denominated
functional currency. At November 30, 2016, these foreign currency forwards settle through July 2017. At November 30, 2016
and 2015, we also had foreign currency swaps totaling $291 million and $387 million, respectively, that are designated as
hedges of our net investments in foreign operations, which have a euro-denominated functional currency. At November 30,
2016, 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 $500
million at November 30, 2016 and $568 million at November 30, 2015 of EURIBOR-based floating rate euro debt to fixed rate
euro debt. At November 30, 2016, these interest rate swaps settle through March 2025. In addition, at November 30, 2015, we
had U.S. dollar interest rate swaps designated as fair value hedges whereby we receive fixed interest rate payments in
exchange for making floating interest rate payments. At November 30, 2015, these interest rate swap agreements effectively
changed $500 million of fixed rate debt to U.S. dollar LIBOR-based floating rate debt. These interest rate swaps settled in
February 2016.
(c) At November 30, 2016 and 2015, 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 November 30, 2016 and 2015, 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 fuel 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):
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
November 30, 2015
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 $ 73 $ (44 ) $ 29 $ (29 ) $ -
Liabilities $ 669 $ (44 ) $ 625 $ (29 ) $ 596
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):
November 30,
2016 2015 2014
Net investment hedges $ (33 ) $ 58 $ 25
Foreign currency zero cost collars - cash flow hedges $ (8 ) $ (57 ) $ (10 )
Interest rate swaps - cash flow hedges $ 8 $ 2 $ (28 )
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
November 30, 2016, no collateral was required to be posted to or received from our fuel derivative counterparties. At
November 30, 2015, we had $25 million of collateral posted to one of our fuel derivative counterparties. At November 30,
2015, no collateral was required to be 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 November 30, 2016 and 2015 and for
the years ended November 30, 2016, 2015 and 2014 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):
November 30,
2016 2015 2014
Unrealized gains (losses) on fuel derivatives, net $ 236 $ (332 ) $ (268 )
Realized losses on fuel derivatives, net (283 ) (244 ) (3 )
Losses on fuel derivatives, net $ (47 ) $ (576 ) $ (271 )
At November 30, 2016, our outstanding fuel derivatives consisted of zero cost collars on Brent as follows:
Maturities (a) Transaction Barrels Weighted-Average Weighted-Average
Dates (in thousands) Floor Prices Ceiling Prices
Fiscal 2017
February 2013 3,276 $ 80 $ 115
April 2013 2,028 $ 75 $ 110
January 2014 1,800 $ 75 $ 114
October 2014 1,020 $ 80 $ 113
8,124
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
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