Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v3.22.4
Fair Value of Financial Instruments
9 Months Ended
Nov. 30, 2022
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS
Authoritative guidance establishes a framework for measuring fair value, including a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy includes three levels:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities;
Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as volatility, interest rates, and yield curves that are observable for the asset or liability, either directly or indirectly; and
Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

Fair value methodology
The following methods and assumptions are used to estimate the fair value for each class of our financial instruments:

Foreign currency and commodity derivative contracts
The fair value is estimated using market-based inputs, obtained from independent pricing services, entered into valuation models. These valuation models require various inputs, including contractual terms, market foreign exchange prices, market commodity prices, interest-rate yield curves, and currency volatilities, as applicable (Level 2 fair value measurement).
Interest rate swap and Pre-issuance hedge contracts
The fair value is estimated based on quoted market prices from respective counterparties. Quotes are corroborated by using discounted cash flow calculations based upon forward interest-rate yield curves, which are obtained from independent pricing services (Level 2 fair value measurement).

Canopy investment
Equity securities, WarrantsThe November 2018 Canopy Warrants consist of three tranches of warrants, including 88.5 million Tranche A Warrants expiring November 1, 2023, which are currently exercisable, 38.4 million Tranche B Warrants expiring November 1, 2026, and 12.8 million Tranche C Warrants expiring November 1, 2026. If the Canopy Transaction is completed we will no longer have the November 2018 Canopy Warrants. The inputs used to estimate the fair value of the November 2018 Canopy Warrants are as follows (1) (2):
November 30, 2022 February 28, 2022
Tranche A
Warrants (3)
Tranche B
Warrants (4)
Tranche A
Warrants (3)
Tranche B
Warrants (4)
Exercise price (5)
C$ 50.40  C$ 76.68  C$ 50.40  C$ 76.68 
Valuation date stock price (6)
C$ 4.86  C$ 4.86  C$ 9.04  C$ 9.04 
Remaining contractual term (7)
0.9 years 3.9 years 1.7 years 4.7 years
Expected volatility (8)
100.0  % 100.0  % 75.0  % 75.0  %
Risk-free interest rate (9)
4.4  % 3.4  % 1.4  % 1.7  %
Expected dividend yield (10)
0.0  % 0.0  % 0.0  % 0.0  %
(1)The exercise price for the Tranche C Warrants is based on the VWAP Exercise Price. The Tranche C Warrants are not included in the table as there is no fair value assigned.
(2)In connection with the Acreage Transaction, we obtained other rights which include a share repurchase credit. If Canopy has not purchased the lesser of 27,378,866 Canopy common shares, or C$1,583.0 million worth of Canopy common shares for cancellation between April 18, 2019, and two-years after the full exercise of the Tranche A Warrants, we will be credited an amount that will reduce the aggregate exercise price otherwise payable upon each exercise of the Tranche B Warrants and Tranche C Warrants. The credit will be an amount equal to the difference between C$1,583.0 million and the actual price paid by Canopy in purchasing its common shares for cancellation. The likelihood of receiving the share repurchase credit if we were to fully exercise the Tranche A Warrants is remote, therefore, no fair value has been assigned.
(3)The fair value is estimated using the Black-Scholes option-pricing model (Level 2 fair value measurement).
(4)The fair value is estimated using Monte Carlo simulations (Level 2 fair value measurement).
(5)Based on the exercise price from the applicable underlying agreements.
(6)Based on the closing market price for Canopy common shares on the TSX as of the applicable date.
(7)Based on the expiration date of the warrants.
(8)Based on consideration of historical and/or implied volatility levels of the underlying equity security and limited consideration of historical peer group volatility levels.
(9)Based on the implied yield currently available on Canadian Treasury zero coupon issues with a remaining term equal to the expiration date of the applicable warrants.
(10)Based on historical dividend levels.

Debt securities We have elected the fair value option to account for the Canopy Debt Securities. Interest income on the Canopy Debt Securities is calculated using the effective interest method and is recognized separately from the changes in fair value in interest expense. The Canopy Debt Securities have a contractual maturity of five years from the date of issuance but may be settled prior to maturity by either party upon the occurrence of certain events. The fair value is estimated using a binomial lattice option-pricing model (Level 2 fair value measurement), which includes an estimate of the credit spread based on market spreads using bond data as
of the valuation date. If the Canopy Transaction is completed we expect to negotiate an exchange of our Canopy Debt Securities. For additional information, refer to Note 7.

The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
November 30,
2022
February 28,
2022
Settlement price (1)
C$ 48.17  C$ 48.17 
Valuation date stock price (2)
C$ 4.86  C$ 9.04 
Remaining term (3)
0.6 years 1.4 years
Expected volatility (4)
100.0  % 75.0  %
Risk-free interest rate (5)
4.4  % 1.4  %
Expected dividend yield (6)
0.0  % 0.0  %
(1)Based on the rate which the Canopy Debt Securities may be settled. In June 2022, the Canopy Debt Securities were amended to remove Canopy’s right to settle the Canopy Debt Securities on conversion into Canopy common shares. As a result, the Canopy Debt Securities may only be settled in cash. Prior to the June 2022 amendment, the Canopy Debt Securities could be settled, at Canopy’s option, in cash, Canopy common shares, or a combination thereof.
(2)Based on the closing market price for Canopy common shares on the TSX as of the applicable date.
(3)Based on the contractual maturity date of the notes.
(4)Based on consideration of historical and/or implied volatility levels of the underlying equity security, adjusted for certain risks associated with debt securities, as appropriate.
(5)Based on the implied yield currently available on Canadian Treasury zero coupon issues with a term equal to the remaining contractual term of the Canopy Debt Securities.
(6)Based on historical dividend levels.

Short-term borrowings
Our short-term borrowings consist of our commercial paper program and the revolving credit facility under our senior credit facility. The revolving credit facility is a variable interest rate bearing note with a fixed margin, adjustable based upon our debt rating (as defined in our senior credit facility). For these short-term borrowings, the carrying value approximates the fair value.

Long-term debt
The term loans under our term loan credit agreements are variable interest rate bearing notes with a fixed margin, adjustable based upon our debt rating. The carrying values approximate the fair value of the term loans. The fair value of the remaining fixed interest rate long-term debt is estimated by discounting cash flows using interest rates currently available for debt with similar terms and maturities (Level 2 fair value measurement).

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, approximate fair value as of November 30, 2022, and February 28, 2022, due to the relatively short maturity of these instruments. As of November 30, 2022, the carrying amount of long-term debt, including the current portion, was $11,296.7 million, compared with an estimated fair value of $10,503.2 million. As of February 28, 2022, the carrying amount of long-term debt, including the current portion, was $10,093.5 million, compared with an estimated fair value of $10,345.3 million.
Recurring basis measurements
The following table presents our financial assets and liabilities measured at estimated fair value on a recurring basis:
Fair Value Measurements Using
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(in millions)
November 30, 2022
Assets:
Foreign currency contracts $ —  $ 191.3  $ —  $ 191.3 
Commodity derivative contracts $ —  $ 57.9  $ —  $ 57.9 
November 2018 Canopy Warrants (1)
$ —  $ 5.6  $ —  $ 5.6 
Canopy Debt Securities (1)
$ —  $ 69.1  $ —  $ 69.1 
Liabilities:
Foreign currency contracts $ —  $ 19.2  $ —  $ 19.2 
Commodity derivative contracts $ —  $ 12.9  $ —  $ 12.9 
February 28, 2022
Assets:
Foreign currency contracts $ —  $ 56.4  $ —  $ 56.4 
Commodity derivative contracts $ —  $ 91.0  $ —  $ 91.0 
November 2018 Canopy Warrants (1)
$ —  $ 36.3  $ —  $ 36.3 
Canopy Debt Securities (1)
$ —  $ 146.6  $ —  $ 146.6 
Liabilities:
Foreign currency contracts $ —  $ 17.8  $ —  $ 17.8 
Commodity derivative contracts $ —  $ 0.9  $ —  $ 0.9 
Pre-issuance hedge contracts $ —  $ 0.4  $ —  $ 0.4 
(1)
Unrealized net gain (loss) from the changes in fair value of our securities measured at fair value recognized in income (loss) from unconsolidated investments, are as follows:
For the Nine Months
Ended November 30,
For the Three Months
Ended November 30,
2022 2021 2022 2021
(in millions)
November 2018 Canopy Warrants $ (30.7) $ (1,496.4) $ (7.1) $ (189.4)
Canopy Debt Securities (i)
(8.4) (38.4) (0.3) (10.3)
$ (39.1) $ (1,534.8) $ (7.4) $ (199.7)
(i)
In July 2022, we received 29.2 million common shares of Canopy through the exchange of C$100.0 million principal amount of our Canopy Debt Securities. We continue to hold Canopy Debt Securities of C$100.0 million principal amount. For additional information, refer to Note 7.
Nonrecurring basis measurements
The following table presents our assets and liabilities measured at estimated fair value on a nonrecurring basis for which an impairment assessment was performed for the periods presented:
Fair Value Measurements Using
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Losses
(in millions)
For the Nine Months Ended November 30, 2022
Equity method investments $ 621.4  $ —  $ —  $ 1,060.3 
For the Nine Months Ended November 30, 2021
Long-lived assets (1)
$ —  $ —  $ 20.0  $ 665.9 
(1)As of November 30, 2022, we determined the remaining Mexicali Brewery net assets have met held for sale criteria. The carrying value of assets held for sale are included in other assets within our consolidated balance sheet and we have concluded that no additional impairment existed.

Equity method investments
As of August 31, 2022, we evaluated the Canopy Equity Method Investment and determined there was an other-than-temporary impairment based on several contributing factors, including: (i) the period of time for which the fair value had been less than the carrying value and the uncertainty surrounding Canopy’s stock price recovering in the near-term, (ii) Canopy recording a significant impairment of goodwill related to its cannabis operations during its three months ended June 30, 2022, and (iii) the uncertainty of U.S. federal cannabis permissibility. As a result, the Canopy Equity Method Investment with a carrying value of $1,695.1 million was written down to its estimated fair value of $634.8 million, resulting in an impairment of $1,060.3 million. This loss from impairment was included in income (loss) from unconsolidated investments within our consolidated results for the nine months ended November 30, 2022. The estimated fair value was determined based on the closing price of the underlying equity security as of August 31, 2022. There may be a future impairment of our Canopy Equity Method Investment if our expectations about Canopy’s prospective results and cash flows decline, which could be influenced by a variety of factors including adverse market conditions or if Canopy records another significant impairment of goodwill or intangible or other long-lived assets, makes significant asset sales, or has changes in senior management.

Long-lived assets
In April 2021, our Board of Directors authorized management to sell or abandon the Mexicali Brewery. Subsequently, management determined that we will be unable to use or repurpose certain assets at the Mexicali Brewery. Accordingly, for the first quarter of Fiscal 2022, long-lived assets with a carrying value of $685.9 million were written down to their estimated fair value of $20.0 million, resulting in an impairment of $665.9 million. This impairment was included in impairment of brewery construction in progress within our consolidated results of operations for the nine months ended November 30, 2021. Our estimate of fair value was determined based on the expected salvage value of the assets. The Mexicali Brewery is a component of the Beer segment. In April 2022, we announced that, with the assistance of the Mexican government and state and local officials in Mexico, we acquired land in Veracruz for the construction of the Veracruz Brewery where there is ample water and we will have a skilled workforce to meet our long-term needs. The design and construction process for the Veracruz Brewery is underway. We continue to work with government officials in Mexico to pursue various forms of recovery for capitalized costs and additional expenses incurred in connection with the canceled Mexicali Brewery construction project, however, there can be no assurance of any recoveries. In the medium-term, under normal operating conditions, we have ample capacity at the Nava and Obregon breweries to meet consumer needs based on current growth forecasts and current and planned production capabilities. Expansion, optimization, and/or
construction activities continue at our current brewery locations under our Mexico Beer Projects to align with our anticipated future growth expectations.