BP 2006 Annual Report Download - page 149

BP Annual Report and Accounts 2006 147
36 Derivative financial instruments continued
The reduction in notional contract gas volumes compared to 2005 was in part due to deliveries during the year but additionally due to the termination
of a contract to supply 1,822 million therms from 2008-2018.
$million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gas price
Gas oil and
fuel oil price Power price
Discount
rate Gas price
Gas oil and
fuel oil price Power price
Discount
rate
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Favourable 10% change 332 7 45 31 408 30 (63) 34
Unfavourable 10% change (341) (7) (41) (32) (427) (45) 58 (34)
These sensitivities are hypothetical and should not be considered to be predictive of future performance. Changes in fair value generally cannot be
extrapolated because the relationship of change in assumption to change in fair value may not be linear. Also, in this table, the effect of a variation ina
particular assumption on the fair value of the embedded derivatives is calculated independently of any change in another assumption. In reality, changes
in one factor may contribute to changes in another, which may magnify or counteract the sensitivities. Furthermore, the estimated fair values as
disclosed should not be considered indicative of future earnings on these contracts.
The fair value gain (loss) on embedded derivatives is shown below.
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Natural gas and LNG embedded derivatives 604 (2,034)
Interest rate embedded derivatives 4(13)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fair value gain (loss) 608 (2,047)
The fair value gain (loss) in the above table includes $179 million of exchange losses (2005 $115 million of exchange gains) arising on transactions which
are denominated in a currency other than the functional currency of an individual operating unit.
Embedded derivative liabilities denominated in currencies other than the functional currency of individual operating units are summarized below.
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Currency of denomination Currency of denomination
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
US dollar Sterling Euro
Other
currencies Total US dollar Sterling Euro
Other
currencies Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Functional currency
US dollar – (1,003) – – (1,003) –––––
Cash flow hedges
At 31 December, the group held forward currency contracts, cylinders and options which were being used to hedge the foreign currency risk of highly
probable transactions. The effective portion of the change in fair value of the hedging instrument is recognized directly in equity, whilst the ineffective
portion is recognized in profit or loss. When the hedged transaction occurs, the gain or loss on the hedging instrument is transferred out of equity to
either profit or loss or the carrying value of assets, as appropriate. If the forecast transaction is no longer expected to occur, the gain or loss previously
recognized in equity is transferred to profit or loss. The hedges were assessed to be highly effective.
An analysis of the changes in net fair value is shown below.
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fair value of cash flow hedges at 1 January (38) 198
Change in fair value during the year 398 (191)
Fair value recognized in income statement during the year (168) (8)
Fair value on capital expenditure hedging recycled into carrying value of assets during the year (6) (37)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fair value of cash flow hedges at 31 December 186 (38)
The forward currency contracts and cylinders primarily cover the purchase of sterling and euros for US dollars, with 85% of such contracts due to
mature within the next year.
Fair value hedges
At 31 December, the group held interest rate and currency swap contracts as fair value hedges of the interest rate risk on fixed rate debt issued by the
group. These hedges were assessed to be highly effective.
The interest rate and currency swaps have an average maturity of 2 to 3 years, and are used to convert sterling, euro, Swiss franc and Australian
dollar denominated borrowings into US dollar floating rate debt.
Hedges of net investments in foreign entities
At 31 December, the group held currency swap contracts as a hedge of a long-term investment in a UK subsidiary. The hedge was assessed to be
highly effective. At 31 December 2006, the hedge had a fair value of $107 million (2005 $63 million) and the gain on the hedge recognized in equity was
$105 million (2005 $58 million). US dollars have been sold forward for sterling purchased, with a maturity of 2 to 3 years.