Royal Caribbean Cruise Lines 2010 Annual Report Download - page 83

2010 ANNUAL REPORT 80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
is being amortized as a reduction to interest expense
over the remaining life of the debt. The increase to
the carrying amount of the debt is reported in long-
term debt.
During the years ended December 31, 2010 and 2009,
we recognized in earnings, a net gain of approximately
$7.0 million and a net loss of approximately $9.4 mil-
lion, respectively, which represented the total ineffec-
tiveness of the fair value hedges pertaining to interest
rate and cross currency swaps. The amount for 2009
includes an out of period adjustment of approximately
$7.1 million which represents the cumulative reduction
in the fair value of certain interest rate swaps during
2007 and 2008 due to an error in data embedded in
the software we use to assist with calculating the fair
value of our interest rate swaps.
The notional amount of outstanding debt related
to interest rate swaps as of December 31, 2010 and
2009 was $350.0 million and $1.8 billion, respectively.
The notional amount of outstanding debt related to
cross currency swaps as of December 31, 2009 was
$389.1 million.
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 agree-
ments to manage our exposure to movements in
foreign currency exchange rates. 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%.
Approximately 2.2% and 9.0% of the aggregate cost
of the ships on order was exposed to fluctuations in
the euro exchange rate at December 31, 2010 and
December 31, 2009, respectively. The majority of our
foreign exchange contracts and our cross currency
swap agreements are accounted for as fair value or
cash flow hedges depending on the designation of
the related hedge.
The notional amount of outstanding foreign exchange
contracts including our cross currency swap agree-
ments as of December 31, 2010 and 2009 was $2.5
billion and $3.4 billion, respectively.
We consider our investments in our 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 subsidiar-
ies’ and investments’ functional currencies. As of
December 31, 2010 and 2009, we have assigned debt
of approximately €327.7 million and €346.8 million,
or approximately $438.7 million and $496.8 million,
respectively, as a hedge of our net investment in
Pullmantur. As of December 31, 2010 and 2009, we
have assigned debt of approximately €141.6 million
and €142.9 million, or approximately $189.5 million
and $204.7 million, respectively, as a hedge of our net
investment in TUI Cruises.
Fuel Price Risk
Our exposure to market risk for changes in fuel prices
relates to the consumption of fuel on our ships. We
use fuel swap agreements and fuel call options to miti-
gate the financial impact of fluctuations in fuel prices.
During 2010, we terminated 22.9% of our fuel swap
agreements as of June 30, 2010 due to a counter-
party no longer meeting our guidelines and entered
into new fuel swap agreements with a different coun-
terparty. Upon termination of the fuel swaps, we
received net cash proceeds of approximately $57.5
million. The swaps were designated as cash flow
hedges and terminating the swaps did not result in
the recognition of a gain or loss in our consolidated
statement of operations. We accounted for the termi-
nation of the swaps by recording the cash received
and removing the fair value of the instruments from
our consolidated balance sheets. At December 31,
2010, $37.2 million of deferred gains associated with
the terminated swaps remain in accumulated other
comprehensive income (loss) and will be reclassified
into earnings during 2011 as this is the period that the
hedged forecasted transactions affect earnings.
As of December 31, 2010 and 2009, we have entered
into the following fuel swap agreements:
Fuel Swap Agreements
As of As of
Projected fuel purchases December 31, December 31,
for year:  
(metric tons)
 — 
  
  
  —
Fuel Swap Agreements
As of As of
Projected fuel purchases December 31, December 31,
for year:  
(% hedged)
 — 
  
  
  —