Construction Partners, Inc. 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk. Commodity Price Risk We are subject to commodity price risk with respect to price changes in liquid asphalt and energy, including fossil fuels and electricity for aggregates and asphalt paving mix production, natural gas for HMA production and diesel fuel for distribution vehicles and production-related mobile equipment. In order to manage or reduce commodity price risk, we monitor the costs of these commodities at the time of bid and price them into our contracts accordingly. Furthermore, liquid asphalt escalator provisions in most of our public contracts, and in some of our private and commercial contracts, limit our exposure to price fluctuations in this commodity. In addition, we enter into various firm purchase commitments, with terms generally less than 18 months, for certain raw materials. Our risk management activities also include the use of financial derivative instruments. We have entered into fuel swap and natural gas swap contracts to mitigate the financial impact of fluctuations in commodity prices. We do not enter into commodity swap contracts for speculative or trading purposes. These fuel and natural gas swap contracts provide a fixed price for less than 50% of our estimated fuel and natural gas usage for the remainder of fiscal year 2022 and fiscal years 2023 and 2024. 34 Table of Contents The table below provides information about the Company’s swap contracts that are sensitive to changes in commodity prices, specifically diesel fuel and natural gas, as of June 30, 2022. Carrying Amount Fair Value Fuel swap contracts (1) Contract volumes (1,000 gallons) 3,360 Weighted average price (per gallon) 2.48 Contract amount (in thousands) $ 3,397 $ 3,397 Natural gas swap contracts (1) Contract volumes (1,000 MMBTU) 690 Weighted average price (per MMBTU) 6.05 Contract amount (in thousands) $ (664) $ (664) (1) See also Note 15 - Investment in Derivative Instruments and Note 16 - Fair Value Measurements to the unaudited consolidated financial statements included in this report. Interest Rate Risk We are exposed to interest rate risk on certain of our short- and long-term debt obligations used to finance our operations and acquisitions. We have SOFR-based floating rate borrowings under the Credit Agreement, which expose us to variability in interest payments due to changes in the reference interest rates. From time to time, we use derivative instruments as hedges against the impact of interest rate changes on future earnings and cash flows. We do not enter into such derivative instruments for speculative or trading purposes. See also Note 19 - Subsequent Events to the unaudited consolidated financial statements included in this report that discusses a new interest rate swap agreement we executed on July 1, 2022 to hedge against SOFR interest rate fluctuations on a portion of our variable rate debt. At June 30, 2022, we had a total of $355.1 million of variable rate borrowings outstanding. Holding other factors constant and absent the interest rate swap agreements described above, a hypothetical 1% change in our borrowing rates would result in a $3.6 million change in our annual interest expense based on our variable rate debt at June 30, 2022. The following table presents the future principal payment obligations, interest payments, and fair values associated with the Company’s debt instruments assuming the Company’s actual level of variable rate debt as of June 30, 2022 (in thousands). For the Fiscal Year Ending September 30, Fair 2022 2023 2024 2025 2026 Thereafter Total Value Debt obligations Term Loan $ 3,125 $ 12,500 $ 12,500 $ 15,625 $ 18,750 $ 187,500 $ 250,000 $ 250,000 Revolving Credit Facility — — — — — 105,100 105,100 105,100 Interest payments (1) 3,099 12,155 11,717 11,266 10,651 9,995 (1) Represents projected interest payments using a SOFR-based floating rate of 3.50%. The notional amount of the Company’s outstanding interest rate swap contracts at June 30, 2022 was $192.2 million. The maturity dates of outstanding interest rate swap contracts range from October 2024 to June 2026. The fair value of outstanding interest rate swap contracts was $12.6 million as of June 30, 2022. See also Note 15 - Investment in Derivative Instruments, Note 16 - Fair Value Measurements, and Note 19 - Subsequent Events to the unaudited consolidated financial statements included in this report. Inflation Risk We are subject to the effects of inflation through wage pressures, increases in the cost of raw materials used to produce HMA, and increases in the costs of other items, such as fuel, concrete and steel. During the quarter ended June 30, 2022, we continued to experience an upward trend in several of these inflation-sensitive items. We seek to recover increasing costs by obtaining higher prices for our products or by including the anticipated price increases in our bids. Due to the relatively short-term duration of our construction contracts, we are generally able to reduce our exposure to price increases on new contracts, but we are limited in our ability to pass 35 Table of Contents through increased costs for projects already in our backlog. Going forward, continued cost inflation in these areas may require further price adjustments to maintain profit margin, and any price increases may have a negative effect on demand.