Carnival Cruises 2015 Annual Report Download - page 26

Contingent Obligations – Lease Out and Lease Back Type (“LILO”) Transactions
At November 30, 2015, Carnival Corporation had estimated contingent obligations totaling $382 million,
excluding termination payments as discussed below, to participants in LILO transactions for two of its ships. At
the inception of these leases, the aggregate of the net present value of these obligations was paid by Carnival
Corporation to a group of major financial institutions, who agreed to act as payment undertakers and directly pay
these obligations. As a result, these contingent obligations are considered extinguished and neither the funds nor
the contingent obligations have been included in our Consolidated Balance Sheets.
In the event that Carnival Corporation were to default on its contingent obligations and assuming performance by
all other participants, we estimate that it would, as of November 30, 2015, be responsible for a termination
payment of $22 million. In January 2016, Carnival Corporation elected to exercise its options to terminate each
of these LILO transactions on January 1, 2017 for one ship and January 1, 2018 for the other, at no cost to it.
If the credit rating of one of the financial institutions who is directly paying the contingent obligations falls below
AA-, or below A- for the other financial institution, then Carnival Corporation will be required to replace the
applicable financial institution with another financial institution whose credit rating is at least AA or meets other
specified credit requirements. In such circumstances, it would incur additional costs, although we estimate that
they would not be significant to our consolidated financial statements. The financial institution payment
undertaker subject to the AA- credit rating threshold has a credit rating of AA, and the financial institution
subject to the A- credit rating threshold has a credit rating of A+. If Carnival Corporation’s credit rating, which is
BBB+, falls below BBB, it will be required to provide a standby letter of credit for $32 million, or, alternatively,
provide mortgages for this aggregate amount on these two ships.
Contingent Obligations – Indemnifications
Some of the debt contracts that we enter into include indemnification provisions that obligate us to make
payments to the counterparty if certain events occur. These contingencies generally relate to changes in taxes and
changes in laws that increase lender capital costs and other similar costs. The indemnification clauses are often
standard contractual terms and were entered into in the normal course of business. There are no stated or notional
amounts included in the indemnification clauses, and we are not able to estimate the maximum potential amount
of future payments, if any, under these indemnification clauses. We have not been required to make any material
payments under such indemnification clauses in the past and, under current circumstances, we do not believe a
request for material future indemnification payments is probable.
NOTE 9 – Taxation
A summary of our principal taxes and exemptions in the jurisdictions where our significant operations are located
is as follows:
U.S. Income Tax
We are primarily foreign corporations engaged in the business of operating cruise ships in international
transportation. We also own and operate, among other businesses, the U.S. hotel and transportation business of
Holland America Princess Alaska Tours through U.S. corporations.
Our North American cruise ship businesses and certain ship-owning subsidiaries are engaged in a trade or
business within the U.S. Depending on its itinerary, any particular ship may generate income from sources within
the U.S. We believe that our U.S. source income and the income of our ship-owning subsidiaries, to the extent
derived from, or incidental to, the international operation of a ship or ships, is currently exempt from U.S. federal
income and branch profit taxes.
Our domestic U.S. operations, principally the hotel and transportation business of Holland America Princess
Alaska Tours, are subject to federal and state income taxation in the U.S.
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