Royal Caribbean Cruise Lines 2010 Annual Report Download - page 56

PART II
ROYAL CARIBBEAN CRUISES LTD. 53
Foreign Currency Exchange Rate Risk
Our primary exposure to foreign currency exchange
rate risk relates to our ship construction firm commit-
ments denominated in euros and a portion of our euro-
denominated debt. We enter into euro-denominated
forward contracts and cross currency swap agreements
to manage this risk. The estimated fair value of such
euro-denominated forward contracts at December 31,
2010, was estimated to be a liability of $79.9 million,
based on the present value of expected future cash
flows. At December 31, 2010, approximately 2.2% of
the aggregate cost of the ships on order was exposed
to fluctuations in the euro exchange rate. A hypotheti-
cal 10% strengthening of the euro as of December 31,
2010, assuming no changes in comparative interest
rates, would result in a $4.1 million increase in the
United States dollar cost of the foreign currency
denominated ship construction contracts exposed to
fluctuations in the euro exchange rate.
During 2010, we entered into cross currency swap
agreements that effectively changed €400.0 million
of the €1.0 billion debt with a fixed rate of 5.625% to
$509.0 million of debt at a weighted-average fixed
rate of 6.625%. The estimated fair value of these cross
currency swap agreements including accrued interest
at December 31, 2010, was an asset of approximately
$16.6 million based on the present value of expected
future cash flows. A hypothetical 10% strengthening
of the euro as of December 31, 2010, assuming no
changes in comparative interest rates, would result in
an increase in the fair value of the €400.0 million of
fixed rate debt by $46.6 million, offset by an increase
in the fair value of the cross currency swap agreements
of $46.9 million.
Also, we consider our investments in foreign operations
to be denominated in relatively stable currencies
and of a long-term nature. We partially address the
exposure of our investments in foreign operations by
denominating a portion of our debt in our subsidiaries’
and investments’ functional currencies. Specifically, we
have assigned debt of approximately €469.3 million,
or approximately $628.2 million as a hedge of our net
investment in foreign operations. Accordingly, we
have included approximately $12.3 million of foreign-
currency transaction losses in the foreign currency
translation adjustment component of accumulated
other comprehensive income (loss) at December 31,
2010. A hypothetical 10% increase or decrease in the
December 31, 2010 foreign currency exchange rate
would increase or decrease the fair value of our
assigned debt by $51.3 million, which would be offset
by a corresponding decrease or increase in the United
States dollar value of our net investment.
Our growing international business operations also
subject us to an increasing level of foreign currency
exchange risk. Movements in foreign currency exchange
rates may affect the translated value of our earnings
and cash flows associated with our international
operations.
Fuel Price Risk
Our exposure to market risk for changes in fuel prices
relates to the consumption of fuel on our ships. Fuel
cost (net of the financial impact of fuel swap agree-
ments), as a percentage of our total revenues, was
approximately 9.6% in 2010, 10.2% in 2009 and 11.1%
in 2008. We use a range of instruments including fuel
swap agreements and fuel call options to mitigate the
financial impact of fluctuations in fuel prices. During
the second quarter of 2010, we terminated 22.9% of
our fuel swap agreements as of June 30, 2010 due to
a counterparty no longer meeting our guidelines and
entered into new fuel swap agreements with a differ-
ent counterparty. Upon termination of the fuel swaps,
we received net cash proceeds of approximately
$57.5 million.
As of December 31, 2010, we had fuel swap agree-
ments to pay fixed prices for fuel with an aggregate
notional amount of approximately $897.5 million,
maturing through 2013. The fuel swap agreements
represent 58% of our projected 2011 fuel requirements,
55% of our projected 2012 fuel requirements and 22%
of our projected 2013 fuel requirements. The estimated
fair value of these contracts at December 31, 2010
was estimated to be an asset of $86.2 million. As of
December 31, 2010, we purchased fuel call options on
a total of 6.6 million barrels which mature between
2011 and 2013. The fuel call options represent 41% of
our projected 2011 fuel requirements, 25% of our pro-
jected 2012 fuel requirements and 11% of our projected
2013 fuel requirements. The estimated fair value of
these contracts at December 31, 2010 was an asset of
approximately $31.7 million. We estimate that a hypo-
thetical 10% increase in our weighted-average fuel
price from that experienced during the year ended
December 31, 2010 would increase our 2011 fuel cost
by approximately $28.0 million, net of the impact of
fuel swap agreements and fuel call options.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Our Consolidated Financial Statements and Quarterly
Selected Financial Data are included beginning on
page 61 of this report.