BT 2003 Annual Report Download - page 41

or (iii) if BT wishes to terminate all arrangements with
Telereal at any time, in which circumstances BT would
pay open market values for the property and
compensation to Telereal covering funding costs and
equity return. BT can also re-acquire the reversion of
the general estate (non-operational buildings such as
offices and warehousing) at the end of the headlease
term of 999 years. BT has the right to renew the lease
of the specialised estate for successive periods which,
in total, amount to 130 years. After 130 years, the
freehold specialised properties revert to BT. The leases
include normal commercial restrictions and covenants.
BT’s divestment of its property estate provides a
flexible approach to BT’s office arrangements and
building requirements. BT expects to reduce its
property needs over time and the transaction allows BT
to vacate properties covering approximately 35% by
rental value of the estate, including existing lease ends,
over the contract term without penalty.
The profit on the sale of the properties amounted
to £1,019 million and was determined after allowing
£129 million for BT’s actual and future obligations
under the terms of the legal agreement with Telereal
and for the cost of advisors’ fees. The obligations
include expenditure of £34 million to be incurred on
completing nearly finished new properties and remedial
work to be undertaken on several properties.
Part of the proceeds of sale were used in novating
fixed interest rate obligations to support Telereal’s
financing. An exceptional cost of £162 million was
incurred in unwinding this position and was included
in the interest charge for the year.
In summary, the property transaction benefited the
results for the 2002 financial year by £857 million as
shown below:
Profit on sale and leaseback of properties £m
Sales proceeds 2,380
Net book value of assets disposed (1,232)
Estimated cost of BT’s future obligations (129)
Profit on properties sold 1,019
Interest rate swap novation costs (162)
Net profit on sale and leaseback of properties 857
The rentals payable under the lease have an adverse
impact on other operating costs in future years, which
is initially around £190 million for the 2003 financial
year which is wholly offset by reduced depreciation
and interest charges.
In advance of the property transaction being
completed with Telereal, BT also completed the sale
of one of its major properties in London at a profit
of £43 million.
Interest charge
In the 2003 financial year, the total net interest
charge, including BT’s share of its ventures’ charges,
at £1,439 million was £183 million lower than in the
preceding year, which in turn was £308 million higher
than in the 2001 financial year. Of the total net
charge, £1,420 million arises in the BT group for
the 2003 financial year, compared with £1,540 million
and £1,044 million in the 2002 and 2001 financial
years, respectively.
The reduction in the net interest charge in the
2003 financial year reflects the reduction in the level
of net debt and is partly offset by the £293 million
exceptional cost of terminating fixed interest rate
swaps as a consequence of the receipt of the Cegetel
sale proceeds.
The substantially higher charge in the 2002 and
2001 financial years is mainly due to the cost of
funding the acquisition of mmO
2
’s third-generation
mobile licences, principally in the UK and Germany,
and the cost of acquisitions in the 2001 and 2000
financial years. In the 2002 financial year, the group’s
net interest charge was further increased by the
£162 million exceptional cost of novating interest
swaps as a consequence of the property sale and
leaseback transaction. In the 2001 financial year, there
was also a one-off £194 million increase in BT’s share
of its ventures’ interest charges principally through the
Japanese investments and Viag Interkom which was
partly offset by an exceptional interest receipt of
£25 million relating to the rates refund from the
UK Government, noted above.
Interest cover for continuing activities in the 2003
financial year represented 2.6 times total operating
profit before goodwill amortisation and exceptional
items, and compares with interest cover of 1.9 in the
2002 financial year and 2.4 in the 2001 financial year.
The improvement in cover in the 2003 financial year
is due to the reduction in the interest charge and
improvement in the operating profit before goodwill
amortisation and exceptional items. We expect the net
interest charge to decrease and interest cover to
continue to improve in the 2004 financial year
following the continued reduction in net debt during
the 2003 financial year.
Profit (loss) before taxation
The group’s profit before taxation for the 2003
financial year was £3,157 million, compared with a
profit of £1,461 million in the 2002 financial year
and a loss of £1,031 million in the 2001 financial year.
The profit in the 2003 financial year included the
exceptional profits from the sale of investments and
businesses totalling £1,691 million. The profit in the
2002 financial year included net exceptional gains of
£753 million. The loss in the 2001 financial year was
principally due to the £3,200 million exceptional
goodwill impairment charges.
The group’s profit before taxation from continuing
activities before goodwill amortisation and exceptional
items for the 2003 financial year was £1,829 million,
compared with £1,273 million in the 2002 financial
year and £1,763 million in the 2001 financial year.
The significantly higher underlying profit in the 2003
financial year was principally due to the exit from loss
making businesses, improved operating profits and
lower interest charges explained above.
The profit before taxation from discontinued
activities in the 2002 and 2001 financial years
amounted to £3,954 million and a loss of £2,968
million, respectively. The 2002 financial year included
Financial review
40 BT Annual Report and Form 20-F 2003