Royal Caribbean Cruise Lines 2007 Annual Report Download - page 39

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
At December 31, 2007, $59.8 million of estimated unrealized net
gains associated with our cash flow hedges are expected to be
reclassified as earnings from other accumulated comprehensive
income within the next twelve months. Reclassification is expected
tooccur primarily as the result of fuel consumption associated
with our hedged forecasted fuel purchases. At December 31, 2007,
wehave hedged the variability in future cash flows for certain
forecasted transactions occurring through the second half of 2011.
Hedge of Net Investment in a Foreign Operation
In 2006, in conjunction with our acquisition of Pullmantur
Cruises, we obtained a bridge loan with a notional amount of
€750.0 million, or approximately $960.5 million, of which we
drew €701.0 million, or approximately $925.1 million, to finance
the acquisition. We designated a portion of this bridge loan,
approximately €478.8 million, or approximately $631.8 million,
as a nonderivative hedge of our net investment in Pullmantur
Cruises and, accordingly, included approximately $18.7 million
of foreign-currency transaction losses in the foreign currency
translation adjustment component of accumulated other
comprehensivelossat December 31, 2006.
In 2007, prior to repaying the bridge loan, we included approxi-
mately $12.7 million of foreign-currency transaction gains in the
foreign currency translation adjustment component of accumu-
lated other comprehensive loss.
Subsequent to repayment of the bridge loan, we issued €1.0 bil-
lion unsecured senior notes to refinance the acquisition of
Pullmantur Cruises and to repay amounts under our $1.2 billion
revolving credit facility.During 2007, wedesignated a portion of
the €1.0 billion unsecured senior notes as a nonderivative hedge
of our net investment in Pullmantur Cruises. The designated
portion was approximately €466.0 million, or approximately
$679.9 million at December 31, 2007. Accordingly, we included
approximately $76.7million of foreign-currency transaction losses
related to the €1.0 billion unsecured senior notes in the foreign
currency translation adjustment component of accumulated
other comprehensive loss. The total net foreign currency trans-
action loss recorded in the foreign currency translation adjust-
ment component of accumulated other comprehensive loss
was approximately $64.0 million as of December 31, 2007.
NOTE 13. FAIR VALUE OF
FINANCIAL INSTRUMENTS
The estimated fair values of certain of our financial instruments
areas follows (in thousands):
2007 2006
Long-term debt (including current portion
of long-term debt) $5,558,984 $5,474,988
Foreign currency forward contracts
in a net gain position 413,652 104,159
Interest rate swap agreements
in a net receivable position 23,437 5,856
Fuel swap agreements in a
net receivable (payable) position 68,595 (20,456)
Cross currency swap agreements
in a net receivable position 53,952 –
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 December 31, 2007 or 2006, or that will be realized in the
future and do not include expenses that could be incurred in an
actual sale or settlement. Our financial instruments are not held
for trading or speculative purposes.
Our exposure under foreign currency contracts, interest rate and
fuel swap agreements is limited to the cost of replacing the contracts
in the event of non-performance by the counterparties to the
contracts, all of which are currently our lending banks. To mini-
mize this risk, we select counterparties with credit risks accept-
able to us and we limit our exposure to an individual counterparty.
Furthermore, all foreign currency forward contracts are denomi-
nated in relatively stable currencies.
Long-Term Debt
The fair values of our senior notes and senior debentures were
estimated by obtaining quoted market prices. The fair values of all
other debt wereestimated using the present value of expected
futurecash flows.
Foreign Currency Contracts
The fair values of our foreign currency forward contracts were
estimated using the present value of expected future cash flows.
Our exposure to market risk for fluctuations in foreign currency
exchange rates relates to seven ship construction contracts and
forecasted transactions. We use foreign currency forward contracts
to mitigate the impact of fluctuations in foreign currency exchange
rates. As of December 31, 2007, wehad foreign currency forward
contracts in a notional amount of €3.9 billion maturing through
2011. As of December 31, 2007, the fair value of our foreign currency
forward contracts was a net unrealized gain of approximately
$413.7 million. At December 31, 2006, the fair value of our foreign
currency forward contracts was a net unrealized gain of approxi-
mately $104.2 million. At December 31, 2007, approximately 7.7%
of the aggregate cost of the ships was exposed to fluctuations in
the euro exchange rate.
Interest Rate Swap Agreements
The fair values of our interest rate swap agreements were esti-
mated based on the present value of expected future cash flows.
Weenter into interest rate swap agreements to modify our expo-
sure to interest rate movements and to manage our interest
expense related to our long-term debt obligations.
Market risk associated with our long-term fixed rate debt is the
potential increase in fair value resulting from a decrease in inter-
est rates. As of December 31, 2007, we had interest rate swap
agreements, designated as fair value hedges, which exchanged
fixed U.S. dollar interest rates for floating U.S. dollar interest
rates in a notional amount of $350.0 million, maturing in 2016,
and exchanged fixed Euro interest rates for floating Euro interest
rates in a notional amount of €1.0 billion, maturing in 2014.
Market risk associated with our long-term floating rate debt is the
potential increase in interest expense from an increase in interest
rates. As of December 31, 2007, we had an interest rate swap
agreement, designated as a cash flow hedge, which exchanges
floating rate term debt for a fixed interest rate of 4.40% in a
notional amount of $25.0 million, maturing in January 2008.