Fair Value Measurements and Derivatives

6 Months Ended

Jun. 30, 2021

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Fair Value Measurements and Derivatives

7.   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, 2021, we had fuel swaps which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately 366 thousand metric tons of our projected fuel purchases, maturing through December 31, 2023.

On January 1, 2021, our fuel swaps designated as hedges for marine gas oil maturing through December 31, 2021 were dedesignated as cash flow hedges. As of June 30, 2021, we had, in aggregate with previously dedesignated fuel swaps, approximately 206 thousand metric tons which were not designated as cash flow hedges maturing through December 31, 2022.

As of June 30, 2021, 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 €1.8 billion, or $2.1 billion based on the euro/U.S. dollar exchange rate as of June 30, 2021.

As of June 30, 2021, 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 $0.6 billion as of June 30, 2021.

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	2021		2020		2021		2020
Derivative Contracts Designated as Hedging Instruments
Fuel contracts
	Prepaid expenses and other assets	$	6,921	$	—	$	—	$	—
	Other long-term assets		17,054		—		—		—
	Accrued expenses and other liabilities		—		—		—		35,973
	Other long-term liabilities		—		—		—		28,947
Foreign currency contracts
	Prepaid expenses and other assets		1,702		5,779		—		—
	Other long-term assets		25,389		43,250		—		—
	Accrued expenses and other liabilities		—		—		74,084		14,778
	Other long-term liabilities		2,466		6,821		30,563		44,938
Interest rate contracts
	Accrued expenses and other liabilities		—		—		2,919		6,776
	Other long-term liabilities		—		—		—		452
Total derivatives designated as hedging instruments		$	53,532	$	55,850	$	107,566	$	131,864
Derivative Contracts Not Designated as Hedging Instruments
Fuel contracts
	Prepaid expenses and other assets	$	6,206	$	—	$	1,284	$	—
	Other long-term assets		2,452		—		—		—
	Accrued expenses and other liabilities		—		546		—		6,732
	Other long-term liabilities		—		—		—		3,534
Total derivatives not designated as hedging instruments		$	8,658	$	546	$	1,284	$	10,266
Total derivatives		$	62,190	$	56,396	$	108,850	$	142,130

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, 2021	Amounts		Offset		Amounts		Not Offset		Net Amounts
Assets	$	59,724	$	(1,284)	$	58,440	$	(27,091)	$	31,349
Liabilities		107,566		(2,466)		105,100		(94,781)		10,319

			Gross				Gross
	Gross		Amounts		Total Net		Amounts
December 31, 2020	Amounts		Offset		Amounts		Not Offset		Net Amounts
Assets	$	49,029	$	—	$	49,029	$	(49,029)	$	—
Liabilities		142,130		(7,367)		134,763		(57,351)		77,412

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 Income
Derivatives	Comprehensive Loss				Income (Expense)	(Loss) into Income (Expense)
	Three Months		Three Months			Three Months		Three Months
	Ended		Ended			Ended		Ended
	June 30, 2021		June 30, 2020			June 30, 2021		June 30, 2020
Fuel contracts	$	25,456	$	27,769	Fuel	$	(8,652)	$	(13,878)
Fuel contracts		—		—	Other income (expense), net		(1,538)		(11,964)
Foreign currency contracts		19,281		27,694	Depreciation and amortization		(1,266)		(1,266)
Interest rate contracts		(63)		(985)	Interest expense, net		(2,086)		(1,674)
Total gain (loss) recognized in other comprehensive loss	$	44,674	$	54,478		$	(13,542)	$	(28,782)

					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 Income
Derivatives	Comprehensive Loss				Income (Expense)	(Loss) into Income (Expense)
	Six Months		Six Months			Six Months		Six Months
	Ended		Ended			Ended		Ended
	June 30, 2021		June 30, 2020			June 30, 2021		June 30, 2020
Fuel contracts	$	49,506	$	(170,708)	Fuel	$	(16,823)	$	(20,095)
Fuel contracts		—		—	Other income (expense), net		(11,728)		(26,284)
Foreign currency contracts		(78,160)		(70,193)	Depreciation and amortization		(2,533)		(2,395)
Interest rate contracts		291		(10,481)	Interest expense, net		(4,296)		(2,007)
Total gain (loss) recognized in other comprehensive loss	$	(28,363)	$	(251,382)		$	(35,380)	$	(50,781)

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

	Three Months Ended June 30, 2021								Three Months Ended June 30, 2020
			Depreciation								Depreciation
			and		Interest		Other Income				and		Interest		Other Income
	Fuel		Amortization		Expense, net		(Expense), net		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	$	54,090	$	174,262	$	137,259	$	25,501	$	48,992	$	179,252	$	114,537	$	(14,418)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense)
Fuel contracts		(8,652)		—		—		—		(13,878)		—		—		—
Foreign currency contracts		—		(1,266)		—		—		—		(1,266)		—		—
Interest rate contracts		—		—		(2,086)		—		—		—		(1,674)		—
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense) as a result that a forecasted transaction is no longer probable of occurring
Fuel contracts		—		—		—		(1,538)		—		—		—		(11,964)

	Six Months Ended June 30, 2021								Six Months Ended June 30, 2020
			Depreciation								Depreciation
			and		Interest		Other Income				and		Interest		Other Income
	Fuel		Amortization		Expense, net		(Expense), net		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	$	96,693	$	344,578	$	961,700	$	52,744	$	174,016	$	377,449	$	183,444	$	(8,595)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense)
Fuel contracts		(16,823)		—		—		—		(20,095)		—		—		—
Foreign currency contracts		—		(2,533)		—		—		—		(2,395)		—		—
Interest rate contracts		—		—		(4,296)		—		—		—		(2,007)		—
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense) as a result that a forecasted transaction is no longer probable of occurring
Fuel contracts		—		—		—		(11,728)		—		—		—		(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)	2021		2020		2021		2020
Derivatives not designated as hedging instruments
Fuel contracts	Other income (expense), net	$	17,935	$	3,646	$	50,107	$	3,646

Long-Term Debt

As of June 30, 2021 and December 31, 2020, the fair value of our long-term debt, including the current portion, was $14.2 billion, which was $1.8 billion higher and $2.2 billion 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 as well as the beneficial conversion feature recognized on the Private Exchangeable Notes as of December 31, 2020. 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.

Other

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