BT 1998 Annual Report Download - page 22

% customer lines served
by digital exchanges
94 95 96 97 98
N A N C I A L R E V I E W
unused committed short-term bank facilities, amounting
to approximately £786 million at 31 March 1998, in support
of a commercial paper programme or other borrowings.
The group also has substantial uncommitted short-term
bank facilities.
The gearing or ratio of net debt (borrowings net of cash
and short-term investments) to shareholders’ equity and
minority interests was 36.1% at 31 March 1998, compared
with 1.6% at 31 March 1997. The group had £3,977 million
net debt at 31 March 1998, an increase of £3,801 million in
the year. Net debt has increased substantially during the
course of the 1998 financial year primarily as a result of the
special dividend payment and the investment in Cegetel.
The majority of the group’s long-term borrowings has
been, and is, subject to fixed interest rates. The group
has entered into interest rate swap agreements with
commercial banks and other institutions to vary the
amounts and period for which interest rates are fixed.
At 31 March 1998, the group had outstanding interest
rate swap agreements with notional principal amounts
totalling £1,489 million.
Most of the group’s current turnover is invoiced in pounds
sterling, and most of its operations and costs arise within
the UK. The group’s foreign currency borrowings, which
totalled £2,316 million at 31 March 1998, are used to finance
its UK operations and to finance the groups’ overseas
investments, including MCI, in order to reduce the
currency exposure on the underlying assets. Cross
currency swaps and forward foreign exchange contracts
have been entered into to reduce the foreign currency
exposure on the group’s operations and the group’s net
assets. The group also enters into forward foreign
exchange contracts to hedge investment, interest expense,
purchase and sale commitments. The commitments hedged
are principally US dollars. As a result of these policies, the
group’s exposure to foreign currency arises mainly on the
residual currency exposure on overseas investments and
on any imbalances between the value of outgoing, transit
and incoming international calls with overseas
telecommunication operators. To date, these imbalances
have not been material. As a result, the group’s profit
has not been materially affected by movements in
exchange rates.
The group is not significantly exposed to changes in
interest rates. Based upon the composition of net debt at
31 March 1998, a one percentage point change in interest
rates would change the group’s interest expense by less
than £10 million. Apart from the potential proceeds from
the sale of the group’s holding in MCI, the group is also
not significantly exposed to changes in currency rates.
Excluding the MCI investment, a 10% change in sterling
against major currencies would cause the group’s net assets
at 31 March 1998 to change by less than £150 million, with
insignificant effect on the group’s profit. Because the
foreign exchange contracts are entered into as a hedge of
sales and purchases, a change in the fair value of the hedge
is offset by a corresponding change in the value of the
underlying sale or purchase.
If market conditions are appropriate, the company will
consider making repurchases of its own shares. Authority
to purchase up to 10% of the company’s issued share capital
is to be requested by the directors at the annual general
meeting of shareholders to be held in July. Decisions on
the amount of cash, if any, to be used in buying back shares
and the precise timing will depend in part on market
conditions and other opportunities that exist for the
deployment of the group’s cash resources.
Capital expenditure
Capital expenditure on plant, equipment and property
totalled £3,030 million in the 1998 financial year, compared