BP 2007 Annual Report Download - page 152

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35 Finance debt continued
Fair values
The estimated fair value of finance debt is shown in the table below together with the carrying amount as reflected in the balance sheet.
Long-term borrowings in the table below include the portion of debt that matures in the year from 31 December 2007, whereas in the balance
sheet the amount would be reported as current liabilities.
The carrying amount of the group’s short-term borrowings, comprising mainly commercial paper, bank loans, overdrafts and US Industrial Revenue/
Municipal Bonds, approximates their fair value. The fair value of the group’s long-term borrowings and finance lease obligations is estimated using
quoted prices or, where these are not available, discounted cash flow analyses based on the group’s current incremental borrowing rates for similar
types and maturities of borrowing.
$ million
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2007 2006
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Carrying Carrying
Fair value amount Fair value amount
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Short-term borrowings 11,212 11,212 9,661 9,661
Long-term borrowings 19,094 18,941 13,580 13,534
Net obligations under finance leases 908 892 832 815
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Total finance debt 31,214 31,045 24,073 24,010
36 Capital disclosures and analysis of changes in net debt
The group defines capital as the total equity of the group. The group’s objective for managing capital is to deliver competitive, secure and sustainable
returns to maximize long-term shareholder value. BP is not subject to any externally-imposed capital requirements.
The group’s approach to managing capital is set out in its financial framework. The group aims to maintain capital discipline in relation to investing
activities while progressively growing the dividend per share. A managed share buyback programme is used to return to shareholders all sustainable
free cash flow in excess of the group’s investment and dividend needs. From 2008, the group intends to rebalance returns to shareholders by
increasing the dividend component. As a result, the level of free cash flow allocated to share buybacks is likely to be lower; however, we will continue
to use share buybacks as a mechanism to return excess cash to shareholders when appropriate.
The group monitors capital on the basis of the net debt ratio, that is, the ratio of net debt to net debt plus equity. Net debt is calculated as gross
finance debt, as shown in the balance sheet, less cash and cash equivalents. All components of equity are included in the denominator of the
calculation. We believe that a net debt ratio in the range 20-30% provides an efficient capital structure and an appropriate level of financial flexibility.
At 31 December 2007 the net debt ratio was 23% (2006 20%).
$ million
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2007 2006
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Gross debt 31,045 24,010
Cash and cash equivalents 3,562 2,590
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Net debt 27,483 21,420
Equity 94,652 85,465
Net debt ratio 23% 20%
An analysis of changes in net debt is provided below.
$ million
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2007 2006
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Cash and Cash and
Finance cash Net Finance cash Net
Movement in net debt debt equivalents debt debt equivalents debt
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At 1 January (24,010) 2,590 (21,420) (19,162) 2,960 (16,202)
Exchange adjustments (122) 135 13 (172) 47 (125)
Debt acquired –––(13) – (13)
Net cash flow (6,411) 837 (5,574) (4,049) (417) (4,466)
Fair value hedge adjustment (368) – (368) (581) – (581)
Other movements (134) – (134) (33) – (33)
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At 31 December (31,045) 3,562 (27,483) (24,010) 2,590 (21,420)
Equity 94,652 85,465