Air Canada 2006 Annual Report Download - page 114

16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Under its risk management policy, the Corporation manages its exposure to changes in interest rates, foreign
exchange rates and jet fuel prices through the use of various derivative financial instruments. The Corporation
uses derivative financial instruments only for risk management purposes, not for generating trading profit.
Interest Rate Risk Management
The Corporation enters into forward interest rate agreements to manage the risks associated with interest rate
movement on US dollar and Canadian dollar floating rate debt and investments. During 2006 the Corporation
entered into 19 interest rate swaps with a notional value of US$414 to receive floating rates and pay a weighted
average fixed rate of 5.81% for the debt to be arranged in relation to the financing of Embraer 190 aircraft
between June 2006 and November 2007. The swaps have 15 year terms from the expected delivery date of the
aircraft and their maturities range from June 2021 to December 2022. The Corporation intends on settling the
interest rate swaps upon delivery of the related aircraft. The Corporation did not apply hedge accounting to
these derivative instruments. Before December 31, 2006, 7 of these swaps were settled at net loss of $4. As at
December 31, 2006, the fair value of the remaining 12 swaps is $13 in favour of the counterparty and is
recorded in Other long-term liabilities on the combined consolidated statement of financial position. The
Corporation has recognized a net loss of $17 since inception of these swaps in Quarter 2 2006.
During 2005, the Corporation reached a settlement with a third party related to interest rate swaps that were
terminated as a result of Air Canada's filing for CCAA on April 1, 2003. A dispute had arisen following
termination between Air Canada and the unrelated third party with respect to replacement arrangements for the
swaps. The settlement agreement provided for a payment to Air Canada of US$8 related to a portion of the net
payments the Corporation would have received had the swaps not been terminated. The replacement swaps
that were put in place with another unrelated third party had a fair value of $9 in favour of the Corporation on
inception. As a result of these transactions, the Corporation recorded a gain of $17 net of transaction fees of $3,
which has been included in Deposits and other assets. The swaps have a term to January 2024 and convert
lease payments related to two B767 aircraft leases consolidated under AcG-15, from fixed to floating rates.
These have not been designated as hedges for accounting purposes. As at December 31, 2006, these two
swaps have a fair value of $4 in favour of the Corporation (December 31, 2005 — $7 in favour of the
Corporation).
During 2006, Jazz entered into interest rate swaps to hedge its exposure to changes in interest rates on its
outstanding senior secured credit facility (Note 7). The interest rate swap is with third parties with a notional
value of $115, which has effectively resulted in a fixed interest rate of 7.09% for the term of the senior secured
credit facility until February 2, 2009. Effective February 2, 2006, the Corporation is applying hedge accounting to
these financial instruments and no amount is recorded in these combined consolidated financial statements. As
at December 31, 2006, the fair value of these swaps was less than $1 in favour of the counterparty.
Foreign Exchange Risk Management
The Corporation enters into certain foreign exchange forward contracts or currency swaps to manage the risks
associated with foreign currency exchange rates. As at December 31, 2006, the Corporation had entered into
foreign currency forward contracts and option agreements on US$503 of future purchases in 2007. The fair
value of these foreign currency contracts as at December 31, 2006 is $25 in favour of the Corporation
(December 31, 2005 — $1 in favour of third parties on US$521 of future purchases in 2006). These derivative
instruments have not been designated as hedges for accounting purposes. The unrealized gain has been
recorded in foreign exchange.
The Corporation has entered into currency swap agreements for 16 Canadair Regional Jet (CRJ) operating
leases until lease terminations between 2007 and 2011. Currency swaps for five CRJ operating leases, with
third parties, were put in place on the inception of the leases and have a fair value at December 31, 2006 of $10
in favour of the third parties (December 31, 2005 — $13 in favour of the third parties), taking into account
foreign exchange rates in effect at that time. Currency swaps for 11 CRJ operating leases with third parties
have a fair value at December 31, 2006 of $3 in favour of the Corporation (December 31, 2005 — $3 in favour
of the Corporation). These have not been designated as hedges for hedge accounting purposes. The unrealized
changes in fair value have been recorded in Foreign exchange gain or loss.
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