filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited; in thousands, except per share data)
| Quarter Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Passenger ticket revenues | $ | 1,418,203 | $ | 22,785 | |||||||
| Onboard and other revenues | 766,039 | 28,129 | |||||||||
| Total revenues | 2,184,242 | 50,914 | |||||||||
| Cruise operating expenses: | |||||||||||
| Commissions, transportation and other | 329,859 | 5,188 | |||||||||
| Onboard and other | 155,570 | 8,598 | |||||||||
| Payroll and related | 327,141 | 167,640 | |||||||||
| Food | 155,226 | 17,196 | |||||||||
| Fuel | 275,179 | 59,109 | |||||||||
| Other operating | 447,887 | 167,099 | |||||||||
| Total cruise operating expenses | 1,690,862 | 424,830 | |||||||||
| Marketing, selling and administrative expenses | 371,425 | 285,558 | |||||||||
| Depreciation and amortization expenses | 351,542 | 323,439 | |||||||||
| Impairment and credit losses (recoveries) | (10,943) | 40,621 | |||||||||
| Operating Loss | (218,644) | (1,023,534) | |||||||||
| Other income (expense): | |||||||||||
| Interest income | 6,490 | 4,670 | |||||||||
| Interest expense, net of interest capitalized | (302,706) | (304,811) | |||||||||
| Equity investment loss | (13,179) | (48,088) | |||||||||
| Other income | 6,457 | 24,508 | |||||||||
| (302,938) | (323,721) | ||||||||||
| Net Loss | $ | (521,582) | $ | (1,347,255) | |||||||
| Loss per Share: | |||||||||||
| Basic | $ | (2.05) | $ | (5.29) | |||||||
| Diluted | $ | (2.05) | $ | (5.29) | |||||||
| Weighted-Average Shares Outstanding: | |||||||||||
| Basic | 254,964 | 254,577 | |||||||||
| Diluted | 254,964 | 254,577 | |||||||||
| Comprehensive Loss | |||||||||||
| Net Loss | $ | (521,582) | $ | (1,347,255) | |||||||
| Other comprehensive income: | |||||||||||
| Foreign currency translation adjustments | 12,682 | (3,489) | |||||||||
| Change in defined benefit plans | 15,168 | (3,088) | |||||||||
| (Loss) gain on cash flow derivative hedges | (84,493) | 51,476 | |||||||||
| Total other comprehensive (loss) income | (56,643) | 44,899 | |||||||||
| Comprehensive Loss | $ | (578,225) | $ | (1,302,356) |
The accompanying notes are an integral part of these consolidated financial statements
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited; in thousands, except per share data)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Passenger ticket revenues | $ | 2,070,061 | $ | 43,629 | |||||||
| Onboard and other revenues | 1,173,412 | 49,299 | |||||||||
| Total revenues | 3,243,473 | 92,928 | |||||||||
| Cruise operating expenses: | |||||||||||
| Commissions, transportation and other | 480,202 | 8,137 | |||||||||
| Onboard and other | 230,009 | 13,079 | |||||||||
| Payroll and related | 676,759 | 264,276 | |||||||||
| Food | 255,410 | 25,668 | |||||||||
| Fuel | 463,659 | 100,931 | |||||||||
| Other operating | 769,592 | 296,226 | |||||||||
| Total cruise operating expenses | 2,875,631 | 708,317 | |||||||||
| Marketing, selling and administrative expenses | 765,455 | 543,599 | |||||||||
| Depreciation and amortization expenses | 691,009 | 633,605 | |||||||||
| Impairment and credit losses (recoveries) | (10,770) | 40,172 | |||||||||
| Operating Loss | (1,077,852) | (1,832,765) | |||||||||
| Other income (expense): | |||||||||||
| Interest income | 9,812 | 9,531 | |||||||||
| Interest expense, net of interest capitalized | (580,365) | (577,325) | |||||||||
| Equity investment loss | (44,238) | (107,959) | |||||||||
| Other income | 3,919 | 29,541 | |||||||||
| (610,872) | (646,212) | ||||||||||
| Net Loss | (1,688,724) | (2,478,977) | |||||||||
| Loss per Share: | |||||||||||
| Basic | $ | (6.63) | $ | (9.96) | |||||||
| Diluted | $ | (6.63) | $ | (9.96) | |||||||
| Weighted-Average Shares Outstanding: | |||||||||||
| Basic | 254,893 | 248,823 | |||||||||
| Diluted | 254,893 | 248,823 | |||||||||
| Comprehensive Loss | |||||||||||
| Net Loss | $ | (1,688,724) | $ | (2,478,977) | |||||||
| Other comprehensive income: | |||||||||||
| Foreign currency translation adjustments | 20,460 | 6,233 | |||||||||
| Change in defined benefit plans | 27,765 | 7,375 | |||||||||
| Gain on cash flow derivative hedges | 111,408 | 61,778 | |||||||||
| Total other comprehensive income | 159,633 | 75,386 | |||||||||
| Comprehensive Loss | (1,529,091) | (2,403,591) |
The accompanying notes are an integral part of these consolidated financial statements
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| As of | |||||||||||
| June 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 2,102,205 | $ | 2,701,770 | |||||||
| Trade and other receivables, net of allowances of $7,897 and $13,411 at June 30, 2022 and December 31, 2021, respectively | 565,014 | 408,067 | |||||||||
| Inventories | 229,108 | 150,224 | |||||||||
| Prepaid expenses and other assets | 492,285 | 286,026 | |||||||||
| Derivative financial instruments | 172,276 | 54,184 | |||||||||
| Total current assets | 3,560,888 | 3,600,271 | |||||||||
| Property and equipment, net | 27,556,323 | 25,907,949 | |||||||||
| Operating lease right-of-use assets | 569,561 | 542,128 | |||||||||
| Goodwill | 809,298 | 809,383 | |||||||||
| Other assets, net of allowances of $72,648 and $86,781 at June 30, 2022 and December 31, 2021, respectively | 1,447,175 | 1,398,624 | |||||||||
| Total assets | $ | 33,943,245 | $ | 32,258,355 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Current portion of long-term debt | $ | 5,466,486 | $ | 2,243,131 | |||||||
| Current portion of operating lease liabilities | 71,651 | 68,922 | |||||||||
| Accounts payable | 760,864 | 545,978 | |||||||||
| Accrued interest | 301,629 | 251,974 | |||||||||
| Accrued expenses and other liabilities | 862,825 | 887,575 | |||||||||
| Derivative financial instruments | 87,184 | 127,236 | |||||||||
| Customer deposits | 4,168,743 | 3,160,867 | |||||||||
| Total current liabilities | 11,719,382 | 7,285,683 | |||||||||
| Long-term debt | 17,746,721 | 18,847,209 | |||||||||
| Long-term operating lease liabilities | 561,160 | 534,726 | |||||||||
| Other long-term liabilities | 517,884 | 505,181 | |||||||||
| Total liabilities | 30,545,147 | 27,172,799 | |||||||||
| Shareholders’ equity | |||||||||||
| Preferred stock ($0.01 par value; 20,000,000 shares authorized; none outstanding) | — | — | |||||||||
| Common stock ($0.01 par value; 500,000,000 shares authorized; 283,076,357 and 282,703,246 shares issued, June 30, 2022 and December 31, 2021, respectively) | 2,831 | 2,827 | |||||||||
| Paid-in capital | 7,254,939 | 7,557,297 | |||||||||
| (Accumulated deficit) Retained earnings | (1,240,191) | 302,276 | |||||||||
| Accumulated other comprehensive loss | (551,252) | (710,885) | |||||||||
| Treasury stock (28,018,385 and 27,882,987 common shares at cost, June 30, 2022 and December 31, 2021, respectively) | (2,068,229) | (2,065,959) | |||||||||
| Total shareholders’ equity | 3,398,098 | 5,085,556 | |||||||||
| Total liabilities and shareholders’ equity | $ | 33,943,245 | $ | 32,258,355 |
The accompanying notes are an integral part of these consolidated financial statements
| ROYAL CARIBBEAN CRUISES LTD. | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (unaudited, in thousands) | |||||||||||
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities | |||||||||||
| Net Loss | $ | (1,688,724) | $ | (2,478,977) | |||||||
| Adjustments: | |||||||||||
| Depreciation and amortization | 691,009 | 633,605 | |||||||||
| Impairment and credit losses (recoveries) | (10,770) | 40,172 | |||||||||
| Net deferred income tax benefit | (9,205) | (8,450) | |||||||||
| Loss (gain) on derivative instruments not designated as hedges | 87,245 | (16,163) | |||||||||
| Share-based compensation expense | 10,134 | 35,562 | |||||||||
| Equity investment loss | 44,238 | 107,959 | |||||||||
| Amortization of debt issuance costs | 77,008 | 72,500 | |||||||||
| Amortization of debt discounts and premiums | 7,726 | 56,609 | |||||||||
| Gain on extinguishment of debt | — | (3,156) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Increase in trade and other receivables, net | (201,605) | (180,562) | |||||||||
| Increase in inventories | (78,884) | (17,191) | |||||||||
| Increase in prepaid expenses and other assets | (168,948) | (75,213) | |||||||||
| Increase in accounts payable | 221,746 | 38,073 | |||||||||
| Increase in accrued interest | 49,655 | 17,675 | |||||||||
| Decrease in accrued expenses and other liabilities | (32,837) | (123,028) | |||||||||
| Increase in customer deposits | 1,007,876 | 629,285 | |||||||||
| Other, net | (55,871) | 1,746 | |||||||||
| Net cash used in operating activities | (50,207) | (1,269,554) | |||||||||
| Investing Activities | |||||||||||
| Purchases of property and equipment | (2,317,747) | (1,286,175) | |||||||||
| Cash received on settlement of derivative financial instruments | 36,073 | 24,766 | |||||||||
| Cash paid on settlement of derivative financial instruments | (265,047) | (34,121) | |||||||||
| Investments in and loans to unconsolidated affiliates | (614) | (70,084) | |||||||||
| Cash received on loans to unconsolidated affiliates | 8,700 | 20,127 | |||||||||
| Proceeds from the sale of property and equipment and other assets | 75 | 175,439 | |||||||||
| Other, net | 11,013 | (13,627) | |||||||||
| Net cash used in investing activities | (2,527,547) | (1,183,675) |
The accompanying notes are an integral part of these consolidated financial statements
| ROYAL CARIBBEAN CRUISES LTD. | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (unaudited, in thousands) | |||||||||||
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Financing Activities | |||||||||||
| Debt proceeds | 3,831,566 | 3,144,077 | |||||||||
| Debt issuance costs | (133,946) | (110,760) | |||||||||
| Repayments of debt | (1,706,807) | (1,185,490) | |||||||||
| Repayments of commercial paper notes | — | (414,570) | |||||||||
| Proceeds from common stock issuances | — | 1,621,860 | |||||||||
| Other, net | (11,050) | (36,125) | |||||||||
| Net cash provided by financing activities | 1,979,763 | 3,018,992 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (1,574) | 132 | |||||||||
| Net (decrease) increase in cash and cash equivalents | (599,565) | 565,895 | |||||||||
| Cash and cash equivalents at beginning of period | 2,701,770 | 3,684,474 | |||||||||
| Cash and cash equivalents at end of period | $ | 2,102,205 | $ | 4,250,369 | |||||||
| Supplemental Disclosure | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest, net of amount capitalized | $ | 425,119 | $ | 382,461 | |||||||
| Non-cash Investing Activities | |||||||||||
| Notes receivable issued upon sale of property and equipment and other assets | $ | — | $ | 16,000 | |||||||
| Purchase of property and equipment included in accounts payable and accrued expenses and other liabilities | $ | 33,189 | $ | 33,207 |
The accompanying notes are an integral part of these consolidated financial statements
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited; in thousands)
| Common Stock | Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||
| Balance at April 1, 2022 | $ | 2,830 | $ | 7,267,545 | $ | (718,609) | $ | (494,609) | $ | (2,068,229) | $ | 3,988,928 | |||||||||||||||||||||||
| Activity related to employee stock plans | 1 | (12,606) | — | — | — | (12,605) | |||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | (84,493) | — | (84,493) | |||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | 15,168 | — | 15,168 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 12,682 | — | 12,682 | |||||||||||||||||||||||||||||
| Net Loss | — | — | (521,582) | — | — | (521,582) | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 2,831 | $ | 7,254,939 | $ | (1,240,191) | $ | (551,252) | $ | (2,068,229) | $ | 3,398,098 |
| Common Stock | Paid-in Capital | Retained Earnings ( Accumulated Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | 2,827 | $ | 7,557,297 | $ | 302,276 | $ | (710,885) | $ | (2,065,959) | $ | 5,085,556 | |||||||||||||||||||||||
| Activity related to employee stock plans | 4 | 5,282 | 37 | — | — | 5,323 | |||||||||||||||||||||||||||||
| Cumulative effect of adoption of Accounting Standards Update 2020-06 | — | (307,640) | 146,220 | — | — | (161,420) | |||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | 111,408 | — | 111,408 | |||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | 27,765 | — | 27,765 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 20,460 | — | 20,460 | |||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | (2,270) | (2,270) | |||||||||||||||||||||||||||||
| Net Loss | — | — | (1,688,724) | — | — | (1,688,724) | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 2,831 | $ | 7,254,939 | $ | (1,240,191) | $ | (551,252) | $ | (2,068,229) | $ | 3,398,098 |
The accompanying notes are an integral part of these consolidated financial statements
ROYAL CARIBBEAN CRUISES LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited; in thousands)
| Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||
| Balance at April 1, 2021 | $ | 2,824 | $ | 7,513,318 | $ | 4,431,053 | $ | (708,854) | $ | (2,065,959) | $ | 9,172,382 | |||||||||||||||||||||||
| Activity related to employee stock plans | 2 | 14,116 | — | — | — | 14,118 | |||||||||||||||||||||||||||||
| Common stock issuance | — | (129) | — | — | — | (129) | |||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | 51,476 | — | 51,476 | |||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | (3,088) | — | (3,088) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (3,489) | — | (3,489) | |||||||||||||||||||||||||||||
| Net Loss attributable to Royal Caribbean Cruises Ltd. | — | — | (1,347,255) | — | — | (1,347,255) | |||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | 2,826 | $ | 7,527,305 | $ | 3,083,798 | $ | (663,955) | $ | (2,065,959) | $ | 7,884,015 |
| Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | 2,652 | $ | 5,998,574 | $ | 5,562,775 | $ | (739,341) | $ | (2,063,991) | $ | 8,760,669 | |||||||||||||||||||||||
| Activity related to employee stock plans | 4 | 32,754 | — | — | — | 32,758 | |||||||||||||||||||||||||||||
| Common stock issuance | 170 | 1,495,977 | — | — | — | 1,496,147 | |||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | — | — | — | 61,778 | — | 61,778 | |||||||||||||||||||||||||||||
| Change in defined benefit plans | — | — | — | 7,375 | — | 7,375 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | 6,233 | — | 6,233 | |||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | (1,968) | (1,968) | |||||||||||||||||||||||||||||
| Net Loss attributable to Royal Caribbean Cruises Ltd. | — | — | (2,478,977) | — | — | (2,478,977) | |||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | 2,826 | $ | 7,527,305 | $ | 3,083,798 | $ | (663,955) | $ | (2,065,959) | $ | 7,884,015 |
The accompanying notes are an integral part of these consolidated financial statements
ROYAL CARIBBEAN CRUISES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As used in this Quarterly Report on Form 10-Q, the terms “Royal Caribbean,” "Royal Caribbean Group," the “Company,” “we,” “our” and “us” refer to Royal Caribbean Cruises Ltd. and, depending on the context, Royal Caribbean Cruises Ltd.’s consolidated subsidiaries and/or affiliates. The terms “Royal Caribbean International,” “Celebrity Cruises,” and "Silversea Cruises" refer to our wholly owned global cruise brands. Throughout this Quarterly Report on Form 10-Q, we also refer to our partner brands in which we hold an ownership interest, including “TUI Cruises” and "Hapag-Lloyd Cruises." However, because these partner brands are unconsolidated investments, our operating results and other disclosures herein do not include these brands unless otherwise specified. In accordance with cruise vacation industry practice, the term “berths” is determined based on double occupancy per cabin even though many cabins can accommodate three or more passengers. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021.
This Quarterly Report on Form 10-Q also includes trademarks, trade names and service marks of other companies. Use or display by us of other parties’ trademarks, trade names or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, these other parties other than as described herein.
Note 1**. General**
Description of Business
We are a global cruise company. We own and operate three global cruise brands: Royal Caribbean International, Celebrity Cruises and Silversea Cruises (collectively, our "Global Brands"). We also own a 50% joint venture interest in TUI Cruises GmbH ("TUIC"), which operates the German brands TUI Cruises and Hapag-Lloyd Cruises (collectively, our "Partner Brands"). We account for our investments in our Partner Brands under the equity method of accounting. Together, our Global Brands and our Partner Brands have a combined fleet of 63 ships as of June 30, 2022. Our ships offer a selection of worldwide itineraries that call on more than 1,000 destinations on all seven continents.
Management's Plan and Liquidity
During 2021, we restarted our global cruise operations in a phased manner, following our voluntary suspension of global cruise operations that commenced in March of 2020 in response to the COVID-19 pandemic. Since then, we have steadily increased the number of ships that have returned to service, with our full fleet in service as of June 30, 2022. Our operations incorporate our enhanced health and safety protocols, including vaccination protocols.
Since the start of the pandemic, we have implemented a number of proactive measures to mitigate the financial and operational impacts of COVID-19 and manage our liquidity. As part of our liquidity management, we rely on the estimation of our future liquidity requirements, which includes numerous assumptions that are subject to various risks and uncertainties. The principal assumptions used to estimate our future liquidity requirements consist of:
-
Continued cruise operations and expected timing of cash collections for cruise bookings;
-
Expected increase in revenue per available passenger cruise day;
-
Expected increase in occupancy levels over time until we reach historical occupancy levels; and
-
Inflationary increase to our operating costs, mostly impacting the expected cost of fuel and food.
As of June 30, 2022, we had liquidity of $3.3 billion, including $0.5 billion of undrawn revolving credit facility capacity, $2.1 billion in cash and cash equivalents, and a $0.7 billion commitment for a 364-day term loan facility available to draw on at any time prior to August 12, 2022. Our revolving credit facilities were mostly utilized through a combination of amounts drawn and letters of credit issued under the facilities as of June 30, 2022.
As of June 30, 2022, we were in compliance with our financial covenants and we estimate we will be in compliance for the next twelve months. In July 2022, we amended our non-export-credit facilities and export credit facilities plus committed export-credit facilities, and certain credit card processing agreements. Refer to Note 7*. Debt* for further information regarding our debt facilities and credit card processing agreements, including related covenants.
In June of 2023, approximately $3.2 billion of long- term debt will become due. Accordingly, in addition to our $3.3 billion liquidity as of June 30, 2022, in February 2022 we entered into certain agreements with Morgan Stanley & Co., LLC (“MS”) where MS agreed to provide backstop committed financing to refinance, repurchase and/or repay in whole or in
part our existing and outstanding 10.875% Senior Secured Notes due 2023, 9.125% Senior Priority Guaranteed Notes due 2023 (the "Priority Guaranteed Notes"), and 4.25% Convertible Notes due 2023. Pursuant to the agreements, we may, at our sole option, issue and sell to MS (subject to the satisfaction of certain conditions) five-year senior unsecured notes with gross proceeds of up to $3.15 billion at any time between April 1, 2023 and June 29, 2023, to refinance the aforementioned notes.
Based on our assumptions regarding the impact of COVID-19 and our resumption of operations, as well as our present financial condition, we believe that we have sufficient financial resources to fund our obligations for at least the next twelve months from the issuance of these financial statements. Additionally, we will continue to pursue various opportunities to raise additional capital to fund obligations associated with future debt maturities and/or to extend the maturity dates associated with our existing indebtedness or facilities. Actions to raise capital may include issuances of debt, convertible debt or equity in private or public transactions or entering into new or extended credit facilities.
If the Company is unable to comply with the applicable financial covenants, including maintaining the applicable minimum liquidity requirement, it could have a significant adverse effect on the Company’s business, financial condition and operating results.
Basis for Preparation of Consolidated Financial Statements
The unaudited consolidated financial statements are presented pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, these statements include all adjustments necessary for a fair statement of the results of the interim periods reported herein. Adjustments consist only of normal recurring items, except for any items discussed in the notes below. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by such Securities and Exchange Commission rules and regulations. Estimates are required for the preparation of financial statements in accordance with these principles. Actual results could differ from these estimates. Refer to Note 2*. Summary of Significant Accounting Policies* in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our significant accounting policies.
All significant intercompany accounts and transactions are eliminated in consolidation. We consolidate entities over which we have control, usually evidenced by a direct ownership interest of greater than 50%, and variable interest entities where we are determined to be the primary beneficiary. Refer to Note 6*. Other Assets* for further information regarding our variable interest entities. For affiliates we do not control but over which we have significant influence on financial and operating policies, usually evidenced by a direct ownership interest from 20% to 50%, the investment is accounted for using the equity method.
Effective March 19, 2021, we sold our wholly-owned brand, Azamara Cruises ("Azamara"), including its three-ship fleet and associated intellectual property, to Sycamore Partners for $201 million, subject to closing adjustments. The March 2021 sale of Azamara did not represent a strategic shift that will have a major effect on our operations and financial results, as we continue to provide similar itineraries to and source passengers from the markets served by the Azamara business. Therefore, the sale of Azamara did not meet the criteria for discontinued operations reporting. Effective March 19, 2021, we no longer consolidate Azamara's balance sheet nor recognize its results of operations in our consolidated financial statements. We recognized an immaterial gain on the sale during the quarter ended March 31, 2021 and have agreed to provide certain transition services to Azamara for a period of time for a fee.
Prior to October 1, 2021, we consolidated the operating results of Silversea Cruises on a three-month reporting lag to allow for more timely preparation of our consolidated financial statements. Effective October 1, 2021, we eliminated the three- month reporting lag to reflect Silversea Cruises' financial position, results of operations and cash flows concurrently and consistently with the fiscal calendar of the Company ("elimination of the Silversea reporting lag"). The elimination of the Silversea reporting lag represents a change in accounting principle which we believe to be preferable because it provides more current information to the users of our financial statements. A change in accounting principle requires retrospective application, if material. The impact of the elimination of the reporting lag was immaterial to prior periods and was immaterial for our fiscal year ended December 31, 2021. As a result, we have accounted for this change in accounting principle in our consolidated results for the quarter and year ended December 31, 2021. Accordingly, the results of Silversea Cruises from April 1, 2022 through June 30, 2022 and from January 1, 2022 through June 30, 2022 are included in our consolidated statement of comprehensive loss for the quarter ended and six months ended June 30, 2022, respectively. The results of Silversea Cruises from January 1, 2021 through March 31, 2021 and from October 1, 2020 through March 31, 2021 are included in our consolidated statement of comprehensive loss for the quarter ended and six months ended June 30, 2021, respectively.
Note 2**. Summary of Significant Accounting Policies**
Adoption of Accounting Pronouncements
In August 2020, the FASB issued Accounting Standard Update (“ASU") No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU 2020-06"), which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments, requiring bifurcation only if the convertible debt feature qualifies as a derivative under Accounting Standards Codification ("ASC") 815, Derivatives and Hedging ("ASC 815") or for convertible debt issued at a substantial premium. The ASU removes certain settlement conditions required for equity contracts to qualify for the derivative scope exception, permitting more contracts to qualify for it. In addition, the guidance eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The guidance also decreases interest expense due to the reversal of the remaining non-cash convertible debt discount. On January 1, 2022, we adopted this pronouncement using the modified retrospective approach to recognize our convertible notes as single liability instruments given they do not qualify as derivatives under ASC 815, nor were they issued at a substantial premium. Accordingly, as of January 1, 2022, we recorded a $161.4 million increase to debt, primarily as a result of the reversal of the remaining non-cash convertible debt discount, as well as a reduction of $307.6 million to additional paid in capital, which resulted in a cumulative effect on adoption of approximately $146.2 million to increase retained earnings.
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB") issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions to the current guidance on contract modifications and hedging relationships to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Subsequently, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which presents amendments to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance in both ASUs was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating the impact of the new guidance on our consolidated financial statements. The impact, if any, will be dependent on the terms of any future contract modifications related to a change in reference rate.
Note 3**. Revenues**
Revenue Recognition
Revenues are measured based on consideration specified in our contracts with customers and are recognized as the related performance obligations are satisfied.
The majority of our revenues are derived from passenger cruise contracts which are reported within Passenger ticket revenues in our consolidated statements of comprehensive loss. Our performance obligation under these contracts is to provide a cruise vacation in exchange for the ticket price. We satisfy this performance obligation and recognize revenue over the duration of each cruise, which generally ranges from two to 25 nights.
Passenger ticket revenues include charges to our guests for port costs that vary with passenger head counts. These type of port costs, along with port costs that do not vary by passenger head counts, are included in our cruise operating expenses. The amounts of port costs charged to our guests and included within Passenger ticket revenues on a gross basis were $236.2 million and $3.2 million for the quarters ended June 30, 2022 and 2021, respectively, and $313.1 million and $4.7 million for the six months ended June 30, 2022 and 2021, respectively.
Our total revenues also include Onboard and other revenues, which consist primarily of revenues from the sale of goods and services onboard our ships that are not included in passenger ticket prices. We receive payment before or concurrently with the transfer of these goods and services to cruise passengers and recognize revenue over the duration of the related cruise.
As a practical expedient, we have omitted disclosures on our remaining performance obligations as the duration of our contracts with customers is less than a year.
Disaggregated Revenues
The following table disaggregates our total revenues by geographic regions where we provide cruise itineraries (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues by itinerary | |||||||||||||||||||||||
| North America (1) | $ | 1,344,043 | $ | 11,632 | $ | 2,233,130 | $ | 11,632 | |||||||||||||||
| Asia/Pacific | 45,216 | 19,317 | 79,849 | 49,202 | |||||||||||||||||||
| Europe | 527,134 | 3,765 | 528,559 | 3,765 | |||||||||||||||||||
| Other regions(2) | 159,390 | 1,900 | 239,022 | 2,710 | |||||||||||||||||||
| Total revenues by itinerary | 2,075,783 | 36,614 | 3,080,560 | 67,309 | |||||||||||||||||||
| Other revenues(3) | 108,459 | 14,300 | 162,913 | 25,619 | |||||||||||||||||||
| Total revenues | $ | 2,184,242 | $ | 50,914 | $ | 3,243,473 | $ | 92,928 |
(1)Includes the United States, Canada, Mexico and the Caribbean.
(2) Includes seasonality impacted itineraries primarily in South and Latin American countries.
(3) Includes revenues primarily related to cancellation fees, vacation protection insurance, pre- and post-cruise tours and fees for operating certain port facilities. Amounts also include revenues related to procurement and management related services we perform on behalf of our unconsolidated affiliates. Refer to Note 6*. Other Assets* for more information on our unconsolidated affiliates.
Passenger ticket revenues are attributed to geographic areas based on where the reservation originates. For the quarters and six months ended June 30, 2022 and 2021, our guests were sourced from the following areas:
| Quarter Ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Passenger ticket revenues: | |||||||||||||||||||||||
| United States | 78 | % | 44 | % | |||||||||||||||||||
| Singapore | 2 | % | 54 | % | |||||||||||||||||||
| All other countries (1) | 20 | % | 2 | % |
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Passenger ticket revenues: | |||||||||||
| United States | 80 | % | 23 | % | |||||||
| Singapore | 3 | % | 61 | % | |||||||
| China | 1 | % | 15 | % | |||||||
| All other countries (1) | 16 | % | 1 | % |
(1)No other individual country's revenue exceeded 10% for the quarters and six months ended June 30, 2022 and 2021.
Customer Deposits and Contract Liabilities
Our payment terms generally require an upfront deposit to confirm a reservation, with the balance due prior to the cruise. Deposits received on sales of passenger cruises are initially recorded as Customer deposits in our consolidated balance sheets and subsequently recognized as passenger ticket revenues or onboard revenues during the duration of the cruise. ASC 606, Revenues from Contracts with Customers, defines a “contract liability” as an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer. We do not consider customer deposits to be a contract liability until the customer no longer retains the unilateral right, resulting from the passage of time, to cancel such customer's reservation and receive a full refund. Customer deposits presented in our consolidated balance sheets include contract liabilities of $1.9 billion and $0.8 billion as of June 30, 2022 and December 31, 2021, respectively.
We have provided flexibility to guests with bookings on sailings cancelled due to COVID-19 by allowing guests to receive future cruise credits (“FCC”). As of June 30, 2022, our customer deposit balance includes approximately $0.6 billion of unredeemed FCCs. Given the uncertainty of travel demand caused by COVID-19 and lack of comparable historical experience of FCC redemptions, we are unable to estimate the number of FCCs that will not be used in future periods and get recognized as breakage. We will update our breakage analysis as future information is received.
Contract Receivables and Contract Assets
Although we generally require full payment from our customers prior to their cruise, we grant credit terms to a relatively small portion of our revenue sourced in select markets outside of the United States. As a result, we have outstanding receivables from passenger cruise contracts in those markets. We also have receivables from credit card merchants for cruise ticket purchases and goods and services sold to guests during cruises that are collected before, during or shortly after the cruise voyage. In addition, we have receivables due from concessionaires onboard our vessels. These receivables are included within Trade and other receivables, net in our consolidated balance sheets.
We have contract assets that are conditional rights to consideration for satisfying the construction services performance obligations under a service concession arrangement. As of June 30, 2022 and December 31, 2021, our contract assets were $118.9 million and $52.9 million, respectively, and were included within Other assets in our consolidated balance sheets. Given the short duration of our cruises and our collection terms, we do not have any other significant contract assets.
Assets Recognized from the Costs to Obtain a Contract with a Customer
Prepaid travel advisor commissions are an incremental cost of obtaining contracts with customers that we recognize as an asset and include within Prepaid expenses and other assets in our consolidated balance sheets. Prepaid travel advisor commissions were $119.4 million as of June 30, 2022 and $75.4 million as of December 31, 2021. Substantially all of our prepaid travel advisor commissions at December 31, 2021 were expensed and reported primarily within Commissions, transportation and other in our consolidated statements of comprehensive loss for the six months ended June 30, 2022.
Note 4. (Loss) Per Share
Basic and diluted (loss) per share is as follows (in thousands, except per share data):
| Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net (Loss) for basic and diluted loss per share | $ | (521,582) | $ | (1,347,255) | $ | (1,688,724) | $ | (2,478,977) | |||||||||||||||
| Weighted-average common shares outstanding | 254,964 | 254,577 | 254,893 | 248,823 | |||||||||||||||||||
| Diluted weighted-average shares outstanding | 254,964 | 254,577 | 254,893 | 248,823 | |||||||||||||||||||
| Basic (loss) per share | $ | (2.05) | $ | (5.29) | $ | (6.63) | $ | (9.96) | |||||||||||||||
| Diluted (loss) per share | $ | (2.05) | $ | (5.29) | $ | (6.63) | $ | (9.96) |
Basic loss per share is computed by dividing Net Loss by the weighted-average number of common stock outstanding during each period. Diluted loss per share incorporates the incremental shares issuable upon the assumed exercise of stock options and conversion of potentially dilutive securities. As we had net losses for the quarter and six months ended June 30, 2022 and June 30, 2021, all potential common shares were determined to be antidilutive, resulting in the same basic and diluted net loss per share amounts for these periods. There were approximately 23,526,181 and 23,597,611 antidilutive shares for the quarters and six months ended June 30, 2022, respectively, compared to 445,000 and 449,000 for the quarters and six months ended June 30, 2021, respectively.
Effective January 1, 2022, ASU 2020-06 eliminated the treasury stock method and instead required the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share when the instruments may be settled in cash or shares. Under the if-converted method, shares related to our convertible notes, to the extent dilutive, are assumed to be converted into common stock at the beginning of the reporting period. The required use of the if-converted method did not impact our diluted net loss per share as the Company was in a net loss position. For further information regarding the adoption of ASU 2020-06, refer to Note 2*. Summary of Significant Accounting Policies*.
Note 5. Property and Equipment
During the quarter ended June 30, 2021, we determined that certain construction in progress projects would be reduced in scope or would no longer be completed due to the impact COVID-19 has had to our operations. This led to an impairment of $40.6 million of construction in progress assets previously reported in Property and equipment, net. This impairment charge was reported within Impairment and credit losses (recoveries) in our consolidated statements of comprehensive loss for the three and six months ended June 30, 2021.
In January 2022 and April 2022, we took delivery of Wonder of the Seas and Celebrity Beyond, respectively. Refer to Note 7*. Debt* for further information on the financing for Wonder of the Seas and Celebrity Beyond.
In July 2022, we purchased a ship for our Silversea Cruises brand for $275.0 million, plus transaction fees. The ship is expected to enter service during the fourth quarter of 2022. For information regarding the financing of the ship, refer to Note 7*. Debt*.
Note 6**. Other Assets**
A Variable Interest Entity (“VIE”) is an entity in which the equity investors have not provided enough equity to finance the entity’s activities or the equity investors: (1) cannot directly or indirectly make decisions about the entity’s activities through their voting rights or similar rights; (2) do not have the obligation to absorb the expected losses of the entity; (3) do not have the right to receive the expected residual returns of the entity; or (4) have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.
We have determined that TUI Cruises GmbH ("TUIC"), our 50%-owned joint venture, which operates the brands TUI Cruises and Hapag-Lloyd Cruises, is a VIE. We have determined that we are not the primary beneficiary of TUIC. We believe that the power to direct the activities that most significantly impact TUIC’s economic performance is shared between ourselves and TUI AG, our joint venture partner. All the significant operating and financial decisions of TUIC require the consent of both parties, which we believe creates shared power over TUIC. Accordingly, we do not consolidate this entity and account for this investment under the equity method of accounting.
As of June 30, 2022, the net book value of our investment in TUIC was $365.0 million, primarily consisting of $258.6 million in equity and a loan of €95.2 million, or approximately $99.5 million based on the exchange rate at June 30, 2022. As of December 31, 2021, the net book value of our investment in TUIC was $444.4 million, primarily consisting of $322.4 million in equity and a loan of €103.0 million, or approximately $117.2 million based on the exchange rate at December 31, 2021. The loan, which was made in connection with the sale of Splendour of the Seas in April 2016, accrues interest at a rate of 6.25% per annum and is payable over 10 years. This loan is 50% guaranteed by TUI AG and is secured by a first priority mortgage on the ship. The majority of these amounts were included within Other assets in our consolidated balance sheets. During the quarter ended March 31, 2021, we and TUI AG each contributed €59.5 million, or approximately $69.9 million based on the exchange rate at March 31, 2021, of additional equity through a combination of cash contributions and conversion of existing receivables.
TUIC has various ship construction and financing agreements which include certain restrictions on each of our and TUI AG’s ability to reduce our current ownership interest in TUI Cruises below 37.55% through May 2033. Our investment amount and outstanding term loan are substantially our maximum exposure to loss in connection with our investment in TUIC.
We have determined that Grand Bahama Shipyard Ltd. ("Grand Bahama"), a ship repair and maintenance facility in which we have a 40% noncontrolling interest, is a VIE. This facility serves cruise and cargo ships, oil and gas tankers and offshore units. We utilize this facility, among other ship repair facilities, for our regularly scheduled drydocks and certain emergency repairs as may be required. During the quarter and six months ended June 30, 2022, we made payments of $4.0 million and $7.7 million, respectively to Grand Bahama for ship repair and maintenance services compared to payments of $2.7 million for the quarter and six months ended June 30, 2021. We have determined that we are not the primary beneficiary of this facility as we do not have the power to direct the activities that most significantly impact the facility’s economic performance. Accordingly, we do not consolidate this entity.
Our loan to Grand Bahama matures March 2026 and bears interest at LIBOR plus 3.5% to 3.75%, capped at 5.75%. Interest payable on the loan is due on a semi-annual basis. During the six months ended June 30, 2021, we received principal and interest payments of $8.9 million related to a term loan that had fully matured. We did not receive principal and interest payments during the six months ended June 30, 2022. As of June 30, 2022, we had exposure to credit loss in Grand Bahama of $10.7 million related to the loan. The outstanding loan balance is in non-accrual status and is included within Other assets in our consolidated balance sheets. In addition, we are currently recognizing our share of net accumulated equity method losses against the carrying value of our loan receivable from Grand Bahama. We monitor credit risk associated with the loan through
our participation on Grand Bahama’s board of directors along with our review of Grand Bahama’s financial statements and projected cash flows.
The following tables set forth information regarding our investments accounted for under the equity method of accounting, including the entities discussed above (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Share of equity loss from investments | $ | (13,179) | $ | (48,088) | $ | (44,238) | $ | (107,959) | ||||||||||||||||||
| Dividends received (1) | $ | 563 | $ | — | $ | 986 | $ | — |
(1) Represents dividends received from our investments accounted for under the equity method of accounting for the quarters and six months ended June 30, 2022 and June 30, 2021.
| As of June 30, 2022 | As of December 31, 2021 | |||||||||||||
| Total notes receivable due from equity investments | $ | 112,812 | $ | 130,587 | ||||||||||
| Less-current portion (1) | 20,260 | 21,508 | ||||||||||||
| Long-term portion (2) | $ | 92,552 | $ | 109,079 |
(1)Included within Trade and other receivables, net in our consolidated balance sheets.
(2)Included within Other assets in our consolidated balance sheets.
We also provide ship management services to TUIC and recorded the following as it relates to these services in our operating results within our consolidated statements of comprehensive income (loss) (in thousands):
| Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Revenues | $ | 3,937 | $ | 5,913 | $ | 10,309 | $ | 11,144 | ||||||||||||||||||||||||
| Expenses | $ | 1,691 | $ | 1,715 | $ | 3,517 | $ | 2,990 |
Credit Losses
We reviewed our notes receivable for credit losses in connection with the preparation of our financial statements for the quarter ended June 30, 2022. In evaluating the allowance, management considered factors such as historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. Based on these credit loss estimation factors, during the six months ended June 30, 2022, we recorded a net credit loss recovery of $10.6 million primarily resulting from cash collections received on a note receivable, in which credit losses were previously recorded. Our credit loss allowance beginning and ending balances as of January 1, 2022 and June 30, 2022 primarily relate to credit losses recognized on notes receivable for the previous sale of our property and equipment of $81.6 million and other receivable balances primarily related to loans due from travel advisors of $12.6 million.
The following table summarizes our credit loss allowance related to receivables for the six months ended June 30, 2022 (in thousands):
| Credit Loss Allowance | ||||||||
| Beginning balance January 1, 2022 | $ | 100,192 | ||||||
| Credit loss recovery, net | (10,623) | |||||||
| Write-offs | (9,024) | |||||||
| Ending balance June 30, 2022 | $ | 80,545 |
Note 7**. Debt**
Debt consists of the following (in thousands):
| Interest Rate (1) | Maturities Through | As of June 30, 2022 | As of December 31, 2021 | |||||||||||||||||||||||
| Fixed rate debt: | ||||||||||||||||||||||||||
| Unsecured senior notes | 3.70% to 9.13% | 2022 - 2028 | $ | 6,595,735 | $ | 5,604,498 | ||||||||||||||||||||
| Secured senior notes | 10.88% to 11.50% | 2023 - 2025 | 2,361,570 | 2,354,037 | ||||||||||||||||||||||
| Unsecured term loans | 1.28% to 5.89% | 2026 - 2034 | 4,767,955 | 2,860,567 | ||||||||||||||||||||||
| Convertible notes | 2.88% to 4.25% | 2023 | 1,725,000 | 1,558,780 | ||||||||||||||||||||||
| Total fixed rate debt | 15,450,260 | 12,377,882 | ||||||||||||||||||||||||
| Variable rate debt: | ||||||||||||||||||||||||||
| Unsecured revolving credit facilities (2) | 3.09% to 3.49% | 2022 - 2024 | 2,611,342 | 2,899,342 | ||||||||||||||||||||||
| USD unsecured term loan | 3.34% to 6.79% | 2022 - 2033 | 4,569,466 | 5,018,740 | ||||||||||||||||||||||
| Euro unsecured term loan | 2.26% to 4.72% | 2023 - 2036 | 577,098 | 685,633 | ||||||||||||||||||||||
| Total variable rate debt | 7,757,906 | 8,603,715 | ||||||||||||||||||||||||
| Finance lease liabilities | 422,893 | 472,275 | ||||||||||||||||||||||||
| Total debt (3) | 23,631,059 | 21,453,872 | ||||||||||||||||||||||||
| Less: unamortized debt issuance costs | (417,852) | (363,532) | ||||||||||||||||||||||||
| Total debt, net of unamortized debt issuance costs | 23,213,207 | 21,090,340 | ||||||||||||||||||||||||
| Less—current portion | (5,466,486) | (2,243,131) | ||||||||||||||||||||||||
| Long-term portion | $ | 17,746,721 | $ | 18,847,209 |
(1) Interest rates based on outstanding loan balance as of June 30, 2022 and, for variable rate debt, include either LIBOR or EURIBOR plus the applicable margin.
(2) Includes $1.9 billion facility and $1.3 billion facility, the vast majority of which is due in 2024. Our $1.9 billion facility accrues interest at LIBOR plus a maximum interest rate margin of 1.30% which interest was 3.09% as of June 30, 2022 and is subject to a facility fee of a maximum of 0.20%. Our $1.3 billion facility accrues interest at LIBOR plus a maximum interest rate margin of 1.70%, which interest was 3.49% as of June 30, 2022 and is subject to a facility fee of a maximum of 0.30%.
(3) At June 30, 2022 and December 31, 2021, the weighted average interest rate for total debt was 6.09% and 5.47%, respectively.
In January 2022, we took delivery of Wonder of the Seas. To finance the delivery, we borrowed a total of $1.3 billion under a credit agreement novated to us upon delivery of the ship in January 2022, resulting in an unsecured term loan which is 100% guaranteed by Bpifrance Assurance Export ("BpiFAE"), the official export credit agency ("ECA") of France. The unsecured loan amortizes semi-annually over 12 years and bears interest at a fixed rate of 3.18% per annum.
In January 2022, we issued $1.0 billion of senior notes (the "January 2022 Unsecured Notes") due in 2027 for net proceeds of approximately $990.0 million. Interest accrues on the January 2022 Unsecured Notes at a fixed rate of 5.375% per annum and is payable semi-annually in arrears. The proceeds from the January 2022 Unsecured Notes are being used to repay principal payments on debt maturing in 2022 (including to pay fees and expenses in connection with such repayments) and have been temporarily applied to repay borrowings under our revolving credit facilities.
In February 2022, we entered into certain agreements with MS where MS agreed to provide backstop committed financing to refinance, repurchase and/or repay in whole or in part our existing and outstanding 10.875% Senior Secured Notes due 2023, Priority Guaranteed Notes and 4.25% Convertible Notes due 2023. Pursuant to the agreements, we may, at our sole option, issue and sell to MS (subject to the satisfaction of certain conditions) five-year senior unsecured notes with gross proceeds of up to $3.15 billion at any time between April 1, 2023 and June 29, 2023, to refinance the aforementioned notes.
In April 2022, we took delivery of Celebrity Beyond. To finance the delivery, we borrowed a total of €0.7 billion under a credit agreement novated to us upon delivery of the ship in April 2022, resulting in an unsecured term loan which is 100%
guaranteed by BpiFAE. The unsecured loan amortizes semi-annually over 12 years and bears interest at a fixed rate of 1.28% per annum.
In July 2022, we purchased a ship for our Silversea Cruises brand. To finance the purchase, we borrowed $277 million, which is 95% guaranteed by Euler Hermes Aktiengesellschaft (“Hermes”), the official export credit agency of Germany. The loan amortizes semi-annually over 15 years and bears interest at a floating rate equal to SOFR plus a margin of 1.25%. Principal payments to the lender will commence in July 2024 and the loan will mature in July 2037.
Our export credit facilities and our non-export credit facilities have an outstanding principal amount of approximately $13.1 billion as of June 30, 2022. These facilities contain covenants that require us, among other things, to maintain a fixed charge coverage ratio of at least 1.25x and limit our net debt-to-capital ratio, and under certain facilities, to maintain a minimum shareholders' equity. In 2021, we amended our non-export credit facilities and export credit facilities, and certain credit card processing agreements, to extend the waiver of our financial covenants through and including at least the third quarter of 2022, and subsequently in the third quarter of 2021, we entered into a letter agreement to extend the waiver period for our export credit facilities to the end of the fourth quarter of 2022. Further, in July 2022, we amended our non-export-credit facilities and export credit facilities, and certain credit card processing agreements. Among other things, the amendments modified the levels at which our net debt to capitalization covenant will be tested during the period commencing immediately following the end of the waiver period and continuing through the end of 2025 and the amount of minimum shareholders' equity required to be maintained through 2025. The amendments impose a monthly-tested minimum liquidity covenant of $350.0 million, which in the case of the non-export credit facilities terminates at the end of the waiver period and in the case of the export credit facilities terminates either in July 2025, or when we pay off all deferred amounts, whichever is earlier. In addition, the amendments to the non-export credit facilities place restrictions on paying cash dividends and effectuating share repurchases through the end of the third quarter of 2022, while the export credit facility amendments require us to prepay any deferred amounts if we elect to issue dividends or complete share repurchases.
As of June 30, 2022, our aggregate revolving borrowing capacity was $3.2 billion and was mostly utilized through a combination of amounts drawn and letters of credits issued under the facilities. Certain of our surety agreements with third party providers for the benefit of certain agencies and associations that provide travel related bonds, allow the sureties to request collateral. We also have agreements with our credit card processors relating to customer deposits received by us for future voyages. These agreements allow the credit card processors to require us, under certain circumstances, to maintain a reserve that can be satisfied by posting collateral. As of June 30, 2022, we have posted letters of credit as collateral with our sureties and credit card processors under our revolving credit facilities in the amount of $111.9 million.
Executed amendments are in place for the majority of our credit card processors, waiving reserve requirements tied to the breach of our financial covenants through at least September 30, 2022, with modified covenants thereafter, and as such, we do not anticipate any incremental collateral requirements for the processors covered by these waivers in the next 12 months. We have a reserve with a processor where the agreement was amended in the first quarter of 2021, such that proceeds are withheld in reserve, until the sailing takes place or the funds are refunded to the customer. The maximum projected exposure with the processor, including amounts currently withheld and reported in Trade and other receivables, is approximately $309.6 million. The amount and timing are dependent on future factors that are uncertain, such as the value of future deposits and whether we transfer our business to other processors. If we require additional waivers on the credit card processing agreements and are not able to obtain them, this could lead to the termination of these agreements or the trigger of reserve requirements.
Except for the term loans we incurred to acquire Celebrity Flora and Silver Moon, all of our unsecured ship financing term loans are guaranteed by the export credit agency in the respective country in which the ship is constructed. For the majority of the loans as of June 30, 2022, we pay to the applicable export credit agency, depending on the financing agreement, an upfront fee of 2.35% to 5.48% of the maximum loan amount in consideration for these guarantees. We amortize the fees that are paid upfront over the life of the loan. We classify these fees within Amortization of debt issuance costs in our consolidated statements of cash flows. Prior to the loan being drawn, we present these fees within Other assets in our consolidated balance sheets. Once the loan is drawn, such fees are classified as a discount to the related loan, or contra-liability account, within Current portion of long-term debt or long-term debt.
The following is a schedule of annual maturities on our total debt, net of debt issuance costs of $417.9 million, and including finance leases, as of June 30, 2022 for each of the next five years (in thousands):
| Year | As of June 30, 2022 (1) | ||||
| Remainder of 2022 | 1,579,926 | ||||
| 2023 | 5,746,141 | ||||
| 2024 | 3,869,007 | ||||
| 2025 | 2,482,849 | ||||
| 2026 | 2,693,083 | ||||
| Thereafter | 6,842,201 | ||||
| 23,213,207 |
(1) Debt denominated in other currencies is calculated based on the applicable exchange rate at June 30, 2022.
Note 8**. Leases**
Operating Leases
Our operating leases primarily relate to preferred berthing arrangements, real estate and shipboard equipment, and are included within Operating lease right-of-use assets, and Long-term operating lease liabilities with the current portion of the liability included within Current portion of operating lease liabilities in our consolidated balance sheets as of June 30, 2022 and December 31, 2021. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. Our operating leases include Silver Explorer, operated by Silversea Cruises. The operating lease for Silver Explorer will expire in 2023.
For some of our real estate leases and berthing agreements, we do have the option to extend our current lease term. For those lease agreements with renewal options, the renewal periods for real estate leases range from one to 10 years and the renewal periods for berthing agreements range from one to 20 years. Generally, we do not include renewal options as a component of our present value calculation for berthing agreements. However, for certain real estate leases, we include them.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of lease payments. We estimate our incremental borrowing rates based on LIBOR and U.S. Treasury note rates corresponding to lease terms increased by the Company’s credit risk spread and reduced by the estimated impact of collateral. In addition, we have lease agreements with lease and non-lease components, which are generally accounted for separately. However, for berthing agreements, we account for the lease and non-lease components as a single lease component.
Finance Leases
Our finance leases primarily relate to buildings and surrounding land located at our Miami headquarters, our Silver Dawn, and Silver Whisper ships. Finance leases are included within Property, and Equipment, net, and Long-term debt with the current portion of the liability included within Current portion of long-term debt in our consolidated balance sheets as of June 30, 2022 and December 31, 2021.
In June 2019, the Company entered into a new master lease agreement (“Master Lease”) with Miami-Dade County related to the buildings and surrounding land located at our Miami headquarters, which has been classified as a finance lease in accordance with ASC 842, Leases. In January of 2022, we executed a modification to the Master Lease to extend the expiration of the lease from 2072 to 2074, which continues to include the two five-year options to extend the lease. We continue to consider the probability of exercising the two five-year options as reasonably certain. The modification of the Master Lease did not change the classification of the lease. The total aggregate amount of the finance lease liabilities recorded for this Master Lease was $100.9 million and $127.0 million as of June 30, 2022 and December 31, 2021, respectively.
Silversea Cruises operates Silver Dawn under a sale-leaseback agreement with a bargain purchase option at the end of the 15-year lease term. Due to the bargain purchase option at the end of the lease term in 2036, whereby Silversea Cruises is reasonably certain of obtaining ownership of the ship, Silver Dawn is accounted for as a finance lease. The lease includes other purchase options beginning in year three, none of which are reasonably certain of being exercised at this time. The total aggregate amount of finance lease liabilities recorded for this ship was $274.3 million and $283.7 million as of June 30, 2022 and December 31, 2021, respectively.
Silversea Cruises operates the Silver Whisper under a finance lease. The finance lease for Silver Whisper will expire in 2023, subject to an option to purchase the ship. Additionally, certain scheduled payments have been deferred and are reflected in Long-term debt in our Consolidated Balance Sheet as of June 30, 2022 and December 31, 2021. The total aggregate amount of the finance lease liabilities recorded for this ship was $16.6 million and $24.1 million at June 30, 2022 and December 31, 2021, respectively. The lease payments on the Silver Whisper are subject to adjustments based on the LIBOR rate.
The components of lease expense were as follows (in thousands):
| Consolidated Statement of Comprehensive Loss Classification | Quarter Ended June 30, 2022 | Six Months Ended June 30, 2022 | ||||||||||||
| Lease costs: | ||||||||||||||
| Operating lease costs | Commission, transportation and other | $ | 27,993 | $ | 50,722 | |||||||||
| Operating lease costs | Other operating expenses | 5,523 | 10,994 | |||||||||||
| Operating lease costs | Marketing, selling and administrative expenses | 4,870 | 9,646 | |||||||||||
| Financial lease costs: | ||||||||||||||
| Amortization of right-of-use-assets | Depreciation and amortization expenses | 6,102 | 12,195 | |||||||||||
| Interest on lease liabilities | Interest expense, net of interest capitalized | 4,654 | 9,254 | |||||||||||
| Total lease costs | $ | 49,142 | $ | 92,811 |
| Consolidated Statement of Comprehensive Loss Classification | Quarter Ended June 30, 2021 | Six Months Ended June 30, 2021 | ||||||||||||
| Lease costs: | ||||||||||||||
| Operating lease costs | Other operating expenses | 4,811 | 9,941 | |||||||||||
| Operating lease costs | Marketing, selling and administrative expenses | 2,475 | 8,510 | |||||||||||
| Financial lease costs: | ||||||||||||||
| Amortization of right-of-use-assets | Depreciation and amortization expenses | 3,983 | 7,727 | |||||||||||
| Interest on lease liabilities | Interest expense, net of interest capitalized | 364 | 674 | |||||||||||
| Total lease costs | $ | 11,633 | $ | 26,852 |
In addition, certain of our berthing agreements include variable lease costs based on the number of passengers berthed. During the quarter and six months ended June 30, 2022, we had $11.9 million and $19.4 million variable lease costs recorded within Commission, transportation and other in our consolidated statement of comprehensive loss, respectively. During the quarter and six months ended June 30, 2021, we had no variable lease costs.
Weighted average of the remaining lease terms and weighted average discount rates are as follows:
| As of June 30, 2022 | As of December 31, 2021 | ||||||||||
| Weighted average of the remaining lease term in years | |||||||||||
| Operating leases | 17.44 | 18.18 | |||||||||
| Finance leases | 22.89 | 23.96 | |||||||||
| Weighted average discount rate | |||||||||||
| Operating leases | 6.88 | % | 6.52 | % | |||||||
| Finance leases | 5.97 | % | 5.54 | % |
Supplemental cash flow information related to leases is as follows (in thousands):
| Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | 56,270 | $ | 13,149 | ||||
| Operating cash flows from finance leases | $ | 9,254 | $ | 674 | ||||
| Financing cash flows from finance leases | $ | 22,455 | $ | 7,935 | ||||
As of June 30, 2022, maturities related to lease liabilities were as follows (in thousands):
| Year | Operating Leases | Finance Leases | |||||||||
| Remainder of 2022 | $ | 52,545 | $ | 38,106 | |||||||
| 2023 | 112,861 | 53,069 | |||||||||
| 2024 | 101,068 | 44,348 | |||||||||
| 2025 | 95,924 | 43,986 | |||||||||
| 2026 | 90,182 | 38,843 | |||||||||
| Thereafter | 859,621 | 705,171 | |||||||||
| Total lease payments | 1,312,201 | 923,523 | |||||||||
| Less: Interest | (679,390) | (500,630) | |||||||||
| Present value of lease liabilities | $ | 632,811 | $ | 422,893 |
Note 9. Commitments and Contingencies
Ship Purchase Obligations
Our future capital commitments consist primarily of new ship orders. As of June 30, 2022, the dates that the ships on order by our Global and Partner Brands are expected to be delivered, subject to change in the event of construction delays, and their approximate berths are as follows:
| Ship | Shipyard | Expected to be delivered | Approximate Berths | |||||||||||||||||
| Royal Caribbean International — | ||||||||||||||||||||
| Oasis-class: | ||||||||||||||||||||
| Utopia of the Seas | Chantiers de l'Atlantique | 2nd Quarter 2024 | 5,700 | |||||||||||||||||
| Icon-class: | ||||||||||||||||||||
| Icon of the Seas | Meyer Turku Oy | 3rd Quarter 2023 | 5,600 | |||||||||||||||||
| Unnamed | Meyer Turku Oy | 2nd Quarter 2025 | 5,600 | |||||||||||||||||
| Unnamed | Meyer Turku Oy | 2nd Quarter 2026 | 5,600 | |||||||||||||||||
| Celebrity Cruises — | ||||||||||||||||||||
| Edge-class: | ||||||||||||||||||||
| Celebrity Ascent | Chantiers de l'Atlantique | 4th Quarter 2023 | 3,250 | |||||||||||||||||
| Silversea Cruises | ||||||||||||||||||||
| Evolution Class: | ||||||||||||||||||||
| Silver Nova | Meyer Werft | 2nd Quarter 2023 | 730 | |||||||||||||||||
| Unnamed | Meyer Werft | 2nd Quarter 2024 | 730 | |||||||||||||||||
| TUI Cruises (50% joint venture) | ||||||||||||||||||||
| Mein Schiff 7 | Meyer Turku Oy | 2nd Quarter 2024 | 2,900 | |||||||||||||||||
| Unnamed | Fincantieri | 4th Quarter 2024 | 4,100 | |||||||||||||||||
| Unnamed | Fincantieri | 2nd Quarter 2026 | 4,100 | |||||||||||||||||
| Total Berths | 38,310 |
In addition, as of June 30, 2022, we have an agreement in place with Chantiers de l'Atlantique to build an additional Edge-class ship for delivery in 2025, which is contingent upon completion of conditions precedent and financing.
As of June 30, 2022, the aggregate cost of our ships on order presented in the table above, excluding any ships on order by our Partner Brands, was approximately $9.4 billion, of which we had deposited $0.6 billion as of such date. Approximately 61.7% of the aggregate cost was exposed to fluctuations in the Euro exchange rate at June 30, 2022. Refer to Note 12*. Fair Value Measurements and Derivative Instruments* for further information.
Litigation
As previously reported, two lawsuits were filed against us in August 2019 in the U.S. District Court for the Southern District of Florida (the "Court") under Title III of the Cuban Liberty and Democratic Solidarity Act, also known as the Helms-Burton Act. The complaint filed by Havana Docks Corporation ("Havana Docks Action") alleges it holds an interest in the Havana Cruise Port Terminal, and the complaint filed by Javier Garcia-Bengochea (the "Port of Santiago Action") alleges that he holds an interest in the Port of Santiago, Cuba, both of which were expropriated by the Cuban government. The complaints further allege that we trafficked in those properties by embarking and disembarking passengers at these facilities. The plaintiffs seek all available statutory remedies, including the value of the expropriated property, plus interest, treble damages, attorneys’ fees and costs. The Court dismissed the Port of Santiago Action with prejudice on the basis that the plaintiff lacked standing, and the plaintiff’s appeal of the dismissal is awaiting a decision by the appellate court. In the Havana Docks Action, the Court granted summary judgement in favor of the plaintiff as to liability and a trial on damages has been scheduled for September 2022. We believe we have meritorious defenses to the claims alleged in both the Havana Docks Action and the Port of Santiago Action, and we intend to vigorously defend ourselves against them. Given that the outcome of the litigation is inherently unpredictable and subject to significant uncertainties, there can be no assurances that the final outcome of either case will not be material, and we cannot reasonably estimate the potential loss or range of loss, if any, associated with the litigation.
We are routinely involved in claims typical within the cruise vacation industry. The majority of these claims are covered by insurance. We believe the outcome of such claims, net of expected insurance recoveries, will not have a material adverse impact on our financial condition or results of operations and cash flows.
Other
Some of the contracts that we enter into include indemnification provisions that obligate us to make payments to the counterparty if certain events occur. These contingencies generally relate to changes in taxes, increased lender capital costs and other similar costs. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business. There are no stated or notional amounts included in the indemnification clauses and we are not able to estimate the maximum potential amount of future payments, if any, under these indemnification clauses. We have not been required to make any payments under such indemnification clauses in the past and, under current circumstances, we do not believe an indemnification in any material amount is probable.
If any person acquires ownership of more than 50% of our common stock or, subject to certain exceptions, during any 24-month period, a majority of our board of directors is no longer comprised of individuals who were members of our board of directors on the first day of such period, we may be obligated to prepay indebtedness outstanding under our credit facilities, which we may be unable to replace on similar terms. Our debt securities also contain change of control provisions that would be triggered by a third-party acquisition of greater than 50% of our common stock coupled with a ratings downgrade. If this were to occur, it would have an adverse impact on our liquidity and operations.
Note 10. Shareholders' Equity
On January 1, 2022, we adopted ASU 2020-06 using the modified retrospective approach to recognize our convertible notes as single liability instruments. As a result of the adoption of this pronouncement, the cumulative effect to Shareholders' equity was a reduction of $161.4 million. For further information regarding the entry recorded and the adoption of ASU 2020-06, refer to Note 2*. Summary of Significant Accounting Policies*.
Common Stock Issued
During March 2021, we issued 16.9 million shares of common stock, par value $0.01 per share, at a price of $91.00 per share. We received net proceeds of $1.5 billion from the sale of our common stock, after deducting the estimated offering expenses payable by us.
Dividends
During the second quarter of 2020, we agreed with certain of our lenders not to pay dividends or engage in common stock repurchases for so long as our debt covenant waivers are in effect. In addition, in the event we declare a dividend or engage in share repurchases, we will need to repay the amounts deferred under our export credit facilities. Accordingly, during the six months ended June 30, 2022 and 2021, we did not declare dividends. Pursuant to amendments made to these agreements during the first quarter of 2021, the restrictions on paying cash dividends and effectuating share repurchases were extended through and including the third quarter of 2022.
Note 11**. Changes in Accumulated Other Comprehensive Loss**
The following table presents the changes in accumulated other comprehensive loss by component for the six months ended June 30, 2022 and 2021 (in thousands):
| Accumulated Other Comprehensive Loss for the Six Months Ended June 30, 2022 | Accumulated Other Comprehensive Loss for the Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Changes related to cash flow derivative hedges | Changes in defined benefit plans | Foreign currency translation adjustments | Accumulated other comprehensive loss | Changes related to cash flow derivative hedges | Changes in defined benefit plans | Foreign currency translation adjustments | Accumulated other comprehensive loss | ||||||||||||||||||||||||||||||||||||||||
| Accumulated comprehensive loss at beginning of the year | $ | (646,473) | $ | (56,835) | $ | (7,577) | $ | (710,885) | $ | (650,519) | $ | (65,542) | $ | (23,280) | $ | (739,341) | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 207,406 | 26,107 | 20,460 | 253,973 | 42,247 | 5,085 | 6,233 | 53,565 | |||||||||||||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (95,998) | 1,658 | — | (94,340) | 19,531 | 2,290 | — | 21,821 | |||||||||||||||||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | 111,408 | 27,765 | 20,460 | 159,633 | 61,778 | 7,375 | 6,233 | 75,386 | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | (535,065) | $ | (29,070) | $ | 12,883 | $ | (551,252) | $ | (588,741) | $ | (58,167) | $ | (17,047) | $ | (663,955) |
The following table presents reclassifications out of accumulated other comprehensive loss for the quarters and six months ended June 30, 2022 and 2021 (in thousands):
| Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | ||||||||||||||||||||||||||||||||
| Details About Accumulated Other Comprehensive Loss Components | Quarter Ended June 30, 2022 | Quarter Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Affected Line Item in Statements of Comprehensive Loss | |||||||||||||||||||||||||||
| Gain (loss) on cash flow derivative hedges: | ||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | (5,152) | $ | (11,448) | $ | (15,585) | $ | (20,957) | Interest expense, net of interest capitalized | |||||||||||||||||||||||
| Foreign currency forward contracts | (4,294) | (3,855) | (8,359) | (7,636) | Depreciation and amortization expenses | |||||||||||||||||||||||||||
| Foreign currency forward contracts | (471) | (515) | (1,689) | (1,806) | Other income (expense) | |||||||||||||||||||||||||||
| Fuel swaps | 15 | (7) | (354) | (414) | Other income (expense) | |||||||||||||||||||||||||||
| Fuel swaps | 77,181 | 7,523 | 121,985 | 11,282 | Fuel | |||||||||||||||||||||||||||
| 67,279 | (8,302) | 95,998 | (19,531) | |||||||||||||||||||||||||||||
| Amortization of defined benefit plans: | ||||||||||||||||||||||||||||||||
| Actuarial loss | (930) | (1,547) | (1,658) | (2,290) | Payroll and related | |||||||||||||||||||||||||||
| (930) | (1,547) | (1,658) | (2,290) | |||||||||||||||||||||||||||||
| Total reclassifications for the period | $ | 66,349 | $ | (9,849) | $ | 94,340 | $ | (21,821) |
Note 12**. Fair Value Measurements and Derivative Instruments**
Fair Value Measurements
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, 2022 | Fair Value Measurements at December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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) | $ | 2,102,205 | $ | 2,102,205 | $ | 2,102,205 | $ | — | $ | — | $ | 2,701,770 | $ | 2,701,770 | $ | 2,701,770 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 2,102,205 | $ | 2,102,205 | $ | 2,102,205 | $ | — | $ | — | $ | 2,701,770 | $ | 2,701,770 | $ | 2,701,770 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt (including current portion of debt)(5) | $ | 22,790,314 | $ | 21,802,888 | $ | — | $ | 21,802,888 | $ | — | $ | 20,618,065 | $ | 22,376,480 | $ | — | $ | 22,376,480 | $ | — | ||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities | $ | 22,790,314 | $ | 21,802,888 | $ | — | $ | 21,802,888 | $ | — | $ | 20,618,065 | $ | 22,376,480 | $ | — | $ | 22,376,480 | $ | — |
(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, 2022 and December 31, 2021.
(4) Consists of cash and marketable securities with original maturities of less than 90 days.
(5) Consists of unsecured revolving credit facilities, senior notes, term loans and convertible notes. These amounts do not include our finance lease obligations or commercial paper.
Other Financial Instruments
The carrying amounts of accounts receivable, accounts payable, accrued interest and accrued expenses approximate fair value at June 30, 2022 and December 31, 2021.
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, 2022 | Fair Value Measurements at December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 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) | $ | 261,057 | $ | — | $ | 261,057 | $ | — | $ | 69,808 | $ | — | $ | 69,808 | $ | — | ||||||||||||||||||||||||||||||||||
| Total Assets | $ | 261,057 | $ | — | $ | 261,057 | $ | — | $ | 69,808 | $ | — | $ | 69,808 | $ | — | ||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative financial instruments(5) | $ | 148,335 | $ | — | $ | 148,335 | $ | — | $ | 200,541 | $ | — | $ | 200,541 | $ | — | ||||||||||||||||||||||||||||||||||
| Total Liabilities | $ | 148,335 | $ | — | $ | 148,335 | $ | — | $ | 200,541 | $ | — | $ | 200,541 | $ | — |
(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. No Level 3 inputs were used in fair value measurements of Other financial instruments as of June 30, 2022 and December 31, 2021.
(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.
The reported fair values are based on a variety of factors and assumptions. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of June 30, 2022 or December 31, 2021, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement.
Nonfinancial Instruments Recorded at Fair Value on a Nonrecurring Basis
Nonfinancial instruments include items such as goodwill, indefinite-lived intangible assets, long-lived assets, right-of-use assets and equity method investments that are measured at fair value on a nonrecurring basis when events and circumstances indicate the carrying value is not recoverable. 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 December 31, 2021 | ||||||||||||||
| Description | Total Carrying Amount | Total Fair Value | Level 3 | Total Impairment for the Year Ended December 31, 2021 (1) | ||||||||||
| Long-lived assets | — | — | — | 55,213 | ||||||||||
| Total | — | — | — | 55,213 |
(1) Amount is primarily composed of construction in progress assets that were impaired during the year ended 2021 due to a reduction in scope or the decision to not complete the projects. The impairments were calculated based on orderly liquidation values. The fair value of these assets was estimated as of the date the assets were last impaired.
There were no nonfinancial instruments recorded at fair value as of June 30, 2022.
Master Netting Agreements
We have master International Swaps and Derivatives Association (“ISDA”) agreements in place with our derivative instrument counterparties. These ISDA agreements generally provide for final close out netting with our counterparties for all positions in the case of default or termination of the ISDA agreement. We have determined that our ISDA agreements provide us with rights of setoff on the fair value of derivative instruments in a gain position and those in a loss position with the same counterparty. We have elected not to offset such derivative instrument fair values in our consolidated balance sheets.
See Credit Related Contingent Features for further discussion on contingent collateral requirements for our derivative instruments.
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, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 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 Liabilities | Cash Collateral Received | Net Amount of Derivative Assets | |||||||||||||||||||||||||||||||||||||||||||
| Derivatives subject to master netting agreements | $ | 261,057 | $ | (106,142) | $ | — | $ | 154,915 | $ | 69,808 | $ | (67,995) | $ | — | $ | 1,813 | ||||||||||||||||||||||||||||||||||
| Total | $ | 261,057 | $ | (106,142) | $ | — | $ | 154,915 | $ | 69,808 | $ | (67,995) | $ | — | $ | 1,813 |
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, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 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 Assets | Cash Collateral Pledged | Net Amount of Derivative Liabilities | |||||||||||||||||||||||||||||||||||||||||||
| Derivatives subject to master netting agreements | $ | (148,335) | $ | 106,142 | $ | — | $ | (42,193) | $ | (200,541) | $ | 67,995 | $ | 44,411 | $ | (88,135) | ||||||||||||||||||||||||||||||||||
| Total | $ | (148,335) | $ | 106,142 | $ | — | $ | (42,193) | $ | (200,541) | $ | 67,995 | $ | 44,411 | $ | (88,135) |
Concentrations of Credit Risk
We monitor our credit risk associated with financial and other institutions with which we conduct significant business, and to minimize these risks, we select counterparties with credit risks acceptable to us and we seek to limit our exposure to an individual counterparty. Credit risk, including, but not limited to, counterparty nonperformance under derivative instruments, our credit facilities and new ship progress payment guarantees, is not considered significant, as we primarily conduct business with large, well-established financial institutions, insurance companies and export credit agencies many of which we have long-term relationships with and which have credit risks acceptable to us or where the credit risk is spread out among a large number of counterparties. As of June 30, 2022, we had counterparty credit risk exposure under our derivative instruments of $144.3 million, which was limited to the cost of replacing the contracts in the event of non-performance by the counterparties to the contracts, the majority of which are currently our lending banks. We do not anticipate nonperformance by any of our significant counterparties. In addition, we have established guidelines we follow regarding credit ratings and instrument maturities to maintain safety and liquidity. We do not normally require collateral or other security to support credit relationships; however, in certain circumstances this option is available to us.
Derivative Instruments
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We try to mitigate these risks through a combination of our normal operating and financing activities and through the use of derivative financial instruments pursuant to our hedging practices and policies. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged. We achieve this by closely matching the notional amount, term and conditions of the derivative instrument with the underlying risk being hedged. Although certain of our derivative financial instruments do not qualify or are not accounted for under hedge accounting, our objective is not to hold or issue derivative financial instruments for trading or other speculative purposes.
We enter into various forward, swap and option contracts to manage our interest rate exposure and to limit our exposure to fluctuations in foreign currency exchange rates and fuel prices. These instruments are recorded on the balance sheet at their fair value and
the vast majority are designated as hedges. We also use non-derivative financial instruments designated as hedges of our net investment in our foreign operations and investments.
At inception of the hedge relationship, a derivative instrument that hedges the exposure to changes in the fair value of a firm commitment or a recognized asset or liability is designated as a fair value hedge. A derivative instrument that hedges a forecasted transaction or the variability of cash flows related to a recognized asset or liability is designated as a cash flow hedge.
Changes in the fair value of derivatives that are designated as fair value hedges are offset against changes in the fair value of the underlying hedged assets, liabilities or firm commitments. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of Accumulated other comprehensive loss until the underlying hedged transactions are recognized in earnings. The foreign currency transaction gain or loss of our non-derivative financial instruments and the changes in the fair value of derivatives designated as hedges of our net investment in foreign operations and investments are recognized as a component of Accumulated other comprehensive loss along with the associated foreign currency translation adjustment of the foreign operation or investment. In certain hedges of our net investment in foreign operations and investments, we exclude forward points from the assessment of hedge effectiveness and we amortize the related amounts directly into earnings.
On an ongoing basis, we assess whether derivatives used in hedging transactions are "highly effective" in offsetting changes in the fair value or cash flow of hedged items. For our net investment hedges, we use the dollar offset method to measure effectiveness. For all other hedging programs, we use the long-haul method to assess hedge effectiveness using regression analysis for each hedge relationship. The methodology for assessing hedge effectiveness is applied on a consistent basis for each one of our hedging programs (i.e., interest rate, foreign currency ship construction, foreign currency net investment and fuel). For our regression analyses, we use an observation period of up to three years, utilizing market data relevant to the hedge horizon of each hedge relationship. High effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the changes in the fair values of the derivative instrument and the hedged item. If it is determined that a derivative is not highly effective as a hedge or hedge accounting is discontinued, any change in fair value of the derivative since the last date at which it was determined to be effective is recognized in earnings.
Cash flows from derivative instruments that are designated as fair value or cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. Cash flows from derivative instruments not designated as hedging instruments are classified as investing activities.
We consider the classification of the underlying hedged item’s cash flows in determining the classification for the designated derivative instrument’s cash flows. We classify derivative instrument cash flows from hedges of benchmark interest rate or hedges of fuel expense as operating activities due to the nature of the hedged item. Likewise, we classify derivative instrument cash flows from hedges of foreign currency risk on our newbuild ship payments as investing activities.
Interest Rate Risk
Our exposure to market risk for changes in interest rates primarily relates to our debt obligations, including future interest payments. At June 30, 2022 and December 31, 2021, approximately 71.3% and 65.7%, respectively, of our debt was effectively fixed-rate debt. We use interest rate swap agreements to modify our exposure to interest rate movements and to manage our interest expense.
Market risk associated with our fixed-rate debt is the potential increase in fair value resulting from a decrease in interest rates. We use interest rate swap agreements that effectively convert a portion of our fixed-rate debt to a floating-rate basis to manage this risk. At June 30, 2022 and December 31, 2021, we maintained interest rate swap agreements on the following fixed-rate debt instruments:
| Debt Instrument | Swap Notional as of June 30, 2022 (in thousands) | Maturity | Debt Fixed Rate | Swap Floating Rate: LIBOR plus | All-in Swap Floating Rate as of June 30, 2022 | ||||||||||||
| Unsecured senior notes | 650,000 | November 2022 | 5.25% | 3.63% | 5.04% | ||||||||||||
| $ | 650,000 |
These interest rate swap agreements are accounted for as fair value hedges.
We use interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis to manage the market risk of increasing interest rates. At June 30, 2022 and December 31, 2021, we maintained interest rate swap agreements on the following floating-rate debt instruments:
| Debt Instrument | Swap Notional as of June 30, 2022 (in thousands) | Maturity | Debt Floating Rate | All-in Swap Fixed Rate | |||||||||||||
| Celebrity Reflection term loan | $ | 136,354 | October 2024 | LIBOR plus | 0.40% | 2.85% | |||||||||||
| Quantum of the Seas term loan | 275,625 | October 2026 | LIBOR plus | 1.30% | 3.74% | ||||||||||||
| Anthem of the Seas term loan | 302,083 | April 2027 | LIBOR plus | 1.30% | 3.86% | ||||||||||||
| Ovation of the Seas term loan | 415,000 | April 2028 | LIBOR plus | 1.00% | 3.16% | ||||||||||||
| Harmony of the Seas term loan (1) | 362,440 | May 2028 | EURIBOR plus | 1.15% | 2.26% | ||||||||||||
| Odyssey of the Seas term loan (2) | 402,500 | October 2032 | LIBOR plus | 0.96% | 3.21% | ||||||||||||
| Odyssey of the Seas term loan (2) | 191,667 | October 2032 | LIBOR plus | 0.96% | 2.84% | ||||||||||||
| $ | 2,085,669 |
(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, 2022.
(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 $402.5 million and $191.7 million interest rate swap agreements are October 2020 and October 2022, respectively. The unsecured term loan for the financing of Odyssey of the Seas was drawn on March 2021.
These interest rate swap agreements are accounted for as cash flow hedges.
The notional amount of interest rate swap agreements related to outstanding debt as of June 30, 2022 and December 31, 2021 was $2.7 billion and $2.9 billion, respectively.
Foreign Currency Exchange Rate Risk
Derivative Instruments
Our primary exposure to foreign currency exchange rate risk relates to our ship construction contracts denominated in Euros, our foreign currency denominated debt and our international business operations. We enter into foreign currency forward contracts to manage portions of the exposure to movements in foreign currency exchange rates. As of June 30, 2022, the aggregate cost of our ships on order was $9.4 billion, of which we had deposited $0.6 billion as of such date. These amounts do not include any ships placed on order that are contingent upon completion of conditions precedent and/or financing and any ships on order by our Partner Brands. Refer to Note 9*. Commitments and Contingencies*, for further information on our ships on order. At June 30, 2022 and December 31, 2021, approximately 61.7% and 59.0%, respectively, of the aggregate cost of the ships under construction was exposed to fluctuations in the Euro exchange rate. Our foreign currency forward contract agreements are accounted for as cash flow or net investment hedges depending on the designation of the related hedge.
On a regular basis, we enter into foreign currency forward contracts and, from time to time, we utilize cross-currency swap agreements and collar options to minimize the volatility resulting from the remeasurement of net monetary assets and liabilities denominated in a currency other than our functional currency or the functional currencies of our foreign subsidiaries. During the second quarter of 2022, we maintained an average of approximately $1.3 billion of these foreign currency forward contracts. These instruments are not designated as hedging instruments. For the quarters ended June 30, 2022 and 2021, changes in the fair value of the foreign currency forward contracts resulted in a (loss) gain of $(80.9) million and $0.5 million, respectively, which offset gains arising from the remeasurement of monetary assets and liabilities denominated in foreign currencies in those same periods of $78.6 million and $0.3 million, respectively. These amounts were recognized in earnings within Other income (expense) in our consolidated statements of comprehensive loss. For the six months ended June 30, 2022 and 2021, changes in the fair value of the foreign currency forward contracts resulted in losses of $87.9 million and $13.0 million, respectively, which offset gains arising from the remeasurement of monetary assets and liabilities denominated in foreign currencies in those same periods of $85.8 million and $4.7 million, respectively. These amounts were recognized in earnings within Other income (expense) in our consolidated statements of comprehensive loss.
The notional amount of outstanding foreign exchange contracts, excluding the forward contracts entered into to minimize remeasurement volatility, as of June 30, 2022 and December 31, 2021 was $2.0 billion and $3.4 billion, respectively.
Non-Derivative Instruments
We consider our investment in our foreign operations to be denominated in relative stable currencies and to be of a long-term nature. We address the exposure of our investments in foreign operations by denominating a portion of our debt in our subsidiaries’ and investments’ functional currencies and designating it as a hedge of these subsidiaries and investments. We had designated debt as a hedge of our net investments primarily in TUI Cruises of €315.0 million, or approximately $329.3 million, as of June 30, 2022. As of
December 31, 2021, we had designated debt as a hedge of our net investments in TUI Cruises of €97.0 million, or approximately $110.3 million.
Fuel Price Risk
Our exposure to market risk for changes in fuel prices relates primarily to the consumption of fuel on our ships. We use fuel swap agreements to mitigate the financial impact of fluctuations in fuel prices.
Our fuel swap agreements are generally accounted for as cash flow hedges. In the case that our hedged forecasted fuel consumption is not probable of occurring, hedge accounting will be discontinued and the related accumulated other comprehensive gain or loss will be reclassified to Other income (expense) immediately. For hedged forecasted fuel consumption that remains possible of occurring, hedge accounting will be discontinued and the related accumulated other comprehensive gain or loss will remain in accumulated other comprehensive gain or loss until the underlying hedged transactions are recognized in earnings or the related hedged forecasted fuel consumption is deemed probable of not occurring.
Prior suspension of our cruise operations due to the COVID-19 pandemic and our gradual resumption of cruise operations has resulted in reductions to our forecasted fuel purchases. During the six months ended June 30, 2021, we discontinued cash flow hedge accounting on 48 thousand metric tons of our fuel swap agreements maturing in 2021, which resulted in the reclassification of a net $4.4 million loss from Accumulated other comprehensive loss to Other income (expense). For the six months ended June 30, 2022, we did not discontinue cash flow hedge accounting on any of our fuel swap agreements. Changes in the fair value of fuel swaps for which cash flow hedge accounting was discontinued are currently recognized in Other income (expense) each reporting period through the maturity dates of the fuel swaps.
Future suspension of our operations or modifications to our itineraries may affect our expected forecasted fuel purchases which could result in further discontinuance of fuel swap cash flow hedge accounting and the reclassification of deferred gains or losses from Accumulated other comprehensive loss into earnings*.* Refer to Risk Factors in Part II, Item 1A. for further discussion on risks related to COVID-19.
At June 30, 2022, we have hedged the variability in future cash flows for certain forecasted fuel transactions occurring through 2023. As of June 30, 2022 and December 31, 2021, we had the following outstanding fuel swap agreements:
| Fuel Swap Agreements | |||||||||||
| As of June 30, 2022 | As of December 31, 2021 | ||||||||||
| Designated as hedges: | (metric tons) | ||||||||||
| 2022 | 453,450 | 821,850 | |||||||||
| 2023 | 415,750 | 249,050 | |||||||||
| Fuel Swap Agreements | |||||||||||
| As of June 30, 2022 | As of December 31, 2021 | ||||||||||
| (% hedged) | |||||||||||
| Designated hedges as a % of projected fuel purchases: | |||||||||||
| 2022 | 56 | % | 54 | % | |||||||
| 2023 | 26 | % | 15 | % | |||||||
| Fuel Swap Agreements | |||||||||||
| As of June 30, 2022 | As of December 31, 2021 | ||||||||||
| Not designated as hedges: | (metric tons) | ||||||||||
| 2022(1) | 110,500 | 231,900 | |||||||||
| 2023 | — | — |
(1) As of June 30, 2022, 55,250 metric tons relate to fuel swap agreements with discontinued hedge accounting, in which we effectively pay fixed prices and receive floating prices from the counterparty. The remaining 55,250 tons relate to fuel swap agreements that were not designated as hedges since inception, in which we effectively pay floating prices and receive fixed prices from the counterparty.
As of June 30, 2022, there was $149.9 million of estimated unrealized gain associated with our cash flow hedges pertaining to fuel swap agreements is expected to be reclassified to earnings from Accumulated other comprehensive loss within the next twelve months when compared to $23.8 million of estimated unrealized net gain at December 31, 2021. Reclassification is expected to occur as the result of fuel consumption associated with our hedged forecasted fuel purchases.
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, 2022 | As of December 31, 2021 | Balance Sheet Location | As of June 30, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||
| Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments under ASC 815-20**(1)** | ||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | Other assets | $ | 56,579 | $ | — | Other long-term liabilities | $ | — | $ | 62,080 | ||||||||||||||||||||||||||||
| Interest rate-swaps | Derivative financial instruments | — | 6,478 | Derivative financial instruments | 1,828 | — | ||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Derivative financial instruments | — | 7,357 | Derivative financial instruments | 61,982 | 116,027 | ||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Other assets | — | 2,070 | Other long-term liabilities | 59,580 | 8,813 | ||||||||||||||||||||||||||||||||
| Fuel swaps | Derivative financial instruments | 150,882 | 31,919 | Derivative financial instruments | 1,044 | 7,944 | ||||||||||||||||||||||||||||||||
| Fuel swaps | Other assets | 32,202 | 13,452 | Other long-term liabilities | 1,571 | 1,202 | ||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments under 815-20 | $ | 239,663 | $ | 61,276 | $ | 126,005 | $ | 196,066 | ||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments under ASC 815-20 | ||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Derivative financial instruments | $ | — | $ | — | Derivative financial instruments | $ | — | $ | — | ||||||||||||||||||||||||||||
| Foreign currency forward contracts | Other assets | — | — | Other long-term liabilities | — | — | ||||||||||||||||||||||||||||||||
| Fuel swaps | Derivative financial instruments | 21,394 | 8,430 | Derivative financial instruments | 22,330 | 3,264 | ||||||||||||||||||||||||||||||||
| Fuel swaps | Other Assets | — | 102 | Other long-term liabilities | — | 1,211 | ||||||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments under 815-20 | 21,394 | 8,532 | 22,330 | 4,475 | ||||||||||||||||||||||||||||||||||
| Total derivatives | $ | 261,057 | $ | 69,808 | $ | 148,335 | $ | 200,541 |
(1)Subtopic 815-20 “Hedging-General” under ASC 815.
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, 2022 | As of December 31, 2021 | |||||||||||||||||
| Foreign currency debt | Current portion of debt | $ | 61,041 | $ | 75,518 | |||||||||||||||
| Foreign currency debt | Long-term debt | 268,260 | 34,795 | |||||||||||||||||
| $ | 329,301 | $ | 110,313 |
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 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, 2022 | Quarter Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Quarter Ended June 30, 2022 | Quarter Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | Interest expense (income), net of interest capitalized | $ | (1,170) | $ | 317 | $ | (4,535) | $ | (234) | $ | 2,927 | $ | 2,068 | $ | 8,951 | $ | 4,998 | |||||||||||||||||||||||||||||||||||||||
| $ | (1,170) | $ | 317 | $ | (4,535) | $ | (234) | $ | 2,927 | $ | 2,068 | $ | 8,951 | $ | 4,998 |
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, 2022 | As of December 31, 2021 | As of June 30, 2022 | As of December 31, 2021 | |||||||||||||||||||||||
| Current portion of debt and Long-term debt | $ | 647,106 | $ | 655,502 | $ | (2,523) | $ | 6,428 | ||||||||||||||||||
| $ | 647,106 | $ | 655,502 | $ | (2,523) | $ | 6,428 |
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 Loss on Derivatives | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Quarter Ended June 30, 2022 | Quarter Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 29,251 | $ | (15,714) | $ | 104,116 | $ | 27,694 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | (122,915) | (2,574) | (162,977) | (102,155) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fuel swaps | 76,451 | 61,463 | 266,267 | 116,708 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | (17,213) | $ | 43,175 | $ | 207,406 | $ | 42,247 |
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, 2022 | |||||||||||||
| Net inception fair value at January 1, 2022 | $ | (554) | ||||||||||||
| Amount of gain recognized in income on derivatives for the period ended June 30, 2022 | 554 | |||||||||||||
| Fair value at June 30, 2022 | $ | — |
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 Loss | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-derivative instruments under ASC 815-20 Net Investment Hedging Relationships | Quarter Ended June 30, 2022 | Quarter Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Debt | $ | 16,814 | $ | (2,813) | $ | 19,559 | $ | 3,009 | ||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 16,814 | $ | (2,813) | $ | 19,559 | $ | 3,009 |
There was no amount recognized in income (ineffective portion and amount excluded from effectiveness testing) for the quarters and six months ended June 30, 2022 and June 30, 2021.
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, 2022 | Quarter Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||
| Foreign currency forward contracts | Other income (expense) | $ | (80,897) | $ | 524 | $ | (87,882) | $ | (12,974) | |||||||||||||||||||||||
| Fuel swaps | Other income (expense) | 273 | 14,981 | 266 | 27,636 | |||||||||||||||||||||||||||
| $ | (80,624) | $ | 15,505 | $ | (87,616) | $ | 14,662 |
Credit Related Contingent Features
Our current interest rate derivative instruments require us to post collateral if our Standard & Poor’s and Moody’s credit ratings fall below specified levels. Specifically, under most of our agreements, if on the fifth anniversary of executing a derivative instrument, or on any succeeding fifth-year anniversary, our credit ratings for our senior unsecured debt is rated below BBB- by Standard & Poor’s and Baa3 by Moody’s, then the counterparty will periodically have the right to demand that we post collateral in an amount equal to the difference between (i) the net market value of all derivative transactions with such counterparty that have reached their fifth year anniversary, to the extent negative, and (ii) the applicable minimum call amount.
The amount of collateral required to be posted will change as, and to the extent, our net liability position increases or decreases by more than the applicable minimum call amount. If our credit rating for our senior unsecured debt is subsequently equal to or above BBB- by Standard & Poor’s or Baa3 by Moody’s, then any collateral posted at such time will be released to us and we will no longer be required to post collateral unless we meet the collateral trigger requirement, generally, at the next fifth-year anniversary.
As of June 30, 2022, our senior unsecured debt credit rating was B by Standard & Poor's and B2 by Moody's. As of June 30, 2022, six of our interest rate derivative hedges had reached their fifth-year anniversary; however, our net market value for these derivative hedges are in a net asset position, accordingly, we were not required to post any collateral as of such date. We expect that we will not need to provide additional collateral under these agreements in the next twelve months.
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