Carnival Cruises 2004 Annual Report Download - page 46

Carnival Corporation & plc 43
of U.S. dollar debt into sterling debt, $466 million of
U.S. dollar debt into euro debt and $170 million of euro
debt into sterling debt, thus partially offsetting this for-
eign currency exchange rate risk. At November 30, 2004,
the fair value of these foreign currency swaps was an
unrealized loss of $137 million, which is recorded in
AOCI and offsets a portion 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, 2004 foreign currency
exchange rate, we estimate that these contracts’ fair
values would increase or decrease by $89 million, which
would be offset by a decrease or increase of $89 million
in the U.S. dollar value of our net investments.
Interest Rate Risks
We seek to minimize the impact of fluctuations in
interest rates through our long-term investment and
debt portfolio strategies, which include entering into a
substantial amount of fixed rate debt instruments. We
continuously evaluate our debt portfolio, and make peri-
odic adjustments to the mix of floating rate and fixed
rate debt based on our view of interest rate movements
through the use of interest rate swaps. Accordingly in
2003 and 2001, we entered into fixed to variable inter-
est rate swaps, which lowered our fiscal 2004, 2003
and 2002 interest costs, and are also expected to lower
our fiscal 2005 interest costs. At November 30, 2004,
68% of the interest cost on our long-term debt was
effectively fixed and 32% was variable, including the
effect of our interest rate swaps.
Specifically, we have interest rate swaps at November
30, 2004, which effectively changed $929 million of
fixed rate debt to Libor-based floating rate debt. In addi-
tion, we have interest rate swaps at November 30, 2004,
which effectively changed $828 million of euribor float-
ing rate debt to fixed rate debt. The fair value of our
long-term debt and interest rate swaps at November
30, 2004 was $8.46 billion. Based upon a hypothetical
10% decrease or increase in the November 30, 2004
market interest rates, the fair value of our long-term
debt and interest rate swaps would increase or decrease
by approximately $100 million and interest expense on
our variable rate debt, including the effect of our inter-
est rate swaps, would increase or decrease by approxi-
mately $8 million.
In addition, based upon a hypothetical 10% decrease
or increase in Carnival Corporation’s November 30,
2004 common stock price, the fair value of our convert-
ible notes would increase or decrease by approximately
$230 million.
These hypothetical amounts are determined by con-
sidering the impact of the hypothetical interest rates
and common stock price on our existing long-term debt
and interest rate swaps. This analysis does not consider
the effects of the changes in the level of overall eco-
nomic activity that could exist in such environments or
any relationships which may exist between interest rate
and stock price movements. Furthermore, since sub-
stantially all of our fixed rate long-term debt cannot
currently be called or prepaid and $828 million of our
variable rate long-term debt is subject to interest rate
swaps which effectively fix the interest rate, it is unlikely
we would be able to take any significant steps in the
short term to mitigate our exposure in the unlikely event
of a significant decrease in market interest rates.
Bunker Fuel Price Risks
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
our fiscal 2004 average bunker fuel price of $194 per
ton, we estimate that our fiscal 2005 bunker fuel cost
would increase or decrease by approximately $55 million.