CHESAPEAKE UTILITIES CORP 10-Q

Item 3. Quantitative and Qualitative Disclosures about Market Risk I NTEREST R ATE R ISK Long-term debt is subject to potential losses based on changes in interest rates. We evaluate whether to refinance existing debt or permanently refinance existing short-term borrowings based in part on the fluctuation in interest rates. Increases in interest rates expose us to potential increased costs we could incur when we (i) issue new debt instruments or (ii) provide financing and liquidity for our business activities. We also utilize interest rate swap agreements to mitigate short-term borrowing rate risk. Additional information about our long-term debt and short-term borrowing is disclosed in Note 14, Long-Term Debt, and Note 15, Short-Term Borrowings , respectively, in the condensed consolidated financial statements. C OMMODITY P RICE R ISK Regulated Energy Segment We have entered into agreements with various wholesale suppliers to purchase natural gas and electricity for resale to our customers. Our regulated energy distribution businesses that sell natural gas or electricity to end-use customers have fuel cost recovery mechanisms authorized by the respective PSCs that allow us to recover all of the costs prudently incurred in purchasing natural gas and electricity for our customers. Therefore, our regulated energy distribution operations have limited commodity price risk exposure. Unregulated Energy Segment Our propane operations are exposed to commodity price risk as a result of the competitive nature of retail pricing offered to our customers. In order to mitigate this risk, we utilize propane storage activities and forward contracts for supply. We can store up to approximately 8.7 million gallons of propane (including leased storage and rail cars) during the winter season to meet our customers’ peak requirements and to serve metered customers. Decreases in the wholesale price of propane may cause the value of stored propane to decline, particularly if we utilize fixed price forward contracts for supply. To mitigate the risk of propane commodity price fluctuations on the inventory valuation, we have adopted a Risk Management Policy that allows our propane distribution operation to enter into fair value hedges, cash flow hedges or other economic hedges of our inventory. Aspire Energy is exposed to commodity price risk, primarily during the winter season, to the extent we are not successful in balancing our natural gas purchases and sales and have to secure natural gas from alternative sources at higher spot prices. In order to mitigate this risk, we procure firm capacity that meets our estimated volume requirements and we continue to seek out new producers in order to fulfill our natural gas purchase requirements. The following table reflects the changes in the fair market value of financial derivatives contracts related to propane purchases and sales from December 31, 2023 to June 30, 2024: (in thousands) Balance at December 31, 2023 Increase in Fair Market Value Less Amounts Settled Balance at June 30, 2024 Sharp $ (376) $ 2,246 $ (1,043) $ 827 There were no changes in methods of valuations during the six months ended June 30, 2024. The following is a summary of fair market value of financial derivatives as of June 30, 2024, by method of valuation and by maturity for each fiscal year period. (in thousands) 2024 2025 2026 2027 Total Fair Value Price based on Mont Belvieu - Sharp $ 337 $ 377 $ 88 $ 25 $ 827 61 Table of Contents W HOLESALE C REDIT R ISK The Risk Management Committee reviews credit risks associated with counterparties to commodity derivative contracts prior to such contracts being approved. Additional information about our derivative instruments is disclosed in Note 12, Derivative Instruments, in the condensed consolidated financial statements. I NFLATION Inflation affects the cost of supply, labor, products and services required for operations, maintenance and capital improvements. To help cope with the effects of inflation on our capital investments and returns, we periodically seek rate increases from regulatory commissions for our regulated operations and closely monitor the returns of our unregulated energy business operations. To compensate for fluctuations in propane gas prices, we adjust propane sales prices to the extent allowed by the market.