Air Canada 2007 Annual Report Download - page 129

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Consolidated Financial Statements and Notes
129
The following table outlines the notional volumes per barrel along with the weighted average fl oor and ceiling price for
each year currently hedged. These average contract prices represent the equivalent price in West Texas Intermediate (“WTI”)
using the forward prices for WTI, heating oil, and jet oil as at December 31, 2007:
Notional
Volumes (bbl) Term
WTI-equivalent
Average Floor
Price (USD$/bbl)
WTI-equivalent
Average Ceiling
Price (USD$/bbl)
4,890,000 2008 $ 77.97 $ 81.58
840,000 2009 $ 76.03 $ 80.92
480,000 2010 $ 84.20 $ 88.00
The Corporation designates certain of its fuel derivatives as cash fl ow hedges and applies hedge accounting as prescribed
under CICA section 3865, Hedges. Designated hedging items under cash fl ow hedges result in all period changes in the fair
value of the hedging item that are considered effective being recorded in AOCI 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.
Effectiveness is defi ned as the extent to which changes in the fair value of a hedged item relating to a risk being hedged
is offset by changes in the fair value of the corresponding hedging item. The Corporation’s accounting policy measures
effectiveness based on the change in the intrinsic value of fuel derivatives compared to the change in the intrinsic value of
the anticipated jet fuel purchase (based on the Corporation’s weighted average price). As the Corporation’s current policy
does not take into account variables affecting fair value such as volatility and time value of money, a signifi cant component
of the change in fair value of outstanding fuel derivatives may be recorded as ineffective under the current policy.
Ineffectiveness is inherent in hedging diversifi ed jet fuel purchases with derivative positions in crude oil and related
commodities and in the differences between intrinsic values and fair market values of the derivative instruments, especially
given the magnitude of volatility observed in oil market prices. As a result the Corporation is unable to predict the amount
of ineffectiveness for each period. This may result, and has resulted, in increased volatility in the accounting results of the
Corporation, but has no impact on the underlying cash fl ows.
If the hedge ceases to qualify for hedge accounting, any period change in fair value of the fuel derivative instrument is
recorded in Non-operating income (expense). For those fuel derivatives that do not qualify for hedge accounting, the period
changes in fair value of the fuel derivative is recorded in Non-operating income (expense).
During 2007 hedge accounting was discontinued for certain fuel hedge contracts where the hedging relationship ceased to
satisfy the conditions for hedge accounting. The value of the AOCI balance recognized in connection with these derivatives
will be taken into fuel expense upon the maturity of the contracts. The Corporation still continues to hold these derivatives
as it believes they continue to be good economic hedges in managing its exposure to jet fuel prices.
The following information summarizes the fi nancial statement impact of derivatives designated under fuel hedge accounting,
before the impact of tax:
■ The fair value of outstanding fuel derivatives under hedge accounting at December 31, 2007 is $67 in favour of the
Corporation.
■ The 2007 benefi t to Fuel expense for the year ended December 31, 2007 is $31.
■ The Non-operating income (loss) for the year ended December 31, 2007 is $12. The amount in Non-operating
income (loss) represents the ineffective portion of the fair value change in items under hedge accounting.
■ The effective change in the fair value of derivatives recorded in OCI for the period is $110 before tax expense of
$28. OCI amounts for the year ended December 31, 2007 are presented net of this tax expense in the Consolidated
statement of comprehensive income.
The estimated net amount of existing gains and losses reported in AOCI that is expected to be reclassifi ed to net income
during 2008 is $68.