Carnival Cruises 2012 Annual Report Download - page 92

Table of Contents
Most of our brands also have non-functional currency risk related to their international sales operations, which has become an increasingly larger part of most
of their businesses over time, and primarily includes the euro, sterling and Australian, Canadian and U.S. dollars. In addition, all of our brands have non-
functional currency expenses for a portion of their operating expenses. Accordingly, these brands’ revenues and expenses in non-functional currencies create
some degree of natural offset for recognized transactional currency gains and losses due to currency exchange movements.
We consider our investments in foreign operations to be denominated in relatively stable currencies and of a long-term nature. We partially mitigate our net
investment currency exposures by denominating a portion of our foreign currency third-party debt and foreign currency intercompany payables in our foreign
operations’ functional currencies, generally the euro or sterling. As of November 30, 2012 and 2011, we have designated $1.8 billion of our foreign currency
intercompany payables and $3.6 billion for our foreign currency third-party debt and intercompany payables, respectively, as nonderivative hedges of our net
investments in foreign operations. Accordingly, we have included $243 million and $204 million of cumulative foreign currency transaction nonderivative
gains in the cumulative translation adjustment component of AOCI at November 30, 2012 and 2011, respectively, which offsets a portion of the losses
recorded in AOCI upon translating our foreign operations’ net assets into U.S. dollars. During 2012, 2011 and 2010, we recognized foreign currency
nonderivative transaction gains of $39 million, $21 million and $271 million, respectively, in the cumulative translation adjustment component of AOCI.
Newbuild Currency Risks
Our shipbuilding contracts are typically denominated in euros. Our decisions regarding whether or not to hedge a non-functional currency ship commitment
for our cruise brands are made on a case-by-case basis, taking into consideration the amount and duration of the exposure, market volatility, currency
exchange rate correlation, economic trends, our overall expected net cash flows by currency and other offsetting risks. We use foreign currency derivative
contracts and have used nonderivative financial instruments to manage foreign currency exchange rate risk for some of our ship construction payments.
In June 2012, we entered into foreign currency zero cost collars that are designated as cash flow hedges for a portion of Royal Princess’ euro-denominated
shipyard payments. These collars mature in May 2013 at a weighted-average ceiling rate of $1.30 to the euro, or $560 million, and a weighted-average floor
rate of $1.19 to the euro, or $512 million. If the spot rate is between these two rates on the date of maturity, then we would not owe or receive any payments
under these collars.
In July 2012, we entered into foreign currency zero cost collars that are designated as cash flow hedges for a portion of P&O Cruises (UK) newbuild’s euro-
denominated shipyard payments. These collars mature in February 2015 at a weighted-average ceiling rate of £0.83 to the euro, or $294 million, and a
weighted-average floor rate of £0.77 to the euro, or $272 million. If the spot rate is between these two rates on the date of maturity, then we would not owe or
receive any payments under these collars.
At November 30, 2012, substantially all of our remaining newbuild currency exchange rate risk relates to euro-denominated newbuild construction payments
for Regal Princess and a portion of P&O Cruises (UK)’s newbuild, which represent a total commitment of $1.1 billion.
The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise brands’ or the shipyards’
functional currency is expected to be affected by foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations may affect our
desire to order new cruise ships.
Interest Rate Risks
We manage our exposure to fluctuations in interest rates through our investment and debt portfolio management strategies. These strategies include purchasing
high quality short-term investments with floating interest rates, and evaluating our debt portfolio as to whether to make periodic adjustments to the mix of fixed
and floating rate debt through the use of interest rate swaps and the issuance of new debt or the early retirement of existing debt. At November 30, 2012, 61%
and 39% (65% and 35% at November 30, 2011) of our debt bore fixed and floating interest rates, respectively, including the effect of interest rate swaps.
Fuel Price Risks
Our exposure to market risk for changes in fuel prices substantially all relate to the consumption of fuel on our ships. We use our fuel derivatives program to
mitigate a portion of our economic risk attributable to potential fuel price increases. We designed our fuel derivatives program to maximize operational
flexibility by utilizing derivative markets with significant trading liquidity and our program currently consists of zero cost collars on Brent.
These derivatives are based on Brent prices whereas the actual fuel used on our ships is marine fuel. Changes in the Brent prices may not show a high degree
of correlation with changes in our underlying marine fuel prices. We will not realize any economic gain or loss upon the monthly maturities of our zero cost
collars unless the average monthly price of Brent is above the ceiling price or below the floor price. We believe that these derivatives will act as economic
hedges, however hedge accounting is not applied. As part of our fuel derivatives program, we will continue to evaluate various derivative products and
strategies.
F-22