Air Canada 2013 Annual Report Download - page 137

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2013 Consolidated Financial Statements and Notes
137
Credit Risk
Credit risk is the risk of loss due to a counterparty’s inability to meet its obligations. As at December 31, 2013, the
Corporation’s credit risk exposure consists mainly of the carrying amounts of Cash and cash equivalents, Short-term
investments and Accounts receivable. Cash and cash equivalents and Short-term investments are in place with major financial
institutions, the Canadian government, and major corporations. Accounts receivable are generally the result of sales of tickets
to individuals, often through the use of major credit cards, through geographically dispersed travel agents, corporate outlets,
or other airlines. Credit rating guidelines are used in determining counterparties for fuel hedging. In order to manage its
exposure to credit risk and assess credit quality, the Corporation reviews counterparty credit ratings on a regular basis and
sets credit limits when deemed necessary.
Fuel Price Risk
Fuel price risk is the risk that future cash flows 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. 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.
During 2013:
• The Corporation recorded a loss of $6 in Loss on financial instruments recorded at fair value related to fuel derivatives
($43 loss in 2012).
• The Corporation purchased crude-oil and refined products-based call options and call spreads covering a portion of 2013
and 2014 fuel exposure. The cash premium related to these contracts was $39 ($51 in 2012 for 2012 and 2013
exposures).
• Fuel derivative contracts cash settled with a fair value of $29 in favour of the Corporation ($3 in favour of the
Corporation in 2012).
As of December 31, 2013, approximately 20% of the Corporation's anticipated purchases of jet fuel for 2014 are hedged at an
average West Texas Intermediate (“WTI”) equivalent capped price of US$100 per barrel. The Corporation's contracts to hedge
anticipated jet fuel purchases over the 2014 period are comprised of call options with notional volumes of 5,136,000 barrels.
The fair value of the fuel derivatives portfolio at December 31, 2013 is $20 in favour of the Corporation ($16 in favour of the
Corporation in 2012) and is recorded within Prepaid expenses and other current assets.
Financial Instrument Fair Values in the Consolidated Statement of Financial Position
The carrying amounts reported in the consolidated statement of financial position for short term financial assets and liabilities,
which includes Accounts receivable and Accounts payable and accrued liabilities, approximate fair values due to the
immediate or short-term maturities of these financial instruments. Cash equivalents and Short-term investments are classified
as held for trading and therefore are recorded at fair value.
The carrying amounts of interest rate swaps, share forward contracts, foreign exchange, and fuel derivatives are equal to fair
value, which is based on the amount at which they could be settled based on estimated current market rates.
Management estimated the fair value of its long-term debt based on valuation techniques taking into account market rates of
interest, the condition of any related collateral, the current conditions in credit markets and the current estimated credit
margins applicable to the Corporation based on recent transactions. Based on significant observable inputs (Level 2 in the fair
value hierarchy), the estimated fair value of debt approximates its carrying value of $4,333.