RGC RESOURCES INC 10-Q

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks associated with interest rates and commodity prices. Interest rate risk is related to the Company’s outstanding variable rate debt including Roanoke Gas' line-of-credit and the Midstream credit facility. Commodity price risk is experienced by the Company’s regulated natural gas operations. The Company’s risk management policy, as authorized by the Company’s Board of Directors, allows management to enter into derivatives for the purpose of managing commodity and financial market risks of its business operations. Interest Rate Risk The Company is exposed to market risk related to changes in interest rates associated with its borrowing activities. At June 30, 2020, the Company had $2,858,130 outstanding balance under its variable rate line-of-credit with an average balance outstanding during the nine-month period of $2,814,826. The Company also had $24,310,200 outstanding under Midstream's variable-rate term credit facility. A hypothetical 100 basis point increase in market interest rates applicable to the Company’s variable-rate debt outstanding during the nine months ended June 30, 2020 would have resulted in an increase of approximately $187,000 in interest expense for the period. The Company's other long-term debt is at fixed rates or is hedged with interest rate swaps. Commodity Price Risk The Company manages the price risk associated with purchases of natural gas by using a combination of LNG storage, underground storage gas, fixed price contracts, spot market purchases and derivative commodity instruments including futures, price caps, swaps and collars. At June 30, 2020, the Company had no outstanding derivative instruments to hedge the price of natural gas. The Company has commitments to purchase 2.8 million decatherms of natural gas over the next 12 months at fixed prices ranging from $1.77 to $2.62 per decatherm. The Company had 1,474,031 decatherms of gas in storage, including LNG, at an average price of $2.34 per decatherm, compared to 1,421,367 decatherms at an average price of $2.92 per decatherm last year. The SCC currently allows for full recovery of prudent costs associated with natural gas purchases, as any additional costs or benefits associated with the settlement of derivative contracts and other price hedging techniques are passed through to customers when realized through the PGA mechanism. 37 RGC RESOURCES, INC. AND SUBSIDIARIES