Air Canada 2011 Annual Report Download - page 126

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2011 Air Canada Annual Report
126
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 2011:
The Corporation recorded a loss of $26 in Loss on financial instruments recorded at fair value related to fuel derivatives
($11 loss in 2010).
The Corporation purchased crude-oil call options and collars covering a portion of 2011 and 2012 fuel exposure. The cash
premium related to these contracts was $35.
Fuel derivative contracts cash settled with a net fair value of $31 in favour of the Corporation ($27 in favour of the
counterparties in 2010).
As of December 31, 2011, approximately 23% of the Corporation's anticipated purchases of jet fuel for 2012 are hedged at an
average West Texas Intermediate (“WTI”) equivalent capped price of US$114 per barrel. The Corporation's contracts to hedge
anticipated jet fuel purchases over the 2012 period are comprised of call options and call spreads. The fair value of the fuel
derivatives portfolio at December 31, 2011 is $11 in favor of the Corporation ($33 in favour of the Corporation in 2010) and is
recorded within Prepaid expenses and other current assets.
The following table outlines the notional volumes per barrel along with the WTI equivalent weighted average floor and capped
price for each year currently hedged by type of derivative instruments as at December 31, 2011.
Derivative Instruments Term Volume (bbls)
WTI
Weighted Average
Floor Price (US$/bbl)
WTI
Weighted Average
Capped Price (US$/bbl)
Call options 2012 5,279,106 not applicable $ 115
Call spreads 2012 360,000 not applicable $ 107
The Corporation is expected to generate fuel hedging gains if oil prices increase above the average capped price.
The Corporation discontinued applying hedge accounting effective the third quarter of 2009. Amounts that were deferred to
Accumulated Other Comprehensive Loss (“AOCL”) for derivatives previously designated under hedge accounting were taken
into fuel expense in the period when the previously forecasted hedge transaction occurred. During 2010, $183 was reclassified
from AOCL to Aircraft fuel expense leaving no amounts remaining in AOCL.