New Horizons for the Global Air Navigation System · 2017-01-09 · ADS-B-equipped aircraft and...

EYESSKIES

New Horizons for the Global Air Navigation System

onthe

ANNUAL REPORT 2013

MISSION

GLOBAL AIR TRAFFIC SURVEILLANCETo date, there has been no single solution for aviation surveillance over oceanic and remote regions.

AIM

OPTIMIZE AIR TRAFFIC MANAGEMENTAireon*, a space-based Automatic Dependent Surveillance-Broadcast (ADS-B) solution, offers the opportunity to improve safety and optimize global air traffic management using Low Earth Orbiting (LEO) satellites.

METHOD

A SPACE-BASED LEO CONSTELLATION OF ADS-B RECEIVERSADS-B receivers will be hosted payloads onboard Iridium NEXT satellites, detecting signals from ADS-B-equipped aircraft and relaying them to Air Navigation Service Providers (ANSPs) world-wide.

RESULT

GLOBAL REAL-TIME VISIBILITY OF ADS-B EQUIPPED AIRCRAFT The global surveillance coverage by space-based ADS-B offers increased safety over oceanic and remote airspace, with optimum flight profiles for billions in fuel savings and millions in reduced GHG emissions.

*Aireon LLC was created to meet the challenge of space-based air traffic monitoring by bringing together commercial aviation companies and air navigation service providers to deliver the world’s first space-based global aviation surveillance system with full service expected by 2018.

Space-basedEYES ON

i NAV CANADA ANNUAL REPORT 2013

A GLOBAL ADVANTAGE SAFETYSAFETYSpace-based ADS-B will provide real time aircraft positions, improving situational awareness, conflict detection and resolution. A surveillance source separate from the communications network will offer more flexibility in emergency situations, and aviation occurrence reporting will be more comprehensive, allowing better management of safety risk.

ENVIRONMENT AND EFFICIENCYENVIRONMENT AND EFFICIENCYImproved surveillance means air traffic control can offer more efficient flight trajectories in oceanic or remote airspace, taking into account responses to winds and other traffic profiles. Airlines will have the ability to plan for more efficient routes and reduced fuel burn, leading to a corresponding and significant world-wide reduction in greenhouse gas (GHG) emissions.

PREDICTABILITY AND RELIABILITYPREDICTABILITY AND RELIABILITYAccess to enhanced ADS-B data supports an information sharing and collaborative ATM process. It provides opportunities for improved traffic flow management, in particular for major cities in eastern North America and Western Europe, and will accommodate System Wide Information Management (SWIM) and related Next Gen and SESAR initiatives to improve reliability and efficiency.

COST EFFECTIVENESSCOST EFFECTIVENESSSatellite coverage will supplement and enhance existing ground-based surveillance capability. Aireon will provide ANSPs a more cost-effective alternative to improving service or closing gaps, allowing for the deferral of equipment replacement or of new investment or expan-sion costs. Domestic traffic will also benefit from improved air traffic flow management, with safer and more efficient flights, and reductions in delays and congestion.

BRINGING THE INDUSTRY TOGETHERCapitalizing on the promise of more opportunities for collaborative ATM with the launch of spaced-based ADS-B, Aireon is getting a head start by bringing the aviation industry together through a Space-based ADS-B Advisory Committee (SAAC). The nine members of the SAAC, representing key aviation industry stakeholders, will be providing guidance and critical insight on operational, regulatory and technical issues as the deployment moves forward.

Representatives of the SAAC met for the first time on October 14, 2013 to provide industry-related input and lay the foundation for collaborative and open dialogue on key aspects of deployment, management and implementation of the program.

*Estimation based on Iridium-commissioned independent studies.

GLOBAL SURVEILLANCE COVERAGE

100%

Global surveillance coverage after AireonSM*

10%

Global surveillance coverage before AireonSM*

FUEL SAVINGS 2017–2030

Savings$6-8 billion*

Emissions35 million metric tons*

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NAV CANADA ANNUAL REPORT 20132

ContentsEyes on Space-based ADS-B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i

Message from the Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Message from the President and CEO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Business Plan Highlights: Fiscal 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Business Direction: Fiscal 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

National Award Winners 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Keeping an Eye on Community Involvement . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Advisory Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

Advisory Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Officers and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

Eyes on Future Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

TABLE OF

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MESSAGE FROM THECHAIRMAN OF THE BOARD

Marc Courtois

It is a great pleasure to introduce the NAV CANADA Annual Report for fiscal 2013, in this my second year on the Board of Directors and my first as Chairman.

Over these two years, I have found that the Company’s unique business model and its position at the heart of the dynamic aviation industry present fascinating challenges and opportunities, especially at this point in our evolution.

At the same time, NAV CANADA’s overarching safety mandate and obligations reinforce the importance of our work to our customers, to Canada as a whole and to the global air transportation industry.

The Company’s track record over the past 17 years – essentially the track record of all NAV CANADA employees – is an impressive one.

It includes the early years of necessary restructuring; the decade-long modernization of the air navigation system (ANS); the response to external shocks including the 9/11 attacks and subsequent severe traffic downturn combined with the SARS crisis, airline bankruptcies and environmental events; and most recently, the successful response to the global financial crisis with its negative impact on air traffic volumes.

After two years on the Board, I understand that this is the world of air navigation service provision – for the Company and our customers. I see how sound manage-ment, long-term vision, and the efforts of each and every employee have allowed NAV CANADA to survive and prevail through these challenges.

I also understand how striving to be part of the world’s most respected Air Navigation Service Provider (ANSP) is such a strong individual and collective motivator, focusing minds and hearts on making the best even better, both today and tomorrow.

I applaud the people of NAV CANADA in every site across the country. Through good times and bad, you continue to reach this Company’s ambitious objectives in safety, service charges, technology, customer value, employee engagement and environmental responsibility.

This has been accomplished while we continue to deliver safe and efficient air navigation services, all the while developing and implementing the world’s fore-most ANS technology platform, the products of which are being successfully marketed around the world.

SAFETY RECORD

In fiscal 2013, we continued to build on our outstanding safety record, especially as measured by the rate of IFR-to-IFR losses of separation, a key safety benchmark among the world’s ANSPs.

In June 2013, the five-year moving average was 0.77 per 100,000 aircraft movements. This is consistent progress from early last decade, when it stood at about 1.00 per 100,000 movements. It is a measurable result of the Company’s strong safety culture, our Safety Management System (SMS), open dialogue, reporting on safety issues, and collaborative approach.


It is important to note that safety management at NAV CANADA is not a discrete activity that takes place alongside other activities. It is a process and an attitude that is built into everyone’s job and every activity the Company undertakes. That is why the strength of our SMS rests with the people of NAV CANADA, and on our external partners who are so critical to effective safety communication and collaboration.

FINANCIAL RESULTS

Attention to cost control and efficiency – including customer efficiency – is also integral to the corporate culture. The financial results for the fiscal year ended August 31, 2013 demonstrate the Company’s successful strategy of implementing effective cost control and productivity initiatives to offset declines in air traffic.

In fiscal 2013, the Company achieved a positive financial performance, improving its rate stabilization account by $22 million. When adjusted for rate-setting purposes, the Company finished the year with a positive notional balance of $93 million in that account, equal to its target balance.

Achieving results such as these, year after year, has enabled the Company to avoid any overall rate increases since September 2004. Customer service charges are only five per cent higher than they were in 1999 – 29 percentage points less than the compounded inflation rate over that time period.

LOOKING FORWARD

Looking forward, I want to relay the Board’s strong support for the direction charted by the Company’s senior management, particularly the recent investment in Aireon LLC, a joint venture with Iridium Communications Inc.

On behalf of the Board, I want to extend this support to the Aireon management team and to our colleagues at Iridium. The recent announcement that three ANSPs intend to invest in Aireon confirms that we have chosen the right direction. The incoming investors are: ENAV S.p.A. of Italy; the Irish Aviation Authority; and Naviair of Denmark.

Aireon’s mandate is to deliver global aircraft surveillance through Automatic Dependent Surveillance-Broadcast (ADS-B) receivers carried on Iridium’s satellites.

This new capability will extend air traffic surveillance to the entire globe, with substantial improvements in safety, efficiency and fuel savings, and in reduced greenhouse-gas emissions. Fuel savings for customers on North Atlantic routes are estimated at $125 million annually when this capability is fully in place.

The Board is solidly behind the Company’s initiatives aimed at enhancing safety and customer efficiency, such as the domestic implementation of Controller-Pilot-Data Link Communications (CPDLC), the recent rollout of Medium Term Conflict Detection (MTCD), customer service enhancements in the North Atlantic, and

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Rate of IFR/IFR Losses of Separation per 100,000 Aircraft Movements (5 year moving average)

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

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the environmental benefits of all the Company’s Collaborative Initiatives for Emissions Reductions, many of which are described in this Annual Report.

NAV CANADA continues to demonstrate the power of synergy by offering its industry leading technology to ANS providers around the world through NAVCANatm. These are products with proven operational histories world-wide that will continue to evolve in response to international standards and in support of customer efficiency.

POINTS OF PRIDE

Every year, the Company’s Points of Pride program brings together the winners of the Chairman’s Awards for Employee Excellence and the President’s Awards for Outstanding Achievement for an evening of recognition and celebration.

National Awards Night 2013, held in Ottawa this past September, was my first opportunity to present the Chairman’s Awards at this event, and it was my privilege to extend that recognition to 15 Chairman’s Award Winners, whose achievements are showcased on page 20.

They were Wade Adams, Kim Boulet, Brett Congram, Craig Dunklee, A. James Flynn, Gang Hu, Jonathan Hunt, Brent Lopushinsky, Bob Lyle, Eileen McKeever, Roddy Mick, Blair Miller, Glen R. Sanford, Jason Shadbolt and Damir Stipanovic.

Four of these employees, Wade Adams, Bob Lyle, Roddy Mick and Jason Shadbolt, were also honoured with awards from the Washington D.C.-based Air Traffic Control Association for outstanding contribu-tions or achievements to the air traffic control system.

GIVING BACK

NAV CANADA and its people continue to participate actively in their communities through volunteer work and charitable giving.

This is an organization in which giving back seems to come naturally. It’s as much a part of the culture as our commitment to safety and service, and I commend the efforts of management to support this outstanding spirit of generosity through matching donations.

BOARD RENEWAL

In closing, I want to thank my colleagues on the Board of Directors for their contributions to the Company. NAV CANADA values your advice, counsel and business judgment.

I would like to express my appreciation to Jean Valiquette, as he departs the Board, and I am pleased to welcome our new members, Ed Barrett, Michael DiLollo, Bonnie DuPont and Fred Peters. On behalf of our current Board members, welcome. We look forward to working with you.

Finally, on behalf of my Board colleagues, I would like to thank John Crichton, his management team, and all NAV CANADA staff for their hard work and dedication to the Company, its customers and its stakeholders. Whatever challenges the coming year holds, I know that the people of NAV CANADA will meet them with the same assurance, competence and initiative you have shown in the past.

This is one of the most important things I have learned in my first two years. As a Company and as a dedicated team, your eyes are firmly on the skies and on the future. The global ANS, and our customers, will be the better for it.

Sincerely

Marc Courtois

Chairman of the Board


Everyone involved in aviation has his or her “eyes on the skies” in one way or another.

For some, it starts with watching airplanes in childhood, hoping someday to fly. For others, it comes with a job in aviation, whether it’s with a commercial airline, an air navigation service provider, or working as a pilot or ground crew.

At NAV CANADA, we have our eyes on the skies every day, because that’s where our customers are. We watch and work and plan, so we can provide these customers with the safe, efficient and cost-effective services they need to move the world’s people and goods.

“Eyes on the Skies” would be a fitting theme for our Annual Report in any year. This year it’s particularly apt, as we raise our eyes even higher to the future of space-based surveillance and its huge potential for the global Air Navigation System (ANS).

Aireon, our joint venture with Iridium Communications Inc., will enable continuous aircraft tracking anywhere in the world using space-qualified ADS-B receivers carried by Iridium’s second-generation satellite constellation, as described in the two-page spread at the beginning of this report.

This is a momentous change, as significant as the introduction of radio or radar in the early days of aviation.

While it is sometimes difficult to appreciate change when it is happening, few are better equipped to understand

and manage it than the people of NAV CANADA, who are taking part in a whole series of changes that together are transforming the world of air navigation services provision for the better.

The general direction of these changes is toward safer, more efficient flight, with substantial fuel savings and lower greenhouse gas (GHG) emissions. Considering the economic uncertainty, cost pressures and environmental concerns facing everyone in the aviation industry, these changes could not come at a more appropriate time.

EYES ON SAFETY

While we look to the skies and beyond, we remain firmly rooted in the realities of our business. First among these realities is the importance of safety management. A commitment to safety cannot succeed without measurable goals and a systematic method to achieve them.

A key indicator of a strong safety culture is an excellent safety record. As the Chairman notes in his message, we continue to see excellence in our rate of IFR-to-IFR losses of separation, the benchmark for safety among the world’s Air Navigation Service Providers (ANSPs).

Every ANSP understands that safety and efficiency are two sides of the same coin. An efficient system is

MESSAGE FROM THE MESSAGE FROM THE PRESIDENT ANDAND CEO

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a safe system, and that is why the great strides we have made in recent years to improve our operational performance also come with significant safety benefits.

The key driver has been innovation in technology and procedures. For instance, we have made excellent progress in expanding air traffic surveillance across four-million-square-kilometres of northern domestic and oceanic airspace. Our customers are benefiting from the safety and efficiency improvements this surveillance coverage is generating.

Another key technology is Multilateration (MLAT), an advanced surveillance system that improves flight efficiency while also enhancing situational awareness on the ground. We have deployed Wide Area MLAT systems in Fort St. John, Kelowna and Vancouver Harbour in British Columbia, with an expansion underway for the Vancouver Mainland, Springbank and Fredericton, slated for fiscal 2014.

MLAT has also been implemented as a surface surveil-lance tool in Montreal Trudeau, Toronto Pearson and Calgary International airports. Of note, the Advanced Surface Movement Guidance and Control System (ASMGCS) in Toronto is using state of the art fusion processing to incorporate MLAT data.

Recognizing the safety advantages of this technology, the Calgary Airport Authority has budgeted to equip in the order of 200 airside vehicles with Vehicle Locator (VeeLo) equipment enabling their position to be determined by MLAT and displayed for operational use. Their commitment is to equip all current and new airside vehicles in this manner, thus adding an addi-tional layer of safety assurance.

PEOPLE

It is clear to me now, with continued attention being paid around the world to the success of the NAV CANADA model, that being part of such a global success story has tapped a reservoir of goodwill, enthusiasm and initiative among our employees.

In other words, our vision “to be the world’s most respected Air Navigation Service” really comes to life when all of our people see themselves as an integral part of this enterprise. Nowhere is that more apparent than in our annual “Points of Pride” recognition program.

It is always a pleasure to participate in this program’s National Awards Night, held in the early fall. The 2013 awards event was the first for our new Chairman, Marc Courtois, who recognized 15 winners of the Chairman’s Awards.

I had the pleasure of presenting two President’s Awards for Outstanding Achievement, one to an individual and the other to a team.

The individual award went to Guy St-Arneault, Operations Manager at the Montreal Area Control Centre (ACC), who worked with the Department of National Defence to open a segment of traditionally closed military airspace. The resulting solution saves our customers flying time and an estimated $2 million in fuel costs per year, with corresponding reductions in GHG emissions.

The team award went to the members of the Edmonton ACC Arctic High specialty, which was formed by merging two specialties. Customer benefits include more random routing and more effective polar planning. This change will save the Company about $1 million a year and make better use of new technology.

Jeffrey SartorCNS Electronic Maintenance Technologist, Calgary Tower


Neil ParsonsAir Traffic Operations Specialist, Gander Area Control Centre

Winnie NgSenior Systems Analyst, Technical Systems Centre

The performance of these and the other award winners, featured on pages 20 and 21, reflects the overall commitment and professionalism of all NAV CANADA employees, who demonstrate a high level of engagement through their dedication, energy, and initiative.

The Company supports its people in a number of ways, through trust-based relationships with all bargaining agents, and a strong commitment to productive and engaging workplaces wherever we do business. We also provide a variety of people programs to support employee wellness, recognition for a job well done, effective leadership, training and development, career opportunities and effective workplace communication.

Nowhere are relationships more important that in collective bargaining, and I am pleased to report the successful conclusion of collective agreements with the Canadian Air Traffic Control Association (CATCA), Unifor Local 5454; the Air Traffic Specialists Association of Canada (ATSAC), Unifor Local 2245; Unifor Local 1016; the Association of Canadian Financial Officers (ACFO); the Canadian Federal Pilots Association (CFPA); and the International Brotherhood of Electrical Workers (IBEW).

All collective agreements include a new-hire pension arrangement, which is a crucial element in our continuing efforts to deal with our substantial pension obligations. This arrangement will help to sustain the legacy pension plan for current employees on a long-term basis.

COMMUNITY SERVICE

NAV CANADA people have a well-deserved reputation for giving back to their communities, and the Company supports their efforts with matching contributions.

A wide variety of activities are undertaken, from the hundreds of thousands donated each year to the Ottawa Hospital and the United Way, to the significant amounts raised for Hope Air, Movember, Dreams Take Flight, the Children’s Wish Foundation, the Children’s Hospital of Manitoba, a host of local charities, and the Canadian Red Cross to support disaster relief at home and abroad.

SERVICE DELIVERY

NAV CANADA people are also working together as never before in finding ways to enhance the delivery of service to our customers.

This is particularly clear in our new Service Delivery organization, which brings together Operations, Engineering and Technical Operations in a coordinated effort to deliver value to customers.

The focus of Service Delivery is the provision and development of air traffic services, aeronautical informa-tion and the development and maintenance of naviga-tional aids, facilities, air traffic management systems and communications, and surveillance equipment.

The people of Service Delivery are building a culture of accountability in everything they do, beginning with safety management, extending to continuous improve-ment in how services are delivered to customers, and supported by ongoing development and maintenance of world-leading technology and systems.

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It is a culture in which the people who operate and manage the system openly share their knowledge of the human, technical, operational and environmental factors that contribute to overall safety, and it is a culture that aspires to track and monitor organizational factors and mitigations that contribute to risk reduction.

NEW CONTROL TOWERS

One area in which all the key elements of our Service Delivery team came together effectively involved the design and construction of new control towers now operational at Calgary and Edmonton International airports. Both towers will meet increasing traffic demand going forward for many years.

In Edmonton, our control tower crowns the airport’s new eight-storey Central Tower, a significant component of its expansion project. At 48 metres high, the control tower is four metres taller than the old one and improves controllers’ sightlines.

In Calgary, the new tower has eight operational positions for controllers (compared to five in the old tower) and will provide optimal sightlines onto the new 14,000-foot parallel runway scheduled to open in spring 2014.

It is the tallest free-standing tower of its kind in Canada. Both facilities are fully equipped with the latest NAVCANatm technology.

FLIGHT EFFICIENCY

Another area in which Service Delivery is achieving significant gains is in the oceanic airspace for which

NAV CANADA is responsible, in the western half of the North Atlantic.

In November 2013, the Gander Oceanic ACC implemented a new service notification in which oceanic controllers are now advising flight crews when higher flight levels become available.

The core of this new proactive service is the determination of our service delivery team to make the best use they can of the new functionality in our Gander Automated Air Traffic System (GAATS), which now routinely interrogates a flight’s vertical profile to determine when higher flight levels become available.

Gander controllers then verify the separation, complete all the necessary coordination and adhere to all safety related procedures before advising the flight that a climb is available. This responds to an expressed customer desire to conduct mid-ocean step climbs to enable more fuel-efficient flight profiles.

In another initiative, underway since February 2012, controllers in Gander Centre have been providing an enhanced air traffic control service with the aid of the Company’s land-based Automatic Dependent Surveillance-Broadcast (ADS-B) coverage in Greenland.

The service, provided to eligible aircraft operating within the southern Greenland portion of the Gander Control Area, involves a reduction in longitudinal separation from the procedural minimum of 10 minutes (approximately 80 nautical miles) to in-trail spacing of 10 nautical miles. This makes it easier for aircraft to change altitude on heavily loaded tracks.

Noel PooleFlight Service Specialist, Kamloops Flight Information Centre

David WallaceSystems Support Technologist, Technical Systems Centre


And there is more. NAV CANADA has provided expandedsurveillance service in airspace off the East Coast ofCanada since October 2010. Now we are planning tomove the oceanic entry points 185 nautical miles eastfrom where they are today.

As a result, aircraft will benefit from approximately22 minutes of additional flying time with thedirect routing and optimal altitudes they receivein domestic airspace.

Better route options, earlier climb opportunities andvariable speeds will shorten flying times and providebetter flying conditions.

CAATS AND DOMESTIC CPDLC

Meanwhile, in domestic airspace, the CanadianAutomated Air Traffic System (CAATS) continues toprovide advanced air traffic management—automatingand integrating flight data from multiple sources –and utilizing exciting new features to further enhancesafety and efficiency.

With the automation of routine tasks such as flight-plangeneration, data communication and sector coordination,along with the use of modern ATM decision-supportfunctionality, controllers are now able to focus on optimizing the airspace in their jurisdiction safely and efficiently.

Domestic Controller-Pilot Datalink Communications(CPDLC) is a major functionality enhancement on theCAATS platform. Whether used domestically or inoceanic airspace (where it has been in use for over10 years) CPDLC allows air traffic controllers and pilots to exchange text-based digital messages via satellite.

These communications may include altitude and speedclearances, change requests or any related air trafficservices information. Benefits include fewer potentialcommunication errors, less frequency congestion andgreater flight efficiency.

The domestic deployment of CPDLC is a significant,world-leading development, which was the subject offeature stories in “Aviation Week”, “The Wall StreetJournal” and “Bloomberg Business News” in fiscal 2013.Usage has literally taken off, with the number of CPDLCcontacts in domestic airspace going from approximately7,000 per month to 57,000 per month in the space ofone year.

Another exciting new feature in the midst of beingimplemented is Medium Term Conflict Detection(MTCD), which continuously checks all correlatedflights for any losses of separation that will occur within20 minutes. MTCD is now available in the high levelairspace sectors of the Moncton, Montreal, Edmonton and Winnipeg ACCs. The next major phase will be to provide low-level controllers with this functionality.

Nu

mb

er o

f CP

DLC

Con

tact

s

Domestic CPDLC Contacts by FIRSeptember 2012-August 2013

120,389

88,911

56,025

32,699

78,787

17,330

394,141

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan

-13

Feb

-13

Mar

-13

Ap

r-13

May

-13

Jun

-13

Jul-

13

Au

g-13

7,2878,540

17,766

29,144 28,31531,561

38,522

45,916

50,838 51,338

57,591

27,323

Gander DomesticMonctonMontrealWinnipegEdmontonVancouver

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AIR TRAFFIC SURVEILLANCE

A key ingredient in many of our initiatives to enhance safety and flight efficiency is our expansion of air traffic surveillance in Canada’s North and over parts of the North Atlantic. This was done initially with radar, and more recently with ground-based ADS-B stations around Hudson Bay, along the Eastern Coast of Canada and in southern Greenland.

However, this expanded ground-based ADS-B capability is only a prelude to the game-changing promise of space-based ADS-B through the Aireon joint venture.

As noted in the opening two-page spread of this report, Aireon will enable continuous aircraft tracking using space-qualified ADS-B receivers built into Iridium’s second-generation constellation of satellites, scheduled for first launch in early 2015.

In June 2013, we invested an additional US $40 million in preferred interests of Aireon, increasing NAV CANADA’s ownership to 18.7 per cent on a fully diluted basis. NAV CANADA signed a long-term commercial data-services contract with Aireon in April 2013, making us Aireon’s first customer.

We continue to make progress with this joint venture, both in meeting the key technical milestones and on the investment side, with three additional ANSPs deciding to join the project as noted by the Chairman. I echo his remarks in welcoming ENAV S.p.A., the Irish Aviation Authority and Naviair to Aireon.

There were other positive developments with the Aireon project over the past year, including the formation of the Space-based ADS-B Advisory Committee (SAAC), bringing together key stakeholders from across the aviation industry to provide input, guidance and critical operational insight to the project.

The SAAC consists of nine members from the airline and ANSP sectors, and is chaired by the International Air Transport Association (IATA). Its first meeting was held in Singapore in October 2013.

GLOBAL PARTNERSHIPS

This latest Aireon news is yet another demonstration of the value of collaboration among ANSPs worldwide. By working together, we avoid the costs of duplicate development and get innovations into the field a lot faster.

That’s the main reason we continue to grow our technology business with sales of NAVCANatm technology to our ANSP and airport colleagues around the world.

It’s also key to our close working relationships with ANSPs such as NATS in the UK, with whom we continue to collaborate on the development and enhancement of world-leading technology for the provision of oceanic air traffic services in the North Atlantic.

On the other side of the world, in 2013, our colleagues in Airservices Australia commissioned the first four Integrated Tower Automation Suites (INTAS) provided by NAV CANADA and Saab Sensis at Broome, Rockhampton, Adelaide and Melbourne Airports.

At the same time, our partner company, Searidge Technologies Inc., continues to grow, enhancing its intelligent video solution functionality and building its global customer base for airport surface management technology. Searidge sales to this global customer base have increased 30 per cent year over year.

FINANCIAL UPDATE

While we continue to move forward with the technology needed for tomorrow’s ANS, we must deal effectively with the headwinds of today’s troubled global economy.

We began fiscal year 2013 as we ended fiscal 2012, with air traffic down across the industry. At the end of fiscal 2013, traffic was still 2.6 percent below 2008 levels.

The Company’s revenues before rate stabilization for fiscal 2013 were $1,231 million, compared to $1,226 million in the previous fiscal year.

Operating expenses before rate stabilization were $997 million compared to $987 million for fiscal 2012.

Air Traffic Activity in Weighted Charging UnitsW

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Ch

argi

ng

Un

its

– M

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

600

800

1,000

1,200


Interest, depreciation and amortization expense before rate stabilization totalled $241 million, $3 million lower than the previous fiscal year.

Through everyone’s efforts, we have been able to offset the slow growth and cost pressures in areas such as compensation through productivity measures and stringent control of discretionary spending. The result was that we were able to maintain the notional balance of our rate stabilization account at its target balance of $93 million.

We continue to meet our long-term goal of holding service charges steady, as we have done for close to a decade now. This year we did remove an exemption to service charges, to regularize what had become an inequitable situation for customers, terminating the enroute charge exemption for flights between staffed and unstaffed/non-certified aerodromes. Flights operating between aerodromes north of 60 degrees north latitude will remain exempt.

It is important to note that the Company’s large pension obligations continue to pose a risk and remain a concern, in particular as regards our statutory solvency deficiency which was $629 million as at January 1, 2013.

Through collective bargaining, we recently introduced changes to pension benefits for certain bargaining units that will assist with the long-term sustainability of the pension plan. I greatly appreciate the construc-tive approach taken by union negotiators.

However, we must continue to work with the Office of the Superintendent of Financial Institutions (OSFI) to clarify some aspects of the new arrangement. We hope to have their support as we work to reduce the Company’s exposure to this significant risk.

EYES ON THE FUTURE

I would like to conclude this Annual Report by acknowledging the excellent work that has been accomplished over the past year by all NAV CANADA employees. I am acutely aware that my Annual Report message can only cover a small number of our major projects, and our key results.

But that does not in any way diminish the importance of all the work we are doing to enhance safety and service for our customers and for the flying public. It is my hope that you will find reference to this work in other areas of this report that will do justice to our collective efforts.

Each and every employee of this Company is a part the world’s leading Air Navigation Service Provider. You are the reason we have that reputation.

This is not a boast. Rather, it is a challenge to maintain our leadership in the only way we know how, by doing it right the first time, and then doing more.

We work in a dynamic industry, subject to the winds of economic, political and technological change. We know by now that change is the only constant, and the best way to stay level is to stay ahead of it.

NAV CANADA is fortunate to have so many people who can keep their eyes on the skies and their focus on the job at hand. It’s a winning combination.

Sincerely

John Crichton

President and CEOThyllix TongAIS Assembly Specialist, Ottawa Combined ANS

13navcanada.ca

In this section, we report on performance against our Business Plan priorities during fiscal 2013, as well as provide a summary of our business direction for fiscal 2014 and beyond.

SAFETY

Details about NAV CANADA’s major safety goals and initiatives, and the progress we have made in delivering on these goals, can be found in our Corporate Safety Plan (2013-2014) and Corporate Safety Report(2012-2013).

INTEGRATED SAFETY PROCESSThe Integrated Safety Process is meant to ensure that operational safety is maintained while implementing changes to facilities, systems and equipment. In 2013, we rolled out a number of important changes to this process based on feedback from our people in our frontline Service Delivery groups: Engineering, Operations and Technical Operations.

SMS IMPROVEMENTS In fiscal 2013, Safety Management System (SMS) site assessments were completed at all staffed sites within the Toronto and Vancouver flight information regions, with the goal of completing this Company-wide initiative in fall 2014.

Also being launched is the national implementation of the SMS Follow-Up process. This involves contacting our industry partners after an operational safety event to identify opportunities for safety enhancements.

PEOPLE

COLLECTIVE BARGAINING Through collective bargaining, we recently introduced changes to pension benefits for certain bargaining units that will assist with the long-term sustainability of the pension plan. The most notable change was the introduction of mandatory enrolment of new hires into the non-indexed Part B of the pension plan, effective January 1, 2014.

COLLECTIVE AGREEMENTSIn fiscal 2013 and in early fiscal 2014, NAV CANADA successfully concluded collective agreements with the following bargaining agents:

• Canadian Air Traffic Control Association (CATCA) Unifor Local 5454;

• Air Traffic Specialists Association of Canada Unifor Local 2245;

• Unifor Local 1016;

• the Association of Canadian Financial Officers (ACFO);

• the Canadian Federal Pilots Association (CFPA); and

• the International Brotherhood of Electrical Workers (IBEW).

BUSINESS PLAN

FISCAL 2013


Donald Gillespie Flight Service Specialist, Halifax Flight Information Centre

Vanessa ThatcherPortfolio Manager/ECM Functional and Test Lead, Head Office

Raymond HoTechnical Delivery Manager, ECM Program, Head Office

OFFICIAL LANGUAGESIn fiscal 2013, the Company continued to sponsor events such as Les Rendez-vous de la francophonie, and to build links with Official Language Minority Communities (OLMCs) such as the Francophone Cultural Centre in Cornwall.

TECHNICAL OPERATIONS – BRANDON HALL AWARD Members of a Technology Training team in Technical Operations were honoured with the Brandon Hall Learning Excellence Award in fiscal 2013. The team was honoured for the innovative changes they made to our Instrument Landing System Normarc course, in which a more efficient delivery strategy was implemented.

CODE OF BUSINESS CONDUCTThe Company’s Code of Business Conduct has been revamped. With this new version of the Code, our goal has been to provide a more consistent, reader-friendly structure and tone, and a stronger emphasis on ethical behaviour. The updated Code also reflects new policies and processes that are relevant to an ethical workplace.

MENTAL HEALTH PEER COUNSELLING“Light the Way,” our peer-counselling program for employees dealing with either a personal or family mental health issue, was launched in October 2012 with more than 80 participants during the first year. The program’s premise is that support from peers – those who have shared the experience of a mental-health challenge – can reduce the isolation people feel and help them find a path to recovery.

INDUSTRY COLLABORATION

NAT OPERATIONAL FORUMLast March, NAV CANADA hosted the North Atlantic (NAT) Operational Forum in Montreal for the second conse-cutive year. Almost 70 participants attended, repre-senting ANS providers, airlines and other organizations.

ICAO ASSEMBLYNAV CANADA representatives were among the Canadian delegation that attended the 38th session of the International Civil Aviation Organization (ICAO) Assembly in Montreal in fall 2013. The Company worked with Transport Canada to prepare three working papers related to space-based ADS-B.

CONSULTATION AND INFORMATION SHARINGAlso in fiscal 2013, NAV CANADA participated in the following:

• Area Operations Consultation Meetings (AOCM) – conducted twice a year in each Flight Information Region (FIR) to provide a forum for consultation with customers and industry partners on technical and operational issues;

• Air Transport Operations Consultation Committee (ATOCC) and the Air Navigation System National Advisory Committee (ANSNAC) – held twice annually to address customer requirements as well as current and future service-delivery issues;

• Canadian Aviation Safety Officers Partnership (CASOP) – meets semi-annually to provide safety partners from across the industry with an opportunity to share information on a range of issues and initiatives.

SERVICE DELIVERY

NEW CONTROL TOWERSIn fiscal 2013, new control towers went operational at Calgary and Edmonton international airports.

SPACE-BASED ADS-B In addition to the milestones noted elsewhere in this Annual Report, NAV CANADA and the U.S. Federal Aviation Administration (FAA) signed a Declaration of Intent in fiscal 2013 that will see both organizations work together on a range of technical and operational issues in support of space-based Automatic Dependent Surveillance-Broadcast (ADS-B).

15navcanada.ca

MULTILATERATION (MLAT) – SURFACE DETECTION MLAT technology has been implemented as an airport surface surveillance tool at Montreal Trudeau, Toronto Pearson and Calgary International. In fiscal 2013, the Calgary Airport Authority has budgeted to equip about 200 airside vehicles with Vehicle Locator (VeeLo) equipment enabling their positions to be determined by MLAT and displayed for operational use.

MEDIUM TERM CONFLICT DETECTIONMedium Term Conflict Detection (MTCD) has been deployed at our Winnipeg, Edmonton, Montreal and Moncton Area Control Centres above FL290. MTCD is one of the latest safety net features within our Canadian Automated Air Traffic System (CAATS).

OCEANIC AIR TRAFFIC CONTROLIn November 2013, the Gander Oceanic Area Control Centre (ACC) implemented a new service notification in which controllers are now advising flight crews when higher flight levels become available.

CONTROLLER-PILOT DATA LINK COMMUNICATIONS NAV CANADA completed deployment of this service to six ACCs in domestic airspace at the end of calendar 2013.

ALBERTA AIRSPACE AND SERVICES PROJECTIn early 2013, NAV CANADA implemented Phase 1 of the Alberta Airspace and Services Project, which effectively transferred airspace from Terminal to the Enroute specialty, increasing the structure and predictability within the Terminal Area so that controllers can direct their focus on arrivals and departures at the Calgary airport.

Phase 2, implemented in June, amended IFR routes south of Calgary. Phase 3 of this project, set for implementation in late 2013, involves changes north of Calgary, in the Calgary-Edmonton corridor. Changes will include Edmonton and Calgary arrival waypoints and RNAV STARS as well as new arrival and departures routes and the revocation of current STARs.

MONTREAL FIRA key recommendation of the START (Simplification des Tâches et Restructuration du Terminal) project was implemented at Montreal Terminal, to address training constraints and improve Terminal capacity. The results are annual fuel-cost savings of $660,000 and reduced carbon emissions of 3,000 metric tons.

Two other initiatives in the FIR are now providing significant customer benefits. The first was an

operational restructuring at the Montreal ACC, merging the West and Frontenac specialties to create the new specialty of St-Laurent. This has improved workload efficiencies, yielding an estimated $1.5 million in cost savings for the Company.

The second initiative involved a key change to the Military Flying Area above FL310 northeast of Bagotville, Quebec. This is providing greater flexibility for airlines, along with an estimated $2 million in customer savings each year and reduced carbon emissions of 5,000 metric tons per year.

SNOWizSNOWiz has significantly improved Runway Surface Condition reporting in Canada by providing a direct web-based interface for airport operators to submit reports on surface conditions. As of fall 2013, more than 130 airports have signed on to SNOWiz.

WEBVIEWWebview is a web-based informational tool that provides real-time operational airport data to stakeholders outside the operational system. Typical WebView users are site managers and supervisors, the National Operations Centre (NOC), airports and airlines.

CIFER In fiscal 2013, we published the latest update on our Collaborative Initiatives for Emissions Reductions (CIFER), which outlines the efficiency gains from new technologies and procedures. These efficiencies are forecast to reduce GHG emissions by an estimated 21 million metric tons between 1997 and 2020, saving approximately $7.4 billion in customer fuel costs.

FINANCE

In fiscal 2013, the Company achieved positive financial performance as evidenced by an improvement of $22 million in its rate stabilization account, finishing with a positive balance of $53 million. When adjusted for rate setting purposes, there is a positive notional balance of $93 million in the rate stabilization account, which is equal to its target balance.

BOND ISSUE AND DEBT OBLIGATIONS The Company’s outstanding long-term debt increased by $75 million to $2 billion at the end of the fiscal year. The additional funds will be used for corporate and investment purposes. In December 2012, the Company entered into a $275 million letter of credit facility to meet pension solvency funding requirements without utilizing existing sources of liquidity.


SERVICE CHARGESNAV CANADA implemented revisions to its customerservice charges, eliminating an exemption from theenroute charge on certain flights.

Previously, flights did not pay enroute charges whenoperating between an airport with staffed NAV CANADAor DND facilities and an aerodrome that was neitherstaffed nor certified. This exemption was eliminated on November 15, 2013 – except for flights operatingbetween aerodromes north of 60 degrees north latitude.

CREDIT RATINGSThe Company’s debt obligations have been assignedthe following credit ratings:

OTHER DEVELOPMENTS

WEBSTER TROPHYOur Operational Training team made a significantcontribution to the Webster Trophy Competition, held annually to choose Canada’s top amateur pilot. Thisyear, the 10 finalists took an exam on pilot-controllercommunications and airspace and airport operations.Operational Training designed the exam, and a newNAV CANADA-sponsored trophy was presented to thewinning pilot.

ENTERPRISE CONTENT MANAGEMENTNAV CANADA has begun the multi-year process ofbuilding a new Enterprise Content Management platform.The first phase of this project involved the successfullaunch of our new corporate website on November 1,2013. Also in the past year, Information Managementcompleted a major upgrade to our desktop capabilitiesacross the Company, and successfully managed ourtransition to the Oracle 12 suite of business applications.

NEW INSURANCE PROVIDERFollowing a Request for Proposals, Sun Life Financialwas selected as the Company’s new provider for bothLife and Long-term Disability insurance plans.

Rating Agency Senior Debt

General Obligation Notes

Outlook

DBRS Limited (DBRS) AA AA (low) Stable

Moody’s Investors Service (Moody’s)

Aa2 Aa3 Stable

Standard & Poor’s (S&P)

AA AA- Stable

Mar

99

Sep

99

Mar

00

Sep

00

Mar

01

Sep

01

Mar

02

Sep

02

Mar

03

Sep

03

Mar

04

Sep

04

Mar

05

Sep

05

Mar

06

Sep

06

Mar

07

Sep

07

Mar

08

Sep

08

Mar

09

Sep

09

Mar

10

Sep

10

Mar

11

Sep

11

Mar

12

Sep

12

Mar

13

Sep

13

80

90

100

110

120

130

140

CONSUMER PRICE INDEX

Ind

ex t

o 19

99

(1) Average changes since charges were fully implemented on March 1, 1999

(2) Consumer price index – growth assumed to be 1.0 per cent for 2013

NAV CANADA RATES

17navcanada.ca

History of NAV CANADA Rate Changes(1)

Versus Consumer Price Index(2)

BUSINESS DIRECTION: FISCAL 2014

SAFETY

The Company has entered the final year of its three-year cycle of safety goals and objectives, as outlined in its Corporate Safety Plan (2013-2014). Our three main safety goals are to:

• identify, analyze and implement safety management assurance processes and outcome measures that support the identification and reduction of operational safety risk;

• enhance our Safety Management Training Program through advancement of training, SMS guidance materials and information sharing capabilities; and

• support the integration of safety data into the NAV CANADA SMS.

INTEGRATED SAFETY INFORMATION SYSTEMAn important information-sharing tool now under development is our Integrated Safety Information System (ISIS). The goal is to integrate key safety data into the SMS. Project partners include our Office of Safety and Quality, Information Management, and all three major frontline groups: Operations, Technical Operations and Engineering.

COLLABORATIVE SAFETY MAPThe Collaborative Safety Map is a new initiative in which we envision a web-based, graphical display of our sites across the country. Posted on this map will be each site’s top safety priorities along with information on the action plans devised to address them.

SAFETY SUPERVISORThis new initiative will define the role of Safety Supervisor across our Company, beginning with our Towers and Area Control Centres. The designated Safety Supervisor at each of these sites will have a more clearly defined role in supporting operational safety.

PEOPLE

COLLECTIVE AGREEMENTS In fiscal 2014, the Company and bargaining agents will work toward completing the current round of collective bargaining.

PEOPLE PROGRAMSWe will continue to make our wellness and other people programs widely available, while conducting our company-wide employee engagement survey. Communications will be enhanced through increased use of electronic publications both for desktop and mobile devices, including a trial involving the provision of select corporate content on the Company’s new Extranet, and the provision of information to pensioners using the same technology.

OFFICIAL LANGUAGESWe will continue to support French-English linguistic duality with new initiatives involving the provision of translation services to the Canadian Aviation Heritage Centre in Sainte-Anne-de-Bellevue, Quebec. Existing support of Official Languages Minority Communities will be enhanced through outreach to post-secondary aviation study programs with a view to sharing the use of the NAV CANADA Terminav© database of English-French terminology, at no charge, to help enhance the bilingual expertise of students.

ENTERPRISE CONTENT MANAGEMENTThe ECM project continues in the current fiscal year, with Phase 2 involving a major upgrade of our employee portal.


SERVICE DELIVERY

GANDER OCEANIC TRANSITION AREAIn May 2014, in oceanic airspace off the east coast of Canada, we are scheduled to move the oceanic entry points from 63 West to 57 West – 185 nautical miles farther east over the Atlantic Ocean from where they are today.

This new Gander Oceanic Transition Area (GOTA) will enable aircraft to benefit from approximately 22 minutes of additional flying time with the kind of direct routing and optimal altitudes they already receive in domestic airspace.

OCEANIC ATCNATS, our counterpart in the U.K., is moving forward with an upgrade to the current version of the Gander Automated Air Traffic System (known as GAATS+) for use at its oceanic ATC facility in Prestwick, Scotland.

Once deployed, NAV CANADA in Gander and NATS in Prestwick will be operating the same enhanced system, with both controllers and customers benefitting from increased functionality and integration across the North Atlantic, including the ADS-B surveillance features already available in this updated version of GAATS.

ALBERTA AIRSPACE AND SERVICES PROJECTPhase 4 of this project will coincide with Calgary International Airport’s planned parallel runway opening date in May 2014, and will see the final changes necessary to move from the current crossing runway configuration to a parallel runway operation for most operations.

WIDE AREA MULTILATERATION (WAM) A WAM system around the Springbank airport is expected to be operational in winter 2014. Additionally, the expanded Vancouver Mainland MLAT system is expected to be operational by spring 2014. The WAM project in Fredericton is scheduled to begin its Operational Readiness Demonstration in spring 2014.

SPACE-BASED ADS-BThe Company will continue to work with customers, stakeholders and partners on the Aireon project, to evolve toward space-based ADS-B in a timely fashion. The launch of the Iridium NEXT constellation, including the ADS-B hosted payload, is slated to begin in 2015 and continue through 2017, with rollout of the Aireon service to follow.

TECHNOLOGY SALESNAV CANADA will be participating with Saab Sensis in a project to install advanced surveillance technology at the Luxembourg Airport. The Administration de la Navigation Aerienne selected the Saab Sensis Advanced-Surface Movement Guidance and Control System, with the data to be displayed on the NAVCANsuite integrated tower automation system.

FINANCE

While some traffic growth is anticipated in fiscal 2014, the Company will continue to focus on strong cost manage-ment and productivity initiatives in an uncertain economic environment. At the same time, NAV CANADA remains committed to making the key technology and systems investments that produce benefits in safety and efficiency.

Veronica TiminskiCorporate Services Analyst, Head Office

19navcanada.ca

National Award Winners 2013

THE CHAIRMAN’S AWARD FOR EMPLOYEE EXCELLENCE

The Chairman’s Award for Employee Excellence recognizes those employees whose personal efforts have made a truly significant difference in the workplace or in the community.

SAFETYBob Lyle, Technical Operations Coordinator Toronto ACC

Roddy Mick, Air Traffic Controller Toronto ACC

PEOPLEWade Adams, Flight Service Specialist Team Supervisor Gander IFSS

CUSTOMER SERVICEBrett Congram, Unit Operations Specialist Calgary Tower

Jonathan Hunt, Unit Operations Specialist Halifax Tower

Brent Lopushinsky, Unit Operations SpecialistCalgary Tower

Blair Miller, Site ManagerHalifax Tower and FIC

Jason Shadbolt, Data Systems Coordinator Moncton ACC

PERFORMANCEGlen R. Sanford, Engineering Project Leader Vancouver Workcentre

RESOURCE MANAGEMENTCraig Dunklee, Engineering Project Leader Moncton ACC

A. James Flynn, Engineering Project Leader Gander ACC

TECHNOLOGYGang Hu, Engineering Systems Specialist Edmonton ACC

COMMUNITY SERVICE Kim Boulet, Manager, Web Content Planning Head Office

Eileen McKeever, Manager, Employee Communications Head Office

Damir Stipanovic, Air Traffic Controller Winnipeg ACC


PRESIDENT’S AWARD FOR OUTSTANDING ACHIEVEMENT

Employees presented with the President’s Award for Outstanding Achievement have made significant contributions to the Company through their commitment to excellence. They are focused on finding innovative solutions to difficult challenges, and consistently demonstrate a high level of skill, leadership, and dedication necessary for producing results.

In 2013, there was one individual winner and one team winner of the President’s Award for Outstanding Achievement.

INDIVIDUAL WINNER Guy St-Arneault, Manager ACC Operations Montreal ACC

TEAM WINNEREdmonton Arctic High Team

MEMBERS OF THE TEAM INCLUDE:Operations

• Darcy Arnold

• Tyler Bjornerud

• Bryon Carlson

• Chris J. Collins

• Dennis Dick

• Theodore E. Dick

• Manuel Di-Vanno

• Collin Hiller

• Jason Holita

• Murray Johnson

• Mike Krahn

• Steve Kutash

• Jonathan Kutryk

• Geoff Leblanc

• Irina Limitovskaia

• Scott Loder

• Stephen Middleton

• David Rife

• Christopher Sailes

• Jeffrey M. Tilling

• Anthony Waggott

• Dan Walker

Engineering

• David L. Pirnak

• Hieu Thieu

• Mitchell Vaters

21navcanada.ca

Keeping an Eye on Community InvolvementAt NAV CANADA we believe in the importance of community involvement.Our people are the first to lead by example, volunteering countless hours and donating hundreds of thousands of dollars each year to local charities and programs. They understand that stepping up to support their community means making a difference in the lives of families and friends and those in need.

We support this involvement because strong communities form the backbone of a vital and healthy Canadian culture and industry. We match employee contributions to local, national and international causes, and we recognize our ‘heroes’ during the year with profiles in our employee newspaper, and with awards such as the Chairman’s Award for Community Service.

The list of donations starts with hundreds of thousands of dollars raised for cancer research, for hospital foundations and for habitat conservation efforts. We’ve opened doors to displaced communities; ridden hundreds of miles and paddled hard to raise funds for various causes; and we’ve volunteered as coaches, fundraisers, and equipment managers for local teams and cadet chapters. We’ve also reached across oceans to lend a hand and offer funds for relief efforts in the wake of devastating natural events, most recently the typhoon that brought death and destruction to the Philippines.

We are proud of the commitment and caring shown by our employees, and we are inspired by their desire to give back to their communities.


© Daniel St. Louis

23navcanada.ca

Corporate Governance

BOARD OF DIRECTORS

Recognizing that sound corporate governance practices can improve company performance, the Board of Directors has sought to ensure that the Company’s overall approach to corporate governance follows best practices and keeps pace with evolving requirements, including those under securities legislation.

NAV CANADA represents a unique consensus among the major stakeholders in the air navigation system – the Government of Canada, the commercial air carriers, general aviation, and our unionized employees. Our governance structure reflects this consensus. All four of these major stakeholders are Members of the Company. In addition, there is a Director Member. These five Members elect the directors as follows:

• The Government of Canada elects three directors.

• The Commercial Air Carriers elect four directors.

• General Aviation elects one director.

• The Unions elect two directors.

• The Directors elect four directors.

The President and CEO of the Company is also a director. The result is a board of directors where all stakeholder interests are represented but none dominates. The Board’s committees are similarly constituted except for the Human Resources & Compensation Committee.

The Board discharges its responsibilities directly and through committees under the Company’s By-laws and the Board of Directors’ Corporate Governance Policy Manual.

BOARD STRUCTURE AND COMPOSITION

The Board of Directors is comprised of 15 directors, all of whom are required to be Canadian citizens. One director (the President and CEO) is an employee of the Company. All other directors are “independent” directors as that term is defined in National Instrument 52-110 Audit Committees (NI 52-110).

Our By-laws disqualify from directorship any person elected to the Parliament of Canada or any provincial legislature or territorial legislative assembly; federal, provincial or territorial government employees; and directors or employees of a bargaining agent which

represents employees of the Company or of an entity that has a material interest as a supplier, client or customer of the ANS. Every director and officer of the Company is required to sign and abide by our Code of Conduct and Conflict of Interest Guidelines.

INDEPENDENT FUNCTIONING OF THE BOARD

All of the directors, other than the President and CEO, are independent. The responsibilities of the Chair are set out in the Terms of Reference for the Chair. The By-laws of the Company do not allow the positions of Chair and President and CEO to be occupied by the same person. The structure and composition of the Board and its Committees have been designed to ensure that the Board functions independently of management. To further enhance the ability of the Board to function independently from management, a portion of each regularly scheduled Board meeting is reserved for discussion without the President and CEO or other representatives of management being present. For the fiscal year ended August 31, 2013, the Board held eight meetings. At six of those meetings, a portion of the meeting was conducted with only the independent directors present.

RECORD OF ATTENDANCE BY DIRECTORS

Board and Committee meetings held during fiscal 2013:

Number of Meetings

Held

Board 8

Audit & Finance Committee 4

Corporate Governance Committee 6

Customer Service Charges Committee 3

Human Resources & Compensation Committee

7

Pension Committee 5

Safety Committee 4

The following chart sets out directors’ attendance at meetings of the Board and Committees held during fiscal 2013.


Director Number of Board

Meetings Attended

Number of Committee

Meetings Attended

Edward Barrett(1) 4/5 4/4

Paul Brotto 8/8 14/14

Marc Courtois 8/8 14/15

John W. Crichton 8/8 9/9

Robert J. Davis 8/8 8/8

Michael DiLollo(1) 5/5 4/4

Bonnie DuPont(1) 5/5 5/5

Gary Fane 7/8 15/15

P. Nicholas Geer(2) 3/3 19/19

James Gouk 8/8 12/12

Linda Hohol 8/8 16/16

Arthur J. LaFlamme 8/8 7/7

Denis Losier(2) 3/3 10/10

Fred Peters(3) 0 0

Robert Reid 8/8 10/10

Roy P. Rideout(2) 3/3 10/10

Scott Sweatman 8/8 11/11

Paul J. Tice 8/8 12/12

Jean Valiquette(4) 8/8 7/8

(1) Messrs. Barrett and DiLollo and Ms. DuPont joined the Board of Directors on February 7, 2013.

(2) Messrs. Geer, Losier and Rideout retired from the Board of Directors on February 7, 2013.

(3) Mr. Peters was elected to the Board of Directors on August 20, 2013 and consequently did not attend any meetings during the fiscal year.

(4) Mr. Valiquette retired from the Board of Directors on August 20, 2013.

DIRECTOR COMPENSATION

The By-laws of the Company provide that reasonable remuneration be paid to directors (other than the President and CEO) for attendance and participation at meetings of the Board of Directors and committees as fixed by resolution of the Board of Directors. Board members receive annual retainers, meeting fees, travel fees, and have the option of participating in an executive medical health assessment program, which program is a taxable benefit. Board members are also entitled to per diems when they are required to conduct business on behalf of the Board (other than attendance at seminars, trade association meetings, training, or for preparation for Board and/or committee meetings). Directors’ compensation is reviewed every two years. No changes in directors’ compensation have been made since October 21, 2010.

Board of Directors Fees

Effective October 21,

2010

Annual Retainer $ 45,000

Board Meeting Attendance Fee 1,500

Board Teleconference Meeting Fee

• for meetings more than one hour

• for meetings less than one hour

1,000

500

Travel Fee (if required to travel across two provinces for the purpose of attending directors’ or committee meetings)

1,500

Per Diem (1)

• full day

• half day

1,250

750

Committee Fees

Committee Member Annual Retainer per Committee

$ 4,000

Audit & Finance Committee Member Annual Retainer 5,000

Committee Chair Annual Retainer per Committee 7,500

Audit & Finance Committee Chair Annual Retainer 15,000

Human Resources & Compensation Committee Chair Annual Retainer 10,000

Committee Meeting Attendance Fee 1,500

Committee Teleconference Meeting Fee

• for meetings more than one hour

• for meetings less than one hour

1,000

500

Other

Chair of the Board Annual Fee(2) $ 175,000(1) Per diems are paid to directors when they are required

to conduct business on behalf of the Board other than attendance at seminars, trade association meetings, training, or for preparation for Board and/or committee meetings.

(2) The Chair of the Board receives no additional meeting fees or other retainers or fees, but is entitled to reimbursement for Travel Fees.

25navcanada.ca

Directors’ Compensation FY2013

Name Fees EarnedAll Other

Compensation(6) Total

Edward Barrett(1) $ 42,300 $ 6,000 $ 48,300

Paul Brotto 100,750 – 100,750

Marc Courtois(2) 140,958 – 140,958

John W. Crichton(3) – – –

Robert J. Davis 87,500 – 87,500

Michael DiLollo(1) 42,800 – 42,800

Bonnie DuPont(1) 42,239 6,000 48,239

Gary Fane 85,500 12,000 97,500

P. Nicholas Geer(4) 76,562 7,500 84,062

James Gouk 88,500 19,000 107,500

Linda Hohol 97,250 10,500 107,750

Arthur J. LaFlamme 77,500 – 77,500

Denis Losier(4) 51,250 11,500 62,750

Fred Peters(5) – – –

Robert Reid 84,750 – 84,750

Roy P. Rideout(4) 52,500 15,500 68,000

Scott Sweatman 85,750 13,500 99,250

Paul J. Tice 92,500 – 92,500

Jean Valiquette 77,500 – 77,500

(1) Ms. DuPont and Messrs. Barrett and DiLollo joined the Board on February 7, 2013.

(2) Mr. Courtois became Chair of the Board on February 7, 2013, and since that time he has received an annual fee as Chair of the Board and no other additional fees for attendance at meetings, other than Travel Fees. Prior to that date, Mr. Courtois received regular Board member fees.

(3) As President and CEO, Mr. Crichton does not receive directors’ fees.

(4) Messrs. Geer, Losier and Rideout retired from the Board on February 7, 2013. Mr. Geer received an annual fee as Chair of the Board and no other additional fees for attendance at meetings. He was entitled to reimbursement for Travel Fees.

(5) Mr. Peters joined the Board on August 20, 2013 and did not earn any fees during the fiscal year ended August 31, 2013.

(6) Includes Travel Fees paid to directors who are required to travel across two provinces for meetings, and per diems, which are paid when a director is required to conduct business on behalf of the Board of Directors other than attendance at seminars, trade association meetings, training, or for preparation for Board and/or Committee meetings.

EXECUTIVE COMPENSATION

An executive compensation package at NAV CANADA consists of the following components:

• Base salary

• Annual cash incentive

• Long-term cash incentive

• Pension plan, and

• Benefits and perquisites

The compensation of executives, other than the President and CEO, is recommended by the President and CEO and reviewed and approved by the Human Resources & Compensation Committee (the “Committee”). The

compensation of the President and CEO is reviewed and approved by the Committee. Base salaries for all executive officers, including that of the President and CEO, are designed to be competitive and are deter-mined on the basis of outside market data as well as individual performance and experience level. Actual individual salary levels are determined according to a number of factors, including the individual’s perfor-mance, responsibilities, and experience. All executive officers receive base salaries. Base salaries are reviewed annually by the Committee.

Base salaries for fiscal 2013 for the five highest paid executives were as follows:


Name and Position Annual Base Salary

John W. Crichton, President and CEO $ 576,526

Brian K. Aitken, Executive Vice President, Finance and Chief Financial Officer

$ 318,150

Neil R. Wilson, Executive Vice President, Administration and General Counsel

$ 305,000

Rudy Kellar, Executive Vice President, Service Delivery

$ 305,000

Sidney Koslow, Vice President and Chief Technology Officer

$ 292,250

BOARD COMMITTEES

Our Board has six committees:

• Audit & Finance

• Corporate Governance

• Customer Service Charges

• Human Resources & Compensation

• Pension, and

• Safety

The committees do not take action or make decisions on behalf of the Board unless specifically mandated to do so. The following is a general description of the composition and an outline of the terms of reference of each committee.

Audit & Finance Committee – The Audit & Finance Committee assists the Board in fulfilling its oversight responsibilities by reviewing the financial statements and disclosure documents of the Company; reviewing reports on the internal control systems, reviewing annually the qualifications and independence of the Company’s auditors; making recommendations to the Members and the Board as to the selection of the Company’s auditors and their fees; reviewing the scope and results of the Company’s audit; and reviewing the status of any significant current and potential legal matters.

Corporate Governance Committee – The mandate of the Corporate Governance Committee is to develop general policies relating to corporate governance and

to ensure that the Company has in force an effective corporate governance system that adds value and assists the Company in achieving its objectives.

Customer Service Charges Committee – The Customer Service Charges Committee assists the Board in fulfilling its responsibilities in establishing or revising the Company’s customer service charges.

Human Resources & Compensation Committee – The Human Resources & Compensation Committee provides oversight to ensure:

• a high quality of leadership within NAV CANADA,

• an employee and labour relations strategy that provides for a productive and fulfilling work environment, and

• ongoing flexibility and productivity throughout the Company.

Specifically, this Committee ensures that the Human Resources plans and programs reflect the Company’s human resources values and principles.

Pension Committee – The Pension Committee oversees the investment management of the plans’ assets and the administration of the Company’s retirement plans, which include a registered pension plan and supplementary retirement arrangements.

Safety Committee – The Safety Committee oversees the safety of the Company’s air navigation services and products. It does this primarily by monitoring the safety, integrity and effectiveness of our risk manage-ment safety policies and procedures.

ETHICAL BUSINESS CONDUCT

NAV CANADA has adopted a Code of Conduct and Conflict of Interest Guidelines which is designed to govern all directors and officers regarding their conduct, and the disclosure and avoidance of conflicts of interest. This disclosure is updated annually, or more frequently, as required. All of the Company’s directors and officers have signed a Code of Conduct and Conflict of Interest declaration. During fiscal 2013, no proceedings were taken against any director or officer by the Board under the Code of Conduct and Conflict of Interest Guidelines.

Jason ChuAir Traffic Controller, Moncton Area Control Centre

27navcanada.ca

In addition, NAV CANADA has a Code of Business Conduct which applies to all directors, officers and employees of the Company. Copies of both the Code of Conduct and Conflict of Interest Guidelines and the Code of Business Conduct are available on the Company’s website and on SEDAR at www.sedar.com. The Corporate Governance Committee has responsibility for reviewing with the Board and management the results of an annual review of compliance with the Code of Conduct and Conflict of Interest Guidelines for directors and officers.

Directors and executive officers who hold office as a director, officer or elected official of another entity or who are an associate or employee of another entity that might be in conflict with their duty or interest towards the Company, must file a written declaration to this effect with the Company. No director or officer who is in such a position may participate in the consideration of any transaction or agreement in which such other entity has an interest.

The Code of Business Conduct, which applies to all employees, directors and officers of the Company is reviewed and approved by the Board and complies with the requirements of National Policy 58-201 Corporate Governance Guidelines. The Board is committed to bringing the highest degree of honesty, integrity and ethical conduct to the Company’s operations and business relationships. This commitment is reflected in the NAV CANADA vision and the Company’s values, as well as in all dealings with employees, customers, bargaining agents, suppliers, and other stakeholders. The Code of Business Conduct describes how that commitment is put into everyday practice.

The Company has in place policies and processes on whistleblowing. The NAV CANADA whistleblowing system, called SENTINEL, has procedures for the receipt, retention and treatment of complaints received regarding accounting, internal accounting controls, auditing or pension plan matters. In addition, whistleblowing mechanisms are in place for the reporting of other

serious ethical or legal concerns. SENTINEL ensures that employees have an outlet for reporting concerns relating to the Company that are not being addressed through existing channels. Concerns regarding accounting, internal controls or auditing matters are directed to the Chair of the Audit & Finance Committee. Concerns relating to pension plan matters are directed to the Chair of the Pension Committee.

The Code of Business Conduct is not simply a list of rules. It is intended to help employees, directors and officers maintain the very high standard of ethical behaviour expected of a company entrusted with public safety. Throughout the Code of Business Conduct, employees, directors and officers are directed to appropriate internal review and redress mechanisms available within the Company to address specific situations and potential violations. Examples of internal review and redress mechanisms include the NAV CANADA Alternate Dispute Resolution Process, the NAV CANADA Workplace Accommodation Right of Review Process, the NAV CANADA Official Languages Internal Complaints Procedure, grievance processes available to unionized employees, and the NAV CANADA Internal Complaints Resolution Process.

In addition, the Company has a confidential safety reporting program, called ARGUS, which provides employees with the opportunity to identify potential hazards while remaining anonymous. ARGUS ensures that employees who recognize a potential hazard can report their concerns confidentially. Every employee and manager is encouraged to use the ARGUS program, without fear of recrimination.

The Board, officers and management of the Company are committed to an active disclosure culture. The Company’s Corporate Disclosure Policy (available on the Company’s website) ensures communications to the investing public are timely, accurate, consistent, informative, compliant with legal and regulatory requirements and are broadly disseminated.

Eva HanesAdministrative Clerk, London Flight Information Centre


OUR VISIONNAV CANADA’s vision is to be the world’s most respected ANS:

• in the eyes of the flying public for our safety record;

• in the eyes of our customers for our fee levels, customer service, efficiency and modern technology; and

• in the eyes of our employees for establishing a motivating and satisfying workplace with competitive compensation and challenging career opportunities.

OUR MISSIONNAV CANADA will facilitate the safe movement of aircraft efficiently and cost-effectively through the provision of air navigation services on a long-term sustainable basis.

OUR OVERARCHING OBJECTIVESThe Company will achieve its Mission by:

1. Maintaining a safety record in the top decile of major ANSPs worldwide; and

2. Maintaining ANS customer service charges, on average, in the bottom quartile (lowest charges) of major ANSPs worldwide by ensuring that the growth in costs of providing air navigation services does not exceed the growth in revenues, thereby resulting in a decline in customer service charges over the long term; and

3. Implementing and maintaining a modern, cost-efficient ANS technology platform in the top quartile of major ANSPs worldwide; and

4. Providing value to our customers by assisting in improving operational efficiency through innovative uses of technology and delivery of service, domesti-cally and internationally; and

5. Creating a productive and fulfilling workplace environment which places NAV CANADA amongst the best employers in Canada; and

6. Identifying and, where feasible, introducing measurable benefits which contribute to the reduction of the environmental footprint of the aviation industry.

VISION, MISSION AND

Objectives

Caroline HérouxTeam Supervisor Montreal Area Control Centre

29navcanada.ca

Advisory Committee Report

The mandate of the NAV CANADA Advisory Committee (NCAC) is to provide informed comment on issues of interest or concern to the aviation community. As a founding member of the NCAC, I can attest to the commitment of our members to ensuring Canada’s Air Navigation Service (ANS) meets the needs of its diverse group of customers and stakeholders.

That the NCAC has worked effectively over the years is due largely to the varied backgrounds and perspec-tives of its members. Our members represent a broad cross-section of our industry, from all regions of the country, and bring to the table unique viewpoints on the issues of the day. This dynamic is crucial to the commit-tee’s success in fulfilling its mandate, particularly its advisory role to the Board of Directors, to which we provide recommendations on a range of industry issues.

I would like to express my thanks to NAV CANADA executives, senior managers and staff for their open and frank dialogue with the NCAC, and their willingness to consider our ideas and input prior to review by the Board. This has enhanced our work significantly, as well as the process through which we provide our feedback, and is certainly appreciated by committee members.

In fiscal 2013, the NCAC met three times to consider various issues. There were a number that stood out as priorities for the committee. These included: clarity on our Level of Service policy; the Company’s progress in deploying Performance Based Navigation (PBN); the installation and maintenance of weather cameras at AWOS sites, as well as a plan to monitor their service-ability; TAF performance efficiency and accuracy; and the creation, distribution and pricing of e-publications, which is of particular interest to our general aviation members.

The committee also discussed many of the broader issues that are likely to have a significant impact on the safety and efficiency of our ANS in the future.

First and foremost is safety. One issue of concern is the proliferation of unmanned aerial vehicles (UAVs). The civilian use of these aircraft is expanding rapidly, while the regulatory system to ensure their safe operation is lagging. We believe that a government regulatory framework is needed, one that will enable UAVs to operate in airspace without interfering in any way with conventional air traffic.

Another concern for the NCAC is the growing incidence of high-powered lasers being used against approaching aircraft at airports, in an attempt to disrupt the actions of pilots during this critical part of a flight. This is a serious safety issue, and we are pleased to see that ATC facilities

in different parts of the country are working closely with our industry partners and local authorities on finding ways to combat these potentially tragic incidents.

An issue, which hinges on both safety and corporate security, is the increasing global reliance on the internet, electronic transmissions, and web-based tools, and the efforts needed to protect the Corporation and our stakeholders from hackers and cyber-terrorists. Continued vigilance will be necessary to prevent events from causing data disruptions.

The NCAC pays close attention to the major technological changes occurring in our industry, of which NAV CANADA is on many occasions at the forefront. We are particularly impressed by the broad implications of the Company’s joint venture in Aireon with Iridium Communications, Inc.

Space-based ADS-B has the potential to deliver major new efficiencies across the global ANS, bringing cost savings to customers around the world – an estimated $125 million per year in North Atlantic airspace alone. It will also be a benefit to the environment, by helping to significantly reduce greenhouse gas emissions worldwide.

The NCAC was particularly impressed with the importance NAV CANADA has recently attached into the development and certification of spaced-based instrument approaches in Canada’s northern regions. These actions will greatly improve the service and safety of flight to the communities depending on air transport for their survival, while at the same time reducing fuel costs and greenhouse gas emissions for the airlines serving this area.

To end on a personal note, my term on the NCAC ends after the 2014 Annual General Meeting in February. I will retire and end my membership on this committee that dates back to just prior to NAV CANADA’s launch in November 1996.

I will leave the Advisory Committee comfortable in the knowledge that the NCAC’s standing within the Company has matured and evolved over the years, and I am truly grateful for the level of support we receive from both senior management and the Board. I am proud of the role we have played in making NAV CANADA one of the best ANS providers in the world.

Captain Don Johnny

Chair, NAV CANADA Advisory Committee


Advisory Committee

Captain Don Johnny – ChairAssociation of Canadian Airlines Pilots

Bram Tilroe – Vice ChairAviation Alberta

Réal Levasseur – SecretaryAir Line Pilots Association

John BaldwinAir Traffic Specialists Association of Canada (ATSAC) Unifor Local 2245

Sam BaroneCanadian Business Aviation Association

Captain Craig BlandfordAir Canada Pilots Association

Bill BoucherAir Transport Association of Canada

Daniel J. BouletInternational Brotherhood of Electrical WorkersLocal 2228

Captain Rod GrahamNational Airlines Council of Canada

Fred L. JonesHelicopter Association of Canada

Ed JordanSaskatchewan Aviation Council

Cyriel KronenburgInternational Air Transport Association

Wil MacMillanCanadian Airports Council

Paul McGrawAirlines for America

James MolloyBritish Columbia Aviation Council

Greg MylesCanadian Air Traffic Control Association (CATCA)Unifor Local 5454

Kevin PsutkaCanadian Owners and Pilots Association

Trevor RyderManitoba Aviation Council

Laval St. GermainNorthern Air Transport Association

Rudy ToeringCanadian Business Aviation Association

Stephen WilcoxAirport Management Council of Ontario

Edmund KimensUnit Operations Specialist, Regina Tower

31navcanada.ca

Board of Directors

CHAIRMAN OF THE BOARD

Marc Courtois Chair of the Board of Canada Post,Former Managing Director (Quebec) RBC Dominion Securities Inc.Westmount, Quebec

DIRECTORS

Ed BarrettCo-Chief Executive Officer of Barrett Corporation, Chief Executive Officer of Barrett Diversified Inc., andCo-Founder of Xplornet CommunicationsWoodstock, New Brunswick

Paul BrottoFormer Executive Vice-PresidentPlanning and Cost Management, Air CanadaBurlington, Ontario

John W. CrichtonPresident and Chief Executive OfficerNAV CANADAOttawa, Ontario

Robert J. DavisFormer President and Chief Executive OfficerBradley Air Services Ltd./ First Air Stittsville, Ontario

Michael DiLollo Former President, Transat Tours CanadaOttawa, Ontario

Bonnie DuPont Chair, University of Calgary’s Board of Governors, and Former Group Vice President, Enbridge Inc.Calgary, Alberta

Gary FaneExecutive Director of Negotiations and Strategic DevelopmentBritish Columbia Nurses’ UnionRichmond, British Columbia

James GoukFormer Member of ParliamentBritish Columbia Southern InteriorCastlegar, British Columbia

Linda HoholFormer PresidentTSX Venture ExchangeCalgary, Alberta

Arthur J. (Art) LaFlammeFormer ConsultantCanadian Business Aviation AssociationOttawa, Ontario

Fred PetersFinancial and Management ConsultantMarkham, Ontario

Robert ReidFormer Executive Vice President and Chief Operating OfficerAir CanadaOakville, Ontario

Scott SweatmanPartnerDentons Canada LLPVancouver, British Columbia

Paul J. Tice, CMA, C.DirFormer Chief Financial OfficerCarstar Automotive Canada Inc.Hamilton, Ontario


Officers and Other Information

John W. CrichtonPresident and Chief Executive Officer

Brian K. Aitken, CPA, CA Executive Vice President, Financeand Chief Financial Officer

Raymond G. BohnVice President, Revenue and Pension Administration

Andrew CampbellVice President, Customer and Commercial Services

John F. DavidVice President, Safety and Quality

Richard J. DixonVice President and Human Resources Officer

Rudy KellarExecutive Vice President, Service Delivery

Sidney KoslowVice President and Chief Technology Officer

Larry LachanceVice President, Operations

Charles LapointeVice President, Technical Operations

Claudio SilvestriVice President and Chief Information Officer

Kim TroutmanVice President, Engineering

Neil R. WilsonExecutive Vice President, Administration and General Counsel

LEGAL COUNSEL

Gowling Lafleur Henderson LLP

AUDITORS

KPMG LLP

BANKERS

Royal Bank of Canada

CORPORATE AND FINANCIAL INFORMATION

Inquiries for additional information relating to the Company should be directed to:

NAV CANADACommunications 77 Metcalfe Street, Ottawa, Ontario, Canada K1P 5L6

General inquiries can also be made by calling 1-800-876-4693, or by visiting our Internet site at www.navcanada.ca.

Copies of the Company’s Financial Statements, Management’s Discussion and Analysis, and Annual Information Form are available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

NOTICE OF ANNUAL MEETING

The Annual Meeting of the Members of NAV CANADA will be held on Thursday, February 27, 2014, at 4:00 p.m. at the Fairmont Queen Elizabeth, 900 René-Lévesque Blvd W, Montreal, Quebec.

33navcanada.ca


MANAGEMENT’S REPORT TO THE MEMBERS OF NAV CANADAThese consolidated financial statements are the responsibility of management and have been approved by the Board of Directors of the Company. These consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP) and include amounts that are based on estimates of the expected effects of current events and transactions with appropriate consideration to materiality, judgments and financial information determined by specialists. In addition, in preparing the financial information we must interpret the requirements described above, make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information.

Management has also prepared a Management’s Discussion and Analysis (MD&A), which is based on the Company’s financial results prepared in accordance with Canadian GAAP. It provides information regarding the Company’s financial condition and results of operations, and should be read in conjunction with these consolidated financial statements and accompanying notes. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from our present assessment of this information because events and circumstances in the future may not occur as expected.

Management has developed and maintains a system of internal control over financial reporting and disclosure controls, including a program of internal audits. Management believes that these controls provide reasonable assurance that financial records are reliable and form a proper basis for preparation of financial statements, and we have signed certificates as required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings in this regard. The internal accounting control process includes management’s communication to employees of policies that govern ethical business conduct.

The Board of Directors has appointed an Audit & Finance Committee that is composed of directors who are independent of the Company and to which the Board of Directors has delegated responsibility for oversight of the financial reporting process. The Audit & Finance Committee meets at least four times during the year with management and independently with each of the internal and external auditors and as a group to review any significant accounting, internal control and auditing matters. The Audit & Finance Committee reviews the consolidated financial statements, MD&A and Annual Information Form before these are submitted to the Board of Directors for approval. The internal and external auditors have free access to the Audit & Finance Committee.

With respect to the external auditors, the Audit & Finance Committee approves the terms of engagement and reviews the annual audit plan, the Independent Auditors’ Report and the results of the audit. It also recommends to the Board of Directors the firm of external auditors to be appointed by the Members of the Company.

The independent external auditors, KPMG LLP, have been appointed by the Members to express an opinion as to whether the consolidated financial statements present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in accordance with Canadian GAAP. The report of KPMG LLP outlines the scope of their examination and their opinion on the consolidated financial statements.

John W. Crichton Brian K. Aitken President and Chief Executive Officer Executive Vice President, Finance

and Chief Financial Officer

October 17, 2013 October 17, 2013

navcanada.ca 35

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF NAV CANADA

Report on the Consolidated Financial StatementsWe have audited the accompanying consolidated financial statements of NAV CANADA, which comprise the consolidated balance sheets as at August 31, 2013 and 2012 and the consolidated statements of operations, retained earnings, and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinions.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of NAV CANADA as at August 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants, Licensed Public AccountantsOttawa, Canada

October 17, 2013


NAV CANADACONSOLIDATED BALANCE SHEETS (AUDITED)As at August 31 (in millions of dollars)

2013 2012

Assets

Current assets

Cash and cash equivalents $ 171 $ 89

Accounts receivable and other (note 3) 99 117

Current portion of capital lease obligations reserve fund (notes 4 and 11) 13 13

Other 13 17

296 236

Regulatory assets (notes 4 and 10) – 9

Reserve funds

Debt service (note 4) 111 110

Capital lease obligations (notes 4 and 11) 225 210

336 320

Investments and other

Investments (note 4) 227 207

Investment in preferred interests (notes 4 and 6) 59 –

Long-term dividend receivable (notes 4 and 6) 1 –

Long-term derivative asset (note 4) 29 –

316 207

Accrued pension and other benefits (notes 10 and 15) 365 443

Capital assets

Property, plant and equipment (note 7) 666 677

Intangible assets (note 8) 1,042 1,049

1,708 1,726

$ 3,021 $ 2,941

Liabilities

Current liabilities

Accounts payable and accrued liabilities $ 193 $ 199

Current portion of long-term debt (note 9) 25 275

Current portion of capital lease obligations (note 11) 13 13

231 487

Rate stabilization account (note 10) 53 31

Long-term liabilities

Long-term debt (notes 9 and 10) 1,974 1,652

Capital lease obligations (note 11) 200 190

Regulatory liabilities (note 10) 303 320

Other (note 12) 232 233

2,709 2,395

2,993 2,913

Retained earnings (note 19) 28 28

$ 3,021 $ 2,941

See accompanying notes to consolidated financial statements.

On behalf of the Board:

Marc Courtois, Director Paul Brotto, Director

navcanada.ca 37

NAV CANADACONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (AUDITED)Years ended August 31 (in millions of dollars)

2013 2012

Revenue

Customer service charges (note 13) $ 1,181 $ 1,182

Other (note 13) 50 44

1,231 1,226

Rate stabilization (note 10) 16 4

1,247 1,230

Operating expenses

Salaries and benefits (note 14) 772 771

Technical services 114 101

Facilities and maintenance 61 63

Other 50 52

997 987

Rate stabilization (note 10) 14 –

1,011 987

Other expenses

Interest 104 110

Depreciation and amortization 137 134

241 244

Rate stabilization (note 10) – 10

241 254

Other loss (income)

Fair value adjustments and other (note 4) (29) (34)

Rate stabilization (note 10) 24 23

(5) (11)

1,247 1,230

Excess of expenses over revenue and other loss (income) (note 1) $ – $ –

Retained earnings, beginning of year 28 28

Retained earnings, end of year $ 28 $ 28



NAV CANADACONSOLIDATED STATEMENTS OF CASH FLOWS (AUDITED)Years ended August 31 (in millions of dollars)

2013 2012

Cash and cash equivalents provided by (used for):

Operations

Receipts from customer service charges $ 1,187 $ 1,180

Other receipts 41 49

Payments to employees and suppliers (857) (843)

Pension contributions (note 15) (79) (72)

Other post-employment contributions (note 15) (14) (14)

Settlement of curtailed severance benefits (note 15) – (9)

Long-term disability plan deficit payment (note 15) (2) (1)

Interest payments (103) (114)

Interest receipts 5 6

178 182

Investing

Capital expenditures (128) (125)

Investment in preferred interests (note 6) (58) –

Recoverable input tax payments on termination of capital lease transaction (note 3) 21 (21)

Net proceeds on termination of capital lease transaction – 2

Capital lease obligation reserve fund (1) 10

(166) (134)

Financing

Issuance of medium term notes (note 9) 348 –

Repayment of medium term notes and revenue bonds (note 9) (275) (275)

Settlement of bond forward (note 10 (g)) (2) –

Debt service reserve fund (1) (1)

70 (276)

Increase (decrease) in cash and cash equivalents 82 (228)

Cash and cash equivalents, beginning of year 89 317

Cash and cash equivalents, end of year $ 171 $ 89

Cash and cash equivalents are comprised of interest bearing bank balances, net of outstanding cheques, of $101 (August 31, 2012 – $12) and short-term investments with original terms to maturity of three months or less of $70 (August 31, 2012 – $77).


navcanada.ca 39

NAV CANADANOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears ended August 31, 2013 and 2012 (in millions of dollars)

1. NATURE OF OPERATIONS:NAV CANADA was incorporated as a non-share capital corporation pursuant to Part II of the Canada Corporations Act to acquire, own, manage, operate, maintain and develop the Canadian civil air navigation system (the “ANS”), as defined in the Civil Air Navigation Services Commercialization Act (the “ANS Act”). NAV CANADA has been continued under the Canada Not-for-profit Corporations Act. The fundamental principles governing the mandate conferred on NAV CANADA by the ANS Act include the right to provide civil air navigation services and the exclusive ability to set and collect customer service charges for such services. NAV CANADA and its subsidiaries’ (“the Company”) core business is to provide air navigation services, for which it collects customer service charges. The core business is the Company’s only reportable segment. The Company’s air navigation services are provided primarily within Canada.

The charges for civil air navigation services provided by the Company are subject to the economic regulatory framework set out in the ANS Act. The ANS Act provides that the Company may establish new charges and amend existing charges for its services. In establishing new charges or revising existing charges, the Company must follow the charging principles as set out in the ANS Act. These principles prescribe that, among other things, charges must not be set at levels which, based on reasonable and prudent projections, would generate revenues exceeding the Company’s current and future financial requirements in relation to the provision of civil air navigation services. Pursuant to these principles, the Board of Directors of the Company, acting as rate regulator, approves the amount and timing of changes to customer service charges. The impacts of rate regulation on the Company’s financial statements are described in note 10.

The Company plans its operations to essentially result in an annual financial breakeven position after recording adjustments to the rate stabilization account (note 10).

The ANS Act requires that the Company communicate proposed new or revised charges to customers in advance of their introduction and to consult thereon. Customers may make representations to the Company as well as appeal revised charges to the Canadian Transportation Agency on the grounds that the Company either breached the charging principles in the ANS Act or failed to provide statutory notice.

NAV CANADA is exempt from income taxes as it meets the definition of a not-for-profit organization under the Income Tax Act(Canada); however its subsidiaries operating in Canada and other jurisdictions are subject to Canadian and foreign taxes (note 6).

2. SIGNIFICANT ACCOUNTING POLICIES:(a) Financial statement presentation:

These consolidated financial statements include the accounts of the Company’s subsidiaries. All significant intercompany balances and transactions have been eliminated in these consolidated financial statements.

These financial statements are in accordance with Canadian generally accepted accounting principles Part V – Pre-changeover accounting standards (“GAAP”).

Certain comparative figures have been reclassified to conform to the current year’s financial statement presentation.

(b) Rate regulation:

The timing of recognition of certain revenues and expenses differs from what would otherwise be expected for companies that are not subject to regulatory statutes governing the level of their charges, the effect of which is described in note 10.

(c) Changes in accounting policies:

There were no changes to accounting policies in the fiscal year ended August 31, 2013 (“fiscal 2013”).

(d) Use of estimates:

In preparing the financial statements, management must make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from such estimates. Significant management estimates include assumptions used in estimating the current year’s pension and other post-employment benefits costs, the useful lives of capital assets, asset retirement obligations, fair value of investments as well as estimates related to collective agreements.

(e) Cash and cash equivalents:

Cash and cash equivalents are defined as cash and short-term investments with original terms to maturity of three months or less. Such short-term investments are recorded at fair value.

(f) Investments:

All investments are designated as financial assets held-for-trading and are recorded at fair value with the exception of the Company’s investment in preferred interests of Aireon LLC (“Aireon”) which is designated as loans and receivables and is measured at amortized cost. Financial instruments not traded in an active market are valued using indicative market prices (if available) or a discounted cash flow approach. Fair value adjustments (including interest income and realized and unrealized gains and losses) are recognized in the statement of operations.



2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):(g) Capital assets:

Capital assets consist of property, plant and equipment and intangible assets. The majority of the Company’s capital assets are located in Canada.

Capital assets are carried at cost less accumulated depreciation and amortization. Capital assets are depreciated or amortized from the time an asset is substantially completed and ready for productive use. Capital assets are not depreciated or amortized while under development.

The cost of capital assets under development includes materials, labour and other costs that are directly attributable to the development of a capital asset. Interest costs are not capitalized.

Amounts received from third parties related to the installation, development or construction of capital assets are deducted from the carrying amount of the capital asset.

Capital assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in the normal course of business.

Depreciation and amortization of capital assets are calculated on a straight-line basis using the following estimated useful lives:

Capital assetsEstimated useful life

(years)

Property, plant and equipment

Buildings 15 to 40

Systems and equipment 3 to 20

Intangible assets

Air navigation right 46

Purchased software 3 to 20

Internally generated software 3 to 20

(h) Revenue recognition:

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding sales taxes.

(i) Customer service charges:Revenue is recognized as services are rendered. Rates for customer service charges are those approved by the Board of Directors of the Company, acting as rate regulator.

(ii) Other services:Revenue is recognized as services are rendered. Revenue from a contract to provide services is recognized by reference to the stage of completion of the contract. When the outcome of a transaction involving the rendering of services cannot be estimated reliably, revenue is recognized to the extent of recognized expenses that are considered recoverable.

(i) Employee future benefits:

The Company has established and maintains defined benefit pension plans for its employees. The plans provide benefits based on age, length of service and best average earnings. Employee contribution rates vary by position and by plan. The majority of employees and retirees are members of a plan that provides benefits that are indexed for inflation. The Company also provides certain health care, life insurance and other post-employment benefits to eligible retirees and their dependents, and long-term disability benefits to eligible employees. The costs of providing these pension and other post-employment benefits are charged to operations as employees render service. The costs of these benefits are actuarially determined using the projected benefits method prorated on services and are based on assumptions that reflect management’s best estimates of expected investment performance, compensation, retirement ages of employees, health-care costs and other factors. The discount rates used to determine the present value of accrued pension and other benefits are based on market interest rates for long-term high quality debt instruments. The expected return on pension plan assets is based on a market-related value of plan assets, which recognizes investment gains and losses over a five-year period. The costs of providing long-term disability benefits are charged to operations as they occur.

Adjustments to post-employment benefits arising from plan amendments are amortized on a straight-line basis over the expected average remaining period of service of the employees covered by the amendments. Adjustments to

navcanada.ca 41


post-employment benefits arising from transitional balances upon adoption of the current accounting policy on September 1, 2000 are being amortized on a straight-line basis over the expected average remaining period of service of the employees covered by the post-employment benefits, ending on August 31, 2013. Adjustments to long-term disability benefits arising from plan amendments are recognized immediately in the period in which they arise.

Amortization of actuarial gains and losses for post-employment benefits is recognized as a cost for the year if the unamortized net actuarial gain or loss at the beginning of the year exceeds 10% of the greater of the value of the accrued benefit obligation or the market-related value of the plans’ assets. The unamortized amount in excess of 10% of the greater of the value of the accrued benefit obligation and the market-related value of the plans’ assets is amortized over the average remaining service life of active employees (approximately 14 years). Actuarial gains and losses for long-term disability benefits are recognized immediately in the period in which they arise.

A curtailment loss is recognized in the income of the plan when it is probable that the curtailment will occur and the net effects can be reasonably estimated. A curtailment gain is recognized in the income of the plan when an event giving rise to a curtailment has occurred. Gains and losses on settlements of post-employment benefit plans are recognized by the plan when settlement occurs. The settlement and curtailment gains and losses are recognized in the Company’s statement of operations based on the plan year established by the measurement date of the plan. When the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.

The cumulative excess of pension contributions over pension expense and the cumulative excess of long-term disability contributions over long-term disability expense are included in accrued pension and other benefits on the balance sheet (note 15). The accrued post-employment benefit liability other than pensions and the accrued pension liability for supplemental pension benefits in excess of tax limits for federally registered pension plans are included in other long-term liabilities (notes 12 and 15).

The Company uses an annual measurement date of May 31 for estimating the accounting surplus or deficit of the pension, other post-employment and long-term disability plans and for establishing benefits costs for the ensuing fiscal year, all of which are dependent on the measurement factors at the measurement date.

The latest actuarial valuation for funding purposes of the Company’s pension plans was performed as at January 1, 2013, and future actuarial valuations for funding purposes are expected to be performed annually thereafter.

(j) Foreign currency translation:

Monetary assets and liabilities denominated in foreign currencies are translated at the prevailing rates of exchange at the balance sheet date. Transactions denominated in foreign currencies are translated at the exchange rates prevailing on the transaction dates. Foreign exchange gains and losses are included in the statement of operations, with the exception of unrealized gains and losses associated with the capital lease transactions (note 18 (c)).

(k) Asset retirement obligations:

An asset retirement obligation is recognized in the period in which the Company incurs a legal obligation to restore land, and/or remove buildings, systems or equipment, if reasonably estimable. The fair value of the liability is equal to the present value of the estimated future restoration or removal expenditures. When the liability is initially recorded, an equivalent amount is capitalized as an inherent cost of the associated buildings, systems or equipment. In each subsequent period, the carrying amount of the asset retirement obligation is adjusted to reflect the fair value of the obligation due to the passage of time and revisions to the timing or amount of cash flows. The capitalized cost is depreciated over the useful life of the capital asset.

Some of the Company’s air navigation system assets, particularly those located on leased sites, may have asset retirement obligations. The majority of these leases are long-term in nature with continuous renewal rights. All other leased facilities are renewed continuously, as the Company is required by the ANS Act to provide air navigation services indefinitely. As a result, no retirement date can be determined and consequently a reasonable estimate of the fair value of any related asset retirement obligations for these facilities cannot be made at this time. If at some future date it becomes possible to estimate the fair value of these asset retirement obligations, the obligation will be recognized at that time.

(l) Future accounting pronouncements – International Financial Reporting Standards (“IFRS”):

In February 2013, the Canadian Accounting Standards Board (“AcSB”) issued an amendment dated March 2013 to the Introduction to Part 1 of the CICA Handbook allowing qualifying entities with rate-regulated activities to adopt IFRS for the first time no later than interim and annual financial statements relating to annual periods beginning on or after January 1, 2015. The Company is a qualifying entity and decided to avail itself of the deferral. As this optional deferral is not reflected



2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (l) Future accounting pronouncements – International Financial Reporting Standards (“IFRS”) (continued):

in National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, the Company applied for and received from the Ontario Securities Commission (“OSC”), the Company’s principal securities regulator, an exemption from, and deferral of, the mandatory changeover date to IFRS subject to certain conditions including, among others, the requirement to provide updated discussion in its annual and interim Management’s Discussion and Analysis (“MD&A”) regarding its preparations for changeover to IFRS and, if possible, the expected effect of the changeover on its financial statements. This exemption allows the Company to adopt IFRS in fiscal 2016, resulting in an IFRS transition date of September 1, 2014 due to the requirement for one year of comparative figures.

In September 2012, the International Accounting Standards Board (“IASB”) decided to restart its comprehensive project on rate-regulated activities with a discussion paper (“DP”) rather than an exposure draft (“ED”). Restarting the comprehensive project with a DP will allow the IASB to conduct a full analysis of the accounting impacts of the various forms of rate regulation; however, it will increase the time required to complete the project. Given the time needed to develop a final standard, the IASB decided in December 2012 to develop an interim standard, to provide temporary guidance on accounting for rate-regulated activities for first-time adopters of IFRS. The ED on the interim standard was published in April 2013 and was open for comment until September 2013; the ED is currently being re-deliberated. Until an interim standard has been finalized, the Company will present the estimated differences between Canadian GAAP and IFRS based on currently effective IFRS.

The Company will continue to monitor developments in this area, including changes to regulatory reporting requirements and possible additional deferrals of the mandatory changeover date to IFRS.

The transition from Canadian GAAP to IFRS is a significant undertaking that will materially affect the Company’s reported financial position and results of operations. The Company is actively monitoring ongoing IASB projects, giving consideration to any proposed changes by the IASB as the Company finalizes its policy determinations. The Company also actively monitors regulatory updates on IFRS adoption in Canada, as issued by the Canadian Securities Administrators and the OSC.

As the Company has been granted exemptive relief by the OSC and is permitted to avail itself of the optional deferral referred to above, the Company is required to quantify the estimated differences between IFRS and Canadian GAAP based on the IFRS transition date of September 1, 2014. The estimated differences between IFRS and Canadian GAAP currently expected to be material to the Company’s statement of financial position are in the areas of rate-regulated accounting, employee benefits and capital lease transactions. This assessment is based on available information and the Company’s expectations as of the date of these financial statements and thus is subject to change based on new facts and circumstances.

Rate-regulated accountingAs permitted under Canadian GAAP, the Company currently follows specific accounting policies unique to a rate-regulated business. At this time, there is no IFRS governing rate-regulated accounting. Consequently, if no new IFRS standard becomes available, the Company’s rate-regulated assets and liabilities will likely not be recognized when IFRS is adopted by the Company. If this occurs, additional disclosures will be presented within the Company’s MD&A to explain the impact of rate regulation on the Company’s financial position as reported under IFRS.

Employee benefits, net of regulatory liabilityUnder Canadian GAAP, actuarial gains and losses are deferred off balance sheet and amortized to earnings before rate stabilization using a “corridor” approach. Under IFRS, the Company expects to recognize actuarial gains and losses in other comprehensive income in the period they are incurred, with no subsequent reclassification to earnings. As a consequence, actuarial gains and losses that have been deferred off balance sheet under Canadian GAAP will be recognized on the balance sheet upon transition to IFRS. This change will not affect the determination of customer service charges, as the Company uses a rate-regulated approach in determining the recovery of pension costs (described in note 10).

In June 2011, the IASB issued revisions to the standard for accounting for employee benefits. These revisions will apply to interim and annual consolidated financial statements (for issuers reporting under IFRS) relating to fiscal years commencing on or after January 1, 2013. This will require the Company to adopt these revisions as of the IFRS transition date of September 1, 2014. The Company is currently assessing the impact of these revisions on its consolidated financial statements upon transition to IFRS.

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The impact on transition to IFRS will be based on actual balances at the date of transition. Based on the estimated pension accounting deficit at August 31, 2013 of $660, the estimated impact upon transition to IFRS on the accrued defined pension benefits is the elimination of the accrued pension asset of $362 recognized under Canadian GAAP, an increase in the accrued pension liability of $606 and a corresponding decrease in retained earnings (increase in the deficit) by $968. This amount would be partially offset by the de-recognition of pension regulatory liabilities of $263, leading to an estimated net impact of $705.

Capital lease transaction, net of regulatory liabilityFinal policy determinations and impact analyses have been completed for the Company’s cross-border capital lease transaction. Under Canadian GAAP, capital lease obligations – payment undertaking agreement reserve funds and capital lease obligations were recognized on the Company’s balance sheet upon entering into such capital lease transaction. Under IFRS, these assets and liabilities will be derecognized from the opening IFRS statement of financial position as they do not meet the criteria of an asset or liability. There is no impact on retained earnings (deficit) as a result of these adjustments. The risks associated with this cross-border transaction will continue to be disclosed under IFRS reporting.

Although the adoption of IFRS will materially affect the Company’s reported financial position, changing to IFRS will not significantly affect customer service charges. This is because the Company will continue to follow a rate regulated approach in determining the rates it charges for air navigation services.

3. ACCOUNTS RECEIVABLE AND OTHER:Accounts receivable and other were comprised of the following:

August 31, 2013 August 31, 2012

Trade receivables (note 18 (d)) $ 78 $ 84

Input tax receivables 3 22

Accrued receivables and unbilled work in progress 20 13

Allowance for doubtful accounts (note 18 (d)) (2) (2)

$ 99 $ 117

In June 2012, the Company terminated one of its capital lease transactions (note 11) resulting in recoverable input tax payments of $21 included in input tax receivables as at August 31, 2012. This amount was received in the first quarter of fiscal 2013.

The Company’s exposure to credit and foreign exchange risks, and to impairment losses related to accounts receivable is described in note 18.

4. FINANCIAL INSTRUMENTS:(a) Summary of financial instruments:

Fair value is defined as the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. The best evidence of fair value is quoted bid or ask prices in an active market. Quoted prices are not always available for transactions in inactive or illiquid markets. In these instances, internal models, normally with observable market-based inputs, are used to estimate fair value. Where financial instruments trade in inactive markets, or when using models where observable parameters do not exist, as described in note 4 (b), greater management judgment is required for valuation purposes. Financial instruments traded in a less active market have been valued using indicative market prices, discounted cash flow models or other valuation techniques. Fair value estimates normally do not consider forced or liquidation sales. The calculation of estimated fair value is based on market conditions at a specific point in time and therefore may not be reflective of future fair values.



4. FINANCIAL INSTRUMENTS (CONTINUED):(a) Summary of financial instruments (continued):

At August 31, 2013, the classification of the Company’s financial instruments, as well as their carrying amounts and fair values are as follows:

Financial assets and liabilities Classification Carrying Amount Fair Value

Cash and cash equivalents (1) Held-for-trading (8) $ 171 $ 171

Accounts receivable (1) Loans and receivables 99 99

Other current assets

Derivative assets (2) Derivative financial assets 2 2

Reserve funds:

Debt service (1) Held-for-trading (8) 111 111

Capital lease obligations (3) Held-for-trading (8) 34 34

Capital lease obligations – payment undertaking agreement (4) Held-to-maturity 204 237

Investments and other

MAV II and ABCP (3) Held-for-trading (8) 227 227

Preferred interests in Aireon LLC (5) Loans and receivables 59 59

Long-term dividend receivable (5) Loans and receivables 1 1

Long-term derivative assets (2) Derivative financial assets 29 29

Accounts payable and accrued liabilities (1) Other financial liabilities 193 193

Long-term debt

Bonds and notes payable (6) Other financial liabilities 1,999 2,249

Capital lease obligations (4) Capital lease 213 237

Other long-term liabilities

Non-derivative financial liability (7) Other financial liabilities 2 2

(1) Due to the short term maturity of these financial assets and liabilities, their respective carrying amounts approximate their fair values.

(2) Short-term and long-term derivative assets and liabilities are recorded at fair value determined using prevailing forward foreign exchange market rates and interest rates at the balance sheet date. The Company uses derivative financial instruments to manage risks from fluctuations in foreign exchange rates and interest rates. The Company’s long-term derivative assets consist of forward dated interest rate swap agreements. Where permissible, the Company accounts for these financial instruments as cash flow hedges which ensures that counterbalancing gains and losses are recognized in income in the same period. With hedge accounting, changes in the fair value of derivative financial instruments designated as cash flow hedges are deferred and are included in regulatory assets or other regulatory liabilities (note 10 (a)). When an anticipated transaction is subsequently recorded, the regulatory amounts deferred are reclassified to a regulatory liability or asset within the related asset or liability (notes 10 (g) and (h)). At the inception of entering into a hedging contract, the relationship between the hedged item and the hedging item is formally documented, in accordance with the Company’s risk management objectives and strategies. The effectiveness of the hedging relationship, as discussed below, is assessed at inception of the contract related to the hedging item and then again at each balance sheet date to ensure the relationship is and will remain effective. Where hedge accounting is not permissible and derivatives are not designated in a hedging relationship, they are classified as held-for-trading and the changes in fair value are immediately recognized in the statement of operations.

(3) These financial assets are comprised of investments in Master Asset Vehicle II (“MAV II”), Ineligible Asset Tracking notes and asset-backed commercial paper (“ABCP”) that are discussed in note 4 (b).

(4) The fair value is calculated as the present value of the expected future cash flows. Prevailing market interest rates for the corresponding term are used for discounting.

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(5) On November 19, 2012, the Company entered into agreements with respect to an initial preferred interest investment in Aireon, which is discussed in note 6. Under the agreements, preferred interests provide for a dividend calculated from the date of issuance, and will be redeemed for cash in three annual instalments beginning on November 19, 2020 (in the event the preferred interests have not been converted to common equity or redeemed by that time). These non-derivative financial assets with fixed payments are measured at amortized cost. Dividends are not considered for rate setting purposes until the cash is received. This is achieved by recording a regulatory liability (note 10 (f)).

(6) Bonds and notes payable are initially recognized at fair value, net of financing fees, premiums, discounts and regulatory assets and liabilities due to cash settlements on hedging transactions that qualify as effective hedges for accounting purposes. They are subsequently measured at amortized cost. Any difference between the carrying amount and the maturity amount is recognized in the statement of operations over the life of the bond or note payable using the effective interest rate method. The fair value of the Company’s bonds and notes payable is determined using quoted market prices for these issues.

(7) The non-derivative financial liability consists of a put option liability that is recorded at fair value using a discounted cash flow approach. One of the Company’s subsidiary’s shareholder agreements contains a put option whereby the non-controlling shareholders may require that the Company purchase all of the non-controlling shareholders’ shares of this subsidiary at any time between June 30, 2015 and September 30, 2015, at the fair value of the shares determined at that time.

(8) These financial instruments were classified or designated as held-for-trading upon initial recognition by the Company either due to the presence of embedded derivatives or their original short term to maturity. Investments in MAV II, Ineligible Asset Tracking notes and ABCP are discussed in note 4 (b).

There has been no change in classification of financial instruments since August 31, 2012.

(b) Fair value hierarchy:

Financial instruments recorded at fair value on the balance sheet are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 Inputs other than quoted prices included in Level 1 that are observable for the assets or liabilities either directly (i.e., as prices) or indirectly (i.e. derived from prices); and

Level 3 Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).

The method used to determine the fair value of financial instruments is described in note 4 (a).

The table below illustrates the classification of the Company’s financial instruments valued and recognized at fair value:

August 31, 2013

Level 1 Level 2 Level 3 Total

Financial assets:

Cash and cash equivalents $ 171 $ – $ – $ 171


Derivative assets – 2 – 2

Debt service reserve fund 111 – – 111

Capital lease obligations reserve fund – – 34 34

Investments – MAV II and ABCP – – 227 227

Long-term derivative assets – 29 – 29

$ 282 $ 31 $ 261 $ 574

Financial liabilities:


Non-derivative financial liability $ – $ – $ 2 $ 2

$ – $ – $ 2 $ 2



4. FINANCIAL INSTRUMENTS (CONTINUED):(b) Fair value hierarchy (continued):

August 31, 2013

Level 1 Level 2 Level 3 Total

Financial assets:

Cash and cash equivalents $ 89 $ – $ – $ 89


Derivative asset – 1 – 1

Debt service reserve fund 110 – – 110

Capital lease obligations reserve fund – – 31 31

Investments – MAV II and ABCP – – 207 207

$ 199 $ 1 $ 238 $ 438

Financial liabilities:


Long-term derivative liability $ – $ 10 $ – $ 10

Non-derivative financial liability – – 1 1

$ – $ 10 $ 1 $ 11

Level 3 financial instruments consist of the following investments in MAV II notes, Ineligible Asset Tracking notes and ABCP investments not subject to the restructuring by the Pan-Canadian Investors Committee as at August 31, 2013 and 2012:

August 31, 2013 August 31, 2012

Face Value

Face Value

VariancesFair

ValueFace

Value

Face Value

VariancesFair

Value

MAV II notes

Class A-1 $ 191 $ (22) $ 169 $ 191 $ (35) $ 156

Class A-2 94 (13) 81 94 (21) 73

285 (35) 250 285 (56) 229

Ineligible Asset

Tracking notes 2 (2) – 2 (2) –

ABCP 20 (9) 11 20 (11) 9

$ 307 $ (46) $ 261 $ 307 $ (69) $ 238

The MAV II notes received as a result of the restructuring of third party sponsored ABCP by the Pan-Canadian Investors Committee in January 2009 include a pooling of leveraged investments as well as traditional assets and cash. The leveraged investments are subject to a potential requirement to post additional collateral based on certain triggers being met (a margin call). Traditional assets are un-levered investments and include residential and commercial mortgage backed securities, corporate credit and cash equivalents. The Class A-1 and A-2 notes provide for the payment of interest on a quarterly basis provided that the three month Canadian Dealer Offered Rate (“CDOR”) rate is above 50 basis points. The MAV II notes benefit from a margin funding facility to meet potential margin calls. This margin funding facility is being provided by certain international and Canadian banks.

The Ineligible Asset Tracking notes, also received as a result of the restructuring of third party sponsored ABCP, track the performance and repayment of the related underlying assets that have significant exposure to the U.S. residential mortgage market.

Within its Level 3 financial instruments, the Company holds the following ABCP investments:

(i) $10 of third party sponsored ABCP in a trust that was not covered by the restructuring of third party sponsored ABCP. The funds in this conduit are subject to a legal dispute between the asset provider and the trust sponsor.

(ii) $10 of bank sponsored ABCP for which a restructuring has been completed. This trust is rated A (low) by DBRS. It continues to pay interest on a monthly basis.

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The Company is aware of a number of trades in the restructured notes that have occurred prior to August 31, 2013, but does not consider them to constitute an active market for purposes of a Level 1 valuation. As described below, the Company has used a discounted cash flow approach to determine the fair value of these investments, incorporating available information regarding market conditions as at the measurement date, August 31, 2013. The estimates arrived at by the Company are subject to measurement uncertainty and are dependent on market conditions as at the measurement date.

If an active market for the restructured notes were to develop in the future, the Company would change its valuation technique to determine the fair value of its notes using quoted market prices.

The Company’s total provision for expected credit losses on Level 3 investments as at August 31, 2013 is $6. This amount is included in the fair value variance from face value on investments of $46. The estimate of expected credit losses with respect to Ineligible Asset Tracking notes was arrived at by estimating the expected realization of the underlying assets. As of August 31, 2013, the Class A-1 and A-2 notes were rated AA (low) (sf) and A (low) (sf) respectively by DBRS. As these are investment grade ratings, the Company has not provided for any credit losses with respect to the Class A-1 and A-2 notes.

The Company has used a discounted cash flow approach to determine the fair value of these investments, taking into account the expected risk and return profile of the notes in comparison to market returns. After deducting the estimated credit losses referred to above, the Company used a discount factor appropriate for a high yield instrument for the Ineligible Asset Tracking notes.

The Company has used the following expected rates and discount factors at August 31, 2013:

Restructured notes Return Market discount factor

MAV II Class A-1 BAs minus 50 basis points BAs plus 3.5%

MAV II Class A-2 BAs minus 50 basis points BAs plus 3.9%

Ineligible Asset Tracking notes BAs plus 30 basis points BAs plus 27.1%

Other ABCP BAs to BAs plus 33 basis points BAs plus 3.8% and BAs plus 24.0%

The Company believes that the market discount factors shown above are reflective of functioning market returns for products with maturities and risk profiles similar to the respective notes.

The following table summarizes the changes in the fair value of financial instruments classified in Level 3 during the year ended August 31, 2013. The balance at August 31, 2012 is provided for comparative purposes.

2013 2012

MAV II and Ineligible Asset Tracking notes Other ABCP Total Total

Fair value as at September 1 $ 229 $ 9 $ 238 $ 212

Net decrease in fair value provision 21 – 21 26

Net decrease in credit provision – 2 2 –

Fair value as at August 31 $ 250 $ 11 $ 261 $ 238

During fiscal 2013, the Company decreased its fair value provision, which is determined using a discounted cash flow approach, by $21 as a result of the use of lower discount factors in keeping with improvement in the market conditions for MAV II notes and the underlying assets within MAV II.



5. RESERVE FUNDS:Pursuant to the Master Trust Indenture (note 9), the Company is required to establish and maintain certain reserve funds, as follows:

Operations and maintenance reserve fund:The Company is required to maintain a reserve fund of at least 25% of its prior year’s annual operating and maintenance expenses, as defined in the Master Trust Indenture. At August 31, 2013, the Company met this requirement with an allocation of $250 in undrawn availability under its committed credit facility (note 9). If at any fiscal year end the amount in the operations and maintenance reserve fund is less than 25% of the Company’s operating and maintenance expense for the year (before rate stabilization, depreciation, amortization, interest and extraordinary expenses), the Company must, at a minimum, increase the balance in the fund to the required level over the following four fiscal quarters through additional contributions or an allocation of its committed credit facility.

Debt service reserve fund:At the end of each fiscal year, the amount in the debt service reserve fund must be equal to the annual projected debt service requirement (principal amortization, interest and fees) on outstanding Master Trust Indenture obligations determined in the manner required by the Master Trust Indenture. Any additional contributions required to be made to the debt service reserve fund must, at a minimum, be made in equal instalments over the following four fiscal quarters. Funds deposited into the debt service reserve fund are held by a Trustee and are released only to pay principal, interest and fees owing in respect of outstanding borrowings under the Master Trust Indenture except that, provided no event of default has occurred and is continuing, surplus funds may be released from time to time at the request of the Company. At August 31, 2013 the Company had a balance of $111 of cash and investments in the debt service reserve fund.

The Company met all reserve fund requirements at August 31, 2013.

The above reserve funds are restricted for the purposes described above. The restricted use of the capital lease obligations reserve fund including the current portion is described in note 11.

Pursuant to the General Obligation Indenture (note 9), the Company is required to maintain certain liquidity levels similar to the reserve fund requirements of the Master Trust Indenture. Specifically, the Company must maintain a minimum liquidity level equal to twelve months net interest expense plus 25% of the annual operating and maintenance expenses. Liquidity is defined to include all cash and qualified investments, amounts held in the operations and maintenance and debt service reserve funds and any undrawn amounts available under a committed credit facility. In addition, the Company must maintain cash liquidity equal to twelve months net interest expense. Cash liquidity includes cash and qualified investments held in the reserve funds maintained under the Master Trust Indenture.

The Company met the liquidity covenants of the General Obligation Indenture for the year ended August 31, 2013.

6. INVESTMENT IN PREFERRED INTERESTS OF AIREON LLC: On November 19, 2012, the Company entered into agreements (the “November 2012 agreements”) finalizing the terms of its participation in Aireon. Aireon’s mandate is to provide global satellite-based surveillance capability for air navigation service providers (“ANSPs“) around the world through Automatic Dependent Surveillance-Broadcast (“ADS-B”) receivers built as an additional payload on the Iridium NEXT satellite constellation, which is expected to be launched by Iridium Communications Inc. (“Iridium”) in the 2015-2017 time period.

Under the terms of the agreements, the Company’s overall investment in Aireon is expected to be implemented in stages for up to a total of $150 U.S. ($158 CDN) by 2017 (including $55 U.S. ($58 CDN) excluding transaction costs in fiscal 2013). If all investment stages are completed, the Company will have purchased preferred interests which, upon conversion to common interests, will represent up to 51% of the fully diluted common equity of Aireon. The preferred interests provide for a 5% dividend (except for the second stage investment described below that provides for a 10% dividend), calculated from the date of issuance, and will be redeemed for cash in three annual instalments beginning on November 19, 2020 (in the event the preferred interests have not been converted to common equity or redeemed by that time).

The Company’s investment is expected to be made in five stages, each subject to the satisfaction of various operational, technical, commercial, regulatory and financial conditions. The staged investments are contingent upon the successful achievement by Aireon and Iridium of certain specific milestones with respect to, among other things, development of the ADS-B payload, deployment of the Iridium NEXT satellite constellation, marketing Aireon’s ADS-B service to potential ANSP customers, and regulatory approvals of the technology’s use. The final stage investment is scheduled for late 2017.

The payment for the first stage of preferred interest amounting to $15 U.S. ($15 CDN) and representing 5.1% of the fully diluted common equity of Aireon was made in November 2012. In June 2013, the Company made its second stage investment in Aireon preferred interests in the amount of $40 U.S. ($42 CDN), representing an additional 13.6% of Aireon’s fully diluted

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common equity, bringing its total interest on a fully diluted basis to 18.7%. At that time the November 2012 agreements were modified as follows:

(i) Certain conditions precedent to the Company’s second and subsequent staged investments were either amended or deleted.

(ii) The dividend rate on the $40 U.S. ($42 CDN) investment made in June 2013 will be 10% rather than 5%, whereas the dividend rate on the Company’s other preferred interests will remain at 5%.

(iii) The circumstances under which the Company may obtain the option to acquire additional preferred interests described below under (b) were amended.

The total of the Company’s preferred interest investments of $59 CDN (including transaction costs) has been classified as loans and receivables within financial assets and is measured at amortized cost. The following embedded derivatives have been identified:

(a) The Company may at any time and from time to time elect to convert all or a portion of its preferred interests into common interests.

(b) Under certain circumstances, the Company will obtain an option, exercisable at its sole discretion, to acquire additional preferred interests, in aggregate amount not to exceed 19% of the fully diluted common equity in Aireon, at a fixed rate per basis point.

Embedded derivatives are to be separated from the host contract and accounted for as stand-alone derivative instruments. Since the embedded derivatives will be settled in equity instruments of Aireon, a private company currently in start-up phase without any operations, the Company considers that the fair value cannot be determined reliably for the embedded derivatives nor the hybrid contract as a whole. Therefore, the Company considers that cost measurement represents the most reliable measure. In the future, if fair value measurement becomes reliable, the embedded derivatives would be fair valued.

The tax effects of significant items regarding the Company’s future income tax assets and liabilities at August 31, 2013 relate to the Company’s investment in Aireon and are comprised of tax assets amounting to $4 (year ended August 31, 2012 – $nil) for operating losses and research and development expenses carried forward and future income tax liabilities amounting to $3 (year ended August 31, 2012 – $nil). As the Company’s investment in Aireon has no history of taxable profits, a valuation allowance of $1 (year ended August 31, 2012 – $nil) has been applied resulting in net future income tax assets and liabilities of $nil (year ended August 31, 2012 – $nil). The operating losses carried forward will begin to expire in calendar year 2033.

7. PROPERTY, PLANT AND EQUIPMENT:Property, plant and equipment were comprised of the following:

August 31, 2013 August 31, 2012

CostAccumulated depreciation

Net book value Net book value

Land and buildings $ 360 $ (192) $ 168 $ 149

Systems and equipment 1,069 (651) 418 412

Property, plant and equipment under development 68 – 68 101

1,497 (843) 654 662

Net increase from capital lease 30 (18) 12 15

$ 1,527 $ (861) $ 666 $ 677

During the year ended August 31, 2013, the Company capitalized to property, plant and equipment $26 of internal labour and travel costs (August 31, 2012 – $27).

The net increase from the capital lease is being depreciated over the terms of the lease (note 11). In June 2012 the Company terminated one of its two original capital lease transactions, thereby derecognizing a net book value of $15 that had been included in the net increase from the capital lease reported above.

As at August 31, 2013 the cost of assets under the capital lease was $274 (August 31, 2012 – $274), and accumulated depreciation and other credits amounted to $241 (August 31, 2012 – $236).

The Company recorded depreciation expense of $84 during the year ended August 31, 2013 (August 31, 2012 – $84).Total cost and accumulated depreciation were $1,464 and $787 respectively at August 31, 2012.



8. INTANGIBLE ASSETS:Intangible assets were comprised of the following:

August 31, 2013 August 31, 2012

CostAccumulated amortization

Net book value Net book value

Air navigation right $ 1,367 $ (640) $ 727 $ 752

Purchased software 276 (124) 152 152

Internally developed software 200 (55) 145 115

Intangible assets under development 15 – 15 27

Goodwill 3 – 3 3

$ 1,861 $ (819) $ 1,042 $ 1,049

During the year ended August 31, 2013, the Company capitalized to intangible assets $12 of internal labour and travel costs (August 31, 2012 – $15).

The Company recorded amortization expense of $53 during the year ended August 31, 2013 (August 31, 2012 – $50). Total cost and accumulated amortization were $1,813 and $764 respectively at August 31, 2012.

9. LONG-TERM DEBT:Because NAV CANADA is a non-share capital corporation, the Company’s initial acquisition of the Canadian civil air navigation system and its ongoing requirements are financed with debt. Until February 21, 2006, all indebtedness was incurred and secured under a Master Trust Indenture that provided the Company with a maximum borrowing capacity, which declines each year. On February 21, 2006, the Company entered into a new indenture (the “General Obligation Indenture”) that established an unsecured borrowing program that qualifies as subordinated debt under the Master Trust Indenture. The borrowing capacity under the General Obligation Indenture does not decline each year. In addition, there is no limit on the issuance of notes under the General Obligation Indenture so long as the Company is able to meet an additional indebtedness test.

(a) Security:

The Master Trust Indenture established a borrowing platform secured by an assignment of revenue and the debt service reserve fund. The General Obligation Indenture is unsecured, but provides a set of positive and negative covenants similar to those of the Master Trust Indenture. In addition, under the terms of the General Obligation Indenture, no further indebtedness may be incurred under the Master Trust Indenture and the amount of the bank credit facility that is secured under the Master Trust Indenture is limited to the amount of outstanding bonds issued under the Master Trust Indenture. At August 31, 2013, this amount is $600 and will decline by $25 on March 1 of every year in conjunction with the annual principal repayment of the series 97-2 amortizing bonds. The remaining $75 of the $675 credit facility (see note 9 (c) below) ranks pari passu to the borrowings under the General Obligation Indenture. The $600 portion of the credit facility along with the $250 series 96-3 bonds and $350 series 97-2 bonds gives a total of $1,200 of indebtedness secured under the Master Trust Indenture and ranking ahead of General Obligation Indenture debt.

As bonds mature or are redeemed under the Master Trust Indenture, they may be replaced with notes issued under the General Obligation Indenture. Borrowings under the General Obligation Indenture are unsecured and repayment is subordinated and postponed to prior payment of Master Trust Indenture obligations unless the Company can meet an additional indebtedness test.

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(b) Borrowings:

Long-term debt outstanding was comprised of the following:

August 31, 2013 August 31, 2012

Bonds and notes payable

Issued under the Master Trust Indenture:

7.40% revenue bonds, series 96-3, maturing June 1, 2027 $ 250 $ 250

7.56% amortizing revenue bonds, series 97-2, maturing March 1, 2027 350 375

600 625

Issued under the General Obligation Indenture:

4.397% general obligation notes, series MTN 2011-1, maturing February 18, 2021 250 250

5.304% general obligation notes, series MTN 2009-1, maturing April 17, 2019 350 350

1.949% general obligation notes, series MTN 2013-1, maturing April 19, 2018 350 –

4.713% general obligation notes, series MTN 2006-1, maturing February 24, 2016 450 450

Floating rate general obligation notes, series MTN 2010-1, maturing April 29, 2013 – 250

1,400 1,300

Total bonds and notes payable 2,000 1,925

Adjusted for deferred financing costs and discounts (8) (8)

Adjusted for regulatory realized hedging transaction asset (note 10 (g)) (2) –

Adjusted for regulatory realized hedging transaction liability (note 10 (h)) 9 10

Carrying value of total bonds and notes payable 1,999 1,927

Less: current portion (25) (275)

Total long-term debt outstanding $ 1,974 $ 1,652

The Company is in compliance with all covenants of the Master Trust Indenture and General Obligation Indenture as at August 31, 2013.

On April 19, 2013, the Company issued $350 series MTN 2013-1 medium term notes, due April 19, 2018. After considering issue costs and the disbursement resulting from a bond forward transaction that the Company had entered into to hedge interest costs related to the issue, the effective interest rate to the Company will be 2.16%. The proceeds of the notes were used to repay the Company’s $250 series MTN 2010-1 medium term notes that matured on April 29, 2013 and to provide additional funds for corporate and investment purposes.

The series 96-3 and 97-2 bonds and the series MTN 2009-1, MTN 2006-1, MTN 2011-1 and MTN 2013-1 notes are redeemable in whole or in part at the option of the Company at any time at the higher of par and the Canada yield price plus redemption premium. The series 97-2 bonds are amortizing bonds repayable in 20 consecutive equal annual instalments of principal payable on March 1 of each year. The instalment payments commenced on March 1, 2008 and will be made until maturity on March 1, 2027. The instalment of principal due within the next twelve months relating to these amortizing bonds is classified in the current portion of long-term debt.



9. LONG-TERM DEBT (CONTINUED):(c) Credit facilities:

The Company’s credit facilities are utilized as follows as at August 31, 2013:

August 31, 2013

Credit facilities:

Credit facility with a syndicate of Canadian financial institutions (1) $ 675

Letter of credit facility (2) 275

Total available credit facilities 950

Less: Outstanding letters of credit (2) 239

Undrawn committed borrowing capacity 711

Less: Operations and maintenance reserve fund allocation (3) 250

Less: Capital lease transaction restriction 25

Credit facilities available for unrestricted use $ 436

(1) The Company’s credit facility with a syndicate of Canadian financial institutions in the amount of $675 is comprised of two equal tranches maturing on September 12, 2016 and September 12, 2018 (after executing 364-day extensions to each tranche on August 2, 2013). The credit facility agreement provides for loans at varying rates of interest based on certain benchmark interest rates, specifically the Canadian prime rate and the Canadian bankers’ acceptance rate, and on the Company’s credit rating at the time of drawdown. A utilization fee is also payable on borrowings in excess of 25% of the available facility. The Company is required to pay commitment fees, which are dependent on the Company’s credit rating. The Company is in compliance with the credit facility covenants as at August 31, 2013.

(2) On December 14, 2012, the Company entered into a $275 letter of credit facility. This facility will expire on December 31, 2013 unless extended. Of the $239 in letters of credit shown above as outstanding, $228 has been drawn from this facility for pension solvency funding purposes (see note 15).

(3) The operations and maintenance reserve fund may be used to pay operating and maintenance expenses, if required.

(d) Interest:

Interest expense for the year ended August 31, 2013 includes interest of $103 on other financial liabilities (year ended August 31, 2012 – $110), which is net of the $1 drawdown of the regulatory realized hedging transaction liability (year ended August 31, 2012 – $1) and the $nil drawdown of the regulatory realized hedging transaction asset (year ended August 31, 2012 – $nil).

The Company made interest payments of $103 during the year ended August 31, 2013 (year ended August 31, 2012 – $114).

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10. FINANCIAL STATEMENT IMPACT OF RATE REGULATION: In accordance with disclosures required for entities subject to rate regulation, the Company’s regulatory assets and liabilities balances are as follows:

August 31, 2013 August 31, 2012

Regulatory assets

Regulatory unrealized hedging transactions assets (a) $ – $ 9

Rate stabilization account

Operating deferrals (b) $ 85 $ 84

Gains on capital lease transaction (c) 11 13

Fair value adjustments (d) (43) (66)

Rate stabilization account liability $ 53 $ 31

Regulatory liabilities

Regulatory pension and long-term disability liabilities (e) $ 269 $ 316

Regulatory unrealized hedging transactions liabilities (a) 29 –

Other regulatory liabilities (f) 5 4

Regulatory liabilities $ 303 $ 320

Long-term debt

Regulatory realized hedging transaction asset (g) $ (2) $ –

Regulatory realized hedging transaction liability (h) 9 10

$ 7 $ 10

In order to mitigate the effect on its operations of unpredictable and uncontrollable factors, principally unanticipated fluctuations in air traffic levels, the Company maintains a rate stabilization mechanism. Amounts are added to or deducted from the rate stabilization account based upon variations from amounts used when establishing customer service charges.

When establishing customer service charges, the Board of Directors, considers the balance in the rate stabilization account, adjusted notionally for the non-credit related portion of the fair value variance from face value on investments. The Board of Directors also considers the balance of the accrued pension benefit asset (net of its regulatory liability) when determining the level of customer service charges, as discussed in note 10 (e) below.

The long-term target liability balance of the rate stabilization account is 7.5% of total planned annual expenses net of other loss (income), excluding non-recurring items, on an ongoing basis. For fiscal 2013, the target balance was $93 (fiscal 2012 – $92). As at August 31, 2013, the balance in the rate stabilization account adjusted notionally for the $40 net non-credit related fair value variance from face value on investments (see note 4 (b)) and after recording additional pension expense as described in note 10 (e) below, was a liability of $93 (August 31, 2012 – $92).

The table below shows the impact of rate stabilization adjustments on the excess of expenses over revenue and other loss (income) as reported in the statement of operations:

August 31, 2013 August 31, 2012

Before rate stabilization:

Revenue $ 1,231 $ 1,226

Expenses 1,238 1,231

Other loss (income) (29) (34)

22 29

Rate stabilization adjustments:

Favourable variances from planned results (51) (44)

Initial approved drawdown (adjustment)* 16 (3)

Additional drawdown related to pension** 13 18

(22) (29)

Excess of expenses over revenue and other loss (income), after rate stabilization $ – $ –

* The initial approved drawdown (adjustment) is combined with the revenue variances from planned results on the statement of operations.

** The additional drawdown related to pension is combined with the operating expenses variances from planned results on the statement of operations.



10. FINANCIAL STATEMENT IMPACT OF RATE REGULATION (CONTINUED):

The following are the changes in the rate stabilization account for the years ended August 31:

2013 2012

Rate stabilization account

Liability balance, beginning of period $ 31 $ 2

Variances from planned results:

Revenue lower than planned, before approved drawdown – (7)

Operating expenses lower than planned, before drawdown related to pension 27 18

Other expenses lower than planned – 10

Other income higher than planned 24 51 23 44

82 46

Initial approved adjustment (drawdown) (i) (16) 3

Additional drawdown related to pension (13) (18)

Liability balance, end of period $ 53 $ 31

(a) Regulatory unrealized hedging transactions assets (liabilities):

Regulatory unrealized hedging transactions assets (liabilities) at August 31, 2013 of ($29) (August 31, 2012 – $9) consist of unrealized gains or losses on derivative financial instruments for anticipated debt refinancings designated as cash flow hedges:

August 31, 2013 August 31, 2012

Unrealized fair value losses (gains) on forward dated interest rate swap agreements (i) $ (29) $ 10

Unrealized fair value loss (gain) on a bond forward derivative instrument (ii) – (1)

Regulatory unrealized hedging transactions assets (liabilities) $ (29) $ 9

(i) The Company intends to cash settle these forward dated interest rate swap agreements in February 2016.

(ii) The bond forward derivative instrument matured in April 2013 (see note 10 (g)).

When the anticipated refinancings occur, the realized gains or losses are reclassified to a regulatory realized hedging transaction asset or liability that is presented within long-term debt (see notes 10 (g) and 10 (h)).

(b) Operating deferrals:

Should actual revenues exceed the Company’s actual expenses, such excess is reflected as a liability (or as a reduction of an asset) in the rate stabilization account. Conversely, should actual revenues be less than actual expenses, such shortfall is reflected as an asset (or as a reduction of a liability) in the rate stabilization account. An asset balance in the rate stabilization account represents amounts recoverable through future customer service charges, while a liability balance represents amounts returnable through future customer service charges.

(c) Gains on capital lease transaction:

Included in the rate stabilization account at August 31, 2013 is an amount of $11 (August 31, 2012 – $13), representing the portion of the gain on the remaining capital lease transaction that would not have been recorded as of August 31, 2013 under Canadian GAAP applicable to companies not subject to regulatory statutes governing the level of their charges.

(d) Fair value adjustments:

As at August 31, 2013, the total of fair value variances from face value on investments recorded on the Company’s balance sheet was $46, of which $43 is from fair value adjustment losses recorded on investments currently held by the Company. During the year ended August 31, 2013 this amount decreased, primarily due to positive fair value adjustments of $21 on its investments based on lower discount factors in keeping with market conditions and a decrease in the credit loss provision of $2.

(e) Regulatory pension and long-term disability liabilities:

Included in regulatory liabilities at August 31, 2013 is $263 (August 31, 2012 – $312) relating to the recovery through customer service charges of special pension contributions and $6 (August 31, 2012 – $4) of long-term disability (“LTD”) contributions (note 15). Accrued pension and other benefit assets, net of their regulatory liabilities as at August 31, 2013 and August 31, 2012 are as follows:

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August 31, 2013 August 31, 2012

Pension LTD Total Total

Accrued pension and other benefit assets (note 15) $ 362 $ 3 $ 365 $ 443

Regulatory liabilities

Balance, September 1, prior calendar year (312) (4) (316) (311)

Regulatory decrease (increase) 62 (2) 60 13

Additional rate stabilization drawdown related to pension (13) – (13) (18)

Balance, end of period (263) (6) (269) (316)

Accrued pension and other benefit assets, net of their regulatory liabilities $ 99 $ (3) $ 96 $ 127

The accrued pension and other benefit assets, net of their related regulatory liabilities, represent the accumulated amounts by which Company contributions to the pension and LTD benefit plans have exceeded the amounts expensed. The Company intends to recover the accrued pension benefit asset, net of its regulatory liability balance, through customer service charges over time.

The Company uses a regulatory approach to determine its expense for pension and LTD, which is charged to the statement of operations. The objective of this approach is to establish benefit expense to reflect the cash cost of the plans. The difference between the pension and LTD expense for regulatory purposes and pension benefit and LTD costs as determined by CICA Handbook Section 3461, Employee Future Benefits, is included in pension and LTD expense in salary and benefits expense on the statement of operations and in the pension and LTD regulatory liability on the balance sheet.

For several years prior to fiscal 2008, pension expense was lower than the Company’s actual contributions to the pension plan. In 2008, the Board of Directors approved a policy by which the fiscal 2008 balance of contributions made in excess of pension expense would be expensed over a period no longer than 15 years. Accordingly for fiscal 2013, the regulatory approach for determining annual pension expense includes an amount equal to the Company’s originally planned annual pension contributions ($81), plus an amount ($19) to reduce the net cumulative balance of recoverable pension contributions made in the past in excess of pension expense.

To further accelerate the reduction of the balance in the accrued pension benefit asset (net of its regulatory liability), the Board of Directors approved, effective September 1, 2010, that if at the end of a quarterly reporting period the “notional” balance (described above) in the rate stabilization account is greater than the target balance, the excess over the target will be recorded as additional pension expense in the reporting period. For the year ended August 31, 2013 this amounted to an additional $13 (August 31, 2012 – $18) of pension expense. During the year ended August 31, 2013, the accrued pension benefit asset, net of its related regulatory liability, decreased by $30 from $129 as at August 31, 2012 to $99 at August 31, 2013.

(f) Other regulatory liabilities:

Other regulatory liabilities at August 31, 2013 consist of $3 (August 31, 2012 – $4) unrealized foreign currency translation gains on derivative financial instruments, $1 (August 31, 2012 – $nil), unrealized foreign currency translation gains on investment of preferred interests of Aireon and $1 (August 31, 2012 – $nil) accrued dividends on preferred interests of Aireon deferred for rate setting purposes. Dividends are not considered for rate setting purposes until the cash is received (note 6).

(g) Regulatory realized hedging transaction asset:

The regulatory realized hedging transaction asset at August 31, 2013 consists of the remaining $2 (August 31, 2012 – $nil) deferred loss on the bond forward that was settled April 16, 2013, which has been applied to the series MTN 2013-1 obligation.

(h) Regulatory realized hedging transaction liability:

The regulatory realized hedging transaction liability at August 31, 2013 consists of the remaining $9 (August 31, 2012 – $10) deferred gain on the bond forward settled February 18, 2011 which has been applied to the series MTN 2011-1 obligation. The Company’s interest expense in fiscal 2013 was offset by the $1 drawdown of the regulatory liability (fiscal 2012 – $1), as the regulatory liability is being amortized using the effective interest rate method over the term of the note issue.

(i) Initial approved adjustment (drawdown):

The Board of Directors approved a $16 drawdown of the rate stabilization account to be recorded in fiscal 2013, in order to achieve planned breakeven results of operations. The drawdown was transferred to revenue evenly throughout the year.

With respect to fiscal 2012, the Board of Directors approved a $3 transfer to the rate stabilization account to be recorded in the first quarter of fiscal 2012, in order to achieve planned breakeven results of operations and to increase the notional balance of the rate stabilization account to its new target level. Accordingly, during the year ended August 31, 2012, $3 was transferred from revenue to the rate stabilization account.



11. CAPITAL LEASE TRANSACTION:During fiscal 2004, the Company entered into two long-term lease transactions with U.S. entities. These transactions involved the lease/leaseback of certain of the Company’s air navigation equipment and software for periods of 24 years, with purchase options after 20 years. As a result of the leaseback transactions, the Company had long-term capital lease obligations that were reflected on the balance sheet. These were collateralized through payment undertaking agreements using the proceeds that were received on the head lease transactions (included in the capital lease obligations reserve fund). On June 7, 2012, the Company terminated one of the two capital lease transactions by negotiating an acceleration of the purchase option. This termination resulted in a gain of $2 after legal and professional fees.

There is no foreign exchange risk that arises from these lease transactions, since the U.S. dollar cash flows from the payment undertaking agreements were structured to fully meet the U.S. dollar capital lease obligations. The amounts at which the capital lease obligations and the payment undertaking agreements are reflected in the financial statements vary with the prevailing exchange rate at the balance sheet dates. Unrealized gains and losses from translating these financial instruments to Canadian dollars at the balance sheet dates are deferred.

The capital lease transaction is included on the consolidated balance sheets as follows:

August 31, 2013 August 31, 2012

Current portion of capital lease obligations reserve fund $ 13 $ 13

Capital lease payment undertaking agreements reserve fund 191 179

Property, plant and equipment 12 15

Current portion of capital lease obligations (13) (13)

Capital lease obligations (200) (190)

Other regulatory liabilities (3) (4)

$ – $ –

Remaining capital lease payments are due as follows:

Years ending August 31:

2014 13

2015 55

2016 18

2017 16

2018 16

Later years, through 2028 162

Net minimum lease payments 280

Less: amount representing interest (at approximately 5%) (67)

Present value of net minimum capital lease payments 213

Less: current portion (13)

Total long-term capital lease obligations $ 200

Interest expense during the year ended August 31, 2013 of $10 (year ended August 31, 2012 – $20) relating to the capital lease obligations, and the amortization of the net increase from the capital lease (note 7) are fully offset by and are recorded net of interest income of $12 (year ended August 31, 2012 – $23) from the payment undertaking agreements included in the capital lease obligations reserve fund.

At the inception of the lease transactions the U.S. entities created special purpose entities, the activities of which are limited to receiving lease payments and making payments to third parties and the U.S. entities. While the Company is considered to have a variable economic interest in the special purpose entities, it is not considered to be the primary beneficiary of these special purpose entities and therefore is not required to consolidate such entities.

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12. OTHER LONG-TERM LIABILITIES: Other long-term liabilities were comprised of the following:

August 31, 2013 August 31, 2012

Accrued post-employment benefit liabilities other than pensions (note 15) $ 176 $ 167

Accrued pension benefit liability – supplemental pension benefits (note 15) 54 52

Non-derivative financial liability (note 4) 2 1

Long-term derivative liability (note 10 (a)) – 10

Asset retirement obligation – 3

$ 232 $ 233

13. REVENUE: Customer service charges by type of service provided during the years ended August 31 were as follows:

2013 2012

En route $ 613 $ 616

Terminal 455 455

Daily / annual / quarterly 67 64

North Atlantic and international communication 46 47

$ 1,181 $ 1,182

Customer service charges include:

(i) En route charges related to air navigation services provided or made available to aircraft during the en route phase of the flight, whether they overfly Canadian-controlled airspace or take-off or land in Canada;

(ii) Terminal charges related to air navigation services provided or made available to aircraft at or in the vicinity of an airport;

(iii) Daily / annual / quarterly charges related to en route and terminal air navigation services. These charges generally apply to propeller aircraft; and

(iv) North Atlantic and international communication charges related to certain air navigation and communication services provided or made available to aircraft while in airspace over the North Atlantic ocean, which is outside of Canadian sovereign airspace but for which Canada has air traffic control responsibility pursuant to international agreements. The international communication charges also include services provided or made available while in Canadian airspace in the north.

Other revenue for the years ended August 31 was as follows:

2013 2012

Service and development contracts $ 34 $ 26

Conference centre services 8 8

Aeronautical publications 4 5

Other 4 5

$ 50 $ 44

The Company has two customers each of which represents more than 10% of total revenues before rate stabilization. For the year ended August 31, 2013, revenue from the largest customer was $221 (year ended August 31, 2012 – $224) and revenue from the second largest customer was $140 (year ended August 31, 2012 – $137), together representing 29% (year ended August 31, 2012 – 29%) of the total revenues of the Company before rate stabilization. The revenues from these two major customers arose from air navigation services.



14. SALARIES AND BENEFITS: Salaries and benefits expenses for the years ended August 31 were comprised of the following:

2013 2012

Salaries and other $ 511 $ 509

Overtime 81 78

Fringe benefits (note 15) 68 66

Pensions (notes 10 (e) and 15) 112 118

$ 772 $ 771

15. EMPLOYEE FUTURE BENEFITS:The Company maintains defined benefit plans that provide pension, other post-employment and LTD benefits to employees. The Company uses an annual measurement date of May 31 when estimating the accounting surplus or deficit of its plans and establishing benefit costs for the coming fiscal year, both of which are dependent on the measurement factors at that time.

Information about the Company’s pension benefits and LTD plans, using the measurement date of May 31, is as follows:

Pension benefits LTD Total

2013 2012 2013 2012 2013 2012

Change in benefit obligations

Benefit obligations at June 1, prior year $ 4,656 $ 3,995 $ 33 $ 25 $ 4,689 $ 4,020

Current service cost 154 133 – – 154 133

Interest cost on benefit obligations 196 204 – – 196 204

Benefits paid (156) (139) (7) (5) (163) (144)

Past service costs (a) 16 – – – 16 –

Actuarial losses (gains) (3) 463 8 13 5 476

Benefit obligations at May 31 4,863 4,656 34 33 4,897 4,689

Change in plan assets

Fair value of plan assets at June 1, prior year 3,650 3,416 33 30 3,683 3,446

Actual gains on plan assets 363 270 – – 363 270

Employer contributions 86 71 9 8 95 79

Plan participants’ contributions 31 32 – – 31 32

Benefits paid (156) (139) (7) (5) (163) (144)

Fair value of plan assets at May 31 3,974 3,650 35 33 4,009 3,683

Funded status at May 31 surplus (deficit) (889) (1,006) 1 – (888) (1,006)

Unamortized net losses not yet recognized 1,159 1,391 – – 1,159 1,391

Unamortized transitional asset – (21) – – – (21)

Unamortized past service cost 16 1 – – 16 1

Employer contributions after May 31 22 24 2 2 24 26

308 389 3 2 311 391

Reclassification to accrued pension benefit liability – supplemental pension benefits 54 52 – – 54 52

Accrued pension and other benefits asset at August 31 $ 362 $ 441 $ 3 $ 2 $ 365 $ 443

The Company intends to recover the balance of the accrued pension benefit asset (net of its related regulatory liability) through customer service charges over time (see note 10 (e)).

(a) Past service costs on pension benefits are due to a previously reported 1% non-pensionable wage increase that had been granted in a prior year that is now pensionable for two of the Company’s bargaining units. Since this benefit was determined for one of the unions in July 2013, the past service costs were subsequently adjusted, resulting in a $4 increase in the funded status deficit as reported in the Company’s unaudited financial statements for the three and nine months ended May 31, 2013.

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Information about the Company’s other post-employment benefit plans, using the measurement date of May 31, is as follows:

Other benefits

2013 2012

Change in benefit obligations

Benefit obligations at June 1, prior year $ 204 $ 176

Current service cost 7 7

Interest cost on benefit obligations 8 9

Benefits paid (10) (15)

Actuarial losses (8) 26

Benefit obligations at May 31 201 203

Change in plan assets

Employer contributions 10 15

Benefits paid (10) (15)

Funded status at May 31 (deficit) (201) (203)

Unamortized net gains not yet recognized 13 22

Unamortized past service cost 10 10

Employer contributions after May 31 2 4

Accrued benefit liability at August 31 $ (176) $ (167)

Weighted-average assumptions at the measurement date of May 31 were as follows:

Pension benefits LTD Other benefits

2013 2012 2013 2012 2013 2012

Benefit obligations at end of year

Discount rate 4.20% 4.20% 2.78% 2.89% 4.06% 4.02%

Rate of inflation 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Benefit costs during the year

Discount rate 4.20% 5.10% 2.78% 2.89% 4.02% 4.94%

Rate of inflation 2.00% 2.25% 2.00% 2.00% 2.00% 2.25%

Expected long term rate of return on plan assets 6.00% 6.25% – – – –

The pension plans had an accounting deficit of $889 as at the annual measurement date of May 31, 2013. The deficit at May 31, 2013 decreased from a deficit of $1,006 at May 31, 2012, primarily due to positive investment experience on plan assets, partially offset by past service costs incurred.

The market-based discount rate is based on the yield on long-term high quality corporate bonds, with maturities matching the estimated cash flows of the plan. A 0.25% decrease in the discount rate would increase the accounting deficit by approximately $223. Conversely, a 0.25% increase in the discount rate would decrease the deficit by approximately $208.

Between May 31, 2013 and August 31, 2013, the pension plan’s accounting deficit improved to approximately $660, primarily due to a 0.5% increase in the market-based discount rate used to determine pension obligations, partially offset by weak asset returns.

The average rate of compensation increase is expected to be equal to the rate of inflation with an adjustment for merit and productivity gains. An increase of 8.57% in drug and other health benefit costs was assumed for 2013 and an increase of 5.0% in drug and other health benefit cost was assumed for 2014. The impact of a one percent change in the assumed drug and other health benefit cost trend rate would have the following effects:

1% increase 1% decrease

Effect on current service cost and interest cost on accrued benefit obligation $ 1 $ (1)

Effect on benefit obligation $ 18 $ (14)



15. EMPLOYEE FUTURE BENEFITS (CONTINUED):Pension plan assets at the measurement date (May 31):

2013 2012

Equities 52% 50%

Canadian nominal bonds 27% 27%

Canadian real return bonds 14% 16%

Canadian real estate 7% 7%

Pension plan assets are subject to investment risks. These risks are managed through diversification among different asset classes, risk factors and geographies and adherence to established investment guidelines. In addition, investment risk relative to plan liabilities is managed via implementation of liability driven investment strategies, including a 20% Canadian real return bond overlay.

The Company’s benefit costs, which are included in salaries and benefits on the statements of operations and retained earnings and in capital expenditures for the years ended August 31 were as follows:

Pension benefits LTD Other benefits

2013 2012 2013 2012 2013 2012

Benefit costs arising from events in the year:

Current service cost, net of plan participants’ contributions $ 123 $ 101 $ – $ – $ 7 $ 6

Past service cost 16 – – – – –

Curtailment loss – – – – 8 2

Interest cost on accrued benefit obligation 196 204 – – – 8

Actual returns on plan assets (363) (270) – – – –

Actuarial (gains) losses arising during the year on accrued benefit obligation (3) 463 8 13 (8) 26

Elements of pension and LTD benefit costs before recognizing long term nature (31) 498 8 13 7 42

Deferrals of amounts arising during the year:

Excess of actual return over expected return 153 55 – – – –

Actuarial gains (losses) on benefit obligation 3 (463) – – 8 (26)

Past service cost (16) – – – – –

Amortization of previously determined amounts:

Net actuarial losses on benefit obligation 76 44 – – – –

Past service cost 1 1 – – 1 1

Transitional asset (21) (21) – – – –

Benefit costs $ 165 $ 114 $ 8 $ 13 $ 16 $ 17

Pension expense for fiscal 2013 was $112 (fiscal 2012 – $118) consisting of pension benefit costs of $165, partially offset by $49 relating to regulatory pension adjustments and $4 included in the cost of capital assets.

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The Company’s contributions to its benefit plans, net of refunds received for the years ended August 31 were as follows:

2013 2012

Company contributions to funded and unfunded pension plans $ 84 $ 77

Benefits paid directly to beneficiaries for other non-funded post-employment benefits 7 8

Settlement of curtailed severance benefits – 9

Company contributions to the funded LTD plan 7 7

Payment of LTD plan deficit 2 1

100 102

Less: amounts capitalized (5) (6)

$ 95 $ 96

Other post-employment benefits are not funded. Pension (other than the supplemental pension plan) and LTD benefits are funded.

Actuarial valuations for pension funding purposes are performed annually as at January 1 and are required to be filed with the Office of the Superintendent of Financial Institutions Canada by June of the same year. The regulations governing the funding of federally regulated pension plans require actuarial valuations on both a going concern and solvency basis. The actuarial valuations performed as at January 1, 2013 that were filed in June 2013 disclosed a going concern surplus of $188 and a statutory solvency deficiency of $629.

In October 2009, the federal government released a plan for the reform of the legislative and regulatory framework governing federally regulated private pension plans. It was announced that the funding period for solvency deficiencies would remain at 5 years but past deficits would be consolidated on a permanent basis for establishing solvency special payments, resulting in a fresh start every year. Following a transition phase, funding of solvency deficits would be based on an average of solvency ratios over the three most recent consecutive years, based on the market value of assets (statutory solvency deficiency). The funding regulations relating to the determination of statutory solvency deficiencies have been adopted by the Company as of January 1, 2012. Regulations came into effect on April 1, 2011 permitting solvency special payments to be replaced by letters of credit provided the total value of the letters of credit does not exceed 15% of the pension plan’s assets.

Going concern current service pension contributions for fiscal 2013 were $84 (fiscal 2012 – $77). In both 2012 and 2013, the Company met its statutory pension solvency funding requirements with letters of credit. As of August 31, 2013, the Company had put in place letters of credit of $228 to meet the pension solvency funding requirements for calendar year 2013 and prior years.

The total amount of required Company contributions and additional letters of credit in future years will be dependent on the investment experience of plan assets, the discount rates and other assumptions that will be used in future actuarial valuations to determine plan liabilities, as well as any changes in plan design or pension funding requirements that may be enacted.

In July 2013, the Canadian Institute of Actuaries released a draft report for consultation, summarizing the results of a Canadian pensioner mortality study. Once finalized, this report may lead to changes in mortality assumptions that will be used in future actuarial valuations. In addition, the Company plans to undertake a study of pensioner mortality with respect to its own pension plan, which will also be considered for possible use in future valuations. On a very preliminary basis, going concern pension contributions for the fiscal year ending August 31, 2014 are estimated to be $92. This preliminary estimate does not take into consideration the potential impact of revised mortality assumptions mentioned above.

16. TRANSACTIONS WITH THE GOVERNMENT OF CANADA:The Company has arrangements with a number of federal government departments and agencies for the provision of various services, such as enhanced security services, weather forecasting and observation, and facilities. These arrangements are based on commercially negotiated terms and conditions.

The Company also has an agreement with the Department of National Defence (“DND”) relating to the exchange of a variety of services with DND such as airspace controls, facilities, information and protocols and systems, for mutual benefit without significant cost or expense to either party.

The Government of Canada has maintained an indemnification program at no cost to the Company, which protects the Company from a terrorist-related loss that may be in excess of the Company’s insurance coverage. This program has been in place since December 2001 and the current undertaking runs until December 31, 2013. The Company is contractually obligated to indemnify the Government of Canada for any loss suffered by or claimed against it which is covered by the Company’s aviation operations liability insurance.



17. GUARANTEES:The Company has not provided any material guarantees other than indemnification commitments typically provided in the ordinary course of business as described below. These indemnification commitments require the Company to compensate the counterparties for costs and losses incurred as a result of various events and are similar to the type of indemnifications required by the Company from suppliers of services and products, or by other companies in the aviation industry.

The Company has provided the following significant indemnification commitments:

Capital lease transactions As described in note 11, the Company entered into two lease transactions with respect to a portion of its air navigation equipment and software. On June 7, 2012, the Company terminated one of the two capital lease transactions by negotiating an acceleration of the purchase option. In connection with the remaining transaction, the Company has agreed to indemnify the other parties to the transaction for certain costs or liabilities, including with respect to certain taxes that may be imposed on such party with respect to the leased equipment, or as a result of such party’s participation in the lease transaction. This indemnification commitment will survive the termination of the lease transaction, but only with respect to events that occur prior to the termination of the lease transactions. This indemnification commitment does not provide for any limit on the maximum amount of the potential indemnification.

The Company has collateralized its obligations to pay base rent under the lease transaction by entering into payment undertaking agreements with two financial institutions. In certain circumstances the Company may be required to replace such collateral with similar collateral. Furthermore, the Company is required to provide additional collateral for the Company’s contingent obligations under the lease transaction if: (i) the long term senior unsecured debt obligations of the Company are not rated at least A+ by Standard & Poor’s and A1 by Moody’s Investors Service or (ii) the Company’s rights and powers under the ANS Act are substantially reduced.

The replacement of existing collateral, or the provision of additional collateral, may result in the Company incurring significant costs.

The Company may be required to make early termination payments under the lease transaction in the event that any portion of the leased equipment is lost or destroyed, and such equipment is not replaced by the Company. Such termination payments may be in excess of the collateral provided for such purpose. The maximum amount by which such early termination payments would exceed the amounts payable under the payment undertaking agreements is estimated to be $31. Accordingly, $34 of the capital lease obligation reserve fund, relating to the reinvestment of net present value benefits from the lease transactions, is available to meet any such obligations. Furthermore, $25 of the Company’s credit facility has been restricted in relation to this contingent liability.

If a financial institution that has entered into a payment undertaking agreement with the Company should fail to meet its obligations under such payment undertaking agreement for any reason, the Company will still be obligated to make the payments that are required pursuant to the lease transaction.

The Company considers it unlikely that any of the above noted events will occur and that the described payments will be required.

Provision of service and system sales(i) The Company has entered into five agreements for the sale and maintenance of technology that would indemnify the

counterparties up to a maximum of $1,000 for each occurrence and in the aggregate for losses sustained as a result of the negligence of the Company. In addition, the Company has entered into one agreement for the sale and maintenance of technology that would indemnify the counterparty up to a maximum of the Company’s ANS liability insurance coverage of $4,128 U.S. ($4,347 CDN). The Company’s ANS liability insurance provides coverage for these indemnification commitments. These indemnities survive termination of the agreements.

(ii) The Company entered into an agreement, which has now ended, with Natural Resources Canada for the production of civil aeronautical information products, which would indemnify the counterparty up to a maximum of $100 for each occurrence and in the aggregate, for losses sustained by the counterparty arising out of or in any way connected with the agreement. The Company’s liability insurance provides coverage for this indemnification commitment. This indemnity survives termination of the agreement.

(iii) The Company has entered into a sales agreement for the supply of an air traffic services data management system and provision of related services, which would indemnify the counterparty up to a maximum of $35 U.S. for the cumulative liability of the Company in relation to any claim in any manner howsoever arising out of or in connection with the agreement. The Company’s liability insurance provides coverage for this indemnification commitment. This indemnity survives termination of the agreement.

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Banking and credit agreementsThe Company has agreed to indemnify its banks against costs or losses resulting from changes in laws and regulations, which would increase the banks’ costs and from any legal claims resulting from defaults, misrepresentations, negligence, wilful misconduct of the Company or from environmental liabilities. These indemnification commitments extend for an unlimited period of time and do not provide for any limit on the maximum potential amount.

Indemnity with respect to third party sponsored ABCP In connection with the restructuring of third party sponsored ABCP (see note 4), the Company (as a member of the Pan-Canadian Investors Committee) agreed to indemnify the indenture trustees of the ABCP trusts should the trustees suffer certain losses only as a result of acting in accordance with extraordinary resolutions passed by the requisite number of noteholders of the trusts. As part of the indemnity agreement, the Company acknowledged that the trustees have the benefit of existing contractual indemnities under the trust indenture and agreed to subordinate its recoveries to any entitlement of the trustees. Further, all members of the Pan-Canadian Investors Committee committed to provide additional protection beyond the contractual indemnification afforded by the trust indentures. The protection provided by members of the Committee is on a several basis and pro rata among the Committee members based upon their respective and aggregate investments in third party sponsored ABCP. The Company estimates that its share of the additional protection could amount to $16. While the indemnity survives the closing of the ABCP restructuring, the terms of the court-sanctioned restructuring plan have effectively eliminated the Company’s exposure.

Other agreementsIn the ordinary course of business the Company provides indemnification commitments to counterparties in transactions such as service arrangements, provision of maintenance services, system sales, sales of assets, licensing agreements, lease and site usage transactions, contribution agreements, and director and officer indemnification commitments. These indemnification commitments require the Company to compensate the counterparties for costs and losses as a result of various events such as results of litigation claims, environmental contamination or statutory sanctions that may be suffered by a counterparty or third party as a consequence of the transaction or in limited cases, for liabilities arising from acts performed by or the negligence of the indemnified parties. The terms of these indemnification commitments vary based on the contract. Certain indemnification agreements extend for an unlimited period and generally do not provide for any limit on the maximum potential amount. The nature of these indemnification commitments does not permit a reasonable estimate of the aggregate potential amount that could be required to be paid. The Company has acquired liability insurance that provides coverage for most of the indemnification commitments described in this paragraph.

Historically, the Company has not made any significant payments under any indemnification commitments and no material amount has been accrued in the financial statements with respect to these indemnification commitments.

18. FINANCIAL RISK MANAGEMENT:The Company is exposed to several risks as a result of holding financial instruments. The following is a description of these risks and how they are managed.

(a) Market risk:

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, foreign exchange risk and other price risk. Interest rate risk and foreign exchange risk are discussed below.

The price risks associated with investments in MAV II and Ineligible Asset Tracking notes and other ABCP are further discussed in note 4 (b). The use of the discounted cash flow approach described in note 4 (b) resulted in a carrying value for these investments of $261 on notes with a face value of $307. The difference of $46 is composed of fair value variances of $40 due to the discounting of cash flows at market rates and an estimate of credit losses of $6.

A change of 50 basis points in the market discount factors would impact the fair value variance by approximately $4. There is no assurance that the fair value of the Company’s investments in MAV II and Ineligible Asset Tracking notes and other ABCP will not decline, or that significant deterioration in financial markets will not cause margin calls in excess of MAV II’s ability to meet them, resulting in a significant credit loss. The estimated fair value of the Company’s investments, including the estimate of expected credit losses, may change in subsequent periods. Any such changes could be material and would be reflected in the statement of operations as they occur.

(b) Interest rate risk:

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.



18. FINANCIAL RISK MANAGEMENT (CONTINUED):(b) Interest rate risk (continued):

The following table summarizes financial assets and liabilities exposed to interest rate risk:

August 31, 2013 August 31, 2012

Floating rate financial assets and liabilities:

Cash and cash equivalents $ 171 $ 89

Debt service reserve fund investments 111 110

Investments in MAV II, Ineligible Asset Tracking notes and other ABCP 261 238

Bonds and notes payable – (250)

Net position, floating rate financial assets and liabilities $ 543 $ 187

Fixed rate financial liabilities:

Bonds and notes payable $ 2,000 $ 1,675

Investments included in the Company’s cash and cash equivalents and debt service reserve fund earn interest at prevailing and fluctuating market rates. The investments in MAV II notes also earn interest at variable rates. If interest rates decline, earnings on these instruments will fall. A 100 basis point change in variable interest rates would result in an annual difference of approximately $5 in the Company’s earnings before rate stabilization.

Interest rate risk related to the Company’s fixed-interest long-term debt relates to the re-setting of interest rates upon maturity and refinancing of the debt. The Company mitigates this source of interest rate risk by spreading maturities of borrowings over periods currently up to and including 2027 so that only a portion of outstanding debt will mature in any given fiscal year. In addition, the Company has International Swaps and Derivatives Association (“ISDA”) Agreements in place and, in November 2010, entered into a bond forward transaction in order to mitigate the impact of fluctuating interest rates on interest costs relating to the Company’s MTN 2011-1 issue, which settled on February 18, 2011. A gain of $11 on the bond forward was deferred and included in long-term debt. This gain has been applied to the series MTN 2011-1 obligation and is being amortized to income using the effective interest rate method.

In June 2012, the Company entered into forward dated interest rate swap agreements totaling $200 under which the Company will notionally pay a fixed rate of interest in exchange for receiving a floating rate of interest based on the three month CDOR rate with the purpose of mitigating the potential impact of rising interest rates on the cost of refinancing a portion of the Company’s $450 Series MTN 2006-1 notes that will mature on February 24, 2016. The Company intends to cash settle these agreements in February 2016 and offset any gain or loss at that time against a portion of the cost of refinancing the above mentioned notes.

In July 2012, the Company entered into a bond forward transaction in the amount of $250 with the purpose of mitigating the potential impact of rising interest rates on the cost of refinancing the Company’s $250 Series MTN 2010-1 notes that matured on April 29, 2013. A loss of $2 on the bond forward was deferred and included in long-term debt. The loss has been applied to the series MTN 2013-1 obligation and is being amortized to income using the effective interest rate method.

The Company has not entered into any other derivative contracts to manage interest rate risk.

(c) Foreign exchange risk:

The Company is exposed to foreign exchange risk on sales and purchases that are denominated in currencies other than in the functional currency of the Company. However, the Company invoices and receives the vast majority of its revenues in Canadian dollars and also incurs operating expenses and capital expenditures primarily in Canadian dollars. In some cases, the Company uses forward exchange contracts to purchase or sell foreign currencies to mitigate its foreign exchange risk on contractual agreements in foreign currencies. Accordingly, the Company does not have a significant exposure to losses arising from fluctuations in exchange rates, except for assets and liabilities relating to the capital lease transaction and the investments in and contractual obligations relating to the purchase of preferred interests in Aireon (note 6) mentioned below.

The Company entered into agreements in November 2012, whereby the Company acquired and may acquire additional preferred interests in Aireon. The agreements are denominated in U.S. dollars. As at August 31, 2013, the Company’s investment in preferred interests was $55 U.S. ($58 CDN excluding transaction costs) and the Company’s outstanding commitment was $95 U.S. ($100 CDN) (see note 18 (e)). The Company has entered into a hedging instrument that will limit the Canadian dollar cost related to $65 U.S. of the outstanding commitment. This instrument does not meet the requirements for hedge accounting.


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As a result of entering into a capital lease transaction (note 11), the Company has a capital lease obligation and payment undertaking agreements (that are part of the capital lease obligations reserve funds) denominated in U.S. dollars. The U.S. dollar cash flows from the payment undertaking agreements, comprising funding commitments from two financial institutions, have been structured to fully meet the U.S. dollar capital lease obligations. As at August 31, 2013, the payment undertaking agreements were $194 U.S. ($204 CDN) and the capital lease obligation was $203 U.S. ($213 CDN). The Company has designated a portion of the capital lease obligation reserve fund as a cash flow hedge of the capital lease obligation. Unrealized gains and losses from translating these financial instruments to Canadian dollars at the balance sheet date are deferred and are included in other regulatory liabilities (note 10 (f)). The Company currently expects no further net effect on its cash flows or results of operations from these transactions.

(d) Credit risk:

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The maximum credit risk to which the Company is exposed as at August 31, 2013 represents the carrying amount of cash equivalents, accounts receivable, reserve funds, investments and forward contracts to purchase or sell foreign currencies.

Cash equivalents and the debt service reserve fund are invested in accordance with the Company’s restrictive investment policy to manage credit risk. The Company invests only in short-term obligations – usually for periods of 90 days or less. Excluding investments in MAV II, Ineligible Asset Tracking notes and other ABCP, described in note 4 (b), the Company limits investments to obligations of the federal government, certain provincial governments, entities guaranteed by a federal or provincial government or other obligations of entities rated by at least two rating agencies in the top two categories for long-term debt or the highest category for short-term debt. The Company does not invest in instruments with exposure to underlying synthetic assets. The Company’s portfolio is diversified, with dollar and percentage limits on investment counterparties.

Credit risk with respect to investments in MAV II and Ineligible Asset Tracking notes and other ABCP is discussed in note 4 (b).

The Company’s additional planned investments in preferred interests of Aireon are subject to the satisfaction of certain conditions, increasing the likelihood of the successful achievement of Aireon’s mandate and reducing the Company’s overall risk of a financial loss on its investment in Aireon.

As a result of entering into a capital lease transaction, the Company has capital lease payment undertaking agreements (that are part of the capital lease obligations reserve funds). The U.S. dollar cash flows from the payment undertaking agreements, comprising funding commitments from financial institutions, have been structured to fully meet the U.S. dollar capital lease obligations. The capital lease payment undertaking agreements are provided by two financial institutions, rated by Standard & Poor’s as AA- stable and A stable.

Accounts receivable are primarily short-term receivables from customers that arise in the normal course of business. The Company provides air navigation services to various aircraft operators, including Canadian and foreign commercial air carriers as well as small general aviation aircraft. Credit limits and compliance with payment terms are monitored by the Company to manage its exposure to credit loss. The Company has established a maximum credit limit of $4 for its largest air navigation services customers, and it has other credit control measures that reduce its credit exposure. The Company’s general payment terms provide for payment periods of 30 days for air navigation services and payment periods of up to 45 days for some other types of services. Shorter payment terms are imposed where customer circumstances warrant. The Company’s credit policies also require payments in advance or satisfactory security to be posted under certain circumstances.

The Company establishes an allowance for doubtful accounts that represents its estimate of incurred losses in respect to accounts receivable.

As at August 31, 2013, one account relating to the Company’s service and development contracts represented more than 10% of total accounts receivable and other. Of the total outstanding amount for this customer of $12, approximately $3 was past due over 90 days and the remainder is presented as unbilled work in progress. The Company expects payment of the total amount due. The accounts of the Company’s other major customers were current.



18. FINANCIAL RISK MANAGEMENT (CONTINUED):(d) Credit risk (continued):

The aging of trade accounts receivable was as follows:

August 31, 2013 August 31, 2012

Gross balance Allowance Net balance Net balance

Current $ 68 $ – $ 68 $ 78

Past due 31–60 days 3 – 3 –

Past due 61–90 days 1 – 1 3

Past due over 91 days 6 (2) 4 1

Total $ 78 $ (2) $ 76 $ 82

There was no significant change to the Company’s allowance for doubtful accounts during the year ended August 31, 2013.

(e) Liquidity risk:

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to evaluate current and expected liquidity requirements under both normal and stressed conditions to ensure that it maintains sufficient reserves of cash and cash equivalents or an available undrawn committed credit facility to meet its liquidity requirements in the short and longer term.

The following table presents the contractual terms to maturity of the financial liabilities owed by the Company andits contractual commitments as at August 31, 2013:

Remaining payments – for years ending August 31

Total 2014 2015 2016 2017 2018 Thereafter

Accounts payable and accrued liabilities $ 193 $ 193 $ – $ – $ – $ – $ –

Long-term debt (including current portion) (1), (2)

2,000 25 25 475 25 375 1,075

Interest payments (2) 740 103 101 89 76 74 297

Operating leases 62 7 7 7 7 6 28

Purchase obligations 20 20 – – – – –

Other long-term obligations (3) 232 8 10 10 10 10 184

Purchase of preferred interests in Aireon (4) 100 68 16 – – 16 –

Total contractual obligations $ 3,347 $ 424 $ 159 $ 581 $ 118 $ 481 $ 1,584

(1) Payments represent principal of $2,000. The Company intends to refinance principal maturities and bank loans at their maturity. The Company may choose to repay a portion of these maturities with available cash or may increase the size of a re-financing to generate additional liquidity or for other purposes.

(2) Further details on interest rates and maturity dates on long-term debt are provided in note 9 to these financial statements.

(3) Includes long-term obligations for post-employment benefits, accrued pension benefit liability for the Company’s supplemental pension plans and other.

(4) Payments represent contractual obligations to purchase preferred interests in Aireon subject to conditions pursuant to the agreements described in note 6. Amounts are presented in $CDN translated using the $U.S. foreign exchange rate at the current balance sheet date.

The Company’s contributions to the pension plan are discussed in note 15 to these financial statements.


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19. CAPITAL DISCLOSURES:The Company is a non-share capital corporation and, as discussed in note 1, must not set customer service charges higher than what is required to meet its current and future financial requirements for the provision of civil air navigation services. The Company views capital as the sum of its issued long-term debt, retained earnings, rate stabilization account and other regulatory liabilities, less the accrued pension and other benefits asset, as depicted in the following table. This definition of capital is used by management and may not be comparable to measures presented by other companies. The Company’s capital is as follows:

August 31, 2013 August 31, 2012

Long-term debt including current portion (note 9) $ 1,999 $ 1,927

Retained earnings 28 28

Rate stabilization account liability (note 10) 53 31

Regulatory assets (note 10) – (9)

Regulatory liabilities (note 10) 303 320

Accrued pension and other benefits asset (note 15) (365) (443)

Accumulated surplus (deficit) 19 (73)

Total capital $ 2,018 $ 1,854

In addition to tracking its capital as defined above for purposes of managing capital adequacy the Company also takes into consideration known contingent exposures and off balance sheet obligations such as funding obligations of its defined benefit pension plans.

The Company’s main objectives when managing capital are:

(a) to safeguard the Company’s ability to continue as a going concern;(b) to provide funds for the ongoing acquisition of systems and equipment necessary to implement and maintain a modern,

cost-efficient ANS technology platform;(c) to ensure the funding of reserve funds as well as working capital and liquidity requirements; (d) to maintain the Company’s credit ratings to facilitate access to capital markets at competitive interest rates; and(e) to minimize interest costs incurred by the Company subject to appropriate risk mitigation actions.

Given that the Company has no share capital, these objectives are achieved through a process that determines an appropriate period and level of cost recoveries through customer service charge rate setting, as well as the appropriate amount of debt and committed credit facilities. This process considers the Company’s operational and capital budgeting process as well as the overall economic and capital market environment. The level of debt and committed credit facilities are approved by the Board of Directors. The Company is not subject to any externally imposed capital requirements.

There were no changes in the Company’s approach to capital management during the year ended August 31, 2013.

20. CONTINGENCIES: The Company is party to legal proceedings in the ordinary course of its business. Management does not expect the outcome of any of these proceedings to have a material adverse effect on the consolidated financial position or results of operations of the Company.

ONE PROVINCE. TWO NEW TOWERS. THREE HUNDRED KILOMETRES APART.

WELCOME TO THE BUSY ALBERTA AIRSPACE CORRIDOR.In 2013, NAV CANADA replaced the air traffic control towers at Calgary and Edmonton International Airports. These two new towers were part of an overall renewal and expansion effort at each airport, designed to respond to current air traffic demands and future growth.

Edmonton Tower was the first to go operational in May 2013. The new structure sits atop the brand new and striking Edmonton International Airport Central Tower. Significantly taller and larger than the original tower, the new location improves controller sight lines and the increased square footage enhances the working environment. New tower equipment includes ergonomically designed consoles and the latest in NAVCANatm technology, integrating electronic strips, ground and air surveillance data, operational informa-tion, and runway lighting control.

A few months later, in July, air traffic controllers in Calgary started to direct air traffic from a lofty new perspective at what is now the tallest free-standing tower of its kind in Canada. Construction of the new tower was necessary to address the changes occurring as part of the Calgary Airport Authority’s development program which includes a new 14,000 foot parallel runway scheduled for opening in May 2014. The new Calgary tower features ergonomic sit or stand work-stations, NAVCANatm technology and an enhanced Advanced Surface Movement Guidance and ControlSystem (A-SMGCS) achieved by integrating multilateration for better situational awareness of aircraft and vehicle movements.

Future Growth

EYES ON

Shawn HullTeam SupervisorAndrew Hall and Matthew ClarkAir Traffic Controllers, Calgary Tower


Height 48 metres

6 operational positions

Floor space

53 square metres

Complement of 18 controllers

8th busiest airport in Canada

142,000aircraft movements annually

Height 91 metres

8 operational positions

Floor space

60 square metres

Complement of 35 controllers

3rd busiest airport in Canada

241,000aircraft movements annually

EDMONTON CALGARY

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navcanada.ca

New Horizons for the Global Air Navigation System · 2017-01-09 · ADS-B-equipped aircraft and...

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