Wednesday 27 May 2015

Air Canada Opts Out of Air Canada Pension Plan Funding Regulations, 2014

  • Returns to Normal Funding Rules applicable to federally regulated pension plans
  • Implements a Normal Course Issuer Bid for up to 10 million shares
MONTRÉAL, May 26, 2015 /CNW Telbec/ - Air Canada announced today that it has elected to opt out of the Air Canada Pension Plan Funding Regulations, 2014 (the "2014 Regulations"), effective immediately.  The 2014 Regulations became effective on January 1, 2014 and under their terms, Air Canada was required to make solvency deficit payments of $200 million per year, on average, over a seven-year period. The agreement entered into in connection with these regulations contained several restrictions, including a prohibition on dividends and share repurchases; however it allowed Air Canada to opt out at any time.
"Our ability to return to normal funding rules for our pension plans represents a highly significant and positive milestone in the execution of our strategy to transform Air Canada into a sustainably profitable company for the long term." said Calin Rovinescu, President and Chief Executive Officer of Air Canada.  "Our three primary pension objectives were to secure our employees' and retirees' pensions, eliminate the pension solvency deficit and ensure that the costs associated with maintaining the pension plans remain affordable, predictable and stable.  We have, over the past six years, achieved all three objectives.  I would like to take this opportunity to thank all stakeholders involved with this complex process, which has ultimately resulted in an immensely positive outcome for our employees and retirees."
Air Canada has elected to opt out of the 2014 Regulations as following a detailed risk assessment, it believes the funding risk associated with the solvency of its pension plans has largely been eliminated. The committed deficit funding contributions over the next six years of approximately $1.1 billion under the 2014 Regulations may be redeployed to further improve the competitive position of Air Canada and create substantial value for shareholders and employees.
The overall risk profile of the pension plans, given the successful execution of a new investment policy and risk mitigation strategy introduced in 2009, is significantly lower.  This is the result of and reflected in the following:
  • 75 per cent of Air Canada's pension liabilities are now immunized with duration-matched fixed income products, significantly reducing the interest rate risk associated with all pension plans.  Air Canada may continue to increase immunization levels, subject to favourable market conditions. 
  • Air Canada utilizes an overall risk measurement called "surplus risk", measuring the potential variability of the plan assets and liabilities over the period of one year.  This surplus risk has been reduced by approximately 50 per cent since 2009, a reflection of a more conservative asset mix policy. 
  • The aggregate solvency surplus as at May 20, 2015, based on management estimates, is $1.2 billion, 82 per cent above the $660 million surplus level at January 1, 2015, and 13.5 times greater than the $89 million surplus level as at January 1, 2014
  • As part of its due diligence and risk mitigation strategy, Air Canada, with the assistance of its professional actuaries, simulated 1,000 different economic scenarios on the current plan asset mix to determine what combination of economic factors would have to occur to cause Air Canada to contribute an aggregate of more than $1.2 billion to its pension plans under normal funding rules, over the next six years.  Air Canada also simulated the past three economic crises (the 2009 financial crisis, the 2001-2002 technology crises and the 1970 oil crisis) to assess the effect each would have on the pension plan assets.  None of those three economic crises would result in payments exceeding an aggregate amount of $1.2 billion over the next six years.  With respect to the 1,000 economic scenarios, less than 2 per cent would result in payments of over $1.2 billion; however, none of these scenarios has ever actually occurred. 

Three years ago, Air Canada's domestic registered pension plans had a significant pension solvency deficit of $4.2 billion.  The $5.4 billion improvement in the pension solvency position to the May 20, 2015 estimated surplus of $1.2 billion is a reflection of top quartile investment returns given the new investment strategy introduced in 2009 which created over $3.5 billion in value, negotiated pension benefit amendments which reduced the deficit by approximately $1.0 billion, and past service cash contributions by Air Canada of approximately $900 million over the past six years, which when added to the $1.0 billioncontributed in current service costs represents a total contribution by Air Canada of $1.9 billion since 2009 to its Canadian registered pension plans.
In addition, the pension share trust created in 2009 as part of an earlier pension arrangement, and held in trust for the benefit of the airline's Canadian employees and retirees, is currently valued at approximately $220 million.  The trust provides that proceeds of any sale of the trust shares will be retained and applied to reduce future deficits, if any should materialize.
Under normal funding rules, Air Canada will make pension solvency payments of approximately $90 million in 2015 versus the $200 million it would have had to contribute under the 2014 Regulations, saving $110 million.  Based on the solvency surplus as at January 1, 2015 of $660 million, and assuming similar market conditions to the current environment and given its immunization strategy, Air Canada expects its pension solvency payments in 2016 to be zero, saving $200 million in that year alone.
Normal Course Issuer Bid
In conjunction with the election to opt out of the 2014 Regulations, Air Canada has reviewed its capital allocation plans.  
  • Over the next several years, Air Canada has committed approximately $9 billion to capital expenditures, primarily related to new aircraft and equipment, which will improve its competitive position, expand operating margins and increase employment levels. 
  • Air Canada is committed to lowering its net debt and leverage ratio and to continue to improve its credit rating as a top priority.  It will continue to apply the majority of its free cash flow to reduce net debt levels in addition to contractual debt payments averaging $600 million per year over the next several years. 

As a result, Air Canada believes that a modest normal course issuer bid is consistent with its capital allocation strategy and shareholder expectations.  
Accordingly, Air Canada announced today that it has received approval from the Toronto Stock Exchange ('TSX') to implement a normal course issuer bid to purchase, for cancellation, up to 10,000,000 Class A variable voting shares and/or Class B voting shares (the 'Shares'), representing approximately 3.49 per cent of the 286,846,898 Shares outstanding as of May 14, 2015.
Air Canada is authorized to make purchases under the normal course issuer bid during the period from May 29, 2015 to May 28, 2016 in accordance with the requirements of the TSX.  Purchases under the normal course issuer bid will be made by means of open market transactions on the TSX or alternative trading systems, if eligible, or such other means as the TSX or a securities regulatory authorities may permit, including pre-arranged crosses, exempt offers and private agreements under an issuer bid exemption order issued by a securities regulatory authority.  The price to be paid by Air Canada for any Share will be the market price at the time of acquisition, plus brokerage fees, or such other price as the TSX may permit.  Any purchases made under an issuer bid exemption order would be at a discount to the prevailing market price of the Shares in accordance with the terms of the order.
The average daily trading volume of Air Canada's Class A variable voting shares and Class B voting shares, taken together, was 1,942,943 Shares over the period between November 1, 2014 and April 30, 2015.  Consequently, under TSX rules, Air Canada will be allowed to purchase daily, through the TSX's facilities, a maximum of 485,735 Shares representing 25 per cent of such average daily trading volume.  In addition, Air Canada may make, once a week, a block purchase (as such term is defined in the TSX Company Manual) of Shares not directly or indirectly owned by insiders of Air Canada, in accordance with TSX rules.  The Shares purchased pursuant to the normal course issuer bid will be cancelled.
The Board of Directors of Air Canada believes that the purchase by Air Canada of its Shares represents an appropriate use of funds to increase shareholder value.  Within the past 12 months, Air Canada has not purchased any of its Shares.
CAUTION REGARDING FORWARD-LOOKING INFORMATION  
This news release includes forward-looking statements within the meaning of applicable securities laws. Forward-looking statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable.  These statements may involve, but are not limited to, comments relating to preliminary results, guidance, strategies, expectations, planned operations or future actions.  Forward-looking statements are identified by the use of terms and phrases such as "preliminary", "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "will", "would", and similar terms and phrases, including references to assumptions.
Pension funding obligations under normal funding rules are generally dependent on a number of factors, including the assumptions used in the most recently filed actuarial valuation reports for current service (including the applicable discount rate used or assumed in the actuarial valuation), the plan demographics at the valuation date, the existing plan provisions, existing pension legislation and changes in economic conditions (mainly the return on fund assets and changes in interest rates). Actual contributions that are determined on the basis of future valuation reports filed annually may vary significantly from projections. In addition to changes in plan demographics and experience, actuarial assumptions and methods may be changed from one valuation to the next, including due to changes in plan experience, financial markets, economic conditions, future expectations, changes in legislation, regulatory requirements and other factors.
Forward-looking statements, by their nature, are based on assumptions, including those described herein and are subject to important risks and uncertainties.  Forward-looking statements cannot be relied upon due to, amongst other things, changing external events and general uncertainties of the business.  Actual results may differ materially from results indicated in forward-looking statements due to a number of factors, including without limitation, industry, market, credit and economic conditions, the ability to reduce operating costs and secure financing, energy prices, currency exchange and interest rates, competition, employee and labour relations, pension issues, war, terrorist acts, epidemic diseases, environmental factors (including weather systems and other natural phenomena and factors arising from man-made sources), insurance issues and costs, changes in demand due to the seasonal nature of the business, supply issues, changes in laws, regulatory developments or proceedings, pending and future litigation and actions by third parties as well as the factors identified throughout this news release and those identified in section 18 "Risk Factors" of Air Canada's 2014 MD&A dated February 11, 2015.  The forward-looking statements contained in this news release represent Air Canada's expectations as of the date of this news release (or as of the date they are otherwise stated to be made), and are subject to change after such date.  However, Air Canada disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.

SOURCE Air Canada - Corporate - Finance

No comments: