Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements and Derivatives

v3.22.4
Fair Value Measurements and Derivatives
12 Months Ended
Dec. 31, 2022
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Fair Value Measurements and Derivatives

10.

Fair Value Measurements and Derivatives

Fair value is defined as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

Fair Value Hierarchy

The following hierarchy for inputs used in measuring fair value should maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available:

Level 1 — Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement dates.

Level 2 — Significant other observable inputs that are used by market participants in pricing the asset or liability based on market data obtained from independent sources.

Level 3 — Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available.

Derivatives

We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use qualitative assessments or regression analysis for hedge relationships and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. If it is determined that the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. There are no amounts excluded from the assessment of hedge effectiveness, except when the hedged item is a contractually specified component, and there are no credit-risk-related contingent features in our derivative agreements. We monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. Credit risk, including but not limited to counterparty non-performance under derivatives, is not considered significant, as we primarily conduct business with large, well-established financial institutions with which we have established relationships, and which have credit risks acceptable to us, or the credit risk is spread out among many creditors. We do not anticipate non-performance by any of our significant counterparties.

As of December 31, 2022, we had fuel swaps, which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately 455 thousand metric tons of our projected fuel purchases, maturing through December 31, 2023.

As of December 31, 2022, we had fuel swaps pertaining to approximately 14 thousand metric tons of our projected fuel purchases which were not designated as cash flow hedges maturing through December 31, 2023.

As of December 31, 2022, we had foreign currency forward contracts, matured foreign currency options and matured foreign currency collars which are used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. The notional amount of our foreign currency forward contracts was €1.6 billion, or $1.7 billion based on the euro/U.S. dollar exchange rate as of December 31, 2022.

The derivatives measured at fair value and the respective location in the consolidated balance sheets includes the following (in thousands):

Assets

Liabilities

December 31, 

December 31, 

December 31, 

December 31, 

    

Balance Sheet Location

    

2022

    

2021

    

2022

    

2021

Derivative Contracts Designated as Hedging Instruments

Fuel contracts

Prepaid expenses and other assets

$

53,224

$

29,349

$

7,137

$

Other long-term assets

3,869

19,554

655

Foreign currency contracts

Prepaid expenses and other assets

 

3,617

 

4,898

 

 

Accrued expenses and other liabilities

 

4,386

 

 

177,746

 

98,592

Other long-term liabilities

 

 

 

 

73,496

Interest rate contracts

Accrued expenses and other liabilities

 

 

 

 

469

Total derivatives designated as hedging instruments

$

65,096

$

53,801

$

185,538

$

172,557

Derivative Contracts Not Designated as Hedging Instruments

Fuel contracts

Prepaid expenses and other assets

$

84

$

10,836

$

348

$

Other long-term assets

3,476

191

Total derivatives not designated as hedging instruments

$

84

$

14,312

$

539

$

Total derivatives

$

65,180

$

68,113

$

186,077

$

172,557

The fair values of swap and forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company determines the value of options and collars utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets. The option pricing model used by the Company is an industry standard model for valuing options and is used by the broker/dealer community. The inputs to this option pricing model are the option strike price, underlying price, risk-free rate of interest, time to expiration, and volatility. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values.

Our derivatives and financial instruments were categorized as Level 2 in the fair value hierarchy, and we had no derivatives or financial instruments categorized as Level 1 or Level 3. Our derivative contracts include rights of offset with our counterparties. We have elected to net certain assets and liabilities within counterparties when the rights of offset exist. We are not required to post cash collateral related to our derivative instruments.

The gross and net amounts recognized within assets and liabilities include the following (in thousands):

Gross 

Gross

Gross 

Amounts 

Total Net

Amounts 

December 31, 2022

    

Amounts

    

Offset

    

Amounts

    

Not Offset

    

Net Amounts

Assets

$

60,794

$

(8,331)

$

52,463

$

(3,617)

$

48,846

Liabilities

177,746

(4,386)

173,360

(146,381)

26,979

Gross

Gross

Gross

Amounts

Total Net

Amounts

December 31, 2021

    

Amounts

    

Offset

    

Amounts

    

Not Offset

    

Net Amounts

Assets

$

68,113

$

$

68,113

$

(68,113)

$

Liabilities

172,557

172,557

(172,557)

The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) include the following (in thousands):

Location of Gain

    

    

(Loss) Reclassified

from Accumulated

Amount of Gain (Loss) Reclassified

Amount of Gain (Loss)

Other Comprehensive

from Accumulated Other

Recognized in Other

Income (Loss) into

Comprehensive

Derivatives

    

Comprehensive Income

    

Income

    

Income (Loss) into Income

Year Ended December 31, 

Year Ended December 31, 

2022

2021

2020

2022

2021

2020

Fuel contracts

 

$

106,994

$

74,434

$

(157,669)

Fuel

 

$

104,250

$

(41,080)

$

(45,488)

Fuel contracts

Other income (expense), net

(293)

(12,002)

(49,653)

Foreign currency contracts

 

 

(211,011)

 

(185,067)

 

116,496

Depreciation and amortization

 

 

(7,052)

 

(5,067)

 

(4,929)

Interest rate contracts

 

 

 

254

 

(10,469)

Interest expense, net

 

 

(40)

 

(6,868)

 

(6,600)

Total gain (loss) recognized in other comprehensive income

 

$

(104,017)

$

(110,379)

$

(51,642)

  

 

$

96,865

$

(65,017)

$

(106,670)

The effects of cash flow hedge accounting on the consolidated statements of operations include the following (in thousands):

Year Ended December 31, 2022

Depreciation 

and 

Interest 

Other Income

    

Fuel

    

Amortization

    

Expense, net

 (Expense), net

Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded

$

686,825

$

749,326

$

801,512

$

76,566

  

  

  

Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income

 

  

 

  

 

  

Fuel contracts

 

104,250

 

 

Foreign currency contracts

 

(7,052)

 

Interest rate contracts

 

 

 

(40)

Amount of loss reclassified from accumulated other comprehensive income (loss) into income as a result that a forecasted transaction is no longer probable of occurring

Fuel contracts

(293)

The effects of cash flow hedge accounting on the consolidated statements of operations include the following (in thousands):

Year Ended December 31, 2021

Depreciation 

and 

Interest 

Other Income

Fuel

    

Amortization

    

Expense, net

 (Expense), net

Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded

$

301,852

$

700,845

$

2,072,925

$

123,953

  

  

  

Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income

  

 

  

 

  

Fuel contracts

(41,080)

 

 

Foreign currency contracts

 

(5,067)

 

Interest rate contracts

 

 

(6,868)

Amount of loss reclassified from accumulated other comprehensive income (loss) into income as a result that a forecasted transaction is no longer probable of occurring

Fuel contracts

(12,002)

The effects of cash flow hedge accounting on the consolidated statements of operations include the following (in thousands):

Year Ended December 31, 2020

    

    

Depreciation 

    

and

Interest 

Other Income

    

Fuel

    

 Amortization

    

Expense, net

    

 (Expense), net

Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded

$

264,712

$

717,840

$

482,313

$

(33,599)

Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income

 

  

 

  

 

  

 

Fuel contracts

(45,488)

 

Foreign currency contracts

(4,929)

 

Interest rate contracts

(6,600)

 

Amount of loss reclassified from accumulated other comprehensive income (loss) into income as a result that a forecasted transaction is no longer probable of occurring

Fuel contracts

(49,653)

Amount of gain recognized in income as a result of failing effectiveness tests

Fuel contracts

5,507

The effects of derivatives not designated as hedging instruments on the consolidated statements of operations include the following (in thousands):

Amount of Gain (Loss) Recognized in Income

Year Ended December 31, 

Location of Gain (Loss)

    

2022

    

2021

    

2020

Derivatives not designated as hedging instruments

Fuel contracts

Other income (expense), net

$

33,850

$

65,507

$

20,932

Foreign exchange contracts

Other income (expense), net

(15,055)

(77)

(76)

Long-Term Debt

As of December 31, 2022 and 2021, the fair value of our long-term debt, including the current portion, was $11.9 billion and $12.5 billion, respectively, which was $2.0 billion and $0.1 billion lower, respectively, than the carrying values, excluding deferred financing costs. The difference between the fair value and carrying value of our long-term debt is due to our fixed and variable rate debt obligations carrying interest rates that are above or below market rates at the measurement dates. The fair value of our long-term revolving and term loan facilities was calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities. The fair value of our exchangeable notes considers observable risk-free rates; credit spreads of the same or similar instruments; and share prices, tenors, and historical and implied volatilities which are sourced from observable market data. The inputs are considered to be Level 2 in the fair value hierarchy. Market risk associated with our long-term variable rate debt is the potential increase in interest expense from an increase in interest rates or from an increase in share values.

Non-Recurring Measurements of Non-Financial Assets

Goodwill and other indefinite-lived assets, principally tradenames, 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 may not be fully recoverable.

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. We estimate fair value based on the best information available utilizing estimates, judgments and projections as necessary. As of December 31, 2022, our annual review supports the carrying value of these assets.

Other

The carrying amounts reported in the consolidated balance sheets of all other financial assets and liabilities approximate fair value.