BP 2010 Annual Report Download - page 200

Notes on financial statements
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 2010, whereas in the balance
sheet the amount would be reported within current finance debt. The disposal deposits noted above are excluded from this analysis.
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
2010 2009
Carrying Carrying
Fair value amount Fair value amount
Short-term borrowings 1,453 1,453 5,144 5,144
Long-term borrowings 37,600 36,876 29,918 28,894
Net obligations under finance leases 928 810 599 589
Total finance debt 39,981 39,139 35,661 34,627
36. Capital disclosures and analysis of changes in net debt
The group defines capital as the total equity of the group. The group’s approach to managing capital is set out in its financial framework which was revised
during 2010, with the objective of maintaining a capital structure that allows the group to execute its strategy and is resilient to inherent volatility. The group
intends to invest to grow the company and shareholder value sustainably through the business cycle, whilst providing the group with financial flexibility in
the medium term as the disposal programme is completed and commitments to the Deepwater Horizon Oil Spill Trust are fulfilled.
In the light of the Gulf of Mexico oil spill and the agreement to establish the $20-billion trust fund, the BP board reviewed its dividend policy and
decided that no ordinary share dividends would be paid in respect of the first three quarters of 2010. On 1 February 2011, BP announced the resumption of
quarterly dividend payments, with a fourth quarter dividend of 7 cents per share. We believe this level is supported by the success of our disposal
programme thus far, and by the improving business environment, but is balanced by the recognition of our continuing obligation to fund the trust until the
end of 2013 and the need to retain financial flexibility. We intend to increase the dividend level over time in line with the circumstances of the company.
Going forward, the group intends to maintain a significant cash liquidity buffer and reduce the net debt ratio to within a range of 10-20%.
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, plus the fair value of associated derivative financial instruments that are used to hedge foreign exchange and
interest rate risks relating to finance debt, for which hedge accounting is claimed, less cash and cash equivalents. Net debt and net debt ratio are
non-GAAP measures. BP uses these measures to 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’. All components of equity are
included in the denominator of the calculation. At 31 December 2010 the net debt ratio was 21% (2009 20%).
During 2010, the company did not repurchase any of its own shares.
$ million
At 31 December 2010 2009
Gross debt 45,336 34,627
Less: Cash and cash equivalents 18,556 8,339
Less: Fair value asset of hedges related to finance debt 916 127
Net debt 25,864 26,161
Equity 95,891 102,113
Net debt ratio 21% 20%
An analysis of changes in net debt is provided below.
$ million
2010 2009
Cash and Cash and
Finance cash Net Finance cash Net
Movement in net debt debta equivalents debt debta equivalents debt
At 1 January (34,500) 8,339 (26,161) (33,238) 8,197 (25,041)
Exchange adjustments 194 (279) (85) (60) 110 50
Net cash flow (3,613) 10,496 6,883 (1,141) 32 (1,109)
Movement in finance debt relating to investing activitiesb (6,197) – (6,197) – – –
Other movements (304) – (304) (61) – (61)
At 31 December (44,420) 18,556 (25,864) (34,500) 8,339 (26,161)
a Including fair value of associated derivative financial instruments.
b See Note 35 for further information.
198 BP Annual Report and Form 20-F 2010