Air Canada 2009 Annual Report Download - page 132

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2009 Air Canada Annual Report
132
The Corporation has $43 in collateral deposits extended to fuel hedge counterparties. Credit risk related to these deposits
is offset against the related liability to the counterparty under the fuel derivative.
Refer to the Asset Backed Commercial Paper section below for further credit risk information.
Fuel Price Risk
In order to manage its exposure to jet fuel prices and to help mitigate volatility in operating cash fl ows, the Corporation
enters into derivative contracts with fi nancial intermediaries. The Corporation uses derivative contracts on jet fuel and other
crude oil-based commodities, heating oil and crude oil. Heating oil and crude oil commodities are used due to the relative
limited liquidity of jet fuel derivative instruments on a medium to long-term horizon since jet fuel is not traded on an organized
futures exchange. The Corporation’s policy permits hedging of up to 75% of the projected jet fuel purchases for the next 12
months, 50% for the next 13 to 24 months and 25% for the next 25 to 36 months. These are maximum (but not mandated)
limits. There is no minimum monthly hedging requirement. There are regular reviews to adjust the strategy in light of market
conditions. The Corporation does not purchase or hold any derivative fi nancial instrument for speculative purposes.
During 2009, the Corporation purchased crude-oil call options. The premium related to these contracts was $6.
As of December 31, 2009, approximately 18% of the Corporation’s anticipated purchases of jet fuel for 2010 are hedged
at an average West Texas Intermediate (“WTI”) capped price of USD$95 per barrel and approximately 10% is subject to an
average fl oor price of US$96 per barrel. The Corporation’s contracts to hedge anticipated jet fuel purchases over the 2010
period are comprised of crude-oil based contracts.
The following table outlines the notional volumes per barrel along with the WTI weighted average fl oor and capped price
for each year currently hedged by type of derivative instruments as at December 31, 2009.
Derivative Instruments Term Volume (BBLs)
WTI Weighted
Average Floor Price
(US$/bbl)
WTI Weighted
Average Capped Price
(US$/bbl)
Call options (a) 2010 1,835,000 $ n/a $ 92
Swaps (a) 2010 1,070,000 $ 99 $ 99
Collars (a) 2010 1,180,000 $ 93 $ 95
(a) The Corporation is expected to generate fuel hedging gains if oil prices increase above the average capped price and is
exposed to fuel hedging losses if prices decrease below the average fl oor price.
During 2009, fuel derivative contracts cash settled with a fair value of $88 in favour of the counterparties ($129 in favour
of the Corporation in 2008).
During 2009, the Corporation modifi ed its fuel hedge portfolio with the termination of swap and put option contracts for
$192, in favour of the counterparties. The collateral held by the counterparties covered the majority of the settlement
amount, therefore minimal additional cash outfl ows resulted. Certain of these contracts were previously designated under
hedge accounting. The value of the AOCL balance recognized in connection with these derivatives while designated under
hedge accounting will be taken into fuel expense in the period where the derivative was scheduled to mature.
As at December 31, 2009, the net amount of existing losses reported in AOCL that are expected to be reclassifi ed to net
income (loss) during the following 12 months is $183 before tax. Due to the discontinuation of hedge accounting effective
the third quarter of 2009 (refer to Note 2L), the AOCL balance related to fuel hedging contracts will be completely depleted
as of December 31, 2010.
The types of derivative instruments used by the Corporation within its hedging program, such as swaps and put options
within collar structures, expose the Corporation to the potential of providing collateral deposits to its counterparties. When
fuel prices decrease causing the Corporation’s derivative position to be in a liability position below the set credit thresholds
with counterparties, the Corporation is responsible for extending collateral to the counterparties. As at December 31, 2009,
the Corporation had extended $43 of collateral to counterparties (2008 – $328).