Carnival Cruises 2014 Annual Report Download - page 37

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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) Britannia’s euro-denominated shipyard payments. These collars mature in
February 2015 at a weighted-average ceiling of $287 million and a weighted-average floor of $266 million. In
June 2014, we entered into additional foreign currency zero cost collars that are also designated as cash flow
hedges for the remaining portion of Britannia’s euro-denominated shipyard payments. These collars also mature
in February 2015 at a weighted-average ceiling of $281 million and a weighted-average floor of $274 million. If
the spot rate is between the weighted-average ceiling and floor rates on the date of maturity, then we would not
owe or receive any payments under these collars.
On January 22, 2015, we entered into foreign currency zero cost collars that are designated as cash flow hedges
for a portion of a Princess and Seabourn newbuilds’ euro-denominated shipyard payments. The Princess
newbuild’s collars mature in March 2017 at a weighted-average ceiling of $590 million and a weighted-average
floor of $504 million. The Seabourn newbuild’s collars mature in November 2016 at a weighted-average ceiling
of $221 million and a weighted-average floor of $185 million. If the spot rate is between the weighted-average
ceiling and floor rates on the date of maturity, then we would not owe or receive any payments under these
collars.
At January 22, 2015, substantially all of our remaining newbuild currency exchange rate risk relates to euro-
denominated newbuild construction payments for a Carnival Cruise Line, Holland America Line and Seabourn
newbuild, which represent a total unhedged commitment of $1.7 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 debt portfolio management and investment
strategies. We evaluate our debt portfolio to determine 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, 2014, 52% and 48% (59% and 41% at November 30, 2013) of our debt bore
fixed and floating interest rates, respectively, including the effect of interest rate swaps. In addition, to the extent
that we have excess cash available for investment, we purchase high quality short-term investments with floating
interest rates, which offset a portion of the impact of interest rate fluctuations arising from our floating interest
rate debt portfolio.
Concentrations of Credit Risk
As part of our ongoing control procedures, we monitor concentrations of credit risk associated with financial and
other institutions with which we conduct significant business. Our maximum exposure under foreign currency
and fuel derivative contracts and interest rate swap agreements that are in-the-money, which were not material at
November 30, 2014, is the replacement cost, net of any collateral received or contractually allowed offset, in the
event of nonperformance by the counterparties to the contracts, all of which are currently our lending banks. We
seek to minimize credit risk exposure, including counterparty nonperformance primarily associated with our cash
equivalents, investments, committed financing facilities, contingent obligations, derivative instruments,
insurance contracts and new ship progress payment guarantees, by normally conducting business with large,
well-established financial institutions, insurance companies and export credit agencies, and by diversifying our
counterparties. In addition, we have guidelines regarding credit ratings and investment maturities that we follow
to help safeguard liquidity and minimize risk. We normally do require collateral and/or guarantees to support
notes receivable on significant asset sales, long-term ship charters and new ship progress payments to
shipyards. We currently believe the risk of nonperformance by any of our significant counterparties is remote.
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