Telstra 2005 Annual Report Download - page 29

www.telstra.com.au/abouttelstra/investor 27
The prior year other expenses included IBMGSA contract exit costs of
$130 million, recognised on sale of our investment in this entity, and a
provision raised against the REACH loan of $226 million, which partially
reduced the reported growth in expenses in fiscal 2005.
We have continued to focus on reducing costs throughout the group.
As part of our focus on cost reduction we established process owners
who are reviewing end-to-end processes. This program has identified cost
reductions through a range of Company wide productivity initiatives
and significant process improvements. In conjunction with our focus on
operating cost efficiencies and other cost initiatives, an operational and
strategic review is under way by the newly appointed CEO.
Net borrowing costs increased by 3.4% to $736 million in fiscal 2005,
primarily due to increased borrowings to fund the purchase of our recently
acquired entities, increased levels of capital expenditure, the payment
of dividends and the share buy-back. This has been offset by increased
interest received as a result of larger holdings of short term liquid assets.
There has also been a benefit from lower interest rates on new and
refinanced long term debt.
Income tax expense increased by 5.3% to $1,822 million in fiscal 2005,
primarily due to higher reported profit and the impact in the prior year
of a $58 million tax benefit arising from the initial adoption of the tax
consolidation legislation. Other items that have impacted the year on year
comparison include the tax effect of the non deductible provision against
the REACH loan in the prior year and increased differences for partnership
losses in the current year, resulting in an overall effective tax rate of
29.1% for fiscal 2005.
Financial condition
We continued to maintain a strong financial position, as well as generating
growth in free cash flow of 4.6% or $191 million. We have continued to
develop our core infrastructure network, acquire strategic investments
and increase our returns to shareholders through the special dividend
and share buy-back in fiscal 2005.
We have made a number of significant acquisitions during the year
to strengthen our operational capabilities and provide additional
opportunities for growth. These acquisitions were the KAZ Group, PSINet
Group and the Damovo Group. The acquisitions will enable us to capitalise
on the expertise of these entities and provide additional opportunities for
us to compete in emerging markets. The consideration for these
acquisitions amounted to $530 million, with an equivalent amount
recognised within the net assets of the group statement of financial
position on consolidation.
During fiscal 2005, we formed a 3G joint venture with a major competitor.
This arrangement with Hutchison 3G Australia Pty Ltd (H3GA), a subsidiary
of Hutchison Telecommunications (Australia) Limited, is to jointly own and
operate H3GA’s existing third generation radio access network (RAN) and
fund future development. The partnership will fund future construction of
3G RAN assets in proportion to the ownership interest of each joint venture
party. The agreements entered into with H3GA create an asset sharing
arrangement. As part of this agreement, Telstra purchased a 50% share of
H3GA’s existing third generation (3G) radio access network assets. Based on
the deferred payment terms, our property, plant and equipment increased
by $428 million, representing the present value of the purchase price of
$450 million. On acquisition we paid $22 million and recognised $406 million
in deferred liabilities, which will be paid in three instalments with the last
due 1 July 2006. The joint enterprise will provide opportunities for new
revenues for Telstra and H3GA, stimulate growth in 3G service uptake and
provide significant savings in 3G network construction capital expenditure
and operating expenses, such as site rental and maintenance.
As part of a restructure of REACH in fiscal 2005, Telstra and its joint venture
partner, PCCW Ltd (PCCW), entered into an indefeasible right of use (IRU)
agreement with REACH. Under this agreement, we, along with PCCW, each
paid $205 million (US$157 million) to REACH as consideration for the IRU,
whereby REACH allocated its international cable capacity between the two
shareholders. As consideration for the IRU, we discharged our capacity
prepayment asset in the amount of $187 million (US $143 million), accrued
interest on the capacity prepayment of $16 million and accrued interest
on the REACH loan of $2 million.
During the year, we completed bond issues in Europe (¤1,500 million),
Switzerland (CHF300 million), Australia ($1,000 million) and New Zealand
(NZ$200 million). The proceeds of our bond issues were used to fund our
recently acquired acquisitions, refinance our maturing debt and for other
working capital purposes.
During the financial year our credit rating outlook was adjusted by
Standard & Poors from stable to negative. This change was generated by
the uncertain environment in which we are operating. This is evidenced
by the regulatory environment and also the speculation surrounding the
privatisation of our company. As a result of this and our debt management,
our current credit ratings are as follows:
Long term Short term Outlook
Standard & Poor’s A+ A1 negative
Moody’s A1 P1 negative
Fitch A+ F1 stable
As described in our strategy section following, we have previously
announced a capital management strategy whereby we have committed
to providing certain returns to shareholders.
Our financial condition has enabled us to execute our capital management
program. During fiscal 2005, we returned $1,497 million to shareholders via
a special dividend and a share-buy-back. In fiscal 2005, we paid a special
dividend of 6 cents per share ($747 million) with our interim dividend and
bought back 185,284,669 ordinary shares. In total, 1.47% of our total issued
ordinary shares, or 3.0% of our non-Commonwealth owned ordinary
shares, were bought back. The cost of the share buy-back comprised the
purchase consideration of $750 million and associated transaction costs
of $6 million. The ordinary shares were bought back at $4.05 per share,
comprising a fully franked dividend of $2.55 per share and a capital
component of $1.50 per share.
We reported a strong free cash flow position, which enabled the company
to pay increased dividends, fund the acquisition of a number of new entities
and complete the off market share buy-back as described. We have sourced
cash through ongoing operating activities and through careful capital and
cash management.
We continued to increase cash flow from operating activities to $8,163
million for the current year compared with $7,433 million in fiscal 2004.
This position was the result of higher sales revenue and continued tight
control of expenditure and working capital management.