Royal Caribbean Cruise Lines 2005 Annual Report Download - page 44

The fair values of our fuel swap agreements were estimated based
on quoted market prices for similar or identical financial instruments
to those we hold. Our exposure to market risk for changes in fuel
prices relates to the forecasted consumption of fuel on our ships.
Historically, we have used fuel swap and zero cost collar agreements
to mitigate the impact of fluctuations in fuel prices. As of December
31, 2005 and 2004, we had fuel swap agreements, designated as
cash flow hedges, to pay fixed prices for fuel with an aggregate
notional amount of $92.4 million, maturing through 2007, and
$35.4 million, maturing through 2005, respectively.
Note 11. Commitments and Contingencies
As of December 31, 2005, we had three Freedom-class ships desig-
nated for Royal Caribbean International and one Solstice-class ship,
Celebrity Solstice , on order for an additional capacity of approxi-
mately 13,800 berths. The aggregate cost of the ships is approxi-
mately $3.2 billion, of which we have deposited $311.4 million as of
December 31, 2005. (See Note 10.
Financial Instruments. )
As of December 31, 2005, we anticipated overall capital expendi-
tures, including the four ships on order, will be approximately $1.1
billion for 2006, $1.1 billion for 2007, $1.6 billion for 2008 and $0.3
billion for 2009. (See Note 13.
Subsequent Events. )
In April 2005, a purported class action lawsuit was filed in the United
States District Court for the Southern District of Florida alleging that
Celebrity Cruises improperly requires its cabin stewards to share
guest gratuities with assistant cabin stewards. The suit seeks pay-
ment of damages, including penalty wages under 46 U.S.C. Section
10113 of U.S. law and interest. We are not able at this time to esti-
mate the impact of this proceeding on us. However, we believe that
we have meritorious defenses and we intend to vigorously defend
against this action.
In May 2005, a purported class action lawsuit was filed in the United
States District Court for the Southern District of Florida alleging that
we improperly profit from shore excursions offered to our guests by
third party shore excursion operators in violation of the Florida
Deceptive and Unfair Trade Practices Act. The suit sought payment of
damages, including the difference between what we collect from our
guests for shore excursions and what we pay to the shore excursion
operators. In September 2005, the Court granted our motion to dis-
miss the lawsuit.
In January 2006, a purported class action lawsuit was filed in the
United States District Court for the Southern District of New York
alleging that we infringed rights in copyrighted works and other
intellectual property by presenting performances on our cruise ships
without securing the necessary licenses. The suit seeks payment of
damages, disgorgement of profits and a permanent injunction
against future infringement. We are not able at this time to estimate
the impact of this preceding on us.
We are routinely involved in other claims typical within the cruise
vacation industry. The majority of these claims is covered by insur-
ance. We believe the outcome of such claims, net of expected insur-
ance recoveries, will not have a material adverse effect upon our
financial condition, results of operations or liquidity.
On July 5, 2002, we added
Brilliance of the Seas to Royal Caribbean
International’s fleet. In connection with this addition, we novated
our original ship building contract and entered into an operating
lease denominated in British pound sterling. In connection with the
novation of the contract, we received $77.7 million for reimburse-
ment of shipyard deposits previously made. The lease payments
vary based on sterling LIBOR. The lease has a contractual life of 25
years; however, the lessor has the right to cancel the lease at years
10 and 18. Accordingly, the lease term for accounting purposes is 10
years. In the event of early termination at year 10, we have the
option to cause the sale of the vessel at its fair value and use the
proceeds toward the applicable termination obligation plus any
unpaid amounts due under the contractual term of the lease.
Alternatively, we can make a termination payment of approximately
£126 million, or approximately $216.7 million based on the
exchange rate at December 31, 2005, and relinquish our right to
cause the sale of the vessel. This is analogous to a guaranteed resid-
ual value. This termination amount, which is our maximum expo-
sure, has been included in the table below for noncancelable oper-
ating leases. Under current circumstances we do not believe early
termination of this lease is probable.
In addition, we are obligated under other noncancelable operating
leases primarily for offices, warehouses and motor vehicles. As of
December 31, 2005, future minimum lease payments under non-
cancelable operating leases were as follows (in thousands):
Year
2006 $ 47,262
2007 45,776
2008 43,395
2009 41,738
2010 41,437
Thereafter 1293,891
$ 513,499
1Under the
Brilliance of the Seas lease agreement, we may be required to make a
termination payment of approximately £126 million, or approximately $216.7 million
based on the exchange rate at December 31, 2005, if the lease is canceled in 2012.
This is analogous to a guaranteed residual value.
42 Royal Caribbean Cruises Ltd.
Notes to the Consolidated
Financial Statements (continued)