Fair Value Measurements and Derivative Instruments (Tables)

6 Months Ended

Jun. 30, 2020

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 June 30, 2020 Using										Fair Value Measurements at December 31, 2019 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)	$	4,146,691	$	4,146,691	$	4,146,691	$	—	$	—	$	243,738	$	243,738	$	243,738	$	—	$	—
Total Assets	$	4,146,691	$	4,146,691	$	4,146,691	$	—	$	—	$	243,738	$	243,738	$	243,738	$	—	$	—
Liabilities:
Long-term debt (including current portion of debt)(5)	$	18,241,405	$	18,915,653	$	—	$	18,915,653	$	—	$	9,370,438	$	10,059,055	$	—	$	10,059,055	$	—
Total Liabilities	$	18,241,405	$	18,915,653	$	—	$	18,915,653	$	—	$	9,370,438	$	10,059,055	$	—	$	10,059,055	$	—

(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 June 30, 2020 and December 31, 2019.

(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.

The following table presents information about the Company’s nonfinancial instruments recorded at fair value on a nonrecurring basis (in thousands):

	Fair Value Measurements at June 30, 2020 Using
Description	Total Carrying Amount		Total Fair Value		Level 3		Total Impairment for the Quarter ended June 30, 2020		Total Impairment for the Six Months ended June 30, 2020
Silversea Cruises Goodwill (1)	$	508,578	$	508,579	$	508,579	$	—	576,208
Indefinite-life intangible asset (2)	$	299,173	$	299,173	$	299,173	$	—	30,800
Long-lived assets - vessels(3)	$	28,607	$	28,607	$	28,607	$	51,613	468,670
Right-of-use assets(4)	$	16,427	$	16,427	$	16,427	$	13,276	59,221
Equity-method investments(5)	—		—		—		$	—	39,735
Total	$	852,785	$	852,786	$	852,786	$	64,889	1,174,634

_________________________________________________________________________________________________________

⁽¹⁾ We estimated the fair value of the Silversea Cruises reporting unit using a probability-weighted discounted cash flow model in combination with a market based valuation approach. The principal assumptions used in the discounted cash flow model are projected operating results, weighted-average cost of capital and terminal value. Significantly impacting these assumptions were changes in market conditions associated with COVID-19 and its impact to the business and related operating plans. The discounted cash flow model used our 2020 projected operating

results as a base. To that base we added future years’ cash flows through 2030 assuming multiple revenue and expense scenarios that reflect the impact of different global economic environments for this period on Silversea Cruises' reporting unit. We assigned a probability to each revenue and expense scenario. We discounted the projected cash flows using rates specific to Silversea Cruises' reporting unit based on its weighted-average cost of capital, which was determined to be 12.75%. A significant input in performing the fair value assessment for the Silversea Cruises goodwill was forecasted operating results, which takes into consideration expected ship deliveries, including ship options. The fair value of Silversea Cruises’ goodwill was estimated as of March 31, 2020, the date of the last impairment test.

⁽²⁾ We estimated the fair value of our indefinite-life intangible asset using a discounted cash flow model and the relief-from-royalty method. For the Silversea Cruises trade name we used a discount rate of 13.25%, comparable to the rate used in valuing the Silversea Cruises reporting unit. Significant inputs in performing the fair value assessment for the trade name were the royalty rate of 3.0% and forecasted net revenues, which takes into consideration expected ship deliveries, including ship options. The fair value of the Silversea Cruises trade name was estimated as of March 31, 2020, the date of the last impairment test.

⁽³⁾ For the vessels impaired as of March 31, 2020, we estimated the fair value of two of our vessels using a blended indication from the income and cost approaches and the fair value of the remaining vessels was estimated primarily based on their orderly liquidation values. For the vessels impaired as of June 30, 2020, we estimated the fair value of the vessels using a modified market approach based on the carrying values and orderly liquidation values of the vessels. A significant input in performing the fair value assessments for these vessels was management's expected use of the vessels, which takes into consideration forecasted operating results.

⁽⁴⁾ Impairments to our right-of-use assets relate to certain of our berthing arrangements and a ship operating lease. We estimated the fair value of the berthing arrangements using estimated projected discounted cash flows and the fair value of the ship operating lease was estimated using a cost approach. The fair value of the berthing arrangements was estimated as of March 31, 2020, the date these assets were last impaired, and a significant input in performing the fair value assessments for these assets was our expected passenger headcount. The fair value of the ship operating lease was estimated as of June 30, 2020 and significant inputs in performing the fair value assessment for this asset were current and residual values of the vessel, expected rate of return and remaining lease payments.

⁽⁵⁾ We estimated the fair value of our other than temporarily impaired equity-method investments using a discounted cash flow model. A significant input in performing the fair value assessments for these assets was forecasted operating results for these investments. The fair value of these equity-method investments was estimated as of March 31, 2020, the date these assets were last impaired.

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 June 30, 2020 Using								Fair Value Measurements at December 31, 2019 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)	$	39,045	$	—	$	39,045	$	—	$	39,994	$	—	$	39,994	$	—
Total Assets	$	39,045	$	—	$	39,045	$	—	$	39,994	$	—	$	39,994	$	—
Liabilities:
Derivative financial instruments(5)	$	404,284	$	—	$	404,284	$	—	$	257,728	$	—	$	257,728	$	—
Contingent consideration (6)	17,795		—		—		17,795		62,400		—		—		62,400
Total Liabilities	$	422,079	$	—	$	404,284	$	17,795	$	320,128	$	—	$	257,728	$	62,400

(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. 

(5)Consists of foreign currency forward contracts, interest rate swaps and fuel swaps.

(6)The contingent consideration related to the 2018 Silversea Cruises acquisition was 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.

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 June 30, 2020								As of December 31, 2019
	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	$	39,045	$	(38,697)	$	—	$	348	$	39,994	$	(39,994)	$	—	$	—
Total	$	39,045	$	(38,697)	$	—	$	348	$	39,994	$	(39,994)	$	—	$	—

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 June 30, 2020								As of December 31, 2019
	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
Derivatives subject to master netting agreements	$	(404,284)	$	38,697	$	20,160	$	(345,427)	$	(257,728)	$	39,994	$	—	$	(217,734)
Total	$	(404,284)	$	38,697	$	20,160	$	(345,427)	$	(257,728)	$	39,994	$	—	$	(217,734)

Schedule of Price Risk Derivatives

As of June 30, 2020 and December 31, 2019, we had the following outstanding fuel swap agreements:

	Fuel Swap Agreements
	As of June 30, 2020	As of December 31, 2019
Designated as hedges:	(metric tons)
2020	205,400	792,900
2021	599,700	488,900
2022	404,300	322,900
2023	82,400	82,400

	Fuel Swap Agreements
	As of June 30, 2020		As of December 31, 2019
	(% hedged)
Designated hedges as a % of projected fuel purchases:
2020	64	%	52	%
2021	40	%	30	%
2022	23	%	19	%
2023	5	%	5	%

	Fuel Swap Agreements
	As of June 30, 2020	As of December 31, 2019
Not designated as hedges:	(metric tons)
2020	172,100	37,600
2021	15,200	—

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 were as follows (in thousands):

	Fair Value of Derivative Instruments
	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	As of June 30, 2020		As of December 31, 2019		Balance Sheet Location	As of June 30, 2020		As of December 31, 2019
		Fair Value		Fair Value			Fair Value		Fair Value
Derivatives designated as hedging instruments under ASC 815-20(1)
Interest rate swaps	Other assets	$	21,695	$	11	Other long-term liabilities	$	102,687	$	64,168
Foreign currency forward contracts	Derivative financial instruments	697		—		Derivative financial instruments	83,034		75,260
Foreign currency forward contracts	Other assets	16,482		9,380		Other long-term liabilities	60,887		64,711
Fuel swaps	Derivative financial instruments	—		16,922		Derivative financial instruments	40,285		16,901
Fuel swaps	Other assets	—		8,677		Other long-term liabilities	80,462		33,965
Total derivatives designated as hedging instruments under 815-20		38,874		34,990			367,355		255,005
Derivatives not designated as hedging instruments under ASC 815-20
Foreign currency forward contracts	Derivative financial instruments	$	171	$	3,186	Derivative financial instruments	$	165	$	2,419
Foreign currency forward contracts	Other assets	—		—		Other long-term liabilities	—		—
Fuel swaps	Derivative financial instruments	—		1,643		Derivative financial instruments	35,334		295
Fuel swaps	Other Assets	—		175		Other long-term liabilities	1,430		9
Total derivatives not designated as hedging instruments under 815-20		171		5,004			36,929		2,723
Total derivatives		$	39,045	$	39,994		$	404,284	$	257,728

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

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 June 30, 2020		As of December 31, 2019		As of June 30, 2020		As of December 31, 2019
Current portion of debt and Long-term debt	$	721,611	$	715,234	$	21,934	$	(1,301)
	$	721,611	$	715,234	$	21,934	$	(1,301)

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 June 30, 2020

Quarter Ended June 30, 2019

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

$79,192

$319,757

$(213,683)

$(83,825)

$181,924

$311,600

$(104,962)

$(21,781)

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

$(1,904)

$—

n/a

n/a

$(13,287)

$—

Derivatives designated as hedging instruments

n/a

n/a

$2,870

$—

n/a

n/a

$10,944

$—

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

$(6,016)

n/a

n/a

n/a

$(409)

n/a

Commodity contracts

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

$(12,689)

n/a

n/a

$2,149

$13,362

n/a

n/a

$(1,188)

Foreign exchange contracts

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

n/a

$(3,780)

n/a

$(2,581)

n/a

$(3,545)

n/a

$(1,300)

				Six Months Ended June 30, 2020						Six Months Ended June 30, 2019
					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					$273,460	$644,087	$(301,060)	$	(116,684)		$342,095	$603,885	$(195,593)	$	(26,869)
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	$(23,234)	—			n/a	n/a	$(21,746)	$	—
			Derivatives designated as hedging instruments		n/a	n/a	$23,299	—			n/a	n/a	$16,779	$	—
	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	$(9,407)	n/a			n/a	n/a	$(800)	n/a
		Commodity contracts
			Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income		$(26,922)	n/a	n/a	$	2,493		$31,380	n/a	n/a	$	(1,444)
		Foreign exchange contracts
			Amount of gain or (loss) reclassified from accumulated other comprehensive income (loss) into income		n/a	$(7,117)	n/a	$	(4,344)		n/a	$(6,879)	n/a	$(2,615)

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 June 30, 2020		As of December 31, 2019
Foreign currency debt	Current portion of debt	$	73,595	$	73,572
Foreign currency debt	Long-term debt	292,454		284,506
		$	366,049	$	358,078

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 June 30, 2020		Quarter Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Foreign Currency Debt	$	(7,541)	$	(2,994)	$	(52)	$	2,708
	$	(7,541)	$	(2,994)	$	(52)	$	2,708

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 June 30, 2020		Quarter Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Foreign currency forward contracts	Other income (expense)	$	12,504	$	(4,168)	$	(40,172)	$	846
Fuel swaps	Fuel	—		122		—		(14)
Fuel swaps	Other income (expense)	(9,153)		(21)		(76,359)		(119)
		$	3,351	$	(4,067)	$	(116,531)	$	713

Fair Value Hedging

Derivative Instruments

Schedule of Interest Rate Derivatives

At June 30, 2020 and December 31, 2019, we maintained interest rate swap agreements on the following fixed-rate debt instruments:

Debt Instrument	Swap Notional as of June 30, 2020 (In thousands)		Maturity	Debt Fixed Rate	Swap Floating Rate: LIBOR plus	All-in Swap Floating Rate as of June 30, 2020
Oasis of the Seas term loan	$	52,500	October 2021	5.41%	3.87%	4.84%
Unsecured senior notes	650,000		November 2022	5.25%	3.63%	4.02%
	$	702,500

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 June 30, 2020		Quarter Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019		Quarter Ended June 30, 2020		Quarter Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Interest rate swaps	Interest expense, net of interest capitalized	$	2,870	$	10,944	$	23,299	$	16,779	$	(1,904)	$	(13,287)	$	(23,234)	$	(21,746)
Interest rate swaps	Other income (expense)	—		—		—		—		—		—		—		—
		$	2,870	$	10,944	$	23,299	$	16,779	$	(1,904)	$	(13,287)	$	(23,234)	$	(21,746)

Cash flow hedge

Derivative Instruments

Schedule of Interest Rate Derivatives

At June 30, 2020 and December 31, 2019, we maintained interest rate swap agreements on the following floating-rate debt instruments:

Debt Instrument	Swap Notional as of June 30, 2020 (In thousands)		Maturity	Debt Floating Rate		All-in Swap Fixed Rate
Celebrity Reflection term loan	$	245,437	October 2024	LIBOR plus	0.40%	2.85%
Quantum of the Seas term loan	398,125		October 2026	LIBOR plus	1.30%	3.74%
Anthem of the Seas term loan	422,917		April 2027	LIBOR plus	1.30%	3.86%
Ovation of the Seas term loan	553,333		April 2028	LIBOR plus	1.00%	3.16%
Harmony of the Seas term loan (1)	519,056		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%
Odyssey of the Seas term loan (2)	191,667		October 2032	LIBOR plus	0.95%	2.83%
	$	2,790,535

(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 June 30, 2020.

(2)Interest rate swap agreements hedging the term loan of Odyssey of the Seas include LIBOR zero-floors matching the debt LIBOR zero-floor. The effective dates of the $460.0 million and $191.7 million interest rate swap agreements are October 2020 and October 2022, respectively. The anticipated unsecured term loan for the financing of Odyssey of the Seas was initially expected to be drawn in October 2020. However, due to the impact of COVID-19 to shipyard operations, there may be a delay in the ship delivery.

Derivative Instruments, Gain (Loss)

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 June 30, 2020		Quarter Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019			Quarter Ended June 30, 2020		Quarter Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Interest rate swaps	$	4,406	$	(40,132)	$	(48,189)	$	(68,461)	Interest expense, net of interest capitalized	$	(6,016)	$	(409)	$	(9,407)	$	(800)
Foreign currency forward contracts	42,354		19,394		(57,660)		(70,750)		Depreciation and amortization expenses	(3,780)		(3,545)		(7,117)		(6,879)
Foreign currency forward contracts	—		—		—		—		Other income (expense)	(2,581)		(1,300)		(4,344)		(2,615)
Fuel swaps	—		—		—		—		Other income (expense)	2,149		(1,188)		2,493		(1,444)
Fuel swaps	54,655		(44,076)		(115,722)		135,962		Fuel	(12,689)		13,362		(26,922)		31,380
	$	101,415	$	(64,814)	$	(221,571)	$	(3,249)		$	(22,917)	$	6,920	$	(45,297)	$	19,642

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)	Six Months Ended June 30, 2020
Net inception fair value at January 1, 2020	$	(8,008)
Amount of gain recognized in income on derivatives for the period ended June 30, 2020	3,273
Amount of gain (loss) remaining to be amortized in accumulated other comprehensive loss, as of June 30, 2020	1,580
Fair value at June 30, 2020	$	(3,155)