6.	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. The determination of ineffectiveness is based on the amount of dollar offset between the cumulative change in fair value of the derivative and the cumulative change in fair value of the hedged transaction at the end of the reporting period. If it is determined that a derivative is not highly effective as a hedge, or if the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. In addition, the ineffective portion of our highly effective hedges is recognized in earnings immediately and reported in other income in our consolidated statements of operations. 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 and our revolving credit facility, is not considered significant, as we primarily conduct business with large, well-established financial institutions that we have established relationships with and that have credit risks acceptable to us or the credit risk is spread out among a large number of creditors. We do not anticipate non-performance by any of our significant counterparties.

The following table sets forth our derivatives measured at fair value and discloses the balance sheet location (in thousands):

 

		Balance Sheet location		Asset								Liability
				March 31, 2014				December 31, 2013				March 31, 2014				December 31, 2013
Fuel swaps designated as hedging instruments
		Prepaid expenses and other assets		$	1,695			$	5,024			$	27			$	666
		Other long-term assets			252				6,869				98				9
		Accrued expenses and other liabilities			1,110				—				1,646				—
		Other long-term liabilities			809				—				1,353				—
Fuel collars designated as hedging instruments
		Prepaid expenses and other assets			—				452				—				195
		Accrued expenses and other liabilities			152				—				110				—
Fuel options not designated as hedging instruments
		Prepaid expenses and other assets			—				—				—				195
		Accrued expenses and other liabilities			—				—				110				—
Foreign currency options designated as hedging instruments
		Accrued expenses and other liabilities			—				—				—				9,815
Foreign currency forward contracts designated as hedging instruments
		Prepaid expenses and other assets			—				2,624				—				—
		Accrued expenses and other liabilities			—				—				—				6,582
Foreign currency collar designated as a hedging instrument
		Prepaid expenses and other assets			—				12,502				—				—
Interest rate swaps designated as hedging instruments
		Accrued expenses and other liabilities			—				—				2,590				1,707
		Other long-term liabilities			—				—				1,724				1,374

 

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. We are not required to post cash collateral related to our derivative instruments. The following table discloses the amounts recognized within assets and liabilities (in thousands):

 

March 31, 2014		Gross Amounts				Gross Amounts Offset				Total Net Amounts				Gross Amounts Not Offset				Net Amounts
Assets		$	1,947			$	(125	)		$	1,822			$	—			$	1,822
Liabilities			7,533				(2,071	)			5,462				(4,314	)			1,148
December 31, 2013		Gross Amounts				Gross Amounts Offset				Total Net Amounts				Gross Amounts Not Offset				Net Amounts
Assets		$	27,471			$	(1,065	)		$	26,406			$	(15,126	)		$	11,280
Liabilities			19,478				—				19,478				(19,478	)			—

Fuel Swaps

As of March 31, 2014, we had fuel swaps maturing through December 31, 2016 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 624,000 metric tons of our projected fuel purchases. The effects on the consolidated financial statements of the fuel swaps which were designated as cash flow hedges were as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013
Gain (loss) recognized in other comprehensive loss – effective portion		$	(9,771	)		$	4,706
Gain (loss) recognized in other income – ineffective portion			(416	)			221
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense			(705	)			(2,263	)

Fuel Collars and Options

As of March 31, 2014, we had fuel collars and options maturing through December 31, 2014 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 26,000 metric tons of our projected fuel purchases. The effects on the consolidated financial statements of the fuel collars which were designated as cash flow hedges were as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013
Loss recognized in other comprehensive loss – effective portion		$	(324	)		$	(35	)
Gain recognized in other income – ineffective portion			108				8
Amount reclassified from accumulated other comprehensive income (loss) into fuel expense			370				427

 

The effects on the consolidated financial statements of the fuel options which were not designated as hedging instruments were as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013
Gain recognized in other income		$	85			$	856

Foreign Currency Forward Contracts

We had foreign currency forward contracts that matured through January 2014 which were used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. The effects on the consolidated financial statements of the foreign currency forward contracts which were designated as cash flow hedges were as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013
Loss recognized in other comprehensive loss – effective portion		$	(1,076	)		$	(16,633	)
Gain (loss) recognized in other income – ineffective portion			(1	)			68
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense			(53	)			—

The effects on the consolidated financial statements of the foreign currency forward contracts which were not designated as hedging instruments were as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013
Gain recognized in other income		$	—			$	20

Foreign Currency Options

We had foreign currency options that matured through January 2014, which consisted of call options with deferred premiums. These options were used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. If the spot rate at the date the ships were delivered was less than the strike price under these option contracts, we would have paid the deferred premium and would not exercise the foreign currency options.

The effects on the consolidated financial statements of the foreign currency options which were designated as cash flow hedges were as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013
Loss recognized in other comprehensive loss – effective portion		$	(1,157	)		$	(4,012	)
Loss recognized in other income – ineffective portion			(241	)			(298	)
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense			279				—

 

Foreign Currency Collar

We had a foreign currency collar that matured in January 2014. The collar was used to mitigate the volatility of foreign currency exchange rates related to our ship construction contracts denominated in euros.

The effects on the consolidated financial statements of the foreign currency collar which was designated as a cash flow hedge was as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013
Loss recognized in other comprehensive income – effective portion		$	(1,588	)		$	(3,722	)
Amount reclassified from accumulated other comprehensive income (loss) into depreciation and amortization expense			(60	)			—

Interest Rate Swaps

As of March 31, 2014, we had interest rate swap agreements to modify our exposure to interest rate movements and to manage our interest expense. The notional amount of outstanding debt associated with the interest rate swap agreements was $699.4 million.

The effects on the consolidated financial statements of the interest rates swaps which were designated as cash flow hedges were as follows (in thousands):

 

		Three Months Ended March 31,
		2014				2013
Loss recognized in other comprehensive loss – effective portion		$	(1,440	)		$	—
Amount reclassified from accumulated other comprehensive income (loss) into interest expense, net			322				—

Long-Term Debt

As of March 31, 2014 and December 31, 2013, the fair value of our long-term debt, including the current portion, was $3,776.7 million and $3,146.4 million, which was $122.5 million and $18.6 million higher, respectively, than the carrying values. 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 debt was calculated based on estimated rates for the same or similar instruments with similar terms and remaining maturities. The calculation of the fair value of our long-term debt is considered a Level 2 input.

Other

The carrying amounts reported in the consolidated balance sheets of all financial assets and liabilities other than our long-term debt approximate fair value.