Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. 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 fiscal years 2023 and 2024.
The table below provides information about the Company’s fuel swap contracts that are sensitive to changes in commodity prices as of September 30, 2022.
Carrying Amount Fair Value
Fuel swap contracts (1)
Contract volumes (1,000 gallons) 3,024
Weighted average price (per gallon) 2.70
Contract amount (in thousands) $ 694 $ 694
Natural gas swap contracts (1)
Contract volumes (1,000 MMBTU) 610
Weighted average price (per MMBTU) 5.93
Contract amount (in thousands) $ (168) $ (168)
(1) See also Note 21 - Fair Value Measurements and Note 22 - Investments in Derivative Instruments to the 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. At September 30, 2022, we had a total of $377.0 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 $3.8 million change in our annual interest expense based on our variable rate debt outstanding at September 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 September 30, 2022 (in thousands).
For the Fiscal Year Ending September 30, Fair
2023 2024 2025 2026 2027 Thereafter Total Value
Debt obligations
Term loan $ 12,500 $ 13,750 $ 17,188 $ 20,625 $ 207,812 $ — $ 271,875 $ 271,875
Revolving credit facility — — — — 105,100 — 105,100 105,100
Interest payments (1)
16,046 15,487 14,875 14,042 9,948 —
(1) Represents projected interest payments using the Company’s September 2022 SOFR-based floating rate of 4.31%.
The notional amount of the Company’s outstanding interest rate swap contract at September 30, 2022 was $300.0 million. The maturity date of this swap is June 30, 2027, and the fair value of the outstanding swap contract was $24.7 million as of September 30,
36
Table of Contents
2022. See also Note 21 - Fair Value Measurements and Note 22 - Investments in Derivative Instruments to the 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 other items, such as fuel, concrete and steel. During the fiscal year ended September 30, 2022, we continued to experience increased costs 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 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.
37
Table of Contents