BP 2015 Annual Report Download - page 261

prices, resulting in measurement differences. BP enters into contracts for
pipelines and storage capacity, oil and gas processing and liquefied
natural gas (LNG) that, under IFRS, are recorded on an accruals basis.
These contracts are risk-managed using a variety of derivative
instruments that are fair valued under IFRS. This results in measurement
differences in relation to recognition of gains and losses.
The way BP manages the economic exposures described above, and
measures performance internally, differs from the way these activities
are measured under IFRS. BP calculates this difference for consolidated
entities by comparing the IFRS result with management’s internal
measure of performance. Under management’s internal measure of
performance the inventory and capacity contracts in question are valued
based on fair value using relevant forward prices prevailing at the end of
the period. The fair values of certain derivative instruments used to risk
manage LNG and oil and gas processing contracts are deferred to match
with the underlying exposure and the commodity contracts for business
requirements are accounted for on an accruals basis. We believe that
disclosing management’s estimate of this difference provides useful
information for investors because it enables investors to see the
economic effect of these activities as a whole.
Free cash flow
Operating cash flow less net cash used in investing activities, as
presented in the group cash flow statement.
Gearing
See Net debt and net debt ratio definition.
Henry Hub
A distribution hub on the natural gas pipeline system in Erath, Louisiana,
that lends its name to the pricing point for natural gas futures contracts
traded on the New York Mercantile Exchange and the over the counter
swaps traded on Intercontinental Exchange.
Hydrocarbons
Liquids and natural gas. Natural gas is converted to oil equivalent at
5.8 billion cubic feet = 1 million barrels.
Inventory holding gains and losses
The difference between the cost of sales calculated using the
replacement cost of inventory and the cost of sales calculated on the
first-in first-out (FIFO) method after adjusting for any changes in
provisions where the net realizable value of the inventory is lower than its
cost. Under the FIFO method, which we use for IFRS reporting, the cost
of inventory charged to the income statement is based on its historical
cost of purchase or manufacture, rather than its replacement cost. In
volatile energy markets, this can have a significant distorting effect on
reported income. The amounts disclosed represent the difference
between the charge to the income statement for inventory on a FIFO
basis (after adjusting for any related movements in net realizable value
provisions) and the charge that would have arisen based on the
replacement cost of inventory. For this purpose, the replacement cost of
inventory is calculated using data from each operation’s production and
manufacturing system, either on a monthly basis, or separately for each
transaction where the system allows this approach. The amounts
disclosed are not separately reflected in the financial statements as a
gain or loss. No adjustment is made in respect of the cost of inventories
held as part of a trading position and certain other temporary inventory
positions. See Replacement cost (RC) profit or loss definition below.
Joint arrangement
An arrangement in which two or more parties have joint control.
Joint control
Contractually agreed sharing of control over an arrangement, which exists
only when decisions about the relevant activities require the unanimous
consent of the parties sharing control.
Joint operation
A joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets, and obligations for the liabilities,
relating to the arrangement.
Joint venture
A joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement.
Liquids
Comprises crude oil, condensate and natural gas liquids. For the
Upstream segment, it also includes bitumen.
LNG train
An LNG train is a processing facility used to liquefy and purify natural gas
in the formation of LNG.
Major projects
Have a BP net investment of at least $250 million, or are considered to
be of strategic importance to BP or of a high degree of complexity.
Net cash margin
Net cash margin is defined by Solomon Associates as the net margin
achieved after subtracting cash operating expenses and adding any
refinery revenue from other sources. Net cash margin is expressed in US
dollars per barrel of net refinery input.
Net debt and net debt ratio (gearing)
Non-GAAP measures. Net debt is calculated as gross finance debt, as
shown in the balance sheet, plus the fair value of associated derivative
financial instruments that are used to hedge foreign currency exchange
and interest rate risks relating to finance debt, for which hedge
accounting is applied, less cash and cash equivalents. The net debt ratio
is defined as the ratio of net debt to the total of net debt plus total equity.
All components of equity are included in the denominator of the
calculation. BP believes these measures provide useful information to
investors. Net debt enables investors to see the economic effect of gross
debt, related hedges and cash and cash equivalents in total. The net debt
ratio enables investors to see how significant net debt is relative to equity
from shareholders. The derivatives are reported on the balance sheet
within the headings ‘Derivative financial instruments’. See Financial
statements – Note 26 for information on gross debt, which is the nearest
equivalent measure to net debt on an IFRS basis.
Net income per barrel
Non-GAAP measure. Net income per barrel is calculated by taking
underlying replacement cost profit before interest and tax for the
Downstream segment, deducting tax at an assumed 30% effective tax
rate on underlying replacement cost profit and then dividing this notional
post tax underlying replacement cost profit by the Downstream
segment’s total refining capacity.
Net investment (organic)
Net investment (organic) is organic capital expenditure less the value of
divestments announced in the year.
Net wind generation capacity
The sum of the rated capacities of the assets/turbines that have entered
into commercial operation, including BP’s share of equity-accounted
entities. The gross data is the equivalent capacity on a gross-joint venture
basis, which includes 100% of the capacity of equity-accounted entities
where BP has partial ownership.
Non-operating items
Charges and credits are included in the financial statements that BP
discloses separately because it considers such disclosures to be
meaningful and relevant to investors. They are items that management
considers not to be part of underlying business operations and are
disclosed in order to enable investors better to understand and evaluate
the group’s reported financial performance. Non-operating items within
equity-accounted earnings are reported net of incremental income tax
reported by the equity-accounted entity. An analysis of non-operating
items by segment and type is shown on page 217.
Operating capital employed
Non-GAAP measure. Total assets (excluding goodwill) less total liabilities,
excluding finance debt and current and deferred taxation.
Operating cash flow and operating cash
Net cash provided by (used in) operating activities as stated in the group cash
flow statement. When used in the context of a segment rather than the
group, the terms refer to the segment’s share thereof.
Operating management system (OMS)
BP’s OMS helps us manage risks in our operating activities by setting out
BP’s principles for good operating practice. It brings together BP
requirements on health, safety, security, the environment, social
responsibility and operational reliability, as well as related issues, such as
maintenance, contractor relations and organizational learning, into a
common management system.
Organic capital expenditure
Excludes acquisitions, asset exchanges, and other inorganic capital
expenditure. An analysis of capital expenditure by segment and region is
shown in Financial statements – Note 5.
BP Annual Report and Form 20-F 2015 257
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