Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements and Derivatives

v3.20.2
Fair Value Measurements and Derivatives
6 Months Ended
Jun. 30, 2020
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Fair Value Measurements and Derivatives

9.   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 regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of 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 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 June 30, 2020, we had fuel swaps which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately 1.1 million metric tons of our projected fuel purchases, maturing through December 31, 2023.

As of June 30, 2020, we had fuel swaps which were not designated as cash flow hedges. Due to a decrease in forecasted fuel consumption resulting from voyage cancellations due to COVID-19, we released into earnings fuel hedges of approximately 63 thousand metric tons of fuel as these forecasted transactions were no longer probable of occurring. The agreements mature through December 31, 2020.

As of June 30, 2020, 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 €2.0 billion, or $2.2 billion based on the euro/U.S. dollar exchange rate as of June 30, 2020.

As of June 30, 2020, we had interest rate swaps and collars, which are used to hedge our exposure to interest rate movements and manage our interest expense. The notional amount of our outstanding debt associated with the interest rate swaps and collars was $0.7 billion as of June 30, 2020.

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

Assets

Liabilities

June 30, 

December 31, 

June 30, 

December 31, 

    

Balance Sheet Location

    

2020

    

2019

    

2020

    

2019

Derivative Contracts Designated as Hedging Instruments

Fuel contracts

Other long-term assets

$

$

277

$

$

Accrued expenses and other liabilities

 

 

2,300

 

67,658

 

18,257

Other long-term liabilities

 

 

683

 

77,694

 

17,763

Foreign currency contracts

Prepaid expenses and other assets

 

180

 

 

 

Other long-term assets

 

4,055

 

 

 

Accrued expenses and other liabilities

 

 

 

30,151

 

33,475

Other long-term liabilities

 

 

169

 

167,517

 

118,500

Interest rate contracts

Accrued expenses and other liabilities

 

 

 

8,820

 

2,178

Other long-term liabilities

 

 

3,009

1,861

Total derivatives designated as hedging instruments

$

4,235

$

3,429

$

354,849

$

192,034

Derivative Contracts Not Designated as Hedging Instruments

Fuel contracts

Accrued expenses and other liabilities

$

$

$

8,194

$

Total derivatives not designated as hedging instruments

$

$

$

8,194

$

Total derivatives

$

4,235

$

3,429

$

363,043

$

192,034

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 following table discloses the gross and net amounts recognized within assets and liabilities (in thousands):

Gross 

Gross

Gross 

Amounts 

Total Net

Amounts 

June 30, 2020

    

Amounts

    

Offset

    

Amounts

    

Not Offset

    

Net Amounts

Assets

$

4,235

$

$

4,235

$

(4,235)

$

Liabilities

363,043

363,043

(363,043)

Gross

Gross

Gross

Amounts

Total Net

Amounts

December 31, 2019

    

Amounts

    

Offset

    

Amounts

    

Not Offset

    

Net Amounts

Assets

$

277

$

$

277

$

$

277

Liabilities

192,034

(3,152)

188,882

(149,863)

39,019

The effects of cash flow hedge accounting on accumulated other comprehensive income (loss) were as follows (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

Three Months

Three Months

Three Months

Three Months

Ended

Ended

Ended

Ended

    

June 30, 2020

    

June 30, 2019

    

    

June 30, 2020

    

June 30, 2019

Fuel contracts

$

27,769

$

(16,577)

 

Fuel

$

(13,878)

$

9,885

Fuel contracts

Other income (expense), net

(11,964)

Foreign currency contracts

 

27,694

 

4,181

 

Depreciation and amortization

 

(1,266)

 

(703)

Interest rate contracts

 

(985)

 

(4,793)

 

Interest expense, net

 

(1,674)

 

92

Total gain (loss) recognized in other comprehensive income

$

54,478

$

(17,189)

 

  

$

(28,782)

$

9,274

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

Six Months

Six Months

Six Months

Six Months

Ended

Ended

Ended

Ended

    

June 30, 2020

    

June 30, 2019

    

June 30, 2020

    

June 30, 2019

Fuel contracts

 

$

(170,708)

$

79,931

Fuel

 

$

(20,095)

$

17,403

Fuel contracts

Other income (expense), net

(26,284)

Foreign currency contracts

 

 

(70,193)

 

(76,097)

Depreciation and amortization

 

 

(2,395)

 

(1,406)

Interest rate contracts

 

 

(10,481)

 

(5,871)

Interest expense, net

 

 

(2,007)

 

277

Total gain (loss) recognized in other comprehensive income

 

$

(251,382)

$

(2,037)

  

 

$

(50,781)

$

16,274

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

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Depreciation

Depreciation

and  

Interest 

Other Income

and

Interest 

    

Fuel

    

Amortization

    

 Expense, net

    

 (Expense), net

    

Fuel

    

Amortization

    

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

$

48,992

$

179,252

$

114,537

$

(14,418)

$

100,531

$

156,271

$

65,969

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

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Fuel contracts

(13,878)

9,885

Foreign currency contracts

(1,266)

(703)

Interest rate contracts

(1,674)

92

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

(11,964)

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

Depreciation 

Depreciation 

and 

Interest 

Other Income

and 

Interest 

    

Fuel

    

Amortization

    

Expense, net

    

 (Expense), net

    

Fuel

    

Amortization

    

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

$

174,016

$

377,449

$

183,444

$

(8,595)

$

198,784

$

326,012

$

139,472

  

  

  

  

  

  

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

 

  

 

  

 

  

 

 

  

 

  

 

  

Fuel contracts

 

(20,095)

 

 

 

 

17,403

 

 

Foreign currency contracts

 

(2,395)

 

 

 

 

(1,406)

 

Interest rate contracts

 

 

 

(2,007)

 

 

 

 

277

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

(26,284)

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

Three Months Ended

Six Months Ended

June 30, 

June 30, 

Location of Gain (Loss)

2020

    

2019

    

2020

    

2019

Derivatives not designated as hedging instruments

 

  

 

  

 

  

 

  

Fuel contracts

Other income (expense), net

$

3,646

$

$

3,646

$

Long-Term Debt

As of June 30, 2020 and December 31, 2019, the fair value of our long-term debt, including the current portion, was $11,142.8 million and $6,957.8 million, respectively, which was $590.2 million higher and $31.3 million higher, 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 of 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.

Goodwill and Tradenames

Goodwill and tradenames are nonfinancial instruments that are measured at fair value on a non-recurring basis. In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350) — Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance was adopted with an effective date of January 1, 2020, and therefore, our interim goodwill impairment tests as of March 31, 2020 were performed using only a Step 1 test.

The Step 1 Test used discounted future cash flows and other market data to determine the fair value of the reporting units at March 31, 2020, which are all considered Level 3 inputs. Our discounted cash flow valuation reflected our principal assumptions of 1) forecasted future operating results and growth rates, which have been prepared under multiple scenarios and are probability weighted, 2) forecasted capital expenditures for fleet growth and ship improvements and 3) a weighted average cost of capital of market participants. Historically, our Step 1 Test consisted of a combined approach using discounted future cash flows and market multiples to determine the fair value of the reporting units. However, for the March 31, 2020 Step 1 Test, the market multiples were used solely as a corroboratory approach given the impact of COVID-19 on the current year’s results, as of the valuation date, as well as prospective results including the lack of any guidance provided, which were not available for our peers. We believe that this approach is the most representative method to assess fair value as it utilizes expectations of long-term growth as well as current market conditions. For the tradenames, we used the relief from royalty method, which uses the same forecasts and discount rates from the discounted cash flow valuation in the goodwill assessment along with a tradename royalty rate assumption. We believe that we made reasonable estimates and judgments. However, a change in our estimated future operating cash flows may result in a decline in fair value in future periods, which may result in a need to recognize additional impairment charges.

Other

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