BT 2004 Annual Report Download - page 44

for each ratings category adjustment by each ratings
agency. In May 2001, Moody’s downgraded BT’s
credit rating to Baa1, which increased BT’s annual
interest charge by approximately £32 million. BT’s
credit rating from S&P is A minus. Based upon the
total amount of debt of £9 billion outstanding on these
instruments at 31 March 2004, BT’s annual interest
charge would increase by approximately £45 million if
BT’s credit rating were to be downgraded by one credit
rating category by both agencies below a long-term
debt rating of Baa1/ A minus. If BT’s credit rating with
Moody’s was to be upgraded by one credit rating
category the annual interest charge would be reduced
by approximately £23 million.
Based upon the composition of net debt at
31 March 2004, a one percentage point increase in
interest rates would increase the group’s annual net
interest expense by less than £15 million. This
compares with an increase of less than £10 million and
less than £20 million in the years ended 31 March
2003 and 2002, respectively.
Capital expenditure
Capital expenditure on plant, equipment and property
(excluding the movement on capital accruals) totalled
£2,673 million in the 2004 financial year, compared
with £2,445 million and £3,908 million in the 2003
and 2002 financial years, respectively. Of the total
capital expenditure in the 2002 financial year,
£3,100 million was in relation to the group’s
continuing activities. Work continues on enhancing the
intelligence of the network to enable customers to
benefit from advanced services and improving the
network’s capacity to carry high-speed data. Capital
expenditure is expected to rise, but remain within its
£3 billion annual target, in the 2005 financial year as
the group invests in its 21st century network (21CN)
programme.
Capital expenditure in relation to the group’s
discontinued activities amounted to £808 million in
the 2002 financial year. Prior to the demerger, mmO
2
continued improving the quality and capacity of its
digital GSM network.
Of the capital expenditure, £86 million was in
Europe, outside the UK, in the 2004 financial year and
£138 million was spent there in the 2003 financial
year.
Contracts placed for ongoing capital expenditure
totalled £879 million at 31 March 2004. We plan to
develop the 21CN 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 the 2004 financial year,
including further funding of existing ventures, was
£61 million. The total amount invested in the 2003
financial year, including further funding of existing
ventures, was £77 million, significantly lower than the
£1,131 million invested in the 2002 financial year. In
the 2002 financial year the significant acquisition
made in April 2001 was of the 49.5% interest in Esat
Digifone that we did not already own, from Telenor,
for £869 million under an agreement made in early
2000.
Demerger and capital reduction
The demerger of mmO
2
, the group’s former mobile
phone business, was completed in November 2001.
The demerger, scheme of arrangement and associated
reduction in capital were approved by shareholders in
October 2001 and the High Court in November 2001.
The demerger of mmO
2
created two new listed
companies and dealings in BT Group and mmO
2
shares commenced on 19 November 2001. BT
shareholders on record on 16 November 2001,
received one BT Group plc share and one mmO
2
plc
share for each existing British Telecommunications plc
share held. Based on the first day’s dealings on the
London Stock Exchange, BT Group represented
approximately 78% of the equity value of the former
BT group and mmO
2
represented approximately 22%.
On the demerger, net assets of £19,490 million
attributable to mmO
2
were distributed to shareholders
in the form of a demerger distribution. mmO
2
assumed approximately £500 million of debt, with the
bulk of the outstanding debt remaining with the
continuing BT Group. The reduction of capital had the
effect of increasing distributable reserves in BT Group
plc by £9,537 million.
Balance sheet
Net assets at 31 March 2004 amounted to
£3,094 million compared to £2,642 million at
31 March 2003, with the increase due to the retained
profits of £685 million offset by the £144 million
buyback of shares and currency movements.
BT Group plc, the parent company, has reserves of
£9,585 million at 31 March 2004 and £9,537 million
at 31 March 2003.
BT’s fixed assets totalled £16,068 million at
31 March 2004 of which £15,487 million were tangible
assets, principally forming the UK fixed network. At
31 March 2003 fixed assets were £16,661 million and
tangible assets were £15,888 million.
Return on capital employed
The return before goodwill amortisation and
exceptional items on the average capital employed
(total assets, excluding goodwill, less current liabilities,
excluding corporate taxes and dividends payable, and
provisions other than those for deferred taxation) was
15.3% for the 2004 financial year. In the 2003
financial year the group made a return from continuing
activities before goodwill amortisation and exceptional
items of 15.7%. In the 2002 financial year the group
made a return from continuing activities before
goodwill amortisation and exceptional items of 15.7%
on the average capital employed in its business
excluding mmO
2
and goodwill.
BT Annual Report and Form 20-F 200443 Operating and financial review