BT 2009 Annual Report Download - page 32

ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS BUSINESS AND FINANCIAL REVIEWS OVERVIEW
BUSINESS AND FINANCIAL REVIEWS OTHER MATTERS
30 BT GROUP PLC ANNUAL REPORT & FORM 20-F
If economic and credit conditions do not improve, we may not be
able to generate sufficient cash flow, or access capital markets, to
enable us to service or repay our indebtedness or to fund our other
liquidity requirements. We may be required to refinance all or a
portion of our indebtedness on or before maturity, reduce or delay
capital expenditure or seek additional capital. Refinancing or
additional financing may not be available on commercially
reasonable terms, or at all. Our inability to generate sufficient cash
flow to satisfy our debt service obligations, or to refinance debt on
commercially reasonable terms, may adversely affect our business,
financial condition, results of operations and prospects.
We expect the current economic conditions to continue for some
time and we will continue to seek to mitigate the risks that arise
while identifying and exploring opportunities.
Regulatory controls
Some of our activities are subject to significant price and other
regulatory controls which may affect our market share, competitive
position and future profitability.
Most of our wholesale fixed-network activities in the UK are
subject to significant regulatory controls. The controls regulate,
among other things, the prices we may charge for many of our
services and the extent to which we have to provide services to
other CPs. In recent years, the effect of some of these controls has
been to require us to reduce our prices. We cannot provide
assurance to our shareholders that the regulatory authorities will
not increase the severity of the price controls, extend the services
to which controls apply (including any new services that we may
offer in the future), or extend the services which we have to provide
to other CPs. These controls may adversely affect our market share
and our future profitability.
In response to Ofcom’s strategic review of telecommunications,
we proposed a number of legally binding Undertakings that were
accepted by Ofcom and came into force in September 2005. A
number of challenging milestones in the Undertakings also remain
to be delivered.
In the case of a breach of the Undertakings, Ofcom has the right
to seek an injunction through the courts or issue a direction. Third
parties who suffer losses as a result of a breach may also take action
against BT in the courts for damages. The timescales for
achievement of a number of the milestones in the Undertakings are
very challenging and we are in consultation with Ofcom and the
wider communications industry about the remaining Undertakings
in the context of changing industry priorities and systems capacity.
Ofcom is conducting a number of reviews which are expected to
be completed during the 2010 financial year. These include review
of the wholesale narrowband market, the Openreach financial
framework, the wholesale line rental charge control, and the
wholesale local access market. Whilst these reviews are, in our view,
an opportunity to create regulatory stability, there is a risk that they
may adversely affect our competitive position and future returns on
our regulated copper asset base.
Further details on the regulatory framework in which we operate
can be found in Regulation on pages 26 to 27.
Major contracts
Our business may be adversely affected if we fail to perform on
major customer contracts.
We have entered into a number of complex and high value
networked IT services contracts with customers, increasingly won in
areas which are competitive. Our pricing, cost and profitability
estimates for major contracts generally include anticipated long-
term cost savings that we expect to achieve over the life of the
contract.
These estimates are based on our best judgement of the
efficiencies we expect to achieve. Any increased or unexpected
costs, failures to achieve the anticipated cost savings, or
unanticipated delays, including delays caused by factors outside
our control, could make these contracts less profitable or even loss
making, so adversely impacting our profit margins. The degree of
risk increases generally in proportion to the scope and life of the
contract and is typically higher in the early stages. Some customer
contracts require significant investment in the early stages which is
recoverable over the life of the contract.
In 2009, a failure to achieve anticipated cost savings made a
number of our major contracts less profitable or even loss making,
adversely impacting our profits. Contract and financial reviews were
undertaken in BT Global Services, and resulted in a more cautious
view of the recognition of future cost efficiencies and other
changes in underlying assumptions and estimates particularly in
light of the current economic outlook, resulting in significant
contract and financial review charges being recognised. For more
detail, see page 10.
In addition, major contracts often involve the implementation of
new systems and communications networks, transformation of
legacy networks and the development of new technologies.
Substantial performance risk exists in these contracts, and some or
all elements of performance depend upon successful completion of
the transition, development, transformation and deployment
phases. There can be delays in these phases and certain milestones
may be missed which could adversely impact our profit margins and
the recoverability of any capitalised contract costs. In some cases,
our products and services incorporate software or system
requirements from other suppliers or service providers, and failure
to meet these obligations may in turn impact our ability to meet our
commitments in a timely manner. Failure to manage and meet our
commitments under these contracts may lead to a reduction in our
future revenue, profitability and cash generation.
We may lose significant customers due to merger or acquisition,
business failure or contract expiry. Failure to replace the revenue
and earnings from lost customers could reduce revenue and
profitability.
BUSINESS AND FINANCIAL REVIEWS