Fair Value Measurements and Derivative Instruments (Tables)

3 Months Ended

Mar. 31, 2018

Derivative Instruments

Fair Value Measurements, Nonrecurring

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 March 31, 2018 Using										Fair Value Measurements at December 31, 2017 Using
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)	$	111,245	$	111,245	$	111,245	$	—	$	—	$	120,112	$	120,112	$	120,112	$	—	$	—
Total Assets	$	111,245	$	111,245	$	111,245	$	—	$	—	$	120,112	$	120,112	$	120,112	$	—	$	—
Liabilities:
Long-term debt (including current portion of long-term debt)(5)	$	8,762,052	$	9,333,745	$	—	$	9,333,745	$	—	$	7,506,312	$	8,038,092	$	—	$	8,038,092	$	—
Total Liabilities	$	8,762,052	$	9,333,745	$	—	$	9,333,745	$	—	$	7,506,312	$	8,038,092	$	—	$	8,038,092	$	—

(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.

(3) Inputs that are unobservable. The Company did not use any Level 3 inputs as of March 31, 2018 and December 31, 2017.

(4) Consists of cash and marketable securities with original maturities of less than 90 days.

(5) Consists of unsecured revolving credit facilities, senior notes, senior debentures and term loans. This does not include our capital lease obligations.

The following table presents information about the fair value of our equity method investment and note and other receivables due related to SkySea Holding, further discussed in Note 5. Other Assets, recorded at fair value on a nonrecurring basis (in thousands):

	Fair Value Measurements at March 31, 2018 Using
Description	Total Carrying Amount		Total Fair Value		Level 3		Total Impairment
Equity-method investment- SkySea Holding (1)	$	—	$	—	$	—	$	509
Debt facility and other receivables due from Skysea Holding (2)	$	69,562	$	69,562	$	69,562	$	22,834
Total	$	69,562	$	69,562	$	69,562	$	23,343

(1) Due to the expectation that Skysea Holding will cease business operations by the end of 2018, we do not deem our investment balance to be recoverable and therefore, we estimated the fair value of our investment to be zero as of March 31, 2018.

(2) We estimated the fair value of our debt facility and other receivables due from Skysea Holding based on the fair value of the collateral of the debt facility, Skysea Holding's ship, Golden Era. During the quarter ended March 31, 2018, Skysea Holding agreed to sell Golden Era to an affiliate of TUI AG, our joint venture partner in TUI Cruises. The fair value of the ship represents the net realizable value based on the agreed upon sale price of the ship. The sale of the ship is expected to be completed in December 2018. For further information on the Skysea Holding impairment, refer to Note 5. Other Assets.

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis

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 March 31, 2018 Using								Fair Value Measurements at December 31, 2017 Using
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)	$	391,116	$	—	$	391,116	$	—	$	320,385	$	—	$	320,385	$	—
Investments(5)	$	5	5		—		—		$	3,340	3,340		—		—
Total Assets	$	391,121	$	5	$	391,116	$	—	$	323,725	$	3,340	$	320,385	$	—
Liabilities:
Derivative financial instruments(6)	$	118,117	$	—	$	118,117	$	—	$	115,961	$	—	$	115,961	$	—
Total Liabilities	$	118,117	$	—	$	118,117	$	—	$	115,961	$	—	$	115,961	$	—

(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 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. All derivative instrument fair values take into account the creditworthiness of the counterparty and the Company.

(3) Inputs that are unobservable. The Company did not use any Level 3 inputs as of March 31, 2018 and December 31, 2017.

(4) Consists of foreign currency forward contracts, interest rate swaps and fuel swaps. Please refer to the “Fair Value of Derivative Instruments” table for breakdown by instrument type.

(5) Consists of exchange-traded equity securities and mutual funds reported within Other assets in our consolidated balance sheets.

(6) Consists of foreign currency forward contracts, interest rate swaps and fuel swaps. Please refer to the “Fair Value of Derivative Instruments” table for breakdown by instrument type.

Offsetting Assets

The following table presents information about the Company’s offsetting of financial assets under master netting agreements with derivative counterparties:

	Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
	As of March 31, 2018									As of December 31, 2017
	Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet		Gross Amount of Eligible Offsetting Recognized Derivative Liabilities			Cash Collateral Received		Net Amount of Derivative Assets		Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet		Gross Amount of Eligible Offsetting Recognized Derivative Assets			Cash Collateral Received		Net Amount of Derivative Assets
(In thousands)
Derivatives subject to master netting agreements	$	391,116	$	(110,989	)	$	—	$	280,127	$	320,385	$	(104,751	)	$	—	$	215,634
Total	$	391,116	$	(110,989	)	$	—	$	280,127	$	320,385	$	(104,751	)	$	—	$	215,634

Offsetting Liabilities

The following table presents information about the Company’s offsetting of financial liabilities under master netting agreements with derivative counterparties:

	Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
	As of March 31, 2018										As of December 31, 2017
	Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet			Gross Amount of Eligible Offsetting Recognized Derivative Assets		Cash Collateral Pledged		Net Amount of Derivative Liabilities			Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet			Gross Amount of Eligible Offsetting Recognized Derivative Liabilities		Cash Collateral Pledged		Net Amount of Derivative Liabilities
(In thousands)
Derivatives subject to master netting agreements	$	(118,117	)	$	110,989	$	—	$	(7,128	)	$	(115,961	)	$	104,751	$	—	$	(11,210	)
Total	$	(118,117	)	$	110,989	$	—	$	(7,128	)	$	(115,961	)	$	104,751	$	—	$	(11,210	)

Schedule of Price Risk Derivatives

As of March 31, 2018 and December 31, 2017, we had the following outstanding fuel swap agreements:

	Fuel Swap Agreements
	As of March 31, 2018	As of December 31, 2017
	(metric tons)
2018	512,800	673,700
2019	668,500	668,500
2020	531,200	531,200
2021	224,900	224,900
2022	—	—

	Fuel Swap Agreements
	As of March 31, 2018		As of December 31, 2017
	(% hedged)
Projected fuel purchases:
2018	50	%	50	%
2019	47	%	46	%
2020	36	%	36	%
2021	14	%	14	%
2022	—		—

Schedule of Derivative Instruments in Statement of Financial Position, Fair Value

The fair value and line item caption of derivative instruments recorded within our consolidated balance sheets for the cumulative basis adjustment for fair value hedges were as follows (in thousands):

Line Item in the Statement of Financial PositionWhere the Hedged Item is Included	Carrying Amount of the Hedged Assets/(Liabilities)				Cumulative amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
	As of March 31, 2018		As of December 31, 2017		As of March 31, 2018			As of December 31, 2017
Current portion of long-term debt and Long-term debt	$	751,014	$	749,155	$	(33,274	)	$	(34,813	)
	$	751,014	$	749,155	$	(33,274	)	$	(34,813	)

The fair value and line item caption of derivative instruments recorded within our consolidated balance sheets were as follows:

	Fair Value of Derivative Instruments
	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	As of March 31, 2018		As of December 31, 2017		Balance Sheet Location	As of March 31, 2018		As of December 31, 2017
		Fair Value		Fair Value			Fair Value		Fair Value
(In thousands)
Derivatives designated as hedging instruments under ASC 815-20(1)
Interest rate swaps	Other assets	$	38,096	$	7,330	Other long-term liabilities	$	47,251	$	46,509
Foreign currency forward contracts	Derivative financial instruments	42,688		68,352		Derivative financial instruments	1,390		—
Foreign currency forward contracts	Other assets	235,802		158,879		Other long-term liabilities	12,426		6,625
Fuel swaps	Derivative financial instruments	22,061		13,137		Derivative financial instruments	31,235		38,488
Fuel swaps	Other assets	38,562		51,265		Other long-term liabilities	15,180		13,411
Total derivatives designated as hedging instruments under 815-20		377,209		298,963			107,482		105,033
Derivatives not designated as hedging instruments under ASC 815-20
Foreign currency forward contracts	Derivative financial instruments	$	4,361	$	9,945	Derivative financial instruments	$	2,369	$	2,933
Foreign currency forward contracts	Other assets	4,413		2,793		Other long-term liabilities	2,762		1,139
Fuel swaps	Derivative financial instruments	4,830		7,886		Derivative financial instruments	5,320		6,043
Fuel swaps	Other Assets	303		798		Other long-term liabilities	184		813
Total derivatives not designated as hedging instruments under 815-20		13,907		21,422			10,635		10,928
Total derivatives		$	391,116	$	320,385		$	118,117	$	115,961

⁽¹⁾Accounting Standard Codification 815-20 “Derivatives and Hedging.”

Derivative Instruments, Gain (Loss)

The location and amount of gain or (loss) recognized in income on fair value and cash flow hedging relationships were as follows (in thousands):

Quarter Ended March 31, 2018

Quarter Ended March 31, 2017

Fuel Expense

Depreciation and Amortization Expenses

Interest Income (Expense)

Other Income (Expense)

Fuel Expense

Depreciation and Amortization Expenses

Interest Income (Expense)

Other Income (Expense)

Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded

160,341

240,230

(60,145)

(757

)

177,414

235,749

(74,065)

(2,611

)

The effects of fair value and cash flow hedging:

Gain or (loss) on fair value hedging relationships in Subtopic 815-20

Interest contracts

Hedged items

n/a

n/a

13,182

n/a

n/a

n/a

n/a

2,457

Derivatives designated as hedging instruments

n/a

n/a

(12,570)

n/a

n/a

n/a

1,173

(1,531

)

Gain or (loss) on cash flow hedging relationships in Subtopic 815-20

Interest contracts

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

n/a

n/a

(6,838)

n/a

n/a

n/a

(8,857)

n/a

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

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Commodity contracts

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

(5,131)

n/a

n/a

325

(39,928)

n/a

n/a

2,277

Amount excluded from effectiveness testing recognized in earnings based on changes in fair value

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Foreign exchange contracts

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

n/a

(3,312)

n/a

42

n/a

(3,312)

n/a

(3,570

)

Amount excluded from effectiveness testing recognized in earnings based on changes in fair value

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Fair Value and Line Item Caption of Non-derivative Instruments

		Carrying Value
Non-derivative instrument designated as hedging instrument under ASC 815-20	Balance Sheet Location	As of March 31, 2018		As of December 31, 2017
(In thousands)
Foreign currency debt	Current portion of long-term debt	$	88,353	$	70,097
Foreign currency debt	Long-term debt	281,907		225,226
		$	370,260	$	295,323

Non Derivative Instruments Qualifying and Designated as Hedging Instruments in Net Investment Hedges

The effect of non-derivative instruments qualifying and designated as net investment hedging instruments on the consolidated financial statements was as follows:

	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)
Non-derivative instruments under ASC 815-20 Net Investment Hedging Relationships	Quarter Ended March 31, 2018			Quarter Ended March 31, 2017
(In thousands)
Foreign Currency Debt	$	(8,244	)	$	4,369
	$	(8,244	)	$	4,369

Not Designated as Hedging Instrument

Derivative Instruments

Derivative Instruments, Gain (Loss)

The effect of derivatives not designated as hedging instruments on the consolidated financial statements was as follows:

		Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives Not Designated as Hedging Instruments under ASC 815-20	Location of Gain (Loss) Recognized in Income on Derivatives	Quarter Ended March 31, 2018			Quarter Ended March 31, 2017
(In thousands)
Foreign currency forward contracts	Other expense	$	5,635		$	13,812
Fuel swaps	Other expense	(30		)	(60		)
Fuel swaps	Fuel	2,205			—
		$	7,810		$	13,752

Fair Value Hedging

Derivative Instruments

Schedule of Interest Rate Derivatives

At March 31, 2018 and December 31, 2017, we maintained interest rate swap agreements on the following fixed-rate debt instruments:

Debt Instrument	Swap Notional as of March 31, 2018 (In thousands)		Maturity	Debt Fixed Rate	Swap Floating Rate: LIBOR plus	All-in Swap Floating Rate as of March 31, 2018
Oasis of the Seas term loan	$	140,000	October 2021	5.41%	3.87%	5.44%
Unsecured senior notes	650,000		November 2022	5.25%	3.63%	5.47%
	$	790,000

Derivative Instruments, Gain (Loss)

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:

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) Recognized in Income on Derivative						Amount of Gain (Loss) Recognized in Income on Hedged Item
		Quarter Ended March 31, 2018			Quarter Ended March 31, 2017			Quarter Ended March 31, 2018		Quarter Ended March 31, 2017
(In thousands)
Interest rate swaps	Interest expense, net of interest capitalized	$	(12,570	)	$	1,173		$	13,182	$	—
Interest rate swaps	Other expense	—			(1,531		)	—		2,457
		$	(12,570	)	$	(358	)	$	13,182	$	2,457

Cash flow hedge

Derivative Instruments

Schedule of Interest Rate Derivatives

At March 31, 2018 and December 31, 2017, we maintained interest rate swap agreements on the following floating-rate debt instruments:

Debt Instrument	Swap Notional as of March 31, 2018 (In thousands)		Maturity	Debt Floating Rate		All-in Swap Fixed Rate
Celebrity Reflection term loan	$	381,792	October 2024	LIBOR plus	0.40%	2.85%
Quantum of the Seas term loan	551,250		October 2026	LIBOR plus	1.30%	3.74%
Anthem of the Seas term loan	573,958		April 2027	LIBOR plus	1.30%	3.86%
Ovation of the Seas term loan	726,250		April 2028	LIBOR plus	1.00%	3.16%
Harmony of the Seas term loan (1)	746,332		May 2028	EURIBOR plus	1.15%	2.26%
	$	2,979,582

(1)Interest rate swap agreements hedging the Euro-denominated term loan for Harmony of the Seas include EURIBOR zero-floor matching the hedged debt EURIBOR zero-floor. Amount presented is based on the exchange rate as of March 31, 2018.

Derivative Instruments, Gain (Loss)

Gain (Loss) Recognized in Income (Net Investment Excluded Components) (1)
(In thousands)
Net inception fair value at January 1, 2018	$	(11,335	)
Fair value at March 31, 2018	(8,861		)
Change in fair value at March 31, 2018	(2,474		)
Amount of gain recognized in income for the quarter ended March 31, 2018	744
Amount of gain recognized in accumulated other comprehensive loss	$	(1,730	)

⁽¹⁾ Represents amounts excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in other comprehensive income.

The effect of derivative instruments qualifying and designated as cash flow hedging instruments on the consolidated financial statements was as follows:

Derivatives under ASC 815-20  Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative  (Effective Portion)						Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income  (Effective Portion)
	Quarter Ended March 31, 2018			Quarter Ended March 31, 2017				Quarter Ended March 31, 2018			Quarter Ended March 31, 2017
(In thousands)
Interest rate swaps	$	37,191		$	(2,489	)	Interest expense, net of interest capitalized	$	(6,838	)	$	(8,857	)
Foreign currency forward contracts	95,366			2,129			Depreciation and amortization expenses	(3,312		)	(2,710		)
Foreign currency forward contracts	—			—			Other expense	42			(3,570		)
Foreign currency collar options	—			—			Depreciation and amortization expenses	—			(602		)
Fuel swaps	—			—			Other expense	325			2,277
Fuel swaps	(4,941		)	(30,569		)	Fuel	(5,131		)	(39,928		)
	$	127,616		$	(30,929	)		$	(14,914	)	$	(53,390	)