Air Canada 2007 Annual Report Download - page 35

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Management’s Discussion and Analysis of Results and Financial Condition
35
7.2 ADJUSTED NET DEBT
The following table refl ects Air Canada’s net debt balances and net debt to net debt plus equity ratio as at December 31, 2007
and as at December 31, 2006. The information provided below excludes the consolidation of Jazz for both periods.
($ millions)
December 31,
2007
December 31,
2006 Change
Total long-term debt and capital lease obligations $ 4,006 $ 3,081 $ 925
Current portion of long-term debt and capital lease obligations 413 367 $ 46
$ 4,419 $ 3,448 $ 971
Non-controlling interest 184 212 (28 )
Cash, cash equivalents and short-term investments (1,239 ) (2,110 ) 871
Net debt and non-controlling interest $ 3,364 $ 1,550 $ 1,814
Capitalized operating leases (1) 2,115 2,558 (443 )
Adjusted net debt and non-controlling interest $ 5,479 $ 4,108 $ 1,371
Pre-delivery (PDP) fi nancing included in long-term debt (521 ) - (521 )
Adjusted net debt and non-controlling interest, excluding PDP fi nancing $ 4,958 $ 4,108 $ 850
Shareholders’ equity and non-controlling interest $ 2,627 $ 2,142 $ 485
Adjusted net debt to net debt plus equity ratio, excluding PDP fi nancing 65.4 % 65.7 % (0.3 ) pp
(1) Financial and credit analysts regularly derive a present value debt equivalent from the future stream of aircraft operating lease payments. Common industry practice
is to multiply annualized aircraft rent expense by 7.5. Aircraft rent was $282 million for the year 2007 and $341 million for the year 2006. Aircraft rent expense for the
year 2007 includes aircraft rent associated with aircraft subleased to third parties. The sublease revenue associated with these aircraft leases is included in “other”
revenues on Air Canada’s statement of operations. Sublease revenues amounted to $26 million for the year 2007.
On October 30, 2007, the Corporation entered into an agreement with a syndicate of banks for the fi nancing of pre-
delivery payments (“PDP”) for 10 of the 16 Boeing 777 aircraft contemplated in the Corporation’s Purchase Agreement
with Boeing. The PDP fi nancing is a series of loans that are aircraft specifi c with a maximum aggregate commitment of up
to $568 million (US$575 million). The PDP loans have a term of fi ve years, but may be prepaid upon the delivery of the
aircraft without penalty. Air Canada has already prepaid the PDP loans on the fi rst two aircraft delivered in November 2007
and January 2008. In addition, Air Canada has served notice to the PDP syndicate that it will be prepaying the PDP loans on
delivery of aircraft three to eight. Air Canada’s intent is to prepay all PDP loans upon delivery of the relevant aircraft, using
the committed long-term aircraft fi nancing and leases for the aircraft to be delivered. The tenth and last aircraft in this
PDP fi nancing is currently scheduled for delivery in November 2008, at which time, Air Canada expects to have fully repaid
the PDP loans. At year-end 2007, the amount drawn on the PDP loans was $521 million (US$528 million). Air Canada is
using the PDP fi nancing to settle most of the outstanding pre-delivery payments. This results in a signifi cant shift in capital
expenditures from 2008 to 2007 from that which was previously disclosed due to the pre-delivery deposit being recorded as
a capital expenditure when paid. Refer to section 6 of this MD&A for additional information on Air Canada’s fl eet strategy.
At December 31, 2007, adjusted net debt and non-controlling interest, including capitalized operating leases, and excluding PDP
fi nancing, increased $850 million from December 31, 2006. The increase was largely the result of additional aircraft fi nancing
in 2007, partly offset by the appreciation of the Canadian dollar against the US dollar on Air Canada’s US denominated debt.
The adjusted net debt to net debt plus equity ratio for Air Canada decreased to 65.4% at December 31, 2007 from 65.7%
at December 31, 2006.