There have been several recent announcements from Delta Airlines related to jet fuel and oil trading.
According to Reuters, Delta Air Lines Inc. reported a second quarter loss because it took $561 million in charges for fuel hedges. Part of the loss was taken for mark-to-market adjustments on open hedge contracts.
It appears that Delta has chosen not to apply FAS commodity hedge accounting treatment. Many of the news reports called these derivative purchases “bets” when in fact they are hedges that reduce risk.
If Delta used hedge accounting it would match the loss of open fuel derivative contracts against future jet fuel purchases and not show the loss in the current period. Hedge accounting is extremely complex, and an advanced, auditable software system is required to support the adoption of these procedures.
Separately but related to managing fuel cost and risk, Delta announced that it completed its acquisition of the Trainer Refinery in Pennsylvania through its Monroe Energy subsidiary. Delta will move jet fuel from the refinery to its hub airports in the Northeast. Additional refined products such as gasoline and diesel fuels will be traded for jet fuel in other parts of the country. Delta spent about $12 billion on jet fuel in 2011 and expects to serve 80% of its domestic jet fuel needs from the Trainer refinery and related deals.
Delta is the first airline to own refining capacity. It will be interesting to observe if other airlines follow suit and move to vertically integrate their energy supply chains.
Supplying a refinery with crude oil and trading products requires sophisticated energy trading and risk management (ETRM) software. With volatility seemingly increasing daily in the commodity and crude oil markets, it seems prudent for Delta to invest in a hedge accounting and oil trading and risk management platform.
Four years ago Triple Point acquired INSSINC, the leading commodity hedge accounting software solution, and integrated it into its energy trading and risk management (ETRM) software solution. At that time, Triple Point recognized the need for an integrated commodity management platform that seamlessly integrates all key risk areas.
The new volatility reality demands that all industries with exposure to commodities and energy review their current risk systems to ensure they are appropriately protected.
Recognizing that it needed a state-of-the-art software solution to effectively manage derivative valuation and hedge reporting for its clients, business consulting services firm Sirius Solutions chose Triple Point’s Commodity XL for Hedge Accounting™. Sirius is the latest in a long line of companies who are realizing that they need sophisticated technology solutions in order to manage the numerous, complex regulations that make hedge accounting a herculean task. The firm will be using Triple Point’s solution to automate the entire hedge accounting process and assist clients with hedge decision making, curve validation, mark to market valuation, financial reporting, and compliance.
In a recent press release Kristi Chickering, CEO of Sirius Solutions, commented: “An upgrade to our proprietary valuation solution was essential due to the growing and complex needs of our clients. Commodity XL will enable us to enhance our existing capabilities and provide more robust documentation while delivering the same deep hedge reporting, derivative advisory solutions, and superior service that our customers have come to depend upon.”
A new trend is emerging in the manufacture of automobiles. Faced with fundamental changes in the metals, chemicals, plastics and energy market environment, global organizations have begun to look at energy companies and commodity houses and wonder whether they could benefit from the types of technology platforms deployed by these institutions.
For years, the world’s most successful energy companies and global commodity houses have relied on sophisticated commodity management platforms that enable them to proactively manage purchasing, demand/supply balancing and risk management of raw materials and financial derivatives. These systems also provide logistics tools, accounting and decision support that create a complete commodity management platform that enables companies to optimally balance between cost, profit and risk.
Automotive manufacturers and suppliers are now recognizing that these same systems can help manage raw material risk and preserve profit margins in the face of today’s unprecedented commodity volatility.
The new normal: volatility, volatility, volatility
The focus for supply chain groups over the past fifteen years or more has been on efficiency (and speed). Manufacturing and supply chain techniques such as just-in-time, inventory management, demand-driven supply networks and total quality management were introduced to eliminate waste, reduce inventory and improve quality.
These efforts have led to a striking reduction in buffer inventories, bringing them down to the bare minimum. At the same time these leaner supply chains have become more global as organizations look for lower cost suppliers and new markets in which to sell products. A side effect of this is that the ability of businesses to handle unforeseen shocks to the system such as sharp raw material volatility has been significantly limited.
We are experiencing unprecedented levels of volatility in all kinds of commodity markets. The vehicles that roll off today’s assembly lines contain hundreds of raw materials – as do the machines that make them. Automotive companies therefore have some of the most diverse and complex procurement portfolios, which represent equally complex supply networks and a broad series of commodities markets – any one of which can be experiencing severe volatility at any given moment.
NFR Energy has licensed Triple Point’s Commodity XL™ software for hedge accounting and fair value disclosure to ensure FAS 133, FAS 157, and FAS 161 compliance.
NFR Energy engages in the acquisition, exploration, development, and production of oil and natural gas and has invested $1 billion in business development to establish a focused asset base.
“Triple Point has a proven track record of providing risk management software to E&P companies,” said Ash Elias, controller, NFR Energy. “We’re confident Triple Point is the best choice to deliver a turnkey solution that manages our hedge accounting requirements, including mark-to-market analysis, effectiveness testing, and fair value disclosure reporting.”
US GAAP and international accounting standards are continually evolving. In a stringent and unforgiving regulatory environment, getting it wrong can put company reputation, earnings, and stock value at risk.
“Companies that rely on homegrown hedge accounting systems face a herculean task of keeping up with complex standards and ensuring modifications are reflected accurately in their systems,” said Michel Zadoroznyj, VP, treasury and regulatory compliance, Triple Point. “Triple Point stays on the forefront of regulatory change to ensure its treasury software remains compliant and to enable our customers to focus on growth.”
In addition to NFR Energy, notable companies that have recently selected Triple Point software for hedge accounting and fair value disclosure include World Fuel Services, Hunt Oil, Evonik, Alta Mesa, Magellan Midstream, Unilever, Xcel Energy, and Petra Foods.
Can you mark all derivatives and perform all hedge accounting requirements for testing, documentation and reporting with only a few clicks? Are you confident you meet all FAS 133, 157 (ASC 815/ASC 820) and IFRS 7 requirements? Are you worried you might fail an audit because of hidden spreadsheet errors?
Triple Point recently hosted a webinar on Hedge Accounting Management and Fair Value Disclosures and how you can streamline your compliance efforts, gain control of operational risk and avoid financial restatements and other regulatory pitfalls. In case you missed the live webinar, here is a link to download the webinar and view at your convenience.
In this webinar, Triple Point’s regulatory experts, Mike Zadoroznyj and Scott Holzman, discussed how Triple Point’s Treasury and Regulatory Management Suite is the only solution that supports all Commodity, FX and IR hedge accounting and fair value disclosure requirements on a single platform. Attendees discovered an easier way to meet strict hedge accounting requirements, how to optimize hedging strategies, and new features including: extended MTM regression functionality and support for commodity swaptions and inventory fair value hedges.
To learn how you can simplify reporting, eliminate risk, and ensure compliance, download the webinar below.