World Fuel Services 2011 Annual Report Download - page 30

We are exposed to counterparty risk in connection with certain of our contracts. The
soundness of our counterparties, which include customers, suppliers and financial
institutions, could adversely affect us.
We operate in the aviation, marine and land fuel industries and as a result, we have exposure to our
customers and suppliers in those industries. As part of our price risk management services, we offer our
customers various pricing structures on future purchases of fuel, as well as derivative products designed
to assist our customers in hedging their exposure to fluctuations in fuel prices. For example, in the
ordinary course of business we enter into fixed forward pricing contracts with our customers and
suppliers under which we agree to sell or purchase, as the case may be, fuel at fixed prices and they
agree to purchase or sell, as the case may be, fixed volumes of fuel during the term of the contract. If
there is a significant fluctuation in the price of fuel, there is a risk they could decide to, or be forced to,
default under their obligations to us. Even if the counterparty to a fixed forward pricing contract does not
default, if a customer has agreed to purchase fuel from us at a fixed price and the price of fuel
subsequently drops, we will be, in effect, extending unsecured credit to that customer at the time the
fuel is purchased. We have credit standards and perform credit evaluations of our customers and
suppliers, which are based in part on our credit history with the applicable party. In this difficult economic
environment, our credit evaluations may be inaccurate and we cannot assure you that credit
performance will not be materially worse than anticipated, and, as a result, materially and adversely
affect our business, financial position, results of operations and cash flows.
We also use derivatives to hedge certain of our fuel inventories and certain purchase and sale
commitments. In connection with these activities, we are exposed to financial risk associated with
fluctuations in fuel prices. We typically hedge this risk by entering into commodity-based derivative
instruments with financial institution counterparties, such as broker/dealers, commercial banks and
investment banks. These transactions are typically done on an unsecured basis. Should any counterparty
fail to honor its obligations under our agreements with them, we could sustain significant losses that
could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer
Protection Act into law, including Title VII, titled ‘‘Wall Street Transparency and Accountability Act of
2010.’’ Among other things, the Act provides for new federal regulation of the over-the-counter swaps
market both for commodities and securities, and gives the U.S. Commodity Futures Trading
Commission (‘‘CFTC’’) and the SEC broad authority to regulate the swaps market and its principal
participants. This includes, among others, derivative transactions linked to crude oil, refined products
and natural gas prices. The CFTC and the SEC are continuing to consider and finalize rules governing,
among other things, where swaps are transacted (on exchange versus off exchange); how they are
transacted (cleared versus uncleared; margined versus unmargined); the differing responsibilities of
those who participate in over-the-counter derivatives (end users, swap dealers, major swap participants),
the size of derivative positions maintained (position limits); and the requisite transparency for these
markets (recordkeeping and reporting). We are currently evaluating how this legislation will impact our
business, but because of the sweeping nature of the changes being undertaken (and to be undertaken),
as well as the need for clarifying and implementing regulations and/or technical corrections, at this time,
we cannot predict whether or how our ability to conduct our business will be impacted. Some of these
new regulations could lead to increased costs and liquidity requirements to participants in the swaps
market. The timing and scope of this and other regulation remains uncertain, but any such regulation
could change the efficiency of the derivative markets and the volatility in the commodity and underlying
markets and impact our ability to offer derivative and other price management products. Any of the
foregoing could have a material adverse effect on our and our counterparties’ respective businesses,
financial conditions, results of operations and cash flows.
We are exposed to various risks in connection with our use of derivatives.
We enter into financial derivative contracts in order to mitigate the risk of market price fluctuations in
aviation, marine and land fuel, to offer our customers fuel pricing alternatives to meet their needs and to
mitigate the risk of fluctuations in foreign currency exchange rates. We also enter into proprietary
derivative transactions, primarily intended to capitalize on arbitrage opportunities related to basis or time
6