BT 2006 Annual Report Download - page 40

CAPITAL EXPENDITURE
Capital expenditure on property, plant and equipment and
computer software (excluding the movement on capital
accruals) totalled £3,142 million in the 2006 financial year,
compared with £3,011 million in the 2005 financial year.
Capital expenditure is expected to be just over £3 billion in the
2007 financial year as the group invests in its 21st century
network (21CN) programme.
Of the capital expenditure in the 2006 financial year,
£270 million was in Europe, outside of the UK, the Americas
and Asia Pacific compared to £152 million in the 2005 financial
year.
Contracts placed for ongoing capital expenditure totalled
£754 million at 31 March 2006. 21CN is being developed using
stringent capital return criteria and a rigorous approach to any
investment in the narrowband network. 21CN aims to deliver
long term, structural cost reduction, as we progressively
migrate onto a simpler, lower cost network architecture. BT
expects that future capital expenditure will be funded from net
cash inflows from operating activities, and, if required, by
external financing.
ACQUISITIONS
The total amount invested in acquisitions in the 2006 financial
year was £167 million, being mainly due to the acquisitions of
Radianz and Atlanet. In April 2005 the group completed the
acquisition of Radianz for total consideration of £143 million,
including cash on the balance sheet and debt assumed on
acquisition. Net of cash and debt acquired, the cash
consideration was £71 million. This gave rise to goodwill of £39
million. In February 2006 the group completed the acquisition
of Atlanet for £65 million, including £7 million of deferred
consideration, being £53 million net of cash. This gave rise to
goodwill of £30 million. The total amount invested in the 2005
financial year was £453 million, being mainly the acquisitions of
Infonet and Albacom.
BALANCE SHEET
Net assets at 31 March 2006 amounted to £1,607 million
compared to £95 million at 31 March 2005, with the increase
of £1,512 million mainly due to the retained profits for the year
of £1,548 million and actuarial gains of £1,485 million (net of
deferred tax) offset by dividends of £912 million, losses on cash
flow hedges of £155 million (net of deferred tax) and the net
purchase of treasury shares of £344 million.
BT’s non current assets totalled £17,978 million at 31 March
2006 of which £15,489 million were property, plant and
equipment, principally forming the UK fixed network. At 31
March 2005 non current assets were £18,212 million and
property, plant and equipment were £15,391 million.
BT Group plc, the parent company, whose financial
statements are prepared in accordance with UK GAAP, had
profit and loss reserves of £9,499 million at 31 March 2006 and
£9,647 million at 31 March 2005.
RETURN ON CAPITAL EMPLOYED
The return before specific items on the average capital
employed was 16.8% for the 2006 financial year. In the 2005
financial year the group made a return before specific items of
16.5%.
PENSIONS
The group’s total pension operating charges for the 2006 and
2005 financial years were £603 million and £540 million,
respectively. This includes £552 million and £507 million,
respectively, in relation to the BTPS. The increase in the
pension charge in the 2006 financial year partly reflects the
introduction of Smart Pensions (a salary sacrifice scheme) part
way through the 2005 financial year, as a result of which there
is a switch between wages and salaries and pension charges, as
well as increases in pensionable pay.
The detailed IAS 19 disclosures are provided in the notes to
the consolidated financial statements. At 31 March 2006 the
IAS 19 deficit was £1.8 billion, net of tax, being a £1.6 billion
reduction from £3.4 billion at 31 March 2005.
The number of retired members and other current
beneficiaries in the BTPS pension fund has been increasing in
recent years. Consequently, BT’s future pension costs and
contributions will depend on the investment returns of the
pension fund and life expectancy of members and could
fluctuate in the medium term.
The BTPS was closed to new entrants on 31 March 2001 and
we launched a new defined contribution pension scheme for
people joining BT after that date which is to provide benefits
based on the employees’ and the employing company’s
contributions. This change is in line with the practice
increasingly adopted by major UK groups and is designed to be
more flexible for employees and enable the group to determine
its pension costs more precisely than is the case for defined
benefit schemes.
The most recently completed triennial actuarial valuation of
the BTPS, performed by the BTPS independent actuary for the
trustees of the scheme, was carried out as at 31 December
2002. This valuation showed the fund to be in deficit to an
amount of £2.1 billion. Assets of the fund of £22.8 billion at
that date covered 91.6% of the fund’s liabilities.
Under the 2002 funding plan the contribution rate was
12.2% of pensionable pay (18.2% under Smart Pensions) and
the company agreed to make annual deficiency contributions to
the BTPS of £232 million. In the 2006 financial year deficiency
payments were £54 million and no payments were made in the
2005 financial year. This was because in the 2004 financial year
total deficiency contributions of £612 million were made,
including early payment of £380 million scheduled for payment
in the 2005 and 2006 financial years. The triennial actuarial
valuation at 31 December 2005 is currently being performed by
the scheme’s independent actuaries and reviewed in the
context of recent regulatory developments and the impact of
the Crown Guarantee granted on privatisation in 1984. Until
that is completed, the contributions will continue to be paid in
accordance with the 2002 funding plan.
GEOGRAPHICAL INFORMATION
In the 2006 financial year, approximately 87% of the group’s
revenue was generated by operations in the UK, compared with
91% in the 2005. BT’s operating profits have been derived
from its UK operations with losses being incurred outside the
UK in the 2006 and 2005 financial years.
REGULATORY FINANCIAL INFORMATION
Ofcom requires regulatory financial information in order to
monitor and enforce various obligations that are placed on
dominant providers in markets where they are found to have
significant market power (‘SMP’). The current regulatory
financial reporting regime for BT has evolved over time in
response to the ongoing changes in the regulatory environment.
The last significant consultation on the regime was in 2004 in
response to the regulatory framework for electronic
communications network services that came into effect on
25 July 2003. The SMP activities presented separately in the
BT Group plc Annual Report and Form 20-F 2006 Operating and financial review38