World Fuel Services 2012 Annual Report Download - page 25

Certain of our contracts with customers, suppliers and financial institutions expose us to
heightened counterparty risk, which could have an adverse effect on our business.
As part of our price risk management services, we offer our customers various pricing structures for
future purchases of fuel, including derivatives products designed to assist our customers with hedging
their exposure to fluctuations in fuel prices. In the ordinary course of business, we enter into fixed
forward pricing contracts (‘‘fixed forward contracts’’) with our customers and suppliers under which we
agree to sell or purchase, as the case may be, certain volumes of fuel at fixed prices. In addition, we may
enter into swap transactions with a customer where we act as the counterparty in the customer’s own
attempt to mitigate their risk against price fluctuations. We also use derivatives to hedge certain of our
fuel inventories and certain purchase and sale commitments. We typically hedge our financial risk in any
of the foregoing types of transactions by entering into commodity-based derivative instruments with
financial institution counterparties (such as broker/dealers, commercial banks and investment banks),
often on an unsecured basis.
If we have not required a customer to post collateral in connection with a fixed forward contract or swap
transaction, we will have effectively extended unsecured credit to that customer in an amount equal to
the difference between the fixed price and the current market price multiplied by the applicable volumes
of fuel. Based on the volatility of fuel, our counterparties may not be willing or able to fulfill their
obligations to us under their fixed forward contracts or their swap transactions. For example, in the event
the market price of fuel at the time of delivery is significantly less than the fixed price, a customer could
decide to default on their purchase obligation to us and purchase the fuel at the current market rate from
another supplier. Meanwhile, we will have already agreed to purchase the fuel from our own supplier and
will therefore have to honor that commitment despite the fact that we may not have an immediate
purchaser for the fuel and we may be forced to later sell that fuel at a loss.
Although we have credit standards and perform credit evaluations of our customers and suppliers, our
evaluations may be inaccurate and we cannot assure you that credit performance will not be materially
worse than anticipated. Should any counterparty fail to honor its obligations under our agreements with
them, we could sustain significant losses that would have a material adverse effect on our business,
financial condition, results of operations and cash flows.
Current and proposed derivatives legislation and rulemaking could have an adverse effect on
our business.
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’’ (the ‘‘Act’’). 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, finalize and
implement rules governing, among other things, where swaps are transacted (on exchange versus off
exchange); how they are transacted (cleared versus uncleared; margined versus unmargined); and the
differing responsibilities of those who participate in over-the-counter derivatives (end users, swap
dealers, major swap participants). Regulations setting limits on the size of a party’s derivative positions in
major energy markets were adopted by the CFTC but vacated after a successful challenge in Federal
court, which the CFTC has announced its intention to appeal. Certain of the other requirements under
the Act have taken effect and other regulations that could have significant impact on us, such as
‘‘margin’’ rules potentially requiring us to deliver cash or other collateral to secure our obligations on
open derivative contracts, are expected to be finalized in the coming months.
Furthermore, various foreign jurisdictions are in the process of adopting legislation regulating the use of
derivatives, including Singapore and the United Kingdom, where we currently engage in derivative
transactions.
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