BT 2007 Annual Report Download - page 45

Currency denominated balances within net debt are translated to
sterling at swapped rates where hedged.
This definition of net debt measures balances at the expected
value of future cash flows due to arise on maturity of financial
instruments and removes the balance sheet adjustments made
from the re-measurement of hedged risks under fair value
hedges and the use of the amortised cost method as required by
IAS 39. In addition the gross balances are adjusted to take
account of netting arrangements.
Net debt is a non GAAP measure since it is not defined in
IFRS. The most directly comparable IFRS measure is the
aggregate of loans and other borrowings (current and non-
current), current asset investments and cash and cash
equivalents which is reconciled to net debt in note 10 to the
consolidated financial statements. In 2001, BT’s net debt
reached £27.9 billion and as part of the group’s transformation
strategy the group went through a major restructuring to reduce
the level of net debt and improve the group’s financial strength.
Therefore management believe it is both useful and necessary to
continue to disclose net debt as it is a key measure against
which the group’s performance against its strategy is measured.
Management believe it is a measure of net indebtedness that
provides an indicator of our overall balance sheet strength and
also facilitates an evaluation of the group’s cash position and
indebtedness in a single performance measure. There are
material limitations in the use of non GAAP measures and the
use of the term net debt does not necessarily mean that the
cash included in the net debt calculation is available to settle
the liabilities included in this measure. The group’s definition of
net debt may not be comparable to similarly titled measures
used by other companies.
Free cash flow
2007
£m
2006
£m
2005
£m
Reconciliation of free cash flow
Net cash inflow from operating
activities 5,210 5,387 5,574
Net purchase of property, plant
equipment and software (3,209) (2,874) (2,945)
Net (purchase) sale of non current
asset investments (3) (1) 537
Dividends from associates and
joint ventures 612
Interest received 147 185 374
Interest paid (797) (1,086) (1,260)
Free cash flow 1,354 1,612 2,282
The components of free cash flow, which is a non GAAP
measure, are presented in the table above and reconciled to net
cash inflow from operating activities, the most directly
comparable IFRS measure.
Management believe it is both useful and necessary to
disclose free cash flow as it is one of the group’s key
performance indicators with which the group’s performance
against the group’s strategy is measured. Whilst free cash flow is
primarily a liquidity measure, management also believe that it is
an important indicator of overall operational performance of the
group as it reflects the cash generated from operations after
reflecting capital expenditure and financing costs, which are
both significant ongoing cash outflows associated with investing
in infrastructure and financing operations. In addition, free cash
flow excludes cash flows that are determined at a corporate
level independently of ongoing trading operations such as
dividends, share buy backs, acquisitions and disposals and
repayment of debt. There are material limitations in the use of
non GAAP measures and management’s use of the term free
cash flow does not mean that this is a measure of the funds that
are available for distribution to shareholders. The group’s
definition of free cash flow may not be comparable to similarly
titled measures used by other companies.
Free cash flow was £1,354 million in the 2007 financial year,
compared to £1,612 million in the 2006 financial year and
£2,282 million in the 2005 financial year.
The reduction in free cash flow in the 2007 financial year
compared to the 2006 financial year was mainly due to the
pension deficiency payment of £520 million and an increase in
net expenditure of property, plant, equipment and software of
£335 million, offset by lower income taxes paid following the
initial cash receipt in relation to the settlement of £376 million
from HM Revenue and Customs and lower net interest paid of
£251 million.
The reduction in free cash flow in 2006 compared to the
2005 financial year was mainly due to the impact of proceeds of
£537 million from the disposal of non-current asset investments
in the 2005 financial year, mainly in respect of the disposal of
interests in Eutelsat, Starhub and Intelsat. Other factors
contributing to the decrease were lower working capital inflows
and higher normalised tax payments following low tax payments
in the 2005 financial year. This was partly offset by lower cash
payments on purchase of property, plant and equipment and
software in the 2006 financial year, although capital additions
and accruals were higher at the end of the 2006 financial year.
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 policy for the centralised treasury
operation 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. The group does not hold or issue derivative financial
instruments for trading purposes. All transactions in financial
instruments are undertaken to manage the risks arising from
underlying business activities.
We have set out further details on this topic in note 33 to
the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
As disclosed in the financial statements there are no off-balance
sheet arrangements that have or are reasonably likely to have a
current or future material effect on the group’s financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditure or capital
resources, with the exception of the following:
Operating leases (note 27)
Capital commitments and guarantees (note 27)
CAPITAL RESOURCES
During the period under review the group has increased its level
of net debt to £7.9 billion at 31 March 2007 compared with
£7.5 billion at 31 March 2006 and £7.9 billion at 31 March
2005 (based on BT’s definition of net debt as set out in note
10).
Report of the Directors Financial review
44 BT Group plc Annual Report & Form 20-F