BT 2006 Annual Report Download - page 37

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NET FINANCE EXPENSE
2006
£m
2005
£m
Interest on borrowings 916 1,053
Loss arising on derivatives not in a
designated hedge relationship 8–
Interest on pension scheme liabilities 1,816 1,720
Total finance expense 2,740 2,773
Income from listed investments (44) (47)
Other interest and similar income (154) (209)
Expected return on pension scheme
assets (2,070) (1,918)
Total finance income (2,268) (2,174)
Net finance expense 472 599
In the 2006 financial year, net finance expense at £472 million
were £127 million lower than last year with the net finance
income associated with the group’sdefined benefit pension
obligation of £254 million, being £56 million higher than the
2005 financial year. The interest on pension scheme liabilities
and expected return on pension scheme assets reflects the
IAS 19 assumptions and valuation as at 31 March 2005.
The reduction in the interest on borrowings reflects the
decrease in the group’s debt. The reduction in other interest
and similar income reflects the lower level of investment
holdings following their utilisation on funding the maturity of
bonds, offset by a gain of £27 million on the group’s US dollar
convertible 2008 bond which was redeemed during the year.
Interest cover in the 2006 financial year, excluding the net
finance income associated with the group’sdefined benefit
pension obligation, represented 3.6 times total operating profit
before specific items, and compares with interest cover of 3.4 in
the 2005 financial year. The improvement in cover was due to
the reduction in the interest expense mainly arising from the
reduction in net debt.
ASSOCIATES AND JOINT VENTURES
The results of associates and joint ventures before specific items
are shown below:
2006
£m
2005
£m
Share of post tax profit (loss) of
associates and joint ventures 16 (14)
The group’s share of post tax profits (losses) from associates
and joint ventures, before specific items, was a profitof
£16 million in the 2006 financial year. This compares to a loss
of £14 million in the 2005 financial year.
The principal contributors to profit before taxation in the
2006 financial year were LG Telecom in Korea of £7 million
(2005: £6 million) and Tech Mahindra Limited of £13 million
(2005: £6 million). In the 2005 financial year Albacom in Italy
also contributed a loss of £22 million prior to becoming a
subsidiary.
PROFIT BEFORE TAXATION
The group’s profit before taxation for the 2006 financial year
was £2,040 million, compared with a profit of £2,354 million in
the 2005 financial year.
The group’s profit before taxation before specific items for
the 2006 financial year was £2,177 million, compared with
£2,080 million in the 2005 financial year. The improvement in
profit was mainly due to cost efficiency savings, lower leaver
costs, lower net finance charges and increased profits from joint
ventures and associates.
TAXATION
The tax charge for the 2006 financial year was £492 million and
comprised a charge of £533 million on the profit before
taxation and specific items, offset by tax relief of £41 million on
certain specific items. The tax charge for the 2005 financial
year was £525 million and comprised a £541 million charge on
the profit before tax and specific items, offset by tax relief of
£16 million on certain specific items. The tax charge on the
profit before taxation and specific items is at an effective rate of
24.5%. This reduction in the effective rate from 26.0% in the
2005 financial year reflects the continued improvements in the
tax efficiency of the group.
EARNINGS PER SHARE
The basic earnings per share of 18.4 pence per share for the
2006 financial year compare with 21.5 pence for the 2005
financial year. The following table illustrates the impact of
specific items on the basic earnings per share.
2006
pence
2005
pence
Basic earnings per share before specific
items 19.5 18.1
Specific items (1.1) 3.4
Total basic earnings per share 18.4 21.5
Basic earnings per share before specific items of 19.5 pence for
the 2006 financial year compare with an equivalent of
18.1 pence for the 2005 financial year.
Diluted earnings per share were not materially different in
either year.
DIVIDENDS
The Board recommends a final dividend of 7.6 pence per share
(2005: 6.5 pence per share) to shareholders, amounting to
£632 million (2005: £551 million). This will be paid, subject to
shareholder approval, on 11 September 2006 to shareholders
on the register on 18 August 2006. When combined with the
2006 interim dividend of 4.3 pence per share, the total
dividend proposed for the 2006 financial year is 11.9 pence per
share, totalling £993 million (2005: £883 million). This
compares to 10.4 pence in the 2005 financial year, an increase
of 14%.
Dividends paid in the 2006 financial year were £912 million
(2005: £786 million) and have been presented as a deduction in
shareholders’ equity.
We continue with our progressive dividend policy. We expect
our pay out ratio to rise to around two-thirds of underlying
earnings by the 2008 financial year.
Operating and financial review BT Group plc Annual Report and Form 20-F 2006 35