BT 2007 Annual Report Download - page 46

The directors have a reasonable expectation that the group has
adequate resources to continue in operational existence for the
foreseeable future and therefore they continue to adopt the
going concern basis in preparing the financial statements.
There has been no significant change in the financial or
trading position of the group since 31 March 2007.
The following table sets out the group’s contractual
obligations and commitments as they fall due for payment, as at
31 March 2007.
Payments due by period
Contractual obligations
and commitments
Total
£m
Less
than 1
year
£m
1-3
years
£m
3-5
years
£m
More
than 5
years
£m
Loans and other borrowings 8,022 1,900 637 2,239 3,246
Finance lease obligations 567 303 33 23 208
Operating lease obligations 9,557 479 882 829 7,367
Pension deficiency obligations 2,280 320 280 560 1,120
Capital commitments 779 616 118 29 16
Total 21,205 3,618 1,950 3,680 11,957
At 31 March 2007, the group had cash, cash equivalents and
current asset investments of £1,078 million. At that date,
£2,071 million of debt fell due for repayment in the 2008
financial year. The group had unused short-term bank facilities,
amounting to approximately £3,535 million at 31 March 2007.
These resources will allow the group to settle its obligations as
they fall due.
FINANCIAL RISK MANAGEMENT
Most of the group’s current revenue is invoiced in pounds
sterling, and most of its operations and costs arise within the
UK. The group’s foreign currency borrowings, which totalled
£5.3 billion at 31 March 2007, are used to finance its
operations. These borrowings have been predominantly swapped
into sterling. Cross currency swaps and forward currency
contracts have been entered into to reduce the foreign currency
exposure on the group’s operations and the group’s net assets.
The group also enters into forward currency contracts to hedge
foreign currency investments, interest expense, capital purchases
and purchase and sale commitments on a selective basis. The
commitments hedged are principally US dollar and euro
denominated. As a result of these policies, the group’s exposure
to foreign currency arises mainly on the residual currency
exposure on its non-UK investments in its subsidiaries and on
any imbalances between the value of outgoing and incoming
international calls.
A 10% strengthening in sterling against major currencies
would cause the group’s net assets at 31 March 2007 to fall by
less than £220 million, with an insignificant effect on the
group’s profits. This compares to a fall of less than £150 million
for the year ended 31 March 2006.
The majority of the group’s long-term borrowings have been,
and are, subject to sterling fixed interest rates after applying the
impact of hedging instruments. The group has entered into
interest rate swap agreements with commercial banks and other
institutions to vary the amounts and period for which interest
rates are fixed. The group had outstanding interest rate swap
agreements with notional principal amounts totalling £5.1 billion
at 31 March 2007 and 31 March 2006 and £5.3 billion at 31
March 2005.
The long-term debt instruments which BT issued in December
2000 and February 2001 both contained covenants providing
that if the BT group credit rating were downgraded below A3 in
the case of Moody’s or below A minus in the case of Standard &
Poor’s (S&P), additional interest would accrue from the next
interest coupon period at the rate of 0.25 percentage points for
each ratings category adjustment by each ratings agency. In July
2006, S&P downgraded BT’s credit rating to BBB plus, which
will increase BT’s annual finance expense by approximately
£11 million in the 2008 financial year. Moody’s currently apply a
credit rating of Baa1 on BT following a downgrade in May
2001. Based upon the total amount of debt of £4.4 billion
outstanding on these instruments at 31 March 2007, BT’s
annual finance expense would increase by approximately
£22 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/BBB plus. If BT’s credit rating with each of
Moody’s and S&P were to be upgraded by one credit rating
category the annual finance expense would be reduced by
approximately £22 million.
Based upon the composition of net debt at 31 March 2007, a
one percentage point increase in interest rates would increase
the group’s annual net finance expense by around £11 million,
which compares to £10 million for the 2006 and 2005 financial
years.
The group considers that it is not exposed to major
concentrations of credit risk. The group, however, is exposed to
credit-related losses in the event of non-performance by
counterparties to financial instruments, but does not expect any
counterparties to fail to meet their obligations. The group limits
the amount of credit exposure to any one counterparty. Where
multiple transactions are undertaken with a single counterparty,
or group of related counterparties, the group may enter into a
netting arrangement to reduce the group’s exposure to credit
risk. Currently the group makes use of standard International
Swaps and Derivative Association (ISDA) documentation. In
addition, where the group has a legal right of set off and the
ability and intention to settle net, the relevant asset and
liabilities are netted within the balance sheet. The group seeks
collateral or other security where it is considered necessary.
The group ensures its liquidity is maintained by entering into
long and short term financial instruments to support operational
and other funding requirements. The group’s liquidity and
funding management process includes projecting cash flows and
considering the level of liquid assets in relation thereto,
monitoring balance sheet liquidity and maintaining a diverse
range of funding sources and back-up facilities. Liquid assets
surplus to immediate operating requirements of the group are
generally invested and managed by the centralised treasury
function. Requirements of group companies for operating
finance are met whenever possible from central resources. The
group manages liquidity risk by maintaining adequate committed
borrowing facilities. Refinancing risk is managed by limiting the
amount of borrowing that matures within any specific period.
The group has limited exposure to equity securities price risk
on investments held by the group.
CAPITAL EXPENDITURE
Capital expenditure on property, plant and equipment and
computer software (excluding the movement on capital accruals)
totalled £3,247 million in the 2007 financial year compared with
£3,142 million and £3,011 million in the 2006 and 2005
financial years, respectively. Capital expenditure is expected to
remain at around £3.2 billion in the 2008 financial year as the
group continues to invest in its 21st century network (21CN)
programme.
BT Group plc Annual Report & Form 20-F 45
Report of the Directors Financial