Carnival Cruises 2006 Annual Report Download - page 48

page฀44 | Carnival Corporation & plc
MANAGEMENT’S฀DISCUSSION฀AND฀ANALYSIS฀OF฀FINANCIAL฀CONDITION฀AND฀RESULTS฀OF฀OPERATIONS
(continued)
currency฀swaps,฀whereby฀we฀have฀converted฀$267฀million฀of฀
U.S.฀dollar฀debt฀into฀sterling฀debt,฀$842฀million฀of฀U.S.฀dollar฀
debt฀into฀euro฀debt฀and฀$143฀million฀of฀euro฀debt฀into฀sterling฀
debt,฀thus฀partially฀offsetting฀this฀foreign฀currency฀exchange฀
rate฀risk.฀At฀November฀30,฀2006,฀the฀fair฀value฀of฀these฀foreign฀
currency฀swaps฀was฀an฀unrealized฀loss฀of฀$169฀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,฀2006฀foreign฀currency฀exchange฀
rates,฀we฀estimate฀that฀these฀derivative฀contracts’฀fair฀values฀
would฀increase฀or฀decrease฀by฀$125฀million,฀which฀would฀be฀
offset฀by฀a฀decrease฀or฀increase฀of฀$125฀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฀periodic฀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.฀At฀
both฀November฀30,฀2006฀and฀2005,฀72%฀of฀the฀interest฀cost฀
on฀our฀long-term฀debt฀was฀effectively฀fixed฀and฀28%฀was฀
variable,฀including฀the฀effect฀of฀our฀interest฀rate฀swaps.
Specifically,฀we฀have฀interest฀rate฀swaps฀at฀November฀30,฀
2006,฀which฀effectively฀changed฀$932฀million฀of฀fixed฀rate฀
debt฀to฀libor-based฀floating฀rate฀debt.฀In฀addition,฀we฀have฀
interest฀rate฀swaps฀at฀November฀30,฀2006฀which฀effectively฀
changed฀$ 365฀million฀of฀libor-based฀floating฀rate฀debt฀to฀฀
fixed฀rate฀debt.฀The฀fair฀value฀of฀our฀long-term฀debt฀and฀฀
interest฀rate฀swaps฀at฀November฀30,฀2006฀was฀$7.79฀billion.฀
Based฀upon฀a฀hypothetical฀10%฀decrease฀or฀increase฀in฀the฀
November฀30,฀2006฀market฀interest฀rates,฀the฀fair฀value฀of฀฀
our฀long-term฀debt฀and฀interest฀rate฀swaps฀would฀increase฀or฀
decrease฀by฀approximately฀$120฀million฀and฀annual฀interest฀
expense฀on฀our฀variable฀rate฀debt,฀including฀the฀effect฀of฀our฀
interest฀rate฀swaps,฀would฀increase฀or฀decrease฀by฀approxi-
mately฀$12฀million.
In฀addition,฀based฀upon฀a฀hypothetical฀10%฀decrease฀or฀
increase฀in฀Carnival฀Corporation’s฀November฀30,฀2006฀com-
mon฀stock฀price,฀the฀fair฀value฀of฀our฀convertible฀notes฀would฀
increase฀or฀decrease฀by฀approximately฀$145฀million.
These฀hypothetical฀amounts฀are฀determined฀by฀considering฀
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฀economic฀activity฀that฀could฀
exist฀in฀such฀environments฀or฀any฀relationships฀which฀may฀
exist฀between฀interest฀rate฀and฀stock฀price฀movements.฀
Furthermore,฀since฀substantially฀all฀of฀our฀fixed฀rate฀long-term฀
debt฀cannot฀currently฀be฀called฀or฀prepaid฀and฀$365฀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฀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.฀We฀esti-
mate฀that฀our฀fiscal฀2007฀fuel฀cost฀would฀increase฀or฀decrease฀
by฀approximately฀$3฀million฀for฀each฀$1฀per฀metric฀ton฀increase฀
or฀decrease฀in฀our฀average฀bunker฀fuel฀price.