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.

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.

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 (expense) 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):

 

		December 31,
		2012				2011
Fuel swaps designated as hedging instruments:
Prepaid expenses and other assets		$	5,079			$	5,484
Other long-term assets			3,581				—
Accrued expenses and other liabilities			(16	)			—
Other long-term liabilities			349				(440	)
Fuel collars designated as hedging instruments:
Prepaid expenses and other assets			1,085				4,377
Other long-term assets			—				740
Accrued expenses and other liabilities			(18	)			—
Other long-term liabilities			678				—
Fuel options not designated as hedging instruments:
Prepaid expenses and other assets			(304	)			—
Accrued expenses and other liabilities			—				(1,278	)
Other long-term liabilities			(1,231	)			(1,670	)
Foreign currency options designated as hedging instruments:
Accrued expenses and other liabilities			(20,267	)			—
Other long-term liabilities			(16,443	)			(15,927	)
Foreign currency forward contracts designated as hedging instruments:
Prepaid expenses and other assets			11,685				—
Foreign currency collar designated as a hedging instrument:
Other long-term assets			8,152				—

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.

 

Fuel Swaps

As of December 31, 2012, we had fuel swaps maturing through December 31, 2015 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 534,000 metric tons of our projected fuel purchases. The effects of the fuel swaps on the consolidated financial statements, which were designated as cash flow hedges were as follows (in thousands):

 

Fuel Collars and Options

As of December 31, 2012, we had fuel collars and fuel options maturing through December 31, 2014 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 91,000 metric tons of our projected fuel purchases. The effects of the fuel collars on the consolidated financial statements, which were designated as cash flow hedges were as follows (in thousands):

 

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

 

		Year Ended December 31,
		2012				2011				2010
Gain recognized in other income (expense)		$	3,218			$	2,422			$	—

Foreign Currency Options

As of December 31, 2012, we had foreign currency derivatives consisting of call options with deferred premiums which are 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 are delivered is less than the strike price under these option contracts we would pay the deferred premium and not exercise the foreign currency options. The notional amount of our foreign currency options was €395.0 million, or $521.1 million based on the euro/U.S. dollar exchange rate as of December 31, 2012. The effects of the foreign currency options on the consolidated financial statements, which were designated as cash flow hedges were as follows (in thousands):

 

 

Foreign Currency Forward Contracts

As of December 31, 2012, we had foreign currency forward contracts 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 €197.0 million, or $259.9 million based on the euro/U.S. dollar exchange rate as of December 31, 2012. The effects of the foreign currency forward contracts on the consolidated financial statements, which were designated as cash flow hedges were as follows (in thousands):

 

		Year Ended December 31,
		2012				2011				2010
Gain recognized in other comprehensive income (loss)—effective portion		$	11,685			$	—			$	—
Loss recognized in other income (expense)—ineffective portion			—				—				(33,061	)
		$	11,685			$	—			$	(33,061	)

Foreign Currency Collar

As of December 31, 2012, we had a foreign currency collar used to mitigate the volatility of foreign currency exchange rates related to our ship construction contracts denominated in euros. The notional amount of our foreign currency collar was €100.0 million, or $131.9 million based on the euro/U.S. dollar exchange rate as of December 31, 2012.

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

 

		Year Ended December 31,
		2012				2011				2010
Gain recognized in other comprehensive income (loss)—effective portion		$	8,152			$	—			$	—

Interest Rate Swap

We had an interest rate swap which matured in October 2010 and we recognized a loss of $623,000 in other income (expense).

Other

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

Long-Term Debt

As of December 31, 2012 and 2011, the fair value of our long-term debt, including the current portion, was $3,106.9 million and $3,113.9 million, respectively, which was $121.5 million and $75.8 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 resulting in Level 2 inputs 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. The calculation of the fair value of our long-term debt is considered a Level 2 input.

 

Non-recurring Measurements of Non-financial Assets

Goodwill and other long-lived assets, principally tradenames, are reviewed for impairment on an annual basis or earlier if there is an event or change in circumstances that would indicate that the carrying value of these assets could not be fully recovered.

If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset to its fair value. We estimate fair value based on the best information available making whatever estimates, judgments and projections considered necessary. The estimation of fair value measured by discounting expected future cash flows at discount rates commensurate with the risk involved are considered Level 3 inputs. We do not believe that we have any impairment to our goodwill or tradenames as of December 31, 2012. We believe our estimates and judgments with respect to our goodwill and tradenames are reasonable. Nonetheless, if there was a material change in assumptions used in the determination of such fair values or if there is a material change in the conditions or circumstances that influence such assets, we could be required to record an impairment charge.

In February 2012, we acquired Sixthman, a company specializing in developing and delivering music oriented Charters. The purchase price was $7.5 million, consisting of $4.0 million in cash and $3.5 million in contingent consideration. As of September 30, 2012, we completed our allocation of the purchase price, which has resulted in recording $8.5 million of goodwill and tradenames related to the acquisition.

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. 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 (expense) 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 the fair value of our derivatives including the balance sheet location (in thousands):

				Asset								Liability
		Balance Sheet location		September 30, 2013				December 31, 2012				September 30, 2013				December 31, 2012
Fuel swaps designated as hedging instruments
		Prepaid expenses and other assets		$	4,421			$	5,955			$	484			$	876
		Other long-term assets			2,201				3,969				1,890				388
		Accrued expenses and other liabilities			669				188				938				204
		Other long-term liabilities			189				391				180				42
Fuel collars designated as hedging instruments
		Prepaid expenses and other assets			614				1,615				322				530
		Accrued expenses and other liabilities			—				51				—				69
		Other long-term liabilities			207				1,908				202				1,230
Fuel options not designated as hedging instruments
		Prepaid expenses and other assets			—				—				322				304
		Other long-term liabilities			—				—				202				1,231
Foreign currency options designated as hedging instruments
		Accrued expenses and other liabilities			—				—				18,756				20,267
		Other long-term liabilities			—				—				—				16,443
Foreign currency forward contracts designated as hedging instruments
		Prepaid expenses and other assets			—				11,685				—				—
Foreign currency collar designated as a hedging instrument
		Prepaid expenses and other assets			10,425				—				30				—
		Other long-term assets			—				9,765				—				1,613
Interest rate swaps designated as hedging instruments
		Accrued expenses and other liabilities			—				—				898				—
		Other long-term liabilities			—				—				2,233				—

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 and collar 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):

September 30, 2013		Gross Amounts				Gross Amounts Offset				Total Net Amounts				Gross Amounts Not Offset				Net Amounts
Assets		$	17,661			$	(3,048	)		$	14,613			$	—			$	14,613
Liabilities			23,409				(1,065	)			22,344				(21,887	)			457
December 31, 2012		Gross Amounts				Gross Amounts Offset				Total Net Amounts				Gross Amounts Not Offset				Net Amounts
Assets		$	32,989			$	(3,711	)		$	29,278			$	(11,685	)		$	17,593
Liabilities			39,486				(2,538	)			36,948				(36,710	)			238

Fuel Swaps

As of September 30, 2013, 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 745,000 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 September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
Gain recognized in other comprehensive loss—effective portion		$	13,500			$	30,848			$	132			$	23,029
Gain (loss) recognized in other income (expense)—ineffective portion			(83	)			157				(182	)			(473	)
Amount reclassified from accumulated comprehensive income (loss) into fuel expense			(2,081	)			(1,600	)			(5,080	)			(13,932	)

Fuel Collars and Options

As of September 30, 2013, we had fuel collars and fuel options maturing through December 31, 2014 which are used to mitigate the financial impact of volatility in fuel prices pertaining to approximately 43,000 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 September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
Gain (loss) recognized in other comprehensive loss—effective portion		$	427			$	5,060			$	(1,108	)		$	2,441
Gain (loss) recognized in other income (expense)—ineffective portion			(51	)			479				(29	)			142
Amount reclassified from other comprehensive income (loss) into fuel expense			332				(1,107	)			1,150				(5,377	)

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 September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
Gain recognized in other income (expense)		$	430			$	1,143			$	1,011			$	2,858

Foreign Currency Forward Contracts

We had foreign currency forward contracts which matured in April 2013. 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 September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
Gain (loss) recognized in other comprehensive loss—effective portion		$	—			$	2,609			$	(7,886	)		$	4,332
Gain recognized in other income (expense)—ineffective portion			—				—				66				—
Amount reclassified from accumulated comprehensive income (loss) into depreciation and amortization expense			(32	)			—				(52	)			—

As of September 30, 2013, 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 September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
Gain recognized in other income (expense)		$	—			$	—			$	20			$	—

Foreign Currency Options

As of September 30, 2013, we had foreign currency derivatives consisting of call options with deferred premiums which are 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 are delivered is less than the strike price under these option contracts, we would pay the deferred premium and not exercise the foreign currency options. The notional amount of our foreign currency options was €175.0 million, or $236.7 million based on the euro/U.S. dollar exchange rate as of September 30, 2013. 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 September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
Gain (loss) recognized in other comprehensive loss—effective portion		$	1,179			$	(2,813	)		$	(3,174	)		$	(19,848	)
Gain (loss) recognized in other income (expense)—ineffective portion			13				(134	)			(307	)			(484	)
Amount reclassified from accumulated comprehensive income (loss) into depreciation and amortization expense			177				—				294				—

Foreign Currency Collar

As of September 30, 2013, we had a foreign currency collar used to mitigate the volatility of foreign currency exchange rates related to our ship construction contracts denominated in euros. The notional amount of our foreign currency collar was €100.0 million, or $135.3 million based on the euro/U.S. dollar exchange rate as of September 30, 2013. 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 September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
Gain recognized in other comprehensive income—effective portion		$	4,518			$	5,156			$	2,243			$	5,156

Interest Rate Swaps

As of September 30, 2013, 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 $705.8 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 September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
Loss recognized in other comprehensive loss—effective portion		$	(2,826	)		$	—			$	(2,826	)		$	—
Loss recognized in other income (expense)—ineffective portion			(334	)			—				(334	)			—
Amount reclassified from other comprehensive income (loss) into interest expense, net			65				—				65				—

Long-Term Debt

As of September 30, 2013 and December 31, 2012, the fair value of our long-term debt, including the current portion, was $3,105.0 million and $3,106.9 million, which was $8.0 million lower and $121.5 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.