Fuel Contract Fees

[JumboShrimp]

What is under "Fuel Contract Fes", under Income Statement, Operating Expenses?

I have some amount being charged, while I do not have a fuel contract (only a fuel hedge)

[Cardinal]

I think the hedge fees go there too.

[JumboShrimp]

Oh, so it is the hedge mark up?  I guess it makes sense.

[JumboShrimp]

Actually, I am still a little puzzled about how the fuel pricing with a hedge is displayed on the financial statements.

Let's say the fuel price was $175 last week.  My hedge has the final price of 174.  At the time I entered the hedge, it was somewhere in 160s, and after the hedge was in place, my final price is $174.  So I don't really see what this line item: Fuel contract fees represents in my case.

[LemonButt]

Actually, I am still a little puzzled about how the fuel pricing with a hedge is displayed on the financial statements.

Let's say the fuel price was $175 last week.  My hedge has the final price of 174.  At the time I entered the hedge, it was somewhere in 160s, and after the hedge was in place, my final price is $174.  So I don't really see what this line item: Fuel contract fees represents in my case.

Is it not the 7.4% (or whatever the value ends up being) premium?  Your fuel price is 160-something and then you pay the fuel hedge fee, so your fuel costs are really 160-something.

[JumboShrimp]

So let's say the market price of fuel at the time of the hedge was $162.   Hedge at +7.4% brings the price to $174, $12 higher.

So is that my fuel priced split as:

Fuel: number of 1000s of kg * $162
Fuel contract fee: number of 1000s of kg * $12

I could see that being the case, I am just not sure if that's how it is being recorded.  And also, I don't see the benefit of doing it this way.

I could see scenario A:

Fuel: number of 1000s of kg * $174
Fuel contract fee: $0

scenario B:

Fuel: number of 1000s of kg * $market price
Fuel hedge gain / loss: number of 1000s of kg * ($market price - $174)

I just don't see the relevance of showing the: number of 1000s of kg * $12

[LemonButt]

Scenario A doesn't make sense because you aren't paying $174 for fuel...you are paying $162.  It technically is a fuel contract and therefore it makes sense to have the $12 go into fuel contracts.

Scenario B doesn't make sense because there is no gain or loss because it is all opportunity cost, which doesn't belong on an income statement and/or balance sheet.  I feel like a broken record when I talk about fuel hedging as the objective is not to "beat the market", but to mitigate risk and reduce uncertainty.  You can make better business decisions when you know what the price of fuel will be in 12 months.

There might be a better way to do it, but IMO the current system makes sense because of all of the above.  It might be better to just have a line item for "Fuel Related Expenses" with everything included, but then it would be very difficult to determine your breakeven on a fuel contract.

[JumboShrimp]

Scenario A doesn't make sense because you aren't paying $174 for fuel...you are paying $162.  It technically is a fuel contract and therefore it makes sense to have the $12 go into fuel contracts.

Yeah, good way to put it.  Makes more sense now.