Carnival Cruises 2013 Annual Report Download - page 85

Table of Contents
In July 2012, we entered into foreign currency zero cost collars that are designated as cash flow hedges for a portion of P&O Cruises (UK) Britannia’s euro-
denominated shipyard payments. These collars mature in February 2015 at a weighted-average ceiling rate of £0.83 to the euro, or $300 million, and a
weighted-average floor rate of £0.77 to the euro, or $278 million. If the spot rate is between these two rates on the date of maturity, then we would not owe or
receive any payments under these collars.
In May 2013, we settled our foreign currency zero cost collars that were designated as cash flow hedges for the final euro-denominated shipyard payments of
Royal Princess prior to their maturity date, which resulted in an insignificant gain being recognized in other comprehensive income during the second quarter
of 2013. Concurrently with the settlement of these foreign currency zero cost collars, we entered into foreign currency forwards for $552 million that were also
designated as cash flow hedges for the final euro-denominated shipyard payments of Royal Princess due in May 2013. These foreign currency forwards
settled in May 2013, and we recognized an insignificant gain in other comprehensive income during the second quarter of 2013.
At November 30, 2013, substantially all of our remaining newbuild currency exchange rate risk relates to euro-denominated newbuild construction payments
for Regal Princess, the Seabourn newbuild, and a portion of Britannia, which represent a total commitment of $1.3 billion.
The cost of shipbuilding orders that we may place in the future that is denominated in a different currency than our cruise brands’ or the shipyards’
functional currency is expected to be affected by foreign currency exchange rate fluctuations. These foreign currency exchange rate fluctuations may affect our
desire to order new cruise ships.
Interest Rate Risks
We manage our exposure to fluctuations in interest rates through our investment and debt portfolio management strategies. These strategies include purchasing
high quality short-term investments with floating interest rates, and evaluating our debt portfolio as to whether to make periodic adjustments to the mix of fixed
and floating rate debt through the use of interest rate swaps and the issuance of new debt or the early retirement of existing debt. At November 30, 2013, 59%
and 41% (61% and 39% at November 30, 2012) of our debt bore fixed and floating interest rates, respectively, including the effect of interest rate swaps.
Fuel Price Risks
Our exposure to market risk for changes in fuel prices substantially all relate to the consumption of fuel on our ships. We use our fuel derivatives program to
mitigate a portion of our economic risk attributable to potential fuel price increases. We designed our fuel derivatives program to maximize operational
flexibility by utilizing derivative markets with significant trading liquidity and our program currently consists of zero cost collars on Brent.
All of our derivatives are based on Brent prices whereas the actual fuel used on our ships is marine fuel. Changes in the Brent prices may not show a high
degree of correlation with changes in our underlying marine fuel prices. We will not realize any economic gain or loss upon the monthly maturities of our zero
cost collars unless the average monthly price of Brent is above the ceiling price or below the floor price. We believe that these derivatives will act as economic
hedges, however hedge accounting is not applied. As part of our fuel derivatives program, we will continue to evaluate various derivative products and
strategies.
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