News Column

NCL CORP LTD. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 21, 2014

Non-GAAP Financial Measures

We use certain non-GAAP financial measures, such as Net Revenue, Net Yield, Net Cruise Cost, Adjusted Net Cruise Cost Excluding Fuel and Adjusted EBITDA to enable us to analyze our performance. See "Terms Used in this Annual Report" for the definition of these non-GAAP financial measures. We utilize Net Revenue and Net Yield to manage our business on a day-to-day basis and believe that they are the most relevant measures of our revenue performance because they reflect the revenue earned by us net of significant variable costs. In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Cost and Adjusted Net Cruise Cost Excluding Fuel to be the most relevant indicators of our performance. As our business includes the sourcing of passengers and deployment of vessels outside of North America, a portion of our revenue and expenses are denominated in foreign currencies, particularly euro and British Pound sterling, which are subject to fluctuations in currency exchange rates versus our reporting currency, the U.S. dollar. In order to monitor results excluding these fluctuations, we calculate certain non-GAAP measures on a Constant Currency basis whereby current period revenue and expenses denominated in foreign currencies are converted to U.S. dollars using currency exchange rates of the comparable period. We believe that presenting these non-GAAP measures on both a reported and Constant Currency basis is useful in providing a more comprehensive view of trends in our business. We believe that Adjusted EBITDA is appropriate as a supplemental financial measure as it is used by management to assess operating performance, is a factor in the evaluation of the performance of management and is the primary metric used in determining the Company's performance incentive bonus paid to its employees. We believe that Adjusted EBITDA is a useful measure in determining the Company's performance as it reflects certain operating drivers of the Company's business, such as sales growth, operating costs, marketing, general and administrative expense and other operating income and expense. Adjusted EBITDA is not a defined term under GAAP. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or measures comparable to net income as it does not take into account certain requirements such as capital expenditures and related depreciation, principal and interest payments and tax payments and it includes other supplemental adjustments. In addition, Adjusted Net Income is a supplemental financial measure used to demonstrate GAAP net income excluding certain charges. We use Adjusted Net Income as a key performance measure of our earnings performance, and we believe that both management and investors benefit from referring to this non-GAAP financial measure in assessing our performance and when planning, forecasting, and analyzing future periods. This non-GAAP financial measure also facilitates management's internal comparison to our historical performance. These charges vary from period to period; accordingly, our presentation of Adjusted Net Income may not be indicative of future adjustments or results. You are encouraged to evaluate each adjustment used in calculating our non-GAAP financial measures and the reasons we consider our non-GAAP financial measures appropriate for supplemental analysis. In evaluating our non-GAAP financial measures, you should be aware that in the future we may incur expenses similar to the adjustments in our presentation. Our non-GAAP financial measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of our non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our non-GAAP financial measures may not be comparable to other companies. Please see a historical reconciliation of these measures to the most comparable GAAP measure presented in our consolidated financial statements below in the "Results of Operations" section.



Financial Presentation

Revenue from our cruise and cruise-related activities are categorized by us as "passenger ticket revenue" and "onboard and other revenue." Passenger ticket revenue and onboard and other revenue vary according to the size of the ship in operation, the length of cruises operated and the markets in which the ship operates. Our revenue is seasonal based on demand for cruises, which has historically been strongest during the summer months. Passenger ticket revenue primarily consists of revenue for accommodations, meals in certain restaurants on the ship, certain onboard entertainment, and includes revenue for service charges and air and land transportation to and from the ship to the extent guests purchase these items from us. Onboard and other revenue primarily consists of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services and photo. We record onboard revenue from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive a share of their revenue. Our cruise operating expense is classified as follows:



Commissions, transportation and other primarily consists of direct costs

associated with passenger ticket revenue. These costs include travel agent commissions, air and land transportation expenses, related credit card fees, costs associated with service charges and certain port expenses. 36



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Onboard and other primarily consists of direct costs that are incurred

in connection with onboard and other revenue. These include costs incurred in connection with shore excursions, beverage sales and gaming.



Payroll and related consists of the cost of wages and benefits for

shipboard employees. Fuel includes fuel costs, the impact of certain fuel hedges and fuel

delivery costs. Food consists of food costs for passengers and crew.



Other consists of repairs and maintenance (including Dry-dock costs),

ship insurance, Charter costs and other ship expenses.



Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with GAAP in the U.S. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make these estimates and judgments. Actual results could differ materially from these estimates. We believe that the following critical accounting policies affect the significant estimates used in the preparation of our consolidated financial statements. These critical accounting policies, which are presented in detail in our notes to our audited consolidated financial statements, relate to ship accounting, asset impairment and contingencies.



Ship Accounting

Ships represent our most significant assets, and we record them at cost less accumulated depreciation. Depreciation of ships is computed on a straight-line basis over the estimated service lives of primarily 30 years after a 15% reduction for the estimated residual value of the ship. Improvement costs that we believe add value to our ships are capitalized to the ship and depreciated over the improvements' estimated useful lives. Repairs and maintenance activities are charged to expense as incurred. We account for Dry-dock costs under the direct expense method which requires us to expense all Dry-dock costs as incurred. We determine the useful life of our ships based primarily on our estimates of the average useful life of the ships' major component systems, such as cabins, main diesels, main electric, superstructure and hull. In addition, we consider the impact of anticipated changes in the vacation market and technological conditions and historical useful lives of similarly-built ships. Given the large and complex nature of our ships, our accounting estimates related to ships and determinations of ship improvement costs to be capitalized require considerable judgment and are inherently uncertain. Should certain factors or circumstances cause us to revise our estimate of ship service lives or projected residual values, depreciation expense could be materially lower or higher. If circumstances cause us to change our assumptions in making determinations as to whether ship improvements should be capitalized, the amounts we expense each year as repairs and maintenance costs could increase, partially offset by a decrease in depreciation expense. If we reduced our estimated average 30-year ship service life by one year, depreciation expense for the year ended December 31, 2013 would have increased by $6.1 million. In addition, if our ships were estimated to have no residual value, depreciation expense for the same period would have increased by $30.6 million. We believe our estimates for ship accounting are reasonable and our methods are consistently applied. We believe that depreciation expense is based on a rational and systematic method to allocate our ships' costs to the periods that benefit from the ships' usage.



Asset Impairment

We review our long-lived assets, principally ships, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. We consider historical performance and future estimated results in our evaluation of potential impairment and then compare the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value. We estimate fair value based on the best information available making whatever estimates, judgments and projections considered necessary. The estimation of fair value is generally measured by discounting expected future cash flows at discount rates commensurate with the risk involved. 37



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Goodwill and other indefinite-lived assets, principally trade names, are reviewed for impairment on an annual basis or earlier if there is an event or change in circumstances that would indicate that the carrying value of these assets could not be fully recovered. We believe our estimates and judgments with respect to our long-lived assets, principally ships, and goodwill and other indefinite-lived intangible assets are reasonable. Nonetheless, if there was a material change in assumptions used in the determination of such fair values or if there is a material change in the conditions or circumstances that influence such assets, we could be required to record an impairment charge. As of December 31, 2013, our annual review supports the carrying value of these assets.



Contingencies

Periodically, we assess potential liabilities related to any lawsuits or claims brought against us or any asserted claims, including tax, legal and/or environmental matters. Although it is typically very difficult to determine the timing and ultimate outcome of such actions, we use our best judgment to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we take into consideration estimates of the amount of insurance recoveries, if any. In accordance with the guidance on accounting for contingencies, we accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recoveries, although we believe that our estimates and judgments are reasonable, it is possible that certain matters may be resolved for amounts materially different from any estimated provisions or previous disclosures.



Executive Overview

Total revenue increased 12.9% to $2.6 billion for the year ended December 31, 2013 compared to $2.3 billion for the year ended December 31, 2012. Net Revenue for the year ended December 31, 2013 increased 13.4% to $1.9 billion from $1.7 billion in the same period in 2012 with an improvement of both Net Yield of 4.3% and Capacity Days of 8.8%. For the year ended December 31, 2013 we had Adjusted Net Income of $311.8 million which excludes $27.9 million of expenses related to non-cash compensation and $164.0 million of expenses related to prepayments of debt, a change in corporate entity structure and NCLH's Secondary Offerings. On a GAAP basis, net income was $119.8 million. Operating income increased 11.7% to $398.8 million for the year ended December 31, 2013 from $357.1 million in 2012. A 16.8% improvement in Adjusted EBITDA was achieved for the same period as revenue increased primarily due to an increase in passenger ticket pricing. Our business improvement measures continued to have an impact even with the increase in the cost of fuel. We refer you to our Results of Operations below for a calculation of Net Revenue, adjusted Net Income, Adjusted EPS and adjusted EBITDA.



Results of Operations

We reported total revenue, total cruise operating expense, operating income and net income as follows (in thousands):

Year Ended December 31, 2013 2012 2011 Total revenue $ 2,570,294$ 2,276,246$ 2,219,324 Total cruise operating expense $ 1,657,659$ 1,478,433$ 1,467,876 Operating income $ 398,777$ 357,093$ 316,112 Net income $ 119,815$ 168,556$ 126,859 38



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The following table sets forth operating data as a percentage of revenue:

Year Ended December 31, 2013 2012 2011 Revenue Passenger ticket 70.6 % 70.5 % 70.4 % Onboard and other 29.4 % 29.5 % 29.6 % Total revenue 100.0 % 100.0 % 100.0 %



Cruise operating expense

Commissions, transportation and other 17.7 % 18.0 %

18.5 % Onboard and other 7.6 % 7.7 % 7.6 % Payroll and related 13.3 % 12.9 % 13.1 % Fuel 11.8 % 12.5 % 11.0 % Food 5.3 % 5.5 % 5.6 % Other 8.8 % 8.4 % 10.3 %

Total cruise operating expense 64.5 % 65.0 %



66.1 %

Other operating expense

Marketing, general and administrative 11.6 % 11.0 %

11.3 %

Depreciation and amortization 8.4 % 8.3 %



8.3 %

Total other operating expense 20.0 % 19.3 %

19.6 % Operating income 15.5 % 15.7 % 14.3 %



Non-operating income (expense)

Interest expense, net (11.0 )% (8.3 )% (8.6 )% Other income (expense) 0.1 % - % 0.1 %



Total non-operating income (expense) (10.9 )% (8.3 )%

(8.5 )%

Net income before income taxes 4.6 % 7.4 %



5.8 %

Income tax benefit (expense) 0.1 % - %

(0.1 )% Net income 4.7 % 7.4 % 5.7 %



The following table sets forth selected statistical information:

Year Ended December 31, 2013 2012 2011 Passengers carried 1,628,278 1,503,107 1,530,113



Passenger Cruise Days 11,400,906 10,332,914 10,227,438

Capacity Days 10,446,216 9,602,730



9,454,570

Occupancy Percentage 109.1 % 107.6 % 108.2 % 39



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Gross Yield and Net Yield were calculated as follows (in thousands, except Capacity Days and Yield data):

Year Ended December 31, 2013 2012 Constant Constant 2013 Currency 2012 Currency 2011 Passenger ticket revenue $ 1,815,869$ 1,814,397$ 1,604,563$ 1,621,412$ 1,563,363 Onboard and other revenue 754,425 754,425 671,683 671,683 655,961 Total revenue 2,570,294 2,568,822 2,276,246 2,293,095 2,219,324 Less: Commissions, transportation and other expense 455,816 455,286 410,531 415,030 410,709 Onboard and other expense 195,526 195,526 173,916 173,916 169,329 Net Revenue $ 1,918,952$ 1,918,010$ 1,691,799$ 1,704,149$ 1,639,286 Capacity Days 10,446,216 10,446,216 9,602,730 9,602,730 9,454,570 Gross Yield $ 246.05$ 245.91$ 237.04$ 238.80$ 234.74 Net Yield $ 183.70$ 183.61$ 176.18$ 177.47$ 173.39 Gross Cruise Cost, Net Cruise Cost, Net Cruise Cost Excluding Fuel and Adjusted Net Cruise Cost Excluding Fuel were calculated as follows (in thousands, except Capacity Days and per Capacity Day data): Year Ended December 31, 2013 2012 Constant Constant 2013 Currency 2012 Currency 2011 Total cruise operating expense $ 1,657,659$ 1,655,971$ 1,478,433$ 1,487,544$ 1,467,876 Marketing, general and administrative expense 298,265 297,830 251,183 252,615 251,351 Gross Cruise Cost 1,955,924 1,953,801 1,729,616 1,740,159 1,719,227 Less: Commissions, transportation and other expense 455,816 455,286 410,531 415,030 410,709 Onboard and other expense 195,526 195,526 173,916 173,916 169,329 Net Cruise Cost 1,304,582 1,302,989 1,145,169 1,151,213 1,139,189 Less: Fuel expense 303,439 303,439 283,678 283,678 243,503 Net Cruise Cost Excluding Fuel 1,001,143 999,550 861,491 867,535 895,686 Less: Other (1) 32,117 32,117 - - - Adjusted Net Cruise Cost Excluding Fuel $ 969,026$ 967,433$ 861,491$ 867,535$ 895,686 Capacity Days 10,446,216 10,446,216 9,602,730 9,602,730 9,454,570 Gross Cruise Cost per Capacity Day $ 187.24$ 187.03$ 180.12$ 181.22$ 181.84 Net Cruise Cost per Capacity Day $ 124.89$ 124.73$ 119.25$ 119.88$ 120.49 Net Cruise Cost Excluding Fuel per Capacity Day $ 95.84$ 95.69$ 89.71$ 90.34$ 94.74 Adjusted Net Cruise Cost Excluding Fuel per Capacity Day $ 92.77$ 92.61$ 89.71$ 90.34$ 94.74



(1) Consists of non-cash share-based compensation related to NCLH's IPO and other

supplemental adjustments. 40



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Adjusted Net Income was calculated as follows (in thousands):

Year Ended December 31, 2013 2012 2011 Net income $ 119,815$ 168,556$ 126,859 Non-cash compensation 9,408 4,500 - Non-cash share-based compensation related to IPO 18,527 - - Expenses related to debt prepayments (1) 160,573 - - Other (2) 3,468 - - Adjusted Net Income $ 311,791$ 173,056$ 126,859



(1) Consists of premiums, write-offs of deferred fees and other expenses related

to prepayments of debt.

(2) Expenses incurred from changes in corporate entity structure and our

Secondary Offerings.

Adjusted EBITDA was calculated as follows (in thousands):

Year Ended December 31, 2013 2012 2011 Net income $ 119,815$ 168,556$ 126,859 Interest expense, net 282,602 189,930 190,187 Income tax expense (benefit) (2,237 ) 706 1,700 Depreciation and amortization expense 215,593 189,537 183,985 EBITDA 615,773 $ 548,729$ 502,731 Other (income) expense (1,403 ) (2,099 ) (2,634 ) Non-cash compensation and other(1) 16,256 9,004 5,942 Non-cash share-based compensation related to IPO 18,527 - - Adjusted EBITDA $ 649,153$ 555,634$ 506,039



(1) Consists of non-cash compensation, expenses incurred from changes in

corporate entity structure, NCLH's Secondary Offerings and other supplemental

adjustments.

Year Ended December 31, 2013 ("2013") Compared to Year Ended December 31, 2012 ("2012")

Revenue Total revenue increased 12.9% to $2.6 billion in 2013 compared to $2.3 billion in 2012. Net Revenue increased 13.4% in 2013, primarily due to an increase in Capacity Days of 8.8% related to the delivery of Norwegian Breakaway and an increase in Net Yield of 4.3%. The increase in Net Yield was due to an increase in passenger ticket pricing and higher onboard and other revenue, partially due to the introduction of Norwegian Breakaway to the fleet. On a Constant Currency basis, Net Yield increased 4.2% in 2013 compared to 2012.



Expense

Total cruise operating expense increased 12.1% in 2013 compared to 2012 primarily due to an increase in Capacity Days, expenses related to planned Dry-docks and fuel expense, partially offset by the timing of certain expenses. The increase in fuel expense was primarily the result of a 1.7% increase in the average fuel price to $675 per metric ton in 2013 from $664 in 2012. Total other operating expense increased 16.6% in 2013 compared to 2012 primarily due to non-cash expenses related to share-based compensation recognized upon the realization of the IPO, the timing of certain expenses and the depreciation expense related to the addition of Norwegian Breakaway. On a Capacity Day basis, Net Cruise Cost increased 4.7% on an as reported and 4.6% on a Constant Currency basis due to the expenses discussed above. Adjusted Net Cruise Cost Excluding Fuel per Capacity Day increased 3.4% and 3.2% on an as reported and Constant Currency basis, respectively, mainly due to the timing of certain expenses. Interest expense, net increased to $282.6 million in 2013 from $189.9 million in 2012 primarily due to $160.6 million of expenses associated with debt prepayments partially offset by lower interest rates resulting from the benefits from the redemption of higher rate debt and refinancing transactions. 41



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Income tax benefit was $2.2 million in 2013 compared to an expense of $0.7 million in 2012.

Year Ended December 31, 2012 ("2012") Compared to Year Ended December 31, 2011 ("2011")

Revenue Total revenue increased 2.6% to $2.3 billion in 2012 compared to $2.2 billion in 2011. Net Revenue increased 3.2% in 2012, primarily due to an increase in Net Yield of 1.6% and an increase in Capacity Days of 1.6%. The increase in Net Yield was primarily due to an increase in passenger ticket pricing and the increase in Capacity Days in 2012 was primarily due to the timing of certain repairs and maintenance. On a Constant Currency basis, Net Yield increased 2.4% in 2012 compared to 2011. Expense Total cruise operating expense increased slightly in 2012 compared to 2011 due to an increase in Capacity Days as described above and higher ship operating expenses. The increase in ship operating expenses was primarily due to an increase in fuel expense as a result of a 16.3% increase in average fuel price to $664 per metric ton in 2012 from $571 in 2011. Total other operating expense increased slightly compared to 2011 due to an increase in depreciation expense related to the purchase of Norwegian Sky primarily offset by lower general and administrative expenses as a result of ongoing business improvement initiatives. Net Cruise Cost increased slightly in 2012 primarily due to an increase in Capacity Days. On a Capacity Day basis, Net Cruise Cost decreased 1.0% primarily due to the decrease in general and administrative expenses discussed above substantially offset by an increase in fuel expense. Excluding fuel expense, Net Cruise Cost per Capacity Day decreased 5.3%. On a Constant Currency basis, Net Cruise Cost per Capacity Day decreased slightly and excluding fuel expense decreased 4.6%.



Interest expense, net of capitalized interest, was $189.9 million in 2012 compared to $190.2 million in 2011.

Liquidity and Capital Resources

General

As of December 31, 2013, our liquidity was $446.1 million consisting of $52.1 million in cash and cash equivalents and $394.0 million available under our revolving credit facility. Our primary ongoing liquidity requirements are to finance working capital, capital expenditures and debt service. As of December 31, 2013, we had a working capital deficit of $879.4 million. This deficit included $411.8 million of advance ticket sales, which represents the passenger revenues we collect in advance of sailing dates and accordingly are substantially more like deferred revenue balances rather than actual current cash liabilities. Our business model, along with our revolving credit facility, allows us to operate with a working capital deficit and still meet our operating, investing and financing needs. Our debt agreements limit or prohibit, and any of our future debt arrangements may restrict, among other things, the ability of our subsidiaries, including NCLC, to pay distributions to NCLH and NCLH's ability to pay cash dividends to its shareholders. NCLH is a holding company and depends upon its subsidiaries for their ability to pay distributions to NCLH to finance any dividend or pay any other obligations of NCLH. However, we do not believe that these restrictions have had or are expected to have an impact on our ability to meet any cash obligations. Sources and Uses of Cash In this section, references to 2013 refer to the year ended December 31, 2013, references to 2012 refer to the year ended December 31, 2012 and references to 2011 refer to the year ended December 31, 2011. Net cash provided by operating activities was $486.9 million in 2013 as compared to $398.6 million in 2012 and $357.0 million in 2011. Although net income decreased in 2013 compared to 2012, primarily due to $124.2 million of fees related to the prepayment of debt, cash provided by operating activities increased mainly due to timing differences in cash receipts and payments relating to operating assets and liabilities primarily with an increase in advance ticket sales. The 2012 balance included $6.0 million related to the premium received from the issuance of $100.0 million of senior unsecured notes. The change in net cash provided by operating activities for the year ended 2012 reflects the increase in net income to $168.6 million in 2012 compared to $126.9 million in 2011, as well as timing differences in cash receipts and payments relating to operating assets and liabilities and $6.0 million related to the premium received from the issuance of $100.0 million of senior unsecured notes. Net cash used in investing activities was $894.9 million in 2013, primarily related to the payments for construction and delivery of Norwegian Breakaway and construction of Norwegian Getaway, as well as other ship improvements and shoreside projects. Net cash used in investing activities was $303.8 million in 2012, primarily related to payments for construction of Norwegian Breakaway and Norwegian Getaway, the purchase of Norwegian Sky, and other ship improvements and shoreside projects. Net cash used in investing activities was $184.8 million in 2011, primarily related to payments for construction of Norwegian Breakaway and Norwegian Getaway. 42



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Net cash provided by financing activities was $414.6 million in 2013, primarily due to the issuance of our $300.0 million 5% senior notes due 2018 as well as borrowings under other credit facilities and the $460.0 million contribution from NCLH partially offset by repayments of our $450.0 million 11.75% senior secured notes due 2016 and revolving credit facilities and a payment related to the Norwegian Sky purchase agreement. Net cash used in financing activities was $108.2 million in 2012, primarily due to repayments of our revolving credit facilities, other borrowings and loan arrangement fees which were partially offset by borrowings on our revolving credit facilities and by the issuance of $100.0 million of senior unsecured notes. Net cash used in financing activities was $168.3 million in 2011, primarily due to repayments of our revolving credit facility and repayments of borrowings related to Norwegian Epic partially offset by borrowings related to the construction of Norwegian Breakaway and Norwegian Getaway. Future Capital Commitments Future capital commitments consist of contracted commitments, including future expected capital expenditures for business enhancements and ship construction contracts. As of December 31, 2013, anticipated capital expenditures together with amounts for ship construction and related export credit financing were as follows (in thousands, based on the euro/U.S. dollar exchange rate as of December 31, 2013): Full Year 2014 2015 2016 Ship construction $ 802,650$ 968,101$ 116,336 Ship financing (705,968 ) (761,085 ) (46,069 ) Ship construction net of financing $ 96,682 $



207,016 $ 70,267

Business Enhancement Capital Expenditures, including ROI Capital Expenditures(1)(2)(3) $ 98,000$ 81,000$ 92,000

Incremental ROI Capital Expenditures for exhaust gas scrubbers $ 27,000$ 29,000$ 8,000



(1) 2014 includes $38.0 million in ROI Capital Expenditures

(2) 2014, 2015 and 2016 exclude amounts for exhaust gas scrubbers

(3) 2014 and 2015 include investment for development of our future cruise

destination in Belize

We have orders with Meyer Werft for two ships for delivery in the fourth quarter of 2015 and the first quarter of 2017. These ships, Norwegian Escape and Norwegian Bliss, will be the largest in our fleet at approximately 163,000 Gross Tons with 4,200 Berths each and will be similar in design and innovation to our Breakaway Class Ships. The combined contract cost of these two ships is approximately 1.4 billion, or $1.9 billion based on the euro/U.S. dollar exchange rate as of December 31, 2013. We have export credit financing in place that provides financing for 80% of their contract price. In connection with the contracts to build these ships, we do not anticipate any contractual breaches or cancellation to occur. However, if any would occur, it could result in, among other things, the forfeiture of prior deposits or payments made by us, subject to certain refund guarantees, and potential claims and impairment losses which may materially impact our business, financial condition and results of operations. Capitalized interest for the year ended December 31, 2013 was $26.3 million for the construction of Norwegian Breakaway, Norwegian Getaway, Norwegian Escape and Norwegian Bliss. Capitalized interest for the years ended December 31, 2012 and 2011 was $22.1 million and $16.7 million, respectively, for the construction of Norwegian Breakaway and Norwegian Getaway.



Off-Balance Sheet Transactions

None. 43



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Contractual Obligations

As of December 31, 2013, our contractual obligations, with initial or remaining terms in excess of one year, including interest payments on long-term debt obligations, were as follows (in thousands):

Less than More than Total 1 year 1-3 years 3-5 years 5 years Long-term debt(1) $ 3,127,789$ 286,575$ 645,807$ 1,417,580$ 777,827 Due to Affiliate(2) 91,672 36,544 55,128 - - Operating leases(3) 36,416 6,740 11,341 10,855 7,480 Ship construction contracts(4) 2,594,068 810,081 1,008,942 775,045 - Port facilities(5) 200,769 28,589 58,675 51,433 62,072 Interest(6) 378,485 75,083 139,245 98,559 65,598 Other(7) 49,574 26,668 18,468 2,293 2,145 Total $ 6,478,773$ 1,270,280$ 1,937,606$ 2,355,765$ 915,122



(1) Net of unamortized original issue discount of $1.4 million. Also includes

capital leases.

(2) Primarily related to the purchase of Norwegian Sky.

(3) Primarily for offices, motor vehicles and office equipment.

(4) For Norwegian Getaway, Norwegian Escape and Norwegian Bliss based on the

euro/U.S. dollar exchange rate as of December 31, 2013. Export credit

financing is in place from a syndicate of banks.

(5) Primarily for our usage of certain port facilities.

(6) Includes fixed and variable rates with LIBOR held constant as of December 31,

2013.

(7) Future commitments for service, maintenance and other Business Enhancement

Capital Expenditure contracts.

Other

Certain of our service providers may require collateral in the normal course of our business. The amount of collateral may change based on certain terms and conditions. As a routine part of our business, depending on market conditions, exchange rates, pricing and our strategy for growth, we regularly consider opportunities to enter into contracts for the building of additional ships. We may also consider the sale of ships, potential acquisitions and strategic alliances. If any of these were to occur, they may be financed through the incurrence of additional permitted indebtedness, through cash flows from operations, or through the issuance of debt, equity or equity-related securities.



Funding Sources

Our debt agreements contain covenants that, among other things, require us to maintain a minimum level of liquidity, as well as limit our net funded debt-to-capital ratio, maintain certain other ratios and restrict our ability to pay dividends. Our ships and substantially all other property and equipment are pledged as collateral for our debt. We believe we were in compliance with these covenants as of December 31, 2013. The impact of changes in world economies and especially the global credit markets has created a challenging environment and may reduce future consumer demand for cruises and adversely affect our counterparty credit risks. In the event this environment deteriorates, our business, financial condition and results of operations could be adversely impacted. We believe our cash on hand, expected future operating cash inflows, additional available borrowings under our existing credit facility and our ability to issue debt securities or raise additional equity, will be sufficient to fund operations, debt payment requirements, capital expenditures and maintain compliance with covenants under our debt agreements over the next twelve-month period. As a result of the equity infusion from NCLH's IPO and the related use of proceeds, our leverage was improved and our balance sheet was strengthened. There is no assurance that cash flows from operations and additional financings will be available in the future to fund our future obligations.


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