Carnival Cruises 2003 Annual Report Download - page 41

38 Carnival Corporation & plc
We have forward foreign currency contracts for
seven of our euro denominated shipbuilding contracts.
At November 30, 2003, the fair value of these forward
contracts was an unrealized gain of $363 million which
is recorded, along with an offsetting $363 million fair
value liability related to our shipbuilding firm commit-
ments, on our accompanying 2003 balance sheet.
Based upon a 10% strengthening or weakening of the
U.S. dollar compared to the euro as of November 30,
2003, assuming no changes in comparative interest
rates, the estimated fair value of these contracts would
decrease or increase by $247 million, which would be
offset by a decrease or increase of $247 million in the
U.S. dollar value of the related foreign currency ship
construction commitments resulting in no net dollar
impact to us.
The cost of shipbuilding orders that we may place in
the future for our cruise lines who generate their cash
flows in a currency that is different than the shipyard’s
operating currency, generally the euro, is expected to
be affected by foreign currency exchange rate fluctua-
tions. Given the recent decline in the U.S. dollar relative
to the euro, the U.S. dollar cost to order new cruise
ships at current exchange rates has increased signifi-
cantly. We currently have on order new cruise ships
for delivery through 2006. Should the U.S. dollar remain
at current levels or decline further, this may affect our
ability to order new cruise ships for 2007 or later years.
In addition to the foreign currency denominated oper-
ations of our Costa subsidiary, we have broadened our
global presence as a result of Carnival plc’s foreign
operations. Specifically, our expanded international busi-
ness operations through P&O Cruises, Ocean Village and
Swan Hellenic in the UK and Aida in Germany subject us
to an increasing level of foreign currency exchange risk
related to the sterling and euro. These are the primary
currencies for which we have U.S. dollar exchange rate
exposures. Accordingly, these foreign currency exchange
fluctuations against the dollar will affect our reported
financial results since the reporting currency for our
consolidated financial statements is the U.S. dollar and
the functional currency for our international operations
is generally the local currency. Any weakening of the
U.S. dollar against these local functional currencies has
the financial statement effect of increasing the U.S.
dollar values reported for cruise revenues and cruise
expenses in our consolidated financial statements.
Strengthening of the U.S. dollar has the opposite effect.
We will continue to monitor the effect of such expo-
sures to determine if any additional actions, such as the
issuance of additional foreign currency denominated debt
or use of other financial instruments would be war-
ranted to reduce such risk.
We consider our investments in foreign subsidiaries
to be denominated in relatively stable currencies and/or
of a long-term nature. However, we partially hedge
these exposures by denominating our debt in our sub-
sidiary’s functional currency (generally euros or sterling).
Specifically, we have $815 million of cross currency
swaps, whereby we have converted U.S. dollar debt to
euro and sterling debt and euro debt to sterling debt,
thus partially offsetting this foreign currency exchange
risk. At November 30, 2003, the fair value of these
cross currency swaps was a loss of $70 million, $39
million of which is recorded in AOCI and offsets a por-
tion of the gains recorded in AOCI upon translating
these foreign subsidiaries net assets into U.S. dollars.
Based upon a 10% hypothetical increase or decrease
in the November 30, 2003 foreign currency exchange
rate, we estimate that these contracts fair values would
increase or decrease by $82 million, which would be
offset by a decrease or increase of $82 million in the
U.S. dollar value of our net investments.
Exposure to Bunker Fuel Prices
Other cruise ship operating expenses are impacted by
changes in bunker fuel prices. Fuel consumed over the
past three fiscal years ranged from approximately 5.5%
in fiscal 2003 to 4.5% in fiscal 2002 and 4.2% in fiscal
2001 of our cruise revenues. We have typically not used
financial instruments to hedge our exposure to the
bunker fuel price market risk.
Based upon a 10% hypothetical increase or decrease
in the November 30, 2003 bunker fuel price, we estimate
that our fiscal 2004 bunker fuel cost would increase or
decrease by approximately $45 million.
Exposure to Interest Rates
In order to limit our exposure to interest rate fluctua-
tions, we have entered into a substantial number of
fixed rate debt instruments. We continuously evaluate
our debt portfolio, including interest rate swap agree-
ments, and make periodic adjustments to the mix of
floating rate and fixed rate debt based on our view of
interest rate movements. Accordingly in 2003 and
2001, we entered into fixed to variable interest rate
swap agreements, which lowered our fiscal 2003, 2002
and 2001 interest costs and are also expected to lower
our fiscal 2004 interest costs. At November 30, 2003,
61% of the interest cost on our debt was effectively
fixed and 39% was variable, including the effect of our
interest rate swaps.
At November 30, 2003, our long-term debt had a car-
rying value of $7.31 billion. At November 30, 2003, our
interest rate swap agreements effectively changed
$1.19 billion of fixed rate debt to Libor-based floating
rate debt. In addition, interest rate swaps at November
30, 2003 effectively changed $760 million of euribor
floating rate debt to fixed rate debt. The fair value of our
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)