The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates and diesel fuel costs. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and payments related to the Company’s borrowings and diesel fuel purchases.

The entire change in the fair value of derivatives that are both designated and qualify as cash flow hedges is recorded in other comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction occurs.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. Since the Company has a substantial portion of its debt in variable-rate instruments, it accomplishes this objective with interest rate swaps. These swaps are designated as cash flow hedges and involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. All of the Company’s interest rate swaps are designated and qualify as cash flow hedges.

On March 20, 2023, Performance Food Group, Inc. entered into an interest rate swap for a $100.0 million notional amount effective from December 16, 2024 and expiring on December 15, 2027. The Company receives floating monthly interest payments based on the greater of one month SOFR CME term or 0.00% and pays a fixed rate of 3.14% to the swap counterparty.

On April 10, 2023, Performance Food Group, Inc. entered into an amended interest rate swap with the swap counterparty for the $350.0 million notional amount effective from April 17, 2023 and expiring on December 16, 2024. The Company receives floating monthly interest payments based on the greater of one-month SOFR CME term or a negative 0.10% and pays a fixed rate of 0.77% to the swap counterparty Prior to April 17, 2023, the Company was receiving interest payments based on one-month LIBOR term and paid a fixed rate of 0.84% to the swap counterparty.

As of July 1, 2023, Performance Food Group, Inc. had two interest rate swaps with a combined $450.0 million notional amount. The following table summarizes the outstanding swap agreements as of July 1, 2023 (in millions):

The tables below present the effect of the interest rate swaps designated in hedging relationships on the consolidated statement of operations for the fiscal years ended July 1, 2023, July 2, 2022, and July 3, 2021:


(in millions)	Fiscal year ended July 1, 2023			Fiscal year ended July 2, 2022			Fiscal year ended July 3, 2021
Amount of (gain) loss recognized in OCI, pre-tax	$	(15.4	)	$	(19.3	)	$	(2.4	)
Tax expense (benefit)		3.9			5.0			0.6
Amount of (gain) loss recognized in OCI, after-tax	$	(11.5	)	$	(14.3	)	$	(1.8	)
Amount of (loss) gain reclassified from OCI into interest expense, pre-tax	$	10.8		$	(4.9	)	$	(4.3	)
Tax benefit (expense)		(2.7	)		1.2			1.1
Amount of (loss) gain reclassified from OCI into interest expense, after-tax	$	8.1		$	(3.7	)	$	(3.2	)
Total interest expense	$	218.0		$	182.9		$	152.4

As hedged interest payments are made on the Company’s debt, amounts are reclassified from Accumulated other comprehensive income (loss) to Interest expense. During the next twelve months, the Company estimates that gains of approximately $15.3 million will be reclassified to interest expense.

From time to time, Performance Food Group, Inc. enters into costless collar or swap arrangements to manage its exposure to variability in cash flows expected to be paid for its forecasted purchases of diesel fuel. As of July 1, 2023, Performance Food Group, Inc. was a party to five such arrangements, with an aggregate 18.9 million-gallon original notional amount for forecasted purchases of diesel fuel expected to be made between July 2, 2023 and June 30, 2024.

The fuel collar and swap instruments do not qualify for hedge accounting. Accordingly, the derivative instruments are recorded as an asset or liability on the balance sheet at fair value and any changes in fair value are recorded in the period of change as unrealized gains or losses on fuel hedging instruments and included in Other, net in the accompanying consolidated statement of operations. For the fiscal years ended July 1, 2023, July 2, 2022, and July 3, 2021 the Company recognized a loss of $18.3 million, a gain of $10.5 million, and a gain of $8.4 million, respectively, related to changes in the fair value of fuel collar and swap instruments along with $12.6 million of income, $10.2 million of income, and $2.0 million of expense, respectively, related to cash settlements.

The Company does not currently have a payable or receivable related to cash collateral for its derivatives, and therefore it has not established an accounting policy for offsetting the fair value of its derivatives against such balances. The table below presents the fair value of the derivative financial instruments as well as their classification on the balance sheet as of July 1, 2023 and July 2, 2022:


(in millions)	Balance Sheet Location	Fair Value as of July 1, 2023		Fair Value as of July 2, 2022
Assets
Derivatives designated as hedges:
Interest rate swaps	Prepaid expenses and other current assets	$	14.8	$	7.3
Interest rate swaps	Other assets		6.9		9.9
Derivatives not designated as hedges:
Diesel fuel derivative instruments	Prepaid expenses and other current assets	$	—	$	16.1
Diesel fuel derivative instruments	Other assets		—		—
Other derivative instruments	Prepaid expenses and other current assets		—		0.2
Total assets		$	21.7	$	33.5
Liabilities
Derivatives designated as hedges:
Interest rate swaps	Accrued expenses and other current liabilities	$	—	$	—
Interest rate swaps	Other long-term liabilities		—		—
Derivatives not designated as hedges:
Diesel fuel derivative instruments	Accrued expenses and other current liabilities	$	4.2	$	1.2
Diesel fuel derivative instruments	Other long-term liabilities		—		0.9
Other derivative instruments	Accrued expenses and other current liabilities		0.5	$	—
Total liabilities		$	4.7	$	2.1

All of the Company’s derivative contracts are subject to a master netting arrangement with the respective counterparties that provide for the net settlement of all derivative contracts in the event of default or upon the occurrence of certain termination events. Upon exercise of termination rights by the non-defaulting party (i) all transactions are terminated, (ii) all transactions are valued and the positive value or “in the money” transactions are netted against the negative value or “out of the money” transactions, and (iii) the only remaining payment obligation is of one of the parties to pay the netted termination amount.

The Company has elected to present the derivative assets and derivative liabilities on the balance sheet on a gross basis for periods ended July 1, 2023 and July 2, 2022. The tables below present the derivative assets and liability balance, before and after the effects of offsetting, as of July 1, 2023 and July 2, 2022:


	July 1, 2023									July 2, 2022
(In millions)	Gross Amounts Presented in the Consolidated Balance Sheet			Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements			Net Amounts			Gross Amounts Presented in the Consolidated Balance Sheet			Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements			Net Amounts
Total asset derivatives:	$	21.7		$	(2.9	)	$	18.8		$	33.5		$	(2.1	)	$	31.4
Total liability derivatives:		(4.7	)		2.9			(1.8	)		(2.1	)		2.1			—

The derivative instruments are the only assets or liabilities that are recorded at fair value on a recurring basis. The fuel collars are exchange-traded commodities and their fair value is derived from valuation models based on certain assumptions regarding market conditions, some of which may be unobservable. Based on the lack of significance of these unobservable inputs, the Company has concluded that these instruments represent Level 2 on the fair value hierarchy. The fair values of the Company’s interest rate swap agreements are determined using a valuation model with several inputs and assumptions, some of which may be unobservable. A specific unobservable input used by the Company in determining the fair value of its interest rate swaps is an estimation of both the unsecured borrowing spread to SOFR for the Company as well as that of the derivative counterparties. Based on the lack of significance of this estimated spread component to the overall value of the Company’s interest rate swaps, the Company has concluded that these swaps represent Level 2 on the hierarchy.

The Company has agreements with each of its derivative counterparties that provide that if the Company either defaults or is capable of being declared in default on any of its indebtedness, the Company can also be declared in default on its derivative obligations.

As of July 1, 2023, the aggregate fair value amount of derivative instruments in a liability position that contain contingent features was $1.8 million. As of July 1, 2023, the Company has not been required to post any collateral related to these agreements. If the Company breached any of these provisions, it would be required to settle the obligations under the agreements at their termination value of $1.8 million.