World Fuel Services 2005 Annual Report Download - page 43

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designated as “hedged items” are marked to market through the statement of income, as is the derivative that
serves as the hedge. As a result, gains and losses attributable to changes in fuel prices offset based on the
effectiveness of the hedge in the period in which the hedge is in effect. As of December 31, 2005, we recorded
unrealized net loss of $0.1 million on these fair value hedges. During 2005, hedge ineffectiveness resulted in a
realized net loss of $0.6 million.
Non-designated Derivatives. Our non-designated derivatives are primarily entered into in order to mitigate
the risk of market price fluctuations in marine and aviation fuel and to offer our customers fuel pricing
alternatives to meet their needs. These derivatives are in the form of swaps and fixed price purchase and sales
contracts. In addition, non-designated derivatives are also entered into through the use of swaps in order to hedge
foreign currency fluctuation. The changes in fair value of our non-designated derivatives are recorded as a
component of cost of sales in the statement of income. As of December 31, 2005, we recorded unrealized loss of
$0.1 million.
As of December 31, 2005 we had the following commodity related derivative instruments outstanding with
average underlying prices that represent hedged prices of commodities at various market locations (in thousands,
except average underlying prices):
Notional Amount
Settlement
Period
Derivative
Instrument Hedge Strategy
Marine
(metric tons)
Aviation
(gallons)
Average
Underlying
Prices
Fair Value
Asset
(Liability)
2006 Swap Fair value 47 $277.40 $ 29
Hedged Item Fair value 47 256.48 (424)
Swap Non-designated 456 238.63 21,318
Swap Non-designated 1,180 274.03 (23,668)
Swap Non-designated 77 303.82 (554)
Swap Non-designated 802 285.27 2,839
Futures Fair value 7,434 1.78 70
Hedged Item Fair value 7,434 1.81 266
Swap Non-designated 106,157 0.89 4,422
Swap Non-designated 106,157 0.89 (4,421)
2007 Swap Non-designated 3 147.32 414
Swap Non-designated 3 147.75 (414)
$ 272
Interest Rate
Borrowings under our $220.0 million revolving credit facility are subject to variable interest rates. However,
from time to time, we may enter into interest rate protection arrangements that, in effect, fix the rate of interest
on our debt. The amount of debt covered by such arrangements may change depending on our working capital
needs. As of December 31, 2005, we had entered into interest rate protection arrangements, for the entire $20.0
million of borrowings under our revolving credit facility. As of December 31, 2005, our weighted average
interest rate on borrowing under the revolving credit facility adjusting for the interest rate protection
arrangements was 5.2% per annum. Accordingly, our future earnings per share would not be impacted by any
interest rate changes on the $20.0 million outstanding balance at December 31, 2005.
Foreign Currency
The majority of our business transactions are denominated in United States dollars. However, in certain
markets, primarily in Mexico, Colombia and the United Kingdom, payments to our aviation fuel suppliers and
from some of our customers are denominated in local currencies. This subjects us to foreign currency exchange
risk. Although we use hedging strategies to manage and minimize the impact of foreign currency exchange risk,
29