Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
These disclosures should be read in conjunction with the condensed consolidated financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other information presented herein, as well as in the "Quantitative and Qualitative Disclosures About Market Risk" section contained in our Annual Report on Form 10-K, filed on February 25, 2022.
Price Risk Management Activities
At times, we enter into the following instruments/transactions in order to manage our market-indexed pricing risk: commodity derivative contracts which we use to manage our price exposure to our inventory positions, future purchases of crude oil and ethanol, future sales of refined products or to fix margins on future production; and future commitments to purchase or sell RINs at fixed prices and quantities, which are used to manage the costs associated with our RINs obligations and meet the definition of derivative instruments under ASC 815, Derivatives and Hedging ("ASC 815"). In accordance with ASC 815, all of these commodity contracts and future purchase commitments are recorded at fair value, and any change in fair value between periods has historically been recorded in the profit and loss section of our condensed consolidated financial statements. Occasionally, at inception, the Company will elect to designate the commodity derivative contracts as cash flow hedges under ASC 815. Gains or losses on commodity derivative contracts accounted for as cash flow hedges are recognized in other comprehensive income on the condensed consolidated balance sheets and, ultimately, when the forecasted transactions are completed, in net revenues or cost of materials and other in the condensed consolidated statements of income.
The following table sets forth information relating to our open commodity derivative contracts, excluding our trading derivative contracts (which are presented separately below), as of September 30, 2022 ($ in millions):
Total Outstanding Notional Contract Volume by Year of Maturity
Contract Description Fair Value Notional Contract Volume 2022 2023 2024
Contracts not designated as hedging instruments:
Crude oil price swaps - long (1)
$ 20.3 51,961,000 24,910,000 27,051,000 —
Crude oil price swaps - short (1)
(11.9) 49,753,000 28,382,000 21,371,000 —
Inventory, refined product and crack spread swaps - long (1)
(8.9) 3,516,000 2,226,000 1,290,000 —
Inventory, refined product and crack spread swaps - short (1)
22.0 7,343,000 4,953,000 2,390,000 —
Natural gas swaps - long (3)
(2.7) 2,030,000 — 2,030,000 —
Natural gas swaps - short (3)
0.5 5,755,000 5,475,000 280,000 —
RIN commitment contracts - long (2)
0.3 128,800,000 128,800,000 — —
RIN commitment contracts - short (2)
1.6 22,000,000 22,000,000 — —
Total $ 21.2 271,158,000 216,746,000 54,412,000 —
(1) Volume in barrels (2) Volume in RINs (3) Volume in MMBTU .
Interest Risk Management Activities
We have market exposure to changes in interest rates relating to our outstanding floating rate borrowings, which totaled approximately $2,107.1 million as of September 30, 2022. The annualized impact of a hypothetical one percent change in interest rates on our floating rate debt as of September 30, 2022 would be to change interest expense by approximately $21.1 million.
Inflation
Inflationary factors, such as increases in the costs of our inputs, operating expenses, and interest rates may adversely affect our operating results. During 2022, our results of operations were negatively affected by higher natural gas costs, higher labor costs and supply chain disruptions, in part, by the COVID-19 Pandemic, the uncertain economic environment, and macroeconomic and geopolitical events and trends. We expect these cost pressures and supply chain challenges to continue into fiscal year 2023. In addition, current or future governmental policies may increase the risk of inflation, which could further increase costs and may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales if the prices at which we are able to sell our products and services do not increase in line with increases in costs.
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Management's Discussion and Analysis
LIBOR Transition
LIBOR is a commonly used indicative measure of the average interest rate at which major global banks could borrow from one another. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR discontinued the reporting of certain LIBOR rates on December 31, 2021, and has publicly announced that it intends to discontinue all USD LIBOR rates after June 2023. Certain of our agreements use LIBOR as a “benchmark” or “reference rate” for various terms. Some agreements contain an existing LIBOR alternative such as the Secured Overnight Financing Rate. Where there is not an alternative, we expect to replace the LIBOR benchmark with an alternative reference rate. While we do not expect the transition to an alternative rate to have a significant impact on our business or operations, it is possible that the move away from LIBOR could materially impact our borrowing costs on our variable rate indebtedness.
Commodity Derivatives Trading Activities
We enter into active trading positions in a variety of commodity derivatives, which include forward physical contracts, swap contracts, and futures contracts. These trading activities are undertaken by using a range of contract types in combination to create incremental gains by capitalizing on crude oil supply and pricing seasonality. These contracts are classified as held for trading and are recognized at fair value with changes in fair value recognized in the income statement.
The following table sets forth information relating to trading commodity derivative contracts as of September 30, 2022:
Total Outstanding Notional Contract Volume by Year of Maturity
Contract Description Fair Value Notional Contract Volume 2022 2023 2024 2025 2026
Crude forward contracts- long (1)
105.9 1,551,582 1,551,582 — — — —
Crude forward contracts- short (1)
(96.3) 1,425,681 1,425,681 — — — —
Total $ 9.6 2,977,263 2,977,263 — — — —
(1) Volume in barrels.