Royal Caribbean Cruise Lines 2014 Annual Report Download - page 60

Royal Caribbean Cruises Ltd. 59
PART II
During 2012, we entered into foreign currency collar
options to hedge a portion of our foreign currency
exposure on the construction contract price for Anthem
of the Seas. These options mature in April 2015 and
their fair value was estimated to be a liability of $21.9
million at December 31, 2014.
Our international business operations subject us to
foreign currency exchange risk. We transact business
in many different foreign currencies and maintain
investments in foreign operations which may expose
us to financial market risk resulting from fluctuations
in foreign currency exchange rates. Movements in for-
eign currency exchange rates may affect the trans-
lated value of our earnings and cash flows. We manage
most of this exposure on a consolidated basis, which
allows us to take advantage of any natural offsets.
Therefore, weakness in one particular currency might
be offset by strengths in other currencies over time.
We consider our investments in our foreign opera-
tions to be denominated in relatively stable currencies
and of a long-term nature. We partially mitigate the
exposure of our investments in foreign operations by
denominating a portion of our debt in our subsidiaries’
and investments’ functional currencies and designat-
ing it as a hedge of these subsidiaries and investments.
We designated debt as a hedge of our net investments
in Pullmantur and TUI Cruises of approximately €139.4
million and €544.9 million, or approximately $168.7
million and $750.8 million, through December 31, 2014
and December 31, 2013, respectively. A hypothetical
10% increase or decrease in the December 31, 2014
Euro exchange rate would increase or decrease the
fair value of our assigned debt by $16.9 million, which
would be offset by a corresponding decrease or
increase in the United States dollar value of our net
investment. Furthermore, during 2014, we entered into
foreign currency forward contracts and designated
them as hedges of a portion of our net investments
in Pullmantur and TUI Cruises of €415.6 million or
approximately $502.9 million, based on the exchange
rate at December 31, 2014. These forward currency
contracts mature in April 2016 and their estimated fair
value was an asset of $64.0 million as of December
31, 2014. Accordingly, we have included approximately
$45.0 million and ($44.4) million of foreign-currency
transaction gains (losses) and of changes in the fair
value of derivatives in the foreign currency translation
adjustment component of Accumulated other com-
prehensive (loss) income at December 31, 2014 and
December 31, 2013, respectively.
Lastly, on a regular basis, we enter into foreign cur-
rency forward contracts and, from time to time, we
have utilized cross-currency swap agreements to min-
imize volatility resulting from the remeasurement of
net monetary assets and liabilities denominated in a
currency other than our functional currency or the
functional currencies of our foreign subsidiaries. Dur-
ing 2014, we maintained an average of approximately
$474.0 million of these foreign currency forward con-
tracts. These instruments are not designated as hedg-
ing instruments. In 2014, 2013 and 2012 changes in the
fair value of the foreign currency forward contracts
were (losses) gains of approximately ($48.6) million,
($19.3) million and $7.7 million, respectively, which
offset gains (losses) arising from the remeasurement
of monetary assets and liabilities denominated in for-
eign currencies in those same years of $49.5 million,
$13.4 million and ($11.8) million, respectively. These
changes were recognized in earnings within Other
income (expense) in our consolidated statements of
comprehensive income (loss).
Fuel Price Risk
Our exposure to market risk for changes in fuel prices
relates primarily to the consumption of fuel on our
ships. Fuel cost (net of the financial impact of fuel
swap agreements), as a percentage of our total reve-
nues, was approximately 11.7% in 2014, 11.6% in 2013 and
11.8% in 2012. We use fuel swap agreements to miti-
gate the financial impact of fluctuations in fuel prices.
As of December 31, 2014, we had fuel swap agreements
to pay fixed prices for fuel with an aggregate notional
amount of approximately $1.4 billion, maturing through
2018. The fuel swap agreements represented 58% of
our projected 2015 fuel requirements, 55% of our pro-
jected 2016 fuel requirements, 35% of our projected
2017 fuel requirements and 15% of our projected 2018
fuel requirements. These fuel swap agreements are
accounted for as cash flow hedges. The estimated fair
value of these contracts at December 31, 2014 was
estimated to be a liability of $497.8 million. We esti-
mate that a hypothetical 10% increase in our weighted-
average fuel price from that experienced during the
year ended December 31, 2014 would increase our
forecasted 2015 fuel cost by approximately $22.7 mil-
lion, net of the impact of fuel swap agreements.
ITEM 8. FINANCIAL STATEMENTS AND
SU PPLE MENTARY DATA
Our Consolidated Financial Statements and Quarterly
Selected Financial Data are included beginning on
page 67 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.