World Fuel Services 2012 Annual Report Download - page 26

As regulations are finalized, adopted and implemented, we continue to evaluate how legislation will
impact our ability to conduct our business. In particular, the Act and any new (or newly implemented)
regulations and international legislation could significantly increase the cost of our derivative contracts
(including through requirements to post collateral which could adversely affect our cash flows and
liquidity), materially alter the terms of our derivative contracts, reduce our ability to offer derivative and
other price management products to our customers, reduce the demand for our price risk management
services, reduce the availability of derivatives to protect against risks we encounter, increase price
volatility in commodities we buy and sell (and derivatives related to those commodities), reduce our
ability to monetize or restructure our existing commodity price contracts, and increase our exposure to
less creditworthy counterparties. If the increased cost of derivative contracts is significant or we reduce
or limit our derivatives activities as a result of the legislation, our profitability and results of operations
could be adversely affected. Any of these consequences could have a material adverse effect on us, our
financial condition, and our results of operations and cash flows.
We are exposed to various risks in connection with our use of derivatives which could have
an adverse effect on our results of operations.
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. However, our efforts to hedge our
exposure to fuel price and exchange rate fluctuations could be ineffective. For example, because there
currently is no market for aviation jet fuel futures, we enter into hedging transactions with respect to our
aviation business by trading in heating oil futures. If the price of aviation jet fuel and heating oil are not
correlated, then it is more likely that our attempts to mitigate price risk associated with our aviation
business would not be effective. For purposes of hedging, heating oil is not a perfect substitute for
aviation jet fuel and short-term significant pricing differences may occur. In the period immediately
following Hurricane Katrina in 2005, for example, the price of aviation jet fuel increased substantially
while the price of heating oil remained relatively constant.
We also enter into proprietary derivative transactions, primarily intended to capitalize on arbitrage
opportunities associated with basis or time spreads related to fuel products we sell. Proprietary
derivative transactions, by their nature, entail exposure to adverse changes in commodity prices in
relation to our proprietary position. Although we have established limits on such exposure, any such
adverse changes could result in losses. The risks we face because of our use of financial derivatives can
be exacerbated by volatility in the financial and other markets. In addition, we may fail to adequately
hedge our risks or could otherwise incur losses if our employees fail to comply with our policies and
procedures with respect to hedging or proprietary trading, for example by failing to hedge a specific
financial risk or to observe limits on exposure, which could subject us to financial losses that would have
a material adverse effect on our business, financial condition, results of operations and cash flows.
Finally, the majority of our derivatives are not designated as cash flow hedges for accounting purposes,
and we therefore recognize changes in the fair market value of these derivatives as a component of
revenue or cost of revenue (based on the underlying transaction type) in our consolidated statements of
income and comprehensive income. Since the fair value of these derivatives are marked to market at the
end of each quarter, changes in the fair value of our derivative instruments as a result of unrealized gains
or losses may cause our earnings to fluctuate from period to period.
Changes in the market price of fuel may have a material adverse effect on our business.
Fuel prices have been extremely volatile in the recent past, are likely to continue to be volatile in the
future and depend on factors outside of our control, such as:
• global economic conditions;
• changes in global crude oil prices;
• expected and actual supply and demand for fuel;
• political conditions;
• laws and regulations related to environmental matters, including those mandating or incentivizing
alternative energy sources or otherwise addressing global climate change;
• changes in pricing or production controls by the Organization of the Petroleum Exporting Countries
(OPEC);
• technological advances affecting energy consumption or supply;
• energy conservation efforts;
• price and availability of alternative fuels; and
• weather.
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