Air Canada 2012 Annual Report Download - page 137

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2012 Consolidated Financial Statements and Notes
137
Fuel Price Risk
Fuel price risk is the risk that future cash flows arising from jet fuel purchases will fluctuate because of changes in jet fuel
prices. In order to manage its exposure to jet fuel prices and to help mitigate volatility in operating cash flows, the
Corporation enters into derivative contracts with financial intermediaries. The Corporation uses derivative contracts based on
jet fuel, heating oil and crude-oil based contracts. Heating oil and crude-oil derivatives 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 financial instrument for speculative purposes.
During 2012:
The Corporation recorded a loss of $43 in Loss on financial instruments recorded at fair value related to fuel derivatives
($26 loss in 2011).
The Corporation purchased crude-oil and refined products-based call options and call spreads covering a portion of 2012
and 2013 fuel exposure. The cash premium related to these contracts was $51 ($35 in 2011 for 2011 and 2012
exposures).
Fuel derivative contracts cash settled with a net fair value of $3 in favour of the Corporation ($31 in favour of the
Corporation in 2011).
As of December 31, 2012, approximately 24% of the Corporation's anticipated purchases of jet fuel for 2013 are hedged at an
average West Texas Intermediate (“WTI”) equivalent capped price of US$100 per barrel. The Corporation's contracts to hedge
anticipated jet fuel purchases over the 2013 period are comprised of call options and call spreads. The fair value of the fuel
derivatives portfolio at December 31, 2012 is $16 in favor of the Corporation ($11 in favour of the Corporation in 2011) and is
recorded within Prepaid expenses and other current assets.
The following table outlines the notional volumes per barrel along with the WTI equivalent weighted average capped price by
type of derivative instruments as at December 31, 2012. The Corporation is expected to generate fuel hedging gains if oil
prices increase above the average capped price.
Derivative Instruments Term Volume (bbls)
WTI
Weighted Average
Capped Price (US$/bbl)
Call options 2013 5,744,499 $ 101
Call spreads 2013 375,000 $ 91
Financial Instrument Fair Values in the Consolidated Statement of Financial Position
The carrying amounts reported in the Consolidated Statement of Financial Position for short term financial assets and
liabilities, which includes Accounts receivable and Accounts payable and accrued liabilities, approximate fair values due to the
immediate or short-term maturities of these financial instruments. Cash equivalents and Short-term investments are classified
as held for trading and therefore are recorded at fair value.
The carrying amounts of interest rate swaps, share forward contracts, foreign exchange, and fuel derivatives are equal to fair
value, which is based on the amount at which they could be settled based on estimated current market rates.
Management estimated the fair value of its long-term debt based on valuation techniques taking into account market rates of
interest, the condition of any related collateral, the current conditions in credit markets and the current estimated credit
margins applicable to the Corporation based on recent transactions. Based on significant observable inputs (Level 2 in the fair
value hierarchy), the estimated fair value of debt approximates its carrying value of $3,955.