BT 2005 Annual Report Download - page 38

financial year and £329 million in the 2003 financial year,
consequently reducing the net cash inflow by these
amounts. The pension payments in the 2004 financial
year include early payment of £380 million deficiency
contributions to the BT Pension Scheme, which represents
most of the deficiency contributions for the 2005 and
2006 financial years.
The net cash outflow for returns on investments and
servicing of finance amounted to £878 million, £527
million and £1,506 million in the 2005, 2004 and 2003
financial years, respectively. The increased outflow of
£351 million in the 2005 financial year reflects the receipt
of £420 million of funds on restructuring part of the
group’s swap portfolio in the 2004 financial year. This
effect was offset by lower interest payments due to
certain bonds maturing during the 2005 financial year.
The reduction in the 2004 financial year outflow of £979
million includes the effect of the restructuring of the
group’s swap portfolio. In addition, the 2003 financial
year included the payment of a £293 million premium on
closing out £2.6 billion of fixed interest rate swaps,
following receipt of the Cegetel sale proceeds.
Tax paid in the 2005 financial year totalled
£332 million compared with £317 million in the 2004
financial year and £434 million paid in the 2003 financial
year. The lower tax paid in the 2005 and 2004 financial
year reflects the lower current tax charge and the level of
payments made on account.
The net cash outflow of £2,408 million for capital
expenditure and financial investment in the 2005 financial
year included £3,056 million of capital expenditure on
property, plant and equipment, offset by £650 million
received on the sale of fixed assets. In the 2004 financial
year the net cash outflow of £2,477 million for capital
expenditure and financial investment included £2,684
million of capital expenditure on property, plant and
equipment, offset by £208 million received on the sale of
fixed assets. Capital expenditure is higher than the 2004
financial year as a result of expenditure to support the
rapid growth in broadband and the transformation of the
group’s network. In the 2003 financial year the net cash
outflow of £2,381 million for capital expenditure and
financial investment included £2,580 million of capital
expenditure on plant and equipment, offset by £200
million received on the sale of fixed assets.
The net cash outflow from acquisitions less disposals in
the 2005 financial year totalled £418 million. The
principal cash outflow for acquisitions was mainly due to
the purchase of Infonet Services Corporation and Albacom
SpA. The net cash outflow from acquisitions less disposals
in the 2004 financial year totalled £60 million. The
principal cash outflow for acquisitions was due to the
purchase of a controlling interest in BT Expedite Limited
(formerly NSB Retail plc) and Transcomm plc. In the 2003
financial year the net cash inflow from disposals less
acquisitions totalled £2,842 million. Cash proceeds from
disposals amounted to £2,919 million and principally
comprised £2,603 million from the sale of the investment
in Cegetel.
Equity dividends paid in the 2005 financial year
totalled £784 million whilst those paid in the 2004 and
2003 financial years totalled £645 million and £367
million, respectively.
The resulting cash inflow for the 2005 financial year,
before management of liquid resources and financing, of
£1,080 million, together with inflows from current asset
investments, were mainly applied to long term borrowing
repayments of £1,297 million. The cash inflow for the
2004 financial year of £1,366 million was mainly applied
in repaying long-term borrowings with total borrowings of
£3,627 million being repaid. In addition, the group issued
new loans of £1,326 million. The new loans included a
US$172 million 0.75% exchangeable bond due in 2008,
exchangeable into ordinary shares of LG Telecom, BT’s
Korean based associate and a sale and leaseback of circuit
switches which had no effect on net debt but increased
gross debt and cash by around £1 billion. The cash inflow
for the 2003 financial year of £4,183 million was applied
in repaying short-term borrowings and investing in short-
term investments, with total borrowings of £2,535 million
being repaid.
The cash inflow for the 2005 financial year resulted in
net debt reducing by a further £639 million to £7,786
million having reduced by £1,148 million to £8,425
million in the 2004 financial year.
During the 2005 financial year the group further
restructured some of its swaps portfolio to mitigate credit
risk to and with certain counterparties. As a result, the
group terminated £2.9 billion of cross-currency and
sterling interest rate swaps with some swaps being
replaced with new swaps which had the same economic
hedging effect. This resulted in the group paying £107
million in reducing gross debt and receiving a net £14
million of interest receipts. The group also restructured
some of its swap portfolio during the 2004 financial year
to mitigate credit risk to certain counterparties. As a
result, the group terminated £7 billion of cross-currency
interest rate swaps and replaced these with new swaps
which had the same economic hedging effect. This
resulted in the group paying £445 million in reducing
gross debt and receiving £420 million of interest receipts.
The interest receipts and payments on restructuring for
the 2005 and 2004 financial years have been included
within deferred income and other debtors, respectively on
the balance sheet and will be amortised to the profit and
loss account over the term of the underlying hedged debt.
During the 2005 financial year the share buyback
programme continued with the group repurchasing 101
million shares for consideration of £195 million. During
the 2004 financial year the group repurchased 81 million
shares for consideration of £144 million.
Treasury policy
The group has a centralised treasury operation whose
primary role is to manage liquidity, funding, investment
and the group’s financial risk, including risk from volatility
in currency and interest rates and counterparty credit risk.
The treasury operation is not a profit centre and the
objective is to manage risk at optimum cost.
The Board sets the treasury department’s policy and
its activities are subject to a set of controls commensurate
with the magnitude of the borrowings and investments
under its management. Counterparty credit risk is closely
monitored and managed within controls set by the Board.
Derivative instruments, including forward foreign
exchange contracts, are entered into for hedging
purposes only.
We have set out further details on this topic and on
our capital resources and foreign currency exposure in
note 33 to the financial statements in compliance with
FRS 13.
Operating and financial review BT Group plc Annual Report and Form 20-F 2005 37