UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
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There were
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |||
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share data)
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Revenue |
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Passenger ticket | $ | | $ | | ||
Onboard and other |
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Total revenue |
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Cruise operating expense |
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Commissions, transportation and other |
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Onboard and other |
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Payroll and related |
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Fuel |
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Food |
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Other |
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Total cruise operating expense |
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Other operating expense |
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Marketing, general and administrative |
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Depreciation and amortization |
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Total other operating expense |
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Operating loss |
| ( |
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Non-operating income (expense) |
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Interest expense, net |
| ( |
| ( | ||
Other income (expense), net |
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Total non-operating income (expense) |
| ( |
| ( | ||
Net loss before income taxes |
| ( |
| ( | ||
Income tax expense |
| ( |
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Net loss | $ | ( | $ | ( | ||
Weighted-average shares outstanding |
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Basic |
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Diluted |
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Loss per share |
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Basic | $ | ( | $ | ( | ||
Diluted | $ | ( | $ | ( | ||
The accompanying notes are an integral part of these consolidated financial statements.
3
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Comprehensive Loss
(Unaudited)
(in thousands)
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Net loss | $ | ( | $ | ( | ||
Other comprehensive income (loss): |
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Shipboard Retirement Plan |
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Cash flow hedges: |
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Net unrealized gain (loss) |
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| ( | ||
Amount realized and reclassified into earnings |
| ( |
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Total other comprehensive income (loss) |
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| ( | ||
Total comprehensive loss | $ | ( | $ | ( | ||
The accompanying notes are an integral part of these consolidated financial statements.
4
Norwegian Cruise Line Holdings Ltd.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
March 31, | December 31, | |||||
| 2022 |
| 2021 | |||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Short-term investments | — | | ||||
Accounts receivable, net |
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Inventories |
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Prepaid expenses and other assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Trade names |
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Other long-term assets |
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Total assets | $ | | $ | | ||
Liabilities and shareholders’ equity |
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Current liabilities: |
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Current portion of long-term debt | $ | | $ | | ||
Accounts payable |
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Accrued expenses and other liabilities |
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Advance ticket sales |
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Total current liabilities |
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Long-term debt |
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Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 9) |
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Shareholders’ equity: |
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Ordinary shares, $ |
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Additional paid-in capital |
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Accumulated other comprehensive income (loss) |
| ( |
| ( | ||
Accumulated deficit |
| ( |
| ( | ||
Total shareholders’ equity |
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Total liabilities and shareholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
5
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization expense | |
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Gain on derivatives | ( | ( | ||||
Loss on extinguishment of debt |
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Provision for bad debts and inventory obsolescence |
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Gain on involuntary conversion of assets | — | ( | ||||
Share-based compensation expense |
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Net foreign currency adjustments |
| ( |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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| ( | ||
Inventories |
| ( |
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Prepaid expenses and other assets |
| ( |
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Accounts payable |
| ( |
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Accrued expenses and other liabilities |
| ( |
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Advance ticket sales |
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Net cash used in operating activities |
| ( |
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Cash flows from investing activities |
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Additions to property and equipment, net |
| ( |
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Purchases of short-term investments | — | ( | ||||
Proceeds from maturities of short-term investments | | — | ||||
Cash paid on settlement of derivatives | — | ( | ||||
Other | | | ||||
Net cash provided by (used in) investing activities |
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Cash flows from financing activities |
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Repayments of long-term debt |
| ( |
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Proceeds from long-term debt |
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Common share issuance proceeds, net | — | | ||||
Proceeds from employee related plans |
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Net share settlement of restricted share units |
| ( |
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Early redemption premium |
| ( |
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Deferred financing fees |
| ( |
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Net cash provided by financing activities |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
6
Norwegian Cruise Line Holdings Ltd.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(in thousands)
Three Months Ended March 31, 2022 | |||||||||||||||
Accumulated | |||||||||||||||
Additional | Other | Total | |||||||||||||
Ordinary | Paid-in | Comprehensive | Accumulated | Shareholders’ | |||||||||||
| Shares |
| Capital |
| Income (Loss) |
| Deficit |
| Equity | ||||||
Balance, December 31, 2021 |
| $ | | $ | | $ | ( | $ | ( | $ | | ||||
Share-based compensation |
| — |
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| — |
| — |
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Issuance of shares under employee related plans |
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| — |
| — |
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Net share settlement of restricted share units |
| — |
| ( |
| — |
| — |
| ( | |||||
Other comprehensive income, net |
| — |
| — |
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| — |
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Net loss |
| — |
| — |
| — |
| ( |
| ( | |||||
Balance, March 31, 2022 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Three Months Ended March 31, 2021 | |||||||||||||||
| Accumulated |
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Additional | Other | Total | |||||||||||||
Ordinary | Paid-in | Comprehensive | Accumulated | Shareholders’ | |||||||||||
| Shares |
| Capital |
| Income (Loss) |
| Deficit |
| Equity | ||||||
Balance, December 31, 2020 |
| $ | | $ | | $ | ( | $ | ( | $ | | ||||
Share-based compensation |
| — |
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| — |
| — |
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Issuance of shares under employee related plans |
| — |
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| — |
| — |
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Common share issuance proceeds, net |
| | | — | — | | |||||||||
Net share settlement of restricted share units |
| — |
| ( |
| — |
| — |
| ( | |||||
Cumulative change in accounting policy | — | ( | — | | ( | ||||||||||
Other comprehensive loss, net | — |
| — |
| ( |
| — |
| ( | ||||||
Net loss |
| — | — | — | ( | ( | |||||||||
Balance, March 31, 2021 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
7
Norwegian Cruise Line Holdings Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
Unless otherwise indicated or the context otherwise requires, references in this report to (i) the “Company,” “we,” “our” and “us” refer to NCLH (as defined below) and its subsidiaries (including Prestige (as defined below), (ii) “NCLC” refers to NCL Corporation Ltd., (iii) “NCLH” refers to Norwegian Cruise Line Holdings Ltd., (iv) “Norwegian Cruise Line” or “Norwegian” refers to the Norwegian Cruise Line brand and its predecessors, and (v) “Prestige” refers to Prestige Cruises International S. de R.L. (formerly Prestige Cruises International, Inc.), together with its consolidated subsidiaries, including Prestige Cruise Holdings S. de R.L. (formerly Prestige Cruise Holdings, Inc.), Prestige’s direct wholly-owned subsidiary, which in turn is the parent of Oceania Cruises S. de R.L. (formerly Oceania Cruises, Inc.) (“Oceania Cruises”) and Seven Seas Cruises S. de R.L. (“Regent”) (Oceania Cruises also refers to the brand by the same name and Regent also refers to the brand Regent Seven Seas Cruises).
References to the “U.S.” are to the United States of America, and “dollar(s)” or “$” are to U.S. dollars, the “U.K.” are to the United Kingdom and “euro(s)” or “€” are to the official currency of the Eurozone. We refer you to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations— Terminology” for the capitalized terms used and not otherwise defined throughout these notes to consolidated financial statements.
1. Description of Business and Organization
We are a leading global cruise company which operates the Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises brands. As of March 31, 2022, we had
We have
2. Summary of Significant Accounting Policies
Liquidity and Management’s Plan
Due to the impact of COVID-19, travel restrictions and limited access to ports around the world, in March 2020, the Company implemented a voluntary suspension of all cruise voyages across its
Significant events affecting travel typically have an impact on demand for cruise vacations, with the full extent of the impact determined by the length of time the event influences travel decisions. The level of occupancy on our ships and the percentage of our fleet in service will depend on a number of factors including, but not limited to, the duration and extent of the COVID-19 pandemic, further resurgences and new more contagious and/or vaccine-resistant variants of COVID-19, the availability, distribution, rate of public acceptance and efficacy of vaccines and therapeutics for COVID-19, our ability to comply with governmental regulations and implement new health and safety protocols, port availability, travel restrictions, bans and advisories, our ability to staff our ships, and the impact of other events impacting travel or consumer discretionary spending, such as inflation, the price of fuel, or Russia’s recent invasion of Ukraine and the actions taken by the United States and other governments in response to the invasion. We believe the ongoing effects of these events on our operations and global bookings have had, and will continue to have, a significant impact on our financial results and liquidity.
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The estimation of our future cash flow projections includes numerous assumptions that are subject to various risks and uncertainties. Our principal assumptions for future cash flow projections include:
| ● | Expected gradual return to historical occupancy levels; |
| ● | Expected increase in revenue per passenger cruise day through a combination of both passenger ticket and onboard revenue as compared to 2019; |
| ● | Forecasted cash collections in accordance with the terms of our credit card processing agreements (see Note 9 - “Commitments and Contingencies”); |
| ● | Expected continued expenses to maintain and comply with additional health and safety protocols; and |
| ● | Expected increases in fuel prices and the impact of inflation. |
We cannot make assurances that our assumptions used to estimate our liquidity requirements will not change due to the unique and ongoing unpredictable nature of the events, including the magnitude and duration. Accordingly, the full effect of the COVID-19 pandemic and other events impacting travel and consumer discretionary spending, including Russia’s recent invasion of Ukraine, on our financial performance and financial condition cannot be quantified at this time. We have made reasonable estimates and judgments of the impact of these events within our financial statements and there may be material changes to those estimates in future periods. We have taken actions to improve our liquidity, including completing various capital market transactions and making capital expenditure and operating expense reductions, and we expect to continue to pursue other opportunities to improve our liquidity.
Based on these actions and assumptions regarding the impact of COVID-19 and other events impacting travel and consumer discretionary spending, including Russia’s recent invasion of Ukraine, and considering our available liquidity of $
Basis of Presentation
The accompanying consolidated financial statements are unaudited and, in our opinion, contain all normal recurring adjustments necessary for a fair statement of the results for the periods presented.
Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire fiscal year. Historically, demand for cruises has been strongest during the Northern Hemisphere’s summer months; however, our cruise voyages were completely suspended from March 2020 until July 2021 due to the COVID-19 pandemic and our resumption of cruise voyages was phased in gradually. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021, which are included in our most recent Annual Report on Form 10-K filed with the SEC on March 1, 2022.
Revisions to Previously Reported Quarterly Financial Statements
During the fourth quarter of 2021, the Company identified an error in its Consolidated Balance Sheet as of March 31, 2021 and Consolidated Statement of Cash Flows for the three months ended March 31, 2021. Based on their nature, certain amounts shown as cash and cash equivalents should have been classified as short-term investments. We have determined that these errors were not material to the previously issued interim financial statements for the period ended March 31, 2021.
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As a result of the error, the amounts previously reported as cash and cash equivalents have been reclassified to cash flows from investing activities in the Consolidated Statement of Cash Flows for the three months ended March 31, 2021 as follows (in thousands):
Three months ended March 31, 2021 | |||||||||
Previously |
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| As | ||||||
Reported | Adjustments | Reported | |||||||
Cash flows from investing activities |
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Purchases of short-term investments | $ | — | $ | ( | $ | ( | |||
Net cash used in investing activities | ( | ( | ( | ||||||
Net increase (decrease) in cash and cash equivalents | | ( | | ||||||
Cash and cash equivalents at end of period | | ( | | ||||||
Loss Per Share
A reconciliation between basic and diluted loss per share was as follows (in thousands, except share and per share data):
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
Net loss | $ | ( | $ | ( | ||
Basic weighted-average shares outstanding |
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Dilutive effect of share awards |
| — |
| — | ||
Diluted weighted-average shares outstanding |
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Basic loss per share | $ | ( | $ | ( | ||
Diluted loss per share | $ | ( | $ | ( | ||
For the three months ended March 31, 2022 and 2021, a total of
Foreign Currency
The majority of our transactions are settled in U.S. dollars. We remeasure assets and liabilities denominated in foreign currencies at exchange rates in effect at the balance sheet date. Gains or losses resulting from transactions denominated in other currencies are recognized in our consolidated statements of operations within other income (expense), net. We recognized a gain of $
Depreciation and Amortization Expense
The amortization of deferred financing fees is included in depreciation and amortization expense in the consolidated statements of cash flows; however, for purposes of the consolidated statements of operations they are included in interest expense, net.
Accounts Receivable, Net
Accounts receivable, net included $
Recently Issued Accounting Guidance
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provided guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying GAAP to contracts, hedging relationships and other transactions
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impacted by reference rate reform. The provisions apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. As of March 31, 2022, we have not adopted any expedients and exceptions under ASU 2020-04. We will continue to evaluate the impact of ASU 2020-04 on our consolidated financial statements.
3. Revenue Recognition
Disaggregation of Revenue
Revenue and cash flows are affected by economic factors in various geographical regions. Revenues by destination were as follows (in thousands):
Three Months Ended | |||
March 31, | |||
| 2022 | ||
North America | $ | | |
Europe |
| | |
Asia-Pacific |
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South America | | ||
Total revenue | $ | | |
Amounts for the comparative three months ended March 31, 2021 are excluded as the information is not meaningful. North America includes the U.S., the Caribbean, Canada and Mexico. Europe includes the Baltic region, Canary Islands and Mediterranean. Asia-Pacific includes Australia, New Zealand and Asia. Other includes all other international territories.
Segment Reporting
We have concluded that our business has a single reportable segment. Each brand, Norwegian, Oceania Cruises and Regent, constitutes a business for which discrete financial information is available and management regularly reviews the brand level operating results and, therefore, each brand is considered an operating segment. Our operating segments have similar economic and qualitative characteristics, including similar long-term margins and similar products and services; therefore, we aggregate all of the operating segments into
Although we sell cruises on an international basis, our passenger ticket revenue is primarily attributed to U.S.-sourced guests who make reservations in the U.S. Revenue attributable to U.S.-sourced guests has approximated
Contract Balances
Receivables from customers are included within accounts receivable, net. As of March 31, 2022, our receivables from customers were $
Our cancellation policies permit guests to cancel cruises booked within certain windows for specified time periods up to
Our contract liabilities are included within advance ticket sales. As of March 31, 2022 and December 31, 2021, our contract liabilities were $
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approximately
For cruise vacations that had been cancelled by us due to COVID-19, during the three months ended March 31, 2022 and 2021, approximately $
4. Leases
Operating lease balances were as follows (in thousands):
| Balance Sheet location |
| March 31, 2022 |
| December 31, 2021 | |||
Operating leases |
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Right-of-use assets |
| $ | | $ | | |||
Current operating lease liabilities |
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Non-current operating lease liabilities |
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5. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) for the three months ended March 31, 2022 was as follows (in thousands):
Three Months Ended March 31, 2022 | ||||||||||
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| Change | ||||||||
Accumulated | Change | Related to | ||||||||
Other | Related to | Shipboard | ||||||||
Comprehensive | Cash Flow | Retirement | ||||||||
| Income (Loss) |
| Hedges | Plan | ||||||
Accumulated other comprehensive income (loss) at beginning of period | $ | ( | $ | ( | $ | ( |
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Current period other comprehensive income before reclassifications |
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Amounts reclassified into earnings |
| ( |
| ( | (1) |
| | (2) | ||
Accumulated other comprehensive income (loss) at end of period | $ | ( | $ | ( | (3) | $ | ( |
| ||
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Accumulated other comprehensive income (loss) for the three months ended March 31, 2021 was as follows (in thousands):
Three Months Ended March 31, 2021 | ||||||||||
|
| Change |
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Accumulated | Change | Related to | ||||||||
Other | Related to | Shipboard | ||||||||
Comprehensive | Cash Flow | Retirement | ||||||||
| Income (Loss) |
| Hedges | Plan | ||||||
Accumulated other comprehensive income (loss) at beginning of period |
| $ | ( | $ | ( | $ | ( |
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Current period other comprehensive loss before reclassifications |
|
| ( |
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| ( |
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| — |
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Amounts reclassified into earnings |
|
| |
|
| | (1) |
| | (2) |
Accumulated other comprehensive income (loss) at end of period |
| $ | ( |
| $ | ( | $ | ( |
| |
| (1) | We refer you to Note 7 – “Fair Value Measurements and Derivatives” for the affected line items in the consolidated statements of operations. |
| (2) | Amortization of prior-service cost and actuarial loss reclassified to other income (expense), net. |
| (3) | Includes $ |
6. Long-Term Debt
In February 2022, NCLC conducted a private offering (the “Notes Offering”) of $
The 2027 Secured Notes are jointly and severally guaranteed on a senior secured basis by Pride of Hawaii, LLC, Norwegian Epic, Ltd. and Sirena Acquisition. The 2027 Secured Notes and the related guarantees are secured by a first-priority interest in, among other things and subject to certain agreed security principles, three of our vessels, namely the Norwegian Jade vessel, the Norwegian Epic vessel and the Sirena vessel.
NCLC may redeem the 2027 Secured Notes at its option, in whole or in part, at any time and from time to time prior to February 15, 2024, at a “make-whole” redemption price, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. NCLC may redeem the 2027 Secured Notes at its option, in whole or in part, at any time and from time to time on or after February 15, 2024, at the redemption prices set forth in the indenture governing the 2027 Secured Notes, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. At any time and from time to time prior to February 15, 2024, NCLC may choose to redeem up to
NCLC may redeem the 2029 Unsecured Notes at its option, in whole or in part, at any time and from time to time prior to November 15, 2028, at a “make-whole” redemption price, plus accrued and unpaid interest and additional amounts, if any, to, but excluding, the redemption date. NCLC may redeem the 2029 Unsecured Notes at its option, in whole or in part, at any time and from time to time on or after November 15, 2028, at a redemption price equal to
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The indentures governing the 2027 Secured Notes and the 2029 Unsecured Notes include requirements that, among other things and subject to a number of qualifications and exceptions, restrict the ability of NCLC and its restricted subsidiaries, as applicable, to (i) incur or guarantee additional indebtedness; (ii) pay dividends or distributions on, or redeem or repurchase, equity interests and make other restricted payments; (iii) make investments; (iv) consummate certain asset sales; (v) engage in certain transactions with affiliates; (vi) grant or assume certain liens; and (vii) consolidate, merge or transfer all or substantially all of their assets.
In February 2022, NCLC also conducted a private offering (the “Exchangeable Notes Offering”) of $
NCLC has used, or will use, the net proceeds from the Notes Offering and the Exchangeable Notes Offering to redeem (the “Redemption”) all of the outstanding 2024 Senior Secured Notes and 2026 Senior Secured Notes and to make scheduled principal payments on debt maturing in 2022, including, in each case, to pay any accrued and unpaid interest thereon, as well as related premiums, fees and expenses. Simultaneously with the Redemption, and pursuant to certain provisions contained in the indentures governing the 2026 Senior Unsecured Notes and the 2028 Senior Unsecured Notes, each of the guarantors party to such indentures were released from their obligations thereunder. The resulting losses on extinguishments, which are recognized in interest expense, net, were $
Exchangeable Notes
The following is a summary of NCLC’s exchangeable notes as of March 31, 2022 (in thousands):
Unamortized | ||||||||||||||
| Principal | Deferred | Net Carrying | Fair Value | ||||||||||
| Amount |
| Financing Fees |
| Amount |
| Amount |
| Leveling | |||||
2024 Exchangeable Notes | $ | | $ | ( | $ | | $ | | Level 2 | |||||
2025 Exchangeable Notes | | ( | | | Level 2 | |||||||||
2027 1.125% Exchangeable Notes | | ( | | | Level 2 | |||||||||
2027 2.5% Exchangeable Notes | | ( | | | Level 2 | |||||||||
The following is a summary of NCLC’s exchangeable notes as of December 31, 2021 (in thousands):
Unamortized Debt | ||||||||||||||
Discount, | ||||||||||||||
| Principal | including Deferred | Net Carrying | Fair Value | ||||||||||
| Amount |
| Financing Fees |
| Amount |
| Amount |
| Leveling | |||||
2024 Exchangeable Notes | $ | | $ | ( | $ | | $ | | Level 2 | |||||
2025 Exchangeable Notes | | ( | | | Level 2 | |||||||||
2027 1.125% Exchangeable Notes | | ( | | | Level 2 | |||||||||
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The following provides a summary of the interest expense of NCLC’s exchangeable notes (in thousands):
Three Months Ended | ||||||
March 31, | ||||||
2022 |
| 2021 | ||||
Coupon interest | $ | | $ | | ||
Amortization of deferred financing fees | | | ||||
Total | $ | | $ | | ||
The effective interest rate is
Debt Repayments
The following are scheduled principal repayments on our long-term debt including finance lease obligations as of March 31, 2022 for each of the following periods (in thousands):
Year |
| Amount | |
Remainder of 2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 | | ||
Thereafter |
| | |
Total | $ | | |
Debt Covenants
During the year ended December 31, 2021, we received certain financial and other debt covenant waivers, added new free liquidity requirements and modified other financial covenants. As of March 31, 2022, taking into account such waivers, we were in compliance with all of our debt covenants. If we do not continue to remain in compliance with our covenants, including following the expiration of any current waivers, we would have to seek additional amendments to our covenants. However, no assurances can be made that such amendments would be approved by our lenders. Generally, if an event of default under any debt agreement occurs, then pursuant to cross default and/or cross acceleration clauses, substantially all of our outstanding debt and derivative contract payables could become due, and all debt and derivative contracts could be terminated, which would have a material adverse impact on our operations and liquidity.
7. Fair Value Measurements and Derivatives
Fair value is defined as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).
Fair Value Hierarchy
The following hierarchy for inputs used in measuring fair value should maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available:
Level 1 Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement dates.
Level 2 Significant other observable inputs that are used by market participants in pricing the asset or liability based on market data obtained from independent sources.
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Level 3 Significant unobservable inputs we believe market participants would use in pricing the asset or liability based on the best information available.
Derivatives
We are exposed to market risk attributable to changes in interest rates, foreign currency exchange rates and fuel prices. We attempt to minimize these risks through a combination of our normal operating and financing activities and through the use of derivatives. We assess whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of our hedged forecasted transactions. We use regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. If it is determined that the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings. There are no amounts excluded from the assessment of hedge effectiveness and there are no credit-risk-related contingent features in our derivative agreements. We monitor concentrations of credit risk associated with financial and other institutions with which we conduct significant business. Credit risk, including but not limited to counterparty non-performance under derivatives, is not considered significant, as we primarily conduct business with large, well-established financial institutions with which we have established relationships, and which have credit risks acceptable to us, or the credit risk is spread out among many creditors. We do not anticipate non-performance by any of our significant counterparties.
As of March 31, 2022, we had fuel swaps, which are used to mitigate the financial impact of volatility of fuel prices pertaining to approximately
As of March 31, 2022, we had approximately
As of March 31, 2022, we had foreign currency forward contracts, matured foreign currency options and matured foreign currency collars which are used to mitigate the financial impact of volatility in foreign currency exchange rates related to our ship construction contracts denominated in euros. The notional amount of our foreign currency forward contracts was €
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The derivatives measured at fair value and the respective location in the consolidated balance sheets include the following (in thousands):
Assets | Liabilities | |||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||
| Balance Sheet Location |
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Derivative Contracts Designated as Hedging Instruments | ||||||||||||||
Fuel contracts | ||||||||||||||
Prepaid expenses and other assets | $ | | $ | | $ | — | $ | — | ||||||
Other long-term assets | | | — | — | ||||||||||
Foreign currency contracts | ||||||||||||||
Prepaid expenses and other assets |
| |
| |
| — |
| — | ||||||
Accrued expenses and other liabilities |
| |
| — |
| |
| | ||||||
Other long-term liabilities |
| — |
| — |
| |
| | ||||||
Interest rate contracts | ||||||||||||||
Accrued expenses and other liabilities |
| — |
| — |
| — |
| | ||||||
Total derivatives designated as hedging instruments | $ | | $ | | $ | | $ | | ||||||
Derivative Contracts Not Designated as Hedging Instruments | ||||||||||||||
Fuel contracts | ||||||||||||||
Prepaid expenses and other assets | $ | | $ | | $ | — | $ | — | ||||||
Other long-term assets | | | — | — | ||||||||||
Total derivatives not designated as hedging instruments | $ | | $ | | $ | — | $ | — | ||||||
Total derivatives | $ | | $ | | $ | | $ | | ||||||
The fair values of swap and forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company determines the value of options and collars utilizing an option pricing model based on inputs that are either readily available in public markets or can be derived from information available in publicly quoted markets. The option pricing model used by the Company is an industry standard model for valuing options and is used by the broker/dealer community. The inputs to this option pricing model are the option strike price, underlying price, risk-free rate of interest, time to expiration, and volatility. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values.
Our derivatives and financial instruments were categorized as Level 2 in the fair value hierarchy, and we had no derivatives or financial instruments categorized as Level 1 or Level 3. Our derivative contracts include rights of offset with our counterparties. We have elected to net certain assets and liabilities within counterparties when the rights of offset exist. We are not required to post cash collateral related to our derivative instruments.
The following table discloses the gross and net amounts recognized within assets and liabilities (in thousands):
Gross | Gross | ||||||||||||||
Gross | Amounts | Total Net | Amounts | ||||||||||||
March 31, 2022 |
| Amounts |
| Offset |
| Amounts |
| Not Offset |
| Net Amounts | |||||
Assets | $ | | $ | — | $ | | $ | ( | $ | — | |||||
Liabilities | | ( | | ( | | ||||||||||
Gross | Gross | ||||||||||||||
Gross | Amounts | Total Net | Amounts | ||||||||||||
December 31, 2021 |
| Amounts |
| Offset |
| Amounts |
| Not Offset |
| Net Amounts | |||||
Assets | $ | | $ | — | $ | | $ | ( | $ | — | |||||
Liabilities | | — | | ( | |||||||||||