BP 2015 Annual Report Download - page 151

26. Capital disclosures and analysis of changes in net debt
The group defines capital as total equity. We maintain our financial framework to support the pursuit of value growth for shareholders, while ensuringa
secure financial base.
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 applied, less cash and cash equivalents. Net debt and net debt ratio are non-
GAAP measures. 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’. All components of equity
are included in the denominator of the calculation.
We aim to maintain the net debt ratio, with some flexibility, at around 20%. We expect the net debt ratio to be above 20% while oil prices remain
weak. At 31 December 2015, the net debt ratio was 21.6% (2014 16.7%).
$ million
At 31 December 2015 2014
Gross debt 53,168 52,854
Less: fair value asset (liability) of hedges related to finance debta(379) 445
53,547 52,409
Less: cash and cash equivalents 26,389 29,763
Net debt 27,158 22,646
Equity 98,387 112,642
Net debt ratio 21.6% 16.7%
aDerivative financial instruments entered into for the purpose of managing interest rate and foreign currency exchange risk associated with net debt with a fair value liability position of $1,617 million
(2014 liability of $774 million) are not included in the calculation of net debt shown above as hedge accounting was not applied for these instruments.
An analysis of changes in net debt is provided below.
$ million
2015 2014
Movement in net debt
Finance
debta
Cash and
cash
equivalents Net debt
Finance
debta
Cash and
cash
equivalents Net debt
At 1 January (52,409) 29,763 (22,646) (47,715) 22,520 (25,195)
Exchange adjustments 1,065 (672) 393 1,160 (671) 489
Net cash flow (2,220) (2,702) (4,922) (5,419) 7,914 2,495
Other movements 17 – 17 (435) – (435)
At 31 December (53,547) 26,389 (27,158) (52,409) 29,763 (22,646)
aIncluding the fair value of associated derivative financial instruments for which hedge accounting is applied.
27. Operating leases
The cost recognized in relation to minimum lease payments for the year was $6,008 million (2014 $6,324 million and 2013 $5,961 million).
The future minimum lease payments at 31 December 2015, before deducting related rental income from operating sub-leases of $166 million (2014
$234 million), are shown in the table below. This does not include future contingent rentals. Where the lease rentals are dependent on a variable factor,
the future minimum lease payments are based on the factor as at inception of the lease.
$ million
Future minimum lease payments 2015 2014
Payable within
1 year 4,144 5,401
2 to 5 years 7,743 9,916
Thereafter 3,535 3,468
15,422 18,785
In the case of an operating lease entered into by BP as the operator of a joint operation, the amounts included in the totals disclosed represent the net
operating lease expense and net future minimum lease payments. These net amounts are after deducting amounts reimbursed, or to be reimbursed,
by joint operators, whether the joint operators have co-signed the lease or not. Where BP is not the operator of a joint operation, BP’s share of the
lease expense and future minimum lease payments is included in the amounts shown, whether BP has co-signed the lease or not.
Typical durations of operating leases are up to forty years for leases of land and buildings, up to fifteen years for leases of ships and commercial
vehicles and up to ten years for leases of plant and machinery.
The group has entered into a number of structured operating leases for ships and in most cases the lease rental payments vary with market interest rates.
The variable portion of the lease payments above or below the amount based on the market interest rate prevailing at inception of the lease is treated as
contingent rental expense. The group also routinely enters into bareboat charters, time-charters and voyage-charters for ships on standard industry terms.
The most significant items of plant and machinery hired under operating leases are drilling rigs used in the Upstream segment. At 31 December 2015,
the future minimum lease payments relating to drilling rigs amounted to $4,783 million (2014 $8,180 million).
Commercial vehicles hired under operating leases are primarily railcars. Retail service station sites and office accommodation are the main items inthe
land and buildings category.
The terms and conditions of these operating leases do not impose any significant financial restrictions on the group. Some of the leases of ships and
buildings allow for renewals at BP’s option, and some of the group’s operating leases contain escalation clauses.
BP Annual Report and Form 20-F 2015 147
Financial statements