BP 2007 Annual Report Download - page 150

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34 Derivative financial instruments continued
The fair value gain (loss) on embedded derivatives is shown below.
$ million
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2007 2006 2005
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Natural gas and LNG embedded derivatives –604 (2,034)
Interest rate embedded derivatives (7) 4(13)
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Fair value gain (loss) (7) 608 (2,047)
The fair value gain (loss) in the above table includes $12 million of exchange losses (2006 $179 million of exchange losses and 2005 $115 million of
exchange gains) arising on contracts that are denominated in a currency other than the functional currency of the individual operating unit.
Cash flow hedges
At 31 December 2007, the group held futures currency contracts and cylinders that were being used to hedge the foreign currency risk of highly
probable forecast transactions, as well as cross-currency interest rate swaps to fix the US dollar interest rate and US dollar redemption value, with
matching critical terms on the currency leg of the swap with the underlying non-US dollar debt issuance. Note 28 outlines the management of risk
aspects for currency and interest rate risk. For cash flow hedges the group only claims for the intrinsic value on the currency with any fair value
attributable to time value taken immediately to profit or loss. There were no highly probable transactions for which hedge accounting has been claimed
that have not occurred and no significant element of hedge ineffectiveness requiring recognition in the income statement. For cash flow hedges the
pre-tax amount removed from equity during the period and included in the income statement is a gain of $74 million (2006 $93 million and 2005 $36
million loss). Of this, a gain of $143 million is included in production and manufacturing expenses (2006 $162 million gain and 2005 $33 million gain)
and a loss of $69 million is included in finance costs (2006 $69 million loss and 2005 $69 million loss). The amount removed from equity during the
period and included in the carrying amount of non-financial assets was a gain of $40 million (2006 $6 million gain and nil for 2005).
The amounts retained in equity at 31 December 2007 are expected to mature and affect the income statement by a $48 million gain in 2008, a loss
of $10 million in 2009 and a gain of $28 million in 2010 and beyond.
Fair value hedges
At 31 December 2007, 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. The receive leg of the swap contracts is largely identical for all critical aspects to the terms of the underlying debt and thus
the hedging is highly effective. The gain on the hedging derivative instruments taken to the income statement in 2007 was $334 million (2006
$257 million) offset by a loss on the fair value of the finance debt of $327 million (2006 $257 million loss).
The interest rate and currency swaps have an average maturity of one to two years, (2006 two to three years) and are used to convert sterling,
euro, Swiss franc and Australian dollar denominated borrowings into US dollar floating rate debt. Note 28 outlines the group’s approach to interest rate
risk management.
Hedges of net investments in foreign operations
The group holds currency swap contracts as a hedge of a long-term investment in a UK subsidiary expiring in 2009. At 31 December 2007, the hedge
had a fair value of $40 million (2006 $107 million) and the loss on the hedge recognized in equity in 2007 was $67 million (2006 $105 million gain, 2005
$58 million gain). US dollars have been sold forward for sterling purchased and match the underlying liability with no significant ineffectiveness
reflected in the income statement.
35 Finance debt
$ million
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2007 2006
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Within After Within After
aa
1 year 1year Total 1 year 1 year Total
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Bank loans 542 978 1,520 543 806 1,349
Other loans 14,607 14,026 28,633 12,321 9,525 21,846
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Total borrowings 15,149 15,004 30,153 12,864 10,331 23,195
Net obligations under finance leases 245 647 892 60 755 815
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15,394 15,651 31,045 12,924 11,086 24,010
aAmounts due within one year include current maturities of long-term debt and borrowings that are expected to be repaid later than the earliest contractual repayment dates
of within one year. US Industrial Revenue/Municipal Bonds of $2,880 million (2006 $2,744 million) with earliest contractual repayment dates within one year have expected
repayment dates ranging from 1 to 35 years (2006 1 to 34 years). The bondholders typically have the option to tender these bonds for repayment on interest reset dates;
however, any bonds that are tendered are usually remarketed and BP has not experienced any significant repurchases. BP considers these bonds to represent long-term
funding when internally assessing the maturity profile of its finance debt. Similar treatment is applied for loans associated with long-term gas supply contracts totalling
$1,899 million (2006 $1,976 million) that mature over 10 years.