Air Canada 2008 Annual Report Download - page 54

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2008 Air Canada Annual Report
54
The following table outlines the notional volumes per barrel along with the weighted average floor and ceiling price for each
year currently hedged by type of derivative instruments. These average contract prices represent the equivalent price in WTI
using the forward prices for WTI, heating oil, and jet fuel as at December 31, 2008.
AtDecember31,2008
Derivative Instruments Term Volume (BBLs)
WTI-equivalent
Average Floor Price
(US$perbarrel)
WTI-equivalent
Average Capped Price
(US$perbarrel)
Call Options (1) 2009 1,620,000 n/a 127
Swaps (1) 2009 1,455,000 100 100
2010 1,250,000 100 100
Collars (1) 2009 4,760,000 82 92
2010 1,960,000 106 116
Put Options (2) 2009 1,200,000 40 n/a
(1) Air Canada is expected to generate fuel hedging gains if oil prices increase above the average capped price and is exposed to fuel hedging losses if oil prices decrease below
the average floor price.
(2) Given the recent significant decrease in oil prices, Air Canada also purchased crude oil put options. Air Canada is expected to generate fuel hedging gains if oil prices decrease
below the average floor price. Their objective is to protect against potential additional collateral requirements caused from further price decreases. The fair value of
these derivative instruments increases as crude oil prices decrease, therefore offsetting in part the exposure on the total portfolio and limiting the collateral requirements.
The premium paid related to these contracts was $4 million (US$3 million).
The Corporation designates certain of its fuel derivatives as cash flow hedges and applies hedge accounting as prescribed
under CICA section 3865, Hedges. Designated hedging items under cash flow hedges result in all period changes in the
fair value of the hedging item that are considered effective being recorded in AOCI (“Accumulated Other Comprehensive
Income”) until the underlying jet fuel is consumed. Upon maturity of the hedging item, the effective gains and losses
are recorded in fuel expense. The ineffective component of the change in fair value is recorded in non-operating income
(expense) when it occurs. The Corporation also holds certain fuel derivative instruments that do not qualify for hedge
accounting, but which still constitute good economic hedges. These contracts, classified as economic hedges, are recorded
at fair value at each balance sheet date and the change in fair value is recognized in non-operating income (expense) when
it occurs.
At December 31, 2008, the fair value of the outstanding fuel derivatives was $420 million in favour of the counterparties
($77 million in favour of the Corporation in 2007). Fuel derivatives include both derivatives designated and not designated
under fuel hedge accounting and are recorded within current liabilities on Air Canada’s consolidated statement of financial
position. In 2008, the total decrease in the fair value of the Corporation’s fuel derivatives amounted to $531 million in 2008
(a gain of $160 million in 2007). Of the fair value loss, a loss of $606 million was recorded in other comprehensive income
(“OCI”) and the remaining $74 million was recorded as a gain in non-operating income (expense) in 2008.
The accounting treatment in either OCI or non-operating expense, as described above, does not alter the economic impact
of the Corporation’s fuel hedging program. During 2008, the fuel derivative contracts matured with a fair value in favour
of the Corporation for $129 million ($61 million in 2007) generating cash inflows which helped the Corporation, along with
fuel surcharges, managing the significant jet fuel price increases it faced in the first half of 2008. The benefit to fuel expense
was $79 million in 2008 ($36 million in 2007).
During 2008, fuel derivative contracts were terminated with fair values in favour of the counterparties for $160 million.
The value of the AOCI balance recognized in connection with these derivatives will be taken into fuel expense in the period
where the derivative was scheduled to mature. As at December 31, 2008, the balance in AOCI was $606 million. The
estimated net amount of existing losses reported in AOCI that is expected to be reclassified to net income (loss) during the
following 12 months is $418 million before tax.
Subsequent to December 31, 2008, the Corporation modified its fuel hedge portfolio with the termination of swap and put
option contracts for cash settlements of $156 million under hedge accounting and $16 million not under hedge accounting,
both in favour of the counterparty. The value of the AOCI balance recognized in connection with these derivatives will be
taken into fuel expense in the period where the derivative was scheduled to mature.