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Derivatives
 6 Months Ended
Jun. 30, 2011
Derivatives  
Derivatives

2.     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 spreads for fuel products that we sell.  We have applied the normal purchase and normal sales exception (“NPNS”), as provided by accounting guidance for derivative instruments and hedging activities, to certain of our physical forward sales and purchase contracts.  While these contracts are considered derivative instruments under the guidance for derivative instruments and hedging activities, they are not recorded at fair value, but rather are recorded in our consolidated financial statements when physical settlement of the contracts occurs.  If it is determined that a transaction designated as NPNS no longer meets the scope of the exception, the fair value of the related contract is recorded as an asset or liability on the consolidated balance sheet and the difference between the fair value and the contract amount is immediately recognized through earnings.

 

The following describes our derivative classifications:

 

Cash Flow Hedges.  Includes certain of our foreign currency forward contracts we enter into in order to mitigate the risk of currency exchange rate fluctuations.

 

Fair Value Hedges.  Includes derivatives we enter into in order to hedge price risk associated with our inventory and certain firm commitments relating to fixed price purchase and sale contracts.

 

Non-designated Derivatives.  Includes derivatives we primarily enter into in order to mitigate the risk of market price fluctuations in aviation, marine and land fuel in the form of swaps as well as certain fixed price purchase and sale contracts (which do not qualify for hedge accounting) to offer our customers fuel pricing alternatives to meet their needs and for proprietary trading.  In addition, non-designated derivatives are also entered into to hedge the risk of currency rate fluctuations.

 

As of June 30, 2011, our derivative instruments, at their respective fair value positions were as follows (in thousands, except mark-to-market prices):

 

Hedge Strategy

 

 

Settlement
Period

 

Derivative Instrument

 

Notional

 

Unit

 

Mark-to-
Market
Prices

 

Mark-to-
Market
Gain
(Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Hedge

 

2011

 

Commodity contracts for firm commitment hedging (long)

 

3,435

 

GAL

 

$

(0.06

)

$

(193

)

 

 

2011

 

Commodity contracts for firm commitment (short)

 

4,578

 

GAL

 

(0.11

)

 

(485

)

 

 

2011

 

Commodity contracts for inventory hedging (short)

 

60,438

 

GAL

 

(0.01

)

(822

)

 

 

2011

 

Commodity contracts for firm commitment hedging (long)

 

114

 

MT

 

22.32

 

2,545

 

 

 

2011

 

Commodity contracts for inventory hedging (short)

 

75

 

MT

 

(16.97

)

(1,273

)

 

 

2012

 

Commodity contracts for firm commitment hedging (long)

 

106

 

GAL

 

0.10

 

11

 

 

 

2012

 

Commodity contracts for firm commitment hedging (long)

 

95

 

MT

 

30.33

 

2,881

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Designated

 

2011

 

Commodity contracts (long)

 

68,796

 

GAL

 

 

0.04

 

2,419

 

 

 

2011

 

Commodity contracts (short)

 

45,943

 

GAL

 

(0.11

)

(5,127

)

 

 

2011

 

Commodity contracts (long)

 

1,309

 

MT

 

11.19

 

14,349

 

 

 

2011

 

Commodity contracts (short)

 

1,037

 

MT

 

(13.58

)

(13,785

)

 

 

2011

 

Foreign currency contracts (long)

 

696

 

BRL

 

0.01

 

5

 

 

 

2011

 

Foreign currency contracts (short)

 

7,298

 

BRL

 

(0.01

)

(104

)

 

 

2011

 

Foreign currency contracts (short)

 

5,700

 

CAD

 

(0.02

)

(131

)

 

 

2011

 

Foreign currency contracts (long)

 

2,880,216

 

CLP

 

(0.00

)

(33

)

 

 

2011

 

Foreign currency contracts (long)

 

679

 

EUR

 

0.01

 

8

 

 

 

2011

 

Foreign currency contracts (short)

 

4,600

 

EUR

 

(0.02

)

(76

)

 

 

2011

 

Foreign currency contracts (long)

 

3,884

 

GBP

 

(0.01

)

(25

)

 

 

2011

 

Foreign currency contracts (short)

 

27,529

 

GBP

 

0.01

 

238

 

 

 

2011

 

Foreign currency contracts (short)

 

584

 

AUD

 

(0.01

)

(5

)

 

 

2011

 

Foreign currency contracts (long)

 

498

 

DKK

 

0.00

 

2

 

 

 

2011

 

Foreign currency contracts (short)

 

4,000

 

DKK

 

(0.00

)

(10

)

 

 

2011

 

Foreign currency contracts (long)

 

281

 

NOK

 

0.00

 

1

 

 

 

2011

 

Foreign currency contracts (short)

 

2,700

 

CZK

 

(0.00

)

(2

)

 

 

2011

 

Foreign currency contracts (short)

 

6,261,150

 

COP

 

(0.00

)

(15

)

 

 

2011

 

Foreign currency contracts (short)

 

600

 

CHF

 

0.01

 

8

 

 

 

2012

 

Commodity contracts (long)

 

5,959

 

GAL

 

0.13

 

773

 

 

 

2012

 

Commodity contracts (short)

 

14,365

 

GAL

 

(0.04

)

(609

)

 

 

2012

 

Commodity contracts (long)

 

347

 

MT

 

9.41

 

2,635

 

 

 

2012

 

Commodity contracts (short)

 

261

 

MT

 

(6.72

)

(1,124

)

 

 

2013

 

Commodity contracts (long)

 

679

 

GAL

 

0.20

 

139

 

 

 

2013

 

Commodity contracts (short)

 

679

 

GAL

 

(0.19

)

(132

)

 

 

2013

 

Commodity contracts (short)

 

6

 

MT

 

(21.00

)

(126

)

 

 

 

 

 

 

 

 

 

 

 

 

$

(727

)

 

The following table presents information about our derivative instruments measured at fair value and their locations on the consolidated balance sheet (in thousands):

 

 

 

 

 

As of

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Balance Sheet Location

 

2011

 

2010

 

Derivative assets:

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Short-term derivative assets, net

 

$

5,348

 

$

439

 

Commodity contracts

 

Non-current other assets

 

1,085

 

448

 

Commodity contracts

 

Short-term derivative liabilities, net

 

155

 

—

 

Total hedging instrument derivatives

 

 

 

6,588

 

887

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Short-term derivative assets, net

 

25,195

 

11,296

 

Commodity contracts

 

Short-term derivative liabilities, net

 

1,139

 

2,195

 

Commodity contracts

 

Non-current other assets

 

1,468

 

637

 

Commodity contracts

 

Other long-term liabilities

 

122

 

—

 

Foreign exchange contracts

 

Short-term derivative assets, net

 

319

 

369

 

Foreign exchange contracts

 

Short-term derivative liabilities, net

 

31

 

92

 

Total non-designated derivatives

 

 

 

28,274

 

14,589

 

Total derivative assets

 

 

 

$

34,862

 

$

15,476

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Short-term derivative assets, net

 

$

1,838

 

$

229

 

Commodity contracts

 

Short-term derivative liabilities, net

 

2,086

 

2,853

 

Total hedging instrument derivatives

 

 

 

3,924

 

3,082

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

Commodity contracts

 

Short-term derivative assets, net

 

7,203

 

4,001

 

Commodity contracts

 

Short-term derivative liabilities, net

 

19,983

 

9,519

 

Commodity contracts

 

Non-current other assets

 

617

 

81

 

Commodity contracts

 

Other long-term liabilities

 

709

 

502

 

Foreign exchange contracts

 

Short-term derivative assets, net

 

39

 

185

 

Foreign exchange contracts

 

Short-term derivative liabilities, net

 

450

 

389

 

Total non-designated derivatives

 

 

 

29,001

 

14,677

 

Total derivative liabilities

 

 

 

$

32,925

 

$

17,759

 

 

The following table presents the effect and financial statement location of our derivative instruments and related hedged items in fair value hedging relationships on our consolidated statements of income (in thousands):

 

Derivatives

 

 

Location

 

Realized and Unrealized
Gain (Loss)

 

Hedged Items

 

Location

 

Realized and Unrealized
Gain (Loss)

 

 

 

 

 

2011

 

2010

 

 

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

5,518

 

$

(8,032

)

Firm commitments

 

Revenue

 

$

(5,356

)

$

8,306

 

Commodity contracts

 

Cost of revenue

 

(369

)

2,249

 

Firm commitments

 

Cost of revenue

 

274

 

(2,875

)

Commodity contracts

 

Cost of revenue

 

6,665

 

11,605

 

Inventories

 

Cost of revenue

 

(3,045

)

(10,243

)

 

 

 

 

$

11,814

 

$

5,822

 

 

 

 

 

$

(8,127

)

$

(4,812

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

16,205

 

$

(2,546

)

Firm commitments

 

Revenue

 

$

(16,789

)

$

3,295

 

Commodity contracts

 

Cost of revenue

 

(7,830

)

2,744

 

Firm commitments

 

Cost of revenue

 

8,311

 

(3,683

)

Commodity contracts

 

Cost of revenue

 

(33,594

)

8,720

 

Inventories

 

Cost of revenue

 

44,296

 

(5,514

)

 

 

 

 

$

(25,219

)

$

8,918

 

 

 

 

 

$

35,818

 

$

(5,902

)

 

There were no gains or losses for the three and six months ended June 30, 2011 and 2010 that were excluded from the assessment of the effectiveness of our fair value hedges.

 

The following table presents the effect and financial statement location of our derivative instruments in cash flow hedging relationships on our accumulated other comprehensive income and consolidated statements of income (in thousands):

 

 

 

Unrealized Gain (Loss)

 

 

 

 

 

 

 

 

 

Recorded in Accumulated

 

Location of

 

 

 

 

 

 

 

Other Comprehensive Income

 

Realized Gain (Loss)

 

Realized Gain (Loss)

 

Derivatives

 

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

 

 

2011

 

2010

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

—

 

$

—

 

Cost of revenue

 

$

—

 

$

417

 

Foreign exchange contracts

 

$

—

 

$

—

 

Other income, net

 

$

—

 

$

252

 

 

 

$

—

 

$

—

 

 

 

$

—

 

$

669

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

—

 

$

1,902

 

Cost of revenue

 

$

—

 

$

1,210

 

Foreign exchange contracts

 

$

—

 

$

252

 

Other income, net

 

$

—

 

$

252

 

 

 

$

—

 

$

2,154

 

 

 

$

—

 

$

1,462

 

 

In the event forecasted foreign currency cash outflows are less than the hedged amounts, a portion or all of the gains or losses recorded in accumulated other comprehensive income (loss) would be reclassified to the consolidated statement of income.

 

The following table presents the effect and financial statement location of our derivative instruments not designated as hedging instruments on our consolidated statements of income for the three and six months ended June 30, 2011 and 2010 (in thousands):

 

 

 

 

 

Realized and Unrealized

 

Derivatives

 

 

Location

 

Gain (Loss)

 

 

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

1,490

 

$

(561

)

Commodity contracts

 

Cost of revenue

 

2,560

 

2,392

 

Foreign exchange contracts

 

Other expense, net

 

(963

)

(560

)

 

 

 

 

$

3,087

 

$

1,271

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

 

 

 

 

 

Commodity contracts

 

Revenue

 

$

3,048

 

$

771

 

Commodity contracts

 

Cost of revenue

 

3,223

 

2,248

 

Foreign exchange contracts

 

Other (expense) income, net

 

(2,872

)

382

 

 

 

 

 

$

3,399

 

$

3,401

 

 

We enter into derivative instrument contracts which may require us to periodically post collateral. Certain of these derivative contracts contain clauses that are similar to credit-risk-related contingent features, including material adverse change, general adequate assurance and internal credit review clauses that may require additional collateral to be posted and/or settlement of the instruments in the event an aforementioned clause is triggered.  The triggering events are not a quantifiable measure; rather they are based on good faith and reasonable determination by the counterparty that the triggers have occurred. The net liability position for such contracts, the collateral posted and the amount of assets required to be posted and/or to settle the positions should a contingent feature be triggered was not significant as of June 30, 2011.