BT 2007 Annual Report Download - page 47

Of the capital expenditure, £296 million was in Europe, outside
of the UK, the Americas and Asia Pacific in the 2007 financial
year, compared to £270 million in the 2006 financial year.
Contracts placed for ongoing capital expenditure totalled
£779 million at 31 March 2007. 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 2007 financial
year, net of cash acquired, was £268 million, relating primarily
to the acquisitions of INS and PlusNet. Goodwill arising on
acquisitions made in the year was £282 million.
The acquisition of INS completed in February 2007, for a
total consideration of £133 million. Net of deferred
consideration and cash acquired, the net cash outflow was
£129 million. The provisional fair value of INS’s net assets at the
date of acquisition was £12 million, giving rise to goodwill of
£121 million.
The acquisition of PlusNet completed in January 2007, for a
total consideration of £66 million. Net of consideration
outstanding at 31 March 2007 and cash acquired, the net cash
outflow was £59 million. The provisional fair value of PlusNet’s
net assets at the date of acquisition was £9 million, giving rise
to goodwill of £57 million.
Other acquisitions made in the year included primarily
dabs.com, Counterpane LLC and I3IT Limited. The total
consideration in respect of these acquisitions was £144 million,
and goodwill of £104 million has been recognised.
The total amount invested in the 2006 financial year was
£165 million mainly due to the acquisitions of Radianz and
Atlanet, which was £286 million lower than the £453 million
invested in the 2005 financial year, which was mainly due to the
acquisitions of Infonet and Albacom.
BALANCE SHEET
Net assets at 31 March 2007 amounted to £4,272 million
compared to £1,607 million at 31 March 2006, with the
increase of £2,665 million mainly due to the retained profits for
the year of £2,850 million and actuarial gains of £985 million
(net of deferred tax) offset by dividends paid of £1,053 million,
losses on cash flow hedges of £201 million and the net purchase
of treasury shares of £284 million.
BT’s non current assets totalled £18,340 million at 31 March
2007, of which £14,997 million were property, plant and
equipment, principally forming the UK fixed network. At
31 March 2006, non current assets were £18,283 million and
property, plant and equipment were £15,222 million.
BT Group plc, the parent company, whose financial
statements are prepared in accordance with UK GAAP, had profit
and loss reserves of £9,713 million at 31 March 2007,
compared with £9,499 million at 31 March 2006.
RETURN ON CAPITAL EMPLOYED
The return before specific items on the average capital employed
was 17.6% for the 2007 financial year. In the 2006 and 2005
financial years the group made a return before specific items of
18.1% and 18.2%, respectively.
PENSIONS
The group’s total pension operating charges for the 2007, 2006
and 2005 financial years were £643 million, £603 million and
£540 million, respectively. This includes £594 million,
£552 million and £507 million, respectively, in relation to the
BTPS, the group’s main defined benefit scheme. The increase in
the pension charge in the 2007 financial year includes the effect
of increased life expectancy assumptions and pay inflation. 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.
Detailed pensions disclosures are provided in note 29 to the
consolidated financial statements. At 31 March 2007 the IAS 19
accounting deficit was £0.3 billion, net of tax, being a
£1.5 billion reduction from £1.8 billion at 31 March 2006. The
reduction reflects the increase in value of equity investments
during the year and the increase in the AA bond rates used to
discount the future liabilities.
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
2005. This valuation showed the fund to be in deficit to an
amount of £3.4 billion. Assets of the fund of £34.4 billion at
that date covered 90.9 % of the fund’s liabilities. The previous
valuation was carried out as at 31 December 2002 which
showed the fund was in deficit by £2.1 billion. The funding
valuation uses conservative assumptions whereas, had the
valuation been based on the actuary’s view of the median
estimate basis, the funding valuation would have shown a
surplus. The market value of the equity investments had
increased and the investment income and contributions received
by the scheme exceeded the benefits paid in the three years
ended 31 December 2005. However, longer life expectancy
assumptions and a lower discount rate used to calculate the
present value of the liabilities, meant the deficit had not
improved by the same amount.
As a result of the triennial valuation the group agreed to
increase the contribution rate to 19.5% of pensionable pay, of
which 6% is payable by employees, from 1 January 2007. In
addition, the group will make deficiency payments equivalent to
£280 million per annum for ten years. The first three instalments
were paid upfront with £520 million paid in the 2007 financial
year and a further £320 million paid in April 2007. This
compares to the previous contribution rate of 18.2%, of which
6% was payable by employees, and annual deficiency payments
of £232 million that were agreed as a result of the 2002
funding valuation.
Report of the Directors Financial review
46 BT Group plc Annual Report & Form 20-F