| Fair Value Measurements and Derivative Instruments | Note 11 . Fair Value Measurements and Derivative Instruments Fair Value Measurements The estimated fair value of our financial instruments that are not measured at fair value, categorized based upon the fair value hierarchy, are as follows (in thousands): Fair Value Measurements at June 30, 2023 Fair Value Measurements at December 31, 2022 Description Total Carrying Amount Total Fair Value Level 1 (1) Level 2 (2) Level 3 (3) Total Carrying Amount Total Fair Value Level 1 (1) Level 2 (2) Level 3 (3) Assets: Cash and cash equivalents (4) $ 726,424 $ 726,424 $ 726,424 $ — $ — $ 1,935,005 $ 1,935,005 $ 1,935,005 $ — $ — Total Assets $ 726,424 $ 726,424 $ 726,424 $ — $ — $ 1,935,005 $ 1,935,005 $ 1,935,005 $ — $ — Liabilities: Long-term debt (including current portion of debt) (5) $ 20,067,802 $ 21,873,063 $ — $ 21,873,063 $ — $ 23,039,859 $ 22,856,306 $ — $ 22,856,306 $ — Total Liabilities $ 20,067,802 $ 21,873,063 $ — $ 21,873,063 $ — $ 23,039,859 $ 22,856,306 $ — $ 22,856,306 $ — (1) Inputs based on quoted prices (unadjusted) in active markets for identical assets that we have the ability to access. Valuation of these items does not entail a significant amount of judgment. (2) Inputs other than quoted prices included within Level 1 that are observable for the liability, either directly or indirectly. For unsecured revolving credit facilities and unsecured term loans, fair value is determined utilizing the income valuation approach. This valuation model takes into account the contract terms of our debt such as the debt maturity and the interest rate on the debt. The valuation model also takes into account the creditworthiness of the Company. We valued our senior notes and convertible notes using a quoted market price, which is considered a Level 2 input as it is observable in the market; however, these instruments have a limited trading volume and as such this fair value estimate is not necessarily indicative of the value at which the instruments could be retired or transferred. (3) Inputs that are unobservable. The Company did not use any Level 3 inputs as of June 30, 2023 and December 31, 2022. (4) Consists of cash and marketable securities with original maturities of less than 90 days. (5) Consists of unsecured revolving credit facilities, senior notes, term loans and convertible notes. These amounts do not include our finance lease obligations. Other Financial Instruments The carrying amounts of accounts receivable, accounts payable, accrued interest and accrued expenses approximate fair value at June 30, 2023 and December 31, 2022. Assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy. The following table presents information about the Company’s financial instruments recorded at fair value on a recurring basis (in thousands): Fair Value Measurements at June 30, 2023 Fair Value Measurements at December 31, 2022 Description Total Level 1 (1) Level 2 (2) Level 3 (3) Total Level 1 (1) Level 2 (2) Level 3 (3) Assets: Derivative financial instruments (4) $ 171,629 $ — $ 171,629 $ — $ 203,802 $ — $ 203,802 $ — Total Assets $ 171,629 $ — $ 171,629 $ — $ 203,802 $ — $ 203,802 $ — Liabilities: Derivative financial instruments (4) $ 141,832 $ — $ 141,832 $ — $ 135,608 $ — $ 135,608 $ — Total Liabilities $ 141,832 $ — $ 141,832 $ — $ 135,608 $ — $ 135,608 $ — (1) Inputs based on quoted prices (unadjusted) 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. No Level 1 inputs were used in fair value measurements of other financial instruments as of June 30, 2023 and December 31, 2022. (2) Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. For foreign currency forward contracts, interest rate swaps and fuel swaps, fair value is derived using valuation models that utilize the income valuation approach. These valuation models take into account the contract terms, such as maturity, as well as other inputs, such as foreign exchange rates and curves, fuel types, fuel curves and interest rate yield curves. Derivative instrument fair values take into account the creditworthiness of the counterparty and the Company. (3) Inputs that are unobservable. No Level 3 inputs were used in fair value measurements of other financial instruments as of June 30, 2023 and December 31, 2022. (4) Consists of foreign currency forward contracts, interest rate and fuel swaps. Refer to the "Fair Value of Derivative Instruments" table for breakdown by instrument type. The reported fair values are based on a variety of factors and assumptions. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of June 30, 2023 or December 31, 2022, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement. Nonfinancial Instruments Recorded at Fair Value on a Nonrecurring Basis Nonfinancial instruments include items such as goodwill, indefinite-lived intangible assets, long-lived assets, right-of-use assets and equity method investments that are measured at fair value on a nonrecurring basis when events and circumstances indicate the carrying value is not recoverable. There were no nonfinancial instruments recorded at fair value as of June 30, 2023. Master Netting Agreements We have master International Swaps and Derivatives Association (“ISDA”) agreements in place with our derivative instrument counterparties. These ISDA agreements generally provide for final close out netting with our counterparties for all positions in the case of default or termination of the ISDA agreement. We have determined that our ISDA agreements provide us with rights of setoff on the fair value of derivative instruments in a gain position and those in a loss position with the same counterparty. We have elected not to offset such derivative instrument fair values in our consolidated balance sheets. See Credit Related Contingent Features for further discussion on contingent collateral requirements for our derivative instruments. The following table presents information about the Company’s offsetting of financial assets under master netting agreements with derivative counterparties (in thousands): Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements As of June 30, 2023 As of December 31, 2022 Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet Gross Amount of Eligible Offsetting Cash Collateral Net Amount of Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet Gross Amount of Eligible Offsetting Cash Collateral Net Amount of Derivatives subject to master netting agreements $ 171,629 $ (83,061) $ — $ 88,568 $ 203,802 $ (105,228) $ — $ 98,574 Total $ 171,629 $ (83,061) $ — $ 88,568 $ 203,802 $ (105,228) $ — $ 98,574 The following table presents information about the Company’s offsetting of financial liabilities under master netting agreements with derivative counterparties (in thousands): Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements As of June 30, 2023 As of December 31, 2022 Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet Gross Amount of Eligible Offsetting Cash Collateral Net Amount of Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet Gross Amount of Eligible Offsetting Cash Collateral Net Amount of Derivatives subject to master netting agreements $ (141,832) $ 83,061 $ — $ (58,771) $ (135,608) $ 105,228 $ — $ (30,380) Total $ (141,832) $ 83,061 $ — $ (58,771) $ (135,608) $ 105,228 $ — $ (30,380) Concentrations of Credit Risk We monitor our credit risk associated with financial and other institutions with which we conduct significant business, and to minimize these risks, we select counterparties with credit risks acceptable to us and we seek to limit our exposure to an individual counterparty. Credit risk, including, but not limited to, counterparty nonperformance under derivative instruments, our credit facilities and new ship progress payment guarantees, is not considered significant, as we primarily conduct business with large, well-established financial institutions, insurance companies and export credit agencies many of which we have long-term relationships with and which have credit risks acceptable to us or where the credit risk is spread out among a large number of counterparties. As of June 30, 2023, we had counterparty credit risk exposure under our derivative instruments of $98.9 million, which was limited to the cost of replacing the contracts in the event of non-performance by the counterparties to the contracts, the majority of which are currently our lending banks. We do not anticipate nonperformance by any of our significant counterparties. In addition, we have established guidelines we follow regarding credit ratings and instrument maturities to maintain safety and liquidity. We do not normally require collateral or other security to support credit relationships; however, in certain circumstances this option is available to us. Derivative Instruments We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We try to mitigate these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our hedging practices and policies. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the notional amount, term and conditions of the derivative instrument with the underlying risk being hedged. Although certain of our derivative financial instruments do not qualify or are not accounted for under hedge accounting, our objective is not to hold or issue derivative financial instruments for trading or other speculative purposes. We enter into various forward, swap and option contracts to manage our interest rate exposure and to limit our exposure to fluctuations in foreign currency exchange rates and fuel prices. These instruments are recorded on the balance sheet at their fair value and the vast majority are designated as hedges. We also use non-derivative financial instruments designated as hedges of our net investment in our foreign operations and investments. At inception of the hedge relationship, a derivative instrument that hedges the exposure to changes in the fair value of a firm commitment or a recognized asset or liability is designated as a fair value hedge. A derivative instrument that hedges a forecasted transaction or the variability of cash flows related to a recognized asset or liability is designated as a cash flow hedge. Changes in the fair value of derivatives that are designated as fair value hedges are offset against changes in the fair value of the underlying hedged assets, liabilities or firm commitments. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of Accumulated other comprehensive loss until the underlying hedged transactions are recognized in earnings. The foreign currency transaction gain or loss of our non-derivative financial instruments and the changes in the fair value of derivatives designated as hedges of our net investment in foreign operations and investments are recognized as a component of Accumulated other comprehensive loss along with the associated foreign currency translation adjustment of the foreign operation or investment. In certain hedges of our net investment in foreign operations and investments, we exclude forward points from the assessment of hedge effectiveness and we amortize the related amounts directly into earnings. On an ongoing basis, we assess whether derivatives used in hedging transactions are "highly effective" in offsetting changes in the fair value or cash flow of hedged items. For our net investment hedges, we use the dollar offset method to measure effectiveness. For all other hedging programs, we use the long-haul method to assess hedge effectiveness using regression analysis for each hedge relationship. The methodology for assessing hedge effectiveness is applied on a consistent basis for each one of our hedging programs (i.e., interest rate, foreign currency ship construction, foreign currency net investment and fuel). For our regression analyses, we use an observation period of up to three years, utilizing market data relevant to the hedge horizon of each hedge relationship. High effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the changes in the fair values of the derivative instrument and the hedged item. If it is determined that a derivative is not highly effective as a hedge or hedge accounting is discontinued, any change in fair value of the derivative since the last date at which it was determined to be highly effective is recognized in earnings. Cash flows from derivative instruments that are designated as fair value or cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. Cash flows from derivative instruments not designated as hedging instruments are classified as investing activities. We consider the classification of the underlying hedged item’s cash flows in determining the classification for the designated derivative instrument’s cash flows. We classify derivative instrument cash flows from hedges of benchmark interest rate or hedges of fuel expense as operating activities due to the nature of the hedged item. Likewise, we classify derivative instrument cash flows from hedges of foreign currency risk on our newbuild ship payments as investing activities. Interest Rate Risk Our exposure to market risk for changes in interest rates primarily relates to our debt obligations, including future interest payments. At June 30, 2023 and December 31, 2022, approximately 86% and 75%, respectively, of our debt was effectively fixed-rate debt, which is net of our interest rate swap agreements. We use interest rate swap agreements to modify our exposure to interest rate movements and to manage our interest expense. Market risk associated with our fixed-rate debt is the potential increase in fair value resulting from a decrease in interest rates. We use interest rate swap agreements that effectively convert a portion of our fixed-rate debt to a floating-rate basis to manage this risk. At June 30, 2023 and December 31, 2022 , there were no interest rate swap agreements for fixed-rate debt instruments. We use interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis to manage the market risk of increasing interest rates. At June 30, 2023 and December 31, 2022, we maintained interest rate swap agreements on the following floating-rate debt instruments: Debt Instrument Swap Notional as of June 30, 2023 (in thousands) Maturity Debt Floating Rate (3) All-in Swap Fixed Rate as of June 30, 2023 Celebrity Reflection term loan $ 81,813 October 2024 LIBOR plus 0.40% 2.85% Quantum of the Seas term loan 214,375 October 2026 LIBOR plus 1.30% 3.74% Anthem of the Seas term loan 241,667 April 2027 LIBOR plus 1.30% 3.86% Ovation of the Seas term loan 345,833 April 2028 LIBOR plus 1.00% 3.16% Harmony of the Seas term loan (1) 315,251 May 2028 EURIBOR plus 1.15% 2.26% Odyssey of the Seas term loan (2) 364,167 October 2032 LIBOR plus 0.96% 3.21% Odyssey of the Seas term loan (2) 182,083 October 2032 LIBOR plus 0.96% 2.84% $ 1,745,189 (1) Interest rate swap agreements hedging the Euro-denominated term loan for Harmony of the Seas include EURIBOR zero-floors matching the hedged debt EURIBOR zero-floor. Amount presented is based on the exchange rate as of June 30, 2023. (2) Interest rate swap agreements hedging the term loan of Odyssey of the Seas include LIBOR zero-floors matching the debt LIBOR zero-floor. (3) During the quarter ended June 30, 2023, we completed our transition from LIBOR to Term SOFR rates for substantially all of our Interest rate swap agreements, with such transition to take effect at the next respective interest reset date for each such agreement. These interest rate swap agreements are accounted for as cash flow hedges. The notional amount of interest rate swap agreements related to outstanding debt as of June 30, 2023 and December 31, 2022 was $1.7 billion and $1.9 billion, respectively. Foreign Currency Exchange Rate Risk Derivative Instruments Our primary exposure to foreign currency exchange rate risk relates to our ship construction contracts denominated in Euros, our foreign currency denominated debt and our international business operations. We enter into foreign currency forward contracts to manage portions of the exposure to movements in foreign currency exchange rates. As of June 30, 2023, the aggregate cost of our ships on order was $11.0 billion, of which we had deposited $1.0 billion as of such date. These amounts do not include any ships placed on order that are contingent upon completion of conditions precedent and/or financing and any ships on order by our Partner Brands. Refer to Note 8 . Commitments and Contingencies , for further information on our ships on order. At June 30, 2023 and December 31, 2022, approximately 42.3% and 52.3%, respectively, of the aggregate cost of the ships under construction was exposed to fluctuations in the Euro exchange rate. Our foreign currency forward contract agreements are accounted for as cash flow or net investment hedges depending on the designation of the related hedge. On a regular basis, we enter into foreign currency forward contracts and, from time to time, we utilize cross-currency swap agreements and collar options to minimize the volatility resulting from the remeasurement of net monetary assets and liabilities denominated in a currency other than our functional currency or the functional currencies of our foreign subsidiaries. During the second quarter of 2023 and 2022 the average notional amount of foreign currency forward contracts was approximately $1.3 billion, respectively. These instruments are not designated as hedging instruments. For the quarters ended June 30, 2023 and 2022, changes in the fair value of the foreign currency forward contracts resulted in gains (losses) of $8.3 million and $(80.9) million, respectively, which offset (losses) gains arising from the remeasurement of monetary assets and liabilities denominated in foreign currencies in those same periods of $(16.3) million and $78.6 million, respectively. These amounts were recognized in earnings within Other (expense) income in our consolidated statements of comprehensive income (loss). For the six months ended June 30, 2023 and 2022, changes in the fair value of the foreign currency forward contracts resulted in gain (losses) of $12.4 million and $(87.9) million, respectively, which offset (losses) gains arising from the remeasurement of monetary assets and liabilities denominated in foreign currencies in those same periods of $(27.3) million and $85.8 million, respectively. These amounts were recognized in earnings within Other (expense) income in our consolidated statements of comprehensive income (loss). The notional amount of outstanding foreign exchange contracts, excluding the forward contracts entered into to minimize remeasurement volatility, as of June 30, 2023 and December 31, 2022 was $4.0 billion and $2.9 billion, respectively. Non-Derivative Instruments We consider our investment in our foreign operations to be denominated in relatively stable currencies and to be of a long-term nature. We address the exposure of our investments in foreign operations by denominating a portion of our debt in our subsidiaries’ and investments’ functional currencies and designating it as a hedge of these subsidiaries and investments. We had designated debt as a hedge of our net investments primarily in TUI Cruises of €461.8 million, or approximately $503.9 million, as of June 30, 2023. As of December 31, 2022, we had designated debt as a hedge of our net investments primarily in TUI Cruises of €433.0 million, or approximately $461.9 million. Fuel Price Risk Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our ships. We use fuel swap agreements to mitigate the financial impact of fluctuations in fuel prices. Our fuel swap agreements are generally accounted for as cash flow hedges. In the case that our hedged forecasted fuel consumption is not probable of occurring, hedge accounting will be discontinued and the related accumulated other comprehensive gain or loss will be reclassified to Other income (expense) immediately. For hedged forecasted fuel consumption that remains possible of occurring, hedge accounting will be discontinued and the related accumulated other comprehensive gain or loss will remain in accumulated other comprehensive gain or loss until the underlying hedged transactions are recognized in earnings or the related hedged forecasted fuel consumption is deemed probable of not occurring. Changes in the fair value of fuel swaps for which cash flow hedge accounting was discontinued are currently recognized in Other (expense) income for each reporting period through the maturity dates of the fuel swaps. For the quarter ended June 30, 2023 and June 30, 2022, we did not discontinue cash flow hedge accounting on any of our fuel swap agreements. At June 30, 2023, we have hedged the variability in future cash flows for certain forecasted fuel transactions occurring through 2024 and 2025. As of June 30, 2023 and December 31, 2022, we had the following outstanding fuel swap agreements: Fuel Swap Agreements As of June 30, 2023 As of December 31, 2022 Designated as hedges: (metric tons) 2023 448,100 825,651 2024 791,051 — 2025 456,000 — Fuel Swap Agreements As of June 30, 2023 As of December 31, 2022 Designated hedges as a % of projected fuel purchases: (% hedged) 2023 54 % 50 % 2024 45 % — % 2025 25 % — % As of June 30, 2023, there was $31.7 million of estimated unrealized net loss associated with our cash flow hedges pertaining to fuel swap agreements that is expected to be reclassified to earnings from Accumulated other comprehensive loss within the next twelve months when compared to $7.9 million of estimated unrealized net loss at December 31, 2022. Reclassification is expected to occur as the result of fuel consumption associated with our hedged forecasted fuel purchases. The fair value and line item caption of derivative instruments recorded within our consolidated balance sheets were as follows (in thousands): Fair Value of Derivative Instruments Asset Derivatives Liability Derivatives Balance Sheet Location As of June 30, 2023 As of December 31, 2022 Balance Sheet Location As of June 30, 2023 As of December 31, 2022 Fair Value Fair Value Fair Value Fair Value Derivatives designated as hedging instruments under ASC 815-20 (1) Interest rate swaps Other assets $ 106,608 $ 115,049 Other long-term liabilities $ — $ — Foreign currency forward contracts Derivative financial instruments 33,357 18,892 Derivative financial instruments 67,836 84,953 Foreign currency forward contracts Other assets 17,806 25,504 Other long-term liabilities 3,106 150 Fuel swaps Derivative financial instruments 13,159 40,191 Derivative financial instruments 44,028 46,359 Fuel swaps Other assets 699 4,166 Other long-term liabilities 26,862 4,147 Total derivatives designated as hedging instruments under 815-20 $ 171,629 $ 203,802 $ 141,832 $ 135,609 (1) Subtopic 815-20 “ Hedging-General ” under ASC 815. The carrying value and line item caption of non-derivative instruments designated as hedging instruments recorded within our consolidated balance sheets were as follows (in thousands): Carrying Value Non-derivative instrument designated as Balance Sheet Location As of June 30, 2023 As of December 31, 2022 Foreign currency debt Current portion of long-term debt $ 63,712 $ 62,282 Foreign currency debt Long-term debt 440,181 399,577 $ 503,893 $ 461,859 The effect of derivative instruments qualifying and designated as hedging instruments and the related hedged items in fair value hedges on the consolidated statements of comprehensive income (loss) was as follows (in thousands): Derivatives and Related Hedged Items under ASC 815-20 Fair Value Hedging Relationships Location of Gain (Loss) Recognized in Income on Derivative and Hedged Item Amount of Gain (Loss) Amount of Gain (Loss) Quarter Ended June 30, 2023 Quarter Ended June 30, 2022 Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Quarter Ended June 30, 2023 Quarter Ended June 30, 2022 Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Interest rate swaps Interest expense, net of interest capitalized $ — $ (1,170) $ — $ (4,535) $ — $ 2,927 $ — $ 8,951 $ — $ (1,170) $ — $ (4,535) $ — $ 2,927 $ — $ 8,951 The effect of derivative instruments qualifying and designated as cash flow hedging instruments on the consolidated financial statements was as follows (in thousands): Derivatives under ASC 815-20 Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in Quarter Ended June 30, 2023 Quarter Ended June 30, 2022 Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Interest rate swaps $ 23,419 $ 29,251 $ 12,800 $ 104,116 Foreign currency forward contracts (8,672) (122,915) 12,748 (162,977) Fuel swaps (25,216) 76,451 (66,295) 266,267 $ (10,469) $ (17,213) $ (40,747) $ 207,406 The effect of non-derivative instruments qualifying and designated as net investment hedging instruments on the consolidated financial statements was as follows (in thousands): Amount of (Loss) Gain Recognized in Other Comprehensive Income (Loss) Non-derivative instruments under ASC 815-20 Net Quarter Ended June 30, 2023 Quarter Ended June 30, 2022 Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Foreign Currency Debt $ (2,258) $ 16,814 $ (11,238) $ 19,559 $ (2,258) $ 16,814 $ (11,238) $ 19,559 The effect of derivatives not designated as hedging instruments on the consolidated financial statements was as follows (in thousands): Amount of Gain (Loss) Recognized in Income on Derivatives Derivatives Not Designated as Hedging Location of Quarter Ended June 30, 2023 Quarter Ended June 30, 2022 Six Months Ended June 30, 2023 Six Months Ended June 30, 2022 Foreign currency forward contracts Other (expense) income $ 8,255 $ (80,897) $ 12,372 $ (87,882) Fuel swaps Other (expense) income — 273 — 266 $ 8,255 $ (80,624) $ 12,372 $ (87,616) Credit Related Contingent Features Our current interest rate derivative instruments require us to post collateral if our Standard & Poor’s and Moody’s credit ratings fall below specified levels. Specifically, under most of our agreements, if on the fifth anniversary of executing a derivative instrument, or on any succeeding fifth-year anniversary, our credit ratings for our senior unsecured debt is rated below BBB- by Standard & Poor’s and Baa3 by Moody’s, then the counterparty will periodically have the right to demand that we post collateral in an amount equal to the difference between (i) the net market value of all derivative transactions with such counterparty that have reached their fifth year anniversary, to the extent negative, and (ii) the applicable minimum call amount. The amount of collateral required to be posted will change as, and to the extent, our net liability position increases or decreases by more than the applicable minimum call amount. If our credit rating for our senior unsecured debt is subsequently equal to or above BBB- by Standard & Poor’s or Baa3 by Moody’s, then any collateral posted at such time will be released to us and we will no longer be required to post collateral unless we meet the collateral trigger requirement, generally, at the next fifth-year anniversary. |
