Air Canada 2013 Annual Report Download - page 135

2013 Consolidated Financial Statements and Notes
135
The Corporation’s cash inflows are primarily in Canadian dollars, while a large portion of its outflows are in US dollars. This
unbalanced mix results in an annual US dollar shortfall from operations. In order to mitigate this imbalance, the Corporation
has adopted a number of risk management strategies, which include:
• The practice of converting excess revenues from offshore currencies into US dollars. In 2013, this conversion generated
coverage for approximately 25% of the imbalance.
• Holding US cash reserves as an economic hedge against changes in the value of the US dollar. US dollar cash and short-
term investment balances as at December 31, 2013 amount to $791(US$743) ($581 (US$584) as at December 31, 2012).
• Locking in the foreign exchange rate through the use of a variety of foreign exchange derivatives which have maturity
dates corresponding to the forecasted dates of US dollar shortfalls.
The target coverage of the above strategies is to cover 50% of the net US dollar exposure on a rolling 12 month basis. The
level of foreign exchange derivatives entered into and their related maturity dates are dependent upon a number of factors,
which include the amount of foreign revenue conversion available, US dollar net cash flows, as well as the amount attributed
to aircraft and debt payments. Based on the notional amount of currency derivatives outstanding at December 31, 2013, as
further described below, and the value of US cash reserves, approximately 50% of net US cash outflows are hedged in 2014.
As at December 31, 2013, the Corporation had outstanding foreign currency options and swap agreements to purchase US
dollars and Euros against Canadian dollars on $1,645 (US$1,547) and $72 (EUR $34, GBP $16) which mature in 2014 and 2015
at a weighted average rate of $1.0341 per $1.00 US dollar (2012 – $1,289 (US$1,296) which matured in 2013). The fair value
of these foreign currency contracts as at December 31, 2013 was $13 in favour of the Corporation (2012 – less than $1 in
favour of the Corporation). These derivative instruments have not been designated as hedges for accounting purposes and are
recorded at fair value. During 2013, a gain of $68 was recorded in Foreign exchange gain (loss) related to these derivatives
(2012 – $20 gain).
Share-based Compensation Risk
The Corporation issues share-based compensation to its employees in the form of stock options and PSUs as described in
Note 14. Each PSU entitles the employees to receive a payment in the form of one Air Canada ordinary share, cash in the
amount equal to market value of one ordinary share, or a combination thereof, at the discretion of the Board of Directors.
Share-based compensation risk refers to the risk that future cash flows to settle the PSUs will fluctuate because of changes in
the Corporation’s share price. To hedge the exposure to outstanding PSUs, the Corporation entered into share forward
contracts to hedge PSUs that may vest between 2014 and 2016, subject to the terms of vesting including realization of
performance vesting criteria. The contracts were prepaid by the Corporation. The forward dates for the share forward
contracts coincide with the vesting terms and planned settlement dates of 7,523,112 PSUs from 2014 to 2016. These
contracts were not designated as hedging instruments for accounting purposes. Accordingly, changes in the fair value of these
contracts are recorded in Gain (loss) on financial instruments recorded at fair value in the period in which they arise. During
2013, a gain of $42 was recorded (2012 – gain of $5). As at December 31, 2013, the fair value of the share forward contracts
is $56 in favour of the Corporation (2012 – $10 in favour of the Corporation), with those contracts maturing in 2014 of $20
recorded in Prepaid expenses and other current assets and the remainder of $36 is recorded in Deposits and other assets.
Liquidity risk
Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with its financial
liabilities and other contractual obligations, including pension funding obligations as described in Note 9 and covenants in
credit card agreements as described below. The Corporation monitors and manages liquidity risk by preparing rolling cash flow
forecasts, monitoring the condition and value of assets available to be used as well as those assets being used as security in
financing arrangements, seeking flexibility in financing arrangements, and establishing programs to monitor and maintain
compliance with terms of financing agreements. The Corporation’s principal objective in managing liquidity risk is to maintain
a minimum unrestricted liquidity level of $1,700. This minimum target level was determined in conjunction with Air Canada’s
liquidity risk management strategy and replaces the previous target of maintaining at least 15% of 12 month trailing revenues.
At December 31, 2013, unrestricted liquidity was $2,364 comprised of Cash and cash equivalents and Short-term investments
of $2,208 and undrawn lines of credit of $156.
A maturity analysis of the Corporation’s financial liabilities, other fixed operating commitments and capital commitments is
set out in Note 16.