| 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 millions): Fair Value Measurements at September 30, 2024 Fair Value Measurements at December 31, 2023 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) $ 418 $ 418 $ 418 $ — $ — $ 497 $ 497 $ 497 $ — $ — Total Assets $ 418 $ 418 $ 418 $ — $ — $ 497 $ 497 $ 497 $ — $ — Liabilities: Long-term debt (including current portion of debt) (5) $ 20,490 $ 21,968 $ — $ 21,968 $ — $ 21,083 $ 23,700 $ — $ 23,700 $ — Total Liabilities $ 20,490 $ 21,968 $ — $ 21,968 $ — $ 21,083 $ 23,700 $ — $ 23,700 $ — (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. (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 September 30, 2024 and December 31, 2023. (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 as of September 30, 2024 and December 31, 2023. 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 millions): Fair Value Measurements at September 30, 2024 Fair Value Measurements at December 31, 2023 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) $ 112 $ — $ 112 $ — $ 144 $ — $ 144 $ — Total Assets $ 112 $ — $ 112 $ — $ 144 $ — $ 144 $ — Liabilities: Derivative financial instruments (4) $ 88 $ — $ 88 $ — $ 66 $ — $ 66 $ — Total Liabilities $ 88 $ — $ 88 $ — $ 66 $ — $ 66 $ — (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 September 30, 2024 and December 31, 2023. (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 September 30, 2024 and December 31, 2023. (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 September 30, 2024 or December 31, 2023, 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 material nonfinancial instruments recorded at fair value as of September 30, 2024 or December 31, 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 and liabilities under master netting agreements with derivative counterparties (in millions): Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements As of September 30, 2024 As of December 31, 2023 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 $ 112 $ (34) $ — $ 78 $ 144 $ (28) $ — $ 116 Total $ 112 $ (34) $ — $ 78 $ 144 $ (28) $ — $ 116 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 $ (88) $ 34 $ — $ (54) $ (66) $ 28 $ — $ (38) Total $ (88) $ 34 $ — $ (54) $ (66) $ 28 $ — $ (38) 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 September 30, 2024, we had counterparty credit risk exposure under our derivative instruments of $95 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 September 30, 2024 and December 31, 2023, approximately 91.4% and 83.2%, 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. 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 September 30, 2024 and December 31, 2023, we maintained interest rate swap agreements on the following floating-rate debt instruments: Debt Instrument Swap Notional as of September 30, 2024 (in millions) Maturity Debt Floating Rate All-in Fixed Rate as of September 30, 2024 Celebrity Reflection term loan $ 27 October 2024 Term SOFR plus 0.40% 2.88% Quantum of the Seas term loan 153 October 2026 Term SOFR plus 1.30% 3.78% Anthem of the Seas term loan 181 April 2027 Term SOFR plus 1.30% 3.90% Ovation of the Seas term loan 277 April 2028 Term SOFR plus 1.00% 3.20% Harmony of the Seas term loan (1) 258 May 2028 EURIBOR plus 1.15% 2.26% Odyssey of the Seas term loan (2) 326 October 2032 Term SOFR plus 0.96% 3.28% Odyssey of the Seas term loan (2) 163 October 2032 Term SOFR plus 0.96% 2.91% $ 1,385 (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 September 30, 2024. (2) Interest rate swap agreements hedging the term loan of Odyssey of the Seas include Term SOFR zero-floors, Term SOFR with no floors, and Overnight SOFR. 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 September 30, 2024 and December 31, 2023 was $1.4 billion and $1.6 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 September 30, 2024, the aggregate cost of our ships on order was $5.9 billion, of which we had deposited $619 million 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 September 30, 2024 and December 31, 2023, approximately 39.6% and 43.5%, 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 third quarter of 2024 and 2023 the average notional amount of foreign currency forward contracts was approximately $989 million and $1.4 billion, respectively. These instruments are not designated as hedging instruments. For the quarters and nine months ended September 30, 2024 and 2023, changes in the fair value of the foreign currency forward contracts, and the remeasurement of monetary assets and liabilities denominated in foreign currencies resulted in immaterial gain (losses). These amounts were recognized in earnings within Other expense 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 September 30, 2024 and December 31, 2023 was $2.1 billion and $2.9 billion, respectively. Non-Derivative Instruments We consider our investments 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 €791 million, or approximately $883 million, as of September 30, 2024. As of December 31, 2023, we had designated debt as a hedge of our net investments primarily in TUI Cruises of €648 million, or approximately $716 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 for each reporting period through the maturity dates of the fuel swaps. For the quarters ended September 30, 2024 and September 30, 2023, we did not discontinue cash flow hedge accounting on any of our fuel swap agreements. At September 30, 2024, we have hedged the variability in future cash flows for certain forecasted fuel transactions occurring through 2027. As of September 30, 2024 and December 31, 2023, we had the following outstanding fuel swap agreements: Fuel Swap Agreements As of September 30, 2024 As of December 31, 2023 Designated as hedges: (metric tons) 2024 263,600 1,054,501 2025 1,031,449 685,400 2026 786,750 44,200 2027 182,049 — Fuel Swap Agreements As of September 30, 2024 As of December 31, 2023 Designated hedges as a % of projected fuel purchases: (% hedged) 2024 61 % 61 % 2025 60 % 39 % 2026 44 % 3 % 2027 10 % — % As of September 30, 2024, there was $38 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 $21 million of estimated unrealized net loss at December 31, 2023. 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 millions): Fair Value of Derivative Instruments Asset Derivatives Liability Derivatives Balance Sheet Location As of September 30, 2024 As of December 31, 2023 Balance Sheet Location As of September 30, 2024 As of December 31, 2023 Fair Value Fair Value Fair Value Fair Value Derivatives designated as hedging instruments under ASC 815-20 (1) Interest rate-swaps Derivative financial instruments $ — 1 Derivative financial instruments $ — $ — Interest rate swaps Other assets 46 75 Other long-term liabilities — — Foreign currency forward contracts Derivative financial instruments 38 20 Derivative financial instruments 4 9 Foreign currency forward contracts Other assets 25 44 Other long-term liabilities — 4 Fuel swaps Derivative financial instruments 2 4 Derivative financial instruments 40 26 Fuel swaps Other assets 1 — Other long-term liabilities 44 27 Total derivatives designated as hedging instruments under 815-20 $ 112 $ 144 $ 88 $ 66 (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 millions): Carrying Value Non-derivative instrument designated as Balance Sheet Location As of September 30, 2024 As of December 31, 2023 Foreign currency debt Current portion of long-term debt $ 65 $ 65 Foreign currency debt Long-term debt 818 523 $ 883 $ 588 The effect of derivative instruments qualifying and designated as cash flow hedging instruments on the consolidated financial statements was as follows (in millions): Derivatives under ASC 815-20 Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in Quarter Ended September 30, 2024 Quarter Ended September 30, 2023 Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Interest rate swaps $ (20) $ 23 $ 8 $ 35 Foreign currency forward contracts 67 (134) (36) (120) Fuel swaps (133) 158 (18) 91 $ (86) $ 47 $ (46) $ 6 The effect of non-derivative instruments qualifying and designated as net investment hedging instruments on the consolidated financial statements was as follows (in millions): Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) Non-derivative instruments under ASC 815-20 Net Quarter Ended September 30, 2024 Quarter Ended September 30, 2023 Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Foreign Currency Debt $ (35) $ 18 $ (13) $ 7 $ (35) $ 18 $ (13) $ 7 The effect of derivatives not designated as hedging instruments on the consolidated financial statements was as follows (in millions): Amount of (Loss) Gain Recognized in Income on Derivatives Derivatives Not Designated as Hedging Location of Quarter Ended September 30, 2024 Quarter Ended September 30, 2023 Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 Foreign currency forward contracts Other income (expense) $ 33 $ (43) $ (8) $ (30) Fuel swaps Other income (expense) — 1 — 1 $ 33 $ (42) $ (8) $ (29) 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. As of September 30, 2024, our senior unsecured debt credit rating was BB+ by Standard & Poor's and Ba2 by Moody's. As of September 30, 2024, six of our ship debt interest rate derivative hedges had reached their fifth-year anniversary; however, the net market value for these derivative hedges were in a net asset position, and accordingly, we were not required to post any collateral as of such date. |
