Fair Value Measurements and Derivative Instruments (Tables)

9 Months Ended

Sep. 30, 2019

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 September 30, 2019 Using										Fair Value Measurements at December 31, 2018 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)	$	276,730	$	276,730	$	276,730	$	—	$	—	$	287,852	$	287,852	$	287,852	$	—	$	—
Total Assets	$	276,730	$	276,730	$	276,730	$	—	$	—	$	287,852	$	287,852	$	287,852	$	—	$	—
Liabilities:
Long-term debt (including current portion of debt)(5)	$	9,523,994	$	10,241,498	$	—	$	10,241,498	$	—	$	9,871,267	$	10,244,214	$	—	$	10,244,214	$	—
Total Liabilities	$	9,523,994	$	10,241,498	$	—	$	10,241,498	$	—	$	9,871,267	$	10,244,214	$	—	$	10,244,214	$	—

(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 September 30, 2019 and December 31, 2018.

(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. These amounts do not include our capital lease obligations or commercial paper.

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 September 30, 2019 Using								Fair Value Measurements at December 31, 2018 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)	$	30,883	$	—	$	30,883	$	—	$	65,297	$	—	$	65,297	$	—
Total Assets	$	30,883	$	—	$	30,883	$	—	$	65,297	$	—	$	65,297	$	—
Liabilities:
Derivative financial instruments(5)	$	385,576	$	—	$	385,576	$	—	$	201,812	$	—	$	201,812	$	—
Contingent consideration (6)	54,700		—		—		54,700		44,000		—		—		44,000
Total Liabilities	$	440,276	$	—	$	385,576	$	54,700	$	245,812	$	—	$	201,812	$	44,000

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

(3) Inputs that are unobservable. 

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

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

(6)

The contingent consideration related to the Silversea Cruises acquisition is estimated by applying a Monte-Carlo simulation method using our closing stock price along with significant inputs not observable in the market, including the probability of achieving the milestones and estimated future operating results. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of fair value. Refer to Note 3. Business Combination for further information on the Silversea Cruises acquisition. For the nine months ended September 30, 2019, we recorded a contingent consideration expense of $10.7 million within Other (expense) income in our consolidated statements of comprehensive income (loss).

Offsetting Assets

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

	Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
	As of September 30, 2019									As of December 31, 2018
	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
Derivatives subject to master netting agreements	$	30,883	$	(30,067	)	$	—	$	816	$	65,297	$	(60,303	)	$	—	$	4,994
Total	$	30,883	$	(30,067	)	$	—	$	816	$	65,297	$	(60,303	)	$	—	$	4,994

Offsetting Liabilities

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

	Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements
	As of September 30, 2019										As of December 31, 2018
	Gross Amount of Derivative Assets 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
Derivatives subject to master netting agreements	$	(385,576	)	$	30,067	$	—	$	(355,509	)	$	(201,812	)	$	60,303	$	—	$	(141,509	)
Total	$	(385,576	)	$	30,067	$	—	$	(355,509	)	$	(201,812	)	$	60,303	$	—	$	(141,509	)

Schedule of Price Risk Derivatives

As of September 30, 2019 and December 31, 2018, we had the following outstanding fuel swap agreements as hedges of our fuel exposure:

	Fuel Swap Agreements
	As of September 30, 2019	As of December 31, 2018
	(metric tons)
2019	221,150	856,800
2020	830,468	830,500
2021	488,900	488,900
2022	322,900	322,900
2023	82,400	—

	Fuel Swap Agreements
	As of September 30, 2019		As of December 31, 2018
	(% hedged)
Projected fuel purchases:
2019	60	%	58	%
2020	55	%	54	%
2021	30	%	28	%
2022	19	%	19	%
2023	5	%	—	%

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 Position Where the Hedged Item is Included	Carrying Amount of the Hedged Liabilities				Cumulative amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liabilities
	As of September 30, 2019		As of December 31, 2018		As of September 30, 2019		As of December 31, 2018
Current portion of debt and Long-term debt	$	734,811	$	725,486	$	1,097	$	(24,766	)
	$	734,811	$	725,486	$	1,097	$	(24,766	)

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

	Fair Value of Derivative Instruments
	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	As of September 30, 2019		As of December 31, 2018		Balance Sheet Location	As of September 30, 2019		As of December 31, 2018
		Fair Value		Fair Value			Fair Value		Fair Value
Derivatives designated as hedging instruments under ASC 815-20(1)
Interest rate swaps	Other assets	$	1,415	$	23,518	Other long-term liabilities	$	85,004	$	40,467
Foreign currency forward contracts	Derivative financial instruments	—		4,044		Derivative financial instruments	54,985		39,665
Foreign currency forward contracts	Other assets	13,351		10,844		Other long-term liabilities	144,592		16,854
Fuel swaps	Derivative financial instruments	6,698		10,966		Derivative financial instruments	43,160		37,627
Fuel swaps	Other assets	4,241		9,204		Other long-term liabilities	53,997		65,182
Total derivatives designated as hedging instruments under 815-20		25,705		58,576			381,738		199,795
Derivatives not designated as hedging instruments under ASC 815-20
Foreign currency forward contracts	Derivative financial instruments	$	3,811	$	1,751	Derivative financial instruments	$	3,046	$	808
Foreign currency forward contracts	Other assets	—		1,579		Other long-term liabilities	—		833
Fuel swaps	Derivative financial instruments	1,124		2,804		Derivative financial instruments	370		376
Fuel swaps	Other Assets	243		587		Other long-term liabilities	422		—
Total derivatives not designated as hedging instruments under 815-20		5,178		6,721			3,838		2,017
Total derivatives		$	30,883	$	65,297		$	385,576	$	201,812

(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 September 30, 2019

Quarter Ended September 30, 2018

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

$177,677

$320,295

$(96,413)

$(7,668)

$182,415

$259,923

$(80,679)

$(3,832)

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

$(4,116)

—

n/a

n/a

$2,124

—

Derivatives designated as hedging instruments

n/a

n/a

$2,920

—

n/a

n/a

$(3,512)

—

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 (loss) into income

n/a

n/a

$(373)

n/a

n/a

n/a

$(1,395)

n/a

Commodity contracts

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

$2,435

n/a

n/a

$(472)

$4,548

n/a

n/a

$466

Foreign exchange contracts

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

n/a

$(3,592)

n/a

$(1,251)

n/a

$(3,157)

n/a

$(835)

Nine Months Ended September 30, 2019

Nine Months Ended September 30, 2018

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

$519,772

$924,180

$(292,006)

$(34,537)

$515,065

$753,529

$(209,590)

$5,923

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

$(25,862)

—

n/a

n/a

$18,680

—

Derivatives designated as hedging instruments

n/a

n/a

$19,699

—

n/a

n/a

$(21,392)

—

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

Interest contracts

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

n/a

n/a

$(1,173)

n/a

n/a

n/a

$(10,371)

n/a

Commodity contracts

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

$33,815

n/a

n/a

$(1,916)

$1,459

n/a

n/a

$658

Foreign exchange contracts

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

n/a

$(10,471)

n/a

$(3,866)

n/a

$(9,625)

n/a

$13,808

Fair Value and Line Item Caption of Non-derivative Instruments

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 thousands):

		Carrying Value
Non-derivative instrument designated as hedging instrument under ASC 815-20	Balance Sheet Location	As of September 30, 2019		As of December 31, 2018
Foreign currency debt	Current portion of debt	$	69,399	$	38,168
Foreign currency debt	Long-term debt	242,398		281,984
		$	311,797	$	320,152

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 (in thousands):

	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)
Non-derivative instruments under ASC 815-20  Net Investment Hedging Relationships	Quarter Ended September 30, 2019		Quarter Ended September 30, 2018		Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Foreign Currency Debt	$	12,811	$	1,700	$	15,519	$	9,309
	$	12,811	$	1,700	$	15,519	$	9,309

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 (in thousands):

		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 September 30, 2019			Quarter Ended September 30, 2018			Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
Foreign currency forward contracts	Other income (expense)	$	(26,035	)	$	(12,097	)	$	(25,189	)	$	(43,356	)
Fuel swaps	Fuel	—			478			(14		)	1,804
Fuel swaps	Other income (expense)	1,095			(28		)	974			155
		$	(24,940	)	$	(11,647	)	$	(24,229	)	$	(41,397	)

Fair Value Hedging

Derivative Instruments

Schedule of Interest Rate Derivatives

At September 30, 2019 and December 31, 2018, we maintained interest rate swap agreements on the following fixed-rate debt instruments:

Debt Instrument	Swap Notional as of September 30, 2019 (In thousands)		Maturity	Debt Fixed Rate	Swap Floating Rate: LIBOR plus	All-in Swap Floating Rate as of September 30, 2019
Oasis of the Seas term loan	$	87,500	October 2021	5.41%	3.87%	6.49%
Unsecured senior notes	650,000		November 2022	5.25%	3.63%	5.79%
	$	737,500

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 (in thousands):

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 September 30, 2019		Quarter Ended September 30, 2018			Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018			Quarter Ended September 30, 2019			Quarter Ended September 30, 2018		Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
Interest rate swaps	Interest income (expense), net of interest capitalized	$	2,920	$	(3,512	)	$	19,699	$	(21,392	)	$	(4,116	)	$	2,124	$	(25,862	)	$	18,680
		$	2,920	$	(3,512	)	$	19,699	$	(21,392	)	$	(4,116	)	$	2,124	$	(25,862	)	$	18,680

Cash flow hedge

Derivative Instruments

Schedule of Interest Rate Derivatives

At September 30, 2019 and December 31, 2018, we maintained interest rate swap agreements on the following floating-rate debt instruments:

Debt Instrument	Swap Notional as of September 30, 2019 (In thousands)		Maturity	Debt Floating Rate		All-in Swap Fixed Rate
Celebrity Reflection term loan	$	299,979	October 2024	LIBOR plus	0.40%	2.85%
Quantum of the Seas term loan	459,375		October 2026	LIBOR plus	1.30%	3.74%
Anthem of the Seas term loan	483,333		April 2027	LIBOR plus	1.30%	3.86%
Ovation of the Seas term loan	622,500		April 2028	LIBOR plus	1.00%	3.16%
Harmony of the Seas term loan (1)	566,959		May 2028	EURIBOR plus	1.15%	2.26%
Odyssey of the Seas term loan (2)	460,000		October 2032	LIBOR plus	0.95%	3.20%
	$	2,892,146

(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 September 30, 2019.

(2)

Interest rate swap agreements hedging the term loan for Odyssey of the Seas includes a LIBOR zero-floor matching the hedged debt LIBOR zero-floor. The anticipated unsecured term loan for the financing of Odyssey of the Seas is expected to be drawn in October 2020.

Derivative Instruments, Gain (Loss)

The table below represents amounts excluded from the assessment of effectiveness for our net investment hedging instruments for which the difference between changes in fair value and periodic amortization is recorded in accumulated other comprehensive income (loss) (in thousands):

Gain (Loss) Recognized in Income (Net Investment Excluded Components)	Nine Months Ended September 30, 2019
Net inception fair value at January 1, 2019	$	(8,359	)
Amount of gain recognized in income on derivatives for the period ended September 30, 2019	2,790
Amount of loss remaining to be amortized in accumulated other comprehensive loss, as of September 30, 2019	(4,056		)
Fair value at September 30, 2019	$	(9,625	)

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

Derivatives under ASC 815-20  Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative												Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
	Quarter Ended September 30, 2019			Quarter Ended September 30, 2018			Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018				Quarter Ended September 30, 2019			Quarter Ended September 30, 2018			Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
Interest rate swaps	$	(23,488	)	$	10,166		$	(91,949	)	$	56,223		Interest expense, net of interest capitalized	$	(373	)	$	(1,395	)	$	(1,173	)	$	(10,371	)
Foreign currency forward contracts	(131,523		)	(35,397		)	(202,273		)	(133,360		)	Depreciation and amortization expenses	(3,592		)	(3,157		)	(10,471		)	(9,625		)
Foreign currency forward contracts	—			—			—			—			Other income (expense)	(1,251		)	(835		)	(3,866		)	13,808
Fuel swaps	—			—			—			—			Other income (expense)	(472		)	466			(1,916		)	658
Fuel swaps	(113,467		)	61,805			22,496			183,642			Fuel	2,435			4,548			33,815			1,459
	$	(268,478	)	$	36,574		$	(271,726	)	$	106,505			$	(3,253	)	$	(373	)	$	16,389		$	(4,071	)