Air Canada 2008 Annual Report Download - page 138

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2008 Air Canada Annual Report
138
The following table outlines the notional volumes per barrel along with the weighted average floor and capped price for
each year currently hedged by type of derivative instruments. 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, 2008.
Derivative Instruments Term Volume (BBLs)
WTI-equivalent
Average Floor Price
(USD$/bbl)
WTI-equivalent
Average Capped Price
(USD$/bbl)
Call options (a) 2009 1,620,000 $ n/a $ 127
Swaps (a) 2009 1,455,000 $ 100 $ 100
2010 1,250,000 $ 100 $ 100
Collars (a) 2009 4,760,000 $ 82 $ 92
2010 1,960,000 $ 106 $ 116
Put options (b) 2009 1,200,000 $ 40 $ n/a
(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 floor price.
(b) Given the recent significant decrease in oil price, the Corporation purchased crude-oil put options. The Corporation
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 price decreases, therefore offsetting in part the exposure on the
total portfolio and limiting the collateral requirements. The premium paid related to these contracts was $4 (USD$3).
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 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 defined 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 significant 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 diversified 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 flows.
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 2008 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. Also during 2008, and
as further described below, certain derivatives were terminated by the Corporation prior to their scheduled maturities.