BT Group plc Annual Report 2016

FY2016 Annual Report · BT Group plc

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BT Group plc
BT Group plc
Annual Report & Form 20-F 2016
Annual Report & Form 20-F 2016

Broadening and
deepening our
customer relationships

Front cover and above image
Bethany Johnson, BT apprentice

Bethany’s Story
The cover of our 2016 Annual Report features Bethany Johnson,
a service delivery apprentice in her second year with the company.
Working for Openreach, Bethany makes a difference to customers
every day, helping them to get connected and making sure they’re
happy with their service. For Bethany, her role is about earning the
customers’ trust and doing a vital job right, the ﬁrst time.

Bethany is one of 1,700 apprentices and graduates that we’ve hired in the
past two years, with a further 1,400 roles announced in February 2016.
We’ll also have returned 2,000 contact centre roles to the UK as part of our
commitment to answer more customer service calls within the UK. This is one
part of the investment we’re making to deliver superior customer service and
to grow our business.

More than 25m businesses and homes now have access to superfast
broadband and the UK has seen a massive increase in average broadband
speed – from just 4Mbps in 2009 to almost 29Mbps in 2015.

Together with the efforts we are making to transform our costs, our focus on
investment and growth will deliver our strategy of broadening and deepening
our customer relationships. Find out more throughout this Annual Report
and on our website.

Watch Bethany’s story online
www.btplc.com/bethany

Online Annual Report
www.bt.com/annualreport

Delivering our purpose update
www.btplc.com/Purposefulbusiness

Welcome to BT Group plc’s
Annual Report 2016

This is the BT Annual Report for the year ended
31 March 2016. It complies with UK regulations and
comprises part of the Annual Report and Form 20-F
for the US Securities and Exchange Commission to
meet US regulations.

This is the second year that we’ve applied an Integrated
Reporting (IR) approach to how we structure and present
our Annual Report.

IR is an initiative led by the International Integrated Reporting
Council (IIRC). Its principles and aims are consistent with UK
regulatory developments in financial and corporate reporting.
We’ve reflected guiding principles and content elements from
the IIRC’s IR Framework in preparing our Annual Report. This is
most obvious in the representation of our business model. This
year, we use an expanded set of icons for the inputs, outputs
and outcomes of the business model. We hope this will improve
linkage between the business model and the rest of the Strategic
Report. And the colours of the icons provide a mapping to the
IIRC’s ‘capitals’.

Find out more
www.theiirc.org

Throughout the report look
out for these

Reference to other pages within
the report

Reference to video content online

Reference to further reading online

Business model icons like these.
They are defined on page 28.

Contents

2
3

Chairman’s introduction
Overview – BT in focus

The Strategic Report

19 Purpose and strategy
20 Chief Executive’s introduction
21 Our purpose
21 Our goal
21 Our strategy
24 Our culture

25 Delivering our strategy
26 Operating Committee
28 Our business model
31 Financial strength
31 Our people
34 Our networks and physical assets
36 Research and development
37 Brand and reputation
38 Stakeholders and relationships
43 Protecting the environment
45 Our performance as a sustainable and responsible business
46 Our risks

57 Our lines of business

93 Group performance
94
96 Group performance

Group Finance Director’s introduction

109 Governance
110 Chairman’s governance report
111 How we govern the group
112 Board of Directors
114 The Board
118 Reports of the Board committees
149 Directors’ information
150 General information
154 Shareholders and Annual General Meeting

157 Financial statements
158 Auditors’ reports – consolidated financial statements
165 Consolidated financial statements
170 Notes to the consolidated financial statements
222 Auditors’ report – parent company financial statements
223 Financial statements of BT Group plc
228 Related undertakings

Please see the cautionary statement regarding forward-looking
statements on page 248.

The Purpose and strategy, Delivering our strategy, Our lines of business
and Group performance sections on pages 19 to 108 form the
Strategic Report. The Governance section on pages 109 to 155 forms
the Report of the Directors.

239 Additional information
240 Alternative performance measures
243 Selected financial data
245 Financial and operational statistics
248 Information for shareholders
264 Cross reference to Form 20-F
268 Glossary of terms

2 BT Group plc

Annual Report 2016

An introduction from our Chairman
This has been a landmark year
for BT. We have completed
the acquisition of EE, helped take
superfast broadband to 90%
of the country and delivered
our best revenue growth
in more than seven years.

While Openreach hit all 60 of the minimum
service levels set by Ofcom, and the group
ended the year on a good trajectory, we did
not hit our internal targets. We have to do
much better to match customers’ growing
expectations.

Investing in our global presence
We operate across the globe. Around a fifth
of our revenue comes from outside the UK.
The new divisional structure we have put in
place from April 2016 will give Global Services
a sharper focus on serving major global and
international businesses and organisations.
We seek a level regulatory playing field in
support of this and have been encouraged by
progress towards genuine reform in the US
this year and by efforts to implement the EU’s
digital single market.

The upcoming EU referendum creates some
market uncertainty and risk. BT believes that
staying in a reforming EU would be in the
best interests of our business.

Changes to the Board
As disclosed in last year’s Annual Report,
Warren East stepped down from the Board
last May as a result of his appointment as
chief executive of Rolls-Royce. I’m delighted
to welcome Mike Inglis who joined the Board
in September 2015. Mike’s insight and in-
depth experience in the technology industry
will be a great asset for BT and the Board.

Tim Höttges, CEO of Deutsche Telekom, joined
the Board in January 2016. This followed
the EE acquisition which resulted in Deutsche
Telekom becoming a 12% shareholder in
BT. I’m very pleased to have Tim on the Board;
he has already provided valuable advice
and insight.

Rewarding our shareholders
The investments we have made are delivering
for the business and resulted in revenue
growth at the top end of our outlook range
for the year. Our goal is to continue to deliver
sustainable profitable revenue growth.
Together with our cost transformation
activities, this will support long-term cash
flow growth and therefore value creation for
shareholders. As a result of the good progress
in the year, the Board is proposing a final
dividend of 9.6p, up 13%. This gives a full year
dividend of 14.0p, also up 13%.

Our dividend policy is to pay a progressive
dividend. Our confidence in future cash flow
generation means that we expect to grow the
dividend per share by at least 10% for each of
the next two years.

Sir Michael Rake
Chairman
4 May 2016

Investing in digital Britain
This year we reached the milestone of
bringing our fibre broadband network to
25 million premises. This has been one of
the fastest deployments of fibre broadband
anywhere in the world. Rollout has been on
budget and ahead of schedule. The UK has
the highest fibre broadband availability of
major European countries, delivered at some
of the lowest prices.

Openreach’s investment in its fibre broadband
network, which is open to all providers on
an equal basis, has been key to this progress.
It has been a real success story for the UK.

Being part of the wider BT Group has given
Openreach the confidence and ability to invest
at scale and pace. And we have plans to go
further:

• delivering the minimum broadband speeds
needed for every home to enjoy the most
popular internet services;

• expanding the reach of fibre broadband
beyond the Government’s current 95%
target; and

• taking the UK from a superfast nation to
an ultrafast one - making a fibre-to-the-
premises service more widely available
together with an ambition to bring ultrafast
broadband to 12 million premises by the
end of 2020.

But in order to do this we need regulatory
support and the right policy framework.
We are open to discussions with Ofcom
and industry to achieve a strengthened but
proportionate form of the current model of
Openreach governance to allow it to continue
to invest at pace.

Investing in new products and services
This year we launched our new European
football content and are pleased with the
response from our customers. BT Mobile has
also done well, adding 400,000 customers
in just a year since launch. The acquisition of
EE in January will allow us to bring together
the best UK mobile network with the largest
superfast broadband network, providing more
innovative, converged products and services.
For business customers, we launched a host of
cloud-based services and a number of security
products to help protect organisations from
growing cyber security threats.

Investing to improve the
customer experience
Our customers have benefited from the
investments we have made in our networks
and products. But our customer service has
not been good enough. We are investing more
in this area and hired 900 new engineers and
more than 900 new contact centre agents as
we look to bring jobs back to the UK.

Overview

The Strategic Report

Governance

Financial statements

Additional information

BT in focus

We’re one of the world’s leading communications
services companies. Our goal is to deliver
sustainable profitable revenue growth by
broadening and deepening our customer
relationships. We made good progress on our
goal, delivering the best revenue performance for
more than seven years. And we bought EE, putting
us in a strong position for the future.

This section gives an overview of who we are and
how we did in the year. It also gives examples
of how we are broadening and deepening our
customer relationships.

Inside BT in focus

4 Who we are and what we do

5 Our lines of business

6 Year in review

8 Our performance in the year

9 Progress on our investments

Broadening and deepening
our customer relationships

At the heart of family life

Better connections
for better business

Driving performance

Creating a digital champion

Celebrating a London landmark

Customers’ expectations continue to rise and there is more we
need to do to provide the experience they deserve. The better their
experience, the more we’ll sell and the less time and money we
need to spend putting things right. And the better we manage our
costs, the more we can invest in giving customers what they need.

We’re building a culture that means we can respond quickly and
provide our customers with a great experience. Our new values
embody this: Personal; Simple; Brilliant. They will help us deliver
our goal and strategy, and fulfil our purpose.

BT in focus
2015/16

Broadening and deepening our customer relationships

Who we are
We’re one of the world’s leading communications services
companies. We’re based in the UK but we serve customers
across 180 countries.

What we do
Our purpose is to use the power of communications to make
a better world. We’re here to meet the needs of our customers,
delivering the experience, products and services that matter
to them. Our services are vital to our customers and their
communities. And we look for ways of using those services to
deliver wider social benefits.

We sell fixed-voice, broadband, mobile and TV products and
services to consumers in the UK. For businesses we offer a variety
of communications services ranging from phone and broadband
through to complex managed networked IT solutions and cyber
security protection. Many public services rely on our technologies.
And in the UK we help more than 500 other Communications
Providers (CPs) to serve their own customers.

How we do it
We have 102,500 employees. Their commitment, expertise and
diversity are key to the success of our business. We invest in them
so they can do their jobs better and are more engaged. And we
encourage them to volunteer in the community.

Our networks and platforms are the foundations of the products
and services we sell. We invest extensively in these. We’re also one
of the largest investors in research and development in the UK
and this has underpinned a long history of innovation. This helps
us offer new and improved products and find better ways of
doing things.

Adjusted
Year ended 31 March 2016

revenue by line of business

11%
Openreach

11%
BT
Wholesale

5%
EE

24%
BT Consumer

a
Adjusted EBITDA by line of business
Year ended 31 March 2016

We’re organised around six customer-facing lines of business,
with support from an internal service unit. You can see how
they did in the year on the next page.

40%
Openreach

Our goal and strategy
Our goal is to deliver sustainable profitable revenue growth.
This will support cash flow growth over the long term. We'll
use this to reward our shareholders and other stakeholders.

To achieve our goal we need to broaden and deepen the
relationships we have with our customers. That means making
sure we stay relevant to them as markets, lifestyles and
technologies change. This is the theme of our Annual Report
and throughout it you’ll find examples of how we’re doing this.

The three pillars of our strategy (page 21) support our goal:
delivering superior customer service; transforming our costs;
and investing for growth.

Performance in the year
on page 8

8%
BT Wholesale

a Before speciﬁc items; includes EE from 29 January 2016.

27%
Openreach
(including internal)

34%
BT Global
Services

15%
BT Business

16%
BT Global
Services

16%
BT
Business

16%
BT Consumer

4%
EE

Overview

The Strategic Report

Governance

Financial statements

Additional information

Our lines of business

BT Global Services
We help around 6,200 corporate
and public sector customers.
We’ve consolidated our position
as a leading global business
communications provider.

This year we grew revenuea in
continental Europe and AMEAb but
overall revenue declined, driven by
lower UK public sector income.
Despite this, we grew our cash flow.
We’ve also delivered a better mix in
our order intake, winning more brand
new business. Looking ahead, our
security and cloud-based products
will help us deepen our customer
relationships.

We acquired EE on 29 January 2016, bringing
together the UK’s best mobile network with
the largest superfast broadband network. This
puts us in a great position to meet the growing
demand from UK consumers and businesses for
converged digital services.

Openreach
We look after the network that
runs from the local exchange to
people’s homes and businesses.
We sell services to all CPs
(including parts of BT) on an
equivalent and arms-length basis.
We’ve brought fibre broadband
to more than 25m premises, or
around 85% of the country. With
other networks, 90% of all
premises can now get fast
broadband. We achieved all 60 of
the minimum service levels set by
Ofcom for the year. We also
announced the Openreach Charter,
setting out our commitments to
improving service and building
Britain’s connected future.

a
Underlying revenue excluding transit.
b
Asia, Middle East and Africa.

BT Business

We sell communications and IT services in the
UK and the Republic of Ireland. We are leaders
in fixed-voice, networking, cloud services
and broadband. Revenuea was flat in the year
but we increased EBITDA for the fourth year
running through cost transformation. We
have sold more fibre broadband and IP-based
products. And the acquisition of EE will help us
provide even more products to our customers.

BT Consumer
We’re the largest provider of
consumer broadband and fixed-
voice telephony in the UK. Revenue
growth of 7% has been driven
by broadband take-up, our new
BT Sport Europe channel and BT
Mobile. But our investments in
these areas meant EBITDA grew by
less. We increased our broadband
market share for the seventh year
in a row, had our best-ever take-
up of TV, and our lowest line losses
for more than eight years.

BT Wholesale
We provide network products and services
to over 1,400 CPs in Great Britain. Revenuea
rose by 1%, reversing the falls of the previous
three years. But EBITDA fell by 3%, reflecting
a changing product mix. Customer satisfaction
continued to rise as a result of our investments
in self-service systems and tools.

BT TSO
We’re the internal technology unit responsible
for delivering and operating BT’s networks,
platforms and IT systems. This year we’ve
maintained and refreshed the technology in
our networks and service platforms. And we’ve
improved the reliability of our IT systems.

BT Group plc
Annual Report 2016

Year in review
We’ve had a busy and successful twelve months

Since our last Annual Report, a lot has happened. We’ve agreed partnerships
with some of the world’s biggest brands, launched new products, helped
improve the tech literacy of hundreds of thousands of children and created
thousands of new apprenticeships and jobs. And we’ve completed the
acquisition of EE, the UK’s leading mobile operator.

May

Jun

100,000

The launch of BT Mobile secured
more than 100,000 customers
in the first three months of
service. The milestone, reached
ahead of the acquisition of EE,
is part of our strategy to provide
customers with greater choice
and value, and help deliver the
UK’s connected future.

We signed a new six-year deal
with Emirates to upgrade and
manage the next generation
of the airline’s contact centre
technology. This will let
Emirates’ global contact centre
agents interact seamlessly
through different channels with
customers across the globe.

The introduction of BT Media Move – a new collaboration
with IBM’s content transfer company Aspera – will allow
huge media files to be transferred faster than ever before.
It uses fast, adaptive, secure protocol (FASP) technology,
in combination with the BT Nexus network, meaning
users will get transfer speeds 70 to 100 times faster than
traditional solutions.

Jul

Aug

Our Cloud of Clouds strategy
took another step forward,
through an agreement with
Ark Data Centre to use its two
highly secure and sustainable
data centre sites. Employing
cutting-edge technology,
our two new data centres are
considerably more efficient
than the industry average,
helping our customers
cut their carbon emissions.

BT Sport became the new UK
home of UEFA Champions
League and UEFA Europa
League football, with BT
holding exclusive live broadcast
rights to all 350 matches each
year from both tournaments for
three seasons. We are the first
UK broadcaster to hold exclusive
live rights to all matches from
both tournaments.

Over the 2014/15 school year we supported 12,500
teachers, helping to give 344,000 children better
teaching in computer science as part of our tech literacy
programme. This is designed to tackle today’s tech paradox
– young people being great tech consumers but few
understanding how it works. We’re on track to reach
a further 15,000 teachers and 400,000 children by
the end of the 2015/16 school year.

AprSepOverview

The Strategic Report

Governance

Financial statements

Additional information

50th year

The BT Tower turned 50
in October 2015.

To find out more turn
to page 18

Nov

Dec

BT Labs at Adastral Park
celebrated 40 years at
the forefront of telecoms
innovation. The work of BT
Labs has transformed the
communications landscape in
the UK and across the world.
We are one of the largest
investors in R&D in the UK and
globally in the telecoms sector.

We became the first UK TV
service to offer Netflix in Ultra
HD. Giving customers access to
some of the world’s biggest TV
shows. This follows the ground-
breaking introduction of
BT Sport Ultra HD – the first of
its kind in Europe.

Feb

Mar

We announced more new
UK-based jobs, with a fresh
recruitment drive to find 1,400
apprentices and graduates.
With a range of roles – in
cyber security and software
development as well as research
– the jobs will be located in cities
including London, Glasgow,
Swansea, Belfast and Liverpool.

EE unveiled Recordings To Go,
a unique feature designed
to set new standards in how
consumers access and watch
the TV they love. The service
means, for the first time in the
UK, TV lovers can select content
to record and then transfer it
to a mobile device as soon as
it has aired.

We announced plans to create 1,000 permanent UK
jobs as part of our commitment to answer 90% of BT
Consumer customers’ calls from within the UK by March
2017. All the positions will be filled by April 2017.

Our acquisition of EE completed, putting us in a strong
position by bringing together the UK’s leading 4G mobile
network and the largest superfast fixed network.

OctJan
BT in focus
2015/16

Performance
in the year

We’ve delivered a strong financial
performance this year at the same time
as continuing to invest extensively in our
business and networks.

We’ve delivered on our outlook with our main revenue measure,
underlying revenue excluding transit (which by definition excludes
EE) up 2.0%, the best performance for more than seven years.

We were delighted to complete our acquisition of EE, the UK’s
best 4G mobile network provider, in January. Including EE’s
contribution, our adjusted profit before tax was up a healthy 9%.

We grew our adjusted earnings per share by 5%. And normalised
free cash flow was £3.1bn, up 9%. Normalised free cash flow
excluding EE was £2.8bn, in line with our outlook.

We’ve invested across the business and are seeing good
results. With Openreach as part of the group, we’ve had the
confidence and ability to invest at scale and speed in the UK’s
digital infrastructure.

Our capital expenditure was £2.65bn, up 14% reflecting our
investments in fibre broadband and £111m from EE.

But we need to do better on service. Our key measure of customer
service, ‘Right First Time’ (RFT) was down 3.0% compared with
a 4.7% increase last year. While Openreach hit all 60 of Ofcom’s
minimum service levels, this is just the start and we have ambitious
goals. That’s why Openreach is tackling missed appointments,
why BT Consumer is upgrading repair service levels and why EE
and BT Consumer are returning contact centre work to the UK.

Trend in underlying revenue excluding transit
Year ended 31 March

Adjusted earnings per share
Year ended 31 March

%
3

(1)

(2)

(3)

(4)

5
0

0
2

)
9
1
(

)
1
3
(

)
4
0
(

2012

2013

2014

2015

2016

pence
35

3
6
2

2
8
2

4
3
2

5
1
3

2
3
3

a
Outlook
Up 1%-2%

Result
Up 2.0%

2012

2013

2014

2015

2016

Normalised free cash ﬂow
Year ended 31 March

Customer service improvement
At 31 March

£m
3,100

2,900

2,700

2,500

2,300

2,100

1,900

8
9
0
7 3
3
8
2

0
3
8
2

7
0
3
2

0
0
3
2

0
5
4
2

0
3

7
4

5
1

5
0
1

)
0
4
(

)
0
3
(

7
5
1

%
20

2012

2013

2014

2015

2016

2010

2011

2012

2013

2014

2015

2016

2016c

Excludes the impact of EE

a
Outlook
c£2.8bn

b
Result
£2.84bn

Target
Above 4.7%

b
Result
Down 3.0%

a Financial outlook we gave at the start of the year and reaffirmed in February.
b Excludes impact of EE.
c Cumulative improvement since 1 April 2009.

Group performance
from page 93

Our KPIs on
page 96

Overview

The Strategic Report

Governance

Financial statements

Additional information

Progress on
our investments

There’s a clear link between our strategy, the
performance of the business and how we
reward our people. This includes the variable
elements of our senior executives’ pay.

The investments we’re making in our five strategic growth
areas underpin our strategy. They also drive our financial and
operational performance, which in turn contribute to our KPIs.
This page provides a snapshot of the progress we’ve made in these
investment areas.

Our strategy

Progress on
investments

Our KPIs

Rewarding
our people

Read more
from page

You can find out more about the IR Framework at:
www.theiirc.org

Natural resources
We use some natural resources in doing business. Our
energy use has declined for the seventh consecutive year.

Read more
from page

Outputs

Outcomes

Skills & expertise
We invest in our people so they can do their jobs better
and are more engaged. And we encourage them to
volunteer to benefit the communities we serve.

Read more
from page

Group performance & KPIs
The group’s financial results and our progress
against our KPIs are the key measurable outcomes
of what we do.

Read more
from page

Line of business performance
Our lines of business sell our products and services and
put our strategy into action.

Read more
from page

Products & services
Our products range from fixed and mobile telephony,
TV and broadband services for UK individuals and
households, through to managing the networks and
communications needs of some of the world’s leading
multinational companies.

Innovation
We have a long history of innovation. It helps us offer
new and improved products and services, find better
ways of doing things and can generate valuable
intellectual property for us.

Read more
from page

Waste & emissions
Our operations produce some waste and emissions;
we’re working to minimise these.

Read more
from page

Our brand strength
Our brands are a key asset. Our investments in areas
such as BT Sport have increased the value of the BT
brand. And the EE brand gives us strength in mobile.

Read more
from page

Environmental benefits
We help our customers and suppliers reduce their
waste and carbon emissions.

Read more
from page

BT Group plc
Annual Report 2016

Who we are
We’re one of the world’s leading communications services
companies.

Where we operate
We’re based in the UK but we serve customers across 180
countries (see page 59).

How we make money
The main output of our business is our portfolio of communications
products and services. We make money by selling these in the
UK and around the world through our customer-facing lines of
business.

We sell through a range of channels including online, contact
centres and account managers. And, following our acquisition
of EE, we now have around 560 EE shops in the UK.

Our revenue is mostly subscription or contract-based. Individuals,
households and SMEs pay for standalone or bundled services,
typically on 12 to 24-month contracts. Large corporate and public
sector customers usually buy managed networked IT services on
contracts spanning several years. Our wholesale customer contracts
range from one month in length for regulated products, to five
years or more for major managed services deals.

But it’s not just about the money
There’s much more to what we do than just making money.
What we do matters. We help millions of people communicate,
be entertained, do business and generally live their lives. We help
our customers reduce their carbon footprint. And we contribute
directly to communities and the health of the UK by providing
jobs, working with suppliers and paying tax, and through our
employees’ volunteering activities.

All of which contribute to the strength of our brands – which can
influence whether a potential customer buys from us or one of
our competitors.

Our approach
Our focus on delivering superior customer service, transforming
our costs and investing for growth is central to what we do.
They are key business activities. Better customer service means
that we spend less time and money putting things right. These
cost reductions, combined with savings from working more
efficiently and the cash we generate from sales, mean we can
invest in the future of our business.

Some investments, such as sports rights, have a lifespan of just
a few years. Other investments, such as our fibre broadband
network, are much longer term and can have ‘pay-back’ periods
stretching to more than ten years.

Delivering our strategy is as much about how we do things, as
what we do. That’s why being a healthy organisation (see page 33)
and living our values (page 31) are so important to us. And that’s
why our people are key to our success.

What sets us apart
We have a strong combination of people, technology, networks
and other physical assets that set us apart from our competitors.
Our research and development (R&D) activities are crucial to us –
and to wider society. We have pioneered innovation in the telecoms
arena, and our R&D supports new ways of doing things and
advancements in our technology.

Importantly, we have the financial strength to invest in these
areas to stay ahead of the competition.

A flexible and sustainable business model
Communications markets are dynamic and very competitive,
particularly in the UK. There are risks and opportunities. Our
Enterprise Risk Management framework (see page 46) helps us
identify and mitigate the challenges and risks we face. And we
do an annual materiality review to understand the societal and
environmental issues that are important to our stakeholders.

We have a flexible and sustainable business model, enabling us
to anticipate and respond to changes in our markets. It underpins
our assessment of the future prospects and viability of the Group
(see page 54).

We see more and more demand for our products and services
because they play such an integral role in modern life. We
use ‘insight’ teams to make sure we stay in tune with market
developments and customer expectations. And we use governance
committees, such as the Design Council, to make sure we’re making
the right investments. So we’re confident that we’ll be able to
deliver value over the short, medium and long term.

Design Council

The Design Council is a sub-committee of the Operating Committee
(page 26). It normally meets monthly. It is collectively responsible for
aligning our capital investments in our networks, systems, platforms and
products so that they are directed towards achieving our overall purpose
and strategy, serve the needs of all of our customers and are delivered
in a cost-effective manner.

Financial strength

Our peoplea

We have the financial strength to make bold decisions
and to invest in the things that set us apart.

Our goal is to deliver sustainable profitable revenue growth.
Together with further transformation of our costs, we aim
to grow our EBITDA and cash flow over the long term.

We have a prudent financial policy and strong governance over
our decisions to make investments, manage our debt and grow
our business, and over how we reward those who work for us
and invest in us.

To build our business, we will continue to make bold decisions
and be prepared to make strategic investments.

At the same time as investing in our five strategic growth areas
(see page 24), we intend to reduce our net debt (which increased
after our acquisition of EE).

We’ll also continue to support the pension fund and to do
so in a responsible way. And we’ll pay progressive dividends
to our shareholders.

Our financial strategy has been consistent for a number of years:

Deliver sustainable profitable revenue growth

Grow EBITDA

Grow free cash flow

Invest in
business

Reduce net
debt

Support
pension fund

Pay progressive
dividends

This approach gives us the financial flexibility to make long-
term investments in the best interests of the company and our
stakeholders; and also in the best interests of communities
where we operate.

Our financial strength has underpinned the investments we’ve
made in BT Sport in recent years, and which we’ll continue to make
in the years ahead. And it meant that in January 2016 we were
able to complete the acquisition of EE, the leading mobile network
operator in the UK.

It means we can invest over £3bn to help take fibre broadband
to 95% of the country by the end of 2017, with plans to
go even further. And with the right investment and regulatory
environment, we’ll invest in ultrafast broadband to 10m premises
(with an ambition of reaching 12m) by the end of 2020.

It also means we can support the business in other ways.
For example, by making sure we continue to innovate and stay
at the forefront of a rapidly-changing industry. And by investing
in the training, development and support we give to our people.

Every day our people touch the lives of millions,
providing products and services which are essential to
the fabric of today’s society – underpinning everything
from global trade and industry to economic growth and
social infrastructure.

They are at the heart of our ambition to deliver an excellent
customer experience and sustainable profitable revenue growth.

Talent
attracted

Enhanced
brand

Product
performance
and design

Sustainable
profitable
revenue
growth

Customer
service

Sales and
marketing
comms

Employee
experience

Believing in what we do
A clear purpose guides everyone’s contribution in BT. By bringing
together the best networks, technology and products and services
for our customers, we use the power of communications to make
a better world.

With EE joining the group, we’ve embraced the opportunity
to combine the best of both cultures. Creating possibilities for
employees is at the heart of this and is a common theme across
our employer brand pillars:

Making a better
world together

Go anywhere,
do anything

Bringing ideas
to life

Simplifying
complexity

Find a world
of diverse,
exciting career
opportunities

Be the best
you can be and
explore your
inventiveness

Join a
community
dedicated
to making a
difference in
the world

Transform
complex
technology
to make our
customers’
lives easier

During the year we had five values to guide our people: Customer,
Team, Honesty, Change and Pride. But we’re changing as a business
so feel the time is right for a refreshed set of shared values.
We asked our people what they thought. We asked our customers
too – they said they want us to understand their needs, be easy
to deal with and show we care. So from next year our values will
be: Personal. Simple. Brilliant.

a Unless stated otherwise, figures in the Our people section exclude EE.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information32 BT Group plc

Annual Report 2016

A global workforce
At 31 March 2016 we had 102,500 full-time equivalent
(FTE) employees in 61 countries, with 81,400 of them based in
the UK. This includes 12,800 who joined the group as part of EE.

Hiring more apprentices
We hired around 550 new apprentices into eight business
operations, learning a range of skills. Demand for apprentices
continues to grow so we expect to hire even more next year.

We’re one of the largest employers in the UK, supporting
its economy by providing jobs and income.

This year, excluding acquisitions, we recruited nearly 11,400
people, bringing fresh ideas and new approaches to help us
innovate, learn and improve. Of these, more than 4,200 are
in the UK.

External hires (full-time equivalents)
Year ended 31 March

000
12

2013

2014

2015

2016

Non-UK

We continued to transform our HR function, reviewing our
systems, processes, policies and services. This has allowed us to
simplify further the way we work and to improve the service our
HR team offers our people.

As our business evolves to meet the needs of our customers,
we adapt our organisation, redeploying people through the BT
transition centre. This helps us avoid redundancies. Last year in
the UK, 1,000 people were redeployed, meaning that we retained
experienced people with the skills we need for the future.

Recruiting talented people

A customer-connected workforce
Improving the quality of our customer relationships is at the heart
of our people strategy.

We’ve built on previous years, recruiting 900 new field engineers
and more than 900 new people to work in customer-facing roles
– in our UK contact centres. We’ve also converted 600 agency
workers to permanent employees, so that we keep their skills and
experience in the organisation.

Highest-ever graduate intake
In 2015/16 we hired 300 graduates globally, our highest intake
to date. We’re planning on hiring around 300 again in 2016/17.

We were again in the top half of The Times Top 100 Graduate
Employers. We’re one of only four companies in the IT and telecoms
sector to feature in the top 100.

Investing for growth
Learning matters at BT. We create meaningful roles so that people
understand what they are responsible for. We also invest in learning
and development to allow our people to build skills and careers to
deliver successfully for our customers. The BT Academy helps them
do this.

The Academy is not a physical place or building, it’s a combination
of materials, events, and activities. It gives people easy
access to the knowledge and skills they need, when they need it,
changing the way they learn and develop. It is organised across
four ‘faculties’.

The Academy

Business

Customer

Leadership

Technical

Each faculty supports a number of communities we call
‘professions’, providing both structured learning and ways
to connect and share with others.

We’re very pleased with how the Academy has done in its first
full year. Across the world employees used the Academy website
over 400,000 times. Over 20% of our people each month are
now sharing information and ideas as well as accessing learning
materials online.

The tools we’ve developed have won awards – gold for Internal
Learning Solution of the Year at the Learning and Performance
Institute Annual Learning Awards 2016, and silver for Best Use
of Technology in Learning at the Training Journal Awards 2015.

This year has seen many success stories culminating in the
National Apprenticeship Finals in January 2016 where we had
two finalists. We also won the Scottish SDS Macro Apprentice
Employer Of The Year Award.

Preparing young people for employment
With growing demand for digital skills in the UK, we feel well-
placed to help create a future supply of suitably-skilled people,
helping both our own business and the national economy, and
creating a brighter future for the country’s youth.

Our 2020 ambition

Help 5m children to receive better
teaching in computer skills

Creating a culture of tech literacy

We’ve made a long-term commitment to help build a culture
of tech literacy. As our first goal, we want to help 5m children
by the end of 2020.

We’re doing this by:

• Inspiring Kids to connect with exciting and relevant tech

concepts;

• Enabling Teachers to feel confident to teach young people

about tech in computing lessons; and

• Equipping Schools to be able to use technology effectively.

We’re working with our partners – the British Computer Society
and the National Schools Partnership – to deliver the Barefoot
Computing Programme, which helps primary school teachers
across the country deliver the new computing curriculum. Over
the 2014/15 school year we supported 12,500 teachers, helping
to give around 340,000 children better teaching in computer
science. We’re on track to reach a further 15,000 teachers and
400,000 children by the end of the 2015/16 school year.

Getting young people ‘Work Ready’
We’re a founding partner of Movement to Work, a voluntary
collaboration of UK employers committed to tackling youth
unemployment. Our Work Ready programme helps 16–24
year-olds get better prepared for work, building both confidence
and their core employability skills. It often supports people from
disadvantaged backgrounds.

Our traineeship programme is at the heart of our strategy. Those
not currently in education, employment or training can join BT for
seven weeks of skills development and work experience. So far over
1,000 young people have taken part in this initiative, with more
than 600 gaining recognised certificates in work skills and business
administration. Many go on to get jobs, either in BT or elsewhere.

The Prince’s Trust
BT is part of The Prince’s Trust Technology Leadership Group, which
helps thousands of young people turn their lives around each year.
We’ve donated use of the BT Tower as a venue for the Trust’s
annual ICT Leaders Dinner for the last ten years – raising £96,000
in 2015.

Engaging our people
We continue to focus on the health of our organisation. From the
rapid expansion of our Academy, through to the business initiatives
that are driving ‘Continuous Improvement’ across BT, we are
investing in a culture of strong employee engagement.

This also benefits our customers. We believe that highly-engaged
employees provide the best experience for customers, helping us
to broaden and deepen our relationship with them.

Employee engagement index
Year ended 31 March

3.9

3.8

3.7

3.6

3.5

2012

2013

2014

2015

2016

Challenge Cup

Challenge Cup is our key people engagement programme. It’s an annual
competition that started in 2003.

It encourages people to form teams and come up with insights and new
initiatives, including ideas for changing business processes.

The aim of the Challenge Cup is to improve customer experience while
generating ideas for creating growth and saving money for BT. This year
over 4,300 people came together to form over 900 teams across 24
countries. The number of people participating has increased year on
year, with 67% of those involved this year doing so for the first time.

Twice a year, more than 72,000 people provide feedback on
working for BT through our employee engagement survey. It helps
us develop a focused people strategy and support action planning
at a local level. Engagement levels have remained stable for the last
two years at just over 3.8 (out of a maximum of 5, with a telecoms
benchmark of 3.95).

We keep our people informed about company results, major
business decisions and other things that affect them using a
variety of digital channels. Leaders regularly connect with their
teams through roundtable meetings, town hall debates, site visits,
webcasts and blogs.

We consult with our people or their representatives on a regular
basis, taking their views into account on decisions that affect
them. In the UK we recognise two main trade unions. The
Communication Workers Union represents people in engineering,
administration and clerical positions. Prospect represents
managerial and professional people.

Diversity at work
Diversity is part of our heritage – as far back as 1880 Henry
Fawcett, who was blind, was appointed Postmaster General.

Improving the mix of our people remains a priority and, in
particular, we’re encouraging more women to take up a career
in technology. We’re proud of our Tech Literacy programmes and
events like the BT Young Scientist and Technology exhibition
that target young women in education. We’ve run recruitment
campaigns in Openreach to attract more women into engineering
and redesigned our entry schemes to try to get rid of any
unconscious bias.

19,000 women now work for us – many with flexible contracts.
That’s 21% of our workforce and there are more than 11,000
women in our management team (corresponding to 26%).
We aim to have at least 25% female representation on our Board,
and it currently sits at 27% (three out of 11 Board members).
Our maternity return rate, measured one year after women come
back, is 86%, well above the industry average.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information34 BT Group plc

Annual Report 2016

Gender is only part of the story. Our aim is to create an inclusive
culture that values all differences in people. Research shows
that diverse teams are more innovative and can deliver a better
experience to an equally diverse customer base.

This year we’ve focused on Inclusive Leadership training for
senior management teams, specific programmes around working
patterns and promoting our #bettertogether culture. The Race at
Work report we sponsored with Business in the Community will set
the direction for development programmes for our employees from
black and minority ethnic backgrounds.

We are a ‘Two Ticks’ a employer and we actively encourage the
recruitment, development and retention of disabled people. We’ll
automatically put an applicant with a disability or long-term health
condition, who meets the minimum criteria for a vacancy, through
to the first stage of a recruitment process. We’re making progress
on improving diversity but we recognise that there is a lot more
we need to do.

Staying safe and well
We’re committed to having no avoidable health and safety
incidents. The 11% reduction in the rate of lost time due to injury
brings us to our lowest-ever level. However, some of our activities
are inherently hazardous and the risks, particularly in external
engineering, remain challenging to manage. We’ve accepted
some localised and historic failures raised by the Health and Safety
Executive. We’ve done a lot to mitigate the risks highlighted and
we still compare well with industry benchmarks.

We haven’t done as well as we wanted on some indicators. Our
sickness absence rate has risen by 5%, driven mainly by increasing
levels of musculoskeletal and mental health conditions. We’ve
measured our people’s sense of wellbeing for some time. The
long-term improvements we’ve seen were broadly flat this year,
with a small increase of 0.5%. The pattern of sickness absence
and wellbeing varies across the group and is strongly linked to the
level of change taking place within a particular business area. We
see the best results where changes have been well managed with
a style that takes account of people’s perceptions. We’re sharing
best practice on managing change across the lines of business and
through the Academy.

We continue to focus on early intervention when people are sick or
injured. Our company-funded schemes helped get 91% of people
treated back into their role on full duties.

Volunteering

Our 2020 ambition

Inspire two-thirds of our people
to volunteer some of their time

66%

Our people can use up to three working days a year on
volunteering activities. As well as having a positive impact on
society, our employee engagement survey (see page 33) shows
higher engagement levels from those who volunteer than from
those who don’t.

Some people choose to help charities with particular issues
needing their expert input and knowledge. Others use their

a Two Ticks is an accreditation that is given to organisations that are committed to employing

disabled people.

energy and enthusiasm to make a practical difference in their local
communities. That includes helping our tech literacy programme
and promoting traineeships.

This year over 27% of our people spent nearly 45,000 days
volunteering their time to support charities and community groups
around the world. BT volunteers were involved in raising £8.5m for
Children In Need and £2.9m for Sport Relief.

The EE business shares our passion for making a difference. It
supports several charities through volunteering such as ‘Apps for
Good’, in which young people use new technologies to design and
make products that can make a difference to their world, gaining
confidence and skills at the same time. Our combined contributions
will benefit good causes in the years ahead.

Pay and benefits
We compare pay and benefits for our people with companies
of similar size and complexity to ensure our remuneration is
competitive.

In the UK, most of our engineering and support people are
paid on terms and conditions negotiated through collective
bargaining with our recognised trade unions, ensuring fair terms
and conditions for all. Our managers’ pay and any bonuses are
determined by a combination of business performance and their
personal contribution to the company.

Our executives may also receive long-term awards to reward the
creation of shareholder value. The amount they ultimately receive
is determined by the group’s performance over a three-year period.
Executive directors must retain incentive shares for a further two-
year period.

In line with our regulatory obligations, incentives for people
in Openreach are tied solely to a combination of personal
contribution and Openreach’s performance, rather than that
of the wider group.

We support our people by providing a range of retirement savings
plans. In the UK, our main defined benefit scheme is the BT
Pension Scheme and our defined contribution scheme is the BT
Retirement Saving Scheme. You can read more about these on
page 107.

Sharing in success
Almost 60% of our people take part in one or more of our savings-
related share option plans (saveshare), which operate in over 25
countries. In August 2015, almost 13,000 people in our 2010
saveshare plan were able to buy shares at 104p, representing an
average gain of around £10,000 each.

Our networks and

physical assets
Our networks, platforms and IT systems are the
foundations of the products our customers rely
on around the world.

Network platforms

Our global reach
Our global network provides service to 180 countries and is
supported by in-country networks and infrastructure. Most
of our network assets are in the UK and continental Europe.
We continue to selectively expand the reach of our network to
support multinational companies in other regions. And we use
the expertise we gain from protecting BT’s own networks, to
help secure our customers’ networks.

The scale and reach of our global multi-protocol label switching
(MPLS) network is a key competitive differentiator. This single
IP-based network lets our lines of business launch products and
services quickly and cost-effectively, without having to invest in
dedicated infrastructure for each product.

To help our multinational customers connect their sites we
offer virtual private network (VPN) services, which are integral
to our ‘Cloud of Clouds’ vision (see page 60). VPNs provide the
convenience and security of a private network, but over the public
internet. We use our MPLS network together with a combination
of owned and leased fibre connections to connect our points of
presence (PoPs) around the world. For the final connection into
the customers’ premises, we either use our own circuits, or rent
connections from telecoms operators in that country. We also
have an extensive satellite network which provides customers
with connectivity around the world, including remote locations.

In-country networks
We have extensive networks in the UK, as well as in Germany,
Italy, the Netherlands, the Republic of Ireland and Spain.

Our UK fixed-line network is one of our most valuable assets and
our investment in fibre broadband is key to delivering modern,
superfast services to UK consumers. To meet the demand from
businesses, we’re continuing to expand the availability of Ethernet.
And when our customers are away from their home or office, they
can use one of more than 5.6m BT Wi-fi hotspots.

Our research shows that over the last five years, at peak times,
data traffic in the core network has grown by around 50% a
year, and we expect growth to continue at a similar rate. So we’re
making sure that our core and access networks can cope with
that demand.

Core network peak-time traﬃc
Year ended 31 March

Gbps
25,000

20,000

15,000

10,000

5,000

2012 2013 2014 2015 2016 2017e 2018e 2019e

2020e

As a result of buying EE, we now own the UK’s largest mobile
network. We’ll continue to invest in its coverage and capability, to
consolidate its position as the biggest and fastest in the UK. At the
end of March 2016 outdoor coverage of the UK population was:
• over 99% for 2G;
• over 98% for 3G; and
• over 96% for 4G.

We want to expand 4G geographic coverage. This stands at 60%
today, and we plan to get this to 95% by the end of 2020 with
an ambition to go even further.

Between BT and EE, we have a combined 120MHz of paired
mobile spectrum. This means we’re able to offer speeds of up
to 90Mbps in areas served by our 4G+ network.

We have access to over 18,500 basestation sites including those
via the MBNL joint operation between EE and Hutchison 3G UK
(see page 237).

Progress this year
This year we’ve:

• installed new, more cost-effective MPLS network routers in all

106 core exchanges in the UK;

• installed new Ethernet switches into 169 exchanges, so even

more businesses can have access to BT Ethernet services;
• continued to roll out the latest technology, such as content

caching so we can use network capacity better and speed up
the delivery of TV and internet content; and

• integrated the technology to allow BT Global Services to offer a

software-defined WAN service. This lets enterprise customers use
different types of network together, and provide various services
to their users seamlessly, as if over just one network.

Service platforms
We run a number of service platforms that combine our network
and IT resources. They underpin many of the key products we offer.

One such platform is BT Conferencing, which provides audio and
video conferencing services to customers around the world. Our
audio conferencing service is called BT MeetMe and is available
with Dolby Voice for higher quality sound and a better user
experience.

Our BT TV platform supports a growing number of customers
and we’re increasing the range of services it delivers. We designed,
developed and tested the new BT Ultra HD set-top box. We
also launched our BT Sport app. It provides customers with
functionality like goal replays, different camera angles and extra
facts – all to enhance the viewing experience.

IT systems
Our IT systems let us manage our processes, handle customer
information and deliver our products and services. They’re critical
to serving our customers and running our business.

For example, our customer management systems hold customer
and billing information. They include the technology that works
with our online customer portals. And the technology used when
customers call a contact centre.

Progress this year
This year we’ve:

• delivered an integrated set of applications that we call

Consumer.com. It’s part of our focus on broadening and
deepening our customer relationships. It means we’ve a
much easier way for our customers and contact centre agents
to manage customer accounts, and track orders and fault
management. It has resulted in around 10,000 fewer calls
to our contact centres each week;

• introduced ‘View My Engineer’ to help reduce missed

appointments. A customer can use it to check details of
scheduled engineer visits. It provides engineer contact details,
indicates when the engineer is travelling to the appointment,
when the work has been started and when the work has been
done; and

• continued to innovate in our data centres – improving their

performance and removing older server technology. For example,
this year we started to roll out storage virtualisation which helps
us store data more efficiently.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information36

Properties
We have around 7,000 properties in the UK and 1,730 across
the rest of the world. The number of properties in the UK is higher
than the 6,350 we had last year, mainly reflecting our acquisition
of EE in January 2016. Through this, we’ve added 635 properties,
of which around 560 are EE shops. There are also around 40
former shops EE is in the process of disposing of.

We lease the majority of our UK properties from Telereal Trillium,
part of the William Pears group. We signed a sale and leaseback
arrangement with them in 2001. 88% of our UK properties
are operational sites housing fixed and mobile telecoms and
broadband equipment. The rest are retail outlets, offices, contact
centres, depots and data centres. We also have our BT Sport TV
studios in London.

In the UK, we’ve been consolidating and disposing of surplus office
space for several years and we’re working on further opportunities
to streamline our real estate. We continue to reduce the size of
the operational estate as new fibre-based technologies mean we
can dispose of buildings and make energy savings. This year we
brought our property management activities back into BT from
Telereal Trillium. This will reduce costs by simplifying how we
manage our UK property portfolio.

Outside the UK, our offices in Gurgaon, Kolkata and Bengaluru in
India are now home to our Central Business Services organisation.
This provides support to our lines of business. As part of our
strategy of investing in high-growth regions, we’ve expanded our
offices in Budapest and Debrecen in Hungary – so we can support
our global customers more effectively and efficiently.

BT property portfolio (UK)

275
Oﬃces and depots

EE property portfolio (UK)a

51
Operational sites

a Excludes leased cell sites.

Research
and development
We invest in research and development (R&D) as we
believe commercial success is ever more dependent
on it. Our long history of innovation combines scientific
breakthrough, practical engineering and commercial
purpose. We call this ‘purposeful innovation’.

Our innovation heritage
Our origins can be traced back to an entrepreneurial fusion of
business and innovation. In 1837 Sir William Fothergill Cooke
(a businessman) and Sir Charles Wheatstone (an academic) filed
a patent for the world’s first practical electric telegraph. This led
to the founding of the Electric Telegraph Company in 1846,
the seed company that eventually led to the formation of BT.

We’ve pioneered many of the technologies that we and customers
now rely on. For example, in 1926 we established the world’s first
two-way, trans-Atlantic conversation by radio telephone, from
our wireless station near Rugby. And in 1943 Tommy Flowers,
working in the telecoms division of the GPO, developed the world’s
first programmable electronic computer, Colossus. In 1968, we
installed the world’s first digital telephone exchange. We laid the
world’s first, purpose-designed optical fibre submarine cable in
Loch Fyne in 1980. And in 1984, we installed the world’s first
140Mbps commercial single-mode optical fibre link. Our global
IP Exchange platform (GIPX) was the result of one of our research
projects. And more recently, we’ve led the industry in setting out
our vision for widescale deployment of ultrafast broadband.

We sponsor the Information Age gallery at the Science Museum
where many of our historical innovations can be seen, including
parts from Colossus.

This year we invested around £470m (2014/15: around £500m)
in research and development. Over the years we’ve been one of the
largest investors in R&D of any company in the UK, and globally in
the telecoms sectorb.

We’ve continued to grow the number of inventions we produce
from our research activities. In 2015/16 we filed patent
applications for 97 inventions (2014/15: 93).

Number of new invention ﬁlings
Year ended 31 March

22
Data centres

6,052

Operational sites

7
9

3
9

9
8

22
Oﬃces

562

Retail outlets

100

9
6

5
6

2012

2013

2014

2015

2016

We routinely seek patent protection in different countries, and
at 31 March 2016 had a worldwide portfolio of around 4,700
patents and applications.

b Comparison based on total R&D spend over 2005/6 to 2014/15. Source: EU Industrial R&D
Investment Scoreboard, http://iri.jrc.ec.europa.eu/scoreboard.html

BT Group plc Annual Report 2016

Brand and reputation
We own three strong brands: BT, EE and Plusnet.
These are at the heart of our efforts to broaden and
deepen our customer relationships. The experience
our customers have is shaped not just by the service
our front-line teams provide, but by everything we do:
from the products and propositions we design, to the
way we communicate with customers.

The BT brand continues to go from strength to strength. Brand
Finance has valued it at $18.4bn, 14% more than a year ago.
According to their analysis, BT is the 60th most valuable brand
in the world and the third most valuable brand in the UK.

In March 2015, we re-entered the UK consumer mobile market,
under the BT brand. In January 2016 we took ownership of the
EE brand. Since its launch in 2012, the EE brand has achieved
impressive results in terms of awareness and positive associations.

The Plusnet brand continues to offer a distinctive position of
brilliant service at a great price. We’ll continue to run all three
of our brands in the UK consumer market, offering products that
meet different customer needs.

We continue to innovate for our customers, further building the
strength and breadth of our brands. For example:

• In August, we added to our BT Sport offering, showing exclusive
UEFA Champions League and UEFA Europa League games.
We enhanced this with the launch of Europe’s first live Ultra HD
sports TV channel.

• We also embarked on a multi-year strategic technology

partnership with the Williams Martini Racing Formula One team.
We’re providing the team with innovative communications
technology to help improve car performance with instant access
to real-time data. Our collaboration is already helping Williams
to work better – connecting race tracks around the world with
its headquarters in Oxfordshire.

Using partnerships to raise awareness
Partnerships continue to play an important role in how we build
our reputation and show our support for good causes. For example
we:

• launched our BT Sport Infinity Lab competition to find start-ups
and entrepreneurs with innovative digital media and production
solutions;

• agreed multi-year sponsorship of the Institution of Engineering
and Technology’s new Diamond Jubilee Scholarship Programme;

• have continued to develop our Connecting Africa programme

(see page 38); and

• continued to support good causes including Children

in Need in November 2015 and Sport Relief in March 2016
(see page 34).

Open innovation
We bring together expertise and resources (both our own and
third-party) at our eight global development centres. Adastral
Park in the UK is our technology headquarters. It’s an innovation
campus which we share with around 70 high-tech companies, and
a workplace for around 3,700 people. This year we continued to
grow our development centres in Kuala Lumpur and Bengaluru.

We’re keen to work with people outside BT. We have extensive,
long-standing, joint-research programmes with Cambridge
University (UK), Massachusetts Institute of Technology (US),
Tsinghua University (China), Khalifa University (UAE) and over
30 other universities globally.

Global innovation scouting

Our research teams work with customers and other companies
in the US, Asia, Europe and the Middle East. And we’ve had people
located at hotbeds of innovation such as Silicon Valley and Cambridge,
Massachusetts for over 15 years.

These teams help us track the latest global developments in new
technologies, business propositions and market trends. We’ve been finding
new ways to support start-ups in Adastral Park and in London’s Tech City.
And through our BT Infinity Lab programme we partner with entrepeneurs
to meet and co-innovate with start-ups from around the world.

Our people help us innovate. This year our internal New Ideas
Scheme had more than 1,700 submissions. It’s helping us provide
a better service to our customers.

We run innovation showcases where business customers can
discuss applications and solutions with our experts, and work
with them on solving problems.

Under our communications programme, ‘Ingenious’, we’re sharing
BT’s innovation story with thought-leaders, governments and
the media. Examples of our research activities this year include:

G.fast speed improvements
We’ve been driving the standards for a new transmission system
at the heart of our ultrafast broadband vision. This means we
should be able to deploy ultrafast broadband far more quickly
than previously thought possible.

XG-FAST trial
Working with Bell Labs, we’ve demonstrated speeds of
5.6Gbps over 35 metres of copper cable in lab conditions.
This proves it’s possible to achieve very high broadband speeds
over existing infrastructure.

Long-reach VDSL
We’ve shown in the lab that we can take a 2km long copper
line currently achieving 9Mbps with standard VDSL, and increase
this to 24Mbps and beyond.

Future-proofing exchange operations
We’ve been improving the tools that our exchange-based
engineering teams use for planning their work. We use
artificial intelligence and mathematical modelling to better
forecast, plan and schedule where people and equipment
will be needed.

Quantum communications
We’re also leading the world in demonstrating how quantum
physics and optical engineering are on the cusp of providing much
improved security for optical fibre systems. We’ve shown how a
200Gbps stream of encrypted data can be transmitted on the
same 100km network link as a quantum encryption key. This work
could offer enhanced security for the data networks of the future.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information38

Stakeholders
and relationships
As well as our people, our main stakeholders are: our
customers; communities; shareholders; lenders; our
pension schemes; suppliers; government; and regulatory
authorities.

Our markets and customers
We sell fixed-voice, broadband, mobile and TV products and
services to individuals and households in the UK. For small and
medium-sized enterprises, as well as larger businesses in the UK,
we offer fixed-voice, broadband, mobility, networking and IT
services. In both the UK and globally we offer managed networked
IT services to multinational corporations, domestic businesses and
public sector organisations.

Some of our customers are also our competitors. This is because
we sell wholesale products and services to other communications
providers in the UK and overseas.

You can read about our markets, customers and the services
we provide them in our lines of business section, from page 57.

Communities and societya

BT’s purpose is embedded at the heart of our business, and has
helped us to deliver economic growth and wider societal and
environmental benefits. During the year we invested £35m to
accelerate a number of environmental and societal priorities that
help to bring our purpose to life (see page 43). This investment is
a mixture of cash, time volunteered, and in-kind contributions. It
is equivalent to 1.1% of our previous year’s adjusted profit before
tax. Over the last five years we’ve invested over £153m,
an average of 1.18% of our adjusted profit before tax.

BT’s total investment in society
Year ended 31 March

£m
40

1.50%

9
1
3

1.12%

1.01%

1.15%

1
7
2

2
7
2

5
2
3

1.10%
0
5
3

2012

2013

2014

2015

2016

Investment – time, cash and in-kind support
Percentage of previous year's adjusted proﬁt before taxation

a Data excludes EE.

Creating a connected society

Our 2020 ambitions

More than 9 out of 10 people in the
UK will have access to our fibre-
based products and services

Help 10m people overcome social
disadvantage through the benefits our
products and services can bring

9/10
10m

This year, we extended our fibre footprint in the UK to more
than 25m premises and – in line with our 2020 goal – this
means around 8.5 out of 10 people can now access fibre-based
products and services (see page 85). We plan to extend coverage
even further so that fibre availability in the UK exceeds the
Government’s current target of 95% by the end of 2017.

We continue to push for greater digital inclusion, both by playing
a leading role in the development of the Government’s Digital
Inclusion Outcomes Framework, and through the use of our own
products.

We’re helping low income groups to get online with two products:
BT Basic + Broadband and our BT Business Digital Inclusion for
Social Housing solution. The launch of the ‘BT and Barclays Wi-Fi
in Our Community’ initiative is providing access, guidance and
coaching to those who need it most.

Keeping people safe online remains a priority. Internet Matters,
the website we co-founded in 2014 to help parents keep their
children safe online, has now had over 2.5m visitors. The Right
Click, our partnership with UNICEF UK, has seen BT volunteers
deliver 280 workshops in schools, teaching children and parents
how to use the internet safely.

This year we’ve developed a methodology to measure the social
impact of our products and services. This has been successfully
piloted on three propositions (BT Basic, Digital Inclusion for Social
Housing and Mobile Health Worker) and has been used on a
corporate contract through our work with the Colombian
government (page 62). Having a way to measure the wider
benefits our products and services can bring shows how valuable
ICT, and what we do, has become in people’s day-to-day lives.
We can also use the methodology to influence how we develop
our future products.

Outside the UK, our Connecting Africa programme has now
successfully connected all 30 of the planned SOS Children’s
Villages, in 13 countries, using BT’s satellite technology. We
have used this in seven villages to provide a new Healthcare
Management System, improving healthcare services for over
100,000 people.

We also continue to embed social and environmental criteria into
our business processes, helping us to make better decisions,
stimulate growth and spark innovation. In January we launched
a BT Infinity Lab competition, in partnership with the Department
of Transport, to stimulate social and environmental innovation in
the SME sector.

BT Group plc Annual Report 2016

Our lenders
Our lenders, mainly banking institutions and bondholders, play
an important role in our treasury and funding strategy.

These relationships are vital for funding the business and meeting
our liquidity requirements. We tell you more about this on
page 102.

Our pension schemes
We operate defined benefit and defined contribution pension
schemes. The largest is the BT Pension Scheme (BTPS) which has
301,500 members. You can read more about it on page 107.

Our suppliers
Our suppliers play a vital role; their products and services help us
deliver our strategy. We source from across the world and currently
have suppliers in over 150 countries. We spent around £10.2bn
with our suppliers this year (2014/15: £9.4bn). Around 64% of
our spend is with the top 100 suppliers.

We want to get the most from our suppliers – especially from their
diversity, skills and innovation. The mix of suppliers keeps evolving
as we expand into markets such as mobility, TV and televised sport.
This year we’ve grown our supplier base in IT security, to support
our growing investment in cyber security. But we’ve also removed
over 2,800 suppliers from our procurement systems.

As part of integrating EE, we’re working to identify opportunities
for cost savings and efficiencies through our combined spend.

Our approach to procurement
We have around 330 BT people in 30 countries working with
suppliers. As part of our cost transformation activities we’ve
concentrated on making the most of our relationships with
our largest suppliers to get even better value. In-life contract
management of our top 130 suppliers has delivered savings
of around £18m.

We’ve continued our Purchase Order (PO) Intercept programme,
reviewing all POs over £1,000 to make sure that we’re getting
the best from our spend across BT. Our Central Business Services
organisation has hired more people to support this programme.
They’ve reviewed around 90,000 POs, accounting for £4bn of
spend, and have saved us more than £15m.

The Procurement Profession, part of the BT Academy, has grown
this year, developing a rich library of over 120 training modules.
The website attracts nearly 250 visits a month on average.

Our ambition is to have all our buyers accredited and licensed.
And for a few of our expert practitioners to be recognised
externally as fellows of CIPS (Chartered Institute of Procurement
and Supply).

We now have 198 licensed buyers. And there are now five fellows
of CIPS (2014/15: two) leading our procurement activities in BT.

Supporting charities and communities

Our 2020 ambition

Help generate more than £1bn for
good causes, using our people, their
skills and our technology

£1bn

This year we added £94m towards our £1bn target. £60m of this
was raised via MyDonate, our commission-free online fundraising
and donations platform. This takes our overall fundraising total to
£327m.

As well as supporting a number of smaller charities and individual
fundraisers, we again used MyDonate and our communications
technology – with help from our volunteers – to support various
large telethons (page 34). These included Comic Relief, Children
in Need, and the Disasters Emergency Committee appeal after the
earthquake in Nepal.

In the UK, we provide discounted calls and line rental charges to
members of The Charities Club, saving those charities £1.2m on
their phone bills.

We see sport as a positive vehicle for change in young people’s
lives. Through the donations of BT Sport customers, The
Supporters Club funded nine new sports charities and community
sports foundations this year (four in the UK). And we encourage
people to take up sport through the Join In campaign.

Our shareholders
We have around 825,000 shareholders. As well as the Annual
Report and Annual General Meeting, we keep our shareholders
up to date with how we’re doing through regular mailings. These
often include offers on our products and services that are only
available to shareholders. Our website includes press releases,
newsletters, presentations and webcasts that can also keep our
shareholders informed.

We held a general meeting in April 2015 at which our shareholders
approved the acquisition of EE. And in January 2016 we published
a prospectus for the issue of new BT shares that were part of the
consideration for the acquisition.

Most of our shares are held by institutional investors. We have an
extensive investor relations programme aimed at keeping existing
investors informed and attracting new ones. This programme
includes:

• reporting quarterly results, accompanied by a conference call

or presentation from senior management;

• ‘teach-ins’ on key topics;
• site visits (for example this year we invited investors to an

innovation event at Adastral Park); and

• meetings and conference calls with investors both in the UK and

around the world.

In 2015/16, we held 353 meetings or events with institutional
investors. This compares with 369 in 2014/15.

We were voted the best company for investor relations in England
in the Extel Survey 2015, for the second year running. We also
maintained our second place in the European telecoms sector.
And we won the IR Magazine award for best investor relations
in the European Technology & Communications sector.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information40

Choosing our suppliers
We want to know who we’re doing business with and who is acting
on our behalf. So we:

We introduced it in September 2013 and it’s now one of the
largest supplier finance schemes in the UK, supporting over
£1.4bn of spend. EE also operates a supplier finance scheme.

• choose suppliers using principles that make sure both we and the

supplier act ethically and responsibly;

• check that the goods and services we buy are made, delivered
and disposed of in a socially and environmentally responsible
way; and

• measure things like suppliers’ energy use, environmental impact
and labour standards, and work with them to improve these.

Ethical standards in our supply chain
We want our suppliers’ employees to experience working
conditions that are safe and fair. We send all but our lowest-risk
suppliers an ethical standards questionnaire. Based on their
responses, we follow up with any suppliers identified as high or
medium risk. This year we met our target to achieve 100% follow-
up action within three months. We also visit supplier sites to make
sure they meet our standards. This year we visited 47 sites around
the world, the same as last year.

Number of on-site supplier assessments
Year ended 31 March

4
5

9
4

7
4

2013

2014

2015

2016

To comply with the Dodd-Frank Act and our Securities and
Exchange Commission (SEC) obligations, we repeated our annual
research asking our BT product suppliers whether their products
contain certain minerals which may have been sourced from
conflict areas such as the Democratic Republic of the Congo. As a
result we have a better understanding of our suppliers’ own supply
chains but we’re not yet at the point where we can declare an
individual product to be entirely conflict mineral free.

In June 2015 we filed with the SEC our 2014 report describing
our conflict minerals approach and reflecting the supplier
responses we received. We will file the report for 2015 in
May 2016.

The Modern Slavery Act, which came into effect in 2015,
has meant that we’re reviewing the processes we use with our
suppliers to address human rights risks in our supply chain.

Paying our suppliers
This year the average number of days between invoice date and
supplier payment was 62 days globally (2014/15: 60 days), with
54 days for UK invoices.

Suppliers can choose to use the BT Supplier Finance scheme
which offers contracted suppliers the chance to be paid early.
This reduces their financing costs.

These schemes are attractive for SMEs (who make up around 40%
of our supply base). They also support UK government initiatives
to encourage small business growth.

We also follow the principles of the Better Payment Practice
Code set up by the Government in partnership with business
organisations.

Human rights
The human rights of our employees, people working in our supply
chain, our customers and members of the communities where we
operate could be affected by the way we do business. We think
about what these effects could be and try to positively impact the
experience and approach for those we work with. We also consider
how we can remove or reduce potential negative impacts in
accordance with the UN Guiding Principles on Business and Human
Rights (UNGPs).

It’s important that everyone in BT, and everyone who works with
us, understands our commitment to the UNGPs. That’s why we
commit to them in The Way We Work, our statement of business
practice.

We have other policies to address specific issues which might
affect human rights, such as: supply chain standards; diversity
and inclusion; and safety and wellbeing in the workplace.

We’re in the process of drawing together our approach into one
overarching human rights policy so that anyone can easily access
our principles and understand how we put them into practice.

As we’re a communications provider, the rights to privacy and
freedom of expression are the human rights which could be most
at risk from our operations:

• Privacy – because we must comply with laws on investigatory
powers. These allow governments, in certain situations, to
request information about how people use our services and the
content of their communications.

• Freedom of expression – because although we don’t host much
online content ourselves, we do help people get online. So if we
block content (which we do in very limited circumstances), that
could clearly affect people’s rights to express their views and
receive information.

We support and respect people’s rights to privacy and free
expression, though we accept that sometimes there may need
to be limitations on those rights, as international human rights
standards allow. Any limitations should be within clear legal
frameworks with the right checks and balances. In December
2015 we published our Privacy and Free Expression in UK
Communications report which explains our approach to this in
more detail.

Our Human Rights Steering Group, which is chaired by a member
of the Operating Committee, meets quarterly. This year it
considered a broad range of issues, including:

• our approach to an overarching human rights policy;
• our due diligence processes when it comes to winning business;
• the Modern Slavery Act 2015;
• our supply chain; and
• specific human rights issues arising from day-to-day business.

Find out more about the BT Supplier
Finance scheme at:
www.selling2bt.bt.com

You can find out more about the
Better Payment Practice Code at:
www.payontime.co.uk

www.btplc.com/TheWayWeWork

BT Group plc Annual Report 201641

We’re developing an enhanced human rights due diligence tool
for our global sales team. We’ve also undertaken detailed human
rights impact assessments on a number of potential business
opportunities. As a result, we took a range of mitigating steps such
as including detailed contractual provisions, integrating human
rights considerations into customer training and ongoing project
monitoring. We’ve also turned down business opportunities on the
basis of human rights concerns.

Our relationship with HM Government
We’re one of the largest suppliers of networked IT services to the
UK public sector. We work with more than 1,400 organisations
across central, local and devolved government, healthcare, police
and defence to provide some of the UK’s most vital services.
For example:

• We run N3, the National Health Service’s secure national

network.

• We provide telecoms services to the Ministry of Defence and
contact centre and conferencing services to the Department
for Work and Pensions.

• We’ve recently started working with the NHS Islington Clinical
Commissioning Group and the London Borough of Islington to
provide a service that will help join up health and social care in
Islington and improve the experience of care for the borough’s
residents.

• We’re working with Bromley Council to deliver computer and

data centre services which will help provide them with greater
flexibility in running their IT services.

• We’re working with the Government to extend fibre broadband
to rural areas under the Broadband Delivery UK (BDUK) scheme.

• In December, EE was awarded a contract to provide the

emergency services with nationwide 4G voice and data services.

We can be required by law to do certain things and provide
certain services to the Government. For example, under the
Communications Act, we (and others) can be required to provide
or restore services during disasters. The Civil Contingencies Act
2004 also says that the Government can impose obligations on
us (and others) at times of emergency or in connection with civil
contingency planning.

The Secretary of State for the Home Department can also require
us to take certain actions in the interests of national security.

Regulation
Communications and TV services are regulated by governmental
and non-governmental bodies in the UK and around the world.
This is to make sure that CPs and broadcasters comply with
common standards and rules, and that nobody is disadvantaged
by providers with strong positions in their markets.

• a requirement for national regulators to review markets for

significant market power (SMP) every three years and to put
appropriate and proportionate SMP remedies in place.

Companies with SMP typically have a market share of 40% or
more and would, without regulation, be able to do things such
as increase prices without losing business to competitors (as would
happen in a fully competitive market). The directives also cover
how regulators should impose remedies to prevent the exercise
of SMP, for example by setting price controls. The rules require
national regulators to consult with the EC on any remedies before
they are finalised to make sure they’re consistent with European
regulations.

Functional separation of the access network from downstream
businesses is included in the EU Common Regulatory Framework
list of remedies. But it’s positioned as an exceptional remedy,
requiring a high burden of proof of market failure, and is subject
to EC approval. Structural separation, unless self-imposed, is not
included.

Review of the European Common
Regulatory Framework

In May 2015, the EC announced its strategy for the Digital Single Market
which includes a plan to review the European Common Regulatory
Framework. As part of this review, the EC will assess how to encourage
investment in infrastructure and how to make current telecoms and media
rules fit for new challenges and new types of service provider. The EC is
also reviewing copyright and content policy. Any changes are expected
to be implemented by mid-2017.

UK regulation
The UK telecoms and broadcasting industries are regulated
primarily by Ofcom (the UK’s independent regulator) within
the framework set by the various European directives, the
Communications Act 2003 (the Communications Act) and other
UK and EU regulations and recommendations.

The telecoms sector is subject to an extensive ex-ante regulatory
framework set out under the European Common Regulatory
Framework. By contrast, broadcasting and pay-TV is only currently
subject to a mixture of separate, specific regulation and general
competition law.

The Communications Act and Ofcom
The Communications Act gives Ofcom legal powers and sets out
how electronic communications and broadcasting services should
be regulated in the UK. It includes the conditions set by the
European directives.

European Union (EU) regulation
In EU countries, electronic communications networks and services
are governed by directives and regulations set by the European
Commission (EC). These create a Europe-wide framework (known
as the European Common Regulatory Framework) covering services
such as fixed and mobile voice, broadband, cable and satellite TV.

Ofcom’s main duties

• To further the interests of citizens in relation to communications

matters.

• To further the interests of consumers in relevant markets, where

appropriate, by promoting competition.

The directives include rules covering:

• access and interconnection;
• universal service obligations; and

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information42

Under the powers of the Communications Act, Ofcom sets
conditions that CPs must comply with. Some conditions, known
as General Conditions, apply to all CPs. These mainly deal with:

• protecting consumers;
• access and interconnection;
• planning for emergencies;
• providing information to Ofcom; and
• allocating and transferring phone numbers.

Other conditions apply to certain companies that are universal
service providers or which Ofcom has decided have SMP in a
particular market. We’re the designated universal service provider
for the UK (except for the Hull area where it is KCOM Group) and
so we have certain obligations. The main one is to make sure
that basic fixed-line services are available at an affordable price
to all consumers. We’re also obliged to provide public payphones,
although we can remove those that are uneconomic (subject to
local consultation and agreement by local authorities).

We have SMP in a number of markets including Business
Connectivity (such as Ethernet and backhaul), Fixed Access
(including LLU, GEA and WLR) and Wholesale Narrowband (such
as Call Origination). Ofcom’s market reviews are therefore very
important for us.

Following a market review, if Ofcom decides that a CP has SMP, it
can put controls in place, typically on the prices which the CP can
charge. Ofcom will generally try to set charges that are reasonably
based on costs and an appropriate return on the capital invested.

CPs affected by Ofcom decisions can appeal them through a
number of routes, including to the Competition Appeal Tribunal
(CAT) or to the High Court.

BT’s Undertakings
In response to Ofcom’s 2005 Strategic Review of
Telecommunications we gave some legally-binding undertakings
under the Enterprise Act 2002. These Undertakings (which
included the creation of Openreach) began in September 2005.
They aim to give clarity and certainty to the UK telecoms industry
about the way we provide wholesale regulated products. This
in turn supports effective and fair competition in related retail
markets.

Ofcom’s Strategic Review
of Digital Communications

Ofcom announced in March 2015 that, ten years on from the last one,
it would carry out a new strategic review, this time of the wider digital
communications industry.

The review has looked at ways to improve investment, innovation and
sustainable competition across fixed-line, broadband and mobile
markets, and at ways to ensure that where regulation is necessary it is
targeted, with deregulation elsewhere. Ofcom has also looked at ways
of empowering consumers.

On 25 February 2016, Ofcom published its initial conclusions:

• Ofcom sees passive access to Openreach’s underground ducts and
telephone poles as key to its future competition policy, especially
to encourage investment in fibre-to-the-premises by other
companies. Ofcom wants an improved process for getting access
to this infrastucture, including an online database of its location,
condition and capacity.

• Ofcom wants a strengthened model of functional separation of

Openreach so that it can take its own decisions on budget, investment
and strategy, in consultation with the wider industry.

• Ofcom intends to introduce: tougher rules on faults, repairs and

installations; transparent information on service quality; and automatic
compensation for consumers when things go wrong.

• Ofcom will work with the Government to deliver a new universal right to
fast, affordable broadband for every household and business in the UK.
Also, when Ofcom releases spectrum for mobile operators, it intends to
impose obligations to improve rural mobile coverage.

We’ve made a number of proposals to Ofcom to address its concerns.
These include a new governance structure for Openreach and a clear
commitment on investment. We’re happy for other companies to use
our ducts and poles which have been open to competitors since 2011.

Overseas regulation
The degree of regulation in international markets varies widely.
This can hinder our ability to compete and provide the services our
customers require. We’re pressing incumbent operators around the
world, and their national regulatory authorities, for fairer, cost-
related wholesale access to their networks.

We’re also in discussions with both EC and US regulatory authorities
over what we believe to be premature deregulation of parts of the
US telecoms market. This has made it more difficult for non-US CPs
to enter and compete in the US, while European telecoms markets
remain open to competition from US operators.

Price regulation of our main wholesale products
The following table shows the main wholesale products provided
to CPs which are subject to price controls in markets where we
have been found to have SMP.

Product

Annual charge control

Current charge
control ends

Call origination

RPI–3.6%

30 September 2016

Call termination

RPI–3.1%

30 September 2016

Ethernet

CPI–13.5%

31 March 2019

PPCs

CPI–3.5%

WLR rental

CPI–3.0%

IPStream rental

CPI–4.4% in Market Aa
only

31 March 2019

31 March 2017

MPF rental

CPI+0.3%

31 March 2017

SMPF rental

CPI–33.4%

31 March 2017

a Wholesale broadband services are regulated in Market A which covers 9.5% of UK premises.
Market B covers the remaining premises and is competitive and unregulated.

Our wholesale fibre broadband product, GEA, is not currently
subject to price regulation. This will be reviewed again in Ofcom’s
Wholesale Local Access market review, expected to begin later in
2016, with a final decision due by 1 April 2017.

BT Group plc Annual Report 201643

Other regulatory decisions and activities

Business Connectivity market and cost attribution
In April 2016, Ofcom published its final statement on its Business
Connectivity Market Review, Leased Lines Charge
Control and Cost Attribution Review. The key measures Ofcom
imposed are:

• charge controls to apply from 1 May 2016 until 31 March

2019;

• the introduction of minimum service levels for the provision

of Ethernet services by Openreach;

• requiring Openreach to provide access to its fibre network for

providers of high-speed leased lines for businesses (‘dark fibre’).

In setting the charge controls, Ofcom made a number of base year
cost adjustments to reflect its Cost Attribution Review assessment
that some of our attribution methodologies do not reflect the
activity that drives the cost. This is also likely to affect future price
controls, including in the Wholesale Local Access and Narrowband
markets.

Ethernet dispute
In August 2015, the Court of Appeal granted us permission to
appeal the CAT’s August 2014 decision relating to a dispute on
historical Ethernet pricing that was originally determined by Ofcom
in 2012. Our appeal was granted on three legal grounds, including
whether Ofcom had the power to require us to make the payments
it determined in the dispute and if it has the power to award
interest charges on these payments. Ofcom has deferred its final
determination on the amount of interest payable until the Court
hears the appeal, which we expect to take place in March 2017.

In November 2015, the Court of Appeal also granted TalkTalk
permission to appeal the CAT’s August 2014 decision.

Margin squeeze test
In May 2015, we lodged an appeal with the CAT against the
design of Ofcom’s regulatory margin squeeze test which requires
BT Consumer to maintain a ‘minimum margin’ on newly-acquired
fibre broadband customers.

In August 2015, Ofcom issued supplementary guidance on how
the ‘minimum margin’ test in respect of fibre broadband would be
impacted by a material change in circumstances (such as the
launch of our UEFA Champions League and UEFA Europa League
content). While we welcome this guidance, it still doesn’t provide
enough flexibility around how we recover our BT Sport costs.
And we believe it doesn’t address concerns previously raised by the
European Commission around providing us sufficient flexibility
to recover these costs.

In March 2016, the CAT issued its judgment on our appeal. The
CAT found that Ofcom was entitled to impose a regulatory margin
squeeze test as one of the remedies in its Fixed Access Market
Review, and rejected our arguments that Ofcom had not met the
legal or evidential tests to impose such a condition. Our appeal
on the design of the margin squeeze test is being heard by the
CMA and its provisional determination is expected in the coming
months.

Pay-TV
We’re appealing to the CAT Ofcom’s November 2015 decision
to remove Sky’s Wholesale Must Offer obligation on Sky Sports.
We believe that effective remedies are essential to address the
failure of competition in the pay-TV market, where Sky has held
a dominant position for more than a decade.

Broadband USO
In March 2016, the UK Government began a consultation on a
broadband Universal Service Obligation (USO) that will require a
minimum line speed of 10Mbps to be provided. In April 2016,
at the Government’s request, Ofcom began a consultation on the
design of the USO including: whether there should be one or more
designated USO providers; whether there should be a competitive
process for designating USO providers; and whether the net costs
of a USO should be funded by industry. Ofcom plans to report back
to the Government by the end of 2016.

Regulatory approval
of our acquisition of EE

In February 2015 we announced that we’d agreed definitive terms to
acquire EE. This transaction was subject to approval by BT shareholders
and merger clearance, in particular from the UK Competition and Markets
Authority (CMA). In October 2015, the CMA gave its provisional clearance
to the deal, announcing that it is not expected to result in a substantial
lessening of competition in any market in the UK. The CMA gave formal
approval, unconditionally without remedies, on 15 January 2016.

Protecting

the environment

We believe that the Information and Communications Technology
(ICT) industry plays a vital and ever-growing role in tackling climate
changea. As set out in a reportb published this year, we believe
increased investment in ICT can reduce UK carbon emissions by
24% by 2030, while creating value for the UK economy (£122bn
in that year). Reflecting our role in this area, we also organised and
took part in working sessions at the UN climate negotiations in
Paris (COP21).

We launched 100% Sport at Climate Week in New York,
encouraging sports fans to switch to renewable energy and
promoting our support for the global #go100percent campaign
(created by the Renewables 100 Policy Institute).

Our 2020 ambition

Enable customers to reduce their
carbon emissions by at least three
times the end-to-end carbon impact
of our business

3:1

a As a signatory to the Climate Disclosure Standards Board’s (CDSB) fiduciary duty and climate
change disclosure, we summarise our response to climate change through this Annual Report
with more details in our Delivering Our Purpose report, www.btplc.com/Purposefulbusiness
b ‘The Role of ICT in Reducing Carbon Emissions in the UK’, www.btplc.com/Purposefulbusiness/
Stories/Energyenvironment/UKcarbontargets/index.htm

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Reducing our customers’ carbon footprinta,b
We continue to progress towards our 3:1 goal, measuring the
impact our products and services can have on reducing our
customers’ carbon emissions.

This year we generated £3.6bn of revenue from products that
have contributed to carbon abatement – up from £3.4bn in
2014/15. As an example, our Field Force Automation services
enable organisations with mobile teams to improve their
productivity by automating fleet and driver scheduling and
reporting. This means they can better manage their fleet of
vehicles, saving fuel and reducing emissions.

3:1 Goal

2015/16b

2014/15

Customer savings

Our impact

Ratio

7.6 Mt

4.8 Mt

1.6:1

7.1 Mt

4.6 Mt

1.5:1

Our own energy use and carbon footprinta,b
Reducing our energy use
We’ve reduced our worldwide energy use for the seventh
consecutive year. In Great Britain we spent around £307m on
energy and fuel this year (2014/15: £306m). We estimate that
our energy savings programme has helped reduce our overall bill
by £29m this year, and by £190m since 2009/10. 95% of the
worldwide energy we buy comes from renewable sources and
we’re aiming to achieve 100% – where markets allow – by the end
of 2020.

BT’s worldwide energy usea,b
Year ended 31 March

Gwh

2,800

2,700

2,600

2,500

2,400

2,300

2,200

2,100

2,000

8
7
6
2

6
1
6
2

6
2
5
2

2
1
4
2

8
3
3
2

2012

2013

2014

2015

2016

Reducing our carbon footprint
We report all of the greenhouse gas (GHG) emission sources
required under UK regulationsc. The following chart shows the
10% reduction this year in our total operational worldwide
CO2 equivalent (CO2e) emissionsd:

BT’s worldwide greenhouse gas emissions
Year ended 31 March

a,b,c,e

CO2e Ktonnes

1,750

1,500

1,628

117

750

1,097

500

250

414

1997
(Base)

535

151

190

194

391

147
62
182

387

148
65

174

349
126
51
172

2013

2014

2015

2016

Scope 3: Other indirect emissions (eg production of purchased materials

e
and fuels)

Scope 2: Indirect emissions from the generation of our purchased energy

(mainly electricity)

Scope 1: Direct emissions from our own operations (eg fuel combustion)

Figures exclude third-party consumption and EE.

We also report two CO2e intensity measures:
• Our climate stabilisation intensity (CSI) target: by 2020, we’ll

reduce our operational worldwide carbon emissions per unit of
value-added (our contribution to GDP) by 80% compared to
1996/97. This year, we achieved 81%, exceeding our target.
Next year, we’ll incorporate EE into the numbers and set a new
target.

• Our scope 1 & 2 emissions this year totalled 12.5 tonnes CO2e
per £m revenue, reflecting an 86% reduction since our base
year of 1996/97.

Conserving natural resourcesa,b
Reducing water usage
Most of our water usage is for office and catering facilities, or to
cool equipment (for example, in telephone exchanges). This year
we reduced our UK water consumption by 10%. We’ll continue
to target and reduce leaks using our half-hourly meter readings,
provided by our automatic monitoring and reporting programme.

Managing waste products
We try to minimise the amount of materials we use in our
operations, and re-use them where we can. Otherwise our
specialist contractors recycle them wherever possible, or manage
their disposal – including hazardous materials such as oil and some
types of light bulbs and batteries – in line with legislation.

a We restate previous years’ data when subsequent information is deemed to be materially
significant, such as replacing previous estimates with measured figures.

b EE data is excluded, in line with the GHG protocol below, pending next year’s report when we

d We report on all our greenhouse gas emissions as a single total, by converting them to the

equivalent amount of CO2 using latest government conversion factors.

e Detailed emissions data is available from our Delivering Our Purpose website, www.btplc.

will provide new baseline numbers.

c We use the GHG Protocol Corporate Accounting and Reporting Standard, with UK Government

GHG Conversion Factors for Company Reporting 2015.

com/Purposefulbusiness. To comply with revised GHG Protocol guidance this year, we now
report both market and location-based Scope 2 data. This chart uses a market-based measure
for 2015/16, consistent with the methodology used in previous years.

BT Group plc Annual Report 201645

Our performance as a sustainable

and responsible business

The first table below demonstrates our performance against our six 2020 ambitions. Below that, we report progress against seven
foundation measures. Next year, we aim to maintain or improve on each of our ambitions and measures. To aid comparison against
previous years, we exclude EE’s contribution to the group this year, but we’ll provide new baseline numbers in our 2016/17 Annual
Report.

Our 2020 ambitions

2014/15 performance 2015/16 performance Status Page

Supporting
charities and
communities

Creating a
connected
society

Creating
a culture
of tech
literacy

Delivering
environmental
benefits

Use our skills and technology to help generate more than £1bn
for good causes

£86m raised for
good causes

£94m raised for
good causes

Inspire 66% (two-thirds) of our people to volunteer

Cumulative total:
£234m since 2012

Cumulative total:
£327m since 2012

26% of BT people
volunteering

27% of BT people
volunteering

More than 9/10 people in the UK will have access to our fibre-based
products and services

7.5 out of 10

8.5 out of 10

Helping 10m people overcome social disadvantage through the
benefits our products and services can bring

n/a – new target

2.6m people reached

Help 5m children to receive better teaching in computer skills

n/a – new target

344,000 children
reached

Enable customers to reduce their carbon emissions by at least
three times the end-to-end carbon impact of our business

1.5:1 achieved

1.6:1 achieved

Our foundation measures

Our foundations

2014/15 performance 2015/16 performance Status Page

Our
customers

Our
employees

Our
investment

Investment to accelerate our purposeful business approach;
to be more than 1% of adjusted profit before tax (PBT)

1.15% of PBT
invested

Customer service: to consistently improve RFT across our entire
customer base

4.7% improvement

1.10% of PBT
invested

3.0% reduction
(see page 22)

Employee engagement index: our relationship with our
employees

3.82/5 achieved

3.81/5 achieved

Sickness absence rate: % of calendar days lost to sickness

2.23% calendar days
lost to sickness

2.33% calendar days
lost to sickness

Ethical performance: our employees’ awareness and training

4.33/5 achieved

4.31/5 achieved

Our suppliers

Ethical Trading: across our supply chain, with focus on Human
Rights. Achieve 100% follow-up within three months, for all
suppliers identified as high or medium risk, through our ethical
standards questionnaire

Our
environmental
impact

CO2e emissions: a measure of our climate change impact. We’ll reduce
our worldwide CO2e emission intensity by 80% by December 2020

96% follow-up
within three months

100% follow-up
within three months

79% reduction in net
CO2e emission intensity
vs. base levels
(1996/97)

81% reduction in net
CO2e emission intensity
vs. base levels
(1996/97)

Target met

Target failed

Ongoing

To find out more about our 2020 ambitions, our methodologies and how our
results are calculated, take a look at www.btplc.com/Purposefulbusiness

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Our risks
We’re affected by a number of risks and uncertainties.
Some risks come from outside our business, others from
within. Some we can’t control. Many of our risks are similar
to those felt by comparable businesses.

Principal risks and uncertainties
The principal risks and uncertainties that affect us could have an
impact on our business, brand, assets, revenue, profits, liquidity
or capital resources. The principal risks we described last year have
evolved, and so has our response to them.

Our Enterprise Risk Management framework gives reasonable
(but cannot give absolute) assurance that we’ve identified and
addressed our biggest risks. However, there may be some risks
which are unknown to us today. And there may be some that we
consider less significant now but which become more important
later.

Things that happen outside BT present both risks and
opportunities, to our business and to others. We focus our efforts
on predicting and mitigating those risks while aiming to take
advantage of any opportunities that may emerge.

We recognise the particular uncertainty that political and geo-
political risks present, both in the UK (like the forthcoming
referendum on Britain’s membership of the EU) and globally.
We monitor these through a separate sub-committee of our
Group Risk Panel.

In the section that follows, we talk about what we’re doing to stop
our main risks materialising, or to limit their impact. Our biggest
risks and uncertainties should be considered alongside the risk
management process, the forward-looking statements in this
document and the cautionary statement on those statements
(see page 248).

How we manage risk
To meet our objectives, build shareholder value and promote
our stakeholders’ interests, we must manage risk.

We have a group-wide risk management process with four stages.
The directors believe our Enterprise Risk Management framework
and process support a robust assessment of our principal risks.

Identification

Monitoring

Business activities

Evaluation

Response

Changes over the year
In 2014/15 we improved the way we manage risk by:
strengthening our approach to managing it in projects and
programmes; further developing our assessment of risk appetite;
and identifying opportunities to develop our risk management
culture. Specific improvements in 2015/16 included:

UK Corporate Governance Code
Responding to changes in the UK Corporate Governance
Code, we’ve refreshed several aspects of our risk management
framework. That included expanding our quantification
methodology and reviewing our material controls.

Enhanced tools
This year we’ve trialled software which helps with modelling risk.
We’re also in the process of upgrading our core risk management
software to make it easier for people to use.

Education and awareness
We believe risk management is an essential capability for our
business. It’ll therefore be a core skill across all the professions in
our business with tailored training for everyone who works for BT.

Enterprise Risk Management framework

Line of business and
BT TSO audit
& risk committees

Line of business and BT TSO
leadership teams

Group Risk
Panel

Operating
Committee

Our lines of business and BT TSO
follow our process for managing
risk as part of our Enterprise Risk
Management framework. That means
identifying and responding to the key
risks to their business. They record the
risks in a register for their leadership
teams to review. Audit & risk
committees in each line of business,
BT TSO and our group functions,
ensure this process is effective.

The Group Risk Panel supports
the Board and the Operating
Committee. Every three months
it reviews the Group Risk Register
(which summarises those risks of
greatest significance across our
business), considers the inclusion
of new or emerging risks, and
recommends ways to tackle them.
It also oversees the work of the
group risk management function.
Geo-political risks are reviewed by a
sub-committee of the Panel.

The Operating Committee identifies,
evaluates, responds to and monitors
risks. Significant risks are reported
and monitored through the Group
Risk Register. The Operating
Committee assigns a management
owner to take charge of monitoring
and managing each risk. It monitors
risks through regular detailed
reviews as well as six-monthly
reviews of the Group Risk Register.

Audit & Risk
Committee

Board

The Board has overall responsibility
for making sure we manage risks
appropriately. It regularly reviews,
either directly or through the Audit
& Risk Committee, how we’re doing
across the group, in our lines of
business and in BT TSO.

BT Group plc Annual Report 2016

Strategic and financial risks

Growth in a competitive market
Our markets are characterised by:
• constant and rapid change;
• strong and new competition;
• falling prices and (in some markets) falling revenues;
• technology changes;
• market and product convergence;
• customers moving between providers; and
• regulation to promote competition and cut wholesale prices.

Potential impact
If we don’t grow our revenue profitably and sustainably, our cash
flows could be impacted. This could limit our ability to invest in the
business or pay dividends.

Link to strategy and business model

• Invest for growth

Trend:

What’s changed over the last year?
Last year we did some big things as part of our growth strategy.
We:

• acquired EE;
• won FA Premier League rights for the second time;
• launched our BT Sport Europe channel; and
• deployed more of our fibre broadband network.

Our competitors are beginning to react. CK Hutchison wants to
buy Telefónica Europe plc (O2 UK). Virgin Media is expanding its
network. Sky is being more aggressive in broadband. Vodafone
has entered the consumer home phone market. The market is
going to get more difficult – not only because of the moves of
our traditional competitors but also from players in neighbouring
markets, as the dividing lines between industries keep blurring.

There are also regulatory risks that could threaten revenue growth
– particularly Ofcom’s ‘Business Connectivity Market Review’ and
‘Wholesale Must Offer’ statement on pay-TV sports channels.

How we’re mitigating the risks
We stick to our strategy, which means:

• broadening and deepening our customer relationships;
• delivering superior customer service;
• transforming our costs; and
• investing for growth.

If we do that, we’ll grow our revenue profitably and sustainably.

We’ve been investing in areas like fibre, TV and content, voice and
mobility, UK business markets, and our global corporate customers.
Our cost transformation programmes are still delivering savings. We
can also seek changes in regulation to make things fairer – so we
can compete harder in neighbouring markets, which will be better
for our customers.

Communications industry regulation
Regulation affects a lot of what we do.

In the UK, after market reviews, Ofcom can make us provide
wholesale services on specified terms. Ofcom reviews the shape
and size of that regulation every three years and can include
controls on the price we charge for regulated products. It can
investigate and enforce any regulatory rules in place and impose
fines on us if we don’t comply.

Ofcom also has powers to regulate the terms on which we
get supplied with certain services – for instance, mobile call
termination and wholesale access to certain pay-TV channels.
This can increase our costs and affects the scope of services
we can provide to customers. Ofcom can also sort out disputes
between us and other communications providers about the
terms on which services are supplied.

Trend indicates management’s perception of how
the pre-mitigation risk has moved year on year

Pre-mitigation risk is
increasing/worsening

Pre-mitigation risk
is at a similar level

Pre-mitigation risk is
lessening/improving

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Outside the UK, general licensing requirements can make it tough
for us to enter markets and compete. Regulation will also define
the terms on which we can buy wholesale services from others.

Potential impact
Regulatory rules can affect our ability to compete effectively and
earn revenues. UK regulation has the biggest impact – because we
have to supply wholesale access products on regulated terms.

Around £5.7bn of our revenue (£3.3bn of which is to downstream
parts of BT) is from supplying wholesale services to markets where
Ofcom has found us to have significant market power. Most of
these revenues are from products with regulated prices which we
also have to cut each year by a defined, real-term percentage.
The regulatory controls usually last for three years and hold back
revenues during that time.

Where other CPs ask Ofcom to sort out disputes with us, there’s
a risk that Ofcom may set the prices we supply services at, and/or
make us provide specific services. In some circumstances, Ofcom
can adjust past prices and make us pay back CPs.

Regulation outside the UK can hit our revenue too. For example,
overly-restrictive licensing requirements or ineffective regulation
of access to other networks mean we might not be able to
compete fairly. Regulation can also define and control the terms of
access to necessary regulated inputs, which raises our costs.

Link to strategy and business model

• Deliver superior customer service
• Transform our costs

Trend:

What’s changed over the last year?
There has been a lot of regulatory activity in different areas.
We’ve summarised this in the Regulation section on page 41.

Alongside the standard cycle of market reviews, in March 2015
Ofcom announced an overarching strategic review of the digital
communications market. In February 2016 it set out its initial
conclusions. Some of these could impact our operations, revenues
and costs if they’re adopted, for example:

• strengthening Openreach’s functional separation;
• keeping structural separation on the table;
• reducing regulation where it’s no longer required; and
• relying on more end-to-end fibre-based competition.

How we’re mitigating the risks
Our team of regulatory specialists include economists and
accountants. Together with legal experts and external advisers they
continuously check for potential disputes with other CPs and look
for opportunities to change regulatory rules. They talk continually
with regulators and other key influencers to understand the
outlook and to make sure we make our positions clear.

We push for fair, proportionate, consistent and evidenced-based
regulation everywhere we do business. Whenever there are market
reviews, charge controls, and disputes or investigations we put
forward evidence and analysis. This helps us manage the risks
around decisions in any particular year.

We can appeal any regulatory decisions we think are wrong. We
can also raise disputes or complain (under the relevant regulatory
framework or competition law) where we have problems getting
access to wholesale services – like to wholesale pay-TV channels
or to other access networks.

Pensions
We have a large funding obligation to our main defined benefit
pension scheme in the UK, the BT Pension Scheme (BTPS or
Scheme). The BTPS faces similar risks to other defined benefit
schemes. Things like future low investment returns, high inflation,
longer life expectancy and regulatory changes may all mean the
BTPS becomes more of a financial burden.

Potential impact
Our contributions to the BTPS are next due to be reviewed at the
triennial funding valuation as at 30 June 2017. If there’s
an increase in the pension deficit, then we could have to increase
deficit payments into the Scheme. That might affect our share
price and credit rating. If our credit rating fell in future, it would
cost us more to borrow money and we might not get such flexible
borrowing terms. Higher deficit payments could mean less money
available to invest, pay out as dividends or repay debt as it matures.

Link to strategy and business model

• Transform our costs
• Invest for growth

Trend:

What’s changed over the last year?
The last funding valuation of the BTPS, as at 30 June 2014,
provided certainty over what we need to pay until the next
triennial valuation is concluded.

Things like financial market conditions and expected future
investment returns at the valuation date affect the funding
position. When considering expected future returns, different
factors are reviewed including yields (or returns) on government
bonds, which have dropped significantly since 30 June 2014. If
a lower future investment return is assumed at the next valuation
our liabilities would likely go up, which may lead to bigger deficit
payments.

EE operates the EE Pension Scheme (EEPS) which has a defined
benefit section that was closed to future benefit accrual in 2014.
The EEPS represents less than 2% of the group’s retirement
benefit obligation. The latest funding valuation for the EEPS is
being performed as at 31 December 2015.

How we’re mitigating the risks
The investment performance and liability experience are regularly
reviewed by both us and the Trustee of the BTPS. We also consider
the associated risks and possible mitigations. The assets of
the BTPS are well diversified, softening the impact of sharp drops
in the value of individual asset classes. This helps us maintain
a reasonable balance of risk and return.

Our financial strength and cash generation provide a level of
protection against the impact of changes in the funding position of
the BTPS. The funding liabilities also include a buffer against future
negative experience, as legislation requires that liabilities
are calculated on a prudent basis.

BT Group plc Annual Report 2016

Operational risks

Security and resilience
Resilient IT systems, networks and associated infrastructure are
essential to our commercial success. There are a lot of different
hazards that could significantly interrupt our services.

These include the evolving threat of cyber-attack, as hackers
increasingly see Internet Service Providers (ISPs) as attractive
targets. Others include component failure, physical attack, copper
cable or equipment theft, fire, explosion, flooding and extreme
weather, power failure, overheating or extreme cold, problems
encountered during upgrades and major changes, and suppliers
failing to meet their obligations.

Potential impact
A malicious cyber-attack or breach of security could mean our data
is lost, corrupted, disclosed or ransomed, or that our services are
interrupted. We might have to pay fines, contract penalties and
compensation, and have to operate under sanctions or temporary
arrangements while we recover and put things right.

A big interruption to our services, from cyber-attack or otherwise,
could mean immediate financial losses from fraud and theft;
contract cancellations; lost revenue from not being able to process
orders and invoices; contractual penalties; lost productivity and
unplanned costs to restore and improve our security; prosecution
and fines. Ultimately individuals’ welfare could be put at risk
where we weren’t able to provide services or personal data was
misappropriated.

Our revenues, new business and cash flow could suffer, and
restoring our reputation and re-building our market share might
take an extended period of time.

Link to strategy and business model

• Deliver superior customer service

Trend:

What’s changed over the last year?
We’ve invested in scanning and monitoring tools and automated
cyber defences. But the rate of major cyber-related incidents
needing a manual response keeps rising. We’ve increased the size
of our Cyber Defence Operations team accordingly. To probe for

vulnerabilities they simulate cyber-attacks. When we learn of
potential attack routes, or get intelligence about attacks on similar
organisations, we treat the information proactively and resolve it
with the same speed and rigour as a real attack.

We’ve reviewed the resilience and disaster recovery capability of
our critical systems, main data centres and our most important
exchanges. This has helped us make judgements on where to
invest in better and stronger systems and infrastructure. We’re also
continuing to develop cross-site recovery for our critical systems
where this didn’t previously exist. There are also several major
change programmes underway to intensify IT and network controls
to meet new levels of risk.

How we’re mitigating the risks
We use encryption to prevent unauthorised access to data
travelling over our networks, or through direct access to computers
and removable storage devices.

But encryption alone can’t eliminate this risk. People can be tricked
into downloading malware or giving away information by phone or
email. So we also implement extra layers of access control, block as
many malicious emails as we can, and run awareness campaigns for
customers and employees to make sure they stay vigilant.

We ask suppliers for evidence of compliance with our security
policies. We also run an audit programme to test this. We simulate
cyber-attacks to test how well protected our websites, networks
and internal controls are.

A control framework helps us prevent service interruptions,
supported by tried and tested recovery capabilities. Proactive
problem management helps us address the root causes of common
incidents.

We continue to invest in resilience and recovery capabilities for
critical IT systems, as well as addressing vulnerabilities in our
physical estate as we become aware of them. We also have a rolling
programme of major incident simulations to test and refine our
procedures for crises.

By replacing equipment approaching the end of its service
life, we’re moving more of our legacy estate to new, more resilient
facilities. We’ve also made sure that we have geographically-
distributed locations that support cross-site recovery.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Major contracts
We have a number of complex and high-value national and
multinational customer contracts. The revenue and profitability
of these contracts are affected by things like: variation in cost;
achieving cost savings anticipated in contract pricing (both in
terms of scale and time); delays in delivering or achieving agreed
milestones owing to factors either in or out of our control; changes
in customers’ requirements, their budgets, strategies or businesses;
and our suppliers’ performance. Any of these factors could make
a contract less profitable or even loss-making.

The degree of risk varies with the scope and life of the contract
and is typically higher in the early stages. Some customer contracts
need investment in the early stages, which we then expect to
recover over the life of the contract.

Major contracts often involve implementing new systems and
communications networks, transforming legacy networks and
developing new technologies. Delays or missed milestones might
have an impact on us recovering these upfront costs. There is
substantial performance risk in some of these highly-complex
contracts.

Potential impact
If we don’t manage and meet our commitments under
these contracts – or if customers’ needs, budgets, strategies
or businesses change – then our expected future revenue,
profitability and cash generation may go down. Unexpectedly
high costs associated with delivering particular transformational
contracts could also hit profitability. Earnings may drop. Contracts
may even become loss-making through loss of revenue, changes
to customers’ businesses (due to, for example, mergers or
acquisitions), business failure or contract termination.

We’re still delivering lots of contracts with local authorities through
regional fibre deployment programmes including the Broadband
Delivery UK programme (BDUK). As with our other major contracts,
if we failed to deliver these contracts successfully it might lead to
reduced future revenue, profitability and cash generation.

As well as carrying a higher reputational risk, these contracts present
specific risks around deployment, delivery and our ability to recover
public funding. We also have an obligation to potentially either re-
invest or repay grant funding depending on lots of different factors
– including how many customers take up a new service.

Link to strategy and business model

• Deliver superior customer service
• Transform our costs
• Invest for growth

Trend:

What’s changed over the last year?
Tough market conditions and competitive pressures continue in
many global regions, while in some we’re seeing bigger growth in
volume of business because of our previous investments. The risk
landscape changes accordingly, as does our focus of risk support
and review.

Of particular note for 2015/16 has been the way the BDUK
programme has helped UK broadband fibre implementation
mature, cutting the associated delivery risks. But these risks have
partly been replaced by new challenges from the next tranche of
smaller contracts (with their associated geographic and technical
risks). While our broadband contracts carry a different risk profile

to other major corporate contracts, we apply our governance and
reporting processes to make sure we identify risks and mitigation
activities and report them to management.

How we’re mitigating the risks
At both group and line of business-level we have governance,
risk management and reporting processes in place. Independent
audits and the checks and balances in individual contracts
provide assurance through an independent review programme.
To track progress, we monitor how we’re doing on these risks and
mitigation actions and report it to senior management. A separate,
dedicated team provides assurance for our BDUK projects.

The BT Academy helps support skills development and learning
initiatives. These help our Contract Management Profession to
better identify and manage risk. We also update new training
collateral whenever we learn something new. The scope and
availability of training options continues to improve through BT-
wide learning and development initiatives.

Supply chain
Our supply market is global, and there are often several links in
our supply chains. So guaranteeing the integrity and continuity of
those links is critical to our operations and therefore a big risk
to our business.

Global markets expose us to global risks, including climate change.
We weigh up and respond to any risks which crop up where geo-
political and market forces could affect our suppliers’ ability to
support us.

A global supply market means better sourcing opportunities, but
brings challenges if suppliers become more geographically and
culturally diverse from our customers.

Our dealings with suppliers – from the way we choose them, to
the contracts we sign, to how we pay them – follow our trading
and ethical policies. For more detail, see Our suppliers on page 39.

Potential impact
If something goes wrong in our supply chain the level of impact
can vary. But most of the time it means higher costs for us, and
potential damage to our customer service, investments and
ultimately our brand. We could lose a lot of money if a big or
important supplier went out of business, especially if that meant
us having to change a technology or system. And if we couldn’t
find an alternative supplier, it might compromise the commitments
we make to our customers. And that might lead to breach of
contract, lost revenue or penalties.

If any link in our supply chain falls foul of the law, or fails to meet
our ethical expectations, that could damage our reputation –
possibly leading to legal action and lost revenue.

Link to strategy and business model

• Deliver superior customer service
• Transform our costs

Trend:

What’s changed over the last year?
We’ve spent time assessing several emerging geo-political threats
and the impact they’d have on our supply chain. They include
Greece’s position in the Eurozone and the UK’s position in the EU.

BT Group plc Annual Report 2016

There’s a continuing trend toward mergers and acquisitions in some
of the global markets we source from. It highlights the risk of us
depending on single or monopolistic suppliers – particularly those
less constrained by regulation and who might charge us more than
their domestic customers.

There’s generally an increasing (and welcome) focus on human
rights. The Modern Slavery Act 2015 means we must examine the
potential risk of both modern slavery and human trafficking in our
supply chain. Another ethical consideration is the risk of conflict
minerals being in our supply chain, which would not only go
against our ethical standard but could also harm our reputation.

How we’re mitigating the risks
We have a few really critical suppliers. We keep a close eye on their
performance and ability to meet their obligations. We tell the
business when to prepare for the risk of a supplier failing. And our
senior leaders continually review how ready we are for those types
of events.

We make sure we put in place the right due diligence when it
comes to introducing new suppliers and to continuing business
with existing ones. That includes checks on company finances,
business and quality management systems, accreditations, and
ethical and sustainability practices. We manage our top suppliers
according to the contracts they’ve signed. We work with them
to drive better ways of working every day, reducing our exposure
to risks around poor supplier practices.

Case study: Early intervention
to deliver major contracts

If we don’t establish strong contract and risk management at the start
of a contract, it can have longer-term impacts on contract profitability and
customer experience.

How we managed the risk
Contracts are generally getting more complex. To reduce contract risk, in
2015 we introduced a new team of contract mobilisation specialists. Their
aim is to make sure large and complex contracts get off to a good start.

The team works exclusively on new contracts. They take a hands-on
approach to improving and supplementing the way we manage contracts
in their early stages. That helps make sure the in-life contract team has the
level of planning and implementation capability it needs.

The result, and what we learned
There’s a strong link between contracts beginning well and us meeting our
customers’ expectations. So our mobilisation specialists’ job is to cut the
service delivery risk and the likelihood of implementation delays.

Our contract leads don’t begin new multi-year contracts that often,
so they’re not always familiar with the huge volume of very detailed and
time-critical actions unique to the first few weeks. But given how many
of those types of contract we sign each year, it helps having a team with
the right expertise and skills solely focused on supporting this activity.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information52

Compliance risks

Business integrity and ethics
We’re proud of our high ethical standards. We don’t tolerate
bribery. We don’t tolerate any forms of corruption. We follow
a wide range of local and international anti-corruption and
bribery laws – in particular the UK Bribery Act and US Foreign
Corrupt Practices Act (FCPA). Both these pieces of legislation have
extraterritorial reach, so cover our global operations. As we expand
globally, we’re increasingly operating in countries seen as having
a higher risk of bribery and corruption. We also have to make sure
we follow trade sanctions and import and export controls.

Potential impact
If BT people, or associated people like suppliers or agents break
anti-corruption, bribery or sanctions legislation there could be
big penalties, criminal prosecution and significant brand damage.
This could have a major or minor impact on future revenue and
cash flow depending on the nature of the breach, the legislation
concerned and any penalties. If we were accused of corruption
or bribery or violating sanctions regulations that could lead to
reputational damage with investors, regulators and customers.

Link to strategy and business model

• Deliver superior customer service
• Transform our costs

Trend:

What’s changed over the last year?
More and more countries are bringing in anti-corruption and
bribery legislation. In the UK, the Serious Fraud Office is now able
to bring in deferred prosecutions agreements for fraud, bribery and
other economic crime. In terms of enforcement, there are yet to
be any big cases stemming from the UK Bribery Act, but US FCPA
generates a lot of enforcement actions.

How we’re mitigating the risks
We’ve put a number of controls in place to address risk in this area.
These include an anti-corruption and bribery programme and ‘The
Way We Work’ (our statement of business practice, available in 14
languages). We ask all BT people to sign up to its principles and
to our anti-corruption and bribery policy. We have policies covering
gifts, hospitality, charitable donations and sponsorship. We run
training for people in higher-risk roles like procurement and sales.

We regularly weigh up our business integrity risks to make sure
we’ve got the right mitigation in place. ‘Speak Up’ (our confidential
hotline) is operated by a third party with all reports passed straight
to our Director of Ethics and Compliance for investigation.

Our internal audit team regularly runs checks on our business.
External providers also assess areas we think are higher risk, to
make sure people understand our policies and that controls are
working. We do selective due diligence checks on third parties like
suppliers, agents, resellers and distributors. Procurement contracts
include anti-corruption and bribery clauses.

Our policy helps us follow all sanctions and export controls that
apply to us. That policy means all bids involving a country with
sanctions imposed by the EU and/or the US need approval. The
policy also mandates everyone uses our internal shipping system to
arrange international exports. That system runs compliance checks
and flags any orders which need an export licence.

Processing our customers’ data
We control and process huge quantities of customer data around
the world. So sticking to data privacy laws is something we take
extremely seriously. Every day we process the personal data of
millions of customers. It’s important that those individuals
and businesses feel they can trust us to do the right thing with
their data.

Being trusted with our customers’ data goes further than making
sure it’s secure. It means preserving the integrity of the personal
data we process. And only keeping the things we need to provide
customers with the services they’ve signed up for. It also means
being transparent around how we use that data, making sure
the way we process personal data is legal, fair and in line with
customers’ rights and wishes.

As a communications provider we operate under a stringent
24-hour reporting regime to tell the UK Information
Commissioner’s Office (ICO) if we become aware of a personal data
security breach. We must also tell any affected individuals
as quickly as possible.

BT Group plc Annual Report 2016

Different parts of the world approach privacy and data protection
differently. Individuals’ fundamental right to privacy is reflected
in the fact that today data privacy laws are in force in over 100
countries. More and more we (and other multinationals) have
to show that we’re handling personal data in line with a complex
tangle of national data laws and societal ethical expectations.

Potential impact
Failing to stick to data protection and privacy laws could result in
possible regulatory enforcement action, fines, class-action, prison
sentences and the regulator telling us to stop processing data.

On top of that, we could see huge reputational damage and
big financial losses. Those losses could come from fines and
damages if we fail to meet our legal requirements, as well as
costs resulting from having to close customer contracts and the
subsequent customer churn. Companies who’ve had high profile
‘data incidents’ have seen their share price hit hard, and suffered
ongoing costs from their non-compliance.

Link to strategy and business model

• Deliver superior customer service

Trend:

What’s changed over the last year?
National regulators are more aggressively protecting their citizens’
privacy and data protection rights. They’re especially targeting
companies who fail to do due diligence, or who knowingly accept
(or ignore) a related risk for too long. This has been brought into
sharp focus by the mushrooming of the data threat environment,
with several big organisations suffering incidents.

There’s been a general trend toward bigger financial penalties
and more frequent public shamings for organisations that break
global privacy and data protection laws. The UK Information
Commissioner now issues more penalties than Ofcom.

How we’re mitigating the risks
We’ve introduced governance to clarify accountabilities and
responsibilities for data activities across the whole business. People,
processes and technology have been our core areas of focus. By
embedding this governance, we’re reinforcing our expectations
around personal data with our people, partners and third parties.

The cornerstone of our education and training programme is
making sure our people understand our data governance culture
and the impact of data risks on our business. Our mandatory
data training focuses on individuals’ roles, with relevant scenarios,
helping highlight the varying data risks of different BT job families.
By educating our technical and commercial units we’ve made a
step change in understanding data risks across the group.

We want to give our people the tools they need to make everyday
risk-based decisions around privacy and data protection without it
being a burden or making their job more complicated. Because if
we do that, there’s a much better chance of data compliance being
‘business as usual’. For example, using Privacy Impact Assessments
when we develop new products and services makes sure everyone
understands privacy issues from the start and builds in the right
controls, without any operational impact.

Supporting the third-line assurance of our Internal Audit team,
the Chief Privacy Officer and his team are a second line of defence.
They undertake an annual cycle of audit and monitoring. That is
overseen by the BT Compliance Programme Panel, who track and
monitor everything until completion.

Health & safety
Our business – and in particular our vast engineering workforce –
does a lot of work which is subject to health and safety regulation
and enforcement by national authorities.

Potential impact
If we failed to implement and keep up effective health and safety
management and governance, that could have a big impact on
our people and our finances. It could lead to people getting
injured, work-related sickness and service disruption for customers.

It could also lead to our people and third parties making
compensation claims against us, or fines or other sanctions if
we didn’t stick to health and safety regulation. There could even
be criminal prosecutions against us, our directors and our people
– all of which would harm our brand and business.

And of course an unhappy or unhealthy workforce also leads
to higher work absence rates and lower performance levels.

Link to strategy and business model

• Deliver superior customer service
• Transform our costs

Trend:

What’s changed over the last year?
The range and complexity of risks has gone up as we’ve offered
new services to our customers. Those risks include us doing more
construction and electrical engineering work on our own network,
and the fact that we have new contracts which need our people to
work to maintain and extend the UK’s mobile network. We’ve taken
a lot of steps to mitigate these risks – especially around how our
people work with electricity or high off the ground.

We’re building a plan to further embed health and safety into
our operations. In the past year, we’ve seen major legislative
change – particularly with the UK introducing Construction,
Design and Management Regulations which place new
responsibilities on organisations around making construction
work safer. We’ve worked with the UK regulator and others in our
sector to respond pragmatically to these demands. We’ve faced
increased enforcement action against us this year, and also a few
prosecutions initiated for past incidents.

How we’re mitigating the risks
For the past five years we’ve busied ourselves implementing a
Board-endorsed health, safety and wellbeing strategy. And each
year, each line of business produces its own health and safety plan
with its own targets and programmes.

Our people managers take responsibility for making sure their
teams know how to comply with health and safety standards.
We monitor compliance using annual licensing, scheduled refresher
training, competency assessments and accreditation processes
for higher risk groups. All BT people do training in basic health
and safety.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Wherever we do business around the world, we put in place policies
and programmes to make sure we stick to our own standards and
that those standards meet or exceed minimum legal requirements.

Our strategy of delivering superior customer service, transforming
our cost base and investing for growth are all designed to support
long term and sustainable cash flow growth.

Advice is provided to help management teams understand and
control health and safety risks and help everyone feel involved
in health, safety and wellbeing. We’ve created interventions to
help promote good mental health and physical wellbeing. We
also provide support and rehabilitation services for people who
have mental or physical health issues. And we complement these
measures with strong attendance management processes.

Case study: Privacy by design

Privacy by design is about building privacy into products and services.
It helps organisations understand their privacy and data protection
obligations. It also indicates a positive data compliance culture. The way
we do privacy by design is through our Privacy Impact Assessment tool.

How we managed the risk
This year, we took a phased approach to embedding Privacy Impact
Assessments within our various lines of business, starting with BT
Consumer.

At the heart of our process is an online tool which each new product or
service proposition must go through. It identifies what the proposition
involves, what personal data is in scope and whether third parties will
access that data. It also asks other tailored questions around marketing,
big data analytics and customer communications. All that provides an
initial insight into the risks.

Our privacy team follow this with an extra one-to-one review for more
complex propositions. They must formally sign them off before they can
move forward and get further development funding. This means our
Privacy Impact Assessment process must be quick to make sure we can
move fast to exploit commercial opportunities.

The result, and what we learned
From small system changes (for example in marketing) to large-scale
projects (like our SmartTalk app) we’ve created Privacy Impact Assessments
in line with industry best practice.

The Privacy team has had to learn to prioritise how they review Privacy
Impact Assessments to meet launch timescales. The tool itself has been
through various versions to make sure it meets the needs of people using
it, with stage gates speeding up the flow of approval and sign off.

It’s likely we’ll need extra changes as we move to confirming the EU
General Data Protection Regulation and what that’ll mean for our
business. But the Privacy Impact Assessment tool’s flexibility will let
us do that with minimal impact on the business.

Our viability statement

Assessment of prospects
An understanding of the group’s business model and strategy
are central to assessing its prospects, and details can be found
on pages 21 to 30.

Our business model provides resilience that is relevant to any
consideration of our prospects and viability. We have a broad
spread of customers and suppliers across different geographic
areas and market sectors, serving the needs of customers
across 180 countries worldwide. In the UK, we benefit from
diversification across a number of markets and products, which
has increased in recent years, most notably through the launch
of BT Sport and the acquisition of EE.

We assess our prospects on a regular basis through our financial
planning process. Our three-year Medium Term Plan forecasts
the group’s profitability, cash flows and funding requirements.
The Medium Term Plan is reviewed by the Board twice during
the year and the latest refresh includes forecasts related to our
newly-acquired EE business. The Medium Term Plan is built
from the ‘bottom up’ forecasts of each of our lines of business,
supplemented by items managed at a group level and assumptions
such as macro-economic activity and exchange rates. The
performance of the group and our lines of business against these
forecasts is monitored monthly and this is supplemented each
quarter through a series of ‘deep dive’ Business Unit Reviews
performed by the Operating Committee.

Viability statement
In accordance with provision C2.2 of the 2014 revision of the
UK Corporate Governance Code, the directors have assessed the
prospects and viability of the group.

Although the directors have no reason to believe that the group will
not be viable over a longer period, the Board has chosen to conduct
this review for a period of three years to 31 March 2019. The
Board believes this is an appropriate timeframe as it aligns with the
group’s financial planning processes.

In support of this statement, we have stress tested our forecast
cash flows by assessing the potential combined impact our most
significant risks could have on these forecasts. This assessment
was informed by our judgements as to the potential financial
impact of these risks if they materialise, together with their
likelihood of occurrence.

Our stress testing confirmed that in many of the scenarios tested,
existing projected cashflows and cash management activities
provide us with a buffer against the impact of these risks. In the
most extreme scenarios we tested, where all of our principal
risks are assumed to materialise over the three-year period,
we have considered the further actions we could take to mitigate
the negative cash flow impact and generate additional funding.
These actions could include, for example, sale of assets, limiting or
delaying discretionary capital expenditure and marketing activities,
restricting share buy back programmes and reducing or ceasing
dividend payments.

In our viability assessment we’ve adopted a number of assumptions
designed to stress test our resilience. For example, in making our
assessments of the impact and likelihood of our risks, we’ve only
taken into account the control activities that we have in place today.
We’ve not factored in any of the extensive future mitigation activity
that we’re undertaking to address these risks, thereby assuming
such activity proves ineffective. We’ve also assumed that existing
debt facilities which mature over the three-year period will not be
renewed. While we don’t expect this to happen, we’ve adopted
these pessimistic assumptions to add greater stress to our viability
testing.

Based on the results of this analysis, the directors have a reasonable
expectation that the group will be able to continue in operation
and meet its liabilities as they fall due over the three-year period of
their assessment.

BT Group plc Annual Report 201655

EE acquisition risks
Our acquisition of EE has introduced additional risks
for BT beyond those captured in our principal risks and
uncertainties. This year, given the acquisition has only
recently completed, we’ve set out these risks separately.
As the EE risks become more embedded in our Enterprise
Risk Management framework, we’ll integrate the
reporting of these risks into our review of our principal
risks and uncertainties.

Risks related to the acquisition
Although a number of the risks EE faces are similar in nature to
those potentially impacting BT, there are also distinct risks that
the group now faces that BT has not previously perceived to be
significant threats.

This section outlines some of those new risks and uncertainties,
but it is not exhaustive.

Realising acquisition synergies
We are targeting significant synergies from the acquisition,
including operating cost savings and capital expenditure savings.
Integrating the respective businesses is also expected to give rise
to further benefits. These include fixed-mobile convergence,
the ability to serve customers through a single, seamless platform
supported by a single IP network, and being able to offer BT
products to EE customers and EE products to BT customers.

The group’s success will depend, in part, on the effectiveness of
the integration process and the ability to realise the anticipated
benefits and synergies from combining the businesses. Some of
the potential challenges in integrating the businesses may not
be known at this stage. If these challenges cannot be overcome,
for example because of unforeseen difficulties in implementing
fixed-mobile convergence or a lack of customer demand for the
offerings, the anticipated benefits of the acquisition will not be
fully achieved.

Realisation of synergies will depend partly on the rapid and
efficient management and co-ordination of the activities of the
group’s businesses. We may experience difficulties in integrating EE
with our existing businesses and may not realise, or it might take
longer than expected to realise, certain or all of the perceived
benefits of the acquisition. There’s also a risk that synergy
benefits and growth opportunities from the acquisition may
fail to materialise, or may be materially lower than have been
estimated. In addition, the costs of generating these synergies
may exceed expectations. Further, we may not achieve the revenue
or profitability that justify the original investment, which could
result in material, non-cash write-downs. Failure to deliver the
anticipated synergies and business opportunities could have a
material adverse effect on our businesses, financial conditions and
results of operations, including our ability to support our pension
deficit, service our debt or to pay dividends.

Competition in the mobile market
Competition in the UK mobile telecommunications market is
intense. Competition results from, among other things, the
existence of established mobile network operators, market entry of
alternative and lower cost carriers (such as mobile virtual network

operators), technology developments (such as Voice over Internet
Protocol (VoIP)), and the ability of other providers to bundle
mobile phone services with different products and content (such
as broadband and pay-TV). In particular, technologies such as
VoIP and so-called ‘over-the-top’ platforms (such as iMessage,
Facetime, Blackberry Messenger, WhatsApp and Facebook
Messenger) could reduce voice and/or text messaging traffic on
mobile networks, which could lead to significant price and revenue
reductions.

Increased competition has led to a decline in the prices which EE
charges for its mobile services and is expected to lead to further
declines in pricing in the future. Competition could also lead to
a reduction in the rate at which we add new mobile customers,
a decrease in the size of our mobile market share and a decline
in the group’s service revenue as customers choose to receive
telecommunications services or other competing services from
other providers. Also, there’s a risk of increased customer churn as
a result of the transition away from the legacy T-Mobile and
Orange brands and any potential changes to the branding in
future. Churn could also increase as a result of potential Ofcom
changes to the mobile switching regime in the UK. An increase in
churn rates could adversely affect profitability because we would
experience lower revenue and/or additional selling costs to replace
customers or recapture lost revenue.

Delays in the deployment of new technologies
Our operations will depend partly on the successful deployment of
continuously evolving telecommunications technologies, including
handsets and network compatibility and components.

EE uses technologies from a number of vendors and incurs
significant capital expenditure deploying these technologies. There
can be no assurance that common standards and specifications
will be achieved, that there will be interoperability across networks,
that technologies will be developed according to anticipated
schedules, that they’ll perform according to expectations or that
they will achieve commercial acceptance. The introduction of
software and other network components may also be delayed.
The failure of vendor performance or technology performance
to meet our expectations or the failure of a technology to
achieve commercial acceptance could result in additional capital
expenditure, or a reduction in profitability.

Technology change and market acceptance
We may not succeed in making customers sufficiently aware of
existing and future services or in creating customer acceptance
of these services at the prices we would want to charge. Also,
we may not identify trends correctly, or may not be able to bring
new services to market as quickly or price-competitively as our
competitors.

These risks exist in the mobile telecommunications area
(eg mobile data services) and in non-mobile telecommunications
areas (eg mobile payment services based on contactless
technology) where there is a risk that differences in the regulatory
treatment of different operators, based on their choice of
technology, could put us at a competitive disadvantage.

Further, as a result of rapid technological progress and the
trend towards technological convergence, new and established
information and telecommunications technologies or products

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information56

may not only fail to complement one another but in some cases,
may even become a substitute for one another. An example of
this is the risk that ‘over-the-top’ services (being those which
are provided by a third party to the end-user device) develop
substitutes for our own products and services. Another example
is VoIP, a technology that is already established in the business
customer market and which has now reached the consumer
market. The availability of mobile handsets with VoIP functionality
may adversely affect our pricing structures and market share in
our mobile voice telephony business. If we don’t appropriately
anticipate the demand for new technologies, and adapt our
strategies, service offering and cost structures accordingly, we
may be unable to compete effectively, which may have an adverse
effect on our business and operations.

Supplier and joint venture failure
EE has a number of suppliers identified as critical. EE is also party
to a complex and critical network-sharing arrangement with
Hutchison 3G UK Limited. The failure of this joint operation to fully
support our interests and goals, or any material disruption to the
operation of the EE network sharing arrangement, could cause
significant harm to our business.

As demand for smartphone and tablet products increases around
the world, there could be shortages in the volume of devices
produced as a result of insufficient manufacturing capacity, the
lack of availability of internal components such as processors or
major supply chain disruptions. This may result in delays in the
supply chain which in turn may have an adverse effect on our
business and operations.

Regulation and spectrum
Regulators, including Ofcom, set annual licence fees for spectrum
bands used by EE for voice calls, and data services. In future
spectrum auctions, the costs of acquiring spectrum could increase
or we may be unsuccessful in our bids. Any significant increases in
spectrum pricing which apply to us could have a material adverse
effect on our business and results of operations.

EE has been found to have significant market power in some areas
of wholesale call termination following market reviews and, as
is the case for all MNOs, EE’s wholesale mobile termination rates
are therefore regulated by Ofcom. The scope and form of the
regulation is reviewed every three years.

EE is also subject to UK and European Union consumer-focused
regulation in areas including: the international roaming services
provided by EE; processes for consumer switching and non-
geographic numbering call services. This regulation may affect
the group’s market share, competitive position, future profitability
and cash.

As technology and market dynamics develop and as the mobile
business of EE is integrated into BT, a wider range of existing
regulations will apply to us and a broader range of new and/or
modified regulations may be directed at us.

Network, licence and technology investment
EE (as well as the rest of BT to a lesser extent), has made
substantial investments in the acquisition of licences and EE
has invested in its mobile networks, including modernising its
2G network, the upgrade of its 3G network and the continued
expansion of its 4G network. We expect to continue to make
significant investments in our mobile networks due to increased
usage and the need to offer new services and greater functionality.
We may acquire new spectrum licences with licence conditions,
which may include network coverage obligations or increased
licence fees. Accordingly, the rate of our capital expenditure and
costs in future years could increase and exceed those expected
or experienced to date.

There can be no assurance that new services will be introduced
according to anticipated schedules or that the level of demand for
new services will justify the cost of setting them up (in particular,
the cost of new spectrum licences and network infrastructure,
for example, for 4G services and subsequent evolutions). Failure
or a delay in completing networks and launching new services, or
increases in the associated costs, could have an adverse effect on
our business and operations and could result in significant write
downs of the value of network spectrum or other licences or other
network-related investments.

If the current economic climate worsens, we may decide, or be
required, to scale back capital expenditure. A lasting reduction in
capital expenditure levels below certain thresholds could affect our
ability to invest in mobile telecommunications networks (including
additional spectrum), new technology and other BT businesses and
so could have an adverse effect on our future growth and the value
of radio spectrum.

Transmission of radio waves from mobile telephones,
transmitters and associated equipment
Media reports have suggested that radio frequency emissions
from wireless mobile devices and mobile telecommunications
sites may cause health issues, including cancer, and may interfere
with some electronic medical devices, including hearing aids and
pacemakers. Research and studies are ongoing. According to the
World Health Organisation’s Fact Sheet Number 193, last reviewed
in October 2014, there are no known adverse effects on health
from emissions at levels below internationally recognised health
and safety standards. However, we cannot provide assurance
that research in the future will not establish links between radio
frequency emissions and health risks.

Whether or not research or studies conclude that there is a
link between radio frequency emissions and health, popular
concerns about radio frequency emissions may discourage the
use of wireless devices, impairing our ability to retain customers
and attract new customers, and may result in restrictions on the
location and operation of mobile communications sites and the
usage of our wireless technology. These concerns could also lead to
litigation against us. Any restrictions on use or litigation could have
an adverse effect on our business and operations.

BT Group plc Annual Report 2016Overview

The Strategic Report

Governance

Financial statements

Additional information

57
57

Our lines of business

We have six customer-facing lines of business.
In this section we describe each of them,
the markets and customers they serve and
the products and services they sell. We give
examples of what they’ve been doing to
broaden and deepen relationships with their
customers and we report on their operational
and financial performance in the year. Looking
ahead, we list their key priorities.

The lines of business are supported by BT TSO,
our internal service unit. We describe its role
and responsibilities and provide case studies
on two important work programmes.

The section starts with an overview of how
we’re organised and summarises some changes
we’ve made since the year-end.

58 How we are organised

59 BT Global Services

65 BT Business

71 BT Consumer

76 EE

80 BT Wholesale

85 Openreach

90 BT TSO

Supporting our business model
The following icons used in this section provide linkage to our business model on page 28.

Inputs

Outputs

Outcomes

Financial strength

Skills & expertise

Group performance & KPIs

Our people

Products & services

Line of business performance

Networks & physical assets

Innovation

Our brand strength

Research & development

Waste & emissions

Societal benefits

Stakeholders & relationships

Natural resources

Environmental benefits

Our lines of business
Our business is structured to best serve our
customers – responding to their needs and
delivering value to them.
How we are organised
For most of the year we were organised around five
customer-facing lines of business (BT Global Services,
BT Business, BT Consumer, BT Wholesale and Openreach)
which were supported by our internal service unit, BT
Technology, Service & Operations (BT TSO). Our acquisition
of EE in January added a sixth line of business.

Customers

BT Global
Services

BT Business

BT Consumer

BT Wholesale

Openreach

People overview
Over 30% of our people work in Openreach. Many of them are
engineers, responsible for building, maintaining and upgrading
our networks. Over 20% of our people are in BT TSO and group
functions, supporting all the customer-facing lines of business.
18% work in BT Global Services, with many supporting our
customers worldwide. And 12% are in EE.

Employeesb by line of business
As at 31 March 2016

24,000 or 23%
BT TSO and other

18,500 or 18%
BT Global Services

7,900 or 8%

BT Business

6,500 or 6%
BT Consumer

12,800 or 13%
EE

1,300 or 1%
BT Wholesale

BT Technology, Service & Operations

31,500 or 31%
Openreach

Management changes
In February 2016 Clive Selley became CEO of Openreach, replacing
Joe Garner who left the group. Howard Watson, previously
responsible for leading BT’s global IT platforms, replaced Clive as
CEO of BT TSO. In addition, in March 2016 Gerry McQuade, who
joined BT as part of the EE acquisition and was previously chief
sales and marketing officer for EE Business, replaced Nigel Stagg
as CEO of BT Wholesale. Marc Allera, previously chief commercial
officer for EE, was appointed the new CEO of EE on completion
of the acquisition.

Financial overview
BT Global Services is our largest line of business by revenue,
generating 34% of the group’s external revenue. BT Consumer
is the next largest, contributing 24%.
Around 60% of Openreach’s revenue is generated from other
BT lines of business so its contribution to external group revenue is
the smallest, at 11%. Total Openreach revenue is equivalent
to 27% of group revenue. It is the group’s largest EBITDA
contributor, generating 40% of the total, reflecting the return
it earns on its extensive network assets. But as a capital-intensive
business, Openreach incurs costs relating to capital expenditure and
depreciation, which are not reflected in this EBITDA contribution.
BT Global Services’ EBITDA margins are below those of the other
lines of business reflecting the type of business it does. That’s
why, at 16%, its proportion of group EBITDA is below its overall
revenue contribution.

Adjusted
Year ended 31 March 2016

revenue by line of business

a
Adjusted EBITDA by line of business
Year ended 31 March 2016

11%
Openreach

11%
BT
Wholesale

5%
EE

27%
Openreach
(including internal)

40%
Openreach

34%
BT Global
Services

24%
BT Consumer

15%
BT Business

8%
BT Wholesale

a
Before speciﬁc items; includes EE from 29 January 2016.

16%
BT Global
Services

16%
BT
Business

16%
BT Consumer

4%
EE

b Full-time equivalent of full and part-time employees.

Internal reorganisation
The acquisition of EE provided us with a chance to refresh our
organisational structure and this took effect on 1 April 2016.

Customers

Global Services

Business
and Public Sector

Wholesale
and Ventures

Consumer

Openreach

Technology, Service & Operations

We still have six lines of business. Two will focus on businesses
and the public sector – one in the UK and the Republic of Ireland
and one globally – two will serve consumers and two will provide
wholesale services to other industry players. They will all be
supported by Technology, Service & Operations. This change
will allow us to better serve our different types of customers:

• EE and Consumer will address different parts of the consumer

market;

• Business and Public Sector will be able to better align its

resources to improve customer service and delivery, and will
adopt a more regional and forensic approach to serving the
UK public sector; and

• large international and global organisations will benefit from the
sharper focus on their needs that Global Services will be better
placed to provide.

In this Annual Report we are reporting against our organisational
structure as of 31 March 2016. We will report in line with the
new structure from the first quarter of 2016/17.

BT Group plc Annual Report 201659

Inputs, outputs and outcomes

Inputs

We have 18,500 people worldwide providing global presence, together
with local expertise and delivery. 63% of our people are based outside
the UK, in nearly 60 countries.

We have over 2,000 professional services people and a further 2,500
security practitioners to support our global customers.

Our network reaches 180 countries. We combine this breadth with our
IT services capabilities to provide global availability for our customers.

Outputs

We bring together a broad portfolio of products and services with
industry-specific solutions and consulting expertise.

Our ‘Cloud of Clouds’ strategy brings these together to give customers a great
choice of cloud providers, easily and securely, with our network at the core.

Innovation improves the products and services we develop and helps us
serve our customers better. We integrate our technologies with those of
our partners so that customers can use cloud services (their own, BT’s and
third parties) on a global basis.

Outcomes

We generate 34% of the group’s external revenue.

We’re recognised as a global leader in managed networked IT services.

‘Cloud of Clouds’ supports our brand. It brings together our cloud services
in a coherent way and summarises what we can do for customers as a
global cloud services integrator.

We work with our customers to cut their carbon emissions. We’ve
opened two new data centres in the UK that will be some of the most
environmentally efficienta in the country.

Our top 1,000 customers generate around 90% of our revenue.
On average, our corporate customers typically spend less than
10% of their total IT and communications expenditure with us.
So we see an opportunity to grow our share of their spending by
broadening and deepening our relationship with them.

BT Global Services revenue by sector
Year ended 31 March 2016

52%
Corporate customers
(excluding ﬁnancial
institutions)

5%
Transit

6%
Other global carriers

19%
Public sector

18%
Financial institutions

BT Global Services
We’re a leading global business communications provider.
We help around 6,200 corporate and public-sector
customers across 180 countries embrace the digital age,
innovate and work more efficiently.

We help our customers use communications to create new ways
of doing business. We combine our global strengths in networks,
IT and innovation with our local presence, expertise and delivery.

During the year we were structured around four regional
operations providing specific solutions and expertise to ten key
industry sectors:

Continental
Europe

US and
Canada

High-growth
regions

Asia Pacific
Middle East
and Africa
Latin America

Financial Services
Public Sector
Automotive
Energy and Resources
Healthcare and Life Sciences

Manufacturing
Media and Business Services
Retail and Consumer Goods
Technology and Telecoms
Travel, Transport and Logistics

New organisational structure
From April 2016, in line with the new BT organisational structure,
we’ll be able to focus more on our key areas of strength, serving
multinational companies and financial services organisations
headquartered in the UK and across the world. As well as
continuing to serve the communications needs of major public
and private-sector customers outside the UK.

Markets and customers

Customers
We work for around 6,200 corporate and public-sector customers
across 180 countries worldwide. We have relationships with:

• 98% of FTSE100 companies;
• 84% of Fortune 500 companies;
• 97% of Interbrand’s annual ranking of the 100 most valuable

brands in the world;

• 95% of the world’s top banks; and
• public sector organisations in 29 countries around the world.
We generate over two-thirds of our revenue from corporate
customers. Of these, financial institutions are our largest segment,
generating 18% of our revenue in the year.

The public sector generated 19% of our revenue. As a key
supplier to the UK Government, we’re helping drive its digital
transformation.

Around 11% of our revenue comes from providing a range
of services to other telecoms companies.

a With a power usage effectiveness (PUE) rating of 1.2 compared to an industry average
of 1.7, according to the Uptime Institute.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Regions
The UK is our largest region by revenue. Financial institutions and
government and healthcare customers are particularly important
in this market.

We have a strong presence in Continental Europe, with national
networks and metropolitan fibre rings in most major countries,
including Belgium, France, Germany, Italy, the Netherlands, the
Republic of Ireland and Spain.

The US and Canada region is important because of the large
number of multinationals headquartered there. However our
biggest challenge in the US continues to be ineffective regulation
of wholesale access to incumbent operator networks. The US
regulator is currently analysing the market and we’re actively
engaged in the process.

The high-growth regions of Asia Pacific, the Middle East and
Africa (AMEA) and Latin America are increasingly important to
our customers. We’re helping multinationals expand into these
areas and supporting local companies as they grow internationally.
We continue to invest in these markets by adding products and
services and improving our network and IT infrastructure.

Yearly growth of hybrid cloud over the
next three years

32%^

Yearly growth of cyber security over the
next three years

14%^

Yearly growth of unified communications
as a service between 2014 and 2018

46%^

BT Global Services revenue by region
Year ended 31 March 2016

13%
High-growth regions

13%
US and Canada

42%
UK

Sources: Gartnera,b and IDC c

Hybrid cloud, a mix of public and private cloud services, is fast
becoming a key aspect of the market. Gartner forecasts that
cloud computing services will grow globally at a compound annual
growth rate of 32% from 2016–2019a.

In this hybrid environment, cyber security is the major concern for
organisations. Managed security services are expected to grow at
a compound annual growth rate of 14% a year globally over the
same periodb.

And unified communications as a service (UCaaS) delivered via the
cloud by third-party providers is forecast to grow at a compound
annual growth rate of 46% between 2014 and 2018c.

‘Cloud of Clouds’

This year we announced our ‘Cloud of Clouds’ strategy and launched
a new generation of cloud services to help customers address their
business challenges in a rapidly-changing digital world.

These cloud services rely on technology developed by ourselves and
our partners and provide large organisations around the world with
a greater choice of cloud services (their own, BT’s and third parties’),
using our network.

32%
Continental Europe

Key market trends
Our main competitors are global telecoms companies such as
AT&T, Orange and Verizon. We also compete against IT and
business process management companies, the latter particularly
in the UK public sector.

The markets we operate in are competitive and we continue
to face pricing pressure. We expect organisations to focus on
improving operational efficiency by using next generation IT
services to cut costs, while expecting more for a lower price.

But some parts of the market are growing. Private and internet
network traffic is increasing due to the number of applications
that are moving from in-house models to external cloud-based
services. We’re investing in a new generation of cloud services
to support these areas.

Sources:
a Gartner, Forecast: IT Services, Worldwide, 2014-2020, 1Q16 Update (March 2016).
b Gartner, Forecast: Information Security, Worldwide, 2013-2019, 4Q15 Update
(February 2016).
c IDC, Western Europe Unified Communications as a Service 2013 Market Analysis and
2014-2018 Forecast (September 2014).

BT Group plc Annual Report 201661

Products and services

We deliver value to our customers by combining a broad
portfolio of products and services with industry-specific
solutions and consulting expertise. Our network is at
the heart of what we provide. We have simple product
categories organised around what our customers need.
These are:

BT Assure
Security that matters

BT Compute
Services that
adapt

BT Connect
Networks that think

BT One
Communications
that unify

BT Contact
Relationships that grow

Service from BT

BT Advise
Knowledge that delivers

Industry propositions

Innovation from BT

BT One
People communicate using technology in many different ways – by
phone, instant messaging, email, audio and video conferencing and
data-sharing solutions, either at their desks or on mobile devices.
Businesses want these channels to be integrated and to work together
easily and reliably.

Our collaboration services help customers simplify their communication
channels and transform the way they interact with their customers,
colleagues, partners and suppliers. And our mobile services help keep
them in touch when they are on the move.

BT Contact
Our contact centre services help our customers build stronger
relationships with their customers. We offer a number of ways for them
to communicate together, including email, web chat, video, social media
and the phone – either via automated systems or dedicated advisers.

Our cloud contact solutions give companies more control over their
costs, allowing them to change capacity in response to demand.

BT Connect
Network services are at the core of our Cloud of Clouds strategy.
They connect our customers to their people, to their own customers,
to the cloud and to the world. We offer a range of flexible, intelligent
and secure IP, Ethernet and internet virtual private network services,
including direct connectivity to third-party cloud services providers.
We deliver our network services across 180 countries over a range of
access technologies including DSL, Ethernet and satellite.

BT Compute
Businesses want reliable but flexible IT platforms and services for their
applications, data storage and security. We provide IT services across
our global network from 48 data centres around the world, 22 of which
are cloud-enabled. Our services range from traditional telehousing
and colocation to the latest public, private and hybrid cloud solutions,
delivered in any combination our customers need.

BT Assure
Cyber security is now firmly on the boardroom agenda for many
companies with cyber-attacks a daily occurrence. We use the expertise
we have from protecting BT to develop products and services (such as
firewalls, web security, intrusion prevention and threat monitoring) to
protect our customers.

BT Advise
We want to become a trusted adviser for all our customers. Our team of
more than 2,000 professional services people provides the connection
between business strategy and technology. By giving expert advice and
then integrating and managing all essential business technologies, our
customers can get the most value from our services.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
62

Industry propositions
Our industry-specific solutions help customers overcome
challenges unique to the environments they operate in.
For example:

• our Digital Consumer portfolio enables retailers to provide
an online experience to shoppers in their physical stores;
• our Field Force Automation solutions provide workers with
access to corporate applications, regardless of their location;
and

• BT Industrial Wireless services provide mining and oil

companies with connectivity to the coalface or wellhead
for safer and more cost-efficient operations.

Performance in the year
We have consolidated our position as a global leader
for managed networked IT services.

We’ve improved our Right First Time performance and have
extended our customer satisfaction measures to give clearer
insight into customer experience. But we continue to work on
service delivery as our loyalty surveys have shown a decline in
customer satisfaction, which was largely driven by delays in
providing Ethernet circuits in the UK.

We grew underlying revenue excluding transit in the high-growth
regions of the world and Continental Europe. But overall it
declined, driven by lower UK public sector income and because
a major customer in the US started to insource some services.
Despite this, we grew our operating cash flow.

Analyst firms recognise us as a global leader in the market.
We were positioned as a Leader in Gartner’s 2016 Magic Quadrant
for Network Services, Global, for the 12th timea. We were also
ranked a Leader in IDC’s MarketScape Worldwide Telecom Service
Provider 2015 Vendor Assessmentb.

Examples of how we’re broadening
and deepening customer relationships

• Working with Williams Martini Racing, we’ve improved the availability

of data in near real-time from each race track back to their
headquarters in Oxfordshire. This supports the teams in improving car
performance on race days through data analysis.

• We opened new customer showcases. One in New York and a security

showcase in the UK with access to highly-skilled cyber security
specialists and innovative demonstrations.

• We extended the rollout of our ‘Customer Thermometer’ which takes
a regular gauge of customer experience. Customers are asked for
feedback via email in a simple format at key points of interaction.
• We use hothousing events to engage with our customers, sharing our
extensive knowledge and skills across a broad spectrum of business
topics, as well as hearing their views and insights.

a Gartner, Magic Quadrant for Network Services, Global, Neil Rickard, Bjarne Munch, January
2016.
Gartner footnote: Gartner does not endorse any vendor, product or service depicted in its
research publications, and does not advise technology users to select only those vendors
with the highest ratings or other designation. Gartner research publications consist of the
opinions of Gartner’s research organization and should not be construed as statements of fact.
Gartner disclaims all warranties, expressed or implied, with respect to this research, including
any warranties of merchantability or fitness for a particular purpose. The Gartner Report(s)
described herein, (Gartner Magic Quadrant for Network Services, Global, Neil Rickard, Bjarne
Munch, 14 January 2016) represent(s) research opinion or viewpoints published, as part of
a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of
fact. Each Gartner Report speaks as of its original publication date (and not as of the date of
this Annual Report) and the opinions expressed in the Gartner Report(s) are subject to change
without notice.
b IDC MarketScape: Worldwide Telecom Service Provider, 2015 Vendor Assessment, July 2015,
IDC #257339.

Societal benefits
We make a positive difference to communities. In India we’ve
been supporting Katha since 2001. We helped it to establish the
Katha Information Technology and E-commerce School (KITES) in
the heart of Govindpuri, an impoverished area of Delhi. Using an
online resource based on Katha methods, the Katha Consortium
has now supported over 17,000 young people and educators, and
the ‘I Love Reading’ programme has touched the lives of almost
700,000 people.

We’re also working with the Colombian government to bring
poorer areas of the country, including rural areas, online. This
project will connect over 700 new Vive Digital kiosks across the
country, allowing people in these areas to connect to the internet
and access e-learning and e-training services as well as a range of
online public services. The estimated social value of this work
is £1.8m a year.

We’re working with Milton Keynes Council to pilot ‘smart’ parking
at the main railway station to help offer a better experience to the
town’s residents as well as reducing fuel use and vehicle emissions.

Operating performance

We achieved a total order intake of £6.2bn. While this was down
4%, excluding contract renewals our order intake grew in the
year, in line with our strategy to grow our share of our customers’
network and IT spend. Key deals with our top global customers
continue to make up a large part overall.

Contracts we won this year include:

Customer

AIA Group
(BT Connect)

ALS
(BT Connect,
BT Assure)

Caixa
(BT Connect)

Commerzbank
(BT One)

Contract

Providing managed network and security
services covering 52 sites in 15 countries
across Asia Pacific.

Providing a global managed network
comprising WAN services, internet access,
cloud connectivity, network acceleration
and optimisation, as well as managed
security services.

Increasing the number of lottery outlets
that we will serve in Brazil from 14,000
to 18,000, using our network and
satellite connectivity.

Providing a global collaboration system
bringing together 49,000 users in 20
countries across the globe.

European Commission
(BT One,
BT Compute)

Delivering cloud services across 52 major
European institutions, agencies and
bodies.

Walgreens Boots Alliance
(BT Connect)

Upgrading and expanding its IT network in
20 countries.

Zurich Insurance Group
(BT Connect)

Modernising and managing its
communications infrastructure.

BT Group plc Annual Report 2016

Deliver superior customer service

Transform our costs

Customer experience is at the heart of the way we do
business. We gather feedback from our customers through
our global account management teams and by using
third-party surveys.

And this year we extended the rollout of our ‘Customer
Thermometer’ to more customers. It takes a regular gauge
of customer experience using email to gain customer feedback
at key points of interaction.

During the year we:

• improved the speed of service delivery for our main products

by 14%. This will remain a key focus for us next year;

• continued to deliver network reliability across our core products;
• introduced pre-emptive, automated service management into
our key networks. This means we can identify issues and act on
them before the customer feels any impact; and

• started to develop better tools to keep our customers informed

of progress on major orders.

Thanks to these improvements, we increased our Right First Time
measure 2.3%, building on last year’s 8.6% increase.

However, we did see a decline in overall customer satisfaction
in our loyalty survey. This was largely driven by issues around
service delivery, in particular delays in providing Ethernet circuits
in the UK. We’re addressing this by changing our processes and
procedures.

We’re currently piloting a Net Promoter Score (NPS) and will launch
this globally next year. This new measure of customer satisfaction
will give us much more timely and actionable insight on a
customer-by-customer basis.

We’ve continued to reduce our costs with underlying
operating costs excluding transit down 1%.

We’re taking tried-and-tested methods from the UK and are using
them overseas to reduce the cost of failure, improve efficiency,
streamline organisational structure and get better value for money
from suppliers.

Reduce failures in our processes
We continue to deliver good results by improving how we manage
access circuits around the world including:

• removing circuits we no longer need;
• migrating to more advanced technologies with lower unit costs;

and

• reducing order backlogs.

Improving third-party supplier value for money
We’ve saved money on customer premises equipment by:

• applying best practice on managing discounts and rebates

from a large supplier;
• using refurbished kit;
• disposing of unused equipment; and
• insourcing the maintenance of equipment where we have

the skills to do this ourselves.

From these, and other, cost transformation programmes, we have
not only delivered significant benefits this year but have
also identified further opportunities for next year.

Invest for growth

We’ve continued to strengthen our capabilities with
the launch of new cloud-based services which can be
integrated with different suppliers and are available
globally.

High-growth regions
We’ve improved our cloud-based BT Connect services in
Singapore, Hong Kong and Japan. And we also launched our
BT MeetMe with Dolby Voice conferencing services in Argentina,
Brazil, Colombia and Mexico.

Our network
We continued to expand our network; we’ve extended our
internet capability including 18 new internet gateways and
a three-fold increase to nearly 100 internet global points
of presence (PoPs). And we opened two new, highly secure,
sustainable data centres in the UK.

We also introduced cloud-based acceleration and security
services, marking our first steps on our virtualised network
services roadmap.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Our core products and services
We’ve made it easier for our customers to connect securely to
third-party providers including Microsoft’s cloud-based Office
365 suite, HP Enterprise Helion Managed Cloud Services and
Salesforce.com.

Operating costs decreased 4% (2014/15: 8%). Underlying
operating costs excluding transit decreased 1% (2014/15: 5%)
reflecting the impact of lower revenue and the benefit of our cost
transformation programmes. Operating costs included £25m of
leaver costs (2014/15: £nil).

We’ve also made it simpler for customers to integrate
video, conferencing and messaging platforms offered
by different providers.

In the security area, we:

• introduced a cloud-based DDoS mitigation service;
• launched BT Assure Cyber Defence, an advanced security

platform for monitoring, detecting and protecting against
cyber-threats; and

• launched two further BT Assure services, Ethical Hacking for
Finance and Ethical Hacking for Vehicles (which assesses the
vulnerabilities of connected vehicles to cyber-attacks).

Industry-specific solutions
As a founding member of the Acuitas Digital Alliance, we’ve
launched our BT In-Store Visibility solution. It gives retailers real-
time digital insight from the shop and across the supply chain to
give customers in-store the same experience they enjoy online.

Financial performance

Year ended 31 March

Revenue

Underlying revenue excluding

transit

Operating costs

EBITDA

Depreciation and amortisation

Operating profit

Capital expenditure

Operating cash flow

2016
£m

6,530

(2)%

5,482

1,048

518

530

415

475

2015
£m

6,779

(4)%

5,732

1,047

519

528

468

349

2014
£m

7,269

(1)%

6,228

1,041

616

425

516

499

Revenue decreased 4% (2014/15: 7%) including
a £105m negative impact from foreign exchange
movements and a £30m decline in transit revenue.
Our key revenue measure, underlying revenue excluding
transit, decreased 2%, which was an improvement on
the 4% decline the year before.

Underlying revenue excluding transit grew 4% in the high-growth
regions (2014/15: 9%) reflecting the signing of key deals and
the impact of newly-launched capabilities, products and services.
Continental Europe delivered 5% growth in underlying revenue
excluding transit (2014/15: 2%) reflecting higher IP Exchange
volumes and growth from corporate customers.

In the UK our revenue was down 5% (2014/15: 11%) reflecting
the decline in our public-sector income. In the US and Canada
we had a 9% decline in underlying revenue excluding transit
(2014/15: 3%) as a major customer started insourcing some
services.

EBITDA was flat (2014/15: up 1%) and was up 1% excluding
foreign exchange movements. Depreciation and amortisation
was flat (2014/15: down 16%), and operating profit was also
flat (2014/15: up 24%).

We reduced our capital expenditure by 11% (2014/15: 9%),
largely reflecting improved efficiencies. EBITDA less capital
expenditure was up £54m to £633m, a similar increase to
last year.

Our operating cash flow of £475m was £126m higher than last
year, benefiting from the timing of contract-specific cash flows
and the lower capital expenditure.

BT Global Services 12-month rolling operating cash ﬂow
Year ended 31 March

£m
600

500

400

300

200

100

2015

2016

Key priorities

We’re focused on strengthening our position as a global leader. This
will be helped by the April 2016 reorganisation and the renewed
focus this provides for Global Services. Our future priorities include:

• strengthening the capabilities that underpin our ‘Cloud of Clouds’
strategy: our network performance, the systems delivering cloud
services to our customers, and vertically-integrated solutions for our
customers;

• continuing to build deeper relationships with our major customers as

their trusted partner;

• transforming our customer service through clearer insight into

customer experiences, including the introduction of a ‘Next Generation
Service Desk’;

• continuing to drive down costs to become a more efficient organisation;
• investing in the technologies which help our customers embrace the

digital age; and

• further strengthening our defences against attempted cyber-attacks
and fraud, and supporting customers in their security challenges.

We’ve also set ourselves some specific ambitions over the next
three years:

• to grow our share of spending with our Global Accounts by 10%;
• to achieve double-digit percentage annual growth rates in the revenue

we generate in security, cloud unified communications and Cloud
Compute; and

• to increase our net promoter score by at least ten points.

BT Group plc Annual Report 2016
BT Business
BT Business sells communications and IT services in the
UK and the Republic of Ireland. We have around 900,000
customers and are leaders in fixed-voice, networking,
cloud services and broadband.

In BT Business we’re passionate about helping businesses
of all sizes succeed. From household names and public-sector
organisations right through to small businesses and start-ups,
we help organisations use the power of technology to change,
compete and thrive.

It’s not just business customers that rely on us. We play a critical
role in society through our management of the 999 service in
the UK and the Republic of Ireland. And we keep the rest of
BT Group on the road by managing and servicing the large fleet
of BT vehicles.

During 2015/16 we had four customer-facing divisions:

UK SME
Small to
mid-market
companies
plus specific
target markets
for specialist
services

BT Business
Solutions
UK SMEs,
corporates,
some public-
sector
organisations

UK Corporate
Larger
businesses
and corporate
mid-market

Typically
customers
have <100
employees

Typically
customers have
250-5,000
employees

Typically
customers have
100-1,000
employees

BT Ireland
SMEs and
public sector
in Northern
Ireland

Public sector,
corporates and
wholesale in
the Republic
of Ireland

BT Redcare
BT Directories
BT Payphones

BT Global
Services and
BT Wholesale
customers

BT Fleet

Ireland
network
infrastructure

‘sell through’ relationship

UK SME
UK SME supplies small businesses, ranging from sole traders
through to more complex organisations (including schools and
colleges), with communication solutions and IT services. We
serve our customers through a number of channels including
our network of 40 independent BT Local Business franchisees.

Business

BT Redcare

BT Directories

BT Payphones

Providing

Fire and security alarm signalling services,
surveillance networks and control room
services.

Directory Enquiries, The Phone Book,
website services, operator services and
call handling for the emergency services.

Public, private and managed payphone
services.

Inputs, outputs and outcomes

Inputs

We have access to the UK’s largest fibre network and, going forward,
the fastest 4G network through EE.

We partner with leading companies such as Broadsoft, Cisco, HP and
Microsoft.

We’re an organisation of around 8,000 people providing local, regional
and national coverage across the UK.

Outputs

We offer a wide choice of fixed, mobile and IT services.

We’re growing our portfolio of converged, IP and cloud-based products
and services.

This year we invested in 40,000 hours of training for our customer-
facing people.

Outcomes

We’re the leading UK provider of fixed business communications and
IT services and represent 15% of BT’s revenue.

We support communities through volunteering and play a critical role
in society through managing the 999 service.

We help young people to learn and develop through our apprentice
scheme.

UK Corporate
UK Corporate serves larger businesses (typically 100 to 1,000
employees), offering both standard and bespoke communications
solutions and IT services.

BT Fleet supplies BT and external customers with fleet
management solutions. It’s one of the UK’s leading providers
of fleet maintenance and accident management services.

BT Business Solutions
We provide IT services to UK customers through four specialist
IT businesses:

Business

Providing

BT IT Services

IT hardware and networked IT solutions,
managed and support services, and
consulting services.

IT and communications hardware and
software, including computing and
networking equipment, sold online.

BT Expedite

Specialised IT services for the retail sector.

Tikit

Bespoke IT products and services for legal
and accountancy firms.

BT Business Solutions typically targets organisations with 250
to 5,000 employees. We sell solutions and IT products primarily
through the UK Corporate and UK SME channels. We also sell to
customers of BT Global Services and BT Wholesale. BT Business
Direct, BT Expedite and Tikit have their own direct sales functions.

BT Ireland
In Northern Ireland we’re the largest provider of communications
services for small and medium-sized enterprises (SMEs) and a
leading supplier of networked IT services for public sector and
corporate customers.

We also have three specialist businesses

BT Business Direct

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

In the Republic of Ireland we provide networked IT services for
the public sector and large businesses and we provide wholesale
services to other communications providers.

New organisational structure
From 1 April 2016 we’re creating a line of business called Business
and Public Sector. This will consist of the existing BT Business
organisation, along with the EE business division and some of BT
Global Services’ UK corporate and public sector teams. A number
of our specialist businesses (including BT Fleet, BT Redcare,
BT Directories, BT Payphones and Tikit) will move into the new
Wholesale and Ventures line of business.

As the new Business and Public Sector line of business, we’ll:

• be a provider of communications and IT services to businesses
and the public sector in the UK and the Republic of Ireland,
serving over 1.2m customers;

• offer the best fixed and mobile networks to provide seamless,

converged business services;

• have 12,000 people located across the UK and the Republic

of Ireland dedicated to giving our customers the best experience;
and

• generate revenue of around £5bn.

Markets and customers

There are 5.4m SMEs in the UK. They are critical to
driving economic growth. They make up 99.9% of all
UK businesses, and account for 60% of private-sector
employment and 47% of business revenue.

Sole traders and small businesses typically buy fixed-lines,
mobile and broadband. Larger customers buy a broader range
of communications services which include Ethernet and cloud-
based products.

We have around 900,000 customers including more than half
of FTSE350 companies. Major customers include:

• retailers like Halfords;
• public sector organisations like the London Fire and Emergency

Planning Authority;

• construction companies like Morgan Sindall;
• financial organisations like Old Mutual Wealth; and
• educational institutions like University of West Scotland.

We’re focused on three main product markets: fixed-voice
and data; mobility; and IT services. We expect these markets
to increasingly converge over the next few years as technology
and customer needs evolve towards integrated services.

Fixed-voice and data
The UK fixed-voice and data market that we address is worth
around £4.6bn. Our share is around 31%.

We compete against more than 800 resellers and fixed network
operators. Our main competitors are Alternative Networks,
Azzurri, Colt Group, Daisy Group, Gamma, KCOM Group, O2,
TalkTalk, Unicom, Virgin Media, Vodafone and XLN.

There are 7.7m (2014/15: 7.7m) business lines in UK, including
those used by both SMEs and large corporates. Some of these
lines are provided by BT Global Services. There are more lines than
businesses as many customers buy more than one line.

The number of business fixed-lines has decreased over the last
few years as companies move towards VoIP and/or mobile solutions.
Businesses have also made fewer calls over their fixed-lines
because of the growth in email and other online communication.
Call volumes in the market are 12% lower than a year earlier.

We have a 46% market share of business lines (excluding VoIP),
broadly level with last year.

Demand for faster and more reliable broadband connections is
growing, with continued migration towards fibre. Businesses want
faster broadband to communicate, to transact with customers and
suppliers, and to maintain a competitive advantage.

We’re the largest business broadband provider in the UK, with over
a third of the market for businesses with one or more employees.

Ethernet and dedicated internet access services are growing
strongly, with businesses becoming increasingly reliant on
connectivity. We’re the leading provider of fixed networking
services in the UK with around a quarter of the market.

Mobility
The competitive landscape in the UK is evolving rapidly as
businesses look to exploit the opportunities of services such as 4G
to work more flexibly and efficiently, and also to buy more of their
communications services from a single supplier.

Our main competitors are O2 and Vodafone. Both offer fixed
products as well as mobile and are increasingly selling
converged services.

Our acquisition of EE means we’ll be able to respond more
rapidly to these trends and accelerate the growth of our
fixed-mobile services.

IT services
The IT services market is very diverse, ranging from off-the-shelf
hardware sales to large outsourced solutions. Competition is
fragmented with providers often focused on specific customer-
types, industries or technologies. Our main competitors are
Computacenter, Dimension Data, Kelway, Logicalis, SCC and
Softcat.

We estimate that the parts of the market we serve are worth
around £8bn, of which we have around 6% share. The areas
of the market that are growing include cloud services, hosting,
infrastructure and security. They offer attractive opportunities
for us to grow our share of the overall market.

Market size and BT Business share
£bn
10

%
1
3

Fixed-voice
and dataa

%
8
2

%
6

Mobility inc EEa,b

IT servicesc

BT Business

Rest of market

Source: BT Business revenue and IDC market sizing model.
a Market size and our market share for ﬁxed and mobility services includes <1,000 employees
and the addressable proportion of the 1,000+ employee market.
b Mobility market size excludes devices and is formalised mobile contracts only.
c IT services market size includes only the product and service portfolio we address for the 250
to 5,000 employee segment. The revenue that is used to calculate our market share includes
sales of BT Business IT products and services through BT Global Services as well as our direct
channels.

BT Group plc Annual Report 201667

Products and services

We offer a wide choice of fixed, mobile and IT services.
These range from standalone products to managed
services and customised solutions, suiting the needs
of customers from small start-ups to large enterprises.

Fixed-voice
Our fixed-voice services range from calls and lines to fully-managed
office phone systems and contact centre solutions. We’ve continued
to develop BT Cloud Voice and BT Cloud Phone in our growing portfolio
of VoIP services.

We’ve launched Call Essentials, two great value fixed-price packages
for small businesses. Customers can get unlimited calls to UK landlines
and mobiles, together with an international option, giving them peace
of mind about their bill.

IT services
Our specialist IT services team provide solution design, through to
delivery, management and in-life support, built around five core product
areas:

• end-user computing;
• unified communications and collaboration;
• networking;
• security; and
• data centres, cloud and hosting.

These services are supported by partnerships with the likes of Cisco,
HP and Microsoft.

Broadband and internet
We provide a range of internet access options including: BT Business
Broadband (over copper connections); BT Business Infinity over fibre-
to-the-cabinet (FTTC) and fibre-to-the-premises (FTTP); and BTnet
dedicated internet access.

We’ve added the option to ‘self-install’, making it even easier
for our customers to benefit from superfast fibre broadband.

And we’ve launched an online app store to allow customers to
conveniently manage and tailor any extra software needs (such
as security, backup and Microsoft Office).

Networking services
Our voice and data networking services support customers who need
to connect more than one site. Products include Ethernet, IP virtual
private network services (which use IP connections), SIP trunking
(which transports voice calls over IP networks), leased lines, cabling
infrastructure and local area networking solutions.

Mobility
We offer a range of handsets and tablets and a choice of voice and data
tariffs.

BT One Phone combines office phone and mobile requirements into one
cloud-based solution delivered through the customer’s mobile phone.
This year we improved the voicemail service, including new recording
features.

Before we bought EE, we operated as a mobile virtual network operator
(MVNO) on the EE network. We’re confident that by bringing together
the EE and BT networks we can launch a broader range of new converged
and innovative services.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
68

Performance in the year

Contracts we won or re-signed this year include:

Customer

Contract

Towergate Insurance

Old Mutual Wealth

University of West
Scotland

Sanctuary Personnel

We’re helping Towergate Insurance to
save costs and improve efficiency by
consolidating systems and by bringing
together lines, mobiles, hosted contact
centres and inbound call service into one
managed service contract.

We’re providing a global WAN, wi-fi, LAN,
security and conferencing service which
forms part of a strategic transformation
programme for Old Mutual Wealth as it
builds the UK’s leading retail investment
business.

We’re providing WAN and LAN services,
unified communications and education-
specific analytical software to enhance the
student journey.

We’re providing BTnet connectivity, cloud
voice and infrastructure for a rapidly
growing recruitment provider offering
future expansion capacity.
A key attraction for Sanctuary was the
ability to work with a single supplier.

The number of business lines we provide reduced 7% as
customers continue to migrate to VoIP. This has been partly offset
by growth in the number of IP lines we provide, which was up
62%. We’re seeing strong take-up of our BT Cloud Voice and BT
Cloud Phone services with the number of users up 29% and 34%
respectively in the fourth quarter alone.

Our Call Essentials packages are also performing well. We’ve signed
up over 80,000 customers since launch.

We’ve increased EBITDA for the fourth year running
through our continued focus on cost transformation.

Underlying revenue excluding transit was flat with the continued
fall in business line volumes offset by growth in VoIP services,
fibre broadband and networking.

Our fibre broadband base has increased 45% and our IP lines are
up by 62%. We’ve made some customer service improvements
this year and have clear plans to go further.

We’ve been learning more about our customers so we can deliver
the services and perfomance they need to succeed.

Examples of how we’re broadening
and deepening customer relationships

• We’ve contacted more customers than ever before to see how we’re

doing, and have learnt from their responses.

• We’ve been working with education and technology partners to develop
the ‘Connected Campus’ blueprint. This means colleges can build and
run a campus platform that uses technology to help students and staff
better engage.

• We’ve used our network expertise to help Shropshire Housing Group
reduce costs while offering its clients a better service. We provided
a ‘smart’ managed WAN with enhanced network intelligence which
delivered greater reliability and the savings they required.

Operating performance

Our order intake of £1,967m was down 5% after last year
included a number of particularly large deals.

BT Business 12-month rolling order intake
Year ended 31 March

£m
2,200

2,100

2,000

1,900

1,800

2015

2016

BT Group plc Annual Report 2016
69

This year we migrated our exisiting mobile customers over to the
EE network, which means our customers can now access the UK’s
largest 4G mobile network.

Helping SMEs get faster connections

We’ve helped more SMEs get online this year. Faster
broadband connections have been shown to really benefit
SMEs by increasing employee effectiveness, speeding up
the delivery of goods and improving their ability to develop
new services.

We joined a discount scheme backed by the Department
for Culture, Media and Sport (DCMS) to encourage faster
adoption of superfast broadband.

We’re proud to be ranked the number one supplier by DCMS
ahead of 840 suppliers including Virgin Media and TalkTalk.

When the scheme closed in October 2015 we had provided
almost 8,800 SMEs across the UK with discounted superfast
connections.

86% of firms reported that their
broadband upgrade had increased
their employees’ effectiveness.

86%

Deliver superior customer service
Our vision is to be the market leader for customer service
within three years. But with our Right First Time measure
down 5.9% (2014/15: up 5.1%), we know we need to
do better.

Our customer service measure has been significantly impacted this
year by the wet winter weather which caused delays in speed of
response for repairs. To mitigate this type of impact, we’ll continue
to invest and make changes until we can provide a consistently
better experience. We’ve already seen signs we’re on the right
track.

We measure feedback directly from our customers and via our
net promoter score, which has increased by 2%. Our people’s
hard work has meant that we’ve seen an 8% decrease in
complaints since last year. We’ve also improved our ability to
resolve issues to the customer’s satisfaction at first point of
contact, and this measure has increased 4%.

During the year we:

• increased the number of customers on our ‘UK Business Solution’

system to 93% of the total. This platform brings all the core
products and services that we sell in large volumes onto a single
system, making it easier to serve customers who buy multiple
products from us. It gives us a single view of the customer’s
account, providing all the right information at the right time;
• simplified our packages and offers, adding great value bundles

so our customers can get all of their communications needs from
us;

• invested in 40,000 hours of training for our customers’

operational teams; and

• proactively contacted our customers after the delivery of their
orders to check their products are working correctly and they’re
getting the most out of their new service.

Almost 70% reported increased
speed and reliability of delivering
goods or services.

70%

We’re proud that our investment in our people and their
performance meant we were shortlisted for two awards, from the
British Quality Foundation and the Institute of Customer Service.

Transform our costs

Operating costs were down 2% due to savings made
through our cost transformation activities. The main
reason for the lower costs was a 4% reduction in our total
labour resource.

We’ve also made savings in other areas such as renegotiating
some supplier contracts, which has saved £29m this year.

Continued investment in back office systems and the migration
of customers onto the UK Business Solution has enabled greater
efficiencies.

Invest for growth

We’ve made significant investments in our products and
services. We want to meet customer needs and address
market opportunities across our three strategic portfolio
areas: fibre and connectivity; mobility and future voice;
and networked IT services.

We’ve invested to improve the speed, reach and quality of
broadband services by improving our network infrastructure.
We’ve invested in our managed compute cloud services product
and our future voice portfolio, focusing on delivering an excellent
customer experience.

45% reported that the upgrade
had improved their ability to develop
new goods or services.

45%

Source: Department for Culture, Media and Sport.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Financial performance

Key priorities

Following the April 2016 reorganisation we have a refreshed and
expanded focus on the business and public-sector markets in the
UK and the Republic of Ireland. Our future priorities include:

• successfully launching our new Business and Public Sector organisation

including delivering efficiencies;

• introducing our full portfolio of fixed, mobile and IT services to existing

BT customers and those acquired with EE;

• developing and integrating further our portfolio of products and

managed services; and

• continuing to improve the customer experience we provide.

We’ve also set ourselves some specific ambitions over the next three
years:

• increase the number of ‘revenue generating units’ by 15%;
• generate double-digit percentage revenue growth in IP voice, mobile,

networking and IT services;

• deliver a 20-point improvement in our net promoter score; and
• become the market leader for customer service.

Year ended 31 March

Revenue

Underlying revenue excluding

transit

Operating costs

EBITDA

Depreciation and amortisation

Operating profit

Capital expenditure

Operating cash flow

2016
£m

3,130

2,054

1,076

198

878

138

819

2015
£m

3,145

(1)%

2,104

1,041

180

861

187

874

2014
£m

3,213

(1)%

2,211

1,002

197

805

127

799

Revenue was broadly flat (2014/15: 2% decline) with
underlying revenue excluding transit also flat (2014/15:
1% decline).

SME & Corporate voice revenue decreased 2% (2014/15: 5%)
with higher average revenue per user and higher uptake of VoIP
services partly mitigating the continued fall in business line
volumes. The number of traditional lines declined 7%, but this
was partly offset by a 62% increase in the number of IP lines.

SME & Corporate data and networking revenue increased 3%
(2014/15: 2%) with continued growth in fibre broadband and
our networking products. Business fibre broadband net additions
were up 17% year on year.

IT services revenue decreased 1% (2014/15: 1%). BT Ireland’s
underlying revenue excluding transit was up 7%, with higher
equipment sales and data and call volumes in the Republic of
Ireland, and continued fibre broadband growth in Northern
Ireland. Foreign exchange movements had a £22m negative
impact on BT Ireland revenue.

Operating costs were down 2% (2014/15: 5%) and underlying
operating costs excluding transit were also down 2% (2014/15:
4%). EBITDA grew 3% (2014/15: 4%). Depreciation and
amortisation increased 10% (2014/15: 9% decrease) mainly
reflecting our investment last year in BT Fleet vehicles to support
Openreach. Operating profit grew 2% (2014/15: 7%).

Capital expenditure decreased £49m (2014/15: £60m increase)
reflecting our investment in BT Fleet vehicles last year. Operating
cash flow was 6% lower (2014/15: 9% higher) reflecting the
timing of working capital movements.

BT Group plc Annual Report 2016
BT Consumer
BT Consumer is the largest provider of consumer
broadband and fixed-voice in the UK. We want to deepen
our customer relationships through selling broadband,
TV, BT Sport channels and mobile services to our customers.

We connect millions of households and people to information and
entertainment, to friends and family, at home or on the move.
Whether they’re banking on their laptop, watching movies through
their YouView box, or tweeting on their smartphone, we’re making
it fast, safe, reliable and easy.

We also offer a range of devices including telephones, baby
monitors and set-top boxes through high street retailers. And we
offer commercial services for businesses who want access to BT
Sport or connectivity through BT Wi-fi.

Through our award-winning second brand, Plusnet, we target
price-conscious customers with fixed-line, broadband and
TV services.

Home phone

Broadband

BT Sport

Mobile

Inputs, outputs and outcomes

Inputs

BT Consumer employs over 6,000 people, with over 70% directly
helping our customers through our contact centres.

We buy access to the Openreach network to sell fixed-line and
broadband services.

We’ve secured exclusive rights to broadcast sports content to our
customers.

Outputs

We provide connectivity services over copper lines, fibre broadband
and 4G mobile.

Developments such as the BT Sport and My BT apps help improve
customer engagement.

This year we provided over 770,000 hours of training to our contact
centre agents.

Outcomes

We generated 24% and 16% of BT’s revenue and EBITDA respectively.

We encourage volunteering, with 55% of BT Consumer employees
volunteering in the year.

We work closely with our suppliers to make our products and business
operations more sustainable, right through the supply chain and to the
customer.

We helped over 9,000 charities raise £60m in the year through
MyDonate, our commission-free online fundraising and donation
platform.

Markets and customers
The UK population consists of around
64m individuals and around 27m households. The
telecoms market is very competitive with more than
ten fixed-line operators, seven major bundled product
suppliers and four mobile network operators.
Pay-TV is less competitive with only four providers.

Most of our major competitors, including Virgin Media and TalkTalk,
offer bundled services which include fixed-line, mobile, broadband
and TV services. Sky and Vodafone have both announced plans
to offer all four services as well.

BT Consumer market share
As at 30 September 2015

%
50

7
3

3
3

Home phone

Broadband

Pay-TV

Source: Ofcom and BT data.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Home phone
As at 30 September 2015 there were 25.9m fixed residential
phone lines in the UK, 2.5% above last year. Our share of this
market declined to 37% from 38% the previous year as more
households chose to consolidate their services with one provider.

People are using their home phones less with call volumes
down 12% over the year. This was a result of migration to mobile,
voice over IP and instant messaging services.

Broadband
There were around 24.5m broadband connections in the UK as at
31 December 2015. Our broadband base among homes and small
businesses is now 8.1m (excluding EE), a market share of 33%.

Services requiring higher speeds and capacity, such as catch-up
TV and on-demand services from the BBC, Netflix and Amazon,
are driving the take-up of fibre broadband. Including Virgin Media
there were 10.2m fibre broadband or cable lines as at
31 December 2015, more than 40% of all broadband lines.

See page 85 for more details on the broadband market.

TV and content
The pay-TV market grew to 15.2m UK households at the end of
December 2015, up 3% compared with a year earlier. BT TV
has 9% of the total market. Pay-TV services are available from
a number of suppliers:

• Sky (satellite);
• Virgin Media (cable);
• BT and EE (Freeview with IP TV channels); or
• TalkTalk (Freeview with IP TV channels).

Customers who choose not to pay for their TV service mostly access
live TV channels through Freeview or Freesat. The overall number
of households without a pay-TV subscription declined to 10.9m at
the end of December 2015. And there are some homes that don’t
have a TV at all.

TV market segmentation
At 31 December 2015

42%
Freeview or Freesat

58%
Pay-TV

Products and services

We sell five main services: home phone, broadband,
TV, mobile and our sports channels. We offer a variety
of packages to our customers with a range of ‘add-ons’.

Home phone
We provide a range of products and calling plans, allowing customers
to choose the best service for their household needs:

• Line Rental Saver gives customers a discount on their line rental if

they pay for a year upfront;

• Line Rental Plus comes with Call Barring and Choose to Refuse, and
gives customers the choice of paying bills automatically by Direct
Debit, or paying when they receive the bill;

• Home Phone Saver offers line rental, inclusive calls and extra calling

features in one simple package at a discounted price;

• BT Basic offers discounted line rental and inclusive calls to those on
low incomes and in receipt of certain state benefits (such as income
support). We’re the only company to offer a service like this; and

• Right Plan is a free service our customers can use to find out whether

they are on the right calling plan for the kinds of calls they make.

All our home phone services come with weekend call bundles and we
provide call packages that let customers choose inclusive evening or
anytime calls to fixed-lines, and discounted calls to mobiles.

We’re in the process of developing a free service aimed at blocking
the majority of nuisance calls made to our home phone customers.
We’ll launch this in 2016.

Source: Ofcom and market data.

‘Over-the-top’ services continue to grow in popularity with 6.8m
households subscribing to a service from Netflix, Amazon or Now TV.

Sky has had exclusivity over much of the UK’s premium content
for many years. We continue to pursue commercial, legal and
regulatory avenues to obtain access to Sky’s sports channels
for our TV customers on a fair basis to increase competition and
consumer choice.

Mobile
The UK mobile market is discussed in the EE section on page 76.

Broadband
We offer two versions of broadband: an ADSL service, delivered
completely over copper lines; and BT Infinity, our superfast broadband
service, which uses fibre to deliver higher speeds and a better overall
experience.

We offer a range of options with different usage limits and speeds.
In addition, our broadband customers can get:

• discounted BT Sport, our collection of premium sports channels;
• discounted BT Mobile, offering SIM-only mobile packages;
• our suite of tools such as BT NetProtect Plus, to protect family
members and devices from harmful websites and other malware;
• BT Wi-fi, offering free unlimited access to wi-fi hotspots in the

UK and abroad; and

• BT Cloud, providing secure online storage and on-the-go access

to data and photos.

BT Group plc Annual Report 201673

BT TV
Our BT TV service is available exclusively to our broadband customers.

We offer three packages:

• Starter. This is our entry-level offering. With our YouView box,
customers can pause and rewind live TV and receive up to 80
Freeview TV channels;

• Entertainment Plus. This package comes with a YouView+ box and

access to Freeview and 27 pay-TV channels; and

• Total Entertainment. Our most complete package offers access to

Freeview and 49 pay-TV channels, and comes with an Ultra HD-ready
YouView+ box.

Customers on our YouView platform can ‘scroll back’ seven days for
easy access to catch-up TV from BBC iPlayer, ITV Hub (formerly ITV
Player), All 4 and Demand 5.

All BT TV customers still in contract get access to our BT Sport
channels and the AMC channel at no extra cost in standard definition.

BT Mobile
We launched BT Mobile in March 2015, focusing initially on the SIM-
only part of the market.

In addition, BT TV customers can add extra channel packs and other
on-demand services such as ‘BT Kids’, Sky Sports 1 and 2, Sky Movies
and Netflix. Customers can also rent or buy TV shows and films.

All our plans come with access to 4G, unlimited use of BT Wi-fi,
unlimited text messages and free access to BT Sport 1. We provide
three packages offering a variety of data and call allowances.

In July 2015, we launched the UK’s first Ultra HD TV service with
content from BT Sport. We later added Netflix Ultra HD.

In February 2016 we upgraded our TV app on both Apple and Android
devices adding a new, dedicated kids on-demand and catch-up library,
seven more channels and a wider collection of premium entertainment
content.

BT Mobile customers can keep track of their usage through the BT
Mobile app. Customers can also use the app to buy various bolt-ons
including roaming bundles.

BT Mobile uses EE’s 4G network offering the best speeds and coverage
in the UK.

BT Sport
We provide live coverage of domestic and international sports across
four channels.

BT Wi-fi
We provide public wi-fi services to a growing number of partners,
including Tesco, Barclays and Hilton.

We offer BT Sport in SD, HD and Ultra HD formats and the channels
are available on BT TV, our BT Sport app, btsport.com and on the Sky
Digital Satellite Platform.

We reward our broadband, TV and mobile customers with discounted
access to BT Sport on their preferred platform.

We also have wholesale agreements for the distribution of BT Sport
to Virgin Media TV customers, and in the Republic of Ireland with
Setanta.

Using our BT Wi-fi app, all BT Broadband and BT Mobile customers can
seamlessly connect to wi-fi in these partner locations, as well as to the
5.6m BT Wi-fi hotspots in the UK and a further 13m internationally as
part of our partnership with FON.

We also offer a range of vouchers for non-BT customers to access
the network.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information74

Performance in the year

Revenue growth of 7% (2014/15: 7%) has been driven
by higher customer numbers in broadband and by our new
BT Sport Europe channel. But our investments in these
areas meant our EBITDA grew by only 1%.

We increased our share of the DSL and fibre broadband market
for the seventh year in a row, had our best-ever take-up of TV,
and our lowest line losses for more than eight years.

Examples of how we’re broadening
and deepening customer relationships

• Customers buying more products from us can save money and get

an even better service.

• By making some football games free on BT Sport Showcase, we’ve

been able to show a further 0.7m homes what’s on offer.

• Sharing multimedia content on social media sites is helping us
explore new ways to engage sports fans without the need of
a subscription.

Operating performancea

At 31 March 2016 we had 9.5m consumer fixed-lines (2014/15:
9.6m), with 9.4m active voice lines (where a customer buys calls
from us as well as paying for the line). We lost 81,000 net active
lines, compared with 203,000 last year.

We achieved 390,000 broadband net additions this year, 63%
of the DSL and fibre broadband market net additions. This took
our overall market share to 41%, up from 40% a year ago.

We’ve continued to grow our fibre base, and now have 3.9m
fibre broadband customers (including business lines), a 29%
increase from last year. 48% of our retail broadband customers
are now on fibre, compared with 39% last year.

We achieved 330,000 BT TV net additions, our best-ever
performance, and now have 1.5m BT TV customers, up 28%.
We grew the number of commercial premises taking BT Sport
to 27,000, including 30% of all UK pubs.

BT Sport’s average daily audience figures increased 45%
year on year, from the start of the football season in August 2015
to the end of March 2016. Almost all of the FA Premier League
matches we showed this season reached over 1m viewers.

Average revenue per user
Year ended 31 March

Our average revenue per user (ARPU) was £446, up £31 from
last year driven mainly by broadband, our new BT Sport Europe
channel, BT Mobile and changes in our pricing.

Our BT Mobile base is now over 400,000 with over 40% of
our customers choosing one of our two higher-tier packages.

Deliver superior customer service

We’ve made investments in 2015/16 that will improve
customer experience in the future. But we didn’t make as
much progress as we would have liked, particularly on our
Right First Time measure of customer service. In March
2016 we answered 60% of customer calls (March 2015:
51%) from within the UK, with a commitment to increase
this to 90% by March 2017.

This means a significant change for our people, who will be
working more evenings and weekends which is often when
customers want to speak to us.

We gave our front-line agents over 770,000 hours of extra
training so that they can more effectively prevent and resolve
customer problems.

We’ve started to introduce a new way of working focused
on people taking ownership of resolving problems. Customer
satisfaction is improved where this has been introduced.

We’ve invested in new and more convenient ways for customers
to deal with us, such as the award-winning My BT app. This allows
customers to do things like check their bill or track their broadband
usage. The app has been downloaded more than 435,000 times
and we’re continuing to regularly add more features.

We’re replacing the systems in our customer service centres with
simpler ones which are built on web-based technologies and
re-use a version of our external website. This should drive higher
productivity and better customer satisfaction.

Right First Time, our overall measure of customer service, declined
2.1% (2014/15: increased 1.9%). While we’ve improved on our
measure of how often a customer needs to contact us by 15%
year on year, we haven’t met our promises around delivering on-
time for enough of our customers, partly reflecting problems from
wider industry demand for Openreach products. Our measure has
also been impacted by the widespread flooding in parts of the UK
this year.

BT Mobile is our best performing ‘Right First Time’ product with
both on-time delivery and on-time repair above 95%.

£
460

440

420

400

380

360

5
1
4

1
9
3

6
4
4

BT Mobile

BT Mobile was designed from the start using customer insight.
As a result, it has the best customer satisfaction of all BT Consumer
products. Key features include:

• discounts for BT Broadband customers;
• UK contact centres;
• the BT Mobile app; and
• spend controls that help people avoid ‘bill-shock’.

2014

2015

2016

a Data excludes EE’s fixed-line and broadband business. For these, see page 78.

BT Group plc Annual Report 2016

Transform our costs

Financial performance

Operating costs increased 9% reflecting the costs of the
UEFA Champions League and UEFA Europa League rights
and the growth in our customer base. The increase was
partly offset by our cost transformation activities.

We delivered savings this year by:

• extending our fibre self-install programme across all fibre

products, including Plusnet’s, which further reduced the number
of engineer visits and the associated cost;

• reducing customer equipment costs by negotiating better

commercial terms with our suppliers; and

• improving our real-time network diagnostics, helping us to

more quickly find the right solution for customer faults, avoiding
unnecessary engineer visits.

Invest for growth

In the summer we launched our new BT Sport Pack, the
home of European football, increasing the choice of
content for our customers and increasing engagement
with sports fans. We also launched an improved BT Sport
app and Europe’s first Ultra HD sports channel.

In August we exclusively launched AMC’s UK channel. AMC is a
leading US TV network with a track record of producing successful
premium dramas. We also extended our deal with UKTV to include
all ten of its channels as well as gaining access to the UKTV Play
service.

We’ve added the UK rights to show all Australian home cricket
internationals, including the 2017/18 Ashes. The five-year rights
deal starts in 2016. In addition, we extended the rights for
the FA Cup until 2021.

We launched BT Mobile and our advertising is improving the
perception of the service and is attracting subscribers.

Year ended 31 March

Revenue

Operating costs

EBITDA

Depreciation and amortisation

Operating profit

Capital expenditure

Operating cash flow

2016
£m

4,598

3,561

1,037

206

831

206

762

2015
£m

4,285

3,254

1,031

218

813

207

813

2014
£m

4,019

3,186

833

219

614

211

472

Revenue increased 7% (2014/15: 7%) with a strong
performance across broadband and TV resulting from
the launch of our European football coverage.

Calls and lines revenue increased 2% (2014/15: 1%), reflecting
the lowest level of line losses for over eight years, new pricing and
the launch of BT Mobile.

Broadband and TV revenue was up 17% (2014/15: 16%)
including the impact of the launch of our European football
proposition, continued growth in broadband and our best-ever
year for adding new TV customers.

Other revenue decreased 10% (2014/15: 6% increase) after
last year benefited from the successful launch of the BT8500
Advanced Call Blocker handset.

Operating costs were up 9% (2014/15: 2%). This reflected the
launch of our European football proposition including the sports
rights costs as well as the cost of launching the channels in August.
Excluding UEFA rights costs, operating costs increased 3%, mainly
reflecting the growth in our customer base.

EBITDA increased 1% (2014/15: 24%).

Depreciation and amortisation decreased 6% (2014/15: broadly
flat). Operating profit increased 2% (2014/15: 32%).

Capital expenditure was flat (2014/15: down 2%). Operating
cash flow decreased 6% (2014/15: 72% increase) reflecting
unfavourable working capital movements relating to the timing
of our sports rights and capital expenditure payments.

Key priorities

Our future plans include:

• continuing to transform our customer service with 90% of all calls

being answered within the UK by March 2017;

• launching our new FA Premier League rights and Australian cricket

rights on BT Sport;

• trialing and launching ultrafast broadband using Openreach G.fast

products;

• launching mobile handsets to unlock a new market opportunity while

creating synergies with EE;

• introducing a new YouView user interface to drive better engagement

with our content;

• launching our breakthrough new service to help home phone

customers avoid nuisance calls; and

• increasing the number of ‘revenue generating units’ by 2.5m over

the next three years.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

EE
We acquired EE on 29 January 2016. EE is the largest
mobile network operator in the UK. It provides mobile and
fixed communications services to consumers, businesses,
the public sector and the wholesale market.

EE came into the group as a separate line of business and that is
how it’s reflected in this Annual Report. In EE, we have over 30m
connections, 15m of which are 4G. New customers join on the
EE brand, though we still have a number of customers on legacy
Orange and T-Mobile tariffs. We acquire and retain customers
through our chain of about 560 shops, our website and contact
centres, and through third parties, such as Dixons Carphone.

Our mobile network is the biggest and fastest in the UK and has
been independently recognised as the best overall network by
RootMetrics in its latest report for the second half of 2015.

Overall Performance
RootScore Award Winner
EE

Three

Network Reliability

Network Speed

Mobile internet

Call

Text

New organisational structure
From 1 April 2016 we changed how the former EE business was
organised to manage it better within the group. Business mobile
was transferred to Business and Public Sector, the wholesale
operations were transferred to Wholesale and Ventures and the
mobile network was transferred as a distinct business unit into TSO.

Following the reorganisation, the consumer-facing parts of EE
will remain as a distinct line of business providing postpay, prepaid
and fixed broadband services primarily to consumers. The EE line
of business will also support the Emergency Services Network
contract awarded to EE in December 2015.

Inputs, outputs and outcomes

Inputs

We have 12,800 people, with 43% directly helping our customers
through our shops and contact centres.

We have an extensive 2G and 3G network and provide the UK’s fastest
4G network covering over 96% of the population.

Outputs

We offer a wide range of mobile services to the consumer and business
markets, in addition to supporting over 30 MVNOs and selling fixed
broadband products.

Our new My EE app is helping to improve customer experience.

Outcomes

We’re the largest mobile operator in the UK, rated as the best network
in independent testing.

In the Sunday Times Best Big Companies to Work For 2016 awards,
EE reached number seven, up from 13 in the 2015 awards.

By September 2015 total UK mobile call volumes were steady
at around 35bn minutes per quarter. SMS and MMS messages
were down 8% to 25bn messages per quarter on average. Mobile
telephony services generated £3.8bn in retail revenues in the
quarter to September 2015, down 1% year on year.

The market is subject to a number of existing and potential
structural changes:

• rapid adoption of 4G devices as 4G networks are deployed.

Nearly all handsets sold are therefore smartphones;

• growth of connected devices, including tablets;
• significant growth in mobile data use;
• continued decline in the prepaid market as customers move to

postpaid tariffs;

• increased popularity of SIM-only tariffs. Smartphones are

evolving at a slower pace so people are keeping their mobile
phones for longer;

• regulatory pressure on the prices we charge customers and other

telecoms companies;

• the proposed takeover of O2 by CK Hutchison (the owner of

Three), subject to regulatory approval; and

• Sky launching as an MVNO in 2016.

EE has a 32% share of the UK mobile market, on a revenue basis.

Markets and customers

Mobile revenue UK market share by operator
At 31 December 2015

The mobile market is very competitive, with over 85m
connectionsa, served by four mobile network operators
and numerous mobile virtual network operators (MVNOs).

Our main competitors are O2, Vodafone, Three, Tesco Mobile and
Virgin Media. Competition for customers is increased by third
party distributors selling mobile services on behalf of the mobile
operators, from high street shops and online.

Around 93% of adults in the UK have a mobile phone, and 15%
of adults live in mobile-only households. Two-thirds of adults in
the UK use a smartphone, and over 54% of homes also have a
tablet. Increasingly, people are using their mobiles to access the
internet, listen to radio and watch TV. According to Ofcom, 60% of
mobile connections are on postpaid tariffs.

4%
Tesco Mobile

12%
Three

25%
Vodafone

Source: EE and market data.

a September 2015.

3%
Virgin Mobile

32%
EE

24%
O2

BT Group plc Annual Report 2016

Products and services

We provide mobile services in the UK, covering up to 99% of
the population with 2G, 98% with 3G and over 96% with 4G
technologies. We also have an extensive wholesale segment,
connecting MVNO customers and machine-to-machine
devices. Broadband services, fixed-voice and a TV service are
also sold under the EE brand.

Postpaid
New consumer customers, and those who renew their contracts with
us, are put on 4G tariffs. If the tariff includes a handset, the contract is
typically for 24 months. The tariff will include a bundle of monthly voice,
SMS and data use. Prices vary with the size of the bundle, the device
type and 4G speed. The tariffs are split into three main groups:

• EE Regular gives access to standard 4G services, unlimited texts and

tiered bundles of voice and data use;

• EE Extra provides access to the double-speed 4G network, has

double the data allowances of EE Regular and includes European
roaming and international calling benefits; and

• EE Complete which provides the benefits of EE Extra together with

the option to upgrade the handset every 12 months.

Prepaid
Prepaid customers buy a phone and then add a ‘pay-as-you-go’ pack
of 4G use. The packs are split into three groups:

• Everything packs for unlimited texts and tiered bundles of voice and

data use over a 30-day period;

• Talk and text packs for tiered bundles of voice and text use over

30 days; and

• Data packs ranging from 1GB to 4GB over seven to 30-day periods.

Prepaid customers are encouraged to buy packs on a regular basis by
rewarding three months of consecutive purchases with extra data, voice
or text use.

Business
We also sell 4G mobile services to business customers.

• Small business plans (up to 50 employees) are for 12 or 24 months,
and most come with unlimited voice and text use. Options include the
ability to share data allowances across a number of devices, access to
double-speed 4G and inclusive overseas roaming.

• Large businesses (more than 50 employees) and public-sector
organisations can choose from a wide range of standard and
customisable plans. Customers can bundle in tiered levels of mobile
security. If required, we also install equipment to improve mobile
coverage inside customer premises. We also offer an extensive range
of fixed-line and data services, including voice, private telephone
network integration, leased lines and VPNs to provide customers with
their complete communications needs.

Devices
We offer a wide range of 4G mobile phones, tablets and mobile
broadband devices. Customers may also choose to bring their own
device and then connect using a SIM-only plan.

Wholesale
Over 30 MVNOs, including Virgin Mobile, use our mobile network.

We’re also active in the machine-to-machine (M2M) market, with
a tiered range of products.

With Enterprise Messaging, our bulk messaging range of products,
organisations can send large volumes of text messages to customers
or employees.

Broadband and TV
We sell fixed-voice, broadband (including superfast fibre broadband) and
TV services. To encourage take-up, our postpaid customers get larger
data allowances if they also buy EE broadband.

EE TV provides more than 70 free channels simultaneously on up to four
devices, and access to pay-TV channels. The EE TV set-top box comes
with one terabyte of memory and can be controlled from a mobile
phone or tablet using the EE TV app.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information78

Performance in the period

Revenue for the two months from 29 January 2016, when
EE was acquired by the BT Group, to 31 March 2016 was
£1,055m with an EBITDA margin of 25%. We had 30.6m
total connections at the end of the year and our
4G customer base reached 15.1m.

Examples of how we’re broadening
and deepening customer relationships

• We’ve developed and promoted our My EE app to help customers

manage their EE account wherever they are.

• We extended our 4G network coverage to over 96% of the population.
• In April 2016 we started trialing online appointment booking in
a selection of our shops, so customers can book sales and service
appointments directly from our website.

• We’ve continued to bring customer service roles back to the UK, and
in April 2016 we announced plans for 100% of EE customer calls
to be handled in the UK by the end of 2016.

Operating performance

At 31 March 2016 we had 30.6m connections. We’ve shown
how these are broken down below.

Customer base by type

000

MVNO

3,720

Fixed broadband

951

M2M

2,272

Prepay

8,251

Postpay

of which 4G

15,411

15,148

6,000

12,000

18,000

Our postpay base grew by 54,000 to 15.4m, supported by
a strong performance in the large business segment with new
customers including Arriva Trains. The prepay base continued
to decline, in line with industry trends, partly as customers move
to postpay.

The machine-to-machine base grew 77,000 to 2.3m as the
Internet of Things market starts to grow.

Fixed broadband was up 11,000 to 951,000, supported by
EE TV, in a competitive market.

Our base of MVNO customers stood at 3.7m, up 28,000, as
our MVNO partners continued to do well in the mobile market.

Customer base movementsa

000
31,000

30,900

30,800

30,700

30,600

30,500

30,400

30,300

30,200

30,100

30,000

4
5

1
6
8
0
3

1
1

8
2

6
2
4

7
7

y
a
p
t
s
o
P

y
a
p
e
r
P

M
2
M

O
N
V
M

d
n
a
b
d
a
o
r
b
d
e
x
i
F

6
1
0
2
y
r
a
u
n
a
J
9
2
t
A

5
0
6
0
3

6
1
0
2
h
c
r
a
M
1
3
t
A

a Period from the acquisition of EE on 29 January 2016 to 31 March 2016.

BT Group plc Annual Report 2016

Deliver superior customer service
Improving customer service is a key priority. While we have
made steady progress, there is still room for improvement,
as shown by the number of complaints our customers
make to Ofcom.

In the period we accelerated work on projects across four key areas:

• Call centres. Transforming service for our customers, reducing

complaints and customers’ propensity to call;

• Self service. Increasing take-up of the My EE app and improving

online service;

• Shops. Improving service and providing more digital capabilities

in store; and

• IT. Improving customer-facing IT systems.

As part of our ambition to offer the best mobile customer service
in the UK, we’ve started the ‘Omnichannel’ initiative, to provide a
consistent experience for our customers, regardless of how they
interact with us. This will enable us to give customers better, more
relevant offers, follow up on potential sales quickly and effectively
and support customers more proactively.

Transform our costs

Since EE was formed in 2010 it has gone through a process of
transformation as the legacy Orange and T-Mobile businesses were
combined. We’ve removed duplication from the mobile network,
shops and support functions to drive profitability. We expect to
continue to drive efficiencies as we integrate EE’s business into the
wider group and share our ideas, experience and methodology.

Invest for growth

We have the best mobile network in the UK, having
been named number one network by RootMetrics and
recognised as the UK’s fastest network by Speedtest.net.

We’ve made 4G voice calling more widely available, bringing it to
Manchester and Birmingham. The increased network coverage and
resilience required for the Emergency Services Network contract
will also benefit consumer and business mobile customers.

Financial performance

From 29 January to 31 March

External revenue

Internal revenue

Total revenue

Operating costs

EBITDA

Depreciation and amortisation

Operating profit

Capital expenditure

Operating cash flow

2016
£m

1,038

1,055

794

261

176

111

310

Revenue for the two months since acquisition was
£1,055m. This consisted of mobile service revenue
of £913m, fixed and wholesale revenue of £89m and
equipment sales of £53m.

This also includes revenue of £17m which is internal, reflecting
trading with other lines of business within the group. Monthly
mobile ARPUs in the period were £26.7 for postpaid customers,
£3.9 for prepaid and £18.6 on a combined basis.

Operating costs were £794m giving EBITDA of £261m,
a margin of 25%.

Capital expenditure was £111m as we extended 4G coverage to
over 96% of the UK population. Preparation for the Emergency
Services Network contract continued in line with agreed
milestones.

Operating cash flow, which excludes interest and tax, was £310m
benefiting from the timing of working capital.

Key priorities

Over the coming year we plan to further integrate the new EE line
of business into the group, in line with the reorganisation that took
effect from 1 April 2016, and begin to realise the revenue and cost
synergies associated with the acquisition. We also plan to broaden
and deepen our customer relationships by:

• improving the customer experience;
• extending 4G coverage and aiming to remain the UK’s best quality

mobile network;

• progressing the build phase of the Emergency Services Network

contract, working closely with TSO; and

• launching a range of combined mobile, fixed-line and TV products.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

BT Wholesale
We provide network products and services to
Communications Providers (CPs) operating
in Great Britain. We also offer services for media
companies and broadcasters.

We do this by combining BT’s core network and IT platforms with
Openreach’s access products. We add our own expertise in
designing, building and supporting new products and bespoke
solutions. We can then offer a range of services that complement our
customers’ own capabilities. This means we can share in their success.

We’re structured around our customers: mobile and fixed network
operators; resellers; and media organisations and broadcasters. Our
largest customers are supported by dedicated client teams, while
others are served by a desk-based sales force. All are supported by
expert product managers and customer service agents.

Customer service teams

Customers

Client
sales
teams

Mobile network
operators

Fixed network
operators

Media &
broadcasters

Resellers

Desk-
based
sales
teams

Product management teams

Outside Great Britain, BT serves CPs through BT Ireland and BT Global
Services. BT remains Europe’s largest wholesale telecoms provider.

Revenue market share of European wholesale
telecommunications providers

51%
Other

5%
Telecom Italia

16%
BT

12%
Orange

9%
Deutsche Telekom

7%
Telefónica

Source: European Wholesale Market Share 2014-15: The Big Picture, Ovum, May 2016.

New organisational structure
From 1 April 2016 we’re integrating BT Wholesale, EE’s wholesale
team and some of BT’s smaller business units into a new Wholesale
and Ventures line of business. The smaller business units include BT
Directories and BT Fleet, together with the majority of BT Redcare,
BT Payphones and Tikit. They’re all described on page 65. The new
organisational structure will give more visibility to these smaller
but important enterprises while bringing together the wholesale
businesses of BT and EE.

Inputs, outputs and outcomes

Inputs

We have 1,300 people, of whom 89% are customer-facing.

We take advantage of the scale, reach and reliability of BT’s networks
and platforms.

We bring BT’s R&D resources to bear on our customers’ business issues.

Outputs

We supply wholesale telecoms products including voice, broadband,
Ethernet and hosted services. We also provide bespoke managed
solutions.

We invest in new services for the wholesale market, such as our Hosted
Communications Services and 4K video transport.

Outcomes

We take a share of the market which BT does not serve directly.

This year our share represented around 11% of BT’s revenue.

A more competitive market for communications services drives greater
customer choice.

Markets and customers

We serve over 1,400 CPs, including: the major consumer
brands Sky, TalkTalk and Virgin Media; the mobile
operators, O2, Three and Vodafone; overseas CPs
operating in the UK; and other service providers such as
Daisy Group and KCOM Group. We also provide specialist
media and broadcast services to major organisations
including the BBC, Channel 4, ITV, Sky, SoftBank Corp.
and Star TV.

Our main competitors are Virgin Media, TalkTalk and Vodafone.

The main trends in the wholesale market this year were the
continuing take-up of IP voice services and stronger demand
for higher-bandwidth broadband networks.

Voice services: moving to IP
The number of calls made over traditional fixed networks fell by
10% this year, as calls moved to mobile networks or to instant
messaging and other IP-based alternatives. And owners of these
networks were able to charge less to carry such calls, as a result
of price reductions imposed following Ofcom’s last Narrowband
Market Review.

As businesses opt to make and receive calls over IP they are
increasingly buying newer voice services such as SIP-Trunking and
Hosted Voice. According to the Cavell Group, in 2015 the number
of SIP Trunks (which connect a business’s switchboard to its
IP voice service provider) grew by 31%. And users of Hosted IP
Voice (which eliminates the need for a switchboard altogether)
grew by 30%.

BT Group plc Annual Report 2016

UK Hosted IP Voice seats

000
2,500

2,000

1,500

1,000

500

2
4
1
2

9
0
9
1

9
4
6
1

6
9
2
1

4
0
4
1

Dec 13

Jun 14

Dec 14

Jun 15

Dec 15

Source: Cavell Group, February 2016.

Connectivity services: higher bandwidths

This year average usage over our wholesale broadband circuits rose
by 40%. And 43% of all our broadband lines ordered this year
use higher-speed fibre technologies. We expect this trend towards
higher-bandwidth broadband to continue.

Products and services

BT Wholesale’s products and services either supplement
CPs’ own capabilities or can be sold on to CPs’ own
customers as they are. Where CPs need a more bespoke
or comprehensive service, we combine our products with
other components to create managed solutions.

Broadband
We provide CPs with broadband connections between their core
network and their customers. Wholesale Broadband Connect can
serve 95% of premises with copper-based broadband (2014/15:
92%) and over 25m premises with fibre broadband. Our older
broadband network brings our total coverage to more than 99%
of all premises.

For CPs without their own network, we offer Managed Broadband.
This includes the necessary connectivity and internet access together
with full end-to-end service management.

Ethernet
We supply CPs with Ethernet connections linking their core network
to their customers’ business premises. Ethernet services are continuing
to replace Partial Private Circuits, a legacy connectivity service which
we also offer.

With Wholesale Ethernet, CPs can reach 82% of business premises
over copper-based circuits (2014/15: 81%) and more than 99% over
fibre, at speeds of up to 10Gbps. This year we fully launched Wholesale
Optical which extends those speeds to 100Gbps.

Our Managed Ethernet Access Service (MEAS) carries mobile voice and
data traffic to and from mobile operators’ transmission masts, using a
mix of copper, fibre and radio technologies.

Media services
Our long-established media network connects major locations around
the world where broadcast or film content is created or distributed.
In the UK it carries all of the nation’s digital terrestrial TV, as well as
TV broadcasts from more than 150 sports and news locations. Local
partners help us link TV stations to major sports venues worldwide.

We also offer related media services such as content playout (in which
we send finished TV content off to be transmitted) and media file
acceleration and security.

Voice calls
CPs use our IP Exchange (IPX) platform to carry their customers’
voice calls beyond the reach of their own voice network. IPX delivers
calls between CPs’ networks, or to their final destination, translating
between the many different network technologies that may be used
along the way. IPX is now used by over 150 CPs, including most of
the UK’s biggest operators.

As voice moves to IP, IPX is gradually replacing our equivalent
products based on older Time Division Multiplexing (TDM)
technology. These products include Transit, Direct Conveyance and
International Direct Dial.

For CPs without their own voice network, we offer BT Wholesale Calls
which routes calls for them end to end. The CP maintains the customer
relationship through its own sales, customer service and billing
operations.

Hosted communications
Our Hosted Communications Services portfolio enables a CP to offer
a range of services without having to develop, maintain and upgrade
them itself.

Traditionally, businesses have made and received calls over phone lines
via a switchboard. Wholesale Hosted Centrex, a hosted voice service,
moves the switchboard capability into BT’s network. And Wholesale
SIP-Trunking delivers the calls over broadband. When put together, the
business no longer needs to house and maintain a switchboard or rent
separate phone lines.

In the same way, our Hosted Contact Centres replace the systems and
services usually needed to handle inbound or outbound customer calls
at scale. In partnership with Avaya Inc. we offer Avaya Cloud Solutions,
a hosted and fully-integrated contact centre service with end-to-end
service-level agreements.

Managed solutions
We combine our products with third-party components and our own
professional services to create managed solutions that solve specific
customer or industry problems.

For example, this year we implemented new ‘small cell’ solutions at a
number of mobile transmission sites. These solutions can include the
electronic equipment at a site, the network to the site, the site itself
and end-to-end service management. They can help mobile operators
improve their coverage in rural areas or provide more capacity in urban
locations.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
82

Performance in the year

Operating performance

Underlying revenue excluding transit rose by 1%,
reversing the falls of the previous three years. But EBITDA
fell by 3% (2014/15: 9%) reflecting a changing volume
and product mix across our product portfolio.

We signed fewer orders this year but saw a substantial uplift
in sales of our strategic growth products: Ethernet, Hosted
Communications Services and IPX. Customer satisfaction continued
to rise as a result of investments in self-service
systems and tools.

Examples of how we’re broadening and
deepening customer relationships

• We’ve expanded our portfolio, so we can meet a wider range of

customer needs. For example, Wholesale Optical enables CPs to connect
sites over very high-bandwidth connections.

• In our Media & Broadcast business, new partnerships have enabled us

to reach more customers and offer more services. New partners this year
include Aspera, Deluxe, Intelsat, Megahertz and SoftBank Corp.

• We’ve extended our network coverage, so we can provide service more

cost-effectively across a wider area.

• We’ve made it easier for CPs to do business with us, for example by

adding new features to our online service portal.

• We’ve invited customers to joint strategy and planning events at BT’s

research facility at Adastral Park.

This year we signed £1.5bn of orders. This was down around
£400m on last year’s order intake, but up around £150m
excluding orders signed with EE, which is now part of BT.
We signed deals for a wide range of services, including:

• Wholesale Hosted Centrex and SIP-Trunking for a large CP

to resell, replacing their own platform;

• the supply and maintenance of vehicles to support the new

Emergency Services Network contract within EE;

• a national broadcast network for the BBC (see page 83);
• MEAS circuits to connect a mobile operator’s new cell sites

to its core network;

• IPX for three major CPs and for a smaller IP voice specialist,

enabling it to close its old voice network; and

• a video multiplexing solution for a major US-based media

company.

We also signed up seven new channel partners to sell our Avaya
Cloud Solutions portfolio.

IPX carried 26bn UK-originated voice minutes in the year, up 41%.
Several major CPs joined the platform, increasing the value of the
service to other users.

Voice minutes carried by IPX
Year ended 31 March

“

“BT Wholesale continues to lead the
local market as a provider of wholesale
connectivity, communications, and media
services, and… continues to invest in
relevant areas, including 4K video and
optical transport.”
Current Analysis, October 2015.

bn
30

6
2

9
1

1
1

2013

2014

2015

2016

The total number of broadband lines we provide on a wholesale
basis grew for the first time in many years. This reflected a
slowdown in the LLU network rollout of large broadband providers
as well as our own success in selling both fibre and copper
broadband to smaller CPs.

The total number of wholesale Ethernet lines we provide grew too,
by 23%, mainly as a result of targeted pricing initiatives, network
expansion and migration from Partial Private Circuits. We also
connected more MEAS circuits.

Despite fierce competition, the number of our SIP Trunks nearly
doubled. And the number of our Hosted Centrex users tripled,
driven in part by new pricing options.

BT Group plc Annual Report 2016BBC

We’ve been chosen by the BBC to provide its next generation
broadcast network in a deal worth more than £100m to BT.

We’re helping the BBC deliver considerable savings as well as paving the
way for future digital innovation. We’ll enable them to move to a new,
state-of-the-art network from April 2017.

The new network will be run by our Media & Broadcast team. It’ll be more
efficient and flexible and better able to support BBC innovation. And it’ll
allow extra services and capacity to be added for major events, such as
a general election or the Olympics, more easily and at a lower cost than
before.

Matthew Postgate of the BBC said: “This is an important step towards
building an internet-fit BBC and will allow us to provide more interactive
and personalised content in the future.”

Deliver superior customer service

Customer satisfaction rose to 85% in the fourth quarter,
up from 80% for the same period last year. It improved
across all customer segments. But our Right First Time
performance, which measures our ability to deliver orders
and repair faults on time, was down by 2.6% (2014/15:
up 4.4%). This was as a result of the weather and systems
outages mentioned on page 22.

Customer satisfaction
Year ended 31 March

%
90

2015

2016

Source: BT customer satisfaction survey. Based on responses from a monthly random sample
of BT Wholesale customers.

Initiatives in three main areas drove the improvement in customer
satisfaction:

• Product reliability. We gave CPs new tools to help them

improve the stability of broadband lines. We also made it easier
for them to identify problems in their customers’ own home
wiring and equipment. CPs reported 7% fewer broadband faults
as a result. And the reliability of our Ethernet circuits improved
by 11% as new diagnostic tools meant we could identify and fix
problems in our network before CPs even noticed them.

• Customer updates. We kept our CP customers better informed
on the progress of their orders and any faults. This meant they
could keep their own customers more up to date. Customer
satisfaction in this area rose by six percentage points.

• The online experience. We made it easier to do business with
us by adding new features to Business Zone, the online service
portal which we launched last year.

Improvements in both our resourcing and the delivery process
itself contributed to strong growth in our Ethernet base this year.
But delivering Ethernet circuits on time proved more challenging,
because a higher proportion needed new fibre or ducting
to be laid.

Transform our costs

This year we focused our cost transformation activities on:

• reducing selling, general and administrative costs, which were

11% lower than last year;

• renegotiating our supplier contracts and reducing the number

of suppliers we use; and

• rationalising legacy platforms and networks and removing

underutilised infrastructure.

Invest for growth

New product launches included Media Move and Cloud Playout,
two new services for the media and broadcast industry. We also
fully launched Wholesale Optical (after a soft-launch last year)
which offers high-bandwidth data connectivity. We enabled
Wholesale Hosted Centrex and Skype for Business to work
together. This means Skype users can get all the features of our
Centrex platform, such as the ability to call people who are not
on their corporate network.

Wholesale Broadband Connect and Wholesale Ethernet are
now available from more exchanges. And we migrated our IPX
customers onto a new, larger platform.

“

“BT Wholesale is unmatched in terms of
breadth of offerings and its abilities to
deliver managed and outsourcing
services.”
Current Analysis, October 2015.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Financial performance

Year ended 31 March

Revenue

Underlying revenue excluding

transit

Operating costs

EBITDA

Depreciation and amortisation

Operating profit

Capital expenditure

Operating cash flow

2016
£m

2,086

1,544

542

212

330

177

404

2015
£m

2,157

(7)%

1,596

561

224

337

210

278

2014
£m

2,422

(3)%

1,808

614

245

369

244

372

Revenue was down 3% compared with an 11% decline
last year. This included £82m or 51% less transit revenue
than in the prior year.

Our key measure, underlying revenue excluding transit, was up 1%
compared with a decline of 7% last year. This reflects growth in IP
services and managed solutions, partly offset by a decline in our
legacy products. IP services revenue was up 25%, helped by 41%
higher IPX volumes and a 23% increase in Ethernet connections.
Managed solutions revenue grew 3% and accounted for 39% of
total revenue, up from 37% last year.

Calls, lines and circuits revenue fell 14%, mainly because of lower
volumes and customers switching to newer IP technologies.
Broadband revenue was 12% lower, but this was an improvement
on last year’s decline of 17%. While migration to LLU continues
to reduce the size of our copper broadband base, fibre broadband
volumes have increased, reflecting demand across the market.

Following the Supreme Court judgment on ladder pricing in July
2014, we recognised around £15m of ladder pricing trading
revenue this year (2014/15: around £30m). This is in addition
to revenue treated as a specific item relating to prior years, as
explained on page 187. We do not expect to include any further
trading revenue relating to ladder pricing in the income statement
next year, because we stopped pricing on that basis in July 2015.

Operating costs decreased 3%. Underlying operating costs
excluding transit increased 2%, with the cost of delivering more
IP services only partially offset by continuing cost transformation
activities.

EBITDA declined 3%, reflecting the one-off impact of lower
ladder pricing revenues as well as the continuing migration to
lower-margin IP services. But this was an improvement on last
year’s 9% decline. Depreciation and amortisation was down 5%
(2014/15: 9%) and operating profit fell 2% (2014/15: 9%).

Capital expenditure was 16% lower than last year (2014/15:
14%), driven by lower spend on sustaining our legacy voice
network, and as last year included some investments in efficiency
programmes. Working capital was helped by better collections
contributing to a 45% increase in operating cash flow.

Key priorities

Next year we’ll be part of the new Wholesale and Ventures line of
business, as explained on page 80. Our priorities will be:

• integrating the various business units and their teams;
• creating revenue and cost synergies, for example by selling EE’s mobile

services to BT Wholesale customers;

• continuing to improve customer experience, especially in Ethernet

delivery;

• further expanding our Ethernet network, making it available from

more BT exchanges and more third-party datacentres;

• increasing the number of customers using fibre rather than copper

broadband;

• further strengthening our defences against attempted cyber-attacks

and fraud; and

• continuing our cost transformation activities.

We’ve also set ourselves some specific ambitions within the next
three years:

• to grow the number of Ethernet circuits we provide by 50%;
• to increase the number of MVNO brands on 4G from less than 5%

to at least 80%; and

• to deliver all our products on time at least 95% of the time

by the end of the period.

BT Group plc Annual Report 2016
85

Openreach
Openreach looks after the ‘last mile’ of the UK
communications network which runs from the local
exchange to people’s homes and businesses. The
network is made up of exchanges, copper and fibre
cables, underground ducts, street cabinets, telephone
poles and distribution points. We provide access to our
network to all CPs on equivalent terms which means
the same products, prices and levels of service.

Our CP customers use our network to deliver services ranging
from broadband, television and telephony for the home,
to high-speed data connections for businesses of all sizes.

Openreach local access network

Exchange

FTTC

PCP

Openreach 10th birthday facts

We celebrated our 10th birthday this year. Our network has grown
substantially since Openreach was established in January 2006.
Since the start of our fibre broadband rollout in 2009, our engineers
have worked 10m hours and driven 72m miles to complement and
extend our existing infrastructure – the copper wires and telephone
poles that are a familiar sight in many streets. Our fibre broadband
network now reaches more than 25m premises. In 2006:

• the average broadband speed was 1.6Mbps, today it is more

than 28Mbps;

• consumer fibre access products didn’t exist. Today we have more

than 5m connections;

• a new WLR connection cost £88 with a £100 rental charge in the
first year. Today it’s £41.55 with an £89.50 annual charge. A 30%
reduction in year one costs;

• there were 41,000 LLU lines. Now there are around 10m;
• we had 1,000 Ethernet connections, today we have over 200,000;

and

• 50% of the country had a broadband connection. Today that’s

risen to around 80%.

Markets and customers

Over 5,500
exchanges

c101,000 PCPs

c4.7m DPs

Fibre
Copper

FTTC Fibre-to-the-cabinet
PCP Primary connection point

DP Distribution point

Inputs, outputs and outcomes

Inputs
We’ve a UK workforce of 31,500 people.

We install and maintain fibre and copper communications networks
that connect homes and businesses. Our network is nationwide, reliable
and fast.

Our customers are the 560+ CPs who deliver communications services
to end customers, and property developers building new homes and
buildings. We also have relationships with communities throughout the
UK that co-fund investments in fibre networks with us.

Outputs

A team of highly-skilled network engineers and planners maintains
a high quality access network.

We provide network access and engineering services which enable
products including broadband and point-to-point Ethernet.

We have 21,000 iPhones in use by our engineers. New and improved
applications are helping them to complete jobs faster and provide
feedback on task times meaning work can be handed out more efficiently.

Outcomes

Fibre broadband has driven growth in our revenue and profits, supporting
further investment in the network.

Our brand has been strengthened by the successful rollout of fibre to
around 85% of the UK. This puts us on track to support the Government’s
target of 95% superfast coverage by the end of 2017. We’ve exceeded
Ofcom’s minimum service targets for the past two years.

The UK has the highest share of GDP generated by the digital economy
of any country in the G20. Openreach underpins that by running the
largest superfast network in the country.

We have more than 560 CPs using our network. We
operate in three markets: consumer, business and
infrastructure.

• The consumer market is made up of households who want
fixed-line broadband and telephony services. Our largest
customers include Sky, TalkTalk and BT Consumer.

• The business market consists of the 5.4m businesses in the

UK, from sole traders to large multinational corporations, and the
public sector. Most of our CP customers serve business clients.

• The infrastructure market includes firms building network

infrastructure to data centres and mobile cell sites, and property
developers connecting new build sites. Ethernet connections
and specialised services are the main areas of demand.

The total number of Openreach physical lines was essentially
unchanged during the year, growing by 2,000 lines, against
a 200,000 increase the year before.

As at 31 December 2015 there were 24.5m broadband lines in
the UK. 81% of these use the Openreach network with the rest
mainly on the Virgin Media cable network.

Total UK broadband market
As at 31 March
m
25

9
2012
0
2

9
1
2

9
2
2

9
3
2

5
4
2

2012

2013

2014

2015

2016a

As at December 2015.
Source: Company data.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Our markets are shaped by the following trends:

• demand for connectivity means total fixed broadband ownership

is rising steadily;

• increasing data usage, propelled by video streaming and content,

is driving demand for faster connections with more capacity;
• rising data consumption is leading to significant investment

in backhaul capacity;

• cloud computing is increasing corporate demand for connectivity.
A fast-growing data centre market is creating a new need for
high-capacity circuits (1Gbps or more); and

• strong demand for Ethernet and optical service products,

as businesses seek increased speeds and reliability.

Competitors
Our main competitor across all three of our markets is Virgin Media.
Its cable network covers around half of UK homes, with plans to
reach an additional 4m premises by 2020.

For consumers, other companies are building their own fibre
access networks, reflecting the competitive nature of the market.
CityFibre, Hyperoptic and Gigaclear are deploying fibre-to-the-
premises. In particular, CityFibre’s joint venture with TalkTalk and
Sky has the potential to pose a competitive threat.

Competitors in the business and infrastructure markets include
Virgin Media, Colt Group and Vodafone. CityFibre’s prominence in
this market is growing with plans to cover 50 ‘Gigabit cities’ by
2020. It also acquired KCOM’s UK infrastructure in the year.

Pricing, service delivery and product innovation remain competitive
themes. The ‘price per Gigabit’ is being driven down by intense
competition, particularly in urban areas. Strong demand for
Ethernet has put pressure on the delivery times of all providers.

Products and services

We offer four main products and services: fibre access;
copper-based services; Ethernet; and infrastructure
solutions. Our access network can carry broadcast
and on-demand internet protocol television (IPTV)
services. Our multicast service cuts the cost of delivering
broadcast TV.

Fibre access
Our wholesale fibre product is called Generic Ethernet Access. We offer
a number of different versions:
• Fibre-to-the-Cabinet (FTTC) takes fibre from the exchange to

the street cabinet and uses the existing copper network for the final
link to the customer. FTTC offers speeds from 40Mbps to 80Mbps.
This year we launched a mid-range product offering speeds of up to
55Mbps.

• Fibre-to-the-Premises (FTTP) provides speeds up to 330Mbps.

The fibre runs from the exchange to the property.

Copper-based services
• Wholesale Line Rental (WLR) lets CPs offer phone services to their

customers using our equipment and copper network. They pay to use
the lines between our exchanges and the customer premises but don’t
need to invest in their own network equipment or infrastructure.
• Local Loop Unbundling (LLU) involves CPs installing their own
equipment in our exchanges and renting the copper line to the
customer building. CPs can use our shared metallic path facility
(SMPF) product to offer broadband over a WLR line or our metallic
path facility (MPF) product to offer phone and broadband services
using just their equipment.

Ethernet
Our Ethernet products offer dedicated fibre connections with speeds
up to 100Gbps. CPs use them to complete their own networks and to
provide high-quality, high-bandwidth services to businesses and the
public sector.
• Ethernet Access Direct (EAD) 10Gbps Standard and Local Access
were launched in Autumn 2015, bringing affordable, high-capacity
services to UK business and infrastructure markets.

• Optical Spectrum Access (OSA) Hub and Spoke also launched

this year. It means CPs can deploy high-bandwidth services more
efficiently and cost effectively to multiple sites, saving the customer
space and power.

Infrastructure solutions
Our infrastructure solutions let CPs build their own networks.
• Our Flexible Co-mingling Product allows CPs to place their

equipment in our exchanges, providing their customers with voice,
broadband and Ethernet services.

• Passive Infrastructure Access (PIA) products offer CPs access to
Openreach’s infrastructure such as our ducts and telephone poles.
CPs can use PIA when building their own fibre networks. This product
has been available since 2011.

• Mobile Infill Infrastructure Solution (MiiS) helps mobile network
operators improve their coverage. We install antennas on telephone
poles linked to a special street cabinet provided with power and
backhaul. Mobile operators can then install their radio equipment
in the cabinet and use their spectrum to improve mobile coverage.

BT Group plc Annual Report 201687

The number of Ethernet circuits we provide grew 17% in the
year; this is the best growth for five years. The physical line base
increased by 2,000.

Deliver superior customer service
As the internet has become a must-have, customers
expect more from the service we provide and we’re
committed to meeting those increasing needs.

The table on page 88 shows Openreach’s service performance on
a number of key measures. We publish this data, with additional
levels of detail, on a quarterly basis.

We continue to deliver 93% of orders on time. We met all 60 of
Ofcom’s minimum service levels (MSLs) for copper products for the
second year in a row. These service levels become more stretching
each year and next year will expand to cover Ethernet products for
the first time.

Despite having achieved the MSLs our key customer service
measure, Right First Time, declined 6.9% (2014/15: 3.5%
improvement). We view the MSLs as a baseline and recognise
we have more to do to deliver the service customers expect.
This is why we set ourselves a more challenging RFT target.

There are a few areas in particular, along with the severity of
the winter storms, that contributed to the decline in RFT. In the
business market we haven’t reduced the backlog of Ethernet
circuits in line with our plans. For residential customers we have
too many jobs that aren’t completed on time which is partially due
to our engineers missing appointments. We have a plan in place to
tackle many of the issues that caused us problems this year. We’re
improving Ethernet delivery processes to complete jobs faster and
we’re focusing on reducing missed appointments.

One area of improvement was the backlog of new property
developments waiting for a network connection. Over the year we
reduced the number of people waiting more than 30 days
for service after moving into a new home by 96%.

In the coming year our goal is to make sure people are connected
on the day they move. We also recognise that most people moving
into a new home expect to have access to fibre broadband and we
launched a co-funding scheme with the Home Builders Federation
to make sure all new builds have fibre available.

Performance in the year

We’ve grown our revenue for the first time in four years.
We made our superfast fibre broadband network available
to a further 3m premises. We achieved record fibre
broadband net additions of 1.7m. We grew Ethernet
connections by 17%. And we achieved all the increased
minimum service levels set by Ofcom, though our ambition
and plans are to go much further.

Examples of how we’re broadening
and deepening customer relationships

• We announced the Openreach Charter to set out our commitments

in building Britain’s connected future.

• We’ve improved customer service and complaints have almost halved,

though we recognise we have more to do.

• We’ve successfully launched the ‘View My Engineer’ service to keep end
customers up to date on their orders or any faults, and to remind them
of their upcoming engineer visit.

Operating performance

We continue to invest heavily in our superfast fibre broadband
network. It now reaches more than 25m premises or around 85%
of the UK. Including other service providers, 90% of the UK is able
to enjoy fibre broadband speeds.

Under the BDUK programme we’re investing alongside public
funding to bring fibre broadband to rural communities. We’re also
working with the government through the Superfast Extension
Programme (SEP) to help take fibre broadband to 95% of the
country by the end of 2017.

We achieved 1.7m fibre broadband net additions in the year. This
means that around 5.9m homes and businesses in the UK are now
connected, 23% of those passed. Of the net additions in the year,
48% were provided to our external CP customers, an increase from
40% last year, demonstrating the market-wide demand for fibre.

Openreach ﬁbre broadband net additions
Year ended 31 March

000
600

500

400

300

200

100

2015

2016

This can be found at:
www.homeandwork.openreach.co.uk/OurResponsibilities.aspx

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

The Openreach Charter
In September 2015 we announced the Openreach Charter
to set out our commitments – to end customers, CPs and
the nation – in building Britain’s connected future.
The most important commitments have been updated
and are summarised below.

Openreach performance against service responsibilities

Movement

Q4
2015/16

Q4
2014/15

Home

New lines installed on time

93.36%

92.98%

Service
Our number one priority will be giving great service to
customers. We’ll set new standards for delivering on time and
getting things right. We hold ourselves accountable to fix
problems

Coverage
We aspire to go beyond the UK Government’s 95% target for
fibre broadband. With new initiatives and new technologies,
we’ll keep working to get Britain connected

Speed
We’ll provide the speed people need, and create Britain’s
ultrafast future with our ambition to bring ultrafast
broadband to 12m homes and businesses by the end of 2020

Trusted partner
We’ll be a trusted partner for CPs, guaranteeing fair and equal
treatment to all

Contribution to our community
We’ll make a difference to the communities we serve,
inspiring our people to become volunteers in the community

Investment
We’ll invest to sustain the leadership of Britain’s digital
economy

Average time to install with an
engineer (working days)

Average time to install without
an engineer (working days)

Installation requiring an
engineer where wait is 22 days
or longer for appointment

Average time for first available
appointment date for new
installation (working days)

New lines requiring an engineer
visit not installed 31 days past
target date

Average time to fix faults
Maintenance level 1 (working
days)

Average time to fix faults
Maintenance level 2 (working
days)

Faults fixed within agreed time
Maintenance level 1

Faults fixed within agreed time
Maintenance level 2

Faults not cleared after 31 days
or more
Maintenance level 1

Faults not cleared after 31 days
or more
Maintenance level 2

Business

Average time to install on-net
services (working days)

Average time to install where
new build is required (working
days)

14.44

13.46

9.49

9.77

1.12%

0.00%

8.51

6.70

1.34%

1.23%

2.82

2.67

1.94

1.79

74.53%

75.10%

76.14%

75.66%

1.60%

0.86%

1.79%

0.84%

26.50

33.49

68.20

69.95

Faults fixed within agreed time

94.26%

92.79%

Note: this compares the performance in the quarter and is not an annual measure.

Improvement

Steady performance – maintaining focus

Further improvement needed – plans in place to get back on track

BT Group plc Annual Report 2016

Transform our costs

Financial performance

Operating costs increased 1% (2014/15: 2% decrease)
with an increase in volumes, pay inflation and leaver costs
partly offset by cost efficiencies.
This year we:

• improved our processes and invested in new systems and tools
that reduce the number of engineering jobs and unnecessary
customer contacts;

• negotiated improved terms with our key suppliers and insourced
activities where possible. This saves us money and means we can
use our people more effectively;

• transformed our desk-based functions by consolidating our

teams from over 400 locations down to 28 larger ‘centres of
excellence’. This means we can run them more efficiently, share
best practice and create better working environments;
• successfully launched the ‘View my Engineer’ tool; and
• worked closely with our suppliers to help reduce the number

of orders awaiting completion.

Invest for growth

We have invested £10.5bn in Britain’s digital
infrastructure in the last ten years, committing over
£3bn to create a fibre broadband network that provides
affordable high-speed broadband to the vast majority
of the UK.
We’ve set out our vision to move the nation from superfast to
ultrafast speeds with an ambition that 12m homes and businesses
will get access to ultrafast services by the end of 2020. We will
deliver ultrafast through a mix of two technologies: G.fast and
FTTP. We launched G.fast trials in Huntingdon, Gosforth and
Swansea, which are progressing well, with homes and businesses
taking part getting speeds of up to 330Mbps. We’ve also
announced additional G.fast pilots in Cherry Hinton and Gillingham
which will cover 25,000 homes and businesses by March 2017.
Finally we’ve introduced several trials across the country to improve
the way we provide FTTP connections. We see FTTP becoming
a much larger part of our network, in particular for new sites,
apartment blocks, small businesses and some rural areas.

We invested 54% more than last year on connecting new sites and
providing Ethernet. We continue to invest to extend, upgrade and
maintain our copper network which underpins most of the services
we provide in the UK. We’ve increased preventative maintenance
spend by 22% year on year. This investment will make our network
less susceptible to faults in future years.

This year we invested in hiring over 1,000 people including around
280 apprentices and graduates.

Year ended 31 March

Revenue

Operating costs

EBITDA

Depreciation and amortisation

Operating profit

Capital expenditure

Operating cash flow

2016
£m

5,100

2,436

2,664

1,301

1,363

1,447

1,419

2015
£m

5,011

2,411

2,600

1,348

1,252

1,082

1,502

2014
£m

5,061

2,460

2,601

1,406

1,195

1,049

1,492

This is the first time in four years that Openreach
has delivered revenue growth.

Revenue increased 2% (2014/15: 1% decline) mainly driven
by a 39% increase in fibre broadband revenue. Higher Ethernet
volumes also contributed to the revenue growth, but regulatory
price changes had an overall negative impact of around £130m,
equivalent to 3% of our revenue.

Operating costs were up 1% (2014/15: 2% down) mainly
reflecting higher volumes, pay inflation and a £29m increase in
leaver costs. There was also no benefit this year from the sale of
redundant copper (2014/15: £29m). These effects were partly
offset by cost efficiencies.

The main driver of the Openreach cost base is labour which
makes up over £1bn of variable cost, after deducting own work
capitalised. We reduced our labour costs by 7%, partly by creating
our ‘centres of excellence’.

EBITDA grew 2% (2014/15: flat). With depreciation and
amortisation down 3% (2014/15: 4%), operating profit was
up 9% (2014/15: 5%).

Capital expenditure was £1,447m, up £365m or 34% (2014/15:
up £33m or 3%). This consists of gross expenditure of £1,540m
(2014/15: £1,460m) which has been reduced by grants of £93m
(2014/15: £378m) directly related to our fibre broadband network
build in the year. The total amount of grants recognised is lower
than last year as we have deferred £227m of grant income due to
strong levels of fibre broadband take-up. This is primarily because
we increased our base-case assumption for take-up from 20%
to 33% in BDUK areas and under the terms of the programme,
we have a potential obligation to either re-invest or repay grant
funding depending on factors including the level of customer
take-up achieved.

Operating cash flow decreased 6% (2014/15: 1% increase)
primarily reflecting the higher capital expenditure.

Key priorities

Following the appointment of Clive Selley as CEO, our future plans
include:

• achieving our goal of 95% on-time installations by the end of 2017,

which is ahead of Ofcom’s minimum service level;

• working with government to help take fibre broadband to 95% of the

country by the end of 2017;

• getting ultrafast broadband to 10m premises, with an ambition to get

this to 12m, by the end of 2020;

• recruiting 1,000 frontline engineers to deliver further improvements

in service; and

• working to deploy FTTP using microfibre technology.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

BT Technology, Service
& Operations (BT TSO)
BT TSO is our internal technology unit and is responsible
for delivering and operating our networks, platforms and
IT systems.

We design, build and operate BT’s global networks and systems.
And we make sure they’re reliable and resilient. We work closely
with each of the lines of business, creating new products for them
and making sure that services evolve with the changing needs of
their customers.

We manage BT’s research and development and look at ways
to differentiate BT though innovation. And we manage BT’s
worldwide patent portfolio. We tell you more about that on
page 36.

Given the rapid pace of change in the technology that BT TSO
people work on, we’ve developed comprehensive training and
re-skilling programmes. We’re also a major recruiter of UK
graduates and apprentices. This is covered further on page 32.

In February Howard Watson replaced Clive Selley as CEO of BT
TSO. Howard was previously responsible for leading BT’s global IT
platforms. During this time we improved our levels of IT reliability
every year.

New organisational structure
On 1 April 2016 we formed a new business unit called IT and
Mobile which sits within TSO. It draws together EE’s mobile
technology experts with the teams that manage BT’s IT platforms.

Products and services

We manage the infrastructure for BT’s products, services
and internal systems, such as the voice, data and TV
networks. Our people also design and deliver the large-
scale global managed networked services which we sell
to many of the top companies in the world.

Inputs, outputs and outcomes

Inputs

There are around 13,000 people in BT TSO and this year we recruited
over 200 graduates and apprentices.

Our global multi-protocol label switching (MPLS) network lets our lines
of business launch products and services quickly and cost effectively.

This year we invested around £470m in research and development. We
have research collaborations with over 30 universities around the world.

Outputs

We help create the products that BT’s lines of business sell to their
customers.

Over 90% of BT TSO people have completed an accredited learning
course.

This year we filed patents for 97 inventions.

Outcomes

We’re ranked as one of the 50 most innovative companies in the world.

34% of our people volunteered this year.

We’ve reduced the group’s total worldwide net CO2e emissions by 81%
versus 1996/97 base levels.

Performance in the year
We’ve continued to proactively maintain and refresh
the technology in our networks and service platforms.

New features have been added, improvements made to network
reliability and older technology removed. For example, we
installed higher capacity and more cost-effective routers for
our MPLS network. You can read more about this and other
network enhancements on page 35. And we’ve continued taking
equipment out of our legacy networks. For example, this year
we turned off around 600 PSTN switching elements that we no
longer need.

We deliver and run BT’s applications and IT systems, such as our
customer management and HR systems. Our investments in
these have simplified processes and improved the way our people
interact with them.

We’ve improved the reliability of our IT systems. This has resulted
in 39% fewer IT faults. We’ve also continued to reduce our costs
and the group’s energy consumption, which we say more about
on page 44.

To help improve customer service, we developed the My BT app.
This means consumers can access their account, billing and order
information from the convenience of their smartphone.

Key priorities

Our future plans include:

• developing technology solutions that help our customers, such as

increasing the broadband speeds we can provide homes at the end
of long copper lines;

• moving from a technology trial to a live consumer trial of an all-IP voice

service;

• continuing to invest in our TV platform, improving the customer

experience of our set-top box and investigating new technologies
such as High Dynamic Range for better picture quality;

• continuing to evaluate technologies such as Software-Defined

Networks that will enhance the cloud-based services that we offer
to businesses; and

• continuing our network rationalisation.

BT Group plc Annual Report 2016

Overview

The Strategic Report

Governance

Financial statements

Additional information

91
91

Case study:

Programmable
networks

We’ve started on our journey to achieve a fully
programmable network.

New technologies such as Network Functions Virtualisation
(NFV) and Software-Defined Networks (SDN) mean we can run
specialist network functions on standard hardware and control
network components using software. We’ve led the industry in
researching the benefits of these technologies since 2011, as we
believe they will help enterprise customers reduce complexity
and cost, and be more agile.

From idea to reality
We’ve worked with standards bodies and vendors to define
how these should work. And in December 2015, we worked
with BT Global Services to introduce NFV capabilities into its BT
Cloud Connect portfolio. A multinational customer is already
using this technology to provide a virtualised wide area network
acceleration function, using standard data centre hardware
rather than specialist equipment.

And we’re moving beyond the data centre. We’re running
customer trials to virtualise routers and firewalls and to support
cloud services such as Office 365. In the future, 5G networks
will use NFV. And we’ll be able to use it in our TV network to
distribute content.

All of this should make our network cheaper to build and simpler
to operate.

BT Cloud Connect portfolio
Introducing NFV capabilities into the BT Cloud Connect portfolio

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

9292 BT Group plc

Annual Report 2016

50%
Broadband traffic has grown at around 50% a year

Case study:

Evolving our
IP network

Over recent years, the needs of our
customers have evolved from PSTN services,
leased lines and early mobile data services
to superfast broadband, TV, mobile data
and Ethernet data services. Our network
now supports a wide range of over-the-top
applications and services, which require
increasing bandwidths. For example, over
the last four years Netflix traffic has grown
from nothing to 20% of the data we carry.
And broadband traffic has grown at around
50% a year.

This year we completed a three-year core
broadband network evolution programme
to ensure that our single IP network supports
these services, and provides improved
performance and reliability. During this time
we’ve:

• introduced new core routers that provide five times
the capacity of the ones they replaced, helping us
to meet future data growth;

• optimised our network to efficiently route traffic

by removing network ‘hops’ and increasing content
caching within our network, speeding up access to
the internet;

• introduced three new, highly-resilient internet

service nodes for our consumer broadband traffic
which are located to minimise internet delay for
our customers;

• deployed over 850 Multi-Service Edge network
components that each support multiple services
such as broadband, Ethernet and internal
connectivity between different layers of the
network; and

• introduced a lower-cost Ethernet router suitable

for smaller exchanges.

BT Group plc Annual Report 2016Overview

The Strategic Report

Governance

Financial statements

Additional information

Group performance

In this section we explain how we’ve done
this year against our key performance
indicators. We set out the group’s financial
results for the year; what we’ve focused on,
and what we’ve achieved.

Progress against our KPIs
While we’ve again delivered strong financial results
this year, our customer service was not good enough.

Our financial performance

Our financial strength has given us the ability to make
investments that are delivering for the business.

Bold decisions

Our acquisition of EE is already having a big effect on how
we do business and we’re pleased with its performance
since joining the group.

Group Finance Director’s
introduction
95 Financial highlights

Income statement

96 Group performance
96 Progress against our KPIs
96 Outlook
98 Our acquisition of EE
98
100 Dividends
101 Cash flow
102 Net debt
104 Taxation
105 Capital expenditure
106 Balance sheet
107 Pensions
108

Contractual obligations
and commitments

Alternative performance measures
We judge and explain our performance using
certain alternative performance measures.
These include trends in underlying revenue
and operating costs excluding transit, adjusted
and reported EBITDA, adjusted earnings per
share, normalised and reported fee cash flow
and net debt. ‘Adjusted’ means that a measure
is before specific items. We describe on page
240 what we mean by specific items and
we’ve disclosed specific items for this year and
the last two years in note 8 to the consolidated
financial statements.

These alternative performance measures are
not defined under IFRS so they’re termed
‘non-GAAP’ measures. But they’re consistent
with how management measures the group’s
financial performance. We’ve defined each
of these measures on pages 240 to 242,
where we’ve provided more detail, including
reconciliations to the nearest measure under
IFRS.

You can find a review of the
performance of our lines of
business this year, from
page 57

Group Finance Director’s introduction
“The investments we’ve been
making have driven our strong
financial performance this year.
EE has made a significant
contribution to our results in the
two months since we acquired the
business at the end of January.”

We grew adjusted EBITDA to £6.6bn, including
£0.3bn from EE. Adjusted profit before tax
was £3.5bn, up 9%, and adjusted EPS of
33.2p was up 5%.

over £1bn out of our gross costs over the next
two years.

Normalised free cash flow was £3.1bn, up
9%, helped by EE. Our ability to generate
strong cash flow from the business has
supported our growth and investment
ambitions.

And finally, we’re already making good
progress on integrating EE. We now see the
opportunity to deliver synergies of around
£400m a year from the EE integration, 10%
more than before and at a lower cost than
we originally expected. We’re refreshing our
organisation to make sure we can deliver the
best possible outcome for our customers and
have made these changes with effect from
1 April 2016 (see page 58).

Tony Chanmugam
Group Finance Director
4 May 2016

I’m pleased to say our key measure of the
group’s revenue trend, underlying revenue
excluding transit (which by definition excludes
EE), was up 2%. That’s our best performance
in more than seven years, and at the top end
of our outlook range of 1% to 2% growth.
And we’ve again delivered EBITDA and free cash
flow growth, in line with the outlook we set
at the start of the year.

BT Consumer revenue was up 7% reflecting
17% growth in broadband and TV revenue,
benefiting from our investments in BT Sport
and BT Mobile. Openreach revenue was up
2% with fibre broadband growth more than
offsetting regulatory headwinds. And we met
the milestone of bringing fibre broadband to
25m premises; this means, including other
service providers, 90% of the UK can now
access the speeds that it offers.

We’ve continued to make further cost
savings, helped by major end-to-end
programmes across our lines of business.
We’re confident there’s plenty more we can
do and we see the opportunity to take well

Performance against our outlook
At the start of the year we published our outlook, which was for BT excluding EE. We refined
this at our third quarter results to reflect our expectations for revenue growth. We’ve met
our commitments.

These measures also impact directors’ remuneration. So we have assessed our financial performance
for the year against the targets that we set, excluding the impact of the EE transaction and its
subsequent contribution to our group results.

2015/16 performance against our outlook, excluding the impact of EE

Outlook for 2016/17 and 2017/18

Change in underlying revenue
excluding transita

Adjusted EBITDAb

Outlook

Result

Up 1%–2%

Modest growth

Up 2%

Up 1%

2016/17

2017/18

Change in underlying revenue
excluding transita

Adjusted EBITDAb

Growth

c£7.9bn

Growth

Normalised free cash flowb

c£2.8bn

£2.84bn

Normalised free cash flowb

£3.1bn–£3.2bn

>£3.6bn

Dividend per share

Share buyback

a Defined on page 240.
b Defined on page 241.

Up 10%–15%

Up 13%

Dividend per share

≥10% growth

c£300m

£315m

Share buyback

c£200m

BT Group plc Annual Report 201695

Financial highlights

Revenue
Year ended 31 March

b
Operating costs
Year ended 31 March

EBITDA
Year ended 31 March

£m
19,500

19,000

18,500

18,000

17,500

17,000

7
8
2
8
1

2014

reported
adjusted a
EE contribution

Proﬁt before taxation
Year ended 31 March

8
6
9

2
4
0
9
1

8
3
0
1

9
0
9
8
1

9
7
9
7
1

1
5
8
7
1

2015

2015
2%
2%

2016

2016
6%
6%

5
2
7

7
7
6
2
1

5
2
7

9
2
3
2
1

2016

2016
6%
6%

1
6
9
1
1

0
8
5
1
1

2015

2015
4%
5%

£m
13,000

12,500

12,000

11,500

11,000

10,500

7
4
4
2
1

1
7
1
2
1

2014

reported
adjusteda
EE contribution

Earnings per share
Year ended 31 March
pence
35

£m
6,800

6,600

6,400

6,200

6,000

5,800

5,600

0
4
8
5

6
1
1
6

2014

reported
adjusted a
EE contribution

1
6
2

0
8
5
6

1
9
1

5
6
3
6

1
7
2
6

8
1
0
6

2015

2015
3%
3%

2016

2016
6%
5%

Proposed full year dividend
Year ended 31 March

£m
4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

2
3
3

9
9
2

5
1
3

5
6
2

2
8
7 2
5
2

7
2
8
2 2
1
3
2

2
7
1
5 3
4
6
2

3
7
4
3

9
2
0
3

2014

reported
adjusted a

2015

2015
14%
12%

2016

2016
15%
9%

2014

reported
adjusted a

2015

2015
3%
12%

2016

2016
13%
5%

Capital expenditure
Year ended 31 March

Free cash ﬂow
Year ended 31 March

£m
2,720

2,600

2,480

2,360

2,240

2,120

2,000

1
1
1

0
5
6
2

6
4
3
2

6
2
3
2

2014

2015

2016

Impact from EE

£m
3,200

3,000

2,800

2,600

2,400

2,200

2,000

1
7
1
2

0
5
4
2

2014

reported
normalised c
Impact from EE

1
6
2

9
6
0
3

1
6
2

8
9
0
3

0
3
8
2

2
8
7
2

2015

2015
28%
16%

2016

2016
10%
9%

14.0p
12.4p
13%^

5
4
8
9

8
2
0
7

9
1
1
5

2016

2015

Change

Net debt
At 31 March
£m
10,000

8,000

6,000

4,000

2,000

2014

2015d

2016e

a Items presented as adjusted are stated before specific items. See page 240 for further details.
b Before depreciation and amortisation.
c See definition on page 241 and summarised cash flow statement on page 101.

d Includes the impact of the £1.0bn equity placing we made in February 2015.
e Reflects the impact from EE. See page 102.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

Group performance

Progress against our KPIs

We’ve performed well against our three financial KPIs.
But our customer service performance was down 3.0%,
and we want to do much better.

We use four key performance indicators (KPIs) to measure how
we are doing against our strategy. Our financial KPIs measure:
the trend in underlying revenue excluding transit; our adjusted
earnings per share; and normalised free cash flow. Customer service
improvement is also a key non-financial KPI for us.

Our KPIs are chosen because they reflect the key elements of our
strategy. We use these to measure the variable elements of our
senior executives’ pay each year, as we’ve explained in the Report
on Directors’ Remuneration (see page 128).

We’ve outlined our performance against each KPI here, together
with an explanation in italics of how we define each measure.
You can find reconciliations of the financial measures to the closest
IFRS measure in the Additional information section on pages
240 to 242.

Profit forecast considered within the Listing Prospectus
On 26 January 2016 we published a Listing Prospectus in relation
to our acquisition of EE. In this, we provided information relating
to our 2015/16 profit forecast. This information confirmed our
outlook as stated on 29 October 2015, when we published our
unaudited results for the six months ended 30 September 2015,
in which we stated that for 2015/16 we expected modest growth
in adjusted EBITDA relative to the £6,271m we achieved in
2014/15.

This profit forecast did not take into account any impact of the
acquisition of EE.

Our adjusted EBITDA in 2015/16 for BT, excluding EE, was
£6,319m, up £48m, consistent with the statement we made
in the Listing Prospectus.

Outlook for 2016/17 and 2017/18

We expect growth in underlying revenue excluding transit in
2016/17. Adjusted EBITDA is expected to be around £7.9bn,
after a net investment of around £100m in launching handset
offerings to BT Mobile customers. Normalised free cash flow
is expected to be £3.1–£3.2bn. This is after up to £300m of
upfront capital expenditure in the Emergency Services Network
(ESN) contract, as well as around £100m of EE integration capital
expenditure.

For 2017/18, we expect growth in underlying revenue excluding
transit and adjusted EBITDA. We also expect to incur capital
expenditure of around £100m on the ESN contract and around
£100m again on integration. We are confident in our cash
flow generation, as a result of the investments we are currently
making, the ability of our business to respond to a dynamic
industry environment, and ongoing cost transformation and
synergy realisation opportunities. As such, we expect to generate
normalised free cash flow of more than £3.6bn in 2017/18.

We expect to grow our dividend per share by at least 10% in both
2016/17 and 2017/18. We expect to buy back around £200m
of shares in 2016/17 to help counteract the dilutive effect of all-
employee share option plans maturing in the year. This is below the
£315m buyback we completed in 2015/16 reflecting the lower
number of shares that are expected to be required for our share
option plans.

Trend in underlying revenue excluding transit

Trend in underlying revenue excluding transit
Year ended 31 March

Our key measure of the group’s
revenue trend, underlying
revenue excluding transit, was
up 2.0%, at the top end of our
outlook range of 1% to 2%.
And it's our best growth in more
than seven years.

2016

2015

2.0%
(0.4)%

Adjusted earnings per share

Adjusted earnings per share
increased 5% to 33.2p.

2016

2015

Change

33.2p
31.5p
5%
^

Normalised free cash flow

We generated normalised free
cash flow of £3,098m. This
was up £268m compared with
last year. Normalised free cash
flow excluding the impact of EE
was £2,837m, in line with our
outlook of around £2.8bn.

2016

2015

£3,098m
£2,830m
9%
^

Change

Customer service

Our customer service measure
‘Right First Time’ was down
3.0% compared with up 4.7%
last year.

2016

2015

3.0%
^
4.7%^

%
3

(1)

(2)

(3)

(4)

5
0

0
2

)
9
1
(

)
1
3
(

)
4
0
(

2012

2013

2014

2015

2016

a
Outlook
Up 1%-2%

Result
Up 2.0%

Adjusted earnings per share
Year ended 31 March

pence
35

3
6
2

2
8
2

4
3
2

5
1
3

2
3
3

2012

2013

2014

2015

2016

Normalised free cash ﬂow
Year ended 31 March

£m
3,100

2,900

2,700

2,500

2,300

2,100

1,900

8
9
0
7 3
3
8
2

0
3
8
2

7
0
3
2

0
0
3
2

0
5
4
2

2012

2013

2014

2015

2016

Excludes the impact of EE

a
Outlook
c£2.8bn

b
Result
£2.84bn

Customer service improvement
At 31 March

%
20

0
3

7
4

5
1

5
0
1

)
0
4
(

)
0
3
(

7
5
1

2010

2011

2012

2013

2014

2015

2016

2016c

Target
Above 4.7%

b
Result
Down 3.0%

a Financial outlook which was given at the start of the year and reaffirmed in February.
b Excludes impact of EE.
c Cumulative improvement since 1 April 2009.

Our positive revenue performance, which excludes the impact
of EE, was driven by BT Consumer where revenue was up 7%
reflecting 17% growth in broadband and TV revenue, helped by
our investments in BT Sport Europe and BT Mobile. We explain more
about the performance of our lines of business from page 57.

Underlying revenue reflects the overall performance of the group
that will contribute to sustainable profitable revenue growth. We
exclude the impact of acquisitions and disposals, foreign exchange
movements and specific items from this measure. We focus on the
trend in underlying revenue excluding transit because transit traffic
is low margin and affected by reductions in mobile termination
rates, which are outside our control.

Adjusted profit after tax grew 13% this year reflecting the impact
of the acquisition of EE, our cost transformation activities and a
lower interest expense together with a reduction in the effective tax
rate from 19.9% to 17.5%.

Adjusted earnings per share grew 5% to 33.2p. The weighted
average number of shares in the market increased 7% reflecting the
additional shares we have issued as part of the EE acquisition.

Adjusted earnings per share is the adjusted profit after tax
attributable to our shareholders, divided by the weighted average
number of shares in issue. Being an ‘adjusted’ measure, it excludes
the impact of specific items and as such it is a consistent way to
measure the performance of our business over time.

The increase of £268m or 9% in our normalised free cash flow
primarily reflects the £261m generated by EE in the period since
acquisition. Excluding EE, normalised free cash flow was £2,837m,
in line with our outlook.

Free cash flow is the cash we generate from our operations, less
capital expenditure and finance costs. It represents the cash
available to invest in the business, repay debt, support the pension
scheme and pay dividends to our shareholders.

Normalised free cash flow excludes significant non-operational
payments and receipts that distort the trend in our cash flow. So
in calculating normalised free cash flow we take out the impact of
specific items, purchases of telecommunications licences, pension
deficit payments and the tax benefit from pension deficit payments.

Improving the service we deliver is key. Our ‘Right First Time’
measure was down 3.0% (2014/15: up 4.7%). This was
disappointing. We’re making good steps in some areas. Openreach
achieved all 60 of the minimum service levels set by Ofcom. But
despite these improvements, we’re not where we want to be, across
all of our lines of business. You can read more about our customer
service on page 22.

‘Right First Time’ is our key measure of customer service. This tracks
how often we keep the promises we make to our customers. This
could be about keeping to appointment times, fixing faults within an
agreed period or answering calls promptly and dealing with queries
or orders efficiently. As well as improving service and the customer
experience, keeping our promises should mean that there is less
work to do in correcting our mistakes, and so reduces our costs.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional informationBT Group plc Annual Report 2016

Our acquisition of EE

EE being a part of the BT family is already having a big effect
on what we can offer our customers (for more about EE’s
operations, see page 76).

EE contributed revenue and EBITDA of £1,038m and £261m
respectively to the group’s results in 2015/16.

And our balance sheet reflects the assets we’ve acquired.
Consideration of £11.0bn paid on acquisition was made up
of £3.5bn cash and 1,595m shares valued at £7.5bn. After
a provisional fair value exercise, we’ve allocated this between
goodwill of £6.4bn and net assets with a fair value of £4.6bn.
You can find out more about the goodwill and purchase price
allocation later in the balance sheet section, and in note 14
to the consolidated financial statements.

We’re making good progress on integrating EE into the group
and have identified further synergy opportunities. We now
expect operating cost and capital expenditure savings to reach
around £400m in the fourth full year (previously £360m)
of which we expect to realise around £100m in 2016/17.
We also expect the cost of integrating EE to be lower than
previously planned, at around £550m (previously around
£600m). The capital expenditure part of this, including around
£100m in each of 2016/17 and 2017/18, will not be
treated as a specific item and will therefore be reflected in our
normalised free cash flow in these years.

The financial measures we’ve used throughout the next sections
include the impact of EE, unless we’ve specifically indicated
otherwise. But our ‘underlying’ measures by definition exclude
EE; as we’ve set out on page 240, we exclude the impact
of acquisitions, disposals and foreign exchange from these.

Income statement

Summarised income statement

Year ended 31 March
Before specific items

Revenue

Operating costsa

EBITDA

2016
£m

2015
£m

2014
£m

18,909

17,851

18,287

(12,329)

(11,580)

(12,171)

6,580

6,271

6,116

Depreciation and amortisation

(2,630)

(2,538)

(2,695)

Operating profit

3,950

3,733

3,421

Net finance expense

(483)

(560)

(591)

Associates and joint ventures

(1)

(3)

Revenue

Our key revenue measure of underlying revenue excluding
transit (which excludes EE), was up 2.0%, at the top
end of our outlook range of 1% to 2%. And it’s our best
growth in more than seven years.

Reported revenue, which includes specific items, was up 6%.
Adjusted revenue was also up 6% at £18,909m. EE contributed
£1,038m to adjusted revenue in the two months since we
acquired it.

We had a £127m negative impact from foreign exchange
movements, a £109m reduction in transit revenue and a £6m
negative impact from disposals. Excluding these, underlying
revenue excluding transit was up 2.0% (2014/15: down 0.4%).

BT Consumer revenue was up 7% with a 17% increase in
broadband and TV revenue and a 2% increase in calls and lines.
And the market-wide demand for fibre broadband led to a 2%
increase in Openreach revenue. This was despite regulatory price
impacts of around £130m.

Underlying revenue excluding transit was up 1% in BT Wholesale
and down 2% in BT Global Services, whilst BT Business remained
broadly flat.

You can see a full breakdown of reported revenue by major product
and service category in note 4 to the consolidated financial statements.

Operating costs

Operating costs before depreciation and amortisation
increased 6%, mainly because of EE.

Our total operating costs before depreciation and amortisation
were £12,329m, up £749m (2014/15: down £591m). Of this
£725m relates to EE with a large proportion within Other costs.
For the group Other costs were up £406m or 12%, primarily
reflecting EE’s subscriber acquisition and retention costs, offset
by favourable foreign exchange movements.

Underlying operating costs excluding transit were up 2%. This year
we no longer benefited from the sale of redundant copper and our
costs were impacted by higher leaver charges (as last year most were
included within specific items), a higher pensions operating charge and
our investment in BT Sport Europe. Without these effects, underlying
operating costs excluding transit would have been down 2%.

Operating costs before depreciation, amortisation and speciﬁc items
Year ended 31 March

£m

12,500

1
2
4

9
2
3
2
1

Profit before taxation

3,473

3,172

2,827

Taxation

(607)

(631)

(613)

11,750

4
1
2

2
7

2
4

Profit for the year

2,866

2,541

2,214

a Excluding depreciation and amortisation.

0
8
5
1
1

5
1
0
2

11,000

s
O
L
O
P

a
r
e
h
t
O

6
1
0
2

e
m
m
a
r
g
o
r
P

s
e
g
r
a
h
c
s
t
h
g
i
r

y
g
r
e
n
e
&
y
t
r
e
p
o
r
P

a Includes all other movements in costs.

BT Group plc Annual Report 2016

Programme rights charges increased £214m to £544m, primarily
reflecting our investment in BT Sport Europe. Property and energy
costs were up 7%, payments to telecommunications operators
(POLOs) were up 2% and network, operating and IT costs were
up 1%, with these again being impacted by EE. Net labour costs
were flat despite leaver costs of £109m (2014/15: £8m), the
additional EE employees joining the group and a £27m increase
in the pensions operating charge.

Specific items

As we’ve explained on page 93, in this performance review
we primarily explain our results before specific items.
That’s because this is how we measure the sustainable
performance of our business.

The table below outlines items we’ve treated as specific items:

2015/16 operating costsa

31%
Other

Programme
rights charges

Network & IT

Property & energy

a Excluding depreciation, amortisation and speciﬁc items.

You can see a detailed breakdown of our operating costs in note 5
to the consolidated financial statements.

EBITDA

Adjusted EBITDA, which is before specific items, was
£6,580m. Adjusted EBITDA for the group excluding EE’s
contribution of £261m was £6,319m, up 1% and in line
with our outlook for the year of modest growth.

Adjusted EBITDA of £6,580m was up 5%. This reflects
revenue growth, the results of EE since 29 January and our
cost transformation activities and is despite the headwinds we
mentioned above (see operating costs on page 98).

Adjusted EBITDA was up in Openreach, BT Business and BT
Consumer. BT Global Services adjusted EBITDA was flat, but was
up 1% excluding foreign exchange movements. Adjusted EBITDA
was down 3% in BT Wholesale reflecting the higher ladder pricing
revenues recognised last year as well as continuing migration to
lower-margin IP services.

Year ended 31 March

Specific revenue

2016
£m

2015
£m

2014
£m

34%
Net labour costs

Retrospective regulatory matters

(203)

(128)

Fair value adjustment to deferred
revenue on acquisition of EE

–

(133)

(128)

18%

POLOs

Specific operating costs

Retrospective regulatory matters

203

EE acquisition-related costs

Integration costs

Property rationalisation costs

Restructuring charges

Profit on disposal of property

Profit on disposal of businesses

Specific operating costs

EBITDA impact

Specific net finance expense

–

348

215

229

–

(67)

(6)

381

253

299

315

276

–

276

235

(Profit) loss on disposal of interest
in associates and joint ventures

–

(25)

Tax credit

(166)

(121)

(319)

Net specific items charge after tax

278

406

196

This year, specific items resulted in a net charge after tax of
£278m (2014/15: £406m). The impact on EBITDA was £215m
(2014/15: £253).

We recognised £203m of both transit revenue and costs with no
EBITDA impact, being the effect of ladder pricing agreements with
the UK mobile operators relating to prior years following a Supreme
Court judgment in 2014. Last year, we recognised £128m of
revenue and EBITDA in relation to this.

We recognised a fair value adjustment as part of the acquisition
of EE which reduced the amount of deferred income by £70m in
relation to its mobile subscriber base. This non-cash item has been
charged against revenue in February and March, being the period
in which the related services were delivered.

Specific items charged to operating costs include £99m of
transaction costs we incurred to buy EE (2014/15: £19m). These
were primarily adviser fees and stamp duty. We incurred a further
£8m (2014/15: £7m) in financing costs. An additional £3m was
directly related to the shares we issued to EE’s shareholders in
January 2016 as part of the purchase consideration, so we have
recognised this amount in equity. We’ve incurred £17m of costs
this year in relation to the integration. In addition to this, £5m
of integration activity has been included in capital expenditure.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

100

We recognised a £29m charge relating to the rationalisation of the
group’s property portfolio.

In addition to the above, we also treated a number of other items
as specific, such as the net interest expense on pensions of £221m
(2014/15: £292m). The decrease from 2014/15 mainly reflects
a fall in the IAS 19 discount rate between 31 March 2014 and
31 March 2015.

We also recognised a tax credit of £96m for the re-measurement
of deferred tax balances due to the upcoming changes in the UK
corporation tax rate from 20% to 19% from 1 April 2017 and to
18% from 1 April 2020 (the UK Finance Bill, not yet enacted, is
expected to reduce this to 17%). There was no credit last year as
all deferred tax balances had already been remeasured at 20%.

The tax credit on specific items (excluding the re-measurement
of deferred tax) was £70m (2014/15: £121m).

You can see details of all revenue and costs that we have treated
as specific items in the income statement in the last three years
in note 8 to the consolidated financial statements.

Profit before tax

Adjusted profit before tax was up 9% at £3,473m.

The increase in adjusted profit before tax reflects our EBITDA
performance, and in particular the contribution from EE.

Reported profit before tax (which includes specific items) was up
15% to £3,029m.

Dividends

The Board is proposing a final dividend to shareholders
of 9.6p, up 13%. This brings the full year dividend to
14.0p, also up 13%, and compares with an increase in the
2014/15 full year dividend of 14%.

This year’s dividend is in the middle of our outlook range. It will be
paid, subject to shareholder approval, on 5 September 2016 to
shareholders on the register on 12 August 2016.

14%

Dividends per share
Year ended 31 March

pence

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

9
0
1

5
7

4
3

4
2
1

5
8

9
3

2014

2015

13%

0
4
1

6
9

4
4

2016

We discuss depreciation, net finance expense and tax in later
sections of this performance review.

Interim

Final

Earnings per share

Adjusted earnings per share increased 5% to 33.2p.

Adjusted earnings per share is one of our key performance
indicators (see pages 96 and 97) and has increased 18% over
the last two years. The graph below shows the key drivers of this
increase.

Reported earnings per share, which includes specific items, was
29.9p, up 13%.

Adjusted earnings per share
Year ended 31 March

37
35
33
31
29
27
25
23

0
2

A
D
T
I
B
E

2
8
2

4
1
0
2

0
2

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3
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a
Other primarily reflects the impact of the change in the weighted average number of shares.

The Board has reviewed the group’s dividend policy and continues
to believe that a policy of paying progressive dividends is the most
appropriate. The Board believes this best aligns with the group’s
financial objectives of growing sustainable profitable revenue
growth and transforming the cost base in order to drive long-term
growth in cash flows. In reaching this decision, the Board took into
account forecasts for future debt reduction as well as the level of
dividend cover expected over the medium-term.

We’ve set out our dividend expectations for 2016/17 and
2017/18 in our Outlook on page 96.

Cash flow

We generated normalised free cash flow of £3,098m,
up £268m or 9%. Excluding EE, this was £2,837m, in line
with our outlook of c£2.8bn for the year.

Free cash flow
The increase in normalised free cash flow is mainly due to the
addition of EE which contributed £261m.

This year we paid £482m for our existing FA Premier League,
UEFA Champions League and UEFA Europa League broadcast
rights.

The net cash cost of specific items was £232m (2014/15:
£154m). This included: EE acquisition-related costs of £114m
(2014/15: £nil); restructuring costs of £85m (2014/15:
£267m); and ladder pricing receipts of £41m (2014/15: £88m).

BT Group plc Annual Report 2016

101

Reported free cash flow, which includes specific item outflows of
£232m (2014/15: £154m) and a £203m (2014/15: £106m)
tax benefit from pension deficit payments, was £3,069m
(2014/15: £2,782m).

We made pension deficit payments of £880m (2014/15:
£876m) and paid dividends to our shareholders of £1,075m
(2014/15: £924m).

Our acquisition of EE resulted in a net cash outflow of £3,371m
which comprised the purchase consideration of £3,464m offset by
cash acquired of £93m.

We spent £315m (2014/15: £320m) on our share buyback
programme to help counteract the dilutive effect of our all-
employee share option plans maturing. Exercises of share options
generated proceeds of £90m (2014/15: £201m). Last year
we also raised £1.0bn from an equity placing to support our
acquisition of EE. We expect to buy back around £200m of
shares in 2016/17 which is below the buyback we completed in
2015/16, reflecting the lower number of shares that are expected
to be required for our share option plans.

Non-cash movements within net debt primarily reflect £2,107m
of net debt acquired with EE.

You can see a reconciliation to normalised free cash flow from
the net cash inflow from operating activities, the most directly
comparable IFRS measure, on page 242.

Summarised cash flow statement

Year ended 31 March
Before specific items

EBITDA

Capital expenditurea

Net interest

Taxationb

2016
£m

2015
£m

2014
£m

6,580

6,271

6,116

(2,459)

(2,411)

(2,346)

(541)

(573)

(608)

(459)

(415)

(424)

Working capital movements

(105)

(220)

(380)

Other non-cash and non-current

liabilities movements

178

Normalised free cash flow

3,098

2,830

2,450

Cash tax benefit of pension deficit
payments

203

106

Specific items

(232)

(154)

(356)

Reported free cash flow

3,069

2,782

2,171

Pension deficit payments

(880)

(876)

(325)

Dividends

(1,075)

(924)

(778)

Disposals and acquisitions

(3,379)

(22)

Share buyback programme

(315)

(320)

(302)

Proceeds from issue of own shares

1,201

(Increase) reduction in net debt from
cash flows

(2,490)

1,873

819

Net debt at 1 April

(5,119)

(7,028)

(7,797)

(Increase) reduction in net debt from
cash flows

(2,490)

1,873

819

Non-cash movements

(2,236)

(50)

Net debt at 31 March

(9,845)

(5,119)

(7,028)

a Net of government grants.
b Excluding cash tax benefit of pension deficit payments.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
102

Net debt

Net debt increased by £4,726m. This included the
£3,464m cash consideration as part of the EE acquisition
and EE net debt of £2,107m. This was partly offset by
strong cash generation from business operations.

Overall our net debt has increased to £9,845m.

We funded the cash element of the consideration for EE by
drawing down £3.2bn of our £3.6bn acquisition facility on 29
January 2016 as well as using £0.3bn of existing cash. We repaid
the majority of the drawdown through the issue of £3,019m of
Euro bonds on 10 March 2016. The effective Sterling interest
rates on the five, seven and ten-year Euro bonds were 2.34%,
2.74% and 3.25% respectively. As at 31 March 2016, £181m
of the acquisition facility remains available and is fully drawn. We
also took on EE net debt of £2,107m.

Excluding the acquisition-related borrowing and EE’s net debt we
decreased our net debt by £752m this year. We’ve achieved this

whilst investing for the future, including in our networks, research
and development, sports and TV content, supporting our pension
fund and funding our share buyback programme. We’ve also paid
progressive dividends to our shareholders.

We regularly review the liquidity of the group and our funding
strategy takes account of what we’ll need in the medium term, like
funding the pension deficit and share buyback.

Gross debt, translated at swap rates, at 31 March 2016 was
£13,260m. That’s made up of term debt of £11,458m, finance
leases of £240m, bank loans of £350m, syndicated loan facilities
of £619m and other loans of £593m.

In June and July 2015 our $750m and €1,000m bonds matured,
resulting in a cash outflow of £1,271m.

In the table below, foreign exchange on net debt includes
translation on finance leases, short-term borrowings, investments
and cash balances. It also includes the benefit of translating our
debt balances to Sterling at swap rates.

Movements in net debt

5
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2
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0
3
8
2

6
0
1

1
0
2
1

0
2
3

6
3

4
2
9

6
7
8

4
5
1

0
1

9
1
1
5

8
9
0
3

9
7
3
3

3
0
2

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9

5
7
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1

5
1
3

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2
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5
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8
9

£m
10,500

9,500

8,500

7,500

6,500

5,500

4,500

3,500

2,500

1,500

500

The table below shows the key components of our net debt and of the increase this year of £4,726m.

£m
Debt due within one yeara

Debt due after one year
Impact of cross-currency swapsb
Removal of accrued interest and fair value adjustmentsc

Gross debt

Less:

Cash equivalents

Current assets investments
Removal of accrued interestc

At
1 April
2015

Term debt
issuance/
(maturities)

Other
cash flow

Fair value
move-
mentsd

Foreign
exchange

Transfer
to within
one year

Other
movementse

At
31 March
2016

1,900

7,868

(357)

(337)

(1,271)

3,019

–

162

–

9,074

1,748

166

(434)

(3,523)

–

(89)

665

–

(36)

–

173

206

(295)

–

(38)

–

1,787

486

3,237

(1,787)

1,686

11,032

–

(652)

(357)

2,188

13,260

(497)

(22)

(2,918)

(2)

–

2,165

9,845

Net debt
a Including accrued interest and bank overdrafts.
b Retranslation of debt balances at swap rates where hedged by cross-currency swaps.
c Removal of accrued interest applied to reflect the effective interest rate method and removal of fair value adjustments.
d Includes £49m fair value adjustment relating to EE acquired debt less £10m amortisation of de-designated fair value hedge.
e Includes £2,223m of gross debt and £23m of investments acquired from EE.

1,748

5,119

742

BT Group plc Annual Report 2016

103

%
4
6

%
5
9

%
9
3

Maturity proﬁle of gross debt (excluding leasing) and average coupon rate
Year ended 31 March
%
2
5

£m
1,800

%
5
5

%
7
3

%
3
2

%
6
6

%
7
2

%
3
3

1,500

1,200

900

600

300

7
1
0
2

8
1
0
2

9
1
0
2

0
2
0
2

1
2
0
2

2
2
0
2

3
2
0
2

4
2
0
2

5
2
0
2

6
2
0
2

7
2
0
2

8
2
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2

9
2
0
2

0
3
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2

1
3
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2
3
0
2

3
3
0
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4
3
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5
3
0
2

6
3
0
2

7
3
0
2

8
3
0
2

£ debt

$ swapped to £

€ swapped to £

Financing and debt maturity

Net finance expense

The main source of our cash inflow in recent years has
been the cash generated from our operations.

Together with our committed bank facility of £1.5bn, we expect
that this will be our key source of liquidity for the foreseeable
future. The facility has been extended by one year and will now
mature in September 2020 with the option to extend the term in
August 2016. If agreed this will mature in September 2021.

In February 2015 we agreed a £3.6bn facility to part-finance the
acquisition of EE. We drew £3.2bn from this facility when the deal
was completed on 29 January 2016. We repaid the majority of
the drawdown in March 2016 with proceeds from term debt of
£3,019m that we raised on the long-term Euro market.

The £1.5bn committed bank facility remains undrawn at
31 March 2016.

Debt due within one year, at hedged rates, or on demand
is £3,005m.

Adjusted net finance expense of £483m decreased by
£77m due to our average net debt and weighted average
interest rate on net debt being lower than last year.

We’ve shown below an overview of our average gross debt,
investments and cash balances, and net debt and the related
weighted average interest rates over the past three years.

The weighted average interest rate on net debt was reduced from
8.1% to 7.5% as the new debt issuances and debt acquired from
EE are at lower interest rates than the average rate of the existing
debt.

You can see a reconciliation of net finance expense to net interest
cash outflow in note 26 to the consolidated financial statements.

Year ended 31 March

Average gross debt

2016
£m

2015
£m

2014
£m

9,036 9,012 9,336

Weighted average interest rate on gross debt

5.4% 6.0% 6.1%

Average investments and cash balances

2,616 2,446 1,467

Weighted average interest rate on investments

0.4% 0.4% 0.4%

Average net debt

6,422 6,566 7,869

Weighted average interest rate on net debta

7.5% 8.1% 7.2%

a Excludes interest relating to unwinding of discount on provisions and derivatives not in a

designated hedge relationship.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional informationTax expense
Our total tax expense before specific items was £607m (2014/15:
£631m). This is not the same as the total corporation tax we paid
in the year and it excludes tax deductions associated with our
pension schemes.

Our effective tax rate on profit before tax and specific items is
impacted by our accounting for deferred tax on non-UK losses
and changes to our estimates of prior year uncertain tax positions.
Excluding these, we would expect our effective tax rate to be
around the UK corporation tax rate, as the majority of our business
occurs in the UK. This is shown in the table below.

Year ended 31 March

2016
%

2015
%

2014
%

Tax at UK statutory rate

20.0

21.0

23.0

Non-UK results taxed at different rates

Net permanent differences

0.1

0.3

0.8

–

0.2

0.3

20.4

21.8

23.5

Changes to prior year estimates

(2.5)

(1.1)

(0.6)

Deferred tax accounting for non-UK losses

(0.4)

(0.8)

(1.2)

Effective tax rate

17.5

19.9

21.7

104

Taxation

Our effective corporation tax rate before specific items was
17.5% compared with 19.9% in 2014/15. This is lower
in both years than the UK corporation tax rate of 20%
(2014/15: 21%).

Our tax contribution
We are proud to be a major contributor of taxes to the UK
economy.

This year we paid UK corporation tax of £200m (2014/15:
£225m).

In both years we have benefited from tax deductions associated
with our employee share schemes and pension schemes. We expect
to continue to benefit from tax deductions from our pension
schemes and also from EE’s historic tax losses.

Additionally, we paid non-UK corporate income taxes of £56m
(2014/15: £84m), which primarily reflects the fact that most of
our business is UK-based.

This year the total taxes we both paid and collected for the UK
Government totalled £2.9bn (2014/15: £3.0bn). The Hundred
Group Total Tax Contribution Survey for 2015 ranked us as the 7th
highest UK contributor. We also contributed £0.4bn (2014/15:
£0.4bn) in our largest non-UK jurisdictions.

Our approach to tax

Our aim is to comply with the tax laws and regulations in each
of the countries in which we do business.

We seek to have open and co-operative working relationships
with tax authorities worldwide.

We manage our tax affairs conservatively and in a manner
consistent with the group’s wider purpose and strategy. We take
the benefit of widely claimed tax incentives and apply OECD
principles.

Tax governance
We have a global framework for managing taxes, which is set
centrally at a group level and agreed by the Board.

The application of tax rules is not always clear, and discussions
with tax authorities can and do take many years to resolve. We
actively monitor our potential tax exposures.

Our group tax team supports regional management to meet
local tax regulations.

BT Group plc Annual Report 2016105

The reduction in the UK corporation tax rate since 2011/12 has
had a major impact on our effective tax rate.

Capital expenditure

The UK corporation tax rate will fall to 19% from 1 April 2017
and is expected to fall to 17% from 1 April 2020. We expect that
this will continue to have a major impact on our effective tax rate
and our tax cash payments.

Recognition of deferred tax assets on historic trading losses may
also reduce our effective tax rate in the future. In addition, future
changes to our estimates of uncertain tax positions may increase or
reduce our effective tax rate.

We receive a tax benefit from R&D incentives in the UK and do not
expect this to be reduced as a result of the OECD Base Erosion and
Profit Shifting project.

Key tax risks
Our key risks relate to the uncertainty of the tax treatment of
providing telecommunications services globally. We follow OECD
guidelines and have a tax control framework in place to monitor
and manage tax.

Additionally, we have extensive and long-standing UK operations
that necessarily require the use of estimates. We routinely work
with HMRC to validate these estimates.

Tax losses
We have an asset of £325m (2014/15: £44m) relating to tax
losses on our balance sheet. This relates mainly to historic UK losses
acquired with EE. We expect to be able to use this against future
profits of EE.

We have £3.9bn of tax losses arising from trading (2014/15:
£3.6bn) that we’ve not given any value to on our balance sheet.
These arose mostly in our non-UK companies in earlier financial
years. We might be able to use the non-UK losses to offset tax
liabilities in the future, but this will depend on us making profits
in countries where we’ve previously made losses and agreeing the
value of the tax losses with the local tax authorities. This is why we
judge that these amounts should not be recognised as assets on
our balance sheet.

We also have £17.0bn (2014/15: £17.1bn) of capital losses in
the UK. We have no expectation of being able to use these losses in
the long term.

We’ve given more details in note 9 to the consolidated financial
statements.

We’re making significant investments in our strategic
growth areas and to improve our customer service.

The Design Council is responsible for BT delivering an efficient and
optimised investment plan, meeting the strategic needs of the
group to help drive sustainable profitable revenue growth.

Capital expenditure now includes the investment EE is making to
maintain mobile network leadership. We’re also investing in the
integration of EE into the wider group.

For the year, our capital expenditure net of grant funding was
£2,650m (2014/15: £2,326m). We’ve shown below how we
spent this across our major capital programmes. Of the total
group capital expenditure EE accounted for £111m and capital
expenditure related to the integration of EE was £5m. We expect
this to grow to around £100m in both 2016/17 and 2017/18 as
our integration of EE gathers pace to drive synergies.

Capital expenditure
Year ended 31 March

£m

3,000

2,500

2,000

1,500

1,000

500

2014

2015

2016

Broadband capex

Fibre capex

Support/Other capex

Network capex

Customer capex

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information106

In recent years we’ve prioritised our capital expenditure to
underpin our growth strategy, and in particular to expand and
enhance our next generation access network, which includes both
fibre and Ethernet. Ongoing investments this year to support our
strategy include:

• increasing the footprint of our fibre broadband network,

including extending the reach of fibre to rural areas under the
BDUK programme. We’ve now passed more than 25m homes
and businesses representing around 80% of UK premises;
• continuing to build our TV capabilities, including BT Sport

Ultra HD and TV Everywhere, as well as enhancing our content
distribution network;

• developing our capabilities and propositions for Mobility and
Future Voice to exploit the convergence of fixed and mobile
services;

• expansion of our next generation networks, including more

capacity on our IP Exchange platform;

• continued development of customer contract-specific

infrastructure for our global clients; and

• improving customer experience by developing new systems and
replacing elements of our network to reduce faults and speed up
repair times.

We recognised net grant funding of £109m (2014/15: £392m),
mainly relating to our capital activity on the BDUK programme.
The total amount of grant funding recognised is lower than last
year as we have deferred £229m of grant income (2014/15:
£29m) due to strong levels of take-up. This continued increase in
take-up across our fibre network is a result of customers wanting
to consume more data at faster speeds. And so we increased our
base-case assumption for take-up in BDUK areas from 20%
to 33% and under the terms of the BDUK contract, we have a
potential obligation to either re-invest or repay grant funding.
We’re actively working with the local bodies to extend coverage
further with this deferred grant funding.

The BDUK programme provides CPs with the platform and
network reach to provide additional services for new and existing
customers. Going forward, we will continue to invest in our fibre
network, expanding the reach. And we have started deployment
trials of our new G.fast technology to deliver even faster speeds in
the future.

Of our total capital expenditure, £248m (2014/15: £231m)
arose outside the UK. Capital expenditure contracted but not yet
incurred was £922m at 31 March 2016 (2014/15: £507m).

Depreciation and amortisation
Depreciation and amortisation has increased by 4% to £2,630m
(2014/15: £2,538m) due to the inclusion of EE depreciation
and amortisation since acquisition. Excluding EE, depreciation and
amortisation has reduced by 3% due to lower capital expenditure
in previous years as we have become more efficient in delivering
our capital investment programmes.

Balance sheet

Our balance sheet this year includes the impact of
acquiring EE. It also reflects our continued investment in
the network infrastructure assets that are the foundation
of our business, as well as the working capital with which
we manage our business day by day.

On 29 January 2016 we purchased EE for a total consideration of
£10,971m which included cash consideration of £3,464m and
shares with a fair value of £7,507m. You can find more about how
we have provisionally allocated the total consideration across the
acquired assets and liabilities and the resulting goodwill in note 14
to the consolidated financial statements.

Purchase considerationa

Cash paid

Ordinary shares issued

Total purchase consideration

Net identifiable assets acquireda

Add: goodwill

Net assets acquired

a Provisional fair values at 31 March 2016.

£m

3,464

7,507

10,971

4,541

6,430

10,971

The impact of EE is reflected in the group’s consolidated balance
sheet at 31 March 2016, as we’ve explained below.

At 31 March

Property, plant & equipment,

software and telecommunications
licences

2016
£m

2015
£m

Movement
£m

20,570

15,216

5,354

Goodwill & other intangible assets

10,876

1,459

9,417

Other non-current & current assets

2,288

1,754

Trade & other receivables

4,296

3,324

534

972

Investments, cash & cash equivalents

3,415

3,957

(542)

Total assetsa

41,445

25,710

15,735

Loans & other borrowings

(14,269)

(9,768)

(4,501)

Trade & other payables

(7,289)

(5,276)

(2,013)

Other current & non-current liabilities

(2,043)

(2,244)

201

Provisions

(723)

(564)

Deferred tax liability

(1,262)

(948)

(159)

(314)

Pensions, net of deferred tax

(5,235)

(6,102)

867

Total liabilities

Total equity

(30,821)

(24,902)

(5,919)

10,624

808

9,816

a Excluding deferred tax asset relating to BT’s defined benefit pension schemes.

Our core fixed and mobile network infrastructure is included within
property, plant and equipment, software and telecommunications
licences. This is the backbone of the UK telecommunications
industry. These assets were held at a net book value of £20.6bn at
31 March 2016.

BT Group plc Annual Report 2016

107

The net increase of £5,354m in the year is mainly due to EE’s
assets which we have brought onto our balance sheet at a fair
value of £5,209m. This included £2,524m of spectrum licences,
£2,270m of network assets and £415m of software. Capital
expenditure during the year was £2,650m which was offset by
depreciation and amortisation of £2,630m.

We’ve shown deferred tax movements in note 9 to the
consolidated financial statements. Pensions, net of deferred tax,
fell by £0.9bn to £5.2bn and are discussed below. And the share
issue used as part of the consideration for the acquisition of EE is
reflected in the improvement in equity of the group at 31 March
2016 compared with the prior year.

Goodwill and other acquisition-related intangible assets increased
by £9,417m. The majority of this relates to our acquisition of EE.
We recognised intangible assets at fair values of £402m for the EE
brand and £2,610m for customer relationships.

The provisional residual goodwill was £6,430m. This is attributable
to the revenue synergies expected to be generated from new
cross-selling and bundling opportunities across the enlarged
customer base as well as EE’s ability to generate a new subscriber
base in the future to replace subscriber churn. It also includes
expected benefits from the existing workforce skills and expertise,
and savings on operating costs and capital expenditure as a result
of joint efficiencies expected from being part of the enlarged
group.

We review the recoverable amounts of goodwill annually, and for
EE in particular, we have reviewed the recoverability during the
year of acquisition. We’ve also considered this across our legacy
cash generating units which hold goodwill, which are BT Global
Services, BT Business and BT Consumer and are satisfied that
these support the carrying value of goodwill (see note 14 to the
consolidated financial statements).

Other non-current and current assets and liabilities relate primarily
to our financial instruments, which we’ve described in note 27 to
the consolidated financial statements. It also includes inventories
which have increased by £95m reflecting the addition of handsets
inventory in EE.

Trade and other receivables increased by £972m to £4,296m
while trade and other payables of £7,289m were £2,013m
higher, and both include the impact of EE. Adjusting for the impact
of the EE opening balance sheet and the increase in programme
rights, working capital was an outflow of £105m in the year.

Investments, cash and cash equivalents, loans and other
borrowings are reconciled to net debt of £9,845m in note 25
to the consolidated financial statements. We’ve discussed net
debt on page 102. Net debt reflects the cash element of the
consideration paid of £3,464m, as well as the debt acquired with
EE of £2,107m.

Provisions increased by £159m to £723m. We have a significant
property portfolio which includes both office buildings and former
telephone exchanges (see page 36). Property provisions, which
mainly comprise onerous lease provisions, amounted to £296m.
The acquisition of EE increased these assets and obligations by
£98m and £72m respectively. EE’s property portfolio includes
office buildings as well as retail stores, some of which are
undergoing a rationalisation programme. We have also taken on
EE’s asset retirement obligation relating to leased mobile sites
forming part of the network, which amounts to £78m. You can
find more information about these provisions in note 19 to the
consolidated financial statements.

Pensions

Overview
We provide a number of retirement plans for our employees:

• The BT Pension Scheme (BTPS), a defined benefit plan in the UK,
is the largest of these plans. Although closed to new members,
the BTPS still has around 35,000 active members, 197,500
pensioners and 69,000 deferred members.

• The BT Retirement Saving Scheme (BTRSS) is the current

arrangement for UK employees who joined BT after 1 April
2001. It has around 29,500 active members.

• EE operates the EE Pension Scheme (EEPS), which has a defined
benefit section that is closed to future accrual and a defined
contribution section which has around 12,500 active members.

• We also maintain retirement arrangements around the world

with a focus on these being appropriate for the local market and
culture.

The BTPS, BTRSS and EEPS are not controlled by the Board. The
BTRSS is a contract-based, defined contribution arrangement
provided by Standard Life under which members choose their own
investments and receive benefits at retirement that are linked to
the performance of those investments.

The BTPS and EEPS are managed by separate and independent
Trustee bodies. Details of the governance of the BTPS, its financial
position, the performance of its investments and a summary
of member benefits are available in the BTPS Annual Report
published by the Trustee in December 2015, on the BTPS Trustee
website (www.btpensions.net).

We’ve given more information on our pension arrangements
and on the funding and accounting valuations in note 20 to the
consolidated financial statements.

BTPS funding valuation and future funding obligations
The funding of the BTPS is subject to legal agreement between BT
and the Trustee of the BTPS and is determined at the conclusion
of each triennial valuation. The most recent triennial funding
valuation at 30 June 2014 and the associated deficit contribution
plan was agreed with the Trustee in January 2015.

At 30 June 2014, the market value of assets was £40.2bn
and the funding deficit was £7.0bn. There are a wide range
of assumptions that could be adopted for measuring pension
liabilities. Legislation requires that this deficit is based on a prudent
view – for example, assuming a lower future investment return
than might be expected in practice.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information108

A 16-year deficit contribution plan was agreed reflecting BT’s
long-term and sustainable cash flow generation. Under this plan,
we made deficit payments of £875m in March 2015, £625m
in April 2015 and £250m in March 2016. A further payment of
£250m will be made in 2016/17, bringing the total for the three
years to 31 March 2017 to £2.0bn.

Contractual obligations and commitments
We’ve shown in the table below our principal contractual financial
obligations and commitments at 31 March 2016. You can see
further details on these items in notes 20, 25 and 30 to the
consolidated financial statements; note 30 includes details relating
to our financial commitments and contingent liabilities.

Payments due by period

Less
than
1 year
£m

Between
1 and
3 years
£m

Between
3 and
5 years
£m

More
than 5
years
£m

Total
£m

Loans and other
borrowingsa

13,850 3,229b 3,092

2,279

5,250

Finance lease obligations

240

179

Operating lease obligations 7,588

669 1,233

1,045

4,641

Capital commitments

Other commitments

922

481

837

191

260

Device purchase
commitments

Programme rights
commitments

260

–

2,026

744 1,145

137

–

Pension deficit obligations

7,903

271 1,420

1,436

4,776

Total

33,270 6,209 7,258

4,954 14,849

a Excludes fair value adjustments.
b Includes £178m of accrued interest due within less than one year.

At 31 March 2016 our cash, cash equivalents and current asset
investments were £3,415m. We have an unused committed
borrowing facility of £1.5bn. We expect that these resources and
our future cash generation will allow us to settle our obligations as
they fall due.

Accounting position under IAS 19
The accounting deficit, net of tax, fell over the year from £6.1bn
to £5.2bn. The movements in the deficit for the group’s defined
benefit plans are shown below.

Movements in IAS 19 deﬁcit

Deﬁcit
(£bn)

(4.0)

(4.5)

(5.0)

(5.5)

(6.0)

(6.5)

(7.0)

(7.5)

(8.0)

(8.5)

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Net of deferred tax

Deferred tax asset

Actuarial losses on plan assets for 2015/16 reflect actual
investment returns in the BTPS over the year of around 2% which
were below the IAS 19 discount rate of 3.25%. The return reflects
strong performance for property, currency gains and broadly flat
returns on other asset classes.

Actuarial gains on the liabilities primarily reflect lower than
expected inflationary increases in pension payments that will be
made in 2016, and other scheme and membership experience
following the use of updated membership data.

BT Group plc Annual Report 2016

Overview

The Strategic Report

Governance

Financial statements

Additional information

109
109

Governance

Over the next few pages we describe our
governance structure. We talk about the
people on the Board, how it works and
what the Board focused on through
the year. We also report on the work of the
Board committees.

Our directors
Our directors’ skills and experience plus their
diverse backgrounds enable the Board to challenge
management constructively and keep developing
our strategy.

Our committees

The Board delegates certain responsibilities and
authorities to its committees.

Our governance framework

Our governance and internal control framework
supports the Board in exercising proper oversight.

110 Chairman’s governance report

111 How we govern the group

112 Board of Directors

114 The Board

122

125
126

118 Reports of the Board committees
Audit & Risk Committee Chairman’s
118
report
Nominating & Governance
Committee Chairman’s report
BT Pensions Committee Chair’s report
Committee for Sustainable and
Responsible Business Chairman’s
report
Technology Committee Chairman’s
report
Report on Directors’ Remuneration

128

127

149 Directors’ information

150 General information

154

Shareholders and Annual
General Meeting

Corporate governance statement
We are committed to operating in
accordance with best practice in business
integrity and ethics and maintaining the
highest standards of financial reporting
and corporate governance. The directors
consider that BT has complied throughout
the year with the provisions of the UK
Corporate Governance Code (the Code) as
currently in effect and applied the main
principles of the Code as described on
pages 109 to 155 of this Report of the
Directors. Please see page 120 for details
of the Audit & Risk Committee’s discussions
on audit tendering.

The directors submit their report and
the audited financial statements of the
company, BT Group plc, and the group,
which includes its subsidiary undertakings,
for 2015/16. BT Group plc is the listed
holding company for the BT group of
companies. Its shares are listed on the
London Stock Exchange, and on the
New York Stock Exchange in the form
of American Depositary Shares.

The Code and associated
guidance are available on the
Financial Reporting Council
website at www.frc.org.uk

OverviewThe Strategic ReportGovernanceGovernanceFinancial statementsAdditional information

110

Chairman’s governance report

“

“This has been a landmark year for BT. I’m delighted
that we have a Board with the range of skills and
experience, to play an active role in delivering our
strategy.”

Firstly, I am delighted to welcome Mike Inglis who joined the Board
in September 2015. Mike’s insight and in-depth experience in
the technology industry will be a great asset for BT and the Board.
Mike is also a member of the Technology Committee. I’m also
pleased to welcome Tim Höttges (CEO of Deutsche Telekom) who
we appointed to the Board, as a non-independent non-executive
director, on completion of the EE acquisition in January 2016.

We announced in March that Tony Chanmugam will be stepping
down from his role as Group Finance Director and from the Board
in July 2016. Tony will move to a short-term role continuing to
integrate EE into the group, before leaving later in the year.

Tony has delivered strong results during his career at BT and I’d like
to thank him for his tremendous hard work and commitment over
the years.

We are delighted that Simon Lowth will join the company in July
as our new Group Finance Director, and a member of the Board.
Simon brings a wealth of experience to BT; strong organisational
leadership and engineering experience at leading infrastructure
companies, as well as his strong financial acumen.

I continually review the membership of the Board and its range
of skills. We look to appoint outstanding candidates with a diverse
mix of experience, as we recognise the importance of diversity in
its widest sense in Board effectiveness. At the moment we have
27% female representation on the Board.

This has been a very full year for BT with a number of major
developments and some big decisions. It has been another very
busy year for Board members who have made themselves available
to support and engage with the management team, as and
when needed. The Board has played an active role, particularly
in relation to the acquisition of EE and the synergies and financial
elements underpinning the deal, as well as the integration of EE
into the group.

As well as our forward programme of key items, updates from
each line of business CEO and updates on customer service, this
year we had in-depth discussions on EE integration, BT TV and
BT Sport. You can read more about what we have done on pages
114 to 117.

Following last year’s triennial external Board evaluation, for
2015/16 the Company Secretary and I carried out a Board
evaluation. We discussed the report in June and noted that, overall,
the results were positive. We also identified a number of areas of
focus; you can find our actions in these areas on page 117.

We keep our governance framework under review to ensure it
enhances the Board’s ability to exercise proper oversight. We
implemented some changes for EE coming into the group which
include establishing a new Integration Committee of the Board.
You can read more about these new aspects of governance on
page 115.

The changes in the Financial Reporting Council’s updated UK
Corporate Governance Code are effective for 2015/16. We report
against these new requirements in the following pages.

We also engage in relevant consultations as they take place as part
of the wider governance debate.

I want to thank all members of the Board for their support this year
and I believe the Board has the right range and mix of skills and
experience to keep delivering and developing our strategy.

Sir Michael Rake
Chairman
4 May 2016

BT Group plc Annual Report 2016111

How we govern the group
Our governance structure

The Board

The Board is ultimately
responsible for the management
of the group; the group’s
strategy; overseeing the group’s
performance; and discharging
certain legal responsibilities.
The Board delegates day-to-
day responsibility to executive
management and certain things
to a number of Board committees.
But there are a number of matters
reserved to the Board.

You can read about the Board’s
activities and how it has applied
governance effectively during
the year on page

114

Audit & Risk Committee
The Audit & Risk Committee is responsible for financial and narrative reporting,
internal controls and risk management including core compliance programmes and
non-financial assurance, internal audit and external audit.

Read more on page

118

Nominating & Governance Committee
The Nominating & Governance Committee makes sure that the Board has an
appropriate balance of skills and experience, independence and knowledge of the
group. It also oversees and monitors BT’s governance framework.

Read more on page

122

Remuneration Committee
The Remuneration Committee agrees the framework for the remuneration of the
Chairman, executive directors and certain senior executives.

BT Pensions Committee
The BT Pensions Committee principally focuses on oversight of the BT Pension
Scheme (BTPS).

Committee for Sustainable and Responsible Business
The Committee for Sustainable and Responsible Business provides strategic
oversight of the direction of BT’s activities as a sustainable and responsible business.

Technology Committee
The Technology Committee agrees the development and implementation of BT’s major
technology connection strategies.

Read more on page

128

Read more on page

125

Read more on page

126

Read more on page

127

Equality of Access Board
The Equality of Access Board (EAB) monitors, reports and advises BT on its compliance
with the Undertakings given by BT to Ofcom. The EAB reports regularly to the Board
and publishes an annual report to Ofcom.

Find out more at
bt.com/eab

Operating Committee
The Operating Committee (OC) is the key management committee and makes
decisions on operational and other matters in accordance with the framework
established by the Board.

Read more on page

Conflicted Matters Committee
Following the appointment of Tim Höttges
to the Board, we have established the
Conflicted Matters Committee to review
all Board papers and agenda items, which
it believes could give rise to a Conflicted
Matter.

Integration Committee
The Integration Committee is a new
committee, which we created on
completing the EE acquisition, to provide
oversight and direction to the integration of
EE and BT.

115

Read more on
page 115

Security Committee
This committee is responsible for
governance and oversight of the assistance
we provide to government on the
Regulation of Investigatory Powers Act
and related matters. The members are
the Chairman, the Chief Executive, a BT
independent non-executive director, senior
technical, security and legal experts and a
specialist independent director.

Read more in BT’s Report
on Privacy at www.bt.com/
privacyandfreeexpression

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

112

113

Board of
Directors

1 Sir Michael Rake
Chairman
Appointed to the Board as Chairman in September 2007. Age 68.
Skills and experience
Sir Michael has financial, risk, international business and
professional services expertise gained during his time at KPMG
(1974 to 2007) where he was senior partner in the UK from
1998 and international chairman from 2002. He was knighted
in 2007 and is a former President of the Confederation of British
Industry.
Other appointments include
Chairman of Worldpay Group, International Chamber of Commerce
UK and Majid Al Futtaim Holdings and a director of McGraw Hill
Financial.

2 Gavin Patterson
A
Chief Executive
Appointed Chief Executive in September 2013 and joined the
Board in June 2008. Age 48.
Skills and experience
Gavin has experience in sales, marketing, technology and
operations. He was previously CEO, BT Retail and from 2004 to
2008 was Managing Director, BT Consumer, BT Retail. Before
joining BT, Gavin was managing director of the consumer division
of Telewest (now Virgin Media). He spent nine years at Procter &
Gamble, rising to become European marketing director.
Other appointments include
Non-executive director of British Airways and a member of the
CBI President’s Committee.

3 Tony Chanmugam
Group Finance Director
Appointed to the Board as Group Finance Director in December
2008. Age 62.
Skills and experience
Tony has experience in finance, risk and the management and
delivery of large contracts. He was formerly CFO, BT Retail;
Managing Director, BT Enterprises and, from 1997 to 2004, he
was CFO and then Chief Operating Officer of BT Global Solutions.
He qualified as a Chartered Management Accountant.
Other appointments include
Race for Opportunity advisory board member.

D H

4 Tony Ball
C
Independent non-executive director
Appointed to the Board in July 2009. Age 60.
Skills and experience
Tony brings international business expertise in addition to financial,
operational, sales and marketing experience. From 1999 to 2003
Tony was chief executive of BSkyB and until 2013 chairman of
Germany’s largest cable operator, Kabel Deutschland Gmbh. He
has held a number of senior executive positions in broadcasting
and telecoms businesses in the UK, US and Continental Europe.
Other appointments include
Senior adviser to Providence Equity Partners, chairman of the
advisory council of Portland PR and a director of Gym Topco.

5 Iain Conn
B
Independent non-executive director
Appointed to the Board in June 2014. Age 53.
Skills and experience
Iain has significant international experience, and understanding
of technology and energy markets. Iain joined Centrica as chief
executive in January 2015 having been with BP since 1986.
From 2004 to 2014 Iain was executive director of BP and chief
executive downstream from 2007 to 2014. Until May 2014, Iain
was a non-executive director of Rolls-Royce for nine years, and
senior independent director.
Other appointments include
Member of the CBI President’s Committee, chairman of the
advisory board of the Imperial College Business School and
member of the Imperial College Council.

6 Tim Höttges
Non-independent, non-executive director
Appointed to the Board in January 2016. Age 54.
Skills and experience
Tim has international telecoms experience having been CEO of
Deutsche Telekom since January 2014, and with the company
since 2006. He joined the board in 2009 having been a member
of the board of management responsible for the fixed-network
and broadband business as well as integrated sales and service in
Germany.
Other appointments include
Chairman of T-Mobile US and supervisory board member of
FC Bayern Munchen AG.

7 Isabel Hudson
Independent non-executive director
Appointed to the Board in November 2014. Age 56.
Skills and experience
Isabel has experience in the financial sector as well as pensions,
risk, control, governance and international business. Isabel was
previously a non-executive director of The Pensions Regulator,
MGM Advantage, QBE Insurance and an executive director of
Prudential Assurance Company in the UK.
Other appointments include
Chair of National House Building Council. Director of Phoenix
Group Holdings and Standard Life. Isabel is an ambassador for
the disability charity, SCOPE.

8 Mike Inglis
Independent non-executive director
Appointed to the Board in September 2015. Age 56.
Skills and experience
Mike’s technology experience includes serving on the board of
ARM Holdings from 2002 to 2013, as well as roles including
chief commercial officer, executive vice president and general
manager of the processor division and executive vice president
of sales and marketing. Prior to joining ARM, Mike worked in
management consultancy with AT Kearney and held a number of
senior operational and marketing positions at Motorola. Mike was
previously a director at Pace.
Other appointments include
Non-executive chairman of Ilika and a director of Advanced Micro
Devices.

9 Karen Richardson
H
Independent non-executive director
Appointed to the Board in November 2011. Age 53.
Skills and experience
With a career over 30 years in the technology and software
industry, Karen brings experience in technology having held a
number of senior operating roles in both the public and private
technology sector. She is a former adviser to Silver Lake Partners,
was with NASDAQ-listed software company Epiphany Inc, latterly
as chief executive and has served on a number of corporate boards
including VirtuOz, Proofpoint, Hi5 Networks and Convercent.
Other appointments include
Director of HackerRank, Exponent and AYASDI.

10 Nick Rose
B
Independent non-executive director
Appointed to the Board in January 2011 and Senior Independent
Director since March 2014. Age 58.
Skills and experience
Nick brings experience in finance, risk, control, governance and
international business expertise. He was chief financial officer of
Diageo prior to his retirement in December 2010, having joined
the board in 1999.
Other appointments include
Chairman of Williams Grand Prix Holdings, senior independent
director of BAE Systems and non-executive chairman of Loch
Lomond Scotch Whisky. Adviser to CCMP Capital.

11 Jasmine Whitbread
Independent non-executive director
Appointed to the Board in January 2011. Age 52.
Skills and experience
Jasmine has experience in transforming large complex
organisations in the UK and internationally and brings an
understanding of corporate social responsibility and sustainable
business. She was previously chief executive of Save the Children
International and has a background in technology marketing.
Other appointments include
Non-executive director of Standard Chartered.

Dan Fitz
Company Secretary
Dan is the Group General
Counsel & Company Secretary
of BT Group plc. He joined
BT in April 2010 as Group
General Counsel and was
appointed Company Secretary
in November 2012. Dan
previously spent six years at
Misys and 12 years at Cable
& Wireless. Age 56.

Key to membership of Board committees

Operating

Audit & Risk

Remuneration

Nominating & Governance

Sustainable and Responsible Business

BT Pensions

Technology

Equality of Access Board

Integration

BT Group plc Annual Report 2016OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information114

The Board

Who we are
You can read about the Board directors and the skills and
experience they each bring to the Board on pages 112 and 113.

The Board consists of: the Chairman, the Chief Executive, the
Group Finance Director, seven independent non-executive
directors (including the Senior Independent Director) and one
non-independent, non-executive director. It is supported by the
Company Secretary.

The roles of the Chairman and the Chief Executive are separate.
They are set out in written job descriptions which provide clear
distinct responsibilities for each role.

Mike Inglis joined the Board on 1 September 2015. We also
appointed Mike as a member of the Technology Committee.

Tim Höttges joined the Board as a non-independent, non-
executive on 29 January 2016. Tim was nominated by Deutsche
Telekom under the terms of the Relationship Agreement between
BT and Deutsche Telekom, effective from completion of the
acquisition of EE. (The main terms of the Relationship Agreement
are on pages 257 to 259.)

Following the Nominating & Governance Committee’s
recommendation, we approved the extension of the appointment of
Tony Ball on the expiry of his second three-year term.

The Board included a majority of independent non-executive
directors throughout the year. We viewed the Chairman as
independent at the time of his appointment, and consider all of the
other non-executive directors to be independent under the terms
of the Code, with the exception of Tim Höttges.

You can read about the roles of the Board members and the
Company Secretary below.

The Chairman
The Chairman’s role is to:

• lead the Board with a culture of openness, debate and

appropriate challenge;

• promote the highest standards of corporate governance;
• ensure that the Board determines the nature and extent of the
significant risks BT is willing to take in implementing its strategy;

• make sure that the Board receives accurate, timely and clear
information and is consulted on all matters important to it;
• monitor the contributions and performance of the Board

members;

• make sure that BT maintains effective communication with

shareholders and communicate their views and concerns to the
Board; and

• be a key contact for important stakeholders and, together with
the Chief Executive and Senior Independent Director, represent
BT in key strategic and government relationships.

The Chief Executive
The Chief Executive’s role is to:

• lead the group’s performance and management;
• propose strategies, business plans and policies to the Board;
• implement Board decisions, policies and strategy;
• develop and promote compliance with BT’s policies on conducting

business globally;

• maintain an effective framework of internal controls and risk

management;

• lead the Operating Committee in the day-to-day running of the

business end to end; and

• lead, motivate and monitor the performance of BT’s senior

management team, and focus on succession planning for roles
on the Operating Committee.

The Independent Non-Executive Directors
An independent non-executive director’s role is to:

• bring experience and independent judgement to the Board; and
• challenge constructively and help develop proposals on strategy.

The Senior Independent Director
The Senior Independent Director is an independent non-executive
director whose role is to:

• meet with BT’s major institutional shareholders and shareholder

representative bodies when requested and, if necessary, to
discuss matters with them where it would be inappropriate for
those discussions to be with either the Chairman or the Chief
Executive;

• act as a sounding board for the Chairman and as an intermediary
between the other directors and the Chairman when necessary;
and

• review the Chairman’s performance during the year taking

account of feedback from other Board members.

The Non-Independent, Non-Executive Director
On completion of the acquisition of EE, we appointed Deutsche
Telekom's nominated director to the Board. The director owes a
fiduciary duty to both the Company and to Deutsche Telekom.
The non-independent, non-executive director has the same
responsibilities as the other directors and a Conflicted Matters
Committee has been established to identify potential or actual
conflicts of interest. You can read more about this committee on
page 115.

The Company Secretary
The Company Secretary’s role is to:

• manage the provision of timely, accurate and considered

information to the Board;

• recommend corporate governance policies and practices to the

Chairman and the Chief Executive;

• implement and communicate corporate governance policies

across the group; and

• advise the Board and its committees on corporate governance
and compliance in the group, and appropriate procedures for
managing their meetings and duties.

The Company Secretary’s appointment and removal is a matter for
the whole Board.

What we have done
The Board is responsible for the group’s strategy and for overseeing
the group’s performance, but delegates day-to-day responsibility
to executive management. But there are a number of matters
reserved to the Board. These include matters relating to the group’s
strategy, approving major acquisitions (for example, this year’s
acquisition of EE), oversight and control, growing shareholder value
and corporate governance.

BT Group plc Annual Report 2016
115

Conflicted Matters Committee (CMC)
The CMC is chaired by the Company Secretary. It is responsible
for assessing whether and to what extent Board meetings
and Board papers are likely to consider or refer to a conflict
of interest between the Company and DT or their respective
affiliates. The committee considers both actual and potential
conflicts of interest; these include matters in which BT and DT
or their respective affiliates are considered competitors. The
CMC assists the non-independent, non-executive director
in complying with his fiduciary duties (although ultimate
responsibility rests with him), supports good governance and
protects the group’s competitively sensitive information.

Where a conflict arises the non-independent, non-executive
director will not be given access to documents or information
made available to the Board in relation to such a matter and
shall absent himself from any related Board discussion.

Integration Committee
The Integration Committee will oversee and monitor the
integration of the mobile business of EE, including to receive
assurance that:

• revenue and cost synergy targets are being met;
• integration activities are consistent with preserving EE's tax

losses;

• a new fit for future organisation and operating model is being

built at pace;

• plans are in place as part of integration to improve customer

experience; and

• cultural integration is on track.

The Chief Executive chairs the committee and Tony Ball, Tony
Chanmugam and Nick Rose are members. Thomas Dannenfeldt
of DT is also a member.

We reviewed our Board committee structure and approved changes
to some committees’ terms of reference.

The chart below shows how the Board allocated its time. A number
of these areas are also considered by the Board committees.

Allocation of time

1%
Other
5%
People, health & safety

18%
Governance,
risk & audit

34%
Business &
CEO updates

19%
Finance & investor relations

23%
Strategy

The Board has a forward programme of business to ensure that it
allocates sufficient time to key areas and that the programme is flexible
enough for items to be added to any particular agenda as necessary.

The Board’s annual programme included:

• Chief Executive’s reports
• Financial reports
• Strategy
• Line of business updates
• Risk management
• Dividend policy
• Investor relations
• Health, safety and well-being

• Succession planning
• Board evaluation
• Regulation
• Governance and compliance
• Approach to tax
• Annual Report & Form 20-F
• Group communications overview
• Customer service

During 2015/16, we also had in-depth discussions on the
acquisition and integration of EE, BT TV and BT Sport.

We visited BT’s Research & Development headquarters at Adastral
Park to review the areas of innovation of strategic importance to
the company.

EE
The Board has particularly focused on the acquisition of EE
and continued to play an active role in reviewing the synergies
of the acquisition and the financial elements underpinning the
deal, as well as the integration of EE into the group.

Under the Relationship Agreement entered into by the company
and Deutsche Telekom (DT) we were required to establish a
Conflicted Matters Committee and an Integration Committee.

112

Find out more:
You can see our Board members on page 112

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information116

Director election and re-election
We appointed Mike Inglis and Tim Höttges as directors after the
last AGM, so they will retire at the 2016 AGM and be proposed for
election as required by BT’s Articles of Association. Simon Lowth
(appointed to the Board with effect from 12 July 2016) will also
be proposed for election. All of the other directors (apart from Tony
Chanmugam) will be proposed for re-election by shareholders at
the AGM in accordance with the Code.

Length of appointment of Chairman and non-executive directors

Sep 2007

Jul 2009

Jan 2011

Sir Michael Rake

Tony Ball

Jasmine Whitbread

Nick Rose

Nov 2011

Karen Richardson

June 2014

Nov 2014

lain Conn

Isabel Hudson

Sep 2015

Mike Inglis

Jan 2016

Tim Höttges

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Calendar year

We include details of all directors’ contracts/letters of appointment
in the Report on Directors’ Remuneration.

Attendance at Board meetings
The following table shows each director’s attendance at meetings
of the Board during the financial year. The Chairman meets
privately with the independent non-executive directors before
each scheduled Board meeting. We encourage directors who are
unable to attend a meeting to give the Chairman their views and
comments on matters to be discussed, in advance.

Board members

Member

Eligible to attend

Attended

Meetings

Sir Michael Rake (Chairman)

Gavin Patterson

Tony Chanmugam

Tony Ball

Iain Conn
Warren Easta

Phil Hodkinsonb

Tim Höttgesc

Isabel Hudson

Mike Inglisd

Karen Richardson

Nick Rose

Jasmine Whitbread

a Warren retired from the Board on 31 May 2015.
b Phil retired from the Board on 31 January 2016.
c Tim was appointed to the Board from 29 January 2016.
d Mike was appointed to the Board from 1 September 2015.

The Chairman reviews the level of attendance and contribution by
directors at Board meetings, as well as their performance. During
the year, he met with each director individually to review their
performance and considers that each of them continues to make
an effective contribution to the Board debate across a wide range
of issues and demonstrates commitment to the role.

Nick Rose reviewed and discussed the Chairman’s performance
during the year, taking into account feedback from other Board
members.

The Senior Independent Director and the independent non-
executive directors discussed Sir Michael Rake’s contribution
as Chairman, and succession in light of his nine years in the
role. Taking into account the Chairman’s performance and his
role with the Chief Executive, who is relatively new to the role,
they concluded that Sir Michael should continue until at least
September 2017. The process to find a successor for the role
would begin in due course.

Board induction
On appointment, directors take part in an induction programme
to increase their knowledge and understanding of the business.
They receive information about BT including financial data and the
key policies supporting BT’s business practices. We also give new
directors details on: the role of the Board, its terms of reference,
membership of the main Board committees and the matters
reserved for decision by the Board, the Board committees or BT’s
most senior executives. Below is a summary of what Mike Inglis’s
induction programme involved.

Induction for Mike Inglis
Following our announcement in August 2015 of Mike
Inglis’s appointment to the Board, Mike has undertaken a
comprehensive induction programme. This has included:

• meeting each line of business CEO to gain a good
understanding of their business and challenges;

• speaking to other senior executives across a range of

functions, such as finance, investor relations, media/corporate
officers, security and human resources;

• a visit to BT’s research laboratories at Adastral Park, BT’s
Newcastle and Sheffield (Plusnet) contact centres and
Openreach’s Ethernet team to see customer service operations
first-hand; as well as the BT Sport studio; and

• reviewing BT policies on anti-bribery and corruption, gifts and
hospitality, charitable donations, corporate sponsorship and
The Way We Work.

Mike will continue to gain an insight into a range of our areas
of business.

“The BT induction programme has been the most
comprehensive of any company I have joined as a director. The
BT team have a very structured induction programme but are
also very open to requests I have made to see specific sites and
people. Our Chief Executive has a very transparent approach to
non-executive directors and gives the Board open access across
the organisation.”

Mike Inglis

BT Group plc Annual Report 2016Training and information
We encourage all directors to update their skills and knowledge
and the Board and individual directors receive ongoing training as
required. The Chairman also reviews with each director any training
or development they need to help them in performing their role.
And directors receive briefings to enhance their awareness of the
different aspects of the business. The Chief Executive regularly
provides information on the business in his report to the Board
which can include: updates on operational matters, the competitive
and regulatory environment and other changes affecting the
group and the wider communications industry, group and line of
business performance, strategy, investor relations and corporate
responsibility. The Chairman also provides a weekly written update
to the non-executive directors on key business activities, high level
meetings, regulation and relevant sector highlights.

The Company Secretary provides briefings during the year
on any significant developments in legal, governance and
compliance areas. We also hold Board seminars during the year
covering accounting, governance and compliance, and reporting
developments.

117

Board evaluation
The Chairman and Company Secretary carried out a Board
evaluation in 2015 through an electronic questionnaire. We
discussed the resulting report in June and noted that, overall,
the results were positive. We also identified a number of areas
of focus and highlight our actions in the table below.

The table below shows progress against the main actions:

Key areas

Actions

Strategy and long-term vision

Time devoted to developing and
our long-term vision

Knowledge to help inform our
strategy, such as competitor
analysis and market insight

Customer perception

A better understanding of our
customers’ needs and how they
see us

Executive succession planning

Better visibility of senior
management to help inform
succession planning

Integration of EE and group
strategy for the enlarged group

Along with the Board strategy day
in March, we have continued to
dedicate time to strategy items
at Board meetings and dinners
throughout the year. Our Group
Director Strategy, Policy and
Portfolio has presented regularly
to the Board.

We received independent external
presentations to address this.

As part of our regular reviews
of customer service, we agreed
a revised customer experience
strategy, which gives us better
insight into customer perception
and how we are seen compared to
our competitors.

We continue to invite independent
non-executives to attend Talent
Breakfasts and Chairman’s dinners
with potential successors to the OC
and other key roles.

The Board has been updated
on integration plans and a new
Integration Committee has been
established, chaired by the Chief
Executive. More details can be
found on page 115.

124

We have begun the Board’s evaluation for 2016/17. This is being conducted internally by electronic questionnaires. Further details on this
evaluation process are on page 124.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information118

Reports of the
Board committees
Audit & Risk Committee

On behalf of the committee I would like to thank Paul for his
contribution over the years.

Chairman’s report

“

“The committee has continued to pay particular
attention to two aspects of our IT environment,
namely data security and cyber security. These areas
present an ever-increasing threat for all companies.
New areas of focus for us this year included
the acquisition and integration of the EE mobile
business and review of our regional governance
and compliance programmes.”

Who we are
I chair the Audit & Risk Committee. Our membership and meeting
attendance during the year are set out opposite. The diverse
backgrounds of the committee members and their combined skills
and experience enable us to fulfil the committee’s remit, as set out
in its terms of reference.

We regularly meet with external experts to keep ourselves fully
aware of market best practices.

Although they aren't members of the committee, the Company
Secretary, Group Finance Director, Deputy Finance Director,
Director Group Financial Control and Director Internal Audit attend
each meeting as does the lead audit partner and representatives
from our external auditors. I meet with this group ahead of the
meetings to review key areas for discussion with the committee.
The external auditors are not present when we discuss their
performance and/or remuneration.

Our lead external audit partner Paul Barkus will rotate after this
year-end audit and be replaced with Richard Hughes. I met with
Richard prior to his appointment and he has also met with other
committee members.

The Board has agreed that I have recent and relevant financial
experience as required by the provisions of the Code and that
I constitute an ‘audit committee financial expert’ for the purposes
of the Sarbanes-Oxley Act.

After each meeting, I report to the Board on the main issues
that we discussed.

Committee members

Member

Eligible to attend

Attended

Meetings

Nick Rose (chairman)

Iain Conn

Warren Easta

Karen Richardson

Jasmine Whitbread

a Warren retired from the committee on 31 May 2015.

What we have done
We met eight times during the year to reflect the increased focus
of the committee for the oversight of certain non-financial risks
which the Board agreed should transfer from the Nominating &
Governance Committee to the Audit & Risk Committee with effect
from April 2015.

We set time aside at each meeting to seek the views of the internal
and external auditors in the absence of management.

Allocation of time

18%
External audit matters

13%

Internal audit matters

24%
Governance and compliance

22%

Financial matters

23%

Risks and controls

BT Group plc Annual Report 2016
119

Goodwill impairment
We reviewed management’s process and methodology for assessing
the carrying value of goodwill. We also considered the cash flow
forecasts for the group’s cash generating units (CGUs) that hold
goodwill, being BT Global Services, BT Business, BT Consumer and
EE. We considered the key assumptions, resulting headroom and
the sensitivities applied by management in forming its assessment
that no goodwill impairment charges were required. We agreed
with management’s assessment that there was no impairment of
goodwill this year. We also discussed and agreed with management’s
disclosures in respect of the headroom in BT Global Services in note
12 to the financial statements.

The external auditors discuss the key judgements and assumptions
used in the impairment tests with the committee and provide us with
their own report.

Accounting for the EE acquisition
We received a paper from management setting out the process
and outcomes of the purchase price allocation exercise and the
assessment of goodwill following the acquisition of EE. Management
highlighted key areas of judgement and risk and the governance
around the review of the fair value assumptions. We reviewed the key
judgements made on intangible assets which include: customer and
MVNO relationships, spectrum, brand and software. We noted that
there were no significant issues on impairment.

BT Pension Scheme (BTPS)
We reviewed the assumptions underlying the valuation of the
pension liabilities in the financial statements and considered the
financial assumptions including the discount rate, future inflation,
salary increase expectations and pension increases as summarised in
note 20 to the financial statements. We also considered sensitivities
around the assumptions and reviewed the accounting impacts, as
well as the impact of the assumptions on the 2015/16 and 2016/17
income statements and the related disclosures. We were satisfied
that these were appropriate.

Revenue, including major contracts
In addition to our review of the appropriateness of accounting
policies, management provided regular updates on the performance
of major contracts within BT Global Services. This included an
overview of the trading and operational performance of the
contracts, contract risk management, governance, controls and
processes, the assessment of the future performance of the contracts
and any requirement for loss provisions.

Asset verification and asset lives
We considered the results of management’s annual review of
asset lives, verification of assets and fully depreciated assets. We
considered the judgements taken in relation to asset lives and the
methodology applied to consider asset verification. We were satisfied
that the proposed adjustments were appropriate.

Other matters
Each quarter, as part of our review of the quarterly results, we are
provided with a summary of specific items and management’s view
of the quality of earnings and of the effective tax rate. At the half-
year and full-year, a detailed assessment of provisions is also provided
and discussed. In each quarter and for the full year, the committee
was satisfied with the information, analysis and explanations
provided in relation to the results.

The committee has an annual work plan. This includes standing
items that we consider regularly, in addition to any specific
matters that need the committee’s attention and topical items on
which we chose to focus. In 2015/16 for example, we reviewed
the accounting for EE and the BDUK regional fibre deployment
programme, privacy and data governance and cyber security.
We also asked management to provide us with greater
detail on overseas contract management, deferred costs in BT
Global Services contracts and ‘Speak Up’ – BT’s whistleblowing
confidential hotline.

Activities during the year

Financial reporting
We:

• reviewed the Annual Report & Form 20-F, together with

annual, half-year and quarterly results announcements for
recommendation to the Board;

• considered updates to the UK Corporate Governance Code and
its application to the Annual Report, including compliance with
the provisions for the robust assessment of risk and the viability
statement; and

• considered the Annual Report in the context of advising the

Board that the Annual Report, taken as a whole, is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the group's position and performance,
business model and strategy.

The significant issues we considered in relation to the financial
statements for the year ended 31 March 2016 are set out below. We
have discussed these with the external auditors during the year.

Group accounting policies, critical accounting estimates and
judgements
We reviewed the accounting policies, the updates made to reflect
the acquisition of EE including the consistency of accounting policies
between BT and EE, and the disclosures in note 2 to the consolidated
financial statements that relate to critical accounting estimates and
judgements, and confirmed they are appropriate for the group.

Going concern
We considered management’s forecasts of group cash flows and
net debt as well as the financing facilities available to the group.
Following this review, which took into account the acquisition of
EE and the related impact on our forecasts, and a discussion of
the sensitivities, we confirmed that it continues to be appropriate
to follow the going concern basis of accounting in the financial
statements. Further detail on the basis of the going concern
assessment by the directors is set out on page 149.

Viability statement
We received a paper from management setting out BT’s obligations
to include a viability statement in the Annual Report. We endorsed
the selection of a three year time horizon as a basis for the statement
and the approach to its development. Further detail on the
assessment of viability and the viability statement are set out on
page 54.

Regulatory reporting
We noted the requirement for BT to publish its Regulatory Financial
Statements and a new Reconciliation report by 31 July 2015. There
were delays in the preparation process of the Reconciliation report
and management are implementing changes across people, processes
and systems in order for us to meet our 2015/16 regulatory
compliance obligations.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information120

External audit
We:

• considered and approved the auditors’ group audit plan – this
followed discussion with the auditors on the scope of the work
to be undertaken as well as their consideration of risk informing
their plan;

• reviewed reports on external audit findings; and
• considered and approved the letter of representation issued to

the external auditors.

The committee and the external auditors have discussed the issues
addressed by the committee during the year and the areas of
particular audit focus, as described in the Independent Auditors’
Report on pages 158 to 163.

Management reported to the committee that they were not aware
of any material misstatement and the auditors also reported the
misstatements they had found in the course of their work. The
committee confirmed that these unadjusted misstatements were
not material to the financial statements.

PricewaterhouseCoopers (PwC) have audited EE for the purposes
of the consolidated financial statements at 31 March 2016 and
will be appointed as statutory auditors of EE Limited and
its subsidiaries.

Audit tender
PwC and its predecessor firms have been BT’s auditors since
BT listed on the London Stock Exchange in 1984. Their
reappointment has not been subject to a tender in that time.
The external auditors are required to rotate the lead partner every
five years and other partners who are responsible for group and
subsidiary audits must change at least every seven years. Paul
Barkus will rotate after this year-end audit and Richard Hughes will
take over as lead partner.

The committee considers its recommendations to the Board on
the appointment and reappointment of auditors annually, and
specifically has responsibility for establishing formal and transparent
arrangements with PwC. The committee has reviewed the
timetable for tendering, taking into account all relevant regulation
and guidance and having regard to the following:

• the group is undergoing a period of significant business change
through the integration of EE, our organisational restructuring
and transformation programmes. A measured rotation timetable
maintains stability in the independent oversight provided by
the external auditors and maximises efficiency and effectiveness
while the business fully implements the changes; and

• BT draws on expertise from other accounting firms and therefore
a rotation of external audit services will require careful planning
of transition periods to ensure that all services are fully contracted
throughout the rotation process and that the incoming auditor is
independent.

In light of the above, the committee proposes to tender the audit
no later than 2019 with the new auditors appointed no later than
for the financial year commencing on 1 April 2020. However,
the committee keeps the external audit arrangements under
annual review and may elect to accelerate the planned
appointment of new auditors if appropriate, for example
for service quality or independence reasons.

The company confirms that it complied with the provisions of the
Competition and Markets Authority’s Order for the financial year
under review.

Auditor effectiveness
We discussed the quality of the audit throughout the year
and consider the performance of our external auditors,
PricewaterhouseCoopers, annually, taking into account feedback
from a survey targeted at various stakeholders across the business
and the committee’s own assessment. The evaluation focuses
on: robustness of the audit process, quality of delivery, reporting
and people and services. The external auditors’ performance was
considered to be on par or improved on the prior year and the
relationship with management is viewed as robust, collaborative
and transparent. We concluded they were independent and
recommended they be re-appointed by the Board.

Independence and objectivity
BT’s agreed policies on what non-audit services can be provided
by the external auditors and the relevant approval process were
updated during the year. The external auditors are not permitted
to perform any work which they may be later required to audit or
which might affect their objectivity and independence or create a
conflict of interests. There are internal procedures in place for the
approval of work given to the external auditors.

We monitored compliance with the agreed policies and the
level of non-audit fees paid to the auditors in order to satisfy
ourselves that the types of services being provided and the fees
incurred were appropriate. You can see details of non-audit
services carried out by the external auditors in note 7 to the
consolidated financial statements. In this context audit-related
assurance services are considered to pose a low threat to auditor
independence and therefore the proportion of other non-audit
services to total services is considered the most suitable measure
of the non-audit services provided. These represented 26% of the
total fees (2014/15: 33%). In the past two years, the Reporting
Accountants work performed by the external auditors in relation
to the acquisition of EE and its subsidiaries has increased the non-
audit fees compared to prior years. Additionally in 2015/16, the
EE acquisition has resulted in incremental audit fees. Further details
of the non-audit services that are prohibited and allowed under
the policy can be found in the corporate governance section of the
BT website.

The committee is satisfied that the overall levels of audit and
non-audit fees are not material relative to the income of the
external auditors as a whole and therefore that the objectivity
and independence of the external auditors was not compromised.

BT Group plc Annual Report 2016121

Governance and compliance
We were briefed on:

• ethics and compliance and strategic priorities for 2015/16;
• the US safe harbour ruling and European general data protection

regulation;

• ‘Speak Up’ cases, outcomes, statistics and trends (including the
confidential, anonymous submission by employees regarding
accounting, internal accounting controls or auditing matters.
We ensure that arrangements are in place for the proportionate,
independent investigation and follow up of these matters); and

• the work of several of our Regional Governance Committees

which monitor governance and compliance in their respective
regions.

Committee review
We review our performance annually by inviting members,
key executives and the external auditors to complete online
questionnaires. The results show that the committee has
performed effectively. Areas of focus during 2016/17 will
include the integration of EE, associated risks and alignment of
controls to BT standards, overseas entities and the regulatory
financial statements.

Nick Rose
Chairman of the Audit & Risk Committee
4 May 2016

Internal audit
We monitor and review the effectiveness of internal audit and
in April 2015, we endorsed the internal audit plan of work. This
integrates the assurance requirements for the internal financial
controls testing programme, the group’s overseas footprint, and the
group’s risk assurance mapping. It includes coverage of static and
dynamic risks. Key areas of focus across the plan included financial
management and controls, customer service, revenue assurance
and billing, procurement and supplier contract governance, major
contracts for networked IT services and data compromise, privacy
and protection including cyber security.

We receive regular reports from the internal auditors.
We monitored management’s responsiveness to the findings and
recommendations and discuss with them the action required
to bring matters to resolution.

At the end of the year we received a report on the performance of
internal audit. During the year audit teams have been established
in Hungary and Hong Kong, whilst in India and LATAM we have
increased the teams to reflect BT’s increasing operations in those
regions.

Internal controls and risk management
BT has in place an internal control environment to protect the
business from material risks which have been identified within the
group. Management is responsible for establishing and maintaining
adequate internal controls over financial reporting and we have
responsibility for ensuring the effectiveness of these controls.
To enable us to do this, each quarter the lines of business certify
compliance with the Financial Reporting Council's risk management
guidance and Sarbanes-Oxley controls. The outcomes of these
reviews are reported to us and no significant weaknesses were
identified in the annual review.

BT’s risk management processes which have been in place
throughout the period under review identify and monitor the
risks facing the group. The risks which are considered material are
reviewed regularly by the Operating Committee and the Board.

During the year we heard from the Chief Executive on the
enterprise-wide risk management process and the key risks facing
the group as a whole. Each line of business CEO presented the key
risks in their part of the business as well as the actions they are
taking to address them.

We have continued to monitor our operations in Italy and progress
has been made to improve the control environment. We continue
to keep under review the current trends of security risks facing BT
and the progress made to manage these risks.

The Board is ultimately responsible for the group’s systems of
internal controls and risk management. You can find details of the
Board’s and our review of the group’s systems of internal control
and risk management on page 151.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information122

Nominating &
Governance Committee
Chairman’s report

What we have done
We met twice this year. This is fewer times than in previous years,
because the Board approved the transfer of oversight of certain
non-financial risks from the Nominating & Governance Committee
to the Audit & Risk Committee in April 2015.

The chart below shows how we allocated our time.

Allocation of time

5%
Other

29%

Governance
programmes

30%
Board membership and
succession

36%

Governance structure and
eﬀectiveness

Board membership and succession
Reviewing our succession plans and the composition of the Board
is essential. We want the composition of our Board to support
diversity in its widest sense. We want to attract Board members
with a diverse range of backgrounds who will contribute a wealth
of knowledge, understanding and experience of the communities
to whom BT provide services.

As part of our gender diversity policy, we aim to have at least 25%
female representation on the Board. With three female members
out of 11, we currently have 27% female representation. We
ensure that diversity is considered as part of any candidate shortlist
process drawn up by external search consultants. We will work
towards Lord Davies’s new target of 33% female Board
representation by 2020. You can read more about BT’s approach
to diversity on page 33.

“

“In preparation for our acquisition of EE, we
continued to focus on our Board composition and
succession plan, and reviewed our governance and
committee structures to help ensure the success of
our new organisation.”

Who we are
I chair the Nominating & Governance Committee at the request
of the Board. We make sure our Board has the right balance of
skills, experience, knowledge, diversity and independence from
its members. I do not take part in any discussion concerning the
selection and appointment of my successor.

Our members and their meeting attendance are set out below. The
Company Secretary attends our meetings, and where appropriate,
so does the Chief Executive.

Committee members

Meetings

We believe our Board composition is currently appropriate, but
we will continue to keep this under review.

Member

Eligible to attend

Attended

Sir Michael Rake (chairman)

Tony Ball

Iain Conn

Phil Hodkinsona

Isabel Hudsonb

Nick Rose

a Phil retired from the committee on 31 January 2016.
b Isabel was appointed to the committee from 1 August 2015.

In order to get the right balance of skills and knowledge on our
Board, we evaluate candidates against a skills matrix, and ask our
Board members to re-evaluate their own skills annually. Our skills
matrix covers the skills required for running a listed company;
knowledge and understanding of different customer sectors;
industry specific knowledge; stakeholder engagement; and
regional experience in different parts of the world.

Having reviewed a list provided by MWM Consulting, we concluded
that the proposed candidates did not have the appropriate
technology skills. I then met with Mike Inglis, who has strong
technology skills and is known to a former director. I recommended
that other members of the committee and the Board met with
Mike before we recommended his appointment to the Board in
July 2015. Mike joined on 1 September 2015, and brings a
decade of Board experience and strong technology expertise,
as well as commercial, operational and marketing experience.

BT Group plc Annual Report 2016
123

After reviewing our Board committees’ membership, we
recommended:

• Isabel Hudson should join the Nominating & Governance

Committee with effect from 1 August 2015; and

• Gunhild Stordalen should join the Committee for Sustainable and
Responsible Business as an independent member, with effect
from 1 January 2016.

We reviewed the proposed governance arrangements to be put in
place from the completion of the EE acquisition, and recommended
that the Board approve a new Reserved Power in relation to related
party transactions between BT and Deutsche Telekom.

Subject to completion of the EE acquisition we recommended that
the Board approve the terms of reference and appoint the
proposed members and chairs of the Integration Committee and
the Conflicted Matters Committee.

Governance programmes
This year, we discussed a review of BT’s governance operating
model and framework, recent improvements to the Delegation
of Authority framework, a project to clarify our governance and
compliance roles outside the UK, and external governance
developments on Board diversity and succession planning.

The aim of reviewing our governance framework is to ensure that
governance in BT is clear and simple, to align with our culture and
purpose. The review is ongoing; in December we endorsed the
proposed next steps, and discussed the proposal to amend the
terms of reference of our Regional Governance Committees to
expand their oversight of risk. We asked the Chief Executive, Group
Finance Director and Group General Counsel & Company Secretary
to decide if this was appropriate and if so, gave them the authority
to amend the terms of reference and seek endorsement from the
Operating Committee.

In BT’s non-UK operations, we have clarified our country managers’
accountability for a common set of governance and compliance
standards, and put in place a formal process to appoint new
country managers. As a result, country managers are reporting a
better understanding of their obligations. We are now focusing on
how to embed the principles into how we work, assessing the
capabilities and development needs of country managers, and
providing appropriate assurance to the Operating Committee.

As part of our acquisition of EE, Deutsche Telekom (DT) is entitled
to nominate an individual to be appointed as a non-independent,
non-executive director of BT. We considered DT’s nomination of Tim
Höttges as the DT representative to the Board and recommended
to the Chairman that he approve this nomination. Tim brings
relevant experience in mobile, financial control, corporate planning,
and mergers and acquisitions.

The appointments of Mike Inglis and Tim Höttges particularly
strengthen our industry specific knowledge and we believe the
Board has strong expertise in all areas of our skills matrix. We
agreed that the size and composition of the Board in light of the EE
transaction was appropriate and did not require a refresh. We will
keep this under review.

As well as the new appointments to the Board, we recommended
that Tony Ball’s appointment as an independent non-executive
director be extended by a further three-year term from 16 July
2015. This recommendation followed a thorough evaluation of
Tony’s performance, in line with the UK Corporate Governance Code
statement that any term beyond six years for a non-executive
director should be subject to a particularly rigorous review.

Tony brings international business expertise, in addition to financial,
operational, sales and marketing experience. Having held a number
of senior executive positions in broadcasting and telecoms
businesses, he has strong industry specific knowledge, and makes a
valuable and long-ranging contribution to the Board and the
committees of which he is a member.

We reviewed Tony’s other roles, and we do not believe that these
prevent Tony from making a full contribution as a BT Group plc
independent non-executive director. We were able to assure
ourselves that Tony continues to be independent in character and
judgement and that there are no conflicts of interest that could
affect his judgement.

All non-executive appointments can be terminated on three
months’ notice and are subject to automatic termination in the
event of a director not being elected or re-elected by shareholders
at the AGM.

In December, the committee supported the Chief Executive
entering into further discussions with Simon Lowth, as successor to
the Group Finance Director. Simon is one of the UK’s most
respected CFOs, known for driving cost transformation and
performance improvement programmes. I look forward to Simon
joining us in July 2016.

We also discussed succession plans for the Operating Committee,
and the appointment of five senior executives from EE.

Governance structure and effectiveness
We keep our membership of BT’s Board committees and
governance structure under constant review.

Following the establishment of the Technology Committee in
November 2014, we recommended a change to the terms of
reference to the Board. We recommended that there should be no
stipulated minimum number of members, but that the quorum of
two members should be retained, and should include at least one
non-executive member. The Board approved the change to the
terms of reference in June 2015.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information124

BT Group plc
Annual Report 2016

Committee evaluation 2015/16
As part of our internal Board review in March 2015, we evaluated
the effectiveness of the committee. Committee members, the
Chief Executive and the Group General Counsel & Company
Secretary completed an online questionnaire based on the
committee’s terms of reference.

We discussed the results of the questionnaire and agreed the
proposed actions in June. In December, we reviewed progress
against the action plan and we highlight our progress in key areas
in the table below:

Key areas

Actions

Succession planning for the Board and senior management

Board succession
planning, including the
next phase of non-
executive requirements

As our Senior Independent Director,
Nick Rose led a discussion on Chairman
succession at a breakfast meeting with the
independent non-executive directors in
July 2015.

Board evaluation 2016/17
We agreed to undertake the 2016/17 Board effectiveness
evaluation internally, using electronic questionnaires. The questions
will be largely the same as for 2015/16, so we can make a direct
comparison of results. These include a focus on Board composition
and expertise, the Board’s role in setting strategy, its understanding
of risks facing the Group, succession planning, and the
effectiveness of the Board committees.

Questionnaires for the Board and several committees were
circulated in March 2016, with the exception of the Audit & Risk
Committee, which completed its annual evaluation in December
2015. Board members and the Company Secretary have also
received separate electronic questionnaires to evaluate their own
individual contribution.

The Board will discuss the results of the evaluation at a future
Board meeting. The Chairman will also conduct one-to-one
interviews with directors on their performance and the Senior
Independent Director, Nick Rose, will conduct the annual
evaluation of the Chairman.

The Chief Executive led a discussion on
executive directors and senior management
appointments at the Board dinner in
January 2016.

Sir Michael Rake
Chairman of the Nominating & Governance Committee
4 May 2016

In December 2015, we reviewed the
current Board composition against our skills
matrix, and identified our skills priorities for
the next three years.

A review of BT’s governance framework is
underway. We discussed progress and next
steps at our meeting in December 2015.

Building a good
understanding of
executive succession
and senior management
positions

Board composition

Board skills matrix and
assessing our skills
priorities for the next
three years

Governance structure

Review of BT’s
governance framework
to assess whether BT
has a clear and simple
governance operating
model

125

39%
Risk management and
investment strategy

BT Pensions Committee
Chair’s report

Allocation of time

8%
Funding

BTPS administration

13%

Other

31%
Pensions legislation and
governance

“

“This year the committee has considered a broad
range of topics, including the impact of recent
financial market volatility and the positive impact
on the covenant that BT provides in support of
our pension schemes following the successful
completion of our acquisition of EE.”

Who we are
I chair the BT Pensions Committee. Our role includes responsibility
for BT’s interactions with the Trustee of the BT Pension Scheme
(BTPS). The BTPS is a defined benefit pension plan with over
300,000 members. It pays out over £2bn a year in benefit
payments and has liabilities of around £50 billion.

I would like to welcome Alison Wilcox who joined the committee
during the year. I would also like to thank Phil Hodkinson, who
stepped down on leaving BT on 31 January, for his contribution
to the committee’s work. Our membership and meeting attendance
are set out below.

Committee members

Member

Isabel Hudsona (chair)

Tony Chanmugam

Phil Hodkinsonb

Sir Michael Rake

Alison Wilcoxc

Meetings

Eligible to attend

Attended

a Isabel was appointed chair from 1 February 2016.
b Phil was chairman until he left BT on 31 January 2016.
c Alison was appointed to the committee from 1 July 2015.

Further information
You can find more details about BT’s retirement benefit plans
in note 20 to the accounts.

What we have done
We met five times during the year, including a joint meeting with
the BTPS Trustee. The chart opposite shows how we allocated
our time.

BT management also provides regular updates on BT’s performance
and strategy at BTPS Trustee meetings and holds additional sessions
with the Trustee Board. During the year, this included presenting
to the Trustee on the acquisition of EE and developments in relation
to Ofcom’s Strategic Review of Digital Communications.

Areas of work
Some key areas of work carried out in the year are set out below:

• Risk management and investment strategy: we reviewed the
risks posed to BT by the BTPS and discussed potential alternative
risk management strategies, including different approaches to
investment.
At each meeting we reviewed the investment performance
and risk associated with the BTPS. For the pension scheme’s
accounting year to 30 June 2015, the investment return was
8.3%. This was above the scheme’s benchmark return of 6.9%.
At the Joint Board meeting with the Trustee we discussed
planned changes to the scheme’s governance on investment
matters. We also provided views during the year to the Trustee
on various elements of the investment strategy, including
interest rate and equity hedging.

• Funding: we received regular updates on the development
of the funding position since the 30 June 2014 valuation.
This included considering draft results of the annual funding
update required to be carried out by the Trustee at 30 June
2015.
We have discussed the impact on the liabilities of the BTPS from
the continued low interest rate environment. We also considered
how the acquisition of EE strengthens the covenant and support
BT provides to its pension schemes.

• Pensions legislation and governance: there have been a

number of recent major changes to pensions legislation. We
spent time considering the impact of legislation that introduced
greater freedom and choice to members of defined contribution
pension schemes from 6 April 2015. This legislation has
consequences for members of defined benefit pension schemes
who wish to take a transfer of their benefits.
We also considered the impact of changes to the State Pension
system from 6 April 2016 and the rules on individuals’ lifetime
and annual allowances. We dealt with other governance matters
including reports on the governance of BT’s pension schemes
other than the BTPS, an update to the BTPS trust deed and rules
and reviewing trustee appointments.

Isabel Hudson
Chair of the BT Pensions Committee
4 May 2016

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information126

Committee for Sustainable

and Responsible Business
Chairman’s report

Business approach which has helped to maximise the social and
environmental value we deliver for our customers, and for society as
a whole. The CSRB meets twice a year to provide strategic direction
on our purpose and create a lasting positive impact on society and
the environment, whilst ensuring long term business success.

The chart below shows how we allocated our time.

Allocation of time

12%
Creating a connected society

12%

Delivering

environmental beneﬁts

11%

Engagement

17%
Volunteering

25%
Strategy and governance

23%

Supporting charities and
communities

Each year, we approve our investment in society. We approved a
minimum investment of 1% of adjusted profit before taxation for
2016/17, which is consistent with our investment in prior years.
In addition to this, and in accordance with BT’s updated articles
of association agreed at the Annual General Meeting in July 2015,
we agreed that the proceeds from the sale of BT Group plc shares
held by shareholders we cannot trace will form a CSRB Investment
Fund. We have chosen to invest the fund in initiatives which will
generate significant returns for good causes.

In 2015/16, we made an investment in society and the
environment of £35m. This was made up of a mixture of cash,
time volunteered by BT people and in-kind contributions.

Supporting charities and communities
This year, we visited the BT Sport studio, where we met with our
partners to discuss grassroots sport, accessibility, inclusion and
how we are driving social change through sport. It was fantastic
to see the results of the BT Supporters Club partnership with
the Tottenham Hotspur Foundation, which gives opportunities
and support to improve the lives of young people in our local
communities.

We’re also making good progress on our 2020 ambitions.
We helped 2.6m people to overcome social disadvantage through
our services in 2015/16. As part of our commitment to help build
a culture of tech literacy, we’ve already reached 340,000 kids
this year. Our ambition is to reach 5m kids by 2020.

To see more detail on our 2020 ambitions and our progress so
far, please see BT’s Delivering Our Purpose Report 2015/16.

Volunteering
The success of many of our Purposeful Business programmes is
enabled by our people. We encourage BT volunteers to get involved
in local communities, and provide a wide range of volunteering
opportunities. We also offer up to three days a year for our people
to participate in volunteering activities.

In 2015/16, over 27% of BT people volunteered almost 45,000
days, worth over £15m to those communities. Find out more
information about volunteering on page 34.

Sir Michael Rake, Chairman of the Committee for Sustainable
and Responsible Business
4 May 2016

“

“BT’s purpose is to use the power of communications
to make a better world. We put our purpose at the
heart of everything we do. It inspires our people,
our customers and our partners to make a lasting,
positive impact on society and the environment.”

Who we are
I chair the Committee for Sustainable and Responsible Business
(CSRB). Our membership and meeting attendance are set out below.

Committee members

Member

Eligible to attend

Attended

Meetings

Sir Michael Rake (chairman)

Tony Chanmugam

Niall Dunnea

Phil Hodkinsonb,c

Baroness Margaret Jayb

Gavin Neathb

Gavin Patterson

Gunhild Stordalenb,d

Jasmine Whitbread

Alison Wilcoxa,e

a BT employee.
b Independent member.
c Phil chaired the CSRB at its meeting in July 2015.
d Gunhild was appointed to the committee from 1 January 2016.
e Alison replaced Clare Chapman with effect from 1 July 2015.

I am pleased to welcome Gunhild and Alison to the CSRB, and
am delighted that Phil will be staying on as an independent
member of the CSRB after he stepped down from the BT Group plc
Board in January 2016.

What we have done
BT’s purpose is embedded in the heart of our business; in fact,
it guides everything we do. We have brought our purpose to
life by integrating our existing programmes into a Purposeful

BT Group plc Annual Report 2016 Technology Committee

Chairman’s report

What we have done
We met three times this year. The chart below shows how we
allocated our time.

127

Allocation of time

11%
Technology investment

17%

Future technology

14%
Governance

21%
Technology risk

37%

Technology strategy

Technology strategy
In the past year we reviewed our strategy and progress on ultrafast
broadband. This included the new G.fast technology pioneered
in BT labs at Adastral Park and currently in trial in three locations
around the UK. We also discussed the technology options, both
fixed and wireless, that could help us reach as many customers as
possible with faster broadband speeds.

As part of the EE integration planning activity, we looked at how
the acquisition could create opportunities for our networks and
systems to improve services and deliver new capabilities for our
customers.

We discussed our areas of focus for future meetings, and agreed
that we will:

• revisit and review progress on the EE integration plan for

technology;

• assess the trends driving customer requirements and discuss

how our technology can help to meet these; and
• continue to review our technology strategy and risks.

Future technology
We spent time looking into potential future technologies,
which could help us to meet the increasing requirements of our
customers. Network Functions Virtualisation (NFV), Software
Defined Networking (SDN), Flexgrid Terabit optical networks, Cloud
of Clouds and other emerging technologies will create important
opportunities for us as we strive to deliver higher-capacity services,
with greater service levels in faster and more flexible ways.

Cyber security
The committee also receives regular updates on cyber security,
to better understand how we are protecting our people and
customers. The scale and complexity of cyber-attacks has
continued to increase this year, and it is more important than
ever that we understand the nature of the attacks, and how to
prevent them.

As a result, we have taken immediate action where possible
to reinforce our defences, and have a wider programme in place
to ensure our systems and networks remain resilient to future
potential threats.

Gavin Patterson
Chairman of the Technology Committee
4 May 2016

“

“From defining the next generation of ultrafast
broadband technologies, to delivering global IT
solutions via our BT Cloud of Clouds or protecting
our people and customers from the ever increasing
threat to cyber security, technology and innovation
are the very foundation of our business and are key
to driving sustainable growth.”

Who we are
I chair the Technology Committee, which was created in November
2014 to improve the Board’s oversight of technological
developments and how the group manages technology strategy
and risk. Our membership and meeting attendance are set out
below.

Committee members

Member

Eligible to attend

Attended

Meetings

Gavin Patterson (chairman)

Tony Ball

Iain Conna

Warren Eastb

Mike Inglisc

Karen Richardson

Clive Selleyd

Howard Watsond

a Iain was appointed to the committee from 1 January 2016.
b Warren retired from the committee with effect from 31 May 2015.
c Mike was appointed to the committee from 1 September 2015.
d Clive is no longer a member of the Technology Committee in his new role as CEO Openreach.
He was replaced by Howard Watson (CEO BT TSO) with effect from 1 February 2016.

Iain and Mike both bring a wealth of technical expertise to the
committee, and I am also pleased to welcome Howard, who
replaced Clive in February. I would like to thank Clive for the
contribution he made to the Technology Committee in his former
role as CEO BT TSO.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information128

Report on Directors’
Remuneration

Review of the year
At the 2015 AGM shareholders endorsed our approach to
remuneration and its disclosure, with 98.6% of votes cast
in favour of the Annual Remuneration Report 2014/15.

During 2015/16 we continued to operate within the
Remuneration Policy (the Policy) approved at the 2014 AGM.
The Policy is reproduced on pages 142 to 148.

The committee’s approach to remuneration includes emphasis on
rewarding executives for delivering on the key strategic goals of
the group, including the acquisition of EE. We considered whether
the previously set performance measures for the existing Incentive
Share Plan (ISP) awards remained appropriate. More detail on this
can be found on page 138.

We announced during the year that after a long and distinguished
career the Group Finance Director, Tony Chanmugam, would leave
by mutual agreement and therefore the committee decided to
treat him as a good leaver. Further details are provided on pages
132 to 133. In addition, to help with a smooth hand over to his
successor he has agreed to stay on in an integration team lead
position to ensure that we are on track to deliver the integration
synergies and wider key performance measures associated with
the EE acquisition.

Outcomes for the year
The committee assessed the executive directors’ performance
against both long-term and short-term targets.

For annual bonus purposes, both executive directors performed
well against their financial targets. However, as sufficient progress
was again not made realising improvements in our customer
service levels no bonus was paid for this component.

We have also assessed each director’s contribution against their
personal performance measures.

As a result, the annual bonus for the Chief Executive was
45% of maximum and for the Group Finance Director was
43% of maximum. In both cases bonuses are lower than last
year, reflecting the above mentioned poor customer service
performance against the target. In keeping with past practice,
part of the annual bonus is deferred for three years and paid
in shares. The detail of performance against the annual bonus
measures is set out on page 130.

Total Shareholder Return (TSR) of 88.9% placed BT in the upper
quartile of its comparator group over the three-year performance
period of our 2013 ISP. Cumulative three-year normalised free
cash flow performance was £8.1bn which was towards the
upper end of the ISP range of £7.4bn to £8.4bn. We returned
above threshold performance against our revenue measure.
The 2013 ISP vested at 82.01% based on this performance.
More information on the ISP vesting is on pages 130 to 131.

Employees also participated in BT’s financial success. BT’s
performance in the year reflects a great deal of expertise, hard
work and commitment. In August 2015, around 23,000 people
in our savings-related share option plans (saveshare) were able to
buy shares – mostly at £1.04 and the rest at £1.89 – representing
an average gain of around £10,200 and £4,400 respectively.
We continue to believe that BT’s share plans help as many of our
people as possible to share in BT’s success.

Looking ahead
Following approval of the acquisition of EE from the Competition
and Markets Authority, BT completed the transaction in January
2016. As we indicated last year, we reassessed the Policy to
ensure that our incentive structure continues to be appropriate
for the enlarged group. As reported above, we concluded that
the remuneration structure should not change and accordingly,
there is no requirement to present a new remuneration policy
for shareholder approval at the 2016 AGM.

We reviewed the performance of our executive directors and
consistent with our approach to establish base pay below the
median against our comparator group, we agreed a salary increase
of £24,325 per annum for the Chief Executive, an increase of
2.5%. The increase takes effect in June 2016. This salary increase
is consistent with the approach taken for substantially all our UK
employees who received an average increase of 2.5%. Pay awards
for this group of employees are agreed through trade union
consultation and collective bargaining arrangements.

We also resolved that no salary increase should be made to
the Group Finance Director in light of his stepping down later
in 2016/17.

Finally, we agreed the remuneration package for the incoming
Group Finance Director, Simon Lowth, who joins the company
on 4 July which is set out on page 133.

Throughout this past year, the committee has maintained the
link between pay and performance and will continue to do so.

Tony Ball
Chairman of the Remuneration Committee
4 May 2016

BT Group plc Annual Report 2016129

Annual Remuneration Report
This part of the Report summarises key
elements of the directors’ remuneration
in 2015/16.

Single figure remuneration
The following sets out the full review of directors’ emoluments,
including bonus and deferred bonus, and long-term incentive
plans and pension arrangements.

Directors’ emoluments (audited)
Directors’ emoluments for the financial years 2015/16
and 2014/15 are set out in the table below.

Basic salary
and fees
(2015/16)
£000

Basic salary
and fees
(2014/15)
£000

Benefits
excluding
pension
(2015/16)
£000

Benefits
excluding
pension
(2014/15)
£000

Annual
Bonusa
(2015/16)
£000

Annual
Bonusa
(2014/15)
£000

ISPb
(2015/16)
£000

ISPc
2014/15)
£000

Pension
allowance net
of pension
contributionsd
(2015/16)
£000

Pension
allowance net
of pension
contributionsd
(2014/15)
£000

Total
2015/16
£000

Total
2014/15
£000

675
969
643
112
103
–
99
47
114
152
97
3,011

656
946
625
103
79
–
32
–
100
147
91
2,779

31
57
32

30
54
32

1,057
587

1,322
714

3,022
1,405

1,956
1,836

291
193

284
188

136

132

1,644

2,036

4,427

3,792

484

472

143
17

168
94

706
5,396
2,860
112
103
–
99
47
130
152
97
9,702

686
4,562
3,395
103
79
–
32
0
116
147
91
9,211

145
17

168
94

3,171

3,041

138

132

1,644

2,036

4,427

3,792

484

472

9,864

9,473

Sir Michael Rake
G Pattersone
T Chanmugam
T Ball
I Conn
T Höttgesf
I Hudson
M Inglisg
K Richardsonh
N Rose
J Whitbread

Sub-total

Former directors
P Hodkinsoni
W Eastj

Total

a Annual bonus shown includes both the cash and deferred share element. The deferred element of
the 2015/16 bonus includes the value of deferred shares to be granted in June 2016. Further
details of the deferred element are set out below.

b Value shown represents the estimated value of ISP awards granted in 2013 that are expected to
vest in May 2016. The estimate is based on a three-month average share price from 1 January
2016 to 31 March 2016 of £4.63. Further details are provided on pages 130 to 131.

c Vesting of ISP 2012 granted in June 2012 and vested in May 2015 at a share price of £4.69.
The value shown last year of £1,812 for the Chief Executive and £1,767 for the Group Finance
Director were based on an estimated share price of £4.35.

d Pension allowance paid in cash for the financial year – see ‘Total pension entitlement’ on page 131.

e The 2015/16 ISP figure reflects two awards granted in 2013. One as CEO BT Retail and one as

Chief Executive.

f Tim Höttges was appointed as a director on 29 January 2016. Under the terms of the Relationship
Agreement between BT and Deutsche Telekom and Tim's letter of appointment, no remuneration is
payable for this position.

g Mike Inglis was appointed as a director on 1 September 2015.
h Includes an additional fee for regular travel to Board and Board Committee meetings.
i Phil Hodkinson retired as a director on 31 January 2016. Value shown relates to reimbursement
of reasonable travelling and other expenses (including any relevant tax) incurred in carrying out his
duties.

j Warren East retired as a director on 31 May 2015.

Additional disclosures relating to the single
figure table

Salaries
We reviewed Gavin Patterson’s salary and increased it to
£972,500 in June 2015. This was an increase of 2.4% from the
prior year. At the same time we increased Tony Chanmugam’s salary
to £646,000, an increase of 2.5%.

The salaries for both Gavin and Tony remain positioned below the
median against our comparator group of companies of a similar
size and complexity.

Benefits
Benefits provided to executive directors and the Chairman include
company car, fuel or driver, personal telecommunication facilities
and home security, medical and dental cover (for the directors and

immediate family), special life cover, professional subscriptions,
personal tax advice and financial counselling.

Annual bonus
Executive directors were eligible for an annual bonus based on:
corporate financial performance targets, customer service and
personal contribution. The customer service element of the annual
bonus is paid only if a minimum adjusted EPS threshold is achieved.
The annual bonus is paid in two elements, a cash element, and a
deferred element awarded in shares.

The Chief Executive’s target bonus opportunity was 120% of
salary and the maximum was 240% of salary.

The target bonus opportunity for the Group Finance Director was
105% of salary with a maximum of 210% of salary.

The bonus weightings for the two roles are described on page 130.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information130

The weighting of the annual bonus structure is set out below.

Chief Executive and Group Finance Director
% Weighting

20%
Adjusted earnings per share

15%
Revenue growth

Gavin Patterson’s annual bonus, paid both in cash and deferred
shares represented 109% of salary (2014/15: 139%) and 45%
of the maximum bonus opportunity (2014/15: 58%).

Tony Chanmugam’s annual bonus, paid both in cash and deferred
shares represented 91% of his salary (2014/15: 113%) and 43%
of the maximum opportunity (2014/15: 54%).

The deferred shares will be granted in June 2016.

Bonus award and proportion of value

25%
Customer service

20%

Normalised
free cash ﬂow

Element of bonus

Adjusted EPS

Normalised free cash flow

Revenue growth

20%

Personal contribution

Customer service

Gavin
Patterson

Tony
Chanmugam

39.40%

20.64%

9.05%

41.22%

21.59%

9.47%

Personal contribution

30.91%

27.71%

Incentive share plan 2013
The ISP is a conditional share award. The awards granted in 2013
vest in May 2016. The performance conditions are based 40%
on relative TSR, 40% on normalised free cash flow, and 20% on
growth in underlying revenue excluding transit over a three-year
performance period.

The table below provides an overview of performance against the
targets for the 2015/16 annual bonus.

Threshold

Target Maximum Outcome

Result %
of max

31.6

33.5

89.3%

Measure
Adjusted EPS (p)a

Normalised free cash
flow (£m)b
Revenue (£m)c

2,712

2,855

3,069

2,827

46.8%

17,506

17,683

17,948 17,522

27.3%

The performance outcome for the 2013 ISP is measured on
the basis of standalone BT performance and excludes any
EE contribution.

a Adjusted EPS is defined on page 97.
b Normalised free cash flow is defined on page 97.
c Revenue is defined on page 97.

Bonus outcomes were based on BT standalone performance during
the year. BT continued to make progress during the year, delivering
on both our business and financial plans as shown in the table
above.

Two-thirds of the customer service measure is based on Right First
Time (RFT) and one-third on the customer perception measure.
We did not meet threshold against stretching customer service
targets and therefore no bonus was paid for this element. You can
find more information on RFT on page 22.

The Chairman assessed the Chief Executive, and the Chief
Executive assessed the Group Finance Director, on personal
contribution targets and performance against personal objectives.
These assessments were based on a number of factors including
BT’s regular employee surveys, organisational health, culture
and performance against personal objectives set at the start of
the year.

The Chief Executive achieved 70% of maximum for his personal
contribution score. The personal contribution score reflected
leadership in key strategic areas including the acquisition of EE
and the subsequent restructuring of the organisation.

The Group Finance Director achieved 60% of the maximum
score for his personal contribution. The result for the personal
contribution score was for delivering against our cost
transformation and operational efficiency objectives.

For both the Chief Executive and Group Finance Director, bonus
is delivered in both cash (two-thirds) and deferred shares (one
third). Once granted, deferred shares are not subject to any
further performance conditions, and will normally be transferred
to participants at the end of the three-year deferred period if the
participant is still employed by BT.

TSR
The TSR element is measured against a comparator group
containing other telecommunications companies and companies
which are of a similar size or market capitalisation, have a similar
business mix and spread as BT or operate in comparable markets.

BT’s TSR comparator group for the 2013 ISP comprised the
following companies:

• Accenture

• IBM

• Telecom Italia

• AT & T

• National Grid

• Telefónica

• Belgacom

• Cap Gemini

• Centrica

• Deutsche Telekom

• France Telecom

• Hellenic Telecom

• Pharol (formerly
Portugal Telecom)

• Royal KPN

• Sky

• Swisscom

• TalkTalk

• Telekom Austria

• Telenor

• TeliaSonera

• Verizon

• Virgin Media

• Vodafone

The TSR for a company is calculated by comparing the return index
(RI) at the beginning of the performance period with the RI at the
end of the period. The RI is the TSR value of a company measured
on a daily basis, as tracked by independent analysts, Datastream.

It uses the official closing price for a company’s shares, adjusted for
all capital actions and dividends paid. The initial RI is determined by
calculating the average RI value taken daily over the three months
prior to the beginning of the performance period; and the end
value is determined by calculating the average RI over the three
months up to the end of the performance period. This mitigates
the effects of share price volatility. A positive change between
the initial and final values indicates growth in TSR.

BT Group plc Annual Report 2016131

The following graph shows the vesting schedule for the TSR
element of the 2013 ISP awards.

TSR vesting schedule 2013 awards

50%

25%

g
n
i
t
s
e
v
d
r
a
w
a
e
r
a
h
s

f
o
%

TSR ranking position

The company’s shares achieved a TSR performance of 88.9%.
This was fourth out of 24 companies during the three-year period
and resulted in 40% (out of 40%) of the ISP award that related
to the TSR element vesting.

Normalised free cash flow
When we set the performance measures for the 2013 ISP, the
threshold for the three-year cumulative normalised free cash flow
was set above consensus market expectations at the time, with the
upper part of the range considered to be stretching. We achieved
a three-year cumulative normalised free cash flow outcome of
£8.1bn. This fell between the threshold and maximum targets of
£7.4bn to £8.4bn, resulting in 31.5% out of the 40% of the ISP
award that related to the cash flow element vesting.

Underlying revenue excluding transit
This measure reflects the group’s aim to drive sustainable profitable
revenue growth. The measure was based on growth in underlying
revenue excluding transit measured against the baseline of
2012/13, with the threshold set as growth of 1%.

Over the three-year period we grew underlying revenue by 2.1%,
resulting in 10.5% of the 20% of the ISP award that related to
the revenue element vesting.

Overall vesting of 2013 ISP
Performance against the TSR, normalised free cash flow and
revenue targets resulted in a 82.01% vesting of the 2013 ISP.
The number of shares due to vest in May 2016 is set out below.
An estimate of the cash value of the shares vesting is shown in
the single figure table on page 129.

Vesting of
revenue
element
(£000)

Vesting
of free
cash flow
element
(£000)

Value
of TSR
element
(£000)

Total
value
of ISP
Vesting
(£000)a

ISP
Vesting
(shares)

Director

Gavin Patterson

Tony Chanmugam

387

180

1,161

1,474

3,022 652,642

540

685

1,405 303,385

a An estimate based on the three-month average share price from 1 January 2016 to 31 March

2016 of £4.63.

Total pension entitlements (audited)
The BT Pension Scheme (BTPS) closed to new entrants on
31 March 2001. None of the executive directors participate in
future service accrual in the BTPS; Tony Chanmugam has deferred
benefits in the BTPS. Executive directors who have been members
of the BTPS, and who retain deferred benefits in the BTPS, also
benefit from a death in service lump sum of four times salary.

All new employees are eligible to join the defined contribution BT
Retirement Saving Scheme (BTRSS). The BTRSS is a group personal
pension plan. For executive directors, the company agrees to pay
a fixed percentage of the executive’s salary each year which can
be put towards the provision of retirement benefits. Executive
directors who have never been members of the BTPS benefit from
death in service cover that would provide a lump sum of four times
salary and a dependant’s pension of 30% of capped salary.

Sir Michael Rake is not a member of any of the company pension
schemes, and the company made no payments towards retirement
provision for him. BT provides him with a lump sum death in
service benefit of £1m.

Gavin Patterson receives an annual allowance equal to 30% of
salary in lieu of pension provision as set out in the table on page
129. Gavin has previously been a member of the BTRSS but
neither he nor the company has made any contribution to the
scheme during 2015/16. BT also provides death in service cover
of a lump sum of four times his salary plus a dependant’s pension
of 30% of his capped salary.

Tony Chanmugam is not a contributing member of any of the
company pension schemes; he did not accrue any BTPS pension
over the financial year and no other contributions were made.
Further information is provided in the table below. The company
has agreed to pay him an annual amount equal to 30% of salary
in lieu of pension provision as set out in the table on page 129.
Tony has deferred payment of the BTPS benefit payable from his
60th birthday. BT provides death in service cover of a lump sum of
four times his salary which would cease if his BTPS benefits were
put into payment.

Deferred pension benefits at 31 March 2016 (audited)
The table below shows Tony Chanmugam’s pension benefits at
31 March 2016. There was no pension accrued over the financial
year and no contributions were made into the pension plans.

Normal retirement age

Accrued
pension
(£000)

Additional scheme
lump sum (£000)

Tony Chanmugama

248

745

a Tony Chanmugam’s contributions in 2015/16 were £nil (2014/15: £nil). Figures represent

total benefits accrued across two BT pension schemes. Tony is beyond the pension plans’ normal
retirement age and is not drawing a pension.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

132

Awards granted during the year (audited)

2015 ISP awards
The 2015 ISP awards were made in June 2015 as set out below
and on page 135. The award to Gavin Patterson represented 400%
of his salary and for Tony Chanmugam it was 280% of salary.

Director

Gavin Patterson

Tony Chanmugam

Date of award

ISP award
(shares)

Face value
of awarda

18 June 2015

865,341

£3,899,708

18 June 2015

402,372

£1,808,662

a Face value based on share price at the date of grant of £4.495.

The performance conditions were based 40% on relative
TSR, 40% on normalised free cash flow, and 20% on growth
in underlying revenue excluding transit over a three-year
performance period from 1 April 2015 to 31 March 2018. The
performance conditions are the same for each director and were
set on the basis of standalone BT performance and excludes any
EE contribution. The target ranges for TSR; the normalised free
cash flow and underlying revenue growth excluding transit for the
three-year performance period 2015/16–2017/18 is set out in
the table below.

TSR vesting schedule 2015 awards

50%

25%

g
n
i
t
s
e
v
d
r
a
w
a
e
r
a
h
s

f
o
%

TSR ranking position

Measure 2016/17-
2018/19

Normalised free cash

flow

Revenueb growth

Threshold

£8.6bn

6.5%

Level of
vesting

Maximum

25%

£9.6bn

Level of
vestinga

100%

a Vesting levels between threshold and maximum will be on a straight line basis.
b Underlying revenue excluding transit.

The committee believes that the free cash flow and revenue
performance measures are challenging, and the financial
performance necessary to achieve the upper end of the range
for each target is stretching.

Please see page 130 for details of how TSR is calculated.

The TSR comparator group for the 2015 ISP awards was the
same for awards granted in June 2014.

When ISP awards vest, additional shares representing the value
of reinvested dividends on the underlying shares are added.

Deferred shares
A proportion of the 2014/15 annual bonus was awarded in
deferred shares. The table below provides further details.

Director

Gavin Patterson

Tony Chanmugam

Date of award

DBP award
(shares)

Face value of
awarda

18 June 2015

98,004

£440,528

18 June 2015

52,946

£237,992

a Face value based on share price at the date of the award of £4.495.

The deferred shares are not subject to further performance
conditions and normally vest in three years if the individual is still
employed by BT. Details of all interests in deferred shares are set
out on page 134.

When Deferred Bonus Plan (DBP) awards vest, additional shares
representing the value of reinvested dividends on the underlying
shares are added.

Former directors (audited)
Sir Peter Bonfield received, under pre-existing arrangements,
a pension of £477,038 in 2015/16 (2014/15: £469,526).

Baroness Jay retired as a non-executive director on 13 January
2008 but continues to be a member of the Committee for
Sustainable and Responsible Business, for which she receives
an annual fee of £10,000.

Payments for loss of office (audited)
No payments were made during the year for loss of office.

Arrangements for the outgoing Group Finance
Director
Tony Chanmugam’s service contract has a notice period of
12 months and includes a provision for a termination payment
in lieu of notice of up to 12 months’ base salary plus contractual
benefits. All payments made to him in respect of 2015/16 are
reported in the single figure of remuneration.

His notice period commenced on 1 April 2016. In order to ensure
an orderly handover, he will remain in role for a period of time after
Simon Lowth joins the company on 4 July 2016. Following this, he
will continue to work full-time, overseeing the integration of EE.

During the period of his notice that he is working full-time, he
will continue to receive his current salary and contractual benefits.
Upon leaving the company’s service, he will be entitled to salary
and contractual benefits for any period of notice remaining. These
payments will be made in instalments and can be reduced pro-rata
in the event that he were to secure employment or engagement
elsewhere. He will also remain available for consultation by the
company as required during this period.

Having served the full year, he was eligible for an annual bonus in
respect of 2015/16. As usual, this will be paid two-thirds in cash
and one-third in shares which are deferred under the terms of the
DBP. He may be eligible for a pro-rata annual bonus in respect
of 2016/17, relating to the period for which he is in full-time
employment and assessed for performance at the end of the
year as normal.

BT Group plc Annual Report 2016

133

The value of the BT shares to be used in determining whether
the minimum shareholding requirement has been reached is the
average BT share price over the preceding 12 months or, if higher,
the share price at the acquisition date.

At 31 March 2016, both of the executive directors met the
shareholding requirements, as set out in the table below:

Executive director

Gavin Patterson

Tony Chanmugam

Personal shareholding as a
percentage of salary

1,149%

315%

The following table shows the total unvested interests held by the
executive directors in the ISP and DBP. The numbers represent
the maximum possible vesting levels. The ISP awards will only
vest to the extent the performance conditions are met over a
three-year period. Full details of all ISP and DBP awards, including
performance periods and vesting conditions, are set out on pages
134 to 135.

Unvested interests in shares (audited)

ISP (subject to performance)

DBP (not subject to performance)

1 April 2015 31 March 2016

Gavin Patterson

2,408,265

2,734,526

516,553

376,092

Tony Chanmugam

1,411,743

1,270,600

521,229

337,943

The following table shows share options held by the directors.
As at 31 March 2016 none of the directors held share options
with performance conditions.

Share options held without performance conditions –
saveshare (audited)

Share
options
at 1 April
2015

Options
granted
during
year

Options
exercised
during
year

Value at
date of
exercise (£)

31 March
2016

Sir Michael Rake

Gavin Patterson

Tony Chanmugam

1,485

5,172

5,642

6,024

501

–

1,485

6,875

–

5,172

5,642

6,024

501

Sir Michael Rake exercised an option over 1,485 shares on
3 August 2015. No other saveshare options were exercised by
the directors during the year. There were no vested but unexercised
options at the year end.

The committee considered the treatment of Tony’s outstanding
share awards under the DBP and ISP. Given that his departure is
by mutual agreement with the company and there is an orderly
transition in place, he is considered to be a good leaver for the
purposes of the DBP and ISP. As such, his unvested DBP awards
will be preserved and vest in accordance with their original
timeframes. In line with the committee’s typical approach for the
treatment of good leavers under the ISP, it has applied pro-rating
to the awards by preserving the oldest two cycles and ‘lapsing’
the most recent award. In practice, this means that his 2014 and
2015 ISP awards will subsist in full (subject to achievement of the
relevant performance conditions), whilst the committee has chosen
not to make an ISP award in 2016 (in lieu of it being granted and
subsequently lapsed).

Arrangements for the incoming Group Finance
Director
As announced on 18 March 2016, Simon Lowth will join the
company on 4 July 2016, moving into the Group Finance Director
role following a handover period.

In reaching remuneration terms, we maintained our approach of
setting base salaries below the median for our comparator group,
with a significant proportion of total remuneration being variable
and linked to corporate performance.

He will receive a base salary of £700,000. He will have
entitlement to our standard benefits package, including a car
allowance and healthcare and he will receive a pension allowance
of 30% of salary.

In line with the approach which we took with the Group Chief
Executive’s remuneration package upon his appointment, we have
taken the opportunity to rebalance the variable pay package,
placing less emphasis on short-term and more on sustainable long-
term performance. As such, he will have a maximum opportunity
of 180% of salary under the annual bonus (compared to 210%
for the current incumbent), one-third of which will be deferred
for three years. Meanwhile his maximum ISP opportunity will be
350% of salary (compared to 280% for the incumbent).

Furthermore, the shareholding requirement has been increased.
He will be required to build-up and hold a shareholding in the
company equivalent to 250% of base salary.

Simon will not receive any buy-out awards in connection
with his recruitment.

Directors’ share ownership
The committee believes that the interests of the executive directors
should be closely aligned with those of shareholders. The deferred
shares and incentive shares provide considerable alignment.

To increase the alignment between shareholders and executive
directors, the Chief Executive is required to build up a shareholding
equal to 300% of salary, and the Group Finance Director 150% of
salary. The aim of this personal shareholding policy is to encourage
the build up of a meaningful shareholding in the company over
time by retaining shares which they have received under an
executive share plan (other than shares sold to meet a National
Insurance contribution or income tax liability) or from purchases
in the market.

As mentioned above the incoming Group Finance Director, Simon
Lowth, will be required to build up a shareholding equal to 250%
of salary.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional informationDuring the period from 1 April 2016 to 4 May 2016, there
were no movements in directors’ beneficial holdings.

The directors, as a group, beneficially own less than 1% of
the company’s shares.

The company encourages the Chairman and independent
non-executive directors to purchase, on a voluntary basis, BT
shares with an aggregate value of £5,000 on average each year to
further align the interests of non-executive directors with those of
our shareholders. The directors are asked to hold these shares until
they retire from the Board. This policy is not mandatory.

This policy does not apply to Tim Höttges who was appointed to
the Board as a non-independent non-executive director following
completion of the EE acquisition in January 2016. This assists
with avoiding any conflict of interest in relation to Tim’s ongoing
employment as CEO of Deutsche Telekom.

134

Directors’ interests at 31 March 2016 or date
of retirement, if earlier (audited)
The beneficial interests of directors holding office at the end of
the year (or at the point of leaving for directors who retired during
the year), and their families, in the company’s shares at 31 March
2016 and 1 April 2015, or at date of appointment if later, are
shown below:

Beneficial holdings

Sir Michael Rakea

G Pattersona

T Chanmugama

T Ball

W Eastb

I Conn

P Hodkinsonc

T Höttgesd

I Hudson

M Inglis

N Rose

K Richardsone

J Whitbread

Total

Number of shares

2016

2015

132,957

130,852

2,448,772

2,102,151

445,268

23,652

574,882

23,196

2,480

4,442

25,263

–

3,552

1,200

50,000

10,250

7,990

2,480

4,442

25,263

–

1,279

–

50,000

7,750

7,990

3,155,826

2,712,312

a Includes shares purchased under directshare and free shares awarded under UK allshare.

Directshare is a HMRC approved plan that allows BT employees to buy shares out of gross pay. Prior
to 2008 BT awarded free shares to UK employees (UK allshare).

b Warren East retired on 31 May 2015 and the number reflects his holding at that date.
c Phil Hodkinson retired on 31 January 2016 and the number reflects his holding at that date.
d Tim Höttges joined the Board on 29 January 2016.
e Shares are held as 2,050 American Depositary Shares (ADS). One ADS equates to five BT ordinary

shares.

Deferred Bonus Plan awards at 31 March 2016 (audited)
The following DBP awards have been granted to the directors. These shares will normally be transferred to participants at the end
of the three-year deferred period if those participants are still employed by BT.

1 April 2015

Awardeda

Dividends
re-invested

Vested

Lapsed

Total number
of award shares
31 March 2016 Vesting date

Price at
grant

Monetary
value of
vested award
£000

Market
price at
vesting

249,357

137,537

129,659

–

98,004

246,017

137,271

137,941

–

52,946

–

249,357

4,102

3,867

2,923

–

246,017

4,093

4,114

1,578

–

– 01/08/2015 202.26p

464.78p

1,159

141,639 01/08/2016 315.00p

133,526 01/08/2017 384.20p

100,927 01/08/2018 449.50p

–

– 01/08/2015 202.26p

464.78p

1,143

141,364 01/08/2016 315.00p

142,055 01/08/2017 384.20p

54,524 01/08/2018 449.50p

–

Gavin Patterson

DBP 2012

DBP 2013

DBP 2014

DBP 2015

Tony Chanmugam

DBP 2012

DBP 2013

DBP 2014

DBP 2015

a Awards granted on 18 June 2015. The number of shares subject to awards was calculated using
the average middle market price of a BT share for the three days prior to the grant. Awards of
deferred shares in respect of 2016 will be calculated using the average middle market price of a BT
share for the three days prior to grant.

BT Group plc Annual Report 2016Share awards under long-term incentive schemes held at 31 March 2016 (audited)
Details of the company’s ordinary shares under conditional share awards made to directors, as participants under the ISP are as follows:

135

1 April 2015

Awarded

Dividends
re-invested

Vested

Lapsed

Total number
of award shares
31 March 2016

Performance
period end

Price on
grant

Market
price at
vesting

618,278

382,724

390,036

1,017,227

–

11,415

11,633

30,340

–

865,341

25,810

–

416,719 201,559

– 31/03/2015 202.26p

469.49p

–

394,139 31/03/2016 315.00p

463.00p

401,669 31/03/2016 372.00p

463.00p

1,047,567 31/03/2017 384.20p

891,151 31/03/2018 449.50p

–

580,314

359,223

472,206

–

402,372

–

391,131 189,183

– 31/03/2015 202.26p

469.49p

10,714

14,084

12,001

–

369,937 31/03/2016 315.00p

463.00p

486,290 31/03/2017 384.20p

414,373 31/03/2018 449.50p

–

Gavin Patterson
ISP 2012a
ISP 2013b
ISP 2013c
ISP 2014d
ISP 2015e

Tony Chanmugam
ISP 2012a
ISP 2013b
ISP 2014d
ISP 2015e

Monetary
value of
vested
award
£000

1,956

1,497

1,525

–

1,836

1,405

–

a Awards granted on 20 June 2012. The number of shares subject to awards was calculated using
the average middle market price of a BT share for the three days prior to grant of 198.83p. 40%
of each award is linked to TSR compared with a group of 25 companies, 40% is linked to a three-
year adjusted cumulative free cash flow measure and 20% to a measure of growth in underlying
revenue (excluding transit) over three years. The awards vested in May 2015.

b Awards granted on 20 June 2013. The number of shares subject to awards was calculated using
the average middle market price of a BT share for the three days prior to grant of 202.26p. 40%
of each award is linked to TSR compared with a group of 25 companies, 40% is linked to a three
year normalised free cash flow measure and 20% to a measure of growth in underlying revenue
(excluding transit) over three years. The market price at vesting is an estimate of the value using the
three-month average share price from 1 January 2016 to 31 March 2016 of £4.63. The award
will vest at 82.01% of the total number of award shares in May 2016.

c Award granted on 12 November 2013 following appointment as Chief Executive. The number of
shares subject to awards was calculated using the average middle market price of a BT share for
the three days prior to grant of 372p. 40% of each award is linked to TSR compared with a group
of 24 companies, 40% is linked to a three-year normalised free cash flow measure and 20% to
a measure of underlying revenue growth (excluding transit) over three years. The market price
at vesting is an estimate of the value using the three-month average share price from 1 January
2016 to 31 March 2016 of £4.63. The award will vest at 82.01% of the total number of award
shares in May 2016.

d Awards granted on 19 June 2014. The number of shares subject to awards was calculated using
the average middle market price of a BT share for the three days prior to grant of 384.2Op. 40%
of each award is linked to TSR compared with a group of 23 companies, 40% is linked to a three-
year normalised free cash flow measure and 20% to a measure of growth in underlying revenue
(excluding transit) over three years.

e Awards granted on 18 June 2015. The number of shares subject to awards was calculated using
the average middle market price of a BT share for the three days prior to grant of 449.50p. 40%
of each award is linked to TSR compared with a group of 23 companies, 40% is linked to a three-
year normalised free cash flow measure and 20% to a measure of underlying revenue growth
(excluding transit) over three years.

Share options held at 31 March 2016 (audited)

Number of shares under option:

Sir Michael Rake

Gavin Patterson

Tony Chanmugam

1 April 2015
1,485a
5,172c
5,642c

6,024b

501c

Granted

Lapsed

Exercised 31 March 2016

Option
price per
share

Market price
at date of
exercise

Usual date
from which
exercisable

Usual expiry
date

–

1,485

–

5,172

5,642

6,024

501

104p

319p

249p

359p

463p

01/08/2015

01/02/2017

–

01/08/2019

01/02/2020

01/08/2019

01/02/2020

01/08/2018

01/02/2019

01/08/2017

01/02/2018

All of the above options were granted for nil consideration.
a Option granted on 17 June 2010 under the employee sharesave scheme, in which all employees of
the company are entitled to participate.
b Option granted on 27 June 2013 under the employee saveshare scheme, in which all employees of
the company are entitled to participate.

c Option granted on 26 June 2014 under the employee sharesave scheme, in which all employees of
the company are entitled to participate.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information136

Comparison of Chief Executive remuneration
to Total Shareholder Return
This graph illustrates the performance of BT Group plc measured
by TSR relative to a broad equity market index over the past seven
years. We consider the FTSE100 to be the most appropriate
index against which to measure performance, as BT has been a
constituent of the FTSE100 throughout the seven-year period,
and the index is widely used. TSR is the measure of the returns that
a company has provided for its shareholders, reflecting share price
movements and assuming reinvestment of dividends.

BT’s TSR performance vs the FTSE100

750

650

550

450

350

250

150

Mar 09

Mar 10

Mar 11

Mar 12

Mar 13

Mar 14

Mar 15

Mar 16

FTSE100

Source: Datastream
The graph shows the relative TSR performance
of BT and the FTSE100 over the past seven years.

History of Chief Executive remuneration

Year end
2016a

2015
2014b

2013

2012

2011

2010

Chief Executive

Gavin Patterson

Ian Livingston

Total rem
£000

Annual bonus
(% of max)

ISP vesting
(% of max)

5,396

4,562

2,901

4,236

9,402

8,520

4,009

3,556

45%

58%

62%

35%

65%

73%

79%

71%

82.01%

67.4%

78.7%

63.4%

100%

a The total remuneration figure includes the ISP award as CEO BT Retail and the first award as Chief
Executive, granted in 2013.
b Ian Livingston stepped down on 10 September 2013 and Gavin Patterson took over from that
date.

Percentage change in Chief Executive
remuneration (comparing 2014/15
to 2015/16)
The table opposite illustrates the increase in salary, benefits and
annual bonus for the Chief Executive and that of a representative
group of the company’s employees.

For these purposes, we have used the UK management and
technical employee population representing around 21,500
people because they also participate in performance related pay
arrangements on a similar basis as executive directors.

% Change in Chief Executive

remuneration

% Change in comparator groupc

Salary

Benefitsa

Bonusb

2.5%

5.5% –20%

0% –20%

a The increase in benefits for the Chief Executive was around £2,000.
b The bonus comparator is based on cash bonus only to give a better like for like comparison.
c Comparator group is the UK management and technical employee population representing around
21,500 individuals.

Relative importance of spend on pay
The table below illustrates the change in total remuneration and
dividends and share buy-back paid.

Area

2015/16 (£m)

2014/15 (£m)

% Change

Remuneration paid to all

employees

Dividends/share buybacks

4,639

1,390

4,551

1,244

12%

Implementation of Remuneration Policy
in 2016/17

Base salary
The committee continues to position salaries towards the lower
end of market practice for our comparator companies. Comparator
company information is provided by Deloitte, independent adviser
to the committee, and consists of companies of a similar size
or market capitalisation and/or companies which have a similar
business mix and spread as BT or operate in comparable markets.

Gavin Patterson will receive a salary increase to £996,825 per
annum effective June 2016, an increase of 2.5%.

Tony Chanmugam will not receive a salary increase this year.

The incoming Group Finance Director will receive a salary of
£700,000 a year.

Benefits
The committee has set benefits in line with the Remuneration
Policy set out on pages 142 to 148. There are no changes
proposed to the benefit framework for 2016/17.

Pension
Current levels of pension provision for 2016/17 are the same as
for 2015/16. Executive directors receive an annual amount equal
to 30% of salary in lieu of pension provision.

Clawback
The clawback provisions introduced in 2015/16 will continue
for annual bonus payments relating to the 2016/17 financial
year paid in May 2017, and for ISP awards made in June 2016.
The annual bonus clawback will apply for one year following
payment. The ISP clawback arrangements may be enforced by the
committee in the two year period post-vesting of any awards.

BT Group plc Annual Report 2016137

Annual bonus
The level of bonus opportunity for the Chief Executive, Group
Finance Director and incoming Group Finance Director is set
out in the table below.

Level of
2016/17 bonus

Chief Executive

Group
Finance Director

Incoming Group
Finance Director

Annual cash bonus

Target 80% of
salary

Target 70% of
salary

Target 80% of
salary

Maximum 160%
of salary

Maximum 140%
of salary

Maximum 120%
of salary

Deferred bonus in
shares

Target 40% of
salary

Target 35% of
salary

Target 40% of
salary

Maximum 80% of
salary

Maximum 70% of
salary

Maximum 60% of
salary

Total bonus

Target 120% of
salary

Target 105% of
salary

Target 120% of
salary

Maximum 240%
of salary

Maximum 210%
of salary

Maximum 180%
of salary

The 2016/17 annual bonus structure and weighting is set
out below.

Chief Executive and incoming Group Finance Director
% Weighting

20%
Personal objectives

20%
Earnings per share

20%
Customer service

10%
Integration synergies

20%
Free cash ﬂow

10%
Revenue (excluding Transit)

Adjusted earnings per share; normalised free cash flow; and
revenue excluding transit have a direct impact on shareholder
value. Customer service (measured through our RFT and the
customer perception measure) is vital to the company’s long-term
health and growth. All four of these measures are KPIs for BT and
are defined on page 96.

We have added an integration synergies measure. This will focus
executives on delivering the EE acquisition effectively and in a
timely manner and also increases the proportion of the total
annual bonus based on financial performance.

We do not publish details of the financial targets in advance since
these are commercially confidential. We will publish achievement
against these targets at the same time as we disclose bonus
payments in the Annual Report Form & 20-F 2017 so that
shareholders can evaluate performance against those targets.

The personal contribution measure is aligned to our strategy and is
assessed by the Chief Executive for the Group Finance Director and
each senior executive, and by the Chairman for the Chief Executive.

Performance against the personal contribution element is assessed
individually and is based on achievement against individual
objectives, organisational culture and growth measures.

Incentive Share Plan
The 2016 ISP award for the Chief Executive will be 400% of
salary and for the incoming Group Finance Director will be 350%
of salary. Whilst he would ordinarily receive an award, given his
departure later in the year and on the basis of the pro-rating
applied to his ISP awards, no award (in lieu of granting and
subsequently lapsing it) will be made to the outgoing Group
Finance Director in 2016. We expect to grant the Chief Executive’s
award with the normal operation of the plan in June 2016, and
will grant to the incoming Group Finance Director once he has
joined the company later in the summer. The number of shares
awarded is calculated using the average middle market price
of a BT share for the three days prior to the grant. The 2016
ISP awards will be subject to a holding period of two years,
commencing from the end of the three-year performance period.
The holding period will apply to the number of shares received
on vesting after tax and other statutory deductions. No further
performance measures will apply during the holding period as
performance will have already been assessed.

The performance conditions will be the same as for the 2015
ISP: 40% based on relative TSR; 40% on normalised free cash
flow; and 20% growth in underlying revenue excluding transit
over a three-year performance period. These measures reflect the
adjustments that the committee agreed for the acquisition of EE.

With one change, BT’s TSR comparator group for the 2016
ISP will be the same as for 2015 and comprise the companies
listed below. The committee agreed the removal of Pharol
(formerly Portugal Telecom) on the basis of scale compared to
others in the group.

• Accenture

• AT & T

• Belgacom

• KPN

• Telekom Austria

• National Grid

• Telenor

• Orange

• TeliaSonera

• Cap Gemini

• Sky

• Verizon

• Centrica

• Swisscom

• Vodafone

• Deutsche Telekom

• TalkTalk

• Hellenic Telecom

• Telecom Italia

• IBM

• Telefónica

TSR vesting schedule
For the 2016 ISP awards, 40% of the potential outcome is based
on relative TSR. The following graph shows the potential vesting
of awards based on the TSR element.

TSR vesting schedule 2016 awards

g
n
i
t
s
e
v
d
r
a
w
a
e
r
a
h
s

f
o
%

50%

25%

TSR ranking position

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

138

The target ranges for the normalised free cash flow and underlying
revenue growth excluding transit revenue are set out below:

Measure
2016/17–2018/19

Normalised free
cash flowb
Revenue growthc

Threshold

£10.7bn

2.1%

Level of
vesting

Maximum

Level of
vestinga

25%

£11.7bn

7.6%

100%

a Vesting level between threshold and maximum will be on a straight line basis.
b Normalised free cash flow is defined on page 97.
c Growth in underlying revenue excluding transit is defined on page 97.

The committee continues to believe that the free cash flow and
revenue performance measures are challenging, and the financial
performance necessary to achieve awards towards each target is
stretching.

Adjustment of performance measures for outstanding
ISP awards
Following completion of the EE acquisition in January 2016, the
committee considered whether the previously set performance
measures for the 2014 and 2015 ISP awards remained
appropriate. Under the rules of the ISP, the committee agreed to
adjust the performance measures to reflect the enlarged group as
set out in the table below.

Measure
2014/15–2017/18

Threshold

Level of
vesting

Maximum

Level of
vesting

Normalised free
cash flow

Original

Revised

Revenue growth

Original

Revised

£8.15bn

£8.67bn

3.5%

2.35%

25%

£9.15bn

£9.67bn

5.35%

100%

Measure
2015/16–2018/19

Threshold

Level of
vesting

Maximum

Level of
vesting

Normalised free
cash flow

Original

Revised

Revenue growth

Original

Revised

£8.6bn

£10.25bn

6.5%

5.79%

25%

£9.6bn

£11.25bn

8.3%

100%

The revenue growth measure is based on growth in underlying
revenue excluding transit, the impact of acquisitions and disposals
and foreign exchange movements. So whilst the absolute value
of revenue is targeted to increase significantly between 2015/16
and 2017/18, to maintain the principle of an underlying measure,
the base year for revenue growth has been adjusted to include
the actual performance of EE during this period, even though
EE was not part of BT at the time. The movement in the range
represents the relative growth opportunity from the acquisition
of EE including revenue synergies and the impact of additional
regulation and elimination of internal trading. This provides a fair
target measure of performance and is considered to be no more or
less difficult to achieve.

Chairman and non-executive director
remuneration
The fees for non-executive directors, and for the Chairman, were
reviewed during the year. The last review of non-executive director
fees was in January 2015. In accordance with the Articles of
Association, the Chairman and executive directors conducted the
review, and considered the role and requirements of BT, together
with the fees paid to non-executive directors at companies of a
similar size and complexity. Company comparator information was
provided by Deloitte, independent advisers to the committee,
using the same comparator group of companies as for executive
remuneration. Following the review, the basic fee for a non-
executive director was increased to £72,000 per year (from
£70,000) from 1 January 2016. The Chairman’s fee was reviewed
by the committee (of which he is not a member) and it was agreed
no increase should be applied.

The fees for membership of, or chairing, a committee were also
reviewed and are reflected in the following table.

Audit & Risk Committee member

Audit & Risk Committee chair

Nominating & Governance
Committee member

Nominating & Governance
Committee chair

Pensions Committee member

Pensions Committee chair

Committee for Sustainable &
Responsible Business member

Committee for Sustainable &
Responsible Business chair

Technology Committee member

Technology Committee chair

Remuneration Committee member

Remuneration Committee chair

Equality of Access Board member

Equality of Access Board chair

2015/16 fee

2014/15 fee

£25,000

£35,000

£20,000

£30,000

£10,000

£7,500

n/aa

£10,000

£25,000

£5,000b

n/aa

£14,000
n/aa

£15,000

£28,000

n/a

£72,500

n/aa

£7,500

£15,000

£5,000b

n/aa

£5,000
n/aa

£15,000

£25,000

n/a

£72,500

a Where the Chairman or Chief Executive acts as Chair of a Board committee, no additional

committee chair fee is payable.

b External members of the CSRB receive a fee of £10,000 a year.

The Senior Independent Director receives an additional fee of
£27,000 for that position.

An additional fee of £2,000 per trip is paid to those non-executive
directors travelling on an inter-continental basis to Board and
Board Committee Meetings.

No element of non-executive director remuneration is
performance-related. Non-executive directors do not participate in
BT’s bonus or employee share plans and are not members of any of
the company pension schemes.

BT Group plc Annual Report 2016

139

The Remuneration Committee
This section describes the membership and role of the committee.

Who we are
Tony Ball chairs the Remuneration Committee, made up of
independent non-executive directors, which met six times during
the year.

Our membership and meeting attendance are set out below.

Committee members

Member

Tony Ball (Chairman)

Karen Richardson

Nick Rose

Meetings

Eligible to attend

Attended

Other Remuneration Matters
In addition to the committee members, the Chairman and Chief
Executive are invited to attend meetings, except in instances where
their own remuneration is discussed, or other circumstances where
their attendance would not be appropriate.

Outside appointments
The committee believes that there are significant benefits, to
both the company and the individual, from executive directors
accepting non-executive directorships of companies outside BT.
The committee will consider up to two external appointments
(of which only one may be to the board of a major company),
for which a director may retain the fees.

Gavin Patterson is a non-executive director of British Airways
for which he receives an annual fee of £50,000 and the benefit
of free BA flights.

Voting at the 2015 Annual General Meeting
The votes cast in respect of the Annual Remuneration Report at
the Annual General Meeting held on 15 July 2015 were:

Votes cast in
favour

Votes cast
against

Approve Annual
Remuneration Report

5,144,960,474

98.60%

72,885,498

1.40%

74,716,964 votes were withheld against approving the Annual
Remuneration Report. A vote withheld is not counted when
calculating voting outcomes.

The committee regularly consults the Chief Executive, the Group
HR Director, the HR Director, Reward and Pensions, and the Group
General Counsel & Company Secretary.

Committee evaluation
The committee reviews its performance with Board members and
other participants, including through the annual Board evaluation.

Advisers
During the year, the committee received independent advice
on executive remuneration matters from Deloitte LLP. Deloitte
received £117,950 in fees for these services. The fees are charged
on a time spent basis in delivering advice that materially assisted
the committee in their consideration of matters relating to
executive remuneration.

Deloitte is a founder member of the Remuneration Consultants
Group and as such, voluntarily operates under the code of conduct
in relation to executive remuneration consulting in the UK.

The committee appointed Deloitte to the role of independent
advisers to the committee in 2012 following a competitive tender
exercise conducted by the committee.

The committee is comfortable that the Deloitte engagement
partner and team, who provide remuneration advice to the
committee, do not have connections with BT that may impair
their independence or objectivity.

In addition, during 2015/16, Deloitte also provided the company
with advice on corporate and indirect taxes, assistance with
regulatory, risk and compliance issues and additional
consultancy services.

Dilution
For a number of years we generally used treasury shares to satisfy
the exercise of share options and the vesting of share awards under
our employee share plans. We intend to use both treasury shares
and shares purchased by the BT Group Employee Share Ownership
Trust (the Trust) for share option exercises, and shares purchased
by the Trust for the vesting of executive share awards in 2016/17.
At the end of 2015/16, shares equivalent to 1.98% (2014/15:
3.81%) of the issued share capital (excluding treasury shares)
would be required for all share options and awards outstanding.
Of these, we estimate that for 2016/17, shares equivalent to
approximately 0.30% (2014/15: 0.72%) of the issued share
capital (excluding treasury shares) will be required for the
all-employee share plans.

Independent non-executive directors’ letters
of appointment
Each independent non-executive director has an appointment
letter setting out the terms of his or her appointment. They do
not have service contracts. The letter includes membership of any
Board committees, the fees to be paid and the time commitment
expected. We ask each non-executive director to allow a minimum
commitment of 22 days each year, subject to committee
responsibilities, and to allow slightly more in the first year in
order to take part in the induction programme. The actual time
commitment required in any year may vary depending on business.
We highlight that additional time may be required if the company
is going through increased activity.

Appointments are for an initial period of three years. During that
period, either party can give the other at least three months’
notice of termination. All Board appointments automatically
terminate in the event of a director not being elected
or re-elected by shareholders at the Annual General Meeting each
year. The appointment of a non-executive director is terminable on
notice by the company without compensation. At the end of the
period, the appointment may be continued by mutual agreement.
Further details of appointment arrangements for independent
non-executive directors are set out on page 140.

The appointment letter also covers matters such as confidentiality,
data protection and BT’s share dealing code.

Tim Höttges was appointed as a non-independent non-
executive director, following Deutsche Telekom’s nomination and
his appointment letter reflects the terms of the Relationship
Agreement between BT and Deutsche Telekom.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information140

Directors’ service agreements and letters of appointment
The dates on which directors’ service agreements/initial letters of appointment commenced and the current expiry dates are as follows:

Chairman and executive directors

Commencement date

Expiry date of current service agreement or letter of appointment

Sir Michael Rake

26 September 2007

Gavin Patterson

10 September 2013

Tony Chanmugam

1 October 2013

Non-executive directors

Tony Ball

Nick Rose

16 July 2009

1 January 2011

Jasmine Whitbread

19 January 2011

Karen Richardson

1 November 2011

The agreement is terminable by the company on 12 months’ notice and by the
director on six months’ notice.

Initial term until 10 September 2014, and thereafter terminable by the company
on 12 months’ notice and by the director on six months’ notice.

Initial term until 1 October 2014 and thereafter terminable by the company on
12 months’ notice and by the director on six months’ notice.

Letter of appointment was for an initial period of three years. The appointment
was extended for a further three years in June 2015 following extension in 2012.

Letter of appointment was for an initial period of three years. The appointment
was extended for a further three years in December 2013.

Letter of appointment was for an initial period of three years. The appointment
was extended for a further three years in October 2014.

Iain Conn

Isabel Hudson

Mike Inglis

1 June 2014

Letters of appointment are for an initial period of three years.

1 November 2014

1 September 2015

Tim Höttges

29 January 2016

Appointed as a non-independent non-executive director under the terms of the
Relationship Agreement between BT and Deutsche Telekom. The appointment is
terminable immediately by either party.

There are no other service agreements, letters of appointment or material contracts, existing or proposed, between the company and any
of the directors. There are no arrangements or understandings between any director or executive officer and any other person pursuant
to which any director or executive officer was selected to serve. Simon Lowth, the incoming Group Finance Director joins the company
on 4 July 2016. There are no family relationships between the directors.

Inspection by the public
The service agreements and letters of appointment are available for inspection by the public at the registered office of the company.
They will also be available for inspection commencing one hour prior to the start of our AGM, to be held in Cardiff on 13 July 2016.

Tony Ball
Chairman of the Remuneration Committee
4 May 2016

BT Group plc Annual Report 2016141

Remuneration Principles
Our remuneration principles are to maintain a competitive
remuneration package that will attract, retain and motivate a high
quality top team, avoid excessive or inappropriate risk taking and
align their interests with those of shareholders.

Remuneration policy
The following pages set out our Directors’ remuneration policy (the
‘Policy’) which was approved by shareholders at the AGM on 16
July 2014 in accordance with section 439A of the Companies Act
2006.

We believe in pay for performance against challenging targets
and stretching goals for the annual bonus (including deferred
shares) and long-term incentive shares. Our approach is to set base
salaries below the median for our comparator group. A significant
proportion of the total remuneration package is therefore variable
and linked to corporate performance.

The committee determines the remuneration policy for the
executive directors and the Chairman. The Chairman is not a
member of the committee.

The committee reviews the performance targets regularly to
ensure that they are both challenging and closely linked to the
group’s strategic priorities. Furthermore, because a large part of the
remuneration package is delivered in shares and senior executives
are required to build up a significant shareholding themselves,
they are directly exposed to the same gains or losses as all other
shareholders.

In setting directors’ remuneration, the committee takes account
of the remuneration of other companies of similar size and
complexity, using a comparator group defined with the assistance
of our independent remuneration consultants Deloitte. The
committee also takes into account the pay and employment
conditions of all our employees.

The committee continues to keep under review the relationship
of risk to remuneration. The Chair of the Audit & Risk Committee
is a member of the Remuneration Committee.

The committee is also satisfied that the incentive structure
for senior executives does not raise environmental, social or
governance risks by inadvertently motivating irresponsible
behaviour. Part of the annual bonus depends upon an assessment
of each senior executive’s personal contribution and includes the
results of the regular employee surveys and health and safety
outcomes. Adherence to these measures is a basic criterion
expected of all executives.

The committee retains absolute discretion to reduce variable
compensation in light of risk and the group’s overall performance.
We would only use this in exceptional circumstances.

The votes cast in respect of the Policy at the AGM in 2014 were:

Votes cast in
favour

Votes cast
against

Approve Directors’
Remuneration policy

4,579,788,136

96.85% 148,973,373

3.15%

208,032,899 votes were withheld against the approval of the
Policy. A vote withheld is not counted when calculating voting
outcomes.

The Policy on pages 142 to 148 is a repeat of the Policy set
out in the Annual Report & Form 20-F 2014 (on pages 104
to 110). The page cross references within the repeated Policy
are to the respective pages in the Annual Report & Form
20-F 2014. The Policy, as approved, is also available online
at bt.com/downloadcentre

We are repeating the Policy this year because we think that it is
helpful when reading the Annual Remuneration Report.

Legacy matters
The committee may make remuneration payments and payments
for loss of office outside of the Policy below, where the terms of
the payment were agreed before the Policy came into effect, or at
a time when the relevant individual was not an executive director
of the company (provided that, in the opinion of the committee,
the payment was not in consideration for the individual becoming
an executive director of the company). This includes the exercise of
any discretion available to the committee in connection with such
payments. Any legacy payments would be disclosed in the Annual
Remuneration Report for the relevant year.

Minor amendments
The committee may make minor amendments to the
arrangements for the directors as described in the Policy, for
regulatory, exchange control, tax or administrative purposes,
or to take account of a change in legislation.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information142

Remuneration Policy
Executive Directors and Chairman

Policy Element

Operation and Opportunity

Performance measures or basis of payment

Base salary
Purpose –
a core element
of remuneration,
used to attract
and retain
executive
directors of the
calibre required
to develop and
deliver our
business strategy.

Benefits
Purpose –
to support health
and wellbeing
and provide
employees
with a market
competitive level
of benefits.

Annual bonus
Purpose –
to incentivise and
reward delivery
of our business
plan on an annual
basis.

Salaries for the executive directors and the Chairman are
reviewed annually, although an out-of-cycle review may be
conducted if the committee determines it appropriate. A review
may not necessarily lead to an increase in salary. Salaries are paid
monthly in cash.

The pay and conditions for all UK employees are considered
when setting salaries for executive directors and the Chairman.

Executive directors and the Chairman receive benefits which
typically include (but are not limited to) company car (or monthly
allowance in lieu of a car or part of such allowance not used for
a car), fuel and/or driver, personal telecommunication facilities
and home security, medical and dental cover for the directors
and their immediate family, special life cover, professional
subscriptions, personal tax advice and financial counselling up to a
maximum of £5,000 (excluding VAT) a year.

Where executive directors are required to relocate, the committee
may offer additional expatriate benefits, if considered appropriate.

The company purchases directors’ and officers’ liability insurance
to cover the directors, and has in place a directors’ and officers’
indemnity. The insurance operates to protect the directors in
circumstances where, by law, BT cannot provide the indemnity.
Further details of the directors’ and officers’ liability insurance and
indemnity are set out on page 112.

Executive directors are eligible for an annual bonus. The
Chairman is not eligible for an annual bonus. Awards are based
on performance in the relevant financial year. The annual bonus
is paid in two elements, a cash element, and a deferred element
awarded in shares. Annual bonus amounts are not pensionable.

The committee sets annual bonus performance targets each year,
taking into account key strategic priorities and the approved
budget for the year.

The committee ensures that targets set are appropriately
stretching in the context of the corporate plan and that there
is an appropriate balance between incentivising executive
directors to meet targets, while ensuring that they do not drive
unacceptable levels of risk or drive inappropriate behaviours.

At least one-third of the annual bonus will be granted in the
form of deferred shares to strengthen further the alignment
of management interests with the long-term interests of
shareholders. The deferred element in shares must be held for a
deferral period which will not be less than three years. Additional
shares may be accrued in lieu of dividends and awarded on
any shares which vest. If following the grant of an award, facts
subsequently become known to the committee which would
justify a reduction in the award, the committee may reduce the
number of deferred shares, including to nil. Further information
on the malus provisions are set out on page 109. The maximum
annual bonus opportunity is 240% of base salary.

Whilst there is no maximum salary level, any
increase will typically be broadly in line with
BT’s UK employee population.

For the executive directors, higher increases
may be made under certain circumstances,
such as:

• increase in the scope and/or responsibility

of the individual’s role;

• development of the individual within their

role; and

• where an executive director has been

appointed to the Board at a lower than
typical level of salary, for example to reflect
less experience, larger increases may be
awarded to move them closer to market
practice as their experience develops.

Individual and business performance are
taken into account in deciding salary levels.

While no maximum level of benefits is
prescribed, they are generally set at an
appropriate market competitive level
determined by the committee, taking into
account a number of factors including:

• the jurisdiction in which the employee is

based;

• the level of benefits provided for other

employees within the group; and
• market practice for comparable roles

within appropriate pay comparators in that
jurisdiction.

The committee keeps the benefit policy and
benefit levels under regular review.

The committee seeks to effectively reward
performance against the key elements of our
strategy. Measures used typically include,
but are not limited to:

• financial performance measures – these
are chosen carefully to ensure alignment
between reward and underlying financial
performance. As an example, such
measures may include free cash flow and
earnings per share; and

• non-financial performance measures
– these reflect key company, strategic
and individual goals. For example, such
measures may include customer service,
purposeful company and personal
objectives.

In terms of weighting, non-financial
measures will typically account for no more
than 50% of the total annual bonus.

A sliding scale between 0% and 100% of
the maximum award applies for achievement
between threshold and maximum
performance under the bonus plan.

BT Group plc Annual Report 2016Policy Element

Operation and Opportunity

Performance measures or basis of payment

143

Incentive Share
Plan (ISP)
Purpose –
to incentivise
executive
directors over the
longer-term, by
rewarding delivery
of stretching
targets linked to
our strategy and
long-term value
creation.

Executive directors are eligible to participate in the ISP. The
Chairman is not eligible to participate. The ISP forms the
long-term variable element of executive remuneration. Awards
are discretionary and normally vest subject to performance
measured over a three-year period.

Under the terms of the plan rules the current ISP has no
maximum award level. The committee have determined that
it will impose limits for executive directors to apply to future
awards. The maximum normal ISP award that may be awarded
to an executive director in respect of any financial year of
the company will be 400% of basic salary. In exceptional
circumstances, for example recruitment, this limit may be
increased to 500% of basic salary.

The proposed award levels for 2014/15 are set out on page
101.

Where shares vest, additional shares representing the value of
reinvested dividends are added. In respect of ISP awards made
to executive directors in June 2014 and future years, there will
be a further holding period of two years, commencing from
the end of the three-year performance period applicable to the
net number of shares received after tax and other statutory
deductions. During the holding period, no further performance
measures will apply as performance will already have been
assessed.

If following the grant of an award, facts subsequently become
known to the committee which would justify a reduction in
the award, the committee may reduce the number of shares,
including to nil. Further information on the malus provisions are
set out on page 109.

The committee aligns the performance
measures under the ISP with the long-term
strategy of the company and considers
that strong performance under the chosen
measures should result in sustainable value
creation:

• financial measures – to reflect the financial
performance of our business and a direct
and focused measure of company success
and for example may include free cash flow
and revenue measures. We set targets to be
appropriately stretching, with regard to a
number of internal and external reference
points including our business plan and
consensus market expectations; and
• share price performance measures, to

reflect the ultimate delivery of shareholder
returns which may, for example, include
TSR. This promotes alignment between
executive director reward and shareholder
value creation. Targets are set with
reference to wider market practice and
positioned at a level which we consider
represents stretching performance. Targets
will be measured against a comparator
group containing other telecommunication
companies and/or companies which are
either similar in size or market capitalisation
and/or have a similar business mix and
spread as BT or operate in comparable
markets.

In terms of weighting, share price
performance measures will typically account
for no more than 50% of the total award.

Under each performance measure,
performance below threshold levels would
result in nil vesting for that element. For
threshold levels of performance, no more
than 25% of the maximum for that element
would typically vest, rising to 100% for
maximum performance.

If an event or transaction occurs which
causes the committee to conclude a target
is no longer appropriate, the committee
can amend that target in a manner which is
reasonable in the circumstances provided that
the new target produces a fairer measure of
performance and is not materially less difficult
to satisfy.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information144

Policy Element

Operation and Opportunity

Performance measures or basis of payment

Pension
Purpose –
to attract and
retain executive
directors of the
right calibre by
providing market
competitive
post-retirement
income.

Save As You
Earn Scheme
(saveshare)
Purpose –
to encourage
employee share
ownership.

ESIP (directshare)
Purpose –
to encourage
employee share
ownership.

Executive directors currently receive a cash allowance in lieu of
pension.

The committee may determine that alternative pension
provisions will operate for new appointments to the Board. When
determining pension arrangements for new appointments, the
committee will give regard to:

• the cost of the arrangements;
• pension arrangements received elsewhere in the group; and
• relevant market practice.

The Chairman does not receive a pension benefit or payment in
lieu of such benefit, but does receive a lump sum death in service
benefit of £1m.

Executive directors and the Chairman may participate in the
saveshare (HMRC approved savings related share option plan) on
the same basis as other eligible employees.

For executive directors, the maximum cash
allowance (or equivalent contribution to an
executive director’s pension) may not exceed
30% of salary.

Executive directors who are not members of
the BT Pension Scheme benefit from a death
in service cover of a lump sum of 4x salary
and a dependant’s pension of 30% of capped
salary.

All participants may invest up to the limits
operated by the company at the time. There
are no performance measures attached to
these awards.

Executive directors and the Chairman may participate in the
Directshare (HMRC approved purchase of shares from gross
salary) on the same basis as other eligible employees.

All participants may invest up to the limits
operated by the company at the time. There
are no performance measures attached to
these awards.

Notes to the policy table
1. For further information on the performance measures applicable to the annual bonus and ISP see

2. No performance measures are applicable to salary, benefits, pension, BT saveshare and BT

directshare in line with market practice.

page 101.

BT Group plc Annual Report 2016145

Remuneration arrangements throughout the
company
BT operates in a number of different environments and has many
employees who carry out diverse jobs across a number of countries:

• all employees, including directors, are paid by reference to the

market rate;

• performance for managers is measured and rewarded through
a number of performance-related bonus schemes across the
group;

• business unit performance measures are cascaded down through

the organisation;

• BT offers employment conditions that reflect our values and are
commensurate with a large publicly listed company, including
high standards of health and safety and equal opportunities;
• BT operates all employee share plans in many countries. These

are open to all employees where offered; and

• BT offers a range of employee benefits many of which are

available to everyone.

Recruitment
Our recruitment policy is based on a number of key principles:

• we aim to provide a remuneration package which is sufficient to

attract, retain and motivate key talent, while at all times ensuring
that we pay no more than is necessary, with due regard to the
best interests of the company and our shareholders;

• the committee will take a number of factors into account

in determining the appropriate remuneration package. For
example, these may typically include the candidate’s experience
and calibre, their circumstances, external market influences and
arrangements for existing executive directors;

• the ongoing remuneration package offered to new directors will

only include those elements listed within the policy table;

• the committee may also consider providing additional benefits

to expatriate appointments, where appropriate; and

• the committee will provide full details of the recruitment

package for new executive directors in the next Annual Report
on Remuneration and will provide shareholders with the rationale
for the decisions that were taken.

The maximum level of variable pay (excluding buyouts for which
see below) which may be awarded in respect of a recruitment
event (internal or external), will not exceed 740% of base salary,
representing the current maximum award under the annual bonus
and ISP.

In addition, to facilitate recruitment, the committee may make a
one-off award to buy-out variable incentives which the individual
would forfeit at their current employer. The committee will give
consideration to any relevant factors, typically including the
form of the award (eg cash or shares), the proportion of the
performance/vesting period outstanding and the potential value
of the forfeited remuneration, including performance conditions
attached to the awards, the likelihood of those conditions being
met, and the timing of any potential payments.

In making buying-out awards, the committee may use the
relevant provision in the Financial Conduct Authority Listing Rules.
This allows for the granting of awards specifically to facilitate, in
unusual circumstances, the recruitment of an executive director,
without seeking prior shareholder approval. In doing so, the
committee will comply with the relevant provisions in force at
the date of this report.

Where an executive director is appointed from within the
organisation, the company will honour legacy arrangements in line
with the original terms and conditions.

In the event of the appointment of a new non-executive director,
remuneration arrangements will be in line with those detailed on
page 103.

Payment for loss of office
In a departure event, the committee will typically consider:

• whether any element of annual bonus should be paid for the

financial year. Any bonus paid will be limited to the period served
during the financial year in which the departure occurs;

• whether any of the share element of deferred bonus awarded in

prior years should be preserved either in full or in part;

• whether any awards under the ISP should be preserved either in
full or in part and if relevant whether the post vesting holding
period should apply.

The committee has historically maintained a discretionary approach
to the treatment of leavers, on the basis that the facts and
circumstances of each case are unique.

In an exit situation, the committee will consider: the individual
circumstances; any mitigating factors that might be relevant;
the appropriate statutory and contractual position and the
requirements of the business for speed of change.

The default position is that an unvested ISP or DBP award or
entitlement lapses on cessation of employment, unless the
committee applies discretion to preserve some or all of the awards.
This provides the committee with the maximum flexibility to review
the facts and circumstances of each case, allowing differentiation
between good and bad leavers and avoiding ‘payment for failure’.

When considering a departure event, there are a number of
factors which the committee takes into account in determining
appropriate treatment for outstanding incentive awards.
These include:

• the position under the relevant plan documentation;
• the individual circumstances of the departure;
• the performance of the company/individual during the year

to date; and

• the nature of the handover process.

In some cases, the treatment is formally prescribed under the
rules of the relevant plan so that where there are ‘good leaver’
circumstances awards, which would otherwise lapse by default,
vest either on the normal vesting date or on cessation of
employment. These circumstances include death, injury, ill-health,
disability, redundancy or sale of the company or business. If the
director dies or leaves due to ill health or injury, ISP awards which
have less than 12 months of the performance period remaining
or DBP awards which have less than 12 months of the deferred
period to run, vest automatically on leaving. In other leaver
circumstances the committee has discretion to determine when,
and to what extent, awards vest.

The committee considers the leaver circumstances along a
continuum, ranging from ‘bad leaver’ scenarios such as termination
of employment for gross misconduct or resignation, through to the
‘good leaver’ scenarios outlined above. Accordingly the committee
may apply (or disapply) such performance conditions or time
pro-rating to awards vesting in these circumstances as it
considers appropriate.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information146

All-employee plans – leavers
The treatment of saveshare options and directshare shares on
leaving is as determined under the respective HMRC approved
rules. For saveshare, someone who ceases to be an employee
in special circumstances (for example injury, disability, death, or
following sale of the company or business where they work) may
exercise the option within six months after leaving (or 12 months
in the case of death) or the relevant corporate event. If someone
leaves for a reason not falling within special circumstances,
the option lapses on the date the individual leaves.

ISP/DBP – change of control
In the event of a takeover or scheme of arrangement involving
the company, ISP and DBP awards will vest, at a minimum, to
the extent that any applicable performance measures have
been satisfied at the time (subject to the committee’s discretion
to determine the appropriate level of vesting, having regard to
such relevant factors as it decides to take into account). If the
acquiring company offers to exchange awards over BT shares for
awards over its shares (or shares in another company), awards
will normally be exchanged and continue under the rules of
the relevant plan. If within 12 months of a change of control, a
participants employment is terminated by his employer other than
for misconduct or performance or he or she resigned as a result
of a reduction of his or her duties or responsibilities constituting
a material breach of the individuals contract, the participant is
entitled to receive an amount equal to the difference between
the value he or she received on the change of control he would
have received if the relevant performance condition had been
met in full.

In the event of a voluntary winding up of the company, awards
may vest on the members’ resolution to voluntarily wind-up
the company being passed.

Employment conditions elsewhere in the group
The committee considers the pay and conditions of employees
throughout the company when determining the remuneration
arrangements for executive directors although no direct
comparison metrics are applied.

In particular, the committee considers the relationship between
general changes to UK employees’ remuneration and executive
director reward.

Whilst the committee does not directly consult with our employees
as part of the process of determining executive pay, the Board does
receive feedback from employee surveys that takes into account
remuneration in general. The committee also receives updates
from the Group People Director.

Executive director and Chairman service contracts
The other key terms of the service contracts for the current
executive directors and the Chairman are set out below.

The termination provisions described above are without prejudice
to BT’s ability in appropriate circumstances to terminate in breach
of the notice period referred to above, and thereby be liable for
damages to the executive director or Chairman.

In the event of termination by BT, each executive director and the
Chairman may have entitlement to compensation in respect of his
or her statutory rights under employment protection legislation
in the UK.

Where appropriate, BT may also meet a director’s reasonable legal
expenses in connection with either his appointment or termination
of his appointment.

There are no other service agreements, letters of appointment or
material contracts, existing or proposed, between the company
and any of the executive directors

Illustration of executive director pay scenarios
Our remuneration policy aims to ensure that a significant
proportion of pay is dependent on the achievement of stretching
performance targets. The committee has considered the level
of total remuneration that would be payable under different
performance scenarios and is satisfied that, as the graph below
illustrates, executive pay is appropriate in the context of the
performance required and is aligned with shareholders’ interests.

The illustrative scenarios below set out the total remuneration that
might be received by each executive director for different levels
of performance, based on our remuneration policy.

The minimum reflects base salary, pension and benefits only
which are not performance related.

Performance Assumptions

Fixed pay

All scenarios

• Consists of total fixed pay – base

salary, benefits and pension
– Base salary – salary effective as

at June 2014

– Benefits – amount received by

each director in 2013/14
– Pension – cash supplement in
lieu of pension provision for
2014/15

Variable
pay

Minimum

• No payout under the annual

On-target

bonus

• No vesting under the ISP
• 50% of the maximum payout

under the annual bonus

• 25% of maximum vesting under

the ISP

Maximum

• 100% of the maximum payout

under the annual bonus
• 100% of maximum vesting

under the ISP

For these purposes, we have assumed a usual maximum ISP award of 400% of base salary for
the CEO and 280% of base salary for the GFD. The absolute maximum ISP award under our
remuneration policy is 500% of base salary.
For the GFD, we have also assumed a maximum bonus opportunity of 210% of salary.

BT Group plc Annual Report 2016147

Provision

Notice period

Termination payment

Remuneration and
benefits

Policy
• 12 months’ notice by the company, six months’ notice by the executive director or Chairman (there is no

fixed expiry date).

• In lieu of giving an executive director or the Chairman 12 months’ notice, BT may terminate the

director’s contract and make a payment in lieu of salary to which the director was entitled if he or she
had received notice and the value of contractual benefits for the period.

• In respect of the executive directors, the payments in lieu will be payable in equal monthly instalments

until the date on which the notice period would have expired or (if earlier) the date on which the
director secures alternate employment with the same or higher basic salary or fee. In the event that
the director secures alternate employment at a basic salary of £30,000 or higher, but lower than their
salary, payment in lieu will be reduced by the amount of the new lower salary received. The Board
retains the right to lower the payment in lieu of the directors new employment if it considers the new
employment terms of the director are not appropriately balanced between basic salary and other
elements, and may cease making payments entirely where the Board is not satisfied the director is
making reasonable efforts to secure alternative employment.

• In respect of the Chairman, the payment in lieu will be payable in equal monthly instalments until the
earlier of 12 months from the date of termination or the date the Chairman secures alternate full-
time employment.

• Participation in the incentive plans ISP, DBP and annual bonus, saveshare and directshare, is non-

contractual. The Chairman does not participate in the ISP, DBP or any annual bonus.

• Other benefits include pension (including life cover), dental cover, car, private health care (including
spouse and children under age of 18 or 21 if in full time education), telecommunication facilities,
home security and professional subscriptions. The Chairman does not receive pension benefits but is
entitled to all other benefits.

• The Chairman receives an all-inclusive fee for the role.

Other Remuneration Policies

Malus
Under the terms of the DBP and ISP, if following the grant of
an award, facts subsequently become known to the committee
which would justify a reduction in the award, the committee may
reduce the number of shares under award to take account of this,
including to nil. In order to retain flexibility, the events under which
this may apply are not formally stipulated in the rules. However,
for illustration, such events may include, for example, miss-
statement of the financial accounts, fraud or material failure of risk
management. Other elements of remuneration are not subject to
recovery arrangements.

Consideration of shareholder views
The committee is strongly committed to an open and transparent
dialogue with shareholders on remuneration matters. We believe
that it is important to meet regularly with our key shareholders to
understand their views on our remuneration arrangements and
discuss our approach going forward.

The committee will continue to engage with shareholders going
forward and will aim to consult on any material changes to the
application of the approved remuneration policy or proposed
changes to the policy.

Non-executive directors
The Board aims to recruit high-calibre Non-Executive Directors
(NEDs), with broad commercial, international or other relevant
experience.

The table of remuneration policy for NEDs is set out on page 110.

ISP awards have been shown at face value, with no share price
growth or discount rate assumptions. All-employee share plans
(saveshare and directshare) have been excluded, as have any legacy
awards held by executive directors.

Chief Executive – performance scenario chart

£1.3m

100%

Minimum

£7.4m

£3.4m

28%

34%

38%

On-target

52%

31%

17%

Maximum

£m

Fixed remuneration

Variable remuneration

Long-term incentives

Group Finance Director – performance scenario chart

£0.85m

100%

Minimum

£3.9m

£2.0m

23%

34%

45%

34%

43%

21%

On-target

Maximum

3.5

2.5

1.5

0.5

£m

Fixed remuneration

Variable remuneration

Long-term incentives

Fixed pay is calculated as follows:

Salary
£000

Benefits
£000

Pension
£000

Chief Executive

Group Finance Director

950

630

285

189

Total
fixed pay
£000

1,278

851

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information148

Non-executive director fees

Element/purpose and
link to strategy

Purpose –
core element of remuneration,
paid for fulfilling the relevant role

Operation

Opportunity

• NEDs receive a basic fee, paid monthly in

• Current fee levels can be found in the Annual

respect of their board duties.

• Further fees may be paid for chairmanship or
membership of Board committees or to the
Senior Independent Director.

• Additional fees up to £2,000 may also be
payable to NEDs travelling regularly from
overseas on an intercontinental basis to
Board and committee meetings.

• NEDs are not eligible for annual bonus, share

incentives, pensions or other benefits.

• Fees are typically reviewed annually.
• Expenses incurred in the performance of

non-executive duties for the company may
be reimbursed or paid for directly by the
company, as appropriate.

Report on Remuneration on page 103.
• Fees are set at a level which is considered

appropriate to attract and retain NEDs of the
necessary calibre.

• Fee levels are normally set by reference to the
level of fees paid to NEDs serving on boards
of similarly-sized, UK-listed companies,
taking into account the size, responsibility
and time commitment required of the role.

• The company’s Articles of Association

provide the maximum fee level is payable.
The maximum is based on NED fees
benchmarked as at 1 April 1999 with
increases linked to the Retail Price Index.

BT Group plc Annual Report 2016149

Directors’ information
Statement of directors’ responsibilities
The directors are responsible for preparing the Annual Report,
the Report on Directors’ Remuneration and the Financial
statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements
for each financial year. Under that law the directors have prepared
the consolidated financial statements in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union, and the parent company financial statements
in accordance with UK Generally Accepted Accounting Practice
(UK GAAP), including Financial Reporting Standard 101 Reduced
Disclosure Framework (FRS 101). In preparing the consolidated
financial statements, the directors have also elected to comply
with IFRS, issued by the International Accounting Standards Board
(IASB). Under company law, the directors must not approve the
financial statements unless they are satisfied that they give a true
and fair view of the state of affairs of the group and the company
and of the profit or loss of the group and the company for that
period.

In preparing these financial statements, the directors are required
to:

• select suitable accounting policies and then apply them

consistently;

• make judgements and accounting estimates that are reasonable

and prudent;

• state whether IFRS, as adopted by the European Union, and IFRS
issued by the IASB and applicable UK GAAP including FRS 101
have been followed, subject to any material departures disclosed
and explained in the consolidated and parent company financial
statements respectively;

• notify the parent company’s shareholders in writing about the
use of disclosure exemptions, if any, of FRS 101 used in the
preparation of financial statements; and

• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the group and the
company will continue in business.

The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the company and the group and enable
them to ensure that the financial statements and the Report on
Directors’ Remuneration comply with the Companies Act 2006
and, as regards the consolidated financial statements, Article 4
of the IAS Regulation. They are also responsible for safeguarding
the assets of the company and the group and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.

The directors are responsible for the maintenance and integrity of
the corporate and financial information included on the company’s
website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.

Each of the directors, whose names and functions are listed on
pages 112 to 113 confirms that, to the best of their knowledge:

• the consolidated financial statements, which have been prepared
in accordance with IFRS, as adopted by the European Union, give
a true and fair view of the assets, liabilities, financial position and
profit of the group; and

• the Strategic Report on pages 19 to 108 includes a fair review
of the development and performance of the business and the
position of the group, together with a description of the principal
risks and uncertainties that it faces.

Fair, balanced and understandable
In accordance with the principles of the UK Corporate Governance
Code, we have processes and procedures in place to ensure that the
information presented in the Annual Report is fair, balanced and
understandable – these are described on page 119.

The Board considers, on the advice of the Audit & Risk Committee
that the Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the group’s position and performance,
business model and strategy.

Critical accounting estimates and key
judgements, and significant accounting
policies
Our critical accounting estimates and key judgements, and
significant accounting policies are set out on pages 171 to 180 of
the consolidated financial statements and conform with IFRS. These
reflect changes required given the acquisition of EE this year. These
policies and applicable estimation techniques have been reviewed
by the directors who have confirmed them to be appropriate for
the preparation of the 2015/16 consolidated financial statements.

Disclosure of information to auditors
So far as each of the directors is aware, there is no relevant
information that has not been disclosed to the auditors and each
of the directors believes that all steps have been taken that ought
to have been taken to make them aware of any relevant audit
information and to establish that the auditors have been made
aware of that information.

Going concern
The Strategic Report on pages 19 to 108 includes information on
the group structure, strategy and business model, the performance
of each of the lines of business, the impact of regulation and
competition and principal risks and uncertainties. The Group
Performance section on pages 93 to 108 includes information
on our group financial results, financial outlook, cash flow and
net debt and balance sheet position. Notes 23, 24, 25 and 27
of the consolidated financial statements include information on
the group’s investments, cash and cash equivalents, borrowings,
derivatives, financial risk management objectives, hedging policies
and exposure to interest, foreign exchange, credit, liquidity and
market risks.

In accordance with IAS 1 ‘Presentation of financial statements’, and
revised FRC Guidance on ‘risk management, internal control and
related financial and business reporting’, management has taken
into account all available information about the future for a period
of at least, but not limited to, 12 months from the date of approval
of the financial statements when assessing the group’s ability to
continue as a going concern.

The directors carried out a robust assessment of the principal
risks affecting the group (including those that would threaten our
business model, future performance, insolvency or liquidity). Details
of those risks and how we manage and mitigate them are set out in
Our Risks on pages 46 to 56.

Having assessed the principal risks and other matters discussed in
connection with the viability statement, in accordance with the
2014 UK Corporate Governance Code and the FRC Guidance, the
directors considered it appropriate to adopt the going concern
basis of accounting in preparing the financial statements. This
assessment covers the period to May 2017, which is consistent
with the FRC Guidance.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information150

Independent advice
The Board has a procedure for directors, in carrying out their
duties, to take independent professional advice if necessary, at BT’s
expense.

All directors also have access to the advice and services of the
Company Secretary.

Directors’ and officers’ liability insurance and
indemnity
For some years, BT has purchased insurance to cover the directors,
officers and employees in positions of managerial supervision of BT
Group plc and its subsidiaries against defence costs, civil damages
and, in some circumstances, civil fines and penalties following
an action brought against them in their personal capacity. The
policy also covers such individuals whilst serving at the company’s
request as directors of other companies or of joint ventures or on
the boards of trade associations or charitable organisations. The
insurance operates to protect the directors and officers directly in
circumstances where, by law, BT cannot provide an indemnity and
also provides BT, subject to a retention, with cover against the cost
of indemnifying a director or officer. One layer of insurance is ring-
fenced for the directors of BT Group plc.

As at 4 May 2016, and throughout 2015/16, the company’s
wholly- owned subsidiary, British Telecommunications plc, has
provided an indemnity in respect of a similar group of people who
would be covered by the above insurance. Neither the insurance
nor the indemnity provides cover where the person has acted
fraudulently or dishonestly.

Interest of management in certain
transactions
During and at the end of 2015/16, none of BT’s directors was
materially interested in any material transaction in relation to the
group’s business and none is materially interested in any presently
proposed material transactions.

As set out below, Tim Höttges is a member of the Board as well as
the CEO of Deutsche Telekom.

Power to authorise conflicts
All directors have a duty under the Companies Act 2006 (the 2006
Act) to avoid a situation in which he or she has, or can have a direct
or indirect interest that conflicts, or possibly may conflict, with the
interests of the company. The company’s Articles of Association
include provisions for dealing with directors’ conflicts of interest in
accordance with the 2006 Act. The company has procedures in
place, which it follows, to deal with situations where directors may
have any such conflicts, which require the Board to:

• consider each conflict situation separately on its particular facts;
• consider the conflict situation in conjunction with the rest of its

duties under the 2006 Act;

• keep records and Board minutes as to authorisations granted by

directors and the scope of any approvals given; and

• regularly review conflict authorisation.

In addition, following Tim Höttges appointment to the Board we
created a Conflicted Matters Committee. Tim Höttges owes duties
to both BT and DT and the Conflicted Matters Committee assists
him in complying with his fiduciary duties (although ultimate
responsibility rests with him). More details about the Conflicted
Matters Committee can be found on page 115.

General information
US Regulation
New York Stock Exchange
BT, as a foreign issuer with American Depositary Shares listed on the
New York Stock Exchange (NYSE), is obliged to disclose any
significant ways in which its corporate governance practices differ
from the corporate governance listing standards of the NYSE.

We have reviewed the NYSE’s listing standards and believe that
our corporate governance practices are consistent with them,
with the following exception where we do not meet the strict
requirements in the standards. These state that companies must
have a nominating/corporate governance committee composed
entirely of independent directors and with written terms of
reference which, in addition to identifying individuals qualified
to become board members, develops and recommends to the
Board a set of corporate governance principles applicable to the
company. We have a Nominating & Governance Committee whose
terms of reference include governance and compliance issues (see
Nominating & Governance Committee Chairman’s report on
page 122). The Nominating & Governance Committee’s terms of
reference are in line with the requirements set out in the standards.
However, the committee is chaired by the Chairman, Sir Michael
Rake, who is not considered independent under the NYSE’s
listing standards. The Board and the Nominating & Governance
Committee are made up of a majority of independent, non-
executive directors.

The US Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), the
US Securities and Exchange Commission (SEC) and NYSE listing
standards require companies to comply with certain provisions
relating to their audit committee. These include the independence
of audit committee members and procedures for the treatment of
complaints regarding accounting or auditing matters. We comply
fully with these requirements.

US Sarbanes-Oxley Act of 2002
BT has securities registered with the SEC. As a result, we must
comply with those provisions of the Sarbanes-Oxley Act which
apply to foreign issuers. We comply with the legal and regulatory
requirements introduced under the Sarbanes-Oxley Act, in so far as
they apply.

The Audit & Risk Committee includes Nick Rose who, in the
opinion of the Board, is an ‘audit committee financial expert’ and
is independent (as defined for this purpose). The Board considers
that the committee’s members have broad commercial knowledge
and extensive business leadership experience, having held between
them various prior roles in major business, financial management,
and financial function supervision and that this constitutes a
broad and suitable mix of business and financial experience on the
committee.

The code of ethics we have adopted for the purposes of the
Sarbanes-Oxley Act applies to the Chief Executive, Group Finance
Director and senior finance managers.

Disclosure controls and procedures
The Chief Executive and Group Finance Director, after evaluating
the effectiveness of BT’s disclosure controls and procedures as of
the end of the period covered by this Annual Report & Form 20-F,
have concluded that, as of that date, BT’s disclosure controls and
procedures were effective to ensure that material information
relating to BT was made known to them by others within the group.

112

Our directors’ names and
functions on page 112

The Strategic Report
from page 19

The code of ethics
for the purposes of the
Sarbanes-Oxley Act at
www.bt.com/ethics

BT Group plc Annual Report 2016151

The Chief Executive and Group Finance Director concluded that BT’s
disclosure controls and procedures are also effective to ensure that
the information the company is required to disclose in reports that
it files under the Securities Exchange Act of 1934 (Exchange Act)
is recorded, processed, summarised and reported within the time
periods specified in the SEC’s rules and forms.

The Chief Executive and Group Finance Director have also provided
the certifications required by the Sarbanes-Oxley Act.

Internal control over financial reporting
BT’s management is responsible for establishing and maintaining
adequate internal control over financial reporting for the group.
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting
purposes in accordance with IFRS. Management conducted an
assessment of the effectiveness of internal control over financial
reporting based on the framework for internal control evaluation
contained in the FRC Guidance on internal control (Turnbull), which
is now reflected in the FRC Guidance on risk management, internal
control and related financial and business reporting.

The scope of management’s assessment of the effectiveness of
our internal control over financial reporting included all relevant
operations, except for the operation of the subsidiary EE Limited,
which we acquired in January 2016. This exclusion is in accordance
with the SEC’s general guidance that an assessment of a recently
acquired business may be omitted from our scope in the year of
acquisition. EE Limited constituted 37% of total assets and 5%
of the external revenue of the consolidated financial statements of
the group for the year ended 31 March 2016.

Management has concluded that at 31 March 2016, BT’s internal
control over financial reporting was effective.

There were no other changes in BT’s internal control over financial
reporting that occurred during 2015/16 that have materially
affected, or are reasonably likely to have materially affected, the
group’s internal control over financial reporting. Any significant
deficiency, as defined by the US Public Company Accounting
Oversight Board (PCAOB), in internal control over financial
reporting, is reported to the Audit & Risk Committee.

PricewaterhouseCoopers, which has audited the consolidated
financial statements for 2015/16, has also audited the
effectiveness of the group’s internal control over financial reporting
under Auditing Standard No. 5 of the PCAOB.

Internal control and risk management
The Board is responsible for the group’s systems of internal control
and risk management and for reviewing the effectiveness of those
systems each year. These systems are designed to manage, rather
than eliminate, the risk of failure to achieve business objectives; any
system can provide only reasonable, and not absolute, assurance
against material misstatement or loss.

The Board also takes account of significant social, environmental
and ethical matters that relate to BT’s businesses and reviews BT’s
corporate responsibility policy annually. The company’s workplace
practices, specific environmental, social and ethical risks and
opportunities and details of underlying governance processes are
dealt with on pages 31 to 41 in the Delivering our strategy
section.

We have enterprise-wide risk management processes for
identifying, evaluating and managing the principal risks faced by
the group. These processes have been in place throughout the year
and have continued up to the date on which this document was
approved. The processes are in accordance with the FRC Guidance
on risk management, internal control and related financial and
business reporting.

Risk assessment and evaluation take place as an integral part
of BT’s annual strategic planning cycle. We have a detailed risk
management process which identifies the key risks facing the
group, each line of business and BT TSO.

The key features of our enterprise-wide risk management and
internal control process (covering financial, operational and
compliance controls) are:

• senior executives collectively review the group’s key risks and have
created a Group Risk Register describing the risks, owners and
mitigation strategies. The Group Risk Panel and the Operating
Committee review this before it is reviewed and approved by the
Board;

• the lines of business and BT TSO carry out risk assessments of

their operations, create risk registers relating to those operations
and ensure that the key risks are addressed;

• senior executives with responsibility for major group operations

report quarterly their opinion on the effectiveness of the
operation of internal controls in their areas of responsibility;
• the group’s internal auditors carry out continuing assessments

of the quality of risk management and control, report to
management and the Audit & Risk Committee on the status of
specific areas identified for improvement and promote effective
risk management in the lines of business and BT TSO; and

• the Audit & Risk Committee, on behalf of the Board, considers
the effectiveness of the group’s internal control procedures
during the financial year. It reviews reports from the internal
and external auditors and reports its conclusions to the Board.
The Audit & Risk Committee has carried out these actions for
2015/16.

We have not dealt with joint ventures and associates, which BT
does not control, as part of the group risk management process.
They are responsible for their own internal control assessment.

Our significant accounting policies are set out on pages 174 to
180. The consistent application of those policies is subject to
ongoing verification through management review and independent
review by internal and external auditors.

The processes supporting the preparation and consolidation of
the financial statements have been documented and are subject
to annual verification through the programme of testing done
by our internal auditors. This serves to confirm the operation of
the internal controls over financial reporting and compliance with
the Sarbanes-Oxley Act. The Audit & Risk Committee reviews BT’s
published financial results, related disclosures and accounting
judgements. The committee’s activities are set out on pages 118
to 121.

The Board has approved the formal statement of matters which
are reserved to it for consideration, approval or oversight. It has
also approved the group’s corporate governance framework,
which sets out the high level principles by which BT is managed
and the responsibilities and powers of the Operating Committee
and the group’s senior executives. As part of this framework, the
development and implementation of certain powers relating to
group-wide policies and practices are reserved to identified senior
executives.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information152

Capital management and funding policy
The objective of our capital management and funding policy is to
reduce net debt while investing in the business, supporting the
pension fund and paying progressive dividends.

The Board reviews the group’s capital structure regularly.
Management proposes actions which reflect the group’s investment
plans and risk characteristics as well as the macro-economic
conditions in which we operate.

Our funding policy is to raise and invest funds centrally to meet the
group’s anticipated requirements. We use a combination of capital
market bond issuance, commercial paper borrowing, committed
borrowing facilities and investments. These are planned so as to
mature at different stages in order to meet short, medium and
long-term requirements.

Details of our treasury policy are included in note 27 to the
consolidated financial statements.

Financial instruments
Details of the group’s financial risk management objectives and
policies of the group and exposure to interest risk, credit risk,
liquidity risk and foreign exchange are given in note 27 to the
consolidated financial statements.

Credit risk management policy
We take proactive steps to minimise the impact of adverse market
conditions on our financial instruments. In managing investments
and derivative financial instruments, the group’s central treasury
function monitors the credit quality across treasury counterparties
and actively manages any exposures which arise. This central team
continually reviews any credit exposures, whether arising from
centrally-managed financial instruments or from the group’s trade-
related receivables.

Management within the lines of business also actively monitors
any exposures arising from trading balances.

Off-balance sheet arrangements
Other than the financial commitments and contingent liabilities
disclosed in note 30 to the consolidated financial statements, there
are no off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on: our financial
condition; changes in financial condition; revenues or expenses;
results of operations; liquidity; capital expenditure; or capital
resources.

Legal proceedings
We do not believe that there is any single current court action
that would have a material adverse effect on our financial position
or operations.

Other information – Listing Rules
For the purposes of LR 9.8.4CR, the information required to be
disclosed by LR 9.8.4 R can be found on the pages set out below:

Section

Information

Page

(1)

(2)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

(14)

Interest capitalised

Not material for the
group

Publication of unaudited financial
information

Details of unusual long-term incentive
schemes

Not applicable

Waiver of emoluments by a director

Not applicable

Waiver of future emoluments by a
director

Not applicable

Non pre-emptive issues of equity for
cash

95 and 225

Non pre-emptive issue by a major
subsidiary undertakings

Not applicable

Parent participation in a placing by a
listed subsidiary

Not applicable

Contracts of significance involving a
director or controlling shareholder

Not applicable

Provision of services by a controlling
shareholder

Not applicable

Shareholder waivers of dividends

See below

Shareholder waivers of future dividends See below

Agreements with controlling
shareholders

Not applicable

In respect of LR 9.8.4R(12) and (13) the trustee of the BT Group
Employee Share Ownership Trust agrees to waive dividends payable
on the BT shares it holds for satisfying awards under various BT
executive share plans. Under the rules of these share plans, the
dividends are re-invested in BT shares which are added to the
relevant share awards.

Our risks from page 46

118

Audit & Risk Committee’s
activities on page 118

158

The independent
auditors’ report on
page 158

164

The United States
auditors’ opinion on
page 164

BT Group plc Annual Report 2016153

Political donations
Our policy is that no company in the group will make contributions
in cash or kind to any political party, whether by gift or loan.
However, the definition of political donations used in the 2006
Act is very much broader than the sense in which these words
are ordinarily used. It could cover things like making Members of
Parliament and others in the political world aware of key industry
issues and matters affecting the company. These activities are
important in enhancing their understanding of BT.

The authority for political donations we are requesting at the AGM
is not designed to change our policy. It will, however, ensure that
the group continues to act within the provisions of the 2006
Act requiring companies to obtain shareholder authority before
they can make donations to EU political parties and/or political
organisations as defined in the 2006 Act. During 2015/16, the
company’s wholly-owned subsidiary, British Telecommunications
plc, paid the costs of attending the Conservative party corporate
day and helped, with others, defray the costs of an economists’
dialogue (and associated report) hosted by the independent Centre
for European Reform think-tank in the EU referendum context.
These costs totalled £4,192 (2014/15: £2,579). No loans were
made to any political party by any company in the BT group.

Other statutory information –
Companies Act 2006
Certain provisions of the 2006 Act require us to make additional
disclosures. A number of these disclosures can be found elsewhere
in this Annual Report as set out below:

Information

Structure of BT’s share capital (including
the rights and obligations attaching to the
shares)

Page

226 and 254 to 256

Restrictions on the transfer of BT shares and
voting rights

254 to 256

Significant direct or indirect shareholdings

154

Appointment and replacement of directors

140 and 256

Significant agreements to which BT
Group plc is a party that take effect, alter
or terminate upon a change of control
following a takeover

256 to 257

The disclosures which are not covered elsewhere in this Annual
Report are:

• BT has two employee share ownership trusts which hold BT

shares for satisfying awards under the various employee share
plans.
The trustee of the BT Group Employee Share Investment Plan
may invite participants, on whose behalf it holds shares, to direct
it how to vote in respect of those shares, and, if there is an offer
for the shares or other transaction which would lead to a change
of control of BT, participants may direct it to accept the offer or
agree to the transaction. In respect of shares held in the BT Group
Employee Share Ownership Trust, the trustee abstains from
voting those shares.

• If there is an offer for the shares, the trustee does not have to

accept or reject the offer but will have regard to the interests of
the participants, may consult them to obtain their views on the
offer and may otherwise take the action with respect to the offer
it thinks fair.

• No person holds securities carrying special rights with regard

to control of the company.

• Proxy appointment and voting instructions must be received

by the registrars not less than 48 hours before a general meeting
(see also page 255).

• Any amendment of BT’s Articles of Association requires

shareholder approval in accordance with legislation in force
from time to time.

• The powers of the directors are determined by UK legislation and
the Articles of Association. The directors are authorised to issue
and allot shares, and to undertake purchases of BT shares subject
to shareholder approval at the AGM.

• We do not have any agreements with directors providing for
compensation for loss of office or employment that occurs
because of a takeover. There is similarly no provision for this in
standard contracts for employees.

• We are not aware of any agreements between shareholders
that may result in restrictions on the transfer of shares or on
voting rights.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information154

Shareholders and
Annual General Meeting
Relations with shareholders
The Chief Executive and Group Finance Director, as well as other
senior executives, hold meetings with BT’s institutional shareholders
and prospective shareholders to discuss BT’s strategy and financial
performance. The Chairman also met with shareholders during
the year. All non-executive directors have an invitation to attend
investor meetings if they wish. During the year we published a
Class 1 shareholder circular and a listing prospectus in relation to
our acquisition of EE. Shareholders voted in favour of the deal at
a general meeting held in April 2015.

We control contact with institutional investors (and with financial
analysts, brokers and the media) through written guidelines to
ensure the protection of commercial and inside information that
has not already been made generally available to the market.

During the year, we surveyed 10,000 private shareholders
selected at random to help us improve shareholder engagement.
We’ve continued to include more information on BT’s financial
performance, strategy and future plans in our shareholder
communications and we’re working with shareholders to combine
duplicate accounts to ensure they receive one communication.

We provide the directors with regular reports and other written
briefings on shareholders’ and analysts’ views and the Company
Secretary notifies directors of changes in the holdings of the
principal shareholders. We have procedures to ensure the timely
release of inside information and for the publication of financial
results and regulatory financial statements. The Disclosure
Committee, a committee of senior executives, which is chaired by
the Company Secretary, also reviews all significant announcements
for accuracy and compliance requirements.

Substantial shareholdings
At 4 May 2016, BT had received notice, under the Financial
Conduct Authority’s Disclosure & Transparency Rules, in respect of
the following holding of shares:

BlackRock Inc

Orange SA and Orange
Telecommunications Group
Limited

T-Mobile Holdings Limited

30 November
2015

29 January
2016

2 February
2016

Date

599,717,880

% of total
voting rights
7.16%a

398,725,107

1,196,175,322

12%

a Percentage based on BT’s issued share capital before the purchase of EE

As partial consideration for our purchase of EE Limited in January
2016, we issued 1,594,900,429 new ordinary shares (the
‘Consideration Shares’) to T-Mobile Holdings Limited and Orange
Telecommunications Group Limited. Following Admission of the
Consideration Shares, BT’s issued share capital is 9,968,127,681.

At 31 March 2016, BlackRock’s interest was 653,331,200 shares
representing 6.56% of total voting rights. No requirement to
notify the company of any increase or decrease would have arisen
unless the holding moved up or down through a whole number
percentage level. The percentage level may decrease on the
transfer of treasury shares for any of the company’s share plans.

In addition to the above, Invesco holds 318,220,301 shares
representing 3.19% of total voting rights (based on BT’s issued
share capital following Admission of the Consideration Shares).
No changes in this holding were notified to BT in 2015/16.

Annual General Meeting
Resolutions
We’ll ask our shareholders to vote on the Annual Report at
the AGM and to vote separately on the Report on Directors’
Remuneration.

As part of our policy to involve shareholders fully in the affairs
of the company, we give them the opportunity at the AGM to
ask questions about BT’s activities. We also give shareholders
the opportunity to vote on every substantially different issue by
proposing a separate resolution for each issue. Before the AGM,
we will count the proxy votes for and against each resolution, as
well as votes withheld, and we’ll make the results available at the
meeting. As at the 2015 AGM, we will take votes on all matters
at the 2016 AGM on a poll, except procedural issues. We’ll count
every vote cast, whether in person or by proxy at the meeting, and
post the outcome of voting on the resolutions on our website as
soon as possible after the meeting. It is our policy for all directors
to attend the AGM if at all possible. While, because of ill health or
other pressing reasons, this may not always be possible, in normal
circumstances this means that the chairs of the Audit & Risk,
Nominating & Governance and Remuneration Committees are at
the AGM and are available to answer relevant questions. All the
directors attended the 2015 AGM.

BT Group plc Annual Report 2016155

We set out the 21 resolutions to be proposed at the 2016 AGM
on 13 July, together with explanatory notes, in the separate
Notice of meeting 2016 which we send to all shareholders who
have requested shareholder documents by post. We notify all
shareholders of the publication of these documents, which we
send out in the most cost-effective way. We aim to give as much
notice of our AGM as possible and at least 21 clear days’ notice, as
required by our Articles of Association. In practice, we send these
documents to shareholders more than 20 working days before
the AGM. (For other general meetings this should be at least 14
working days in advance).

We will propose at the AGM resolutions to re-appoint
PricewaterhouseCoopers as BT’s auditors and to authorise the
directors to agree their remuneration.

Authority to purchase shares
The authority given at last year’s AGM, held on 15 July 2015,
for BT to purchase in the market 837m of its shares, representing
10% of the issued share capital, expires on 13 July 2016.
Shareholders will be asked to give a similar authority at the 2016
AGM.

During 2015/16, 46m shares of 5p each were purchased under
this authority (0.46% of the share capital) for a consideration of
£210m, at an average price of £4.57 per share. During 2015/16,
39m treasury shares were transferred to meet BT’s obligations
under our employee share plans. At 29 April 2016, we held a
total of 6.9m shares as treasury shares. All of those shares were
purchased in an on-market buy back programme from May 2015
to March 2016.

In addition, the BT Group Employee Share Ownership Trust
purchased 22m BT shares for a total consideration of £103m, of
which 16.6m shares continued to be held in the Trust at 29 April
2016.

Cross reference to the Strategic Report
As permitted by the Companies Act, we have chosen to include in
the Strategic Report the following information (required by law
to be included in the Report of the Directors):

• the final dividend proposed by the Board (page 95);
• an indication of likely future developments in the business of
the company (see the Strategic Report on pages 19 to 108);

• an indication of our R&D activities (page 36);
• information about our people (page 31); and
• information about greenhouse gas emissions (page 44).

By order of the Board

Dan Fitz
Group General Counsel & Company Secretary
4 May 2016

263

Contact information for shareholders,
institutional investors and industry
analysts is on page 263

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information156

BT Group plc Annual Report 2016Overview

The Strategic Report

Governance

Financial statements

Additional information

157
157

Financial statements

158

Auditors’ reports – consolidated
financial statements

158 United Kingdom opinion
164 United States opinion
165 Group income statement
Group statement of
166
comprehensive income

167 Group balance sheet
168

Group statement of changes
in equity

169 Group cash flow statement
Notes to the consolidated
170
financial statements

170 Basis of preparation
171

Critical accounting estimates and key
judgements

174 Significant accounting policies
181 Segment information
185 Operating costs
186 Employees
186

Audit, audit related and other
non-audit services

Intangible assets

187 Specific items
188 Taxation
191 Earnings per share
191 Dividends
192
194 Property, plant and equipment
195 Business combinations
196 Programme rights
Inventories
196
197 Trade and other receivables
198 Trade and other payables
198 Provisions
199 Retirement benefit plans
206 Own shares
207 Share-based payments
209
210 Cash and cash equivalents
210 Loans and other borrowings
213 Finance expense
214

Financial instruments and risk
management

Investments

220 Other reserves
220 Related party transactions
221

Financial commitments and
contingent liabilities
221 Subsequent events
222

Auditors’ report – parent
company financial statements
Financial statements of
BT Group plc

223

228 Related undertakings

158 BT Group plc

Annual Report 2016

United Kingdom opinion

Independent auditors’ report to the members of
BT Group plc

Report on the group financial statements
Our opinion
In our opinion, BT Group plc’s group financial statements (the
financial statements):

• give a true and fair view of the state of the group’s affairs as at
31 March 2016 and of its profit and cash flows for the year
then ended;

• have been properly prepared in accordance with International

Financial Reporting Standards (IFRS) as adopted by the European
Union; and

• have been prepared in accordance with the requirements of the

Companies Act 2006 and Article 4 of the IAS Regulation.

Separate opinion in relation to IFRS as issued by the IASB
As explained in note 1 to the financial statements, the group,
in addition to applying IFRS as adopted by the European Union,
has also applied IFRS as issued by the International Accounting
Standards Board (IASB).

In our opinion, the financial statements comply with IFRS as issued
by the IASB.

What we have audited
The financial statements, included within the Annual Report &
Form 20-F 2016 (the Annual Report), comprise:

• the group balance sheet as at 31 March 2016;
• the group income statement for the year then ended;
• the group statement of comprehensive income for the year then

ended;

• the group cash flow statement for the year then ended;
• the group statement of changes in equity for the year then

ended; and

• the notes to the financial statements, which include a summary

of significant accounting policies and other explanatory
information.

Certain required disclosures have been presented elsewhere
in the Annual Report, rather than in the notes to the financial
statements. These are cross-referenced from the financial
statements and are identified as audited.

The financial reporting framework that has been applied in the
preparation of the financial statements is applicable law and IFRS
as adopted by the European Union.

Our audit approach
Context
The group acquired EE Limited on 29 January 2016. The
acquisition accounting became an area of focus for the audit
for the year ended 31 March 2016 as acquisition accounting
is inherently complex and requires the directors to make
judgements regarding the assets and liabilities acquired and their
valuation. We also considered other potential areas of focus for
our audit as a result of the acquisition and the group’s entry into
mobile. Commissions paid to third party dealers are common
in the industry, are material and are recorded in more than one
accounting period and so this was an area of focus. Our other areas
of focus were refined to reflect the acquisition of EE.

Overview
• Overall group materiality: £130 million which represents 5% of
average profit before tax for the current year and the previous
three years.

• We conducted full scope audit work at four reporting units – the
primary UK trading company, EE, Italy and Germany. These units
accounted for 79% of the group’s revenue and 93% of the
group’s profit before tax.

• Specific audit procedures were performed at five reporting units,
based on our risk assessment, in France (two reporting units),
Ireland, the Netherlands and Spain. These units accounted for
5% of the group’s revenue.

Our assessment of the risk of material misstatement also informed
our views on the areas of particular focus for our work which are
listed below:

• Acquisition accounting for EE Limited under IFRS 3 ‘Business

Combinations’

• Major contracts in BT Global Services and BT Wholesale
• Accuracy of revenue due to complex billing systems
• Pension scheme obligations and unquoted investments in the BT

Pension Scheme and the EE Pension Scheme

• Regulatory and other provisions
• Capitalisation practices and asset lives for property, plant and

equipment and software intangible assets.

• Recognition and measurement of potential tax exposures and

tax assets

• Assessment of the carrying value of goodwill in BT Global

Services

• Commissions paid to third party dealers

The scope of our audit and our areas of focus
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)).

We designed our audit by determining materiality and assessing
the risks of material misstatement in the financial statements.
In particular, we looked at where the directors made subjective
judgements, for example in respect of significant accounting
estimates that involved making assumptions and considering
future events that are inherently uncertain. As in all of our audits
we also addressed the risk of management override of internal
controls, including evaluating whether there was evidence of bias
by the directors that represented a risk of material misstatement
due to fraud.

The risks of material misstatement that had the greatest effect on
our audit, including the allocation of our resources and effort, are
identified as “areas of focus” in the table below. We have also set
out how we tailored our audit to address these specific areas in
order to provide an opinion on the financial statements as a whole,
and any comments we make on the results of our procedures
should be read in this context. This is not a complete list of all risks
identified by our audit.

Overview

The Strategic Report

Governance

Financial statements

Additional information

159

Area of focus

How our audit addressed the area of focus

Acquisition accounting for EE Limited under IFRS 3 ‘Business
Combinations’
EE Limited was acquired on 29 January 2016 for £11.0bn. We focused
on this because the acquisition is material and requires the use of significant
management judgement regarding the identification of intangible assets
acquired and the valuation of the assets and liabilities acquired. The valuation
of certain of the assets involves the use of estimates regarding future cash
flows.

A purchase price allocation exercise has been performed by management,
assisted by an external expert. The primary element of the valuation exercise
assessed the fair value of identifiable intangible assets in the form of software
licences (£415m), telecommunications licences (£2,524m), customer
relationships (£2,610m) and brand (£402m). The allocation also considered
the fair values of property, plant and equipment, current assets and current
and non current liabilities.

We evaluated the design and tested the operating effectiveness of controls
around the acquisition accounting.

In testing the valuation of the intangible assets (customer relationships,
telecommunications licences and the brand) acquired we:

• assessed the methodology adopted by management and its appointed

expert for calculating the fair values;

• assessed the discount rates applicable to the transaction;
• assessed the key valuation assumptions; and
• validated and challenged key inputs and data used in valuation models

such as customer numbers, ARPU and churn assumptions by reference to
historical data and our expectations based on our experience of comparable
businesses.

For the property, plant and equipment and software licences we assessed the
methodology adopted by management and its expert for calculating the fair
values.

Where applicable we used our valuation experts to independently reperform
the valuations prepared by management and the expert.

We found the methodologies and the assumptions applied to be within a
reasonable range.

Using our knowledge of the mobile and wider telecoms industry we assessed
the completeness of the identification of the assets acquired and assessed the
appropriateness of the assets’ useful economic lives. The assets identified and
the lives assigned are consistent with our expectations.

We read relevant contracts, agreements and board minutes which supported
our final conclusions in respect of the acquisition accounting.

Major contracts in BT Global Services and BT Wholesale
We focused on this area as it involves significant judgements in respect of:

• the determination and timing of recognition of contract profits and the
assumptions underpinning the lifetime profitability forecasts for the
contracts;

We tested a sample of major contracts through the year, focusing our work on
those which were material by size or which we otherwise regarded as higher risk
because of the nature of the contract or its stage of delivery. In performing this
testing we assessed the appropriateness of the assumptions and judgements
underpinning the accounting for these major contracts as follows:

• completeness and adequacy of provisions against contracts projected to be

• We evaluated the design and tested the operating effectiveness of controls

loss making; and

• the recoverability of contract-specific assets, including deferred costs and

property, plant and equipment.

Accuracy of revenue due to complex billing systems
The accuracy of revenue amounts recorded is an inherent industry risk. This
is because telecom billing systems are complex and process large volumes of
data with a combination of different products sold and price changes in the
year, through a number of different systems.

in respect of the accounting for major contracts.

• We obtained and read the relevant sections of the contracts agreed between
BT and the customer, tested a sample of revenue and cost transactions by
tracing them to supporting evidence of delivery and acceptance and assessed
the revenue recognised in the period by comparing it with the contractual
terms and actual pattern of delivery of services.

• We compared the forecast results of each contract to the actual results
to assess the performance of the contract and the historical accuracy of
forecasting.

We challenged the recoverability of contract-specific assets dedicated to the
sampled contracts by examining contractual cover and the associated deferred
revenue or assessing recoverability against the forecast profitability of the relevant
contract.

We assessed the reasonableness of lifetime profitability forecasts by analysing
historical contract performance relative to overall contractual commitments. We
challenged the directors’ assumptions on the future costs including any forecast
savings by assessing the actions required to achieve these forecasts. In determining
whether the provisions for loss making contracts are adequate, we considered the
results of the above procedures.

Based on the results of each of the procedures as set out above we considered the
related financial statement amounts to be appropriate and in line with the group’s
accounting policies as set out in note 3.

We evaluated the relevant IT systems and the design of controls, and tested
the operating effectiveness of controls over the:

• capture and recording of revenue transactions;
• authorisation of rate changes and the input of this information to the billing

systems; and

• calculation of amounts billed to customers.

We determined that the operation of the controls provided us with evidence
over the accuracy of revenue recorded.

We also tested a sample of customer bills and checked these to cash received
from customers. Our testing included customer bills for consumers, corporate
and wholesale customers.

Based on our work, we noted no significant issues in the accuracy of revenue
recorded in the year.

160 BT Group plc

Annual Report 2016

Area of focus

How our audit addressed the area of focus

Pension scheme obligations and unquoted investments in the BT Pension
Scheme and the EE Pension Scheme
We focused on the BT Pension Scheme (BTPS) because the valuation of the BT
Pension Scheme obligations (£49.1bn) and unquoted investments (£15.8bn)
require the use of estimates and significant judgement, and a small change in
the assumptions can have a material impact on the financial statements.

The EE Pension Scheme (EEPS) has significantly lower obligations (£710m)
and unquoted investments (£99m). We focused on the EE Pension Scheme
because the valuation of the obligations and unquoted investments also
requires the use of estimates and significant judgement.

Regulatory and other provisions
The group has total provisions of £723m relating to restructuring (£20m),
property (£296m), asset retirement obligations (£78m), network share
(£60m) and other of £269m (comprising litigation, regulatory risks and
insurance claims).

Provisions are based on judgements and estimates made by the directors. In
particular, the current telecom regulatory environment has seen an increased
frequency and magnitude of matters brought to Ofcom and the Competition
Appeal Tribunal in the UK.

Capitalisation practices and asset lives for property, plant and equipment
and software intangible assets
Capitalisation of costs and the useful lives assigned to assets are areas of
significant judgement by the directors.

There are two main risks that we addressed in our audit:

• the risk that amounts being capitalised do not meet capitalisation criteria;

and

• the risk that the useful economic lives assigned to assets are inappropriate.

Our work also focused on the capitalisation of costs for broadband
deployment under the BDUK programme and the recognition of the
associated capital grants.

We evaluated the design and tested the operating effectiveness of controls in
respect of the determination of the pension scheme obligations in the BTPS. We
determined these controls to be operating and this provided us with evidence over
the obligations.

We used our actuarial experts to assess the reasonableness of actuarial
assumptions used in valuing pension scheme obligations. The assumptions used
were consistent with our internally developed benchmarks.

The pension assets include significant unquoted pension asset investments. We
tested the existence of the unquoted investments and the valuation of these
investments on a sample basis. Specifically:

• For property assets in BTPS, we tested internal controls at the property fund
manager and obtained valuation reports prepared by third party specialist
valuers. We assessed the methods and assumptions used by the valuers.
• For direct investments held by the BTPS, the valuations of the investments

are derived from discounted cash flow models. We assessed the
assumptions used in the valuations by checking that the assumptions used
were consistent with our internally developed range of discount rates, by
comparing the cash flows to historical results and considering the impact
of other external information. We tested the accuracy of the calculations
and assessed whether the assumptions used were in line with other
market participants and reflected the particular status of the investment
shareholding.

• For other unquoted investments in both schemes we obtained

confirmations from the custodians and the investment managers.

We considered the estimates and judgements used by the directors for the
obligations and the unquoted investments to be within an acceptable range.

For regulatory provisions, we read correspondence and pronouncements
from Ofcom and the Competition Appeal Tribunal. We held discussions with
management to understand the risk associated with historical transactions
where there is not yet a formal dispute but there is a known risk of dispute.

For property provisions we tested the underlying cash flows on a sample basis
to third party data and assessed the discount rate applied by the directors.

For legal provisions, we held discussions with the group’s general counsel
and head of litigation, read the summary of litigation matters provided by
management and discussed each of the material cases noted in the report
to determine the group’ s assessment of the likelihood and magnitude of
any liability that may arise. Where appropriate and relevant, we examined
correspondence connected with the cases, including external legal advice.

For all provisions, including asset retirement obligations and network share, we
tested the calculation of the provisions, assessed the assumptions including
with third party data where available, and assessed the judgements against
historical trends.

We considered the directors’ judgements on the level of provisioning to be
appropriate.

We evaluated the design and tested the operating effectiveness of controls
around the property, plant and equipment cycle and software intangible assets
cycle, including the controls over whether engineering (labour) activity is capital
or operating in nature. We determined that the operation of the controls
provided us with audit evidence in respect of the capitalisation practices.

We assessed the nature of costs incurred in capital projects through testing of
amounts recorded and assessing whether the description of the expenditure
met capitalisation criteria. We found no material misstatements from our
testing.

We tested the controls over the annual review of asset lives. In addition,
we tested whether the directors’ decisions on asset lives are appropriate
by considering our knowledge of the business and practice in the wider
telecoms industry. We also tested whether approved asset life changes were
appropriately applied prospectively to the fixed asset register. We found that
the asset lives were consistent with those commonly used in the industry and
appropriately reflected technological developments.

We assessed the key assumptions (primarily the forecast level of end users)
applied by the directors to calculate the level of capital grants attributable to
superfast broadband deployment in rural areas and we tested the calculation
of the accrual and deferral based on these assumptions and the current level
of capital investment. We considered the level of grant recognition to be
appropriate.

161

Area of focus

How our audit addressed the area of focus

Recognition and measurement of uncertain tax positions and potential
assets relating to tax losses
We focused on this area due to the judgements required in determining the
group’s effective tax rate, specifically in relation to the recognition of uncertain
tax positions and potential deferred tax assets relating to tax losses.

The group has recognised a deferred tax asset of £293m relating to historical
trading losses in EE. The recoverability of this asset is dependent on the future
structuring of the group.

In conjunction with our tax specialists, we evaluated management’s rationale
in relation to the level of tax provisions. We considered the status of recent
and current tax audits and enquiries, the results of previous claims and
changes to the tax environments. We utilised our specialist tax knowledge
and experience of similar situations elsewhere to examine tax planning
arrangements and assess management’s judgements. We considered the level
of provisioning to be appropriate.

In the calculation of deferred tax assets, we evaluated the amount of tax
losses recognised in light of future projected profitability of the relevant
subsidiary companies, by assessing the forecasts against past results and our
expectations of future trading performance.

In assessing the measurement and recoverability of the EE deferred tax asset
we tested management’s controls over the calculation of the asset and the
review of the future recoverability. We assessed the recoverability of the asset
using both our specialist tax knowledge and our knowledge of the group.

We determined the deferred tax asset to be supported through the forecast
of future profits and the proposed structuring of the group following the
acquisition of EE.

Assessment of the carrying value of goodwill in BT Global Services
As at 31 March 2016, goodwill relating to the BT Global Services cash
generating unit (CGU) amounted to £1,145m out of a total goodwill balance
of £7,878m. The directors prepared an impairment assessment that was
based on a value in use calculation of the BT Global Services CGU.

We agreed the cash flow forecasts used in the impairment model to Board
approved forecasts. We considered the directors’ expectations in respect of
material contract activity (including new business and contract renewals) and
planned operational improvements and whether these were appropriately
reflected in the cash flow forecasts.

We focused on the impairment assessment for BT Global Services as the
assessment is sensitive to changes in assumptions (in particular the long
term growth rate, the discount rate and the assumptions underlying future
operating cash flows). The directors concluded that there was no impairment
of goodwill.

We compared actual historical cash flow results for the BT Global Services CGU
with previous forecasts and determined whether any differences fell within an
acceptable range.

We independently calculated a weighted average cost of capital by making
reference to market data and verified the long term growth rate to market
data.

We assessed the sufficiency of the sensitivity analysis performed by the
directors and performed further sensitivity analyses, primarily focused on
changes in operating cash flows.

As a result of our work we determined that the judgement by the directors
that no impairment was required was reasonable. We considered the
disclosures in note 12 of the financial statements and assessed them as
appropriate.

Commissions paid to third party dealers
As at 31 March 2016, commissions paid to third parties and recorded as a
prepayment on the balance sheet total £104m.

We read contracts with significant indirect channel dealers and considered the
accounting treatment for commissions including the timing of recognition of
commissions due on activation and over the customer life.

We focused on this area as commissions paid to third party dealers who
introduce customers to the EE network are material, and are recorded in more
than one accounting period. We focused on whether the amounts payable
have been accurately captured and whether amounts recorded on the balance
sheet as assets are recoverable.

We tested a sample of commission payments and checked these to detailed
commission payment documentation shared with dealers and to cash
payments.

We tested the calculation of accruals for unpaid commissions including
retrospective claims from dealers, and assessed the assumptions and
judgements against historical trends.

We found no material misstatements in our substantive testing and, from
the evidence obtained, we considered the directors’ judgements on the level
of accruals and recoverability of assets through offset against future charges
from the dealers to be appropriate.

How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the geographical
structure of the group, the accounting processes and controls, and
the industry in which the group operates.

under our instruction. Where the work was performed by
component auditors, we determined the level of involvement we
needed to have in the audit work at those reporting units to be
able to conclude whether sufficient appropriate audit evidence
had been obtained as a basis for our opinion on the group financial
statements as a whole.

The group’s accounting process is structured around a finance function
in each of the reporting units. These are responsible for their own
accounting records and controls and report to the head office finance
team in London through an integrated consolidation system.

In establishing the overall approach to the group audit, we
determined the type of work that needed to be performed
at reporting units by us, as the group engagement team, or
component auditors from other PwC network firms operating

For four reporting units (the principal UK trading company, EE, Italy
and Germany), an audit of the complete financial information was
performed. For EE the audit was performed on the period from the
group’s acquisition date, 29 January 2016. These units accounted
for 79% of the group’s revenue and 93% of the group’s profit
before tax.

In five reporting units, based on our risk assessment, specific audit
procedures on revenue and receivables, payables and cash were

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information162 BT Group plc

Annual Report 2016

performed. This, together with additional procedures performed on
centralised functions and at the group level, gave us the evidence
we needed for our opinion on the financial statements as a whole.

The group engagement team performed the audit of the UK and
EE reporting units. The group team visited Italy and conference
calls were held with both our teams in Italy and Germany on a
regular basis. The group engagement team was also involved
in the audits of the five reporting units for which specific audit
procedures were performed through a combination of visits and
conference calls.

Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us
to determine the scope of our audit and the nature, timing
and extent of our audit procedures on the individual financial
statement line items and disclosures and in evaluating the effect of
misstatements, both individually and on the financial statements
as a whole.

Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:

Overall group
materiality

How we determined it

Rationale for
benchmark applied

£130m (2014/15: £120m)

5% of average profit before tax for
the current year and the previous
three years.

Consistent with last year, we used
average profit before tax for the
current year and previous three years
to reduce volatility in the measure
year on year.

Other required reporting

We agreed with the Audit & Risk Committee that we would report
to them misstatements identified during our audit above £5m
(2014/15: £5m) as well as misstatements below that amount
that, in our view, warranted reporting for qualitative reasons.

Going concern
Under the Listing Rules we are required to review the directors’
statement, set out on page 149, in relation to going concern.
We have nothing to report having performed our review.

Under ISAs (UK & Ireland) we are required to report to you if we
have anything material to add or to draw attention to in relation
to the directors’ statement about whether they considered it
appropriate to adopt the going concern basis in preparing the
financial statements. We have nothing material to add or to draw
attention to.

As noted in the directors’ statement, the directors have concluded
that it is appropriate to adopt the going concern basis in preparing
the financial statements. The going concern basis presumes that
the group has adequate resources to remain in operation, and
that the directors intend it to do so, for at least one year from the
date the financial statements were signed. As part of our audit we
have concluded that the directors’ use of the going concern basis
is appropriate. However, because not all future events or conditions
can be predicted, these statements are not a guarantee as to the
group’s ability to continue as a going concern.

Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report and the Report of the Directors for the financial year for which the
financial statements are prepared is consistent with the financial statements.

ISAs (UK & Ireland) reporting

Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:

• information in the Annual Report is:

We have no exceptions to report.

– materially inconsistent with the information in the audited financial statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge

of the group acquired in the course of performing our audit; or

– otherwise misleading

• the statement given by the directors on page 149, in accordance with provision C.1.1

We have no exceptions to report.

of the UK Corporate Governance Code (the Code), that they consider the Annual Report
taken as a whole to be fair, balanced and understandable and provides the information
necessary for members to assess the group’s position and performance, business model
and strategy is materially inconsistent with our knowledge of the group acquired in the
course of performing our audit.

• the section of the Annual Report on page 119, as required by provision C.3.8 of the Code,
describing the work of the Audit & Risk Committee does not appropriately address matters
communicated by us to the Audit & Risk Committee.

We have no exceptions to report.

163

The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the group
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:

• the directors’ confirmation on page 149 of the Annual Report, in accordance with
provision C.2.1 of the Code, that they have carried out a robust assessment of the
principal risks facing the group, including those that would threaten its business model,
future performance, solvency or liquidity.

• the disclosures in the Annual Report that describe those risks and explain how they are

being managed or mitigated.

• the directors’ explanation on page 54 of the Annual Report, in accordance with provision
C.2.2 of the Code, as to how they have assessed the prospects of the group, over what
period they have done so and why they consider that period to be appropriate, and
their statement as to whether they have a reasonable expectation that the group will be
able to continue in operation and meet its liabilities as they fall due over the period of
their assessment, including any related disclosures drawing attention to any necessary
qualifications or assumptions.

We have nothing material to add or to
draw attention to.

Under the Listing Rules we are required to review the directors’
statement that they have carried out a robust assessment of the
principal risks facing the group and the directors’ statement in
relation to the longer-term viability of the group. Our review was
substantially less in scope than an audit and only consisted of
making inquiries and considering the directors’ process supporting
their statements; checking that the statements are in alignment
with the relevant provisions of the Code; and considering whether
the statements are consistent with the knowledge acquired by us
in the course of performing our audit. We have nothing to report
having performed our review.

Adequacy of information and explanations received
Under the Companies Act 2006 we are required to report to you
if, in our opinion, we have not received all the information and
explanations we require for our audit. We have no exceptions to
report arising from this responsibility.

Directors’ remuneration
Under the Companies Act 2006 we are required to report to you
if, in our opinion, certain disclosures of directors’ remuneration
specified by law are not made. We have no exceptions to report
arising from this responsibility.

Corporate governance statement
Under the Listing Rules we are required to review the part of the
Corporate Governance Statement relating to ten further provisions
of the Code. We have nothing to report having performed our
review.

Responsibilities for the financial statements and the audit

Our responsibilities and those of the directors
As explained more fully in the Statement of directors’
responsibilities, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a
true and fair view.

Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and ISAs (UK &
Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only
for the parent company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other
purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to
whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.

What an audit of financial statements involves
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of:

• whether the accounting policies are appropriate to the

group’s circumstances and have been consistently applied and
adequately disclosed;

• the reasonableness of significant accounting estimates made by

the directors; and

• the overall presentation of the financial statements.

We primarily focus our work in these areas by assessing the
directors’ judgements against available evidence, forming our
own judgements, and evaluating the disclosures in the financial
statements.

We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We obtain
audit evidence through testing the effectiveness of controls,
substantive procedures or a combination of both.

In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing
the audit. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for
our report.

Other matter

We have reported separately on the parent company financial
statements of BT Group plc for the year ended 31 March
2016 and on the information in the Report on Directors’
Remuneration that is described as having been audited.

Paul Barkus (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
4 May 2016

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information164 BT Group plc

Annual Report 2016

United States opinion

Report of Independent Registered Public Accounting
Firm to the Board of Directors and Shareholders of BT
Group plc (the ‘company’)
In our opinion, the accompanying group balance sheets and
the related group income statements, group statements of
comprehensive income, group statements of changes in equity
and group cash flow statements present fairly, in all material
respects, the financial position of BT Group plc and its subsidiaries
at 31 March 2016 and 31 March 2015 and the results of their
operations and their cash flows for each of the three years in the
period ended 31 March 2016 in conformity with International
Financial Reporting Standards as issued by the International
Accounting Standards Board. Also in our opinion, the company
maintained, in all material respects, effective internal control
over financial reporting as of 31 March 2016, based on criteria
established in the FRC Guidance on risk management, internal
control and related financial and business reporting.

The company's management is responsible for these financial
statements, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in management’s
evaluation of the effectiveness of internal control over financial
reporting as set out in the first two paragraphs of Internal
control over financial reporting in the Report of the Directors,
General information, of the BT Group plc Annual Report &
Form 20-F 2016.

Our responsibility is to express opinions on these financial
statements and on the company's internal control over financial
reporting based on our integrated audits. We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement and whether effective internal control over
financial reporting was maintained in all material respects.

Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorisations
of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection
of unauthorised acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.

As described in the second paragraph of Internal control over
financial reporting in the Report of the Directors, General
information, of the BT Group plc Annual Report & Form 20-F
2016, management has excluded EE Limited from its assessment
of internal control over financial reporting as of 31 March 2016,
based on the FRC Guidance on internal control (‘Turnbull’), which
is now reflected in the FRC Guidance on risk management, internal
control and related financial and business reporting, because it
was acquired by the company in a purchase business combination
during 2016. We have also excluded EE Limited from our audit
of internal control over financial reporting. EE Limited is a wholly-
owned subsidiary whose total assets and total revenues represent
37% and 5% respectively, of the related consolidated financial
statements amounts as of and for the year ended 31 March 2016.

PricewaterhouseCoopers LLP
London, United Kingdom
4 May 2016

Group income statement

Year ended 31 March 2016

Revenue
Operating costs

Operating profit (loss)

Finance expense
Finance income

Net finance expense
Share of post tax profit of associates and joint ventures

Profit (loss) before taxation
Taxation

Profit (loss) for the year

Earnings per share
Basic
Diluted

Year ended 31 March 2015

Revenue
Operating costs

Operating profit (loss)

Finance expense
Finance income

Net finance expense
Share of post tax loss of associates and joint ventures
Profit on disposal of interest in associates and joint ventures

Profit (loss) before taxation
Taxation

Profit (loss) for the year

Earnings per share
Basic
Diluted

a For a definition of specific items, see page 240. An analysis of specific items is provided in note 8.

165

Before
specific items
£m

Specific
a
items
£m

Notes

18,909
(14,959)

3,950

(520)
37

(483)
6

3,473
(607)

2,866

133
(348)

(215)

(229)
–

(444)
166

(278)

4
5

Before
specific items
£m

Specific
a
items
£m

Notes

17,851
(14,118)

3,733

(577)
17

(560)
(1)
–

3,172
(631)

2,541

128
(381)

(253)

(299)
–

(299)
–
25

(527)
121

(406)

4
5

Total
£m

19,042
(15,307)

3,735

(749)
37

(712)
6

3,029
(441)

2,588

29.9p
29.6p

Total
£m

17,979
(14,499)

3,480

(876)
17

(859)
(1)
25

2,645
(510)

2,135

26.5p
26.1p

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

166

Group income statement

Year ended 31 March 2014

Revenue
Operating costs

Operating profit (loss)

Finance expense
Finance income

Net finance expense
Share of post tax loss of associates and joint ventures
Loss on disposal of interest in associates and joint ventures

Profit (loss) before taxation
Taxation

Profit (loss) for the year

Earnings per share
Basic
Diluted

a For a definition of specific items, see page 240. An analysis of specific items is provided in note 8.

Group statement of comprehensive income

Year ended 31 March

Profit for the year

Other comprehensive income (loss)
Items that will not be reclassified to the income statement
Actuarial gains (losses) relating to retirement benefit obligations
Tax on actuarial gains or losses

Items that may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations
Fair value movements on available-for-sale assets
Fair value movements on cash flow hedges:
– net fair value gains (losses)
– recognised in income and expense
Tax on components of other comprehensive income that may be reclassified

Other comprehensive income (loss) for the year, net of tax

Total comprehensive income for the year

Before
specific items
£m

Specific
a
items
£m

Notes

18,287
(14,866)

3,421

(603)
12

(591)
(3)
–

2,827
(613)

2,214

–
(276)

(276)

(235)
–

(235)
–
(4)

(515)
319

(196)

4
5

Total
£m

18,287
(15,142)

3,145

(838)
12

(826)
(3)
(4)

2,312
(294)

2,018

25.7p
24.5p

Notes

2016
£m

2015
£m

2014
£m

2,588

2,135

2,018

20
9

28
28

28
28
9, 28

755
(240)

(1,051)
208

(1,179)
16

52
(2)

381
(230)
5

721

5
7

207
(218)
37

(176)
(27)

(528)
384
4

(805)

(1,506)

3,309

1,330

512

BT Group plc Annual Report 2016

Group balance sheet

At 31 March

Non-current assets
Intangible assets
Property, plant and equipment
Derivative financial instruments
Investments
Associates and joint ventures
Trade and other receivables
Deferred tax assets

Current assets
Programme rights
Inventories
Trade and other receivables
Current tax receivable
Derivative financial instruments
Investments
Cash and cash equivalents

Current liabilities
Loans and other borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions

Total assets less current liabilities

Non-current liabilities
Loans and other borrowings
Derivative financial instruments
Retirement benefit obligations
Other payables
Deferred tax liabilities
Provisions

Equity
Ordinary shares
Share premium
Own shares
Merger reserve
Other reserves
Retained loss

Total equity

167

Notes

2016
£m

2015
£m

12
13
27
23

17
9

15
16
17

27
23
24

25
27
18

25
27
20
18
9
19

15,436
16,010
1,462
46
24
233
1,247

3,170
13,505
1,232
44
26
184
1,559

34,458

19,720

225
189
4,063
65
177
2,918
497

8,134

3,237
48
7,289
271
171

11,016

118
94
3,140
65
97
3,523
434

7,471

1,900
168
5,276
222
142

7,708

31,576

19,483

11,032
863
6,382
1,105
1,262
552

7,868
927
7,583
927
948
422

21,196

18,675

499
1,051
(115)
8,422
690
(167)

419
1,051
(165)
998
487
(1,982)

10,380

808

31,576

19,483

The consolidated financial statements on pages 165 to 221 and 228 to 237 were approved by the Board of Directors on 4 May 2016
and were signed on its behalf by:

Sir Michael Rake
Chairman

Gavin Patterson
Chief Executive

Tony Chanmugam
Group Finance Director

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

168

Group statement of changes in equity

At 1 April 2013

Profit for the year
Other comprehensive loss – before tax
Tax on other comprehensive loss
Transferred to the income statement

Total comprehensive (loss) income for the year
Dividends to shareholders
Share-based payments
Tax on share-based payments
Net buyback of own shares

At 1 April 2014

Profit for the year
Other comprehensive gain (loss) – before tax
Tax on other comprehensive gain (loss)
Transferred to the income statement

Total comprehensive income for the year
Issue of new sharesf
Dividends to shareholders
Share-based payments
Tax on share-based payments
Net buyback of own shares
Other movements

At 1 April 2015

Profit for the year
Other comprehensive gain – before tax
Tax on other comprehensive gain
Transferred to the income statement

Total comprehensive income for the year
Issue of new sharesg
Dividends to shareholders
Share-based payments
Tax on share-based payments
Net buyback of own shares
Other movements

Notes

Share
a
capital
£m

408

Share
b
premium
£m

Own
c
shares
£m

(832)

Merger
d
reserve
£m

998

–
–
–
–

–
–
–
–
–

–
–
–
–

–
–
–
–
–

–
–
–
–

–
–
–
–
3

–
–
–
–

–
–
–
–
–

408

(829)

998

–
–
–
–

–
11
–
–
–
–
–

–
–
–
–

–
989
–
–
–
–
–

–
–
–
–

–
–
–
–
–
664
–

–
–
–
–

–
–
–
–
–
–
–

419

1,051

(165)

998

–
–
–
–

–
80
–
–
–
–
–

–
–
–
–

–
–
–
–
–
–
–

–
–
–
–

–
–
–
–
–
50
–

–
–
–
–

–
7,424
–
–
–
–
–

11
22
9
21

14
11
22
9
21

At 31 March 2016

499

1,051

(115)

8,422

Other
e
reserves
£m

792

–
(731)
4
384

(343)
–
–
–
–

449

–
219
37
(218)

38
–
–
–
–
–
–

487

–
428
5
(230)

203
–
–
–
–
–
–

690

Retained
(loss)
earnings
£m

Total
equity
(deficit)
£m

(1,690)

(262)

2,018
(1,179)
16
–

855
(781)
60
106
(230)

(1,680)

2,135
(1,051)
208
–

1,292
–
(925)
70
54
(783)
(10)

(1,982)

2,588
758
(240)
–

3,106
–
(1,078)
58
12
(275)
(8)

2,018
(1,910)
20
384

512
(781)
60
106
(227)

(592)

2,135
(832)
245
(218)

1,330
1,000
(925)
70
54
(119)
(10)

808

2,588
1,186
(235)
(230)

3,309
7,504
(1,078)
58
12
(225)
(8)

(167)

10,380

a The allotted, called up, and fully paid ordinary share capital of BT Group plc at 31 March 2016 was £499m comprising 9,968,127,681 (2015: £419m comprising 8,373,227,252) ordinary shares of
5p each.
b The share premium account, comprising the premium on allotment of shares, is not available for distribution.
c For further analysis of own shares, see note 21.
d The merger reserve balance at 1 April 2015 arose on the group reorganisation that occurred in November 2001 and represented the difference between the nominal value of shares in the new parent
company, BT Group plc, and the aggregate of the share capital, share premium account and capital redemption reserve of prior parent company, British Telecommunications plc. On 29 January 2016, the
company issued 1,594,900,429 ordinary shares of 5p at 470.7p per share. These shares were used as part consideration for the acquisition of EE. As a result of this transaction the merger reserve was
credited with £7,424m net of £3m issue costs.
e For further analysis of other reserves, see note 28.
f On 12 February 2015, the company issued 222,000,223 ordinary shares of 5p at 455p per share, raising £1,000m net of issue costs. Share capital increased by £11m and share premium by £989m.
g On 29 January 2016, the company issued 1,594,900,429 ordinary shares of 5p at 470.7p per share, raising £7,504m net of issue costs. Share capital increased by £80m and merger reserve by £7,424m.

BT Group plc Annual Report 2016

Group cash flow statement

Year ended 31 March

Cash flow from operating activities
Profit before taxation
(Profit) loss on disposal of interest in associates and joint ventures
Share of post tax (profit) loss of associates and joint ventures
Net finance expense

Operating profit
Other non-cash charges (credits)
Loss on disposal of businesses
Depreciation and amortisation
(Increase) decrease in inventories
Increase in programme rights
Increase in trade and other receivables
Increase (decrease) in trade and other payables
Decrease in other liabilitiesa
(Decrease) increase in provisions

Cash generated from operations
Income taxes paid

Net cash inflow from operating activities

Cash flow from investing activities
Interest received
Dividends received from associates and joint ventures
Acquisition of subsidiariesb
Proceeds on disposal of subsidiariesb, associates and joint ventures
Acquisition of joint ventures
Proceeds on disposal of current financial assetsc
Purchases of current financial assetsc
Proceeds on disposal of non-current asset investments
Proceeds on disposal of property, plant and equipment
Purchases of property, plant and equipment and software

Net cash outflow from investing activities

Cash flow from financing activities
Equity dividends paid
Interest paid
Repayment of borrowingsd
Net repayment of commercial paper
Proceeds from bank loans and bonds
Cash flows from derivatives related to net debt
Drawdown on acquisition facility
Repayment of acquisition facility
Repayment of EE revolving credit facility
Proceeds from issue of own shares
Repurchase of ordinary share capital

Net cash inflow (outflow) from financing activities

Net increase (decrease) in cash and cash equivalents
Opening cash and cash equivalentse
Net increase (decrease) in cash and cash equivalents
Effect of exchange rate changes

Closing cash and cash equivalentse

a Includes pension deficit payments of £880m (2014/15: £876m, 2013/14: £325m).
b Acquisitions and disposals of subsidiaries are shown net of cash acquired or disposed of.
c Primarily consists of investment in and redemption of amounts held in liquidity funds.
d Repayment of borrowings includes the impact of hedging and repayment of lease liabilities.
e Net of bank overdrafts of £38m (2014/15: £27m, 2013/14: £11m).

169

Note

2016
£m

2015
£m

2014
£m

3,029
–
(6)
712

3,735
40
–
2,630
–
(44)
(131)
78
(810)
(63)

5,435
(256)

5,179

10
17
(3,371)
–
(8)
8,918
(8,252)
–
7
(2,466)

2,645
(25)
1
859

3,480
(19)
1
2,538
(13)
(40)
(97)
(37)
(727)
19

5,105
(309)

4,796

10
–
(6)
26
(10)
8,124
(9,898)
8
100
(2,418)

2,312
4
3
826

3,145
39
–
2,695
16
(142)
(102)
(174)
(234)
(100)

5,143
(347)

4,796

6
–
(21)
2
(3)
7,531
(8,773)
4
10
(2,356)

(5,145)

(4,064)

(3,600)

(1,075)
(558)
(1,283)
–
3,023
79
3,200
(3,019)
(100)
90
(315)

407
76
(24)

459

(924)
(590)
(1,166)
(338)
812
297
–
–
–
1,201
(320)

(778)
(614)
(339)
(420)
1,195
(209)
–
–
–
75
(302)

(1,028)

(1,392)

(296)

684
(296)
19

407

(196)

919
(196)
(39)

684

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

170

Notes to the consolidated financial
statements

1. Basis of preparation

Preparation of the financial statements
These consolidated financial statements have been prepared
in accordance with the Companies Act 2006, Article 4 of the
IAS Regulation and International Accounting Standards (IAS)
and International Financial Reporting Standards (IFRS) and
related interpretations, as adopted by the European Union. The
consolidated financial statements are also in compliance with IFRS
as issued by the International Accounting Standards Board (the
IASB). The consolidated financial statements are prepared on a
going concern basis.

The consolidated financial statements are prepared on the
historical cost basis, except for certain financial and equity
instruments that have been measured at fair value. The
consolidated financial statements are presented in Sterling, the
functional currency of BT Group plc, the parent company.

New and amended accounting standards adopted with
no significant impact on the group
The group has applied the following standards and amendments
for the first time for its annual reporting period commencing
1 April 2015:

– Annual Improvements to IFRSs – 2010–12 Cycle and 2011–13

Cycle.

– Defined Benefit Plans: Employee contributions – Amendments

to IAS 19.

The adoption of these amendments did not have any impact on
the current or prior periods.

New and amended accounting standards that have
been issued but are not yet effective
The following standards have been issued and are effective for
accounting periods ending on or after 1 April 2016 and are
expected to have an impact on the group financial statements.

IFRS 15 ‘Revenue from Contracts with Customers’
In May 2014, IFRS 15 ‘Revenue from Contracts with Customers’
was issued and will be effective for periods beginning on or after
1 January 2018, following the July 2015 decision to delay the
effective date by one year. For the group, transition to IFRS 15
will take place on 1 April 2018. Quarterly results in the 2018/19
financial year will be IFRS 15 compliant, with the first Annual
Report and Form 20-F published in accordance with IFRS 15
being the 31 March 2019 report.

IFRS 15 sets out the requirements for recognising revenue from
contracts with customers. The standard requires entities to
apportion revenue earned from contracts to individual promises,
or performance obligations, on a relative standalone selling price
basis, based on a five-step model.

The group is still in the process of quantifying the implications of
this standard, however we expect the following indicative impacts:

– Currently, the group recognises connections revenue upon

performance of the connection activity. The transition to IFRS 15
will result in this revenue being deferred and recognised on a
straight-line basis over the associated line/circuit contractual
period. This leads to the recognition of what is known as a
contract liability – a liability arising from secured revenue flows –
on the balance sheet.

– Under the current accounting policy, revenue recognised in
relation to equipment and mobile handsets is based on the
corresponding customer charge when the asset is transferred
to the customer. Generally customer premises equipment is
provided for free, and mobile handsets are either provided for
free or for a small upfront charge. Under IFRS 15, additional
revenue will be allocated to all equipment and handsets with
reference to the asset’s relative standalone value within the
contract, regardless of contract pricing. As a result, on adoption
of IFRS 15, there will be an acceleration of revenue for these
items, with a corresponding reduction in ongoing service revenue
over the contract period. The difference between the revenue
and the customer charge will be recognised as a contract asset
– a receivable arising from secured cash flows – on the balance
sheet.

– Sales commissions and other third party acquisition costs

resulting directly from securing contracts with customers are
currently expensed when incurred. IFRS 15 will require these
costs of acquiring contracts to be recognised as an asset when
incurred, to be expensed over the associated contract period.
– IFRS 15 will also result in some contract fulfilment costs which
are currently expensed at a point in time to be deferred on the
balance sheet where they relate to a performance obligation
which is satisfied over time.

– IFRS 15 gives far greater detail on how to account for contract

modifications than current revenue standards IAS 18 and
IAS 11. Changes must be accounted for either as a retrospective
change (creating either a catch up or deferral of past revenues),
prospectively with a reallocation of revenues amongst identified
performance obligations, or prospectively as separate contracts
which will not require any reallocation.

– There will be a corresponding effect on tax liabilities in relation to

all of the above impacts.

The group is continuing its analysis of the expected impacts of
transition to IFRS 15.

IFRS 9 ‘Financial instruments’
IFRS 9 was published in July 2014 and will be effective for BT
from 1 April 2018 subject to EU endorsement. It is applicable to
financial assets and financial liabilities, and covers the classification,
measurement, impairment and de-recognition of financial assets
and financial liabilities together with a new hedge accounting
model.

We do not expect this to have a material impact on our results,
with the key changes for BT being around documentation of
policies, hedging strategy and new hedge documentation.
However, the provision for lifetime expected losses on all financial
assets will be reviewed as part of quantifying the impact of the
standard.

IFRS 16 ‘Leases’
IFRS 16 was published in January 2016 and will be effective for
BT from 1 April 2019, replacing IAS 17 ‘Leases’ subject to EU
endorsement. The standard requires lessees to recognise assets and
liabilities for all leases unless the lease term is 12 months or less or
the underlying asset is of low value.

BT Group plc Annual Report 2016171

1. Basis of preparation continued
The group is in the process of quantifying the impact of the new
standard. This will have a material impact on the group's results
and balance sheet, as a significant number of arrangements that
are currently accounted for as operating leases will come onto the
group's balance sheet.

There are no other standards or interpretations issued but not yet
effective which we expect to have a material impact on the group.

Presentation of specific items
The group’s income statement and segmental analysis separately
identify trading results before specific items. The directors believe
that presentation of the group’s results in this way is relevant to
an understanding of the group’s financial performance, as specific
items are identified by virtue of their size, nature or incidence. This
presentation is consistent with the way that financial performance
is measured by management and reported to the Board and the
Operating Committee and assists in providing a meaningful analysis
of the trading results of the group. In determining whether an
event or transaction is specific, management considers quantitative
as well as qualitative factors such as the frequency or predictability
of occurrence.

Furthermore, the group considers a columnar presentation to be
appropriate, as it improves the clarity of the presentation and is
consistent with the way that financial performance is measured
by management and reported to the Board and the Operating
Committee.

Specific items may not be comparable to similarly titled measures
used by other companies. Examples of charges or credits meeting
the above definition and which have been presented as specific
items in the current and/or prior years include acquisitions/
disposals of businesses and investments, regulatory settlements,
historical insurance or litigation claims, business restructuring
programmes, asset impairment charges, property rationalisation
programmes, net interest on pensions and the settlement of
multiple tax years. In the event that other items meet the criteria,
which are applied consistently from year to year, they are also
treated as specific items.

Specific items for the current and prior years are disclosed
in note 8.

2. Critical accounting estimates
and key judgements
The preparation of financial statements in conformity with IFRS
requires the use of accounting estimates and assumptions. It also
requires management to exercise its judgement in the process of
applying the group’s accounting policies. We continually evaluate
our estimates, assumptions and judgements based on available
information and experience. As the use of estimates is inherent in
financial reporting, actual results could differ from these estimates.
Management has discussed its critical accounting estimates and
associated disclosures with the Audit & Risk Committee. The
areas involving a higher degree of judgement or complexity are
described below.

Long-term customer contracts
Long-term customer contracts can extend over a number of
financial years. During the contractual period recognition of
costs and profits may be impacted by estimates of the ultimate
profitability of each contract. Judgements are required in assessing
whether a contract becomes onerous and include a consideration
of the lifetime profitability of each contract. If, at any time, these
estimates indicate that any contract will be unprofitable, the entire
estimated loss for the contract is recognised immediately. If these

estimates indicate that any contract will be less profitable than
previously forecast, contract assets may have to be written down
to the extent they are no longer considered to be fully recoverable.
The group performs ongoing profitability reviews of its contracts
in order to determine whether the latest estimates are appropriate.

Key factors reviewed include:

– Transaction volumes or other inputs affecting future revenues
which can vary depending on customer requirements, plans,
market position and other factors such as general economic
conditions.

– Our ability to achieve key contract milestones connected with the
transition, development, transformation and deployment phases
for customer contracts.

– The status of commercial relations with customers and the

implication for future revenue and cost projections.

– Our estimates of future staff and third-party costs and the
degree to which cost savings and efficiencies are deliverable.

The carrying value of assets comprising the costs of the initial
set-up, transition or transformation phase of long-term networked
IT services contracts is disclosed in note 17.

Revenue from multiple element arrangements
Numerous service offers by the group include two components:
equipment (eg a mobile handset) and a service (eg a talk plan).
For the sale of multiple products or services, the group evaluates
all deliverables in the arrangement to determine whether they
represent separate units of accounting.

Where a contractual arrangement consists of two or more separate
elements that have value to a customer on a standalone basis,
revenue is recognised for each element as if it were an individual
contract. The total contract consideration is allocated between the
separate elements.

Sales of bundled offers in the mobile business frequently
include a handset and a telecommunications service contract.
There is objective and reliable evidence of fair value for the
telecommunications service to be delivered and this represents the
revenue recognised in respect of the services delivered. The residual
value of the bundled offer therefore represents the revenue in
respect of the handset. This is generally the amount paid by the
customer for the handset.

For offers that cannot be separated into identifiable components,
revenues are recognised in full over the life of the contract. The
main example is connection to the service: this does not represent
a separately identifiable transaction from the subscription.

Pension obligations
BT has a commitment, to pay pension benefits to over 310,000
people over a period of more than 70 years. This is mainly through
the BTPS but also includes EE’s defined benefit scheme which has
been consolidated on acquisition. The accounting cost of these
benefits and the present value of our pension liabilities involve
judgements about uncertain events including such factors as the
life expectancy of the members, the salary progression of our
current employees, price inflation and the discount rate used to
calculate the net present value of the future pension payments.
We use estimates for all of these factors in determining the pension
costs and liabilities incorporated in our financial statements.
The assumptions reflect historical experience and our judgement
regarding future expectations.

The value of the net pension obligation at 31 March 2016, the
key financial assumptions used to measure the obligation, the
sensitivity of the IAS 19 pension liability at 31 March 2016, and

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information172

2. Critical accounting estimates
and key judgements continued
of the income statement charge in 2016/17 to changes in these
assumptions are disclosed in note 20.

Useful lives for property, plant and equipment and
software
The plant and equipment in our networks is long-lived with
cables and switching equipment operating for over ten years
and underground ducts being used for decades. We also develop
software for use in IT systems and platforms that supports the
products and services provided to our customers and that is also
used within the group.

The annual depreciation and amortisation charge is sensitive to
the estimated service lives allocated to each type of asset. Asset
lives are assessed annually and changed when necessary to reflect
current thinking on the remaining lives in light of technological
change, network investment plans (including the group’s fibre
rollout programme), prospective economic utilisation and physical
condition of the assets concerned. Changes to the service lives of
assets implemented from 1 April 2015 had no significant impact
in aggregate on the results for the year ended 31 March 2016.

The carrying values of software, property, plant and equipment
are disclosed in notes 12 and 13. The useful lives applied to the
principal categories of assets are disclosed on pages 176 and 177.

Provisions and contingent liabilities
As disclosed in note 19, the group’s provisions principally relate
to obligations arising from property rationalisation programmes,
restructuring programmes, asset retirement obligations, network
assets, claims, litigation and regulatory risks.

Under our property rationalisation programmes we have identified
a number of surplus properties. Although efforts are being made
to sub-let this space, this is not always possible. Estimates have
been made of the cost of vacant possession and of any shortfall
arising from any sub-lease income being lower than the lease
costs. Any such shortfall is recognised as a provision.

Restructuring programmes involve estimation of the direct
cost necessary for the restructuring and exclude items that are
associated with the on-going activities of the entity.

Asset retirement obligations involve judgement around the cost
to dismantle equipment and restore sites upon vacation and
the timing of the event. The provision represents the group’s
best estimate of the amount that may be required to settle the
obligation. Costs are expected to be incurred over a period of up
to 20 years and the estimates are discounted using a rate that
reflects the passage of time.

Network asset provisions represent our future operational costs
and vacant site rentals arising from restructuring obligations
relating to network share agreements. Costs are expected to be
incurred over a period of up to 20 years and the estimates are
discounted using a rate that reflects the passage of time.

In respect of claims, litigation and regulatory risks, the group
provides for anticipated costs where an outflow of resources is
considered probable and a reasonable estimate can be made of

the likely outcome. The prices at which certain services are charged
are regulated and may be subject to retrospective adjustment by
regulators. Estimates are used in assessing the likely value of the
regulatory risk.

For all risks, the ultimate liability may vary from the amounts
provided and will be dependent upon the eventual outcome of any
settlement.

Management exercised judgement in measuring the exposures to
contingent liabilities (see note 30) through assessing the likelihood
that a potential claim or liability will arise and in quantifying the
possible range of financial outcomes.

Current and deferred income tax
The actual tax we pay on our profits is determined according
to complex tax laws and regulations. Where the effect of these
laws and regulations is unclear, we use estimates in determining
the liability for the tax to be paid on our past profits which we
recognise in our financial statements. We believe the estimates,
assumptions and judgements are reasonable but this can involve
complex issues which may take a number of years to resolve. The
final determination of prior year tax liabilities could be different
from the estimates reflected in the financial statements and may
result in the recognition of an additional tax expense or tax credit
in the financial statements.

The complexity of the group means that it pays taxes across a
number of countries. Where the interpretation of local tax law is
not clear, the tax position taken in a tax return may be enquired
into by the local tax authorities. We have processes in place to
manage our uncertain tax provisions individually, but the process
for agreeing the final tax liabilities can take a number of years
to complete. Included within current tax liabilities is £278m in
respect of these uncertain tax positions.

Deferred tax assets and liabilities require management judgement
in determining the amounts to be recognised. In particular,
judgement is used when assessing the extent to which deferred
tax assets should be recognised, taking into account the expected
timing and level of future taxable income.

Deferred tax assets are only recognised when management believe
they will be recovered against future taxable profits, including the
future release of deferred tax liabilities. In making this assessment,
management uses the expectations of future revenue growth,
operating costs, and profit margins assumed in the latest financial
plans. Management also considers whether transfer pricing
arrangements have been explicitly agreed with local tax authorities.

Changes in assumptions which underpin the group’s forecast could
have an impact on the amount of future taxable profits and could
have an impact on the period over which any deferred tax asset
would be recovered.

The value of the group’s income tax assets and liabilities is disclosed
on the balance sheet on page 167. The carrying value of the
group’s deferred tax assets and liabilities, including the deferred tax
asset recognised in respect of EE Limited’s historical tax losses, is
disclosed in note 9.

BT Group plc Annual Report 2016173

• The EE brand was measured by estimating the savings realised

by owning or holding the right to use the brand name (as opposed
to paying a royalty fee to a third party). This includes an estimate
of the projected revenues generated and the estimated life of
the brand to a third party.

• Tangible assets were valued by estimating the current cost

to purchase or replace the assets.

The excess of the consideration transferred over the fair value
of the net identifiable assets acquired is recorded as goodwill.
No resulting gains or loss were recognised on settlement of pre-
existing relationships between BT and EE. The group has one year
from the acquisition date to re-measure the fair values of the
acquired assets and liabilities and the resulting goodwill if new
information is obtained relating to conditions that existed at the
acquisition date.

Acquisition related costs are expensed as incurred.

The business combinations entered into during the period are
disclosed in note 14.

Government grants relating to Broadband Delivery
UK (BDUK) contracts
The group receives government grants in relation to the BDUK
programme and other rural superfast broadband contracts. Where
we have achieved certain service levels, or delivered the network
more efficiently than anticipated, we have a potential obligation
to either re-invest or repay grant funding. Where this is the case,
management assesses and defers the income with a corresponding
increase in capital expenditure. The value of the government
grants is disclosed in note 13.

Providing for doubtful debts
BT provides services to consumer and business customers, mainly
on credit terms. We know that certain debts due to us will not
be paid through the default of a small number of our customers.
Judgements are required in assessing the recoverability of overdue
trade receivables and whether a provision for doubtful debts may
be required.

Estimates, based on our historical experience, are used in
determining the level of debts that we believe will not be collected.
These estimates include such factors as the current state of the
economy and particular industry issues.

The value of the provision for doubtful debts is disclosed
in note 17.

2. Critical accounting estimates
and key judgements continued
Goodwill
Goodwill recognised in a business combination does not
generate cash flows independently of other assets or groups
of assets. As a result, the recoverable amount, being the value
in use, is determined at a cash generating unit (CGU) level.
The determination of the CGU is judgemental and for goodwill
impairment purposes represents the lowest level within the entity
at which the goodwill is monitored for internal management
purposes, and cannot be larger than an operating segment.
The relevant CGUs are deemed to be BT Global Services, BT Business,
BT Consumer and EE which are the same units we report in our
segmental reporting.

The value in use calculations require judgement in relation to
uncertain items, including management’s expectations of future
revenue growth, operating costs, profit margins, operating cash
flows, and discount rate for each CGU.

The future cash flows used in the value in use calculations are
based on the latest Board approved three-year financial plans
and are adjusted for risks specific to the CGU. Expectations about
future growth reflect the expectations of growth in the markets
in which the CGU operates. The discount rate is derived from the
group’s post-tax weighted average cost of capital which is assessed
each year. Where relevant, the discount rate used in each CGU is
adjusted for the risk specific to the asset for which the future cash
flow estimates have not been adjusted.

Irrespective of whether there is any indication of impairment,
the group is required to test annually for impairment of goodwill
acquired in a business combination. The carrying value of
goodwill and the key assumptions used in performing the annual
impairment assessment are disclosed in note 12.

Business combinations
The acquisition method of accounting is used to account for all
business combinations regardless of whether equity instruments or
other assets are acquired.
For the EE acquisition, BT provisionally paid £3,464m of cash
and issued 1,595m of new shares valued at £7,507m using the
opening share price of 470.7p per share on 29 January 2016,
being the date of acquisition of EE and the date when the shares
were admitted to trading.
Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are, with limited exceptions,
measured initially at their fair values at the acquisition date. The
fair value of an asset or liability represents the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. We used independent
valuers to assist in the valuation for EE.

In determining the fair value of the intangible assets acquired with
EE we generally used risk-adjusted future cash flows discounted
using discount rates specific to the asset. In determining cash
flows we have used a combination of historical data and estimates
regarding revenue growth, profit margins and operating cash
flows.

• We valued the spectrum licences using prices paid on comparable
licences in a range of jurisdictions and assumptions on future
cash flows.

• Customer relationships require judgement on future cash

flows, churn, and the expected remaining life of the customer
relationship.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information174

2. Critical accounting estimates and key
judgements continued
Subscriber acquisition and retention costs
Subscriber acquisition and retention costs are recognised as an
expense for the period in which they are incurred. In some cases,
contractual clauses with retailers provide for profit-sharing based
on the recognised and paid revenue. In these cases the expense is
recognised when the revenue is earned from the customer and a
corresponding liability to pay that retailer arises. To the extent that
subscriber acquisition and retention costs are paid in advance they
are recognised as prepayments provided the amounts are able to
be measured reliably and are expected to be recoverable.

Joint arrangements
The group’s joint operation, Mobile Broadband Network Limited
(MBNL), is structured in a separate incorporated company. The
group holds a 50% interest in the arrangement and, under the
joint operations agreement, unanimous consent is required from
all parties to the agreement for all significant activities. MBNL
operates solely for the benefit of the parties to the joint operation
and all of MBNL’s output is to those parties. MBNL relies on the
parties to the agreement on a continuous basis for the settlement
of liabilities.

In determining whether the operation is a joint operation or a joint
venture, we have considered whether the arrangement indicates
that the group and other parties to the agreement have a direct
share in all of the assets employed by the arrangement, the group
is liable for its share of the liabilities incurred through the terms
of the contractual arrangement and whether the arrangement
establishes the allocation of revenues and expenses relative to its
capacity used in the arrangement.

On consideration of the facts and circumstances the group has
determined this arrangement to be classified as a joint operation.
The group’s share of the results and assets and liabilities of MBNL
are therefore reflected on a line by line basis in the consolidated
financial statements.

3. Significant accounting policies
The significant accounting policies applied in preparation of these
consolidated financial statements are set out below. These policies
have been consistently applied to all the years presented, unless
otherwise stated.

Revenue
Revenue represents the fair value of the consideration received
or receivable for communications services and equipment sales,
net of discounts and sales taxes. Revenue is recognised when it is
probable that the economic benefits associated with a transaction
will flow to the group and the amount of revenue and associated
costs can be measured reliably. The accounting for revenue sharing
arrangements and supply depends on the analysis of the facts and
circumstances surrounding these transactions.

Where the group acts as an agent in a transaction, it recognises
revenue net of directly attributable costs.

Bundles
Revenue from sale of bundles is described under ‘Critical
accounting estimates and key judgements’ above.

Services
Revenue arising from separable installation and connection services
is recognised when it is earned, upon activation. Revenue from the
rental of analogue and digital lines and private circuits is recognised

on a straight line basis over the period to which it relates. Revenue
from calls is recognised at the time the call is made over the group’s
network. Subscription fees, consisting primarily of monthly charges
for access to broadband and other internet access or voice services,
are recognised as revenue as the service is provided. Revenue
from the interconnection of voice and data traffic between other
telecommunications operators is recognised at the time of transit
across the group’s network.

Revenues from telephone service and internet access subscription
fees as well as those from the wholesale access revenues are
recognised on a straight line basis over the period to which they
relate. Revenue from calls is recognised at the time the call is
made over the group’s network. Revenue from the interconnection
of voice and data traffic between other telecommunications
operators is recognised at the time of transit across the group’s
network.

Equipment sales
Revenue from the sale of equipment is recognised when all the
significant risks and rewards of ownership are transferred to the
customer, which is normally the date the equipment is delivered
and accepted by the customer.

Long-term contractual arrangements
Revenue from long-term contractual arrangements, including fixed
price contracts to design and build software solutions, is recognised
based on the percentage of completion method. The stage of
completion is estimated using an appropriate measure according to
the nature of the contract such as the proportion of costs incurred
relative to the estimated total contract costs, or other measures of
completion such as the achievement of contract milestones and
customer acceptance. In the case of time and materials contracts,
revenue is recognised as the service is rendered.

Costs related to delivering services under long-term contractual
arrangements are expensed as incurred except for an element
of costs incurred in the initial contract set-up, transition or
transformation phase, which is deferred and recorded within
non-current assets. These costs are then recognised in the income
statement on a straight line basis over the remaining contract
term, unless the pattern of service delivery indicates a different
profile is appropriate. These costs are directly attributable to
specific contracts, relate to future activity, will generate future
economic benefits and are assessed for recoverability on a regular
basis.

The percentage of completion method relies on estimates of
total expected contract revenues and costs, as well as reliable
measurement of the progress made towards completion. Unless
the financial outcome of a contract can be estimated with
reasonable certainty, no attributable profit is recognised. In
such circumstances, revenue is recognised equal to the costs
incurred to date, to the extent that such revenue is expected to
be recoverable, or costs are accrued to bring the margin to nil.
Recognised revenue and profits are subject to revisions during the
contract if the assumptions regarding the overall contract outcome
are changed. The cumulative impact of a revision in estimates
is recorded in the period in which such revisions become likely
and can be estimated. Where the actual and estimated costs to
completion exceed the estimated revenue for a contract, the full
contract life loss is recognised immediately.

Multiple element arrangements
Revenue from multiple element arrangements is described in
‘Critical accounting estimates and key judgements’, above.

BT Group plc Annual Report 2016175

3. Significant accounting policies continued
Operating and reportable segments
The group’s operating segments are reported based on financial
information provided to the Operating Committee, as detailed on
page 26, which is the key management committee and represents
the ‘chief operating decision maker’.

The group’s organisational structure reflects the different customer
groups to which it provides communications products and services
via its customer-facing lines of business: BT Global Services, BT
Business, BT Consumer, EE, BT Wholesale and Openreach. The
customer-facing lines of business are supported by an internal
service unit: BT Technology, Service & Operations (BT TSO).

The customer-facing lines of business are the group’s reportable
segments and generate substantially all the group’s revenue. The
remaining operations of the group are aggregated and included
within the ‘Other’ category to reconcile to the consolidated results
of the group. The ‘Other’ category includes BT TSO and the group’s
centralised functions including procurement, supply chain and
property management.

Provisions for the settlement of significant legal, commercial
and regulatory disputes, which are negotiated at a group level,
are initially recorded in the ‘Other’ segment. On resolution of
the dispute, the full impact is recognised in the results of the
relevant line of business and offset in the group results through
the utilisation of the provision previously charged to the ‘Other’
segment. Settlements which are particularly significant or cover
more than one financial year may fall within the definition of
specific items as detailed on page 240.

The costs incurred by BT TSO are recharged to the customer-
facing lines of business to reflect the services it provides to them.

Depreciation and amortisation incurred by BT TSO in relation to
the networks and systems it manages and operates on behalf of
the customer-facing lines of business is allocated to the lines of
business based on their respective utilisation. Capital expenditure
incurred by BT TSO for specific projects undertaken on behalf of
the customer-facing lines of business is allocated based on the
value of the directly attributable expenditure incurred. Where
projects are not directly attributable to a particular line of business,
capital expenditure is allocated between them based on the
proportion of estimated future economic benefits. BT TSO and
the group’s centralised functions are not reportable segments as
they did not meet the quantitative thresholds as set out in IFRS 8
‘Operating Segments’ for any of the years presented.

Performance of each reportable segment is measured based
on adjusted EBITDA, defined as EBITDA before specific items,
as included in the internal financial reports reviewed by the
Operating Committee. EBITDA is defined as the operating profit
or loss before depreciation, amortisation, net finance expense and
taxation. Adjusted EBITDA is considered to be a useful measure
of the operating performance of the lines of business because it
approximates the underlying operating cash flow by eliminating
depreciation and amortisation and also provides a meaningful
analysis of trading performance by excluding specific items, which
are disclosed separately by virtue of their size, nature or incidence.
Specific items are detailed in note 8 and are not allocated to the
reportable segments as this reflects how they are reported to
the Operating Committee. Finance expense and income are not
allocated to the reportable segments, as the central treasury
function manages this activity, together with the overall net debt
position of the group.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information176

3. Significant accounting policies continued
Retirement benefits
The group’s net obligation in respect of defined benefit pension
plans is the present value of the defined benefit obligation less the
fair value of the plan assets.

The calculation of the obligation is performed by a qualified
actuary using the projected unit credit method and key actuarial
assumptions at the balance sheet date.

The income statement expense is allocated between an operating
charge and net finance income or expense. The operating charge
reflects the increase in the defined benefit obligation resulting
from the pension benefit earned by active employees in the
current period, the costs of administering the plans and any
past service costs/credits such as those arising from curtailments
or settlements. The net finance income or expense reflects the
interest on the retirement benefit obligations recognised in the
group balance sheet, based on the discount rate at the start of the
year. Actuarial gains and losses are recognised in full in the period
in which they occur and are presented in the group statement of
comprehensive income.

The group also operates defined contribution pension plans and
the income statement expense represents the contributions
payable for the year.

Property, plant and equipment
Property, plant and equipment are included at historical cost,
net of accumulated depreciation, government grants and any
impairment charges. Property, plant and equipment acquired
through business combinations are initially recorded at fair value
and subsequently accounted for on the same basis as the group’s
existing assets. An item of property, plant and equipment is
derecognised on disposal or when no future economic benefits
are expected to arise from the continued use of the asset. The
difference between the sale proceeds and the net book value at
the date of disposal is recognised in operating costs in the income
statement.

Included within the cost of network infrastructure and equipment
are direct and indirect labour costs, materials and directly
attributable overheads.

Depreciation is provided on property, plant and equipment on
a straight line basis from the time the asset is available for use,
to write off the asset’s cost over the estimated useful life taking
into account any expected residual value. Freehold land is not
depreciated.

The lives assigned to principal categories of assets are as follows:

Land and buildings
– Freehold buildings
– Short-term leasehold improvements

– Leasehold land and buildings

Network infrastructure
Transmission equipment
– Duct
– Cable
– Fibre
Exchange equipment
Other network equipment

Other assets
– Motor vehicles
– Computers and office equipment

14 to 50 years
Shorter of 10 years or
lease term
Unexpired portion of lease or
40 years, whichever is the shorter

40 years
3 to 25 years
5 to 20 years
2 to 13 years
2 to 20 years

2 to 9 years
3 to 7 years

Assets held under finance leases are depreciated over the shorter
of the lease term or their useful economic life. Residual values and
useful lives are reassessed annually and, if necessary, changes are
recognised prospectively.

Network share assets
Certain assets have been contributed to a network share
arrangement by both EE and Hutchison 3G UK Limited, with legal
title remaining with the contributor. This is considered to be a
reciprocal arrangement. The group’s share of the assets on
acquisition of EE was recognised at fair value within tangible
assets, and depreciated in line with the group’s policy. Subsequent
additions are recorded at cost. For further information see notes
13 and 14.

Intangible assets
Identifiable intangible assets are recognised when the group
controls the asset, it is probable that future economic benefits
attributable to the asset will flow to the group and the cost of
the asset can be reliably measured. All intangible assets, other
than goodwill, are amortised over their useful economic life. The
method of amortisation reflects the pattern in which the assets are
expected to be consumed. If the pattern cannot be determined
reliably, the straight line method is used.

Goodwill
Goodwill represents the excess of the cost of an acquisition over
the fair value of the group’s share of the identifiable net assets
(including intangible assets) of the acquired business.

For the purpose of impairment testing, goodwill acquired in a
business combination is allocated to each of the CGUs that is
expected to benefit from the business combination. Each CGU to
which goodwill is allocated represents the lowest level within the
group at which the goodwill is monitored for internal management
purposes.

BT Group plc Annual Report 2016
177

3. Significant accounting policies continued
Acquired intangible assets – customer relationships and brands
Intangible assets such as customer relationships or brands acquired
through business combinations are recorded at fair value at
the date of acquisition and subsequently carried at amortised
cost. Assumptions are used in estimating the fair values of these
relationships or brands and include management’s estimates of
revenue and profits to be generated by them.

Telecommunications licences
Licence fees paid to governments, which permit
telecommunications activities to be operated for defined periods,
are initially recorded at cost and amortised from the time the
network is available for use to the end of the licence period.
Licences acquired through business combinations are recorded
at fair value at the date of acquisition and subsequently carried
at amortised cost. The fair value is based on management’s
assumption of future cash flows using market expectations at
acquisition date.

Computer software
Computer software comprises computer software licences
purchased from third parties, and also the cost of internally
developed software. Computer software licences purchased from
third parties are initially recorded at cost.

Costs directly associated with the production of internally
developed software, including direct and indirect labour costs of
development, are capitalised only where it is probable that the
software will generate future economic benefits, the cost of the
asset can be reliably measured and technical feasibility can be
demonstrated, in which case it is capitalised as an intangible asset
on the balance sheet. Costs which do not meet these criteria and
research costs are expensed as incurred.

The group’s development costs which give rise to internally
developed software include upgrading the network architecture
or functionality and developing service platforms aimed at
offering new services to the group’s customers. See Research and
Development on page 36.

Other
Other intangible assets include website development costs and
other licences. Items are capitalised at cost and amortised on a
straight line basis over their useful economic life or the term of the
contract.

Estimated useful economic lives
The estimated useful economic lives assigned to the principal
categories of intangible assets are as follows:

– Computer software
– Telecommunications licences
– Customer relationships and brands

2 to 10 years
2 to 20 years
1 to 15 years

Programme rights
Programme rights are recognised on the balance sheet from
the point at which the legally enforceable licence period begins.
Rights for which the licence period has not started are disclosed as
contractual commitments in note 30. Payments made to receive
commissioned or acquired programming in advance of the legal
right to broadcast the programmes are classified as prepayments.

Programme rights are initially recognised at cost and are amortised
from the point at which they are available for use, on a straight
line basis over the programming period, or the remaining licence
term, as appropriate. The amortisation charge is recorded within
operating costs in the income statement.

Programmes produced internally are recognised within current
assets at production cost, which includes labour costs and an
appropriate portion of relevant overheads, and charged to the
income statement over the period of the related broadcast.

Programme rights are tested for impairment in accordance with
the group’s policy for impairment of non-financial assets set out on
page 178. Related cash outflows are classified as operating cash
flows in the cash flow statement.

Inventories
Network maintenance equipment and equipment to be sold to
customers are stated at the lower of cost or net realisable value,
taking into account expected revenues from the sale of packages
comprising a mobile handset and a subscription. Cost corresponds
to purchase or production cost determined by the first in first out
(FIFO) cost method.

Provisions
Provisions are recognised when the group has a present legal or
constructive obligation as a result of past events, it is probable that
an outflow of resources will be required to settle the obligation and
the amount can be reliably estimated. Provisions are determined by
discounting the expected future cash flows at a pre-tax rate that
reflects current market assessments of the time value of money
and the risks specific to the liability. Financial liabilities within
provisions are initially recognised at fair value and subsequently
carried at amortised cost using the effective interest method.
Onerous lease provisions are measured at the lower of the cost to
fulfil or to exit the contract.

Current and deferred income tax
Current income tax is calculated on the basis of the tax laws
enacted or substantively enacted at the balance sheet date
in the countries where the group’s subsidiaries, associates and
joint ventures operate and generate taxable income. The group
periodically evaluates positions taken in tax returns with respect
to situations in which applicable tax regulation is subject to
interpretation, and the group establishes provisions where
appropriate on the basis of the amounts expected to be paid to
tax authorities.

Deferred tax is recognised, using the liability method, in respect of
temporary differences between the carrying amount of the group’s
assets and liabilities and their tax base. Deferred income tax assets
and liabilities are offset when there is a legally enforceable right
to offset current tax assets against current tax liabilities and when
the deferred income tax assets and liabilities relate to income taxes
levied by the same taxation authority on either the taxable entity
or different taxable entities where there is an intention to settle
the balances on a net basis. Any remaining deferred tax asset is
recognised only when, on the basis of all available evidence, it can
be regarded as probable that there will be suitable taxable profits,
within the same jurisdiction, in the foreseeable future against
which the deductible temporary difference can be utilised.

Deferred tax is determined using tax rates that are expected
to apply in the periods in which the asset is realised or liability
settled, based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.

Basis of consolidation
The group financial statements consolidate the financial
statements of BT Group plc and its subsidiaries, and include its
share of the results of associates and joint ventures using the
equity method of accounting. The group recognises its direct rights
to (and its share of) jointly held assets, liabilities, revenues and
expenses of joint operations under the appropriate headings in the
consolidated financial statements.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information178

3. Significant accounting policies continued
A subsidiary is an entity that is controlled by another entity, known
as the parent or investor. An investor controls an investee when
the investor is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those
returns through its power over the investee.

Non-controlling interests in the net assets of consolidated
subsidiaries, which consist of the amounts of those interests at
the date of the original business combination and non-controlling
share of changes in equity since the date of the combination, are
not material to the group’s financial statements.

The results of subsidiaries acquired or disposed of during the year
are consolidated from and up to the date of change of control.
Where necessary, accounting policies of subsidiaries have been
aligned with the policies adopted by the group. All intra-group
transactions including any gains or losses, balances, income or
expenses are eliminated in full on consolidation.

When the group loses control of a subsidiary, the profit or loss on
disposal is calculated as the difference between (i) the aggregate of
the fair value of the consideration received and the fair value of any
retained interest and (ii) the previous carrying amount of the assets
(including goodwill), and liabilities of the subsidiary and any non-
controlling interests. The profit or loss on disposal is recognised as
a specific item.

Impairment of non-financial assets
Intangible assets with finite useful lives and property, plant and
equipment are tested for impairment if events or changes in
circumstances (assessed at each reporting date) indicate that the
carrying amount may not be recoverable. When an impairment
test is performed, the recoverable amount is assessed by reference
to the higher of the net present value of the expected future cash
flows (value in use) of the relevant cash generating unit and the fair
value less cost to sell.

Goodwill is reviewed for impairment at least annually. Impairment
losses are recognised in the income statement, as a specific item. If
a cash generating unit is impaired, impairment losses are allocated
firstly against goodwill, and secondly on a pro-rata basis against
intangible and other assets.

Government grants
Government grants are recognised when there is reasonable
assurance that the conditions associated with the grants have been
complied with and the grants will be received.

Grants for the purchase or production of property, plant and
equipment are deducted from the cost of the related assets and
reduce future depreciation expense accordingly. Grants for the
reimbursement of operating expenditure are deducted from the
related category of costs in the income statement. Government
grants received relating to the BDUK programme and other rural
superfast broadband contracts are accounted for as described
under ‘Critical accounting estimates and key judgements’.

Once a government grant is recognised, any related contingent
liability or contingent asset is treated in accordance with IAS 37
‘Provisions, Contingent Liabilities and Contingent Assets’.

Foreign currencies
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the date of the
transaction. Foreign exchange gains and losses resulting from the
settlement of transactions and the translation of monetary assets
and liabilities denominated in foreign currencies at period end
exchange rates are recognised in the income statement line which
most appropriately reflects the nature of the item or transaction.

On consolidation, assets and liabilities of foreign undertakings are
translated into Sterling at year end exchange rates. The results of
foreign undertakings are translated into Sterling at average rates
of exchange for the year (unless this average is not a reasonable
approximation of the cumulative effects of the rates prevailing
on the transaction dates, in which case income and expenses are
translated at the dates of the transactions). Foreign exchange
differences arising on retranslation are recognised directly in a
separate component of equity, the translation reserve.

In the event of the disposal of an undertaking with assets and
liabilities denominated in a foreign currency, the cumulative
translation difference associated with the undertaking in the
translation reserve is charged or credited to the gain or loss on
disposal recognised in the income statement.

Research and development
Research expenditure is recognised in the income statement
in the period in which it is incurred. Development expenditure,
including the cost of internally developed software, is recognised
in the income statement in the period in which it is incurred unless
it is probable that economic benefits will flow to the group from
the asset being developed, the cost of the asset can be reliably
measured and technical feasibility can be demonstrated, in which
case it is capitalised as an intangible asset on the balance sheet.
Capitalisation ceases when the asset being developed is ready for
use. Research and development costs include direct and indirect
labour, materials and directly attributable overheads.

Leases
The determination of whether an arrangement is, or contains, a
lease is based on the substance of the arrangement and requires
an assessment of whether the fulfilment of the arrangement is
dependent on the use of a specific asset or assets and whether the
arrangement conveys the right to use the asset.

Leases of property, plant and equipment where the group holds
substantially all the risks and rewards of ownership are classified
as finance leases. Finance lease assets are capitalised at the
commencement of the lease term at the lower of the present value
of the minimum lease payments or the fair value of the leased
asset. The obligations relating to finance leases, net of finance
charges in respect of future periods, are recognised as liabilities.
Leases are subsequently measured at amortised cost using the
effective interest method.

Leases where a significant portion of the risks and rewards are held
by the lessor are classified as operating leases. Rentals are charged
to the income statement on a straight line basis over the period of
the lease.

Own shares
Own shares represent the shares of the parent company BT Group
plc that are held in treasury or by employee share ownership trusts.
Own shares are recorded at cost and deducted from equity. When
shares vest unconditionally or are cancelled they are transferred
from the own shares reserve to retained earnings at their weighted
average cost.

Share-based payments
The group operates a number of equity settled share-based
payment arrangements, under which the group receives services
from employees in consideration for equity instruments (share
options and shares) of the group. Equity settled share-based
payments are measured at fair value at the date of grant excluding
the effect of non market-based vesting conditions but including
any market-based performance criteria and the impact of non-
vesting conditions (for example, the requirement for employees to
save). The fair value determined at the grant date is recognised as

BT Group plc Annual Report 2016179

3. Significant accounting policies continued
an expense on a straight line basis over the vesting period, based
on the group’s estimate of the options or shares that will eventually
vest and adjusted for the effect of non market-based vesting
conditions. Fair value is measured using either the Binomial options
pricing model or Monte Carlo simulations, whichever is most
appropriate to the share-based payment arrangement.

Service and performance conditions are vesting conditions.
Any other conditions are non-vesting conditions which have
to be taken into account to determine the fair value of equity
instruments granted. In the case that an award or option does not
vest as a result of a failure to meet a non-vesting condition that
is within the control of either counterparty, this is accounted for
as a cancellation. Cancellations are treated as accelerated vesting
and all remaining future charges are immediately recognised in the
income statement. As the requirement to save under an employee
saveshare arrangement is a non-vesting condition, employee
cancellations are treated as an accelerated vesting.

Awards that lapse or are forfeited result in a credit to the income
statement (reversing all previously recognised charges) in the year
in which they lapse or are forfeited.

Termination benefits
Termination benefits (leaver costs) are payable when employment
is terminated before the normal retirement date, or when an
employee accepts voluntary redundancy in exchange for these
benefits. The group recognises termination benefits when it is
demonstrably committed to the affected employees leaving the
group.

Financial instruments

Financial liabilities at amortised cost

Trade and other payables
Financial liabilities within trade and other payables are initially
recognised at fair value, which is usually the original invoiced
amount, and subsequently carried at amortised cost using the
effective interest method.

Loans and other borrowings
Loans and other borrowings are initially recognised at the fair value
of amounts received net of transaction costs. Loans and other
borrowings are subsequently measured at amortised cost using
the effective interest method and, if included in a fair value hedge
relationship, are re-valued to reflect the fair value movements on
the hedged risk associated with the loans and other borrowings.
The resulting amortisation of fair value movements, on de-
designation of the hedge, is recognised in the income statement.

Available-for-sale investments
Liquid and other investments are classified as available-for-sale
investments and are initially recognised at fair value plus direct
transaction costs and then re-measured at subsequent reporting
dates to fair value, with unrealised gains and losses (except
for changes in exchange rates for monetary items, interest,
dividends and impairment losses, which are recognised in the
income statement) recognised in equity until the financial asset is
derecognised, at which time the cumulative gain or loss previously
recognised in equity is taken to the income statement, in the
line that most appropriately reflects the nature of the item or
transaction. On disposal or impairment of the investments, any
gains and losses that have been deferred in other comprehensive
income are re-classified to the income statement. Dividends
on equity investments are recognised in the income statement
when the group’s right to receive payment is established. Equity
investments are recorded in non-current assets unless they are
expected to be sold within one year.

Loans and receivables

Trade and other receivables
Trade and other receivables are initially recognised at fair value,
which is usually the original invoiced amount, and are subsequently
carried at amortised cost, using the effective interest method,
less provisions made for doubtful receivables. Provisions are made
specifically where there is evidence of a risk of non-payment,
taking into account ageing, previous losses experienced and
general economic conditions.

Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current
balances with banks and similar institutions, which are readily
convertible to cash and are subject to insignificant risk of changes
in value and have an original maturity of three months or less. For
the purpose of the consolidated cash flow statement, cash and
cash equivalents are as defined above net of outstanding bank
overdrafts. Bank overdrafts are included within loans and other
borrowings, in current liabilities on the balance sheet.

Financial assets and liabilities at fair value through
profit or loss
All of the group’s derivative financial instruments are held for
trading and classified as fair value through profit or loss.

Derivative financial instruments
The group uses derivative financial instruments mainly to reduce
exposure to foreign exchange and interest rate risks. The group’s
policy is not to use derivatives for trading purposes. However,
derivatives that do not qualify for hedge accounting or are
specifically not designated as a hedge where natural offset is more
appropriate are initially recognised and subsequently measured at
fair value through profit and loss. Any direct transaction costs are
recognised immediately in the income statement. Gains and losses
on re-measurement are recognised in the income statement in
the line that most appropriately reflects the nature of the item or
transaction to which they relate. Derivative financial instruments
are classified as current assets or current liabilities where they have
a maturity period within 12 months. Where derivative financial
instruments have a maturity period greater than 12 months, they
are classified within either non-current assets or non-current
liabilities.

Where the fair value of a derivative contract at initial recognition
is not supported by observable market data and differs from
the transaction price, a day one gain or loss will arise which is
not recognised in the income statement. Such gains and losses
are deferred and amortised to the income statement based on
the remaining contractual term and as observable market data
becomes available.

Hedge accounting
Where derivatives qualify for hedge accounting, recognition of
any resultant gain or loss depends on the nature of the hedge.
To qualify for hedge accounting, hedge documentation must be
prepared at inception and the hedge must be expected to be
highly effective both prospectively and retrospectively. The hedge
is tested for effectiveness at inception and in subsequent periods
in which the hedge remains in operation. Hedge accounting is
discontinued when the hedging instrument expires, or is sold,
terminated or no longer qualifies for hedge accounting or the
group chooses to end the hedge relationship. The group designates
certain derivatives as either cash flow hedges or fair value hedges.

Cash flow hedges
When a derivative financial instrument is designated as a hedge
of the variability in cash flows of a recognised asset or liability, or
a highly probable transaction, the effective part of any gain or
loss on the derivative financial instrument is recognised directly

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information180

3. Significant accounting policies continued
in equity, in the cash flow reserve. For cash flow hedges of
recognised assets or liabilities, the associated cumulative gain
or loss is removed from equity and recognised in the same line
of the income statement and in the same period or periods
that the hedged transaction affects the income statement. Any
ineffectiveness arising on a cash flow hedge of a recognised asset
or liability is recognised immediately in the same income statement
line as the hedged item. Where ineffectiveness arises on highly
probable transactions, it is recognised in the income statement
line which most appropriately reflects the nature of the item or
transaction.

Fair value hedges
When a derivative financial instrument is designated as a hedge
of the variability in fair value of a recognised asset or liability, or
unrecognised firm commitment, the change in fair value of the
derivative that is designated as a fair value hedge is recorded
in the income statement at each reporting date, together with
any changes in fair value of the hedged asset or liability that is
attributable to the hedged risk.

BT Group plc Annual Report 2016181

4. Segment information
The definition of the group’s operating and reportable segments is provided on page 175.

EE was acquired on 29 January 2016 and up to 31 March 2016 has been reported as a separate line of business to the Operating
Committee. It is therefore a reportable segment. EE had trading with other lines of business within the group which has become internal
trade since acquisition, and is therefore eliminated on consolidation. We have set out below information regarding the results of each
reportable segment including a reconciliation of the 2015/16 consolidated results to our results excluding EE, to enable us to show how
we performed compared to our outlook.

Segment revenue and profit

Year ended 31 March
2016

BT Global
Services
£m

BT
Business
£m

BT
Consumer
£m

BT
d Wholesale
£m

EE
£m

Openreach
£m

Other
£m

Total
£m

Reconciliation of BT consolidated
to BT excluding EE
Add back
elimination
of BT
internal
trade with
e
EE
£m

Removal
of EE
contribution
£m

Total
excluding
EE
£m

Segment revenue
Internal revenue

6,530
(29)

3,130
(377)

4,598 1,055
(17)

(65)

2,086
(68)

5,100
(3,058)

75
(51)

22,574
(3,665)

(1,055)
17

–
69

21,519
(3,579)

Revenue from external
customersa
EBITDAb
Depreciation and
amortisation

6,501

1,048

2,753

1,076

4,533 1,038

2,018

1,037

261

542

2,042

2,664

(518)

(198)

(206)

(176)

(212)

(1,301)

530

Operating profit (loss)a
Specific items (note 8)
Operating profit (loss)
Net finance expensec
Share of post tax profit of associates and joint ventures

878

Profit before tax

831

330

1,363

18,909

(1,038)

17,940

–

6,319

(2,454)

3,865

(48)

6,580

(261)

176

(85)

(19)

(67)

(2,630)

3,950
(215)
3,735
(712)
6

3,029

a Before specific items.
b EBITDA is stated before specific items and is a non-GAAP measure provided in addition to the disclosure requirements defined under IFRS. Our rationale for using non-GAAP measures is explained on

pages 240 to 242.

c Net finance expense includes specific item expense of £229m (2014/15: £299m, 2013/14: £235m). See note 8.
d EE reflects results for the period from acquisition on 29 January to 31 March 2016.
e On acquisition transactions between EE and other BT lines of business have become internal. BT Wholesale and BT Business had £68m and £1m of internal revenue with EE respectively. EE had a total of

£17m of internal revenue with BT Business, BT Consumer and BT Wholesale.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

182 BT Group plc

Annual Report 2016

4. Segment information continued
BT Global
Services
£m

Year ended 31 March 2015

BT Business
£m

BT Consumer
£m

BT Wholesale
£m

Openreach
£m

Other
£m

Total
£m

Segment revenue
Internal revenue

Revenue from external customersa
EBITDAb
Depreciation and amortisation

Operating profit (loss)a

Specific items (note 8)
Operating profit
Net finance expensec
Share of post tax loss of associates and

joint ventures

Profit on disposal of interest in associates
and joint ventures

Profit before tax

Year ended 31 March 2014

Segment revenue
Internal revenue

Revenue from external customersa
EBITDAb
Depreciation and amortisation

Operating profita

Specific items (note 8)
Operating profit
Net finance expensec
Share of post tax loss of associates and

joint ventures

Loss on disposal of interest in associates
and joint ventures

Profit before tax

6,779
(29)

6,750

1,047
(519)

528

3,145
(399)

2,746

1,041
(180)

861

4,285
(62)

4,223

1,031
(218)

813

2,157
–

2,157

561
(224)

337

5,011
(3,064)

1,947

2,600
(1,348)

1,252

74
(46)

(9)
(49)

(58)

21,451
(3,600)

17,851

6,271
(2,538)

3,733

(253)

3,480
(859)

(1)

2,645

BT Global
Services
£m

7,269
(31)

7,238

1,041
(616)

425

BT Business
£m

BT Consumer
£m

BT Wholesale
£m

Openreach
£m

Other
£m

Total
£m

3,213
(415)

2,798

1,002
(197)

805

4,019
(49)

3,970

833
(219)

614

2,422
–

2,422

614
(245)

369

5,061
(3,239)

1,822

2,601
(1,406)

1,195

82
(45)

25
(12)

22,066
(3,779)

18,287

6,116
(2,695)

3,421

(276)

3,145
(826)

(3)

(4)

2,312

a Before specific items.
b EBITDA is stated before specific items and is a non-GAAP measure provided in addition to the disclosure requirements defined under IFRS. The rationale for using non-GAAP measures is explained on

pages 240 to 242.

c Net finance expense includes specific item expense of £229m (2014/15: £299m, 2013/14: £235m). See note 8.

183

4. Segment information continued
Internal revenue and costs
Intra-group revenue generated from the sale of regulated products and services is based on market price. Intra-group revenue from the
sale of other products and services is agreed between the relevant lines of business and therefore line of business profitability may be
impacted by transfer pricing levels.

The majority of internal trading relates to Openreach and arises on rentals, and any associated connection or migration charges, of the UK
access lines and other network products to the customer-facing lines of business. This occurs both directly, and also indirectly, through
BT TSO which is included within the ‘Other’ segment. BT Wholesale did not generate internal revenue from other lines of business before
the EE acquisition, but now receives internal revenue from EE for mobile ethernet access and transmission planning services. Internal
revenue in BT Business relates primarily to IT services and BT Ireland. Internal revenue arising in BT Consumer relates primarily to employee
broadband and wi-fi services, while internal revenue in BT Global Services relates primarily to conferencing services.

Year ended 31 March 2016

Internal revenue recorded by
BT Global Services
BT Business
BT Consumer
EEa
BT Wholesale
Openreach
Other

Total

BT Global
Services
£m

–
238
23
–
–
173
–

434

Internal cost recorded by

BT Business
£m

BT Consumer
£m

EE
£m

a BT Wholesale
£m

Openreach
£m

Other
£m

Total
£m

29
–
22
3
–
284
–

338

–
61
–
6
–
905
–

972

–
1
–
–
68
–
–

–
75
2
8
-
242
–

327

–
1
–
–
–
–
51

–
1
18
–
–
1,454
–

1,473

29
377
65
17
68
3,058
51

3,665

a EE reflects results for period from acquisition on 29 January to 31 March 2016.

Year ended 31 March 2015

Internal revenue recorded by
BT Global Services
BT Business
BT Consumer
BT Wholesale
Openreach
Other

Total

Year ended 31 March 2014

Internal revenue recorded by
BT Global Services
BT Business
BT Consumer
BT Wholesale
Openreach
Other

Total

BT Global
Services
£m

–
241
20
–
187
–

448

BT Global
Services
£m

–
247
13
–
198
–

458

Internal cost recorded by

BT Business
£m

BT Consumer
£m

BT Wholesale
£m

Openreach
£m

Other
£m

Total
£m

29
–
22
–
306
–

357

–
62
–
–
939
–

1,001

–
94
2
–
242
–

338

–
1
–
–
–
46

–
1
18
–
1,390
–

1,409

29
399
62
–
3,064
46

3,600

Internal cost recorded by

BT Business
£m

BT Consumer
£m

BT Wholesale
£m

Openreach
£m

Other
£m

Total
£m

31
–
18
–
333
–

382

–
47
–
–
1,021
3

1,071

–
120
3
–
275
–

398

–
1
–
–
–
42

–
–
15
–
1,412
–

1,427

31
415
49
–
3,239
45

3,779

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information184

4. Segment information continued
Revenue by products and services

Year ended 31 March

ICT and managed networks
Broadband, TV and convergence
Mobility
Calls, lines and connectivity
Transit
Other products and services

Revenueb

2016
£m

2015
a
£m

2014
a
£m

6,193
3,535
1,326
5,920
419
1,516

6,493
3,112
314
5,881
555
1,496

6,608
2,800
326
5,978
697
1,878

18,909

17,851

18,287

a Following the acquisition of EE, we have revised our categories of products and services. In addition we have represented certain prior period information to be on a consistent basis. The impact was to
decrease 2014/15 Broadband, TV and convergence revenue by £196m (2013/14: £167m), decrease 2014/15 calls, lines and connectivity revenue by £6m (2013/14: £1m increase) and increase
2014/15 other products and services revenue by £202m (2013/14: £166m).

b Before specific items.

Capital expenditure

Year ended 31 March 2016

Intangible assets
Property, plant and equipment

Capital expenditureb

Year ended 31 March 2015

Intangible assets
Property, plant and equipment

Capital expenditureb

BT Global
Services
£m

78
337

415

BT Business
£m

BT Consumer
£m

EE
£m

a BT Wholesale
£m

Openreach
£m

24
114

138

BT Global
Services
£m

220
248

468

90
116

206

22
89

111

68
109

177

62
1,385

1,447

BT Business
£m

BT Consumer
£m

BT Wholesale
£m

Openreach
£m

31
156

187

85
122

207

80
130

210

55
1,027

1,082

Other
£m

68
88

156

Other
£m

90
82

172

Total
£m

412
2,238

2,650

Total
£m

561
1,765

2,326

a EE reflects results for the period from acquisition on 29 January to 31 March 2016.
b Net of government grants.

Geographic information
The UK is the group’s country of domicile and the group generates the majority of its revenue from external customers in the UK. The
geographic analysis of revenue is on the basis of the country of origin in which the customer is invoiced. The geographic analysis of non-
current assets, which exclude derivative financial instruments, investments and deferred tax assets, are based on the location of the assets.

Revenue from external customers

Year ended 31 March

UK
Europe, Middle East and Africa, excluding the UK
Americas
Asia Pacific

Revenuea

a Before specific items. We have represented certain prior period information to be on a consistent basis.

Non-current assets

At 31 March

UKa
Europe, Middle East and Africa, excluding the UK
Americas
Asia Pacific

Non-current assets

a The increase in non-current assets in the UK is primarily due to the acquisition of EE.

2016
£m

2015
£m

2014
£m

14,814
2,472
1,011
612

13,827
2,394
1,049
581

14,084
2,585
1,074
544

18,909

17,851

18,287

2016
£m

2015
£m

28,561
2,403
548
191

13,977
2,184
555
169

31,703

16,885

BT Group plc Annual Report 20165. Operating costs
Year ended 31 March

Operating costs by nature
Staff costs:
Wages and salaries
Social security costs
Other pension costs
Share-based payment expense

Total staff costs
Own work capitalised

Net staff costs
Net indirect labour costsa

Net labour costs
Payments to telecommunications operators
Property and energy costs
Network operating and IT costs
TV programme rights charges
Other operating costs
Other operating income
Depreciation of property, plant and equipment
Owned assets
Held under finance leases
Amortisation of intangible assets

Total operating costs before specific items

Specific items

Total operating costs

Operating costs before specific items include the following:
Leaver costsb
Research and development expenditurec
Operating lease charges
Foreign currency gains
Government grants

185

Notes

2016
£m

2015
£m

2014
£m

20
22

13
13
12

3,689
398
494
58

4,639
(726)

3,913
281

4,194
2,186
1,040
610
544
3,970
(215)

1,999
10
621

3,574
440
467
70

4,551
(691)

3,860
324

4,184
2,144
968
605
330
3,573
(224)

1,997
11
530

3,736
444
463
60

4,703
(600)

4,103
452

4,555
2,472
959
591
203
3,672
(281)

2,090
22
583

14,959

14,118

14,866

348

381

276

15,307

14,499

15,142

109
574
441
(1)
(6)

8
580
388
(1)
(7)

14
680
390
(2)
(10)

a Net of capitalised indirect labour costs of £430m (2014/15: £451m, 2013/14: £396m).
b Leaver costs are included within wages and salaries and social security costs, except for leaver costs of £nil (2014/15: £237m, 2013/14: £175m) associated with restructuring, which have been recorded

as a specific item.

c Research and development expenditure reported in the income statement, includes amortisation of £501m (2014/15: £493m, 2013/14: £510m) in respect of internally developed computer software
and operating expenses of £73m (2014/15: £87m, 2013/14: £170m). In addition, the group capitalised software development costs of £399m (2014/15: £421m, 2013/14: £365m). Prior year
amounts are presented on a consistent basis.

Compensation of key management personnel
Key management personnel comprise executive and non-executive directors and members of the Operating Committee. Compensation of
key management personnel is shown in the table below:

Year ended 31 March

Short-term employee benefits
Post employment benefits
Share-based payments
Termination benefits

2016
£m

2015
£m

9.4
1.1
5.5
0.6

9.7
1.1
5.7
0.5

16.6

17.0

2014
£m

11.1
1.0
6.4
–

18.5

More detailed information concerning directors’ remuneration, shareholdings, pension entitlements, share options and other long-term
incentive plans is shown in the audited part of the Report on Directors’ Remuneration (see pages 128 to 148), which forms part of
these consolidated financial statements.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

186

6. Employees

Number of employees in the groupa

UK
Non-UK

Total employees

Number of employees in the groupa

BT Global Services
BT Business
BT Consumer
EEb
BT Wholesale
Openreach
Other

Total employees

Year end
000

81.4
21.1

102.5

Year end
000

18.5
7.9
6.5
12.8
1.3
31.5
24.0

102.5

2016
Average
000

71.8
19.2

91.0

2016
Average
000

18.2
8.0
6.3
2.0
1.4
32.1
23.0

91.0

Year end
000

70.9
17.6

88.5

Year end
000

18.1
8.0
6.2
–
1.5
32.7
22.0

88.5

2015
Average
000

72.2
16.5

88.7

2015
Average
000

19.2
8.6
6.0
–
1.7
32.4
20.8

88.7

Year end
000

72.2
15.6

87.8

Year end
000

22.7
8.7
6.0
–
1.8
31.6
17.0

87.8

2014
Average
000

72.7
15.1

87.8

2014
Average
000

22.1
8.9
6.2
–
1.8
31.5
17.3

87.8

a These reflect the full-time equivalent of full and part-time employees.
b EE was acquired on 29 January 2016.

7. Audit, audit related and other non-audit services
The following fees were paid or are payable to the company’s auditors, PricewaterhouseCoopers LLP.

Year ended 31 March

Fees payable to the company’s auditors and its associates for:
Audit servicesa
The audit of parent company and consolidated financial statements
The audit of the company’s subsidiaries

Audit related assurance servicesb

Other non-audit services
Taxation compliance servicesc
Taxation advisory servicesd
All other assurance servicese
All other servicesf

Total services

2016
£000

2015
£000

2014
£000

3,915
5,084

8,999

2,925
4,809

7,734

2,619
5,355

7,974

2,210

1,639

1,573

412
156
1,611
1,665

3,844

350
401
3,199
570

4,520

260
371
180
829

1,640

15,053

13,893

11,187

a Services in relation to the audit of the parent company and the consolidated financial statements, including fees for reports under section 404 of the Sarbanes-Oxley Act. This also includes fees payable for

the statutory audits of the financial statements of subsidiary companies.

b Services in relation to other statutory filings or engagements that are required by law or regulation to be carried out by an appointed auditor. This includes fees for the audit of the group’s regulatory financial

statements and reporting associated with the group’s US debt shelf registration and the issue of a Euro medium term note during the year.

c Services relating to tax returns, tax audits, monitoring and enquiries.
d Fees payable for all taxation advisory services not falling within taxation compliance.
e All other assurance services in the year include fees payable to PricewaterhouseCoopers LLP as Reporting Accountants in relation to the Listing Prospectus, which was issued on 26 January 2016 for the

issue of new shares and in 2014/15 in relation to the Circular to shareholders, which was issued on 1 April 2015, both in connection with the acquisition of EE.

f Fees payable for all non-audit services not covered above, principally comprising other advisory services.

The fees for audit services have increased for 2015/16, principally due to the acquisition of EE Limited and its subsidiaries and the
associated incremental audit activity.

The BT Pension Scheme is an associated pension fund as defined in the Companies (Disclosure of Auditor Remuneration and Liability
Limitation Agreements) (Amendment) Regulations 2011. In the year ended 31 March 2016 PricewaterhouseCoopers LLP received total
fees from the BT Pension Scheme of £1,705,000 (2014/15: £2,481,000, 2013/14: £1,363,000) in respect of the following services:
audit of financial statements of associates £213,000 (2014/15: £265,000, 2013/14: £220,000); audit-related assurance services
£10,000 (2014/15: £10,000, 2013/14: £nil); taxation compliance services £198,000 (2014/15: £374,000, 2013/14: £103,000);
taxation advisory services £681,000 (2014/15: £227,000, 2013/14: £118,000); and other non-audit services of £603,000
(2014/15: £1,605,000, 2013/14: £922,000).

BT Group plc Annual Report 2016

8. Specific items
Year ended 31 March

Revenue
Retrospective regulatory matters
Impact of fair value adjustment to deferred revenue on acquisition of EE

Operating costs
Retrospective regulatory matters
EE acquisition-related costs
Integration costs
Property rationalisation costs
Restructuring charges
Profit on disposal of property
Profit on disposal of businesses

Net finance expense
Interest expense on retirement benefit obligation
EE-related financing costs

Share of results of associates and joint ventures
(Profit) loss on disposal of interest in associates and joint ventures

Net specific items charge before tax

Taxation
Tax credit on specific items above
Tax credit on re-measurement of deferred tax

Net specific items charge after tax

187

2016
£m

2015
£m

2014
£m

(203)
70

(133)

(128)
–

(128)

203
99
17
29
–
–
–

348

221
8

229

–

444

(70)
(96)

(166)

278

75
19
–
45
315
(67)
(6)

381

292
7

299

(25)

527

(121)
–

(121)

406

–
–

–

–
–
–
–
276
–
–

276

235
–

235

515

(111)
(208)

(319)

196

Retrospective regulatory matters – in July 2014 the Supreme Court overturned a Court of Appeal judgment, made in July 2012, which
had disallowed our ladder pricing policy relating to 0800, 0845 and 0870 calls from mobile phones terminating on our network. In
2012/13 we had recognised specific item charges of £85m and £58m against revenue and EBITDA respectively relating to this matter.
In 2015/16 we recognised revenue and costs of £203m, being the prior year impacts of ladder pricing agreements with the UK mobile
operators following the Supreme Court judgment.

In August 2014 the Competition Appeal Tribunal (CAT) handed down judgment on various appeals brought against a December 2012
Ofcom determination on the pricing of certain Ethernet products. We disagree with the CAT’s judgment and have been granted permission
to appeal to the Court of Appeal. Ofcom had determined that BT had overcharged for certain services between 1 April 2006 and
31 March 2011 and required BT to make repayments. The CAT judged that BT should also pay interest on these amounts. Together with a
review of our regulatory risk position in relation to other historical matters, we recognised a specific item charge of £75m in 2014/15.

Impact of fair value adjustment to deferred revenue on acquisition of EE – we recognised a fair value adjustment on the acquisition of
EE which reduced the amount of deferred income in relation to its prepaid subscriber base by £70m. The step down reflects the difference
between the amount recorded by EE on acquisition and the fair value calculated based on the incremental cost that a market participant
would incur to take on the liability plus a reasonable profit margin. This amount was released as a reduction to revenue in the period
between acquisition and 31 March 2016, reflecting the period over which EE provided the related service.

Acquisition, integration and financing costs relating to EE – transaction costs of £99m (2014/15: £19m, 2013/14: £nil) and
integration costs of £17m (2014/15: £nil, 2013/14: £nil) were incurred relating to the acquisition of EE and debt financing fees of £8m
(2014/15: £7m, 2013/14: £nil) were incurred arranging a £3.6bn acquisition facility.

Property rationalisation costs – we recognised a £29m charge (2014/15: £45m, 2013/14: £nil) relating to the rationalisation of the
group’s property portfolio.

Restructuring charges – There were no restructuring charges for the current year. The components of the restructuring charges
recognised in the prior years were: people and property charges of 2014/15: £294m and in 2014/15 (2013/14: £217m), principally
comprising leaver costs of 2014/15: £237m in 2014/15 and (2013/14: £175m), property exit costs and networks, products and
procurement channels rationalisation charges of 2014/15: £21m and in 2014/15 (2013/14: £59m).

Profit on disposal of property – in February 2015 we disposed of a surplus building in London, Keybridge House, for a consideration of
£93m resulting in a profit of £67m.

Interest expense on retirement benefit obligations – see note 20 for more details.

Profit or loss on disposal of interest in associates and joint ventures – in 2014/15 we recognised a £25m profit on the disposal of an
associate, which was held at nil cost.

Tax credit on re-measurement of deferred tax – see note 9 for more details.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

188

9. Taxation

Analysis of taxation expense for the year

Year ended 31 March

United Kingdom
Corporation tax at 20% (2014/15: 21%, 2013/14: 23%)
Adjustments in respect of earlier years
Non-UK taxation
Current
Adjustments in respect of earlier years

Total current tax expense

Deferred taxation
Origination and reversal of temporary differences
Adjustments in respect of prior periods

Impact of change in UK corporation tax rate to 19% and 18% (2013/14: 20%)

Total deferred taxation credit

Total taxation expense

2016
£m

2015
£m

2014
£m

(617)
59

(80)
29

(655)
35

(60)
18

(693)
10

(65)
3

(609)

(662)

(745)

70
2
96

168

(441)

170
(18)
–

152

239
4
208

451

(510)

(294)

Factors affecting taxation expense for the year
The taxation expense on the profit for the year differs from the amount computed by applying the UK corporation tax rate to the profit
before taxation as a result of the following factors:

Year ended 31 March

Profit before taxation

Expected taxation expense at UK rate of 20% (2014/15: 21%, 2013/14: 23%)
Effects of:
Higher taxes on non-UK profits
Net permanent differences between tax and accountinga,d
Adjustments in respect of earlier yearsb
Non-UK losses used against current year profits
Non-UK losses not recognisedc
Other deferred tax assets not recognised
Lower taxes on profit on disposal of business
Re-measurement of deferred tax balances
Other non-recurring itemsd

Total taxation expense
Exclude specific items (note 8)

Total taxation expense before specific items

2016
£m

2015
£m

2014
£m

3,029

2,645

2,312

(606)

(555)

(532)

(4)
(12)
90
26
(18)
6
–
96
(19)

(441)
(166)

(607)

(9)
(4)
35
36
(37)
9
7
–
8

(510)
(121)

(631)

(5)
(9)
17
13
(40)
54
–
208
–

(294)
(319)

(613)

a Includes income that is not taxable or UK income taxable at a different rate, and expenses for which no tax relief is received. Examples include some types of depreciation and amortisation and the benefit of

R&D tax incentives.

b Reflects the differences between initial accounting estimates and tax returns submitted to tax authorities, including the release and establishment of provisions for uncertain tax positions.
c Reflects losses made in countries where it has not been considered appropriate to recognise a deferred tax asset, as the potential for future taxable profits is not sufficiently certain and we have not agreed

the value of tax losses with local authorities.

d Following the acquisition of EE, we have expanded the categories of factors affecting the total taxation expense. Prior year amounts are presented on a consistent basis.

BT Group plc Annual Report 2016
9. Taxation continued

Tax components of other comprehensive income

Year ended 31 March

Tax on items that will not be reclassified to the income statement
Actuarial (gains) losses relating to retirement benefit obligations
Tax on items that may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations
Fair value movements on cash flow hedges
– net fair value gains or losses
– recognised in income and expense

Current tax credita
Deferred tax expense

a Includes £217m (2014/15: £220m, 2013/14: £122m) relating to cash contributions made to reduce retirement benefit obligations.

Tax credit recognised directly in equity

Year ended 31 March

Tax credit relating to share-based payments

Deferred taxation

At 1 April 2014
(Credit) expense recognised in income statement
Expense (credit) recognised in other comprehensive income
Expense recognised in equity

At 31 March 2015

Non-current
Deferred tax asset
Deferred tax liability

At 1 April 2015
(Credit) expense recognised in the income statement
(Credit) expense recognised in other comprehensive income
Expense recognised in equity
Acquisition

At 31 March 2016

Non-current
Deferred tax asset
Deferred tax liability

At 31 March 2016

1,084
(49)
6
–

(1,382)
(113)
12
–

1,041

(1,483)

(125)
1,166

1,041
(63)
(4)
–
644

(1,483)
–

(1,483)
(107)
457
–
(16)

1,618

(1,149)

(81)
1,699

(1,149)
–

1,618

(1,149)

(238)
3
–
149

(86)

(86)
–

(86)
2
–
30
–

(54)

(54)
–

(54)

(40)
(2)
(2)
–

(44)

(44)
–

(44)
34
(2)
–
(313)

(325)

(325)
–

(325)

189

2016
Tax credit
(expense)
£m

2015
Tax credit
(expense)
£m

2014
Tax credit
(expense)
£m

(240)

208

(72)
39

(235)

231
(466)

(235)

(28)
52

245

268
(23)

245

(2)

83
(77)

130
(110)

2016
£m

2015
£m

2014
£m

106

Total
£m

(631)
(152)
23
149

(611)

–
–
–
–

–

242
(242)

(1,559)
948

–
–
–
–
–

–

(611)
(168)
466
30
298

(55)
9
7
–

(39)

(63)
24

(39)
(34)
15
–
(17)

(75)

(102)
27

(75)

464
(464)

–

(1,247)
1,262

Fixed asset
temporary
differences
£m

Retirement
benefit
a obligations
£m

Share-
based
b payments
£m

Tax
a
losses
£m

Jurisdictional
a
offset
Other
£m
£m

a Following the acquisition of EE, we have reallocated £12m from Other into Fixed asset temporary differences and £44m from Other to Tax losses at 31 March 2015. Balances as at 1 April 2014 are

presented on a consistent basis.

b Includes a deferred tax asset of £2m (2014/15: £2m) arising on contributions payable to defined contribution pension plans.

The acquisition relates to deferred tax assets and liabilities arising on the acquisition of EE, such as deferred tax liabilities on fair value
adjustments (note 14) and deferred tax assets acquired with the business of EE, such as tax losses.

We have recognised a deferred tax asset at 31 March 2016 of £293m in respect of EE Limited’s historical tax losses. We expect to be
able to utilise these against future taxable profits in EE Limited. If EE Limited’s business were subject to a major change in the nature or
conduct of trade on or before 5 February 2018, these losses would be forfeited and a current tax liability of £152m would be created.
Based on our current plans, we do not expect a major change to arise.

Deferred tax balances for which there is a right of offset within the same jurisdiction are presented net on the face of the group balance
sheet as permitted by IAS 12, with the exception of deferred tax related to BT’s pension schemes which is disclosed within deferred tax
assets.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

190

9. Taxation continued

Factors affecting future tax charges
The rate of UK corporation tax will change from 20% to 19% on 1 April 2017 and to 18% on 1 April 2020. As deferred tax assets and
liabilities are measured at the rates that are expected to apply in the periods of the reversal, deferred tax balances at 31 March 2016 have
been calculated at the rate at which the relevant balance is expected to be recovered or settled. This reduction has been recognised as a
deferred tax credit specific item in the income statement (note 8) and as a deferred tax expense in reserves.

The UK Finance Bill 2016 includes a reduction of the UK corporation tax rate to 17% on 1 April 2020. This will replace the 18% UK
corporation tax rate that is currently legislated to take effect. This will have an effect on future tax charges of the group. Relevant deferred
tax balances will be re-measured to 17% once the UK Finance Bill 2016 is substantively enacted.

Unrecognised tax losses and other temporary differences
At 31 March 2016 the group had operating losses and other temporary differences carried forward in respect of which no deferred
tax assets were recognised amounting to £4.1bn (2014/15: £3.8bn). The group’s other temporary differences have no expiry date
restrictions. The expiry date of operating losses carried forward is dependent upon the tax law of the various territories in which the losses
arose. A summary of expiry dates for losses in respect of which restrictions apply is set out below:

At 31 March 2016

Restricted losses
Europe
Americas
Other

Total restricted losses

Unrestricted operating losses

Other temporary differences

Total

£m

Expiry

2017–2023
2020–2034
2017–2021

13
105
38

156

3,742

No expiry

155

No expiry

4,053

At 31 March 2016 the group also had UK capital losses carried forward in respect of which no deferred tax assets were recognised
amounting to £17.0bn (2014/15 £17.1bn). These losses have no expiry date, and the group considers the future utilisation of these
losses to be remote.

At 31 March 2016 the undistributed earnings of non-UK subsidiaries were £3.3bn (2014/15 £8.1bn). No deferred tax liabilities have
been recognised in respect of these unremitted earnings because the group is in a position to control the timing of any dividends from
subsidiaries and hence any tax consequences that may arise. Tax of £23.1m (2014/15: £21.2m) would arise if these earnings were to be
repatriated to the UK.

BT Group plc Annual Report 2016

191

10. Earnings per share
Basic earnings per share is calculated by dividing the profit after tax attributable to equity shareholders by the weighted average number
of shares in issue after deducting the own shares held by employee share ownership trusts and treasury shares.

In calculating the diluted earnings per share, share options outstanding and other potential shares have been taken into account where
the impact of these is dilutive. Options over 15m shares (2014/15: 13m shares, 2013/14: 24m shares) were excluded from the
calculation of the total diluted number of shares as the impact of these is antidilutive.

Year ended 31 March

Basic weighted average number of shares (millions)
Dilutive shares from share options (millions)
Dilutive shares from executive share awards (millions)

Diluted weighted average number of shares (millions)

Basic earnings per share
Diluted earnings per share

2016

2015

2014

8,619
58
37

8,714

29.9p
29.6p

8,056
80
55

8,191

26.5p
26.1p

7,857
314
60

8,231

25.7p
24.5p

The earnings per share calculations are based on profit after tax attributable to equity shareholders of the parent company which excludes
non-controlling interests. Profit after tax attributable to equity shareholders of the parent company was £2,581m (2014/15: £2,135m,
2013/14: £2,016m) and profit after tax attributable to non-controlling interests was £7m (2014/15: £nil, 2013/14: £2m). Profit
attributable to non-controlling interests is not presented separately in the financial statements as it is not material.

As a result of the acquisition of EE our earnings per share ratio improved despite the 7% increase in the weighted average number of
shares.

The group also measures financial performance based on adjusted earnings per share, which excludes specific items. Adjusted earnings per
share and a reconciliation to basic earnings per share is disclosed on page 241.

11. Dividends

Year ended 31 March

Final dividend in respect of the prior year
Interim dividend in respect of the current year

pence
per share

8.5
4.4

2016

£m

710
368

12.9

1,078

pence
per share

7.5
3.9

11.4

2015

£m

609
316

925

pence
per share

6.5
3.4

9.9

2014

£m

512
269

781

The Board recommends that a final dividend in respect of the year ended 31 March 2016 of 9.6p per share will be paid to shareholders
on 5 September 2016, taking the full year proposed dividend in respect of 2015/16 to 14.0p (2014/15: 12.4p, 2013/14: 10.9p)
which amounts to approximately £1,324m (2014/15: £1,028m, 2013/14: £880m). This dividend is subject to approval by
shareholders at the Annual General Meeting and therefore the liability of approximately £956m (2014/15: £712m, 2013/14: £611m)
has not been included in these financial statements. The proposed dividend will be payable to all shareholders on the Register of Members
on 12 August 2016.

The value of £1,078m (2014/15: £925m, 2013/14: £781m) for the final and interim dividends is disclosed in the group statement
of changes in equity. This value may differ from the amount shown for equity dividends paid in the group cash flow statement, which
represents the actual cash paid in relation to dividend cheques that have been presented over the course of the financial year.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
192

12. Intangible assets

Cost
At 1 April 2014
Additions
Interest on qualifying assetsa
Disposals and adjustments
Transfers
Exchange differences

At 31 March 2015
Acquisitionsb
Additions
Disposals and adjustments
Transfers
Exchange differences

At 31 March 2016

Accumulated amortisation
At 1 April 2014
Charge for the year
Disposals and adjustments
Transfers
Exchange differences

At 31 March 2015
Charge for the year
Disposals and adjustments
Exchange differences

At 31 March 2016

Carrying amount
At 31 March 2016

At 31 March 2015

Customer
relationships
and brands
£m

Telecoms
licences
and other
£m

Internally
developed
software
£m

Goodwill
£m

Purchased
software
£m

394
–
–
–
–
5

399
3,012
–
–
–
5

415
1
–
–
–
(26)

390
2,524
1
–
–
15

3,156
488
2
(3)
35
2

3,680
129
331
(63)
(4)
–

1,262
72
–
(9)
(46)
(49)

1,230
286
80
(27)
4
37

1,331
–
–
–
–
65

1,396
6,430
–
–
–
52

7,878

Total
£m

6,558
561
2
(12)
(11)
(3)

7,095
12,381
412
(90)
–
109

3,416

2,930

4,073

1,610

19,907

323
15
–
–
(2)

336
78
–
4

418

101
7
–
–
(12)

96
27
–
8

1,939
448
(5)
18
1

2,401
437
(91)
–

1,108
60
(6)
(25)
(45)

1,092
79
(28)
32

3,471
530
(11)
(7)
(58)

3,925
621
(119)
44

131

2,747

1,175

4,471

7,878

1,396

2,998

2,799

294

1,326

1,279

435

138

15,436

3,170

a There was no interest capitalisation in 2015/16. Additions to internally developed software in 2014/15 included interest capitalised at a weighted average borrowing rate of 6%.
b Relates to the fair value of intangible assets identified on acquisition of EE on 29 January 2016. See note 14.

BT Group plc Annual Report 2016

193

12. Intangible assets continued

Goodwill impairment review
The group performs an annual goodwill impairment review, based on its cash generating units (CGUs).

The CGUs that have associated goodwill are BT Global Services, BT Business, BT Consumer and EE, since acquisition on 29 January 2016.
These are the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other
groups of assets, and to which goodwill is allocated. Goodwill is allocated to the group’s CGUs as follows:

At 31 March 2014
Exchange differences

At 31 March 2015
Acquisitions (note 14)
Exchange differences

At 31 March 2016

BT Global
Services
£m

BT Business
£m

BT Consumer
£m

1,037
59

1,096
–
49

1,145

214
6

220
439
3

662

80
–

80
1,103
–

1,183

EE
£m

–
–

–
4,888
–

4,888

Total
£m

1,331
65

1,396
6,430
52

7,878

The amount of goodwill allocated to BT Business and BT Consumer relates to goodwill arising on the acquisition of EE and represents the
expected benefit to each of these CGUs from the synergies identified.

Recoverable amount
The value in use of each CGU is determined using cash flow projections derived from financial plans approved by the Board covering a
three-year period. They reflect management’s expectations of revenue, EBITDA growth, capital expenditure, working capital and operating
cash flows, based on past experience and future expectations of business performance. Cash flows are also adjusted downwards to reflect
the different risk attributes of each CGU. The value in use calculation includes a fourth year estimate which is held flat from the last year
assumed in the financial plans approved by the Board. Cash flows beyond the fourth-year period have been extrapolated using perpetuity
growth rates.

Discount rate
The pre-tax discount rates applied to the cash flow forecasts are derived from the group’s post-tax weighted average cost of capital. The
assumptions used in the calculation of the group’s weighted average cost of capital are benchmarked to externally available data. The
discount rate used in performing the value in use calculation in 2015/16 was 8.8% (2014/15: 9.3%) for all CGUs.

Growth rates
The perpetuity growth rates are determined based on the long-term historical growth rates of the regions in which the CGU operates, and
they reflect an assessment of the long-term growth prospects of that sector. The growth rates have been benchmarked against external
data for the relevant markets. None of the growth rates applied exceed the long-term historical average growth rates for those markets
or sectors. The perpetuity growth rate for BT Global Services was 2.3% (2014/15: 2.2%), 2.0% (2014/15: 2.0%) for BT Business and
BT Consumer, and 2.0% for EE.

Sensitivities
There is significant headroom in all CGUs. For BT Global Services, the value in use exceeds the carrying value of the CGU by approximately
£6,900m. The following changes (in combination) in assumptions would cause the recoverable amount to fall below the carrying value:

– reduction in the perpetuity growth rate from the 2.3% assumption applied to a revised assumption of no growth
– an increase in the discount rate from the 8.8% assumption applied to a revised assumption of 15%
– shortfalls in trading performance against forecast resulting in operating cash flows decreasing by £210m or more in perpetuity.

For BT Business, BT Consumer and EE no reasonably possible changes in the key assumptions would cause the carrying amount of the
CGUs to exceed the recoverable amount.

From 1 April 2016, the CGUs that have associated goodwill reflect the reorganisation as disclosed in Note 31.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

194

13. Property, plant and equipment

Land and
a
buildings
£m

Network
a
infrastructure
£m

Assets in
course of
construction
£m

b
Other
£m

Total
£m

Cost
At 1 April 2014
Additionsc
Transfers
Disposals and adjustmentsd
Exchange differences

At 31 March 2015

Acquisitions
Additionsc
Transfers
Disposals and adjustmentsd
Exchange differences

At 31 March 2016

Accumulated depreciation
At 1 April 2014
Charge for the year
Disposals and adjustmentsd
Transfers
Exchange differences

At 31 March 2015

Charge for the year
Disposals and adjustmentsd
Exchange differences

At 31 March 2016

Carrying amount
At 31 March 2016
Engineering stores

Total at 31 March 2016

At 31 March 2015
Engineering stores

Total at 31 March 2015

At 31 March

1,191
12
18
(51)
(38)

1,132

98
13
22
(17)
30

45,070
106
1,545
(1,201)
(365)

45,155

1,772
106
1,810
(879)
237

1,922
159
24
(263)
(22)

1,820

43
67
9
(60)
23

1,278

48,201

1,902

32,729
1,845
(1,210)
(6)
(316)

33,042

1,855
(848)
210

1,626
113
(257)
13
(21)

1,474

101
(56)
22

34,259

1,541

650
1,482
(1,576)
(25)
(4)

527

357
2,055
(1,841)
8
2

1,108

–
–
–
–
–

–

–
–
–

–

13,942
–

13,942

12,113
–

12,113

361
–

361

346
–

346

1,108
71

1,179

527
74

601

706
50
(41)
–
(28)

687

53
(17)
27

750

528
–

528

445
–

445

48,833
1,759
11
(1,540)
(429)

48,634

2,270
2,241
–
(948)
292

52,489

35,061
2,008
(1,508)
7
(365)

35,203

2,009
(921)
259

36,550

15,939
71

16,010

13,431
74

13,505

2016
£m

2015
£m

296
232

528

208
237

445

The carrying amount of land and buildings, including leasehold improvements, comprised:
Freehold
Leasehold

Total land and buildings

a The carrying amount of the group’s property, plant and equipment includes an amount of £83m (2014/15: £36m) in respect of assets held under finance leases, comprising land and buildings of £52m
(2014/15: £14m) and network infrastructure of £31m (2014/15: £22m). The depreciation expense on those assets in 2015/16 was £10m (2014/15: £11m), comprising land and buildings of £4m
(2014/15: £3m) and network infrastructure of £6m (2014/15: £8m).
b Other mainly comprises motor vehicles, computers and fixtures and fittings.
c Net of government grants of £109m (2014/15: £392m).
d Fully depreciated assets in the group’s fixed asset registers were reviewed during the year, as part of the group’s annual asset verification exercise, and certain assets that were no longer in use have been

written out, reducing cost and accumulated depreciation by £0.7bn (2014/15: £1.3bn).

Network infrastructure
Some of our network assets are jointly controlled by EE with Hutchison 3G UK Limited. These relate to shared 3G network and certain
elements of network for 4G rural sites. The net book value of the group’s investment in this shared operation is £519m and is recorded
within network infrastructure. Included within this is £128m, being the group’s share of assets owned by its joint operation MBNL.

Within network infrastructure are assets with net book value of £8.3bn which have useful economic lives of more than 18 years.

BT Group plc Annual Report 2016

195

14. Business combinations
On 29 January 2016 the group acquired the entire share capital of EE Limited (EE) from Deutsche Telekom and Orange. The acquisition
will enable the group to bring together the UK’s best 4G mobile network with the largest superfast fixed network. The enlarged group will
be the UK’s leading communications provider which means we’re best placed to meet the demand we expect for converged products and
services. We did not make any other material acquisitions in the year ended 31 March 2016.

Details of the purchase consideration, the provisional fair values of the net assets acquired and provisional goodwill arising on the
acquisition of EE are set out below:

Purchase consideration:
Cash paid
Ordinary shares issued

Total purchase consideration

£m

3,464
7,507

10,971

BT issued 1,595m of new shares representing 16% of BT’s post acquisition issued share capital, as part of the consideration paid for EE.
These were valued at £7,507m based on the published opening share price on 29 January 2016 of 470.7p per share, the day when the
shares were admitted to trading. Of the consideration paid, £80m, being the nominal value, was credited to share capital and £7,424m,
net of £3m share issue costs, was credited to a merger reserve. The transaction qualifies for merger accounting under section 612 of the
Companies Act 2006.

The provisional fair value of the assets and liabilities acquired are as follows:

Non-current assets
Intangible assets: customer relationships
Intangible assets: brands
Intangible assets: telecommunications licences
Intangible assets: software licences
Property, plant and equipment
Other non-current assets

Current assets
Trade and other receivables
Inventories
Prepayments
Derivative financial instruments
Investments
Cash and cash equivalents

Current liabilities
Loans and other borrowings
Trade and other payables

Non-current liabilities
Loans and other borrowings
Derivative financial instruments
Retirement benefit obligations
Other payables
Deferred tax liabilities
Provisions

Fair value of identifiable assets acquired
Add: goodwill

Total purchase consideration

Provisional
fair values
£m

2,610
402
2,524
415
2,270
27

8,248

696
94
128
23
23
93

1,057

575
1,819

2,394

1,681
37
113
22
298
219

2,370

4,541
6,430

10,971

The fair values are after adjustments to align EE to BT’s accounting policies. These values and resulting goodwill are provisional and could
change, as permitted under IFRS 3 Business Combinations, should any revisions to the purchase consideration or to the fair value of the
assets and liabilities be identified in the year from acquisition date.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

196

14. Business combinations continued

Purchase consideration net of cash acquired
Of the total £10,971m consideration, £3,464m was satisfied in cash and a reconciliation between this amount and the net cash outflow
arising on the acquisition of EE is as follows:

Outflow of cash to acquire subsidiary
Cash consideration
Less: cash and cash equivalents acquired

Net outflow of cash – investing activities

£m

3,464
93

3,371

Goodwill
Goodwill of £6,430m arising from the acquisition is attributable to the revenue synergies expected to be generated from new cross-
selling and bundling opportunities across the enlarged customer base as well as EE’s ability to generate a new subscriber base in the future
to replace subscribers churn. It also includes expected benefits from the existing workforce skills and expertise, and savings on operating
costs and capital expenditure as a result of joint efficiencies expected from being part of the enlarged group. None of the goodwill
recognised is expected to be deductible for income tax purposes.

For the year ended 31 March 2016, goodwill arising on the acquisition has been allocated to the EE, BT Consumer and BT Business CGUs.
BT Consumer and BT Business have been allocated a portion of the goodwill as a result of the benefits that we expect to arise in these
CGUs, mainly from synergies. Note 12 Intangible assets sets out the goodwill allocation for the year ended 31 March 2016 including the
outcome of the impairment reviews. From 1 April 2016, certain businesses within EE will be integrated into the other lines of business as
part of the reorganisation disclosed in note 31. The goodwill relating to EE will therefore be reallocated to other CGUs for the year ended
31 March 2017.

Acquired receivables
The fair value of acquired trade receivables was £696m. The gross contractual amount for trade receivables due is £784m of which £88m
is expected to be uncollectible.

Revenue and profit contribution
From the date of acquisition to 31 March 2016, EE contributed revenues before specific items of £1,038m and EBITDA before specific
items of £261m to the group. If the acquisition had occurred on 1 April 2015, the consolidated pro-forma revenue and EBITDA for the
year ended 31 March 2016 would have been £23,722m and £7,948m respectively. These amounts have been calculated using EE’s
consolidated results and adjusting them for differences in accounting policies, and are net of any intercompany transactions with the wider
BT group.

Acquisition-related costs included within specific items amounted to £107m in the year (2014/15: £26m). These mainly comprised
advisory and transaction fees, financial advisory costs, stamp duty, legal fees, due diligence, reporting and assurance services.

15. Programme rights

At 1 April 2014
Additions
Amortisation

At 1 April 2015
Additions
Amortisation

At 31 March 2016

Total
£m

108
340
(330)

118
651
(544)

225

Additions reflect TV programme rights for which the legally enforceable licence period has started during the year. Payments made for
programme rights for which the legally enforceable licence period has not yet started are included within prepayments (see note 17).

TV programme rights commitments are disclosed in note 30.

16. Inventories
At 31 March

Consumables
Work in progress
Finished goods

2016
£m

2015
£m

26
11
152

189

25
10
59

Inventories recognised as an expense during the year ended 31 March 2016 amounted to £1,220m (2014/15: £924m). These were
included in ‘Operating costs’ in the income statement.

BT Group plc Annual Report 2016

17. Trade and other receivables
At 31 March

Non-current
Other assetsa

197

2016
£m

2015
£m

233

184

a Other assets includes costs relating to the initial set-up, transition or transformation phase of long-term networked IT services contracts of £111m (2014/15: £89m), and prepayments and leasing debtors

of £122m (2014/15: £95m).

At 31 March

Current
Trade receivables
Prepayments
Accrued income
Other receivables

Trade receivables are stated after deducting allowances for doubtful debts, as follows:

At 1 April
Expense
Utilised
Exchange differences

At 31 March

2016
£m

2015
£m

1,874
736
1,073
380

4,063

1,454
505
810
371

3,140

2016
£m

196
77
(89)
11

195

2015
£m

192
78
(58)
(16)

196

Trade receivables are continuously monitored and allowances applied against trade receivables consist of both specific impairments and
collective impairments based on the group’s historical loss experiences for the relevant aged c ategory as well as taking into account general
economic conditions. Historical loss experience allowances are calculated by line of busine ss in order to reflect the specific nature of the
customers relevant to that line of business.

Trade and other receivables are classified as loans and receivables and are held at amortised cost. The carrying amount of these balances
approximates to fair value due to the short maturity of amounts receivable.

Note 27 provides further disclosure regarding the credit quality of the group’s gross trade receivables.

Trade receivables are due as follows:

At 31 March

2016

2015

Past due and not specifically impaired

Trade
receivables
specifically
impaired net
of provision
£m

Not past due
£m

Between
0 and 3
months
£m

Between
3 and 6
months
£m

Between
6 and 12
months
£m

Over 12
months
£m

Total
£m

1,223

867

367

366

1,874

1,454

Gross trade receivables which have been specifically impaired amounted to £192m (2014/15: £159m).

Trade receivables not past due and accrued income are analysed below by line of business.

At 31 March

BT Global Services
BT Business
BT Consumer
EE
BT Wholesale
Openreach
Other

Total

Trade receivables
not past due
2016
£m

2015
£m

Accrued income
2016
£m

2015
£m

633
130
138
267
53
1
1

1,223

517
143
119
–
70
15
3

867

386
147
83
312
64
79
2

1,073

405
115
85
–
128
75
2

810

Given the broad and varied nature of the group’s customer base, the analysis of trade receivables not past due and accrued income by line
of business is considered the most appropriate disclosure of credit concentrations. Cash collateral held against trade and other receivables
amounted to £4m (2014/15: £4m).

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

198

18. Trade and other payables
At 31 March

Current
Trade payables
Other taxation and social security
Other payables
Accrued expenses
Deferred incomeb

At 31 March

Non-current
Other payablesa
Deferred incomeb

2016
£m

2015
£m

4,257
682
498
418
1,434

7,289

2,835
416
535
414
1,076

5,276

2016
£m

2015
£m

876
229

1,105

854
73

927

a Other payables relate to operating lease liabilities and deferred gains on a 2001 sale and finance leaseback transaction.
b Includes £71m (2014/15: £nil) current and £187m (2014/15: £29m) non-current liabilities relating to the Broadband Delivery UK programme, for which grants received by the group may be subject to

re-investment or repayment depending on the level of take-up.

19. Provisions

a
Restructuring
£m

b
Property
£m

Network
c
ARO
£m

Network
d
share
£m

e
Other
£m

Total
£m

At 31 March 2014
Income statement expense
Unwind of discount
Utilised or released
Transfers
Exchange differences

At 31 March 2015
Acquisitions
Income statement expense
Unwind of discount
Utilised or released
Transfers
Exchange differences

At 31 March 2016

At 31 March

Analysed as:
Current
Non-current

58
6
–
(20)
–
1

45
–
–
–
(25)
–
–

201
46
8
(38)
–
–

217
72
28
8
(29)
–
–

296

–
–
–
–
–
–

–
81
2
–
(5)
–
–

–
–
–
–
–
–

–
63
-
–
(3)
–
–

274
88
–
(63)
6
(3)

302
3
15
–
(46)
(7)
2

269

533
140
8
(121)
6
(2)

564
219
45
8
(108)
(7)
2

723

2016
£m

2015
£m

171
552

723

142
422

564

a Provisions relating to group-wide restructuring programmes. These are utilised as the obligations are settled.
b Mainly comprise onerous lease provisions arising from the rationalisation of the group’s property portfolio. The provisions will be utilised over the remaining lease periods, which range from one to 67 years.
The weighted average remaining term is 31 years (2014/15: 20 years).

c The group is required to dismantle equipment and restore certain sites on vacation of a site. The asset retirement obligation (ARO) provision reflects our current estimate of the amount required to settle the

obligation. These costs are expected to be incurred over a period of up to 20 years.

d Represents future operational costs and vacant site rentals arising from restructuring obligations relating to network share agreements. These costs are expected to be incurred over a period of up to 20

years.
e Other provisions include amounts provided for legal or constructive obligations arising from insurance claims, litigation and regulatory risks which will be utilised as the obligations are settled.

BT Group plc Annual Report 2016

199

20. Retirement benefit plans

Background
The group has both defined benefit and defined contribution retirement benefit plans. The group’s main plans are in the UK and the
largest by membership is the BT Pension Scheme (BTPS) which is a defined benefit plan that was closed to new entrants on 31 March
2001. After that date new entrants to BT in the UK have been able to join a defined contribution plan, currently the BT Retirement Saving
Scheme (BTRSS), a contract-based arrangement. EE operates the EE Pension Scheme (EEPS), which has a defined benefit section that was
closed to future benefit accrual in 2014 and a defined contribution section which is open to new joiners.

Defined contribution plans
A defined contribution plan is a pension arrangement where the benefits are linked to contributions paid, the performance of
each individual’s chosen investments and the form in which individuals choose to take their benefits. Contributions are paid into an
independently administered fund. The income statement charge in respect of defined contribution plans represents the contribution
payable by the group based upon a fixed percentage of employees’ pay. The company has no exposure to investment and other experience
risks.

Defined benefit plans
A defined benefit plan is a pension arrangement where participating members receive a pension benefit at retirement determined by the
plan rules dependent on factors such as age, years of service and pensionable pay and is not dependent upon actual contributions made
by the company or members. The income statement service cost in respect of defined benefit plans represents the increase in the defined
benefit liability arising from pension benefits earned by active members in the current period. The group is exposed to investment and
other experience risks and may need to make additional contributions where it is estimated that the benefits will not be met from regular
contributions, expected investment income and assets held.

Group income statement
The expense or income arising from all group retirement benefit arrangements recognised in the group income statement is shown below.

Year ended 31 March

Recognised in the income statement before specific items
Current service cost:
– defined benefit plans
– defined contribution plans
Past service credit

Total operating expense

Net interest expense on net pensions deficit included in specific items (note 8)

Total recognised in the income statement

a Past service credit relates to various pension plans operating outside the UK.

2016
£m

2015
£m

2014
£m

301
193
–

494

221

715

296
176
(5)a

467

292

759

312
151
–

463

235

698

Group statement of comprehensive income
Remeasurements of the net defined benefit obligation are recognised in full in the group statement of comprehensive income in the
year in which they arise. These comprise the impact on the defined benefit liability of changes in demographic and financial assumptions
compared with the start of the year, actual experience being different to those assumptions and the return on plan assets above the
amount included in the net pension interest expense.

Group balance sheet
The net pension obligation in respect of defined benefit plans reported in the group balance sheet is set out below.

At 31 March

BTPS
EEPS
Other plansa

Retirement benefit obligation
Adjustments due to effect of asset ceilingb
Deferred tax asset

Net pension obligation

Present value
of liabilities
£m

Assets
£m

43,121
596
251

(49,119)
(710)
(521)

43,968

(50,350)

Present value
of liabilities
£m

Assets
£m

43,386
–
241

(50,715)
–
(495)

43,627

(51,210)

2016

Deficit
£m

(5,998)
(114)
(270)

(6,382)
–
1,147

(5,235)

2015

Deficit
£m

(7,329)
–
(254)

(7,583)
–
1,481

(6,102)

a Included in the present value of liabilities of other plans is £90m (2014/15: £80m) related to unfunded pension arrangements.
b There is no limiting effect of the asset ceiling as any accounting surplus arising in individual plans is deemed to be recoverable due to the economic benefits available in the form of future refunds or

reductions to future contributions.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

200

20. Retirement benefit plans continued
Included within trade and other payables in the group balance sheet is £10m (2014/15: £9m) in respect of contributions payable to
defined contribution plans.

Movements in defined benefit plan assets and liabilities
The table below shows the movements on the total plan assets and liabilities for all group schemes in the year and shows where they are
reflected in the financial statements.

At 31 March 2014

Current service cost (including administration expenses and PPF levy)

Interest on pension deficit

Past service credit

Included in the group income statement
Return on plan assets above the amount included in the group income statementa
Actuarial loss arising from changes in financial assumptionsb
Actuarial gain arising from changes in demographic assumptionsb
Actuarial gain arising from experience adjustmentsc

Included in the group statement of comprehensive income

Regular contributions by employer
Deficit contributions by employer

Included in the group cash flow statement

Contributions by employees
Benefits paid
Foreign exchange

Other movements

At 31 March 2015

Current service cost (including administration expenses and PPF levy)

Interest on pension deficit

Included in the group income statement
Return on plan assets below the amount included in the group income statementa
Actuarial gain arising from changes in financial assumptionsb
Actuarial gain arising from changes in demographic assumptionsb
Actuarial gain arising from experience adjustmentsc

Included in the group statement of comprehensive income

Regular contributions by employer
Deficit contributions by employer

Included in the group cash flow statement

EEPS position at acquisition
Contributions by employees
Benefits paid
Foreign exchange

Other movements

At 31 March 2016

Assets
£m

Liabilities
£m

Deficit
£m

40,113

(47,135)

(7,022)

(42)
1,663
–

3,083
–
–
–

178
876

(254)
(1,955)
5

–
(4,703)
126
443

–
–

12
(2,231)
(25)

(12)
2,231
44

(296)
(292)
5

(583)

3,083
(4,703)
126
443

(1,051)

178
876

1,054

–
–
19

43,627

(51,210)

(7,583)

(40)
1,406

(261)
(1,627)

(423)
–
–
–

226
880

–
255
2
921

–
–

585
10
(2,321)
18

(698)
(10)
2,321
(43)

(301)
(221)

(522)

(423)
255
2
921

755

226
880

1,106

(113)
–
–
(25)

(138)

43,968

(50,350)

(6,382)

a The total actual return on plan assets in 2015/16 was a gain of £983m (2014/15: £4,746m).
b The actuarial gain or loss arises from changes in the assumptions used to value the defined benefit liabilities at the end of the year compared with the assumptions used at the start of the year. This includes

both financial assumptions, which are based on market conditions at the year end, and demographic assumptions such as life expectancy.

c The actuarial loss or gain arising from experience adjustments on defined benefit liabilities represents the impact on the liabilities of differences between actual experience during the year compared with
the assumptions made at the start of the year. Such differences might arise, for example, from members choosing different benefit options at retirement, actual salary increases being different from those
assumed or actual benefit increases being different to the pension increase assumption.

BT Group plc Annual Report 2016

201

20. Retirement benefit plans continued

BTPS
At 31 March 2016 there were 301,500 members of the BTPS. Members belong to one of three sections depending upon the date they
first joined the Scheme. Section A is for members who joined before 1 December 1971, Section B is for members who joined the Scheme
between 1 December 1971 and 31 March 1986 and Section C is for members who joined the Scheme on or after 1 April 1986 but
before the scheme closed to new entrants on 31 March 2001. The membership is analysed below.

At 31 March 2016

Sections A and Ba
Section C

Total

At 31 March 2015

Sections A and Ba
Section C

Total

Number
of active
members

Number of
deferred
members

Number of
pensioners

Total
membership

13,000
22,000

29,000
40,000

176,000
21,500

218,000
83,500

35,000

69,000

197,500

301,500

15,000
23,000

32,000
40,500

176,000
20,000

223,000
83,500

38,000

72,500

196,000

306,500

a Section A and Section B memberships have been aggregated in this table as Section A members have typically elected to take Section B benefits at retirement.

Since 1 April 2009, when changes to member benefits and contribution rates were introduced, Section B and C active members have
accrued benefits based upon a career average re-valued earnings (CARE) basis and a normal pensionable age of 65. On a CARE basis
benefits are built up based upon earnings in each year and the benefit accrued for each year is increased by the lower of inflation or the
individual’s actual pay increase in each year to retirement. Benefits earned for pensionable service prior to 1 April 2009 are based upon a
member’s final salary and a normal pensionable age of 60. Under the Scheme rules the determination of the rate of inflation for statutory
minimum rates of revaluation and indexation for the majority of benefits is based upon either the Retail Prices Index (RPI) or the Consumer
Prices Index (CPI) which apply to each category of member as shown below.

Active members

Deferred members

Pensioners

Section Ba

Section C

Benefits accrue on a CARE basis increasing
at the lower of RPI or the individual’s actual
pay increase

a Section A members have typically elected to take Section B benefits at retirement.

Preserved benefits are revalued before
retirement based upon CPI

Increases in benefits in payment are
currently based upon CPI

Increases in benefits in payment are
currently based upon RPI up to a maximum
of 5%

Management of the scheme
BT Pension Scheme Trustees Limited (the Trustee) has been appointed by BT as an independent trustee to administer and manage the
scheme on behalf of the members in accordance with the terms of the Trust Deed of the Scheme and relevant legislation. Under the
terms of the Trust Deed there are nine Trustee directors, all of whom are appointed by BT. The chairman of the Trustee is appointed after
consultation with, and with the agreement of, the relevant trade unions who are also responsible for nominating four directors to act as
representatives of the members. Of the remaining four directors, two will normally hold senior positions within the group, and two will
normally hold (or have held) senior positions in commerce or industry. Subject to there being an appropriately qualified candidate, at least
one of the Trustee directors is usually a current pensioner or deferred pensioner of the BTPS. Trustee directors are usually appointed for a
three-year term but are then eligible for re-appointment.

BTPS assets

Asset allocation
The allocation of assets between different classes of investment is reviewed regularly and is a key factor in the Trustee’s investment policy.
The allocations set reflect the Trustee’s views on the appropriate balance to be struck between seeking returns and incurring risk, and on
the extent to which the assets should be distributed to match liabilities. Current market conditions and trends are regularly assessed which
may lead to adjustments in the asset allocation. The BTPS also uses financial instruments to balance the asset allocation and to manage
inflation risk, interest rate risk, longevity risk, liquidity risk and foreign currency risk.

Under IAS 19, plan assets must be valued at the bid market value at the balance sheet date. For the main asset categories

– securities listed on recognised stock exchanges are valued at closing bid prices;
– properties are valued on the basis of open market value;
– unlisted equities are valued in accordance with International Private Equity and Venture Capital (IPEVC) guidelines;
– unlisted fixed interest and index-linked instruments are valued using the latest market price or using discounted cash flow models that

consider credit risk.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

202

20. Retirement benefit plans continued
The fair value of the assets of the BTPS analysed by asset category are shown below. These are subdivided by assets that have a quoted
market price in an active market and those that do not (such as investment funds).

At 31 March

Equitiesc
Fixed-interest securities
Inflation-linked securities
Property
Alternative assetsd
Cash, derivatives and other

Total

2016a

Total assets
£bn

of which
b
quoted
£bn

Total
%

Total assets
£bn

of which
b
quoted
£bn

14.7
7.3
11.7
5.5
4.6
(0.7)

43.1

11.3
5.6
10.4
–
–
–

27.3

34
17
27
13
11
(2)

100

14.4
7.4
11.7
4.6
4.9
0.4

43.4

10.6
5.7
10.5
–
–
–

26.8

2015a

Total
%

33
17
27
11
11
1

100

a At 31 March 2016 and 31 March 2015, the Scheme’s assets did not include any directly held ordinary shares of the company. The Scheme held £9m (2014/15: £9m) of index-linked bonds issued by the

group.

b Assets with a quoted price in an active market.
c At 31 March 2016, the BTPS held £0.8bn of UK equities (2014/15: £0.8bn).
d Alternative assets include absolute return funds and emerging market debt.

Investment performance
The Trustee reports on investment performance against a benchmark which is based on the asset mix and the market returns for each
asset class. BTPS performance against the benchmark for the periods to 30 June 2015 was as follows.

Period ending 30 June 2015

1 year
3 years
10 years

IAS 19 liabilities

Benchmark
%

Actual
BTPS return
%

Over
performance
%

6.9
7.2
5.6

8.3
7.8
6.1

1.4
0.6
0.5

Valuation methodology
The IAS 19 liabilities are measured as the present value of the estimated future benefit cash flows to be paid by each scheme, calculated
using the projected unit credit method. These calculations are performed for the group by professionally qualified independent actuaries.

The expected future benefit payments are based on a number of assumptions including future inflation, retirement ages, benefit options
chosen and life expectancy and are therefore inherently uncertain. Actual benefit payments in a given year may be higher or lower, for
example if members retire sooner or later than assumed, or take a greater or lesser cash lump sum at retirement than assumed.

BTPS liabilities
The estimated duration of the BTPS liabilities, which is an indicator of the weighted average term of the liabilities, is around 15 years
although the benefits payable by the BTPS are expected to be paid over more than 70 years as shown in the graph below. Whilst benefit
payments are expected to increase over the earlier years, the value of the liabilities is expected to reduce.

Forecast beneﬁts payable by the BTPS at 31 March 2016 (unaudited)

£bn

3.0

2.5

2.0

1.5

1.0

0.5

£bn

S
P
T
B
e
h
t
y
b
e
b
a
y
a
p
s
t
ﬁ
e
n
e
b
t
s
a
c
e
r
o
F

2016

2036

2056

2076

2096

Forecast beneﬁt payments (Left axis)

Liabilities (Right axis)

aBased on accrued beneﬁts to date.

s
e
i
t
i
l
i

b
a
L

BT Group plc Annual Report 2016

203

20. Retirement benefit plans continued

IAS 19 liabilities: Key assumptions
The key financial assumptions used to measure the liabilities of the BTPS under IAS 19 are shown below.

At 31 March

Rate used to discount liabilities
Inflation – increase in RPI
Inflation – increase in CPI

a The real rate is calculated relative to RPI inflation and is shown as a comparator.
b Assumed to be 0.2% lower after 31 March 2017.
c Assumed to be 0.45% lower after 31 March 2016.

Nominal rates (per year)

Real rates (per year)a

2016
%

3.30
2.85
1.85b

2015
%

3.25
2.85
1.85b

2014
%

4.25
3.25
2.50c

2016
%

0.44
–
(1.0)b

2015
%

0.39
–
(1.0)b

2014
%

0.97
–
(0.75)c

The financial assumptions vary for each plan and the BTPS represents over 97% of the group’s retirement benefit obligation. The nominal
financial assumptions weighted by liabilities across all plans are equal to the figures shown in the table above (to nearest 0.05%).

Rate used to discount liabilities
IAS 19 requires that the discount rate is determined by reference to market yields at the reporting date on high quality corporate bonds.
The currency and term of these should be consistent with the currency and estimated term of the pension obligations.

The discount rate at 31 March 2016 for the BTPS is based on a market-based AA corporate bond yield curve allowing for the future
expected benefit payments.

Inflation – increases in RPI and CPI
The assumption for RPI has been assessed by reference to yields on long-term fixed and index-linked Government bonds and Bank of
England published inflationary expectations. CPI is assessed at a margin below RPI taking into account market forecasts and independent
estimates of the expected difference.

Long-term salary increases for BTPS members are assumed to be equal to CPI inflation whilst benefits are assumed to increase by either
RPI or CPI inflation as prescribed by the rules of the BTPS and summarised above.

Longevity
The assumptions about life expectancy have regard to information published by the UK actuarial profession’s Continuous Mortality
Investigation. Due to the size of the membership of the BTPS it is considered appropriate for the adopted life expectancy assumptions to
take into account the actual membership experience of the Scheme. Allowance is also made for future improvements in mortality. The
BTPS actuary undertakes formal reviews of the membership experience at every triennial valuation.

Under IAS 19, the forecast life expectancies for BTPS members aged 60 are as follows:

At 31 March

Male in lower pay bracket
Male in medium pay bracket
Male in higher pay bracket

Female in lower pay bracket
Female in higher pay bracket

Average improvement for a member retiring at age 60 in 10 years’ time

2016
Number of
years

2015
Number of
years

26.1
27.4
28.8

28.8
29.1

1.0

26.0
27.3
28.7

28.7
29.0

1.0

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
204

20. Retirement benefit plans continued

Sensitivity analysis of the principal assumptions used to measure BTPS liabilities
The assumptions on the discount rate, inflation, salary increases and life expectancy all have a significant effect on the measurement of
Scheme liabilities. The table below provides an indication of the sensitivity of the IAS 19 pension liabilities for the BTPS at 31 March 2016,
and of the income statement charge for 2016/17, to changes in these assumptions.

The sensitivity of the deficit allows for both the change in the liabilities and the expected change in the assets. For example, the increase in
the deficit under the life expectancy scenario incorporates the expected movement in the value of a contract held to hedge longevity risk.

0.25 percentage point increase to:
– discount rate
– inflation rate (assuming RPI, CPI and salary increases all move by 0.25 percentage points)
– CPI inflation rate (assuming RPI and salary increases are unchanged)
– salary increases (assuming RPI and CPI are unchanged)
Additional one year increase to life expectancy

a Allows for the estimated impact on assets from a 0.25% per year increase to interest rates and corporate bond yields, with credit spreads unchanged.
b Allows for the estimated impact on assets directly linked to inflation from a 0.25% per year increase to inflation.

BTPS funding

Decrease
(increase) in
liability
£bn

Decrease
(increase) in
deficit
£bn

Decrease
(increase)
in income
statement
charge
£m

1.7
(1.4)
(0.9)
(0.2)
(1.3)

0.8a
(0.4)b
(0.9)
(0.2)
(1.0)

25
(15)
(35)
(10)
(35)

Triennial funding valuation
The triennial valuation is carried out for the Trustee by a professionally qualified independent actuary. The purpose of the valuation is
to design a funding plan to ensure that the Scheme has sufficient funds available to meet future benefit payments. The latest funding
valuation was performed as at 30 June 2014. The next funding valuation will have an effective date of no later than 30 June 2017.

The valuation methodology for funding purposes, which is based on prudent assumptions, is broadly as follows:

– assets are valued at market value at the valuation date; and
– liabilities are measured on an actuarial funding basis using the projected unit credit method and discounted to their present value.

The results of the two most recent triennial valuations are shown below.

BTPS liabilities
Market value of BTPS assets

Funding deficit

Percentage of accrued benefits covered by BTPS assets at valuation date
Percentage of accrued benefits on a solvency basis covered by the BTPS assets at the valuation date

June
2014
valuation
£bn

June
2011
valuation
£bn

(47.2)
40.2

(7.0)

(40.8)
36.9

(3.9)

85.2%
63.0%

90.4%
66.0%

The funding deficit increased to £7.0bn at 30 June 2014. While deficit contribution payments totalling £2.65bn and investment returns
of 5.8% per year since the 2011 valuation contributed to higher assets at the 2014 valuation date, the low interest rate environment
resulted in a higher value being placed on the Scheme’s liabilities which more than offset the improvements in the Scheme’s assets.

Key assumptions – funding valuation
These valuations were determined using the following prudent long-term assumptions.

Average single equivalent discount rate
Average long-term increase in RPI
Average long-term increase in CPI

a The real rate is calculated relative to RPI inflation and is shown as a comparator.

Nominal rates (per year)

Real rates (per year)a

June
2014
valuation
%

June
2011
valuation
%

June
2014
valuation
%

June
2011
valuation
%

4.5
3.5
2.5

5.2
3.2
2.2

1.0
–
(1.0)

2.0
–
(1.0)

The discount rate at 30 June 2014 was derived from prudent return expectations above a yield curve based on gilt and swap rates. The
discount rate reflects views of future returns at the valuation date. This gives a prudent discount rate of 2.1% per year above the yield
curve initially, trending down to 0.6% per year above the curve in the long-term. The assumption is equivalent to using a flat discount
rate of 4.5% per year.

BT Group plc Annual Report 2016

20. Retirement benefit plans continued
The average life expectancy assumptions at the 2014 valuation date, for members 60 years of age, are as follows.

Number of years from 30 June 2014

Male in lower pay bracket

Male in medium pay bracket
Male in high pay bracket

Female in lower pay bracket
Female in high pay bracket

Average improvement for a member retiring at age 60 in 10 years’ time

Payments made to the BTPS

Year ended 31 March

Ordinary contributions
Deficit contributions

Total contributions in the year

205

June
2014
assumptions

June
2011
assumptions

26.1

27.5
29.0

28.9
29.2

1.3

2016
£m

215
875

26.3

28.1

28.7

1.2

2015
£m

168
875

1,090

1,043

The group expects to make contributions of approximately £485m to the BTPS in 2016/17, comprising ordinary contributions of
approximately £235m and deficit contributions of £250m.

Future funding obligations and recovery plan
Under the terms of the Trust Deed, the group is required to have a funding plan, determined at the conclusion of the triennial funding
valuation, which is a legal agreement between BT and the Trustee and should address the deficit over a maximum period of 20 years.

In January 2015, the 2014 triennial funding valuation was finalised, agreed with the Trustee and certified by the Scheme Actuary. The
funding deficit at 30 June 2014 was £7.0bn. Under the associated recovery plan BT made payments of £875m in March 2015, £625m
in April 2015 and £250m in March 2016. BT is scheduled to make future deficit payments in line with the table below.

Year to 31 March

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Deficit contribution (£m)

250

688

699

711

724

670

495

289

The ordinary contribution rate to meet the benefits of current employed members increased from 13.5% to 16.0% of pensionable
salaries (including employee contributions) from 1 April 2015 through to the next valuation date.

Other protections
The 2014 funding agreement with the Trustee included additional features for BT to provide support to the Scheme. These include:

Feature

Detail

Shareholder
distributions

In the event that shareholder distributions exceed an agreed threshold, BT will provide matching payments to the
Scheme. The threshold allows for 15% per year dividend per share growth plus £300m per year of share buybacks on a
cumulative basis.

BT will consult with the Trustee if it considers share buybacks in excess of £300m per year or making a special dividend.

These provisions apply from 29 January 2015 until 31 March 2019, or until the finalisation of the next valuation if
earlier.

Material
corporate
events

In the event that BT generates net cash proceeds greater than £1bn from disposals (net of acquisitions) in any
12-month period ending 30 June, BT will make additional contributions to the Scheme equal to one third of those net
cash proceeds.

BT will consult with the Trustee if:

– it considers making acquisitions with a total cost of more than £1bn in any 12-month period; or

– it considers making disposals of more than £1bn; or

– it considers making a Class 1 transaction (acquisition or disposal) which will have a material impact on the Scheme; or

– it becomes aware it is likely to be subject to a takeover offer.

BT will advise the Trustee should there be other material corporate events which would materially impact BT’s covenant
to the Scheme.

These provisions apply from 29 January 2015 until 31 March 2019, or until the finalisation of the next valuation if
earlier.

Negative
pledge

A negative pledge that future creditors will not be granted superior security to the Scheme in excess of a £1.5bn
threshold, to cover both British Telecommunications plc and BT Group plc.

This provision applies until the deficit reduces to below £2.0bn at any subsequent funding valuation.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

206

20. Retirement benefit plans continued
In the unlikely event that the group were to become insolvent there are additional protections of BTPS members’ benefits:

Feature

Detail

Crown
Guarantee

The Crown Guarantee was granted by the Government when the group was privatised in 1984 and would only come
into effect upon the insolvency of BT.

The Trustee brought court proceedings to clarify the scope and extent of the Crown Guarantee. The Court of Appeal
judgment on 16 July 2014 established that:

– the Crown Guarantee covers BT’s funding obligation in relation to members of the Scheme who joined post-

privatisation as well as those who joined pre-privatisation (subject to certain exceptions);

– the funding obligation to which the Crown Guarantee relates is measured with reference to BT’s obligation to pay

deficit contributions under the rules of the Scheme.

The Crown Guarantee is not taken into account for the purposes of the actuarial valuation of the Scheme and is an
entirely separate matter, only being relevant in the highly unlikely event that BT became insolvent.

The Pension Protection Fund (PPF) may take over the Scheme and pay benefits not covered by the Crown Guarantee to
members.

There are limits on the amounts paid by the PPF and the PPF would not provide exactly the same benefits as those in
the Scheme.

Pension
Protection
Fund (PPF)

Other benefit plans
In addition to the BTPS, the group maintains benefit plans around the world with a focus on these being appropriate for the local market
and culture.

The EEPS is the largest defined benefit plan sponsored by the group after the BTPS with defined benefit liabilities of around £700m.
The scheme’s assets are invested across a number of asset classes including UK listed equities and unit trusts (25%), property (16%),
alternative assets (35%) and fixed income assets (24%). A funding valuation of the EEPS is being carried out as at 31 December 2015.
The group is currently paying deficit contributions of £20m each year to meet the deficit at the 31 December 2012 valuation of £130m.
The EEPS also has a defined contribution section with around 12,500 active members.

The BT Retirement Saving Scheme (BTRSS) is the largest defined contribution scheme maintained by the group with around 29,500
active members. In the year to 31 March 2016, the group contributed £114m to the BTRSS.

21. Own shares

At 31 March 2014
Own shares purchasedb
Share options exercisedb,c
Executive share awards vested

At 31 March 2015
Own shares purchasedb
Share options exercisedb,c
Executive share awards vested

At 31 March 2016

Treasury sharesa
millions

£m

Employee share
ownership trusta
millions

Total

£m

millions

£m

232
25
(256)
–

1
46
(39)
–

(626)
(102)
724
–

(4)
(211)
176
–

(39)

62
55
(51)
(25)

41
22
(24)
(22)

(203)
(218)
173
87

(161)
(104)
102
87

(76)

294
80
(307)
(25)

42
68
(63)
(22)

(829)
(320)
897
87

(165)
(315)
278
87

(115)

a At 31 March 2016, 8,170,876 shares (2014/15: 1,009,913) with an aggregate nominal value of £nil (2014/15: £nil) were held at cost as treasury shares and 16,600,756 shares (2014/15:

40,567,778) with an aggregate nominal value of £1m (2014/15: £2m) were held in the Trust.

b See group cash flow statement on page 169. In 2015/16 the cash paid for the repurchase of ordinary share capital was £315m (2014/15: £320m). The cash received for proceeds on the issue of

treasury shares was £90m (2014/15: £1,201m).

c Includes share option exercises of nil (2014/15: 2m) relating to other plans.

The treasury shares reserve represents BT Group plc shares purchased directly by the group. The BT Group Employee Share Ownership Trust
(‘the Trust’) also purchases BT Group plc shares.

The treasury shares and the shares in the Trust are being used to satisfy the group’s obligations under its employee share plans. Further
details on Employee Saveshare Plans and Executive share plans are provided in note 22.

BT Group plc Annual Report 2016

207

22. Share-based payments

Overview
The company has savings-related share option plans for its employees and those of participating subsidiaries, further share option plans
for selected employees and a stock purchase plan for employees in the US. It also has several share plans for executives. All share-based
payment plans are equity-settled. Details of these plans and an analysis of the total charge by type of award is set out below.

Year ended 31 March

Employee Saveshare Plans
Executive Share Plans:
Incentive Share Plan (ISP)
Deferred Bonus Plan (DBP)
Other plans

2016
£m

2015
£m

2014
£m

21
4
6

32
9
4

21
11
3

Employee Saveshare Plans
Under an HMRC-approved savings-related share option plan, employees save on a monthly basis, over a three or five-year period, towards
the purchase of shares at a fixed price determined when the option is granted. This price is usually set at a 20% discount to the market
price for five-year plans and 10% for three-year plans. The options must be exercised within six months of maturity of the savings
contract, otherwise they lapse. Similar plans operate for BT’s overseas employees.

Incentive Share Plan (ISP)
Under the ISP, participants are only entitled to these shares in full at the end of a three-year period if the company has met the relevant
pre-determined corporate performance measures and if the participants are still employed by the group. For ISP awards granted in
2015/16, 2014/15 and 2013/14: 40% of each award is linked to a total shareholder return (TSR) target for a comparator group of
companies from the beginning of the relevant performance period; 40% is linked to a three-year cumulative free cash flow measure, and
20% to growth in underlying revenue excluding transit.

Deferred Bonus Plan (DBP)
Under the DBP, awards are granted annually to selected employees of the group. Shares in the company are transferred to participants at
the end of three years if they continue to be employed by the group throughout that period.

Under the terms of the ISP and DBP, dividends or dividend equivalents earned on shares during the conditional periods are reinvested
in company shares for the potential benefit of the participants.

Employee Saveshare Plans
Movements in Employee Saveshare options are shown below.

Year ended 31 March

Outstanding at 1 April
Granted
Forfeited
Exercised
Expired

Outstanding at 31 March

Exercisable at 31 March

Movement in the number of share options
2014
millions

2015
millions

2016
millions

Weighted average exercise price

2016
pence

2015
pence

2014
pence

226
47
(12)
(63)
(1)

197

–

459
81
(9)
(304)
(1)

226

–

490
40
(10)
(57)
(4)

459

226
385
306
139
247

287

140

102
326
239
65
163

226

91
257
158
110
78

102

111

The weighted average share price for all options exercised during 2015/16 was 463p (2014/15: 382p, 2013/14: 356p).

The following table summarises information relating to options outstanding and exercisable under Employee Saveshare plans at 31 March
2016.

Normal dates of vesting and exercise (based on calendar years)

2016
2017
2018
2019
2020

Total

Exercise price per
share

156p – 280p
168p – 359p
249p – 423p
319p – 376p
376p

Weighted
average
exercise
price

Number of
outstanding
options
millions

Weighted
average
remaining
contractual
life

204p
233p
315p
320p
376p

287p

31 10 months
49 22 months
34 34 months
54 46 months
29 58 months

197 34 months

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

208

22. Share-based payments continued

Executive share plans
Movements in executive share plan awards during 2015/16 are shown below:

Number of shares (millions)
Total

DBP

ISP

At 1 April 2015
Awards granted
Awards vested
Awards lapsed
Dividend shares reinvested

At 31 March 2016

57
14
(17)
(12)
1

11
2
(5)
–
–

68
16
(22)
(12)
1

Fair values
The following table summarises the fair values and key assumptions used for valuing grants made under the Employee Saveshare plans
and ISP in 2015/16, 2014/15 and 2013/14.

Year ended 31 March

Weighted average fair value
Weighted average share price
Weighted average exercise price
Expected dividend yield
Risk free rates
Expected volatility

Employee
Saveshare

2016

ISP

Employee
Saveshare

2015

ISP

Employee
Saveshare

81p
454p
385p
3.2% – 3.7%
0.7% – 1.6%
19.7% – 22.7%

364p
451p
n/a
n/a
0.7%

82p
387p
326p
3.5% – 3.8%
1.2% – 2.0%
22.0% 22.2% – 24.9%

309p
393p
n/a
n/a
1.2%

61p
310p
257p
3.9% – 5.6%
0.7% – 1.5%
24.3% 23.3% – 31.9%

2014

ISP

269p
315p
n/a
n/a
0.7%
32.0%

Employee Saveshare grants are valued using a Binomial options pricing model. Awards under the ISP are valued using Monte Carlo
simulations. TSRs are generated for BT and the comparator group at the end of the three-year performance period, using each company’s
volatility and the cross correlation between pairs of stocks.

Volatility has been determined by reference to BT’s historical volatility which is expected to reflect the BT share price in the future. An
expected life of three months after vesting date is assumed for Employee Saveshare options and for all other awards the expected life is
equal to the vesting period. The risk-free interest rate is based on the UK gilt curve in effect at the time of the grant, for the expected life
of the option or award.

The fair values for the DBP were determined using the market price of the shares at the grant date. The weighted average share price for
DBP awards granted in 2015/16 was 451p (2014/15: 393p, 2013/14: 315p).

BT Group plc Annual Report 2016

23. Investments

At 31 March

Non-current assets
Available-for-sale
Fair value through profit or loss

Current assets
Available-for-sale
Loans and receivables

209

2016
£m

2015
£m

39
7

36
8

2,878
40

2,918

3,133
390

3,523

Loans and receivables are held on the balance sheet at amortised cost and this approximates fair value. Loans and receivables consist of
investments in term deposits denominated in Sterling of £10m (2014/15: £360m) and in US Dollars of £30m (2014/15: £30m).

Fair value hierarchy
At 31 March 2016

Non-current and current investments
Available-for-sale investments
Fair value through profit or loss

Total

At 31 March 2015

Non-current and current investments
Available-for-sale investments
Fair value through profit or loss

Total

Level 1
£m

Level 2
£m

Total held at
fair value
£m

Level 3
£m

24
7

2,878
–

2,878

15
–

2,917
7

2,924

Level 1
£m

Level 2
£m

Total held at
fair value
£m

Level 3
£m

26
8

3,133
–

3,133

10
–

3,169
8

3,177

The three levels of valuation methodology used are:

Level 1 – uses quoted prices in active markets for identical assets or liabilities
Level 2 – uses inputs for the asset or liability other than quoted prices, that are observable either directly or indirectly
Level 3 – uses inputs for the asset or liability that are not based on observable market data, such as internal models or other valuation
method.

Level 2 balances classified as available-for-sale consist of investments in liquidity funds denominated in Sterling of £2,430m (2014/15:
£2,784m) and in Euros of £448m (2014/15: £349m).

Level 3 balances consist of available-for-sale investments of £15m (2014/15: £10m) which represent investments in a number of
private companies. In the absence of specific market data, these investments are held at cost, adjusted as necessary for impairments,
which approximates to fair value.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

210

24. Cash and cash equivalents
At 31 March

Cash at bank and in hand

Cash equivalents
Loans and receivables
US deposits
UK deposits
Other deposits

Total cash equivalents

Total cash and cash equivalents
Bank overdrafts (note 25)

Cash and cash equivalents per the cash flow statement

2016
£m

401

2015
£m

335

44
20
32

497
(38)

459

28
28
43

434
(27)

407

The group has cross-undertaking guarantee facilities across certain bank accounts which allow a legally enforceable right of set-off of the
relevant cash and overdraft balances on those bank accounts.

The group’s cash and cash equivalents included restricted cash of £101m (2014/15: £143m), of which £99m (2014/15: £140m) was
held in countries in which prior approval is required to transfer funds abroad. Such funds can be used by the group within a reasonable
period of time if it complies with these requirements. The remaining balance of £2m (2014/15: £3m) was held in escrow accounts.

Cash and cash equivalents are classified as loans and receivables and are held on the group balance sheet at amortised cost which equates to
fair value.

25. Loans and other borrowings

Capital management policy
The objective of the group’s capital management policy is to reduce net debt over time whilst investing in the business, supporting
the pension scheme and paying progressive dividends. In order to meet this objective, the group may issue or repay debt, issue new
shares, repurchase shares, or adjust the amount of dividends paid to shareholders. The group manages the capital structure and makes
adjustments to it in the light of changes in economic conditions and the risk characteristics of the group. The Board regularly reviews the
capital structure. No changes were made to these objectives and processes during 2015/16 and 2014/15. For details of share issues and
repurchases in the year see note 21.

The group’s capital structure consists of net debt and shareholders’ equity. The analysis below summarises the components which the
group manages as capital.

At 31 March

Net debt
Total parent shareholders’ equitya

a Excludes non-controlling interests of £22m (2014/15: £12m).

2016
£m

2015
£m

9,845
10,358

20,203

5,119
796

5,915

BT Group plc Annual Report 2016
211

25. Loans and other borrowings continued

Net debt
Net debt consists of loans and other borrowings (both current and non-current), less current asset investments and cash and cash
equivalents. Loans and other borrowings are measured at the net proceeds raised, adjusted to amortise any discount over the term of the
debt. For the purpose of this measure, current asset investments and cash and cash equivalents are measured at the lower of cost and net
realisable value. Currency denominated balances within net debt are translated to Sterling at swapped rates where hedged.

Net debt is considered to be an alternative performance measure as 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. A
reconciliation from the most directly comparable IFRS measure to net debt is given below.

On the acquisition of EE, we acquired a further £2,107m of net debt.

At 31 March

Loans and other borrowings
Less:
Cash and cash equivalents
Current asset investments

Adjustments:
To retranslate debt balances at swap rates where hedged by currency swaps
To remove accrued interest applied to reflect the effective interest method and fair value adjustments

Net debt

At 31 March
2.00% US$750m bond due June 2015a
6.50% €1,000m bond due July 2015a
1.625% US$600m bond due June 2016a
8.50% £683m bond due December 2016 (minimum 7.50%c)
1.25% US$500m bond due February 2017a
3.5% €500m bond due February 2017a
6.625% £500m bond due June 2017a
5.95% US$1,100m bond due January 2018a
3.25% €600m bond due August 2018a
2.35% US$800m bond due February 2019a
4.38% £400m bond due March 2019
1.125% €1,000m bond due June 2019a
8.625% £300m bond due March 2020
0.625% €1,500m bond due March 2021a
1.125% €1,100m bond due March 2023a
3.50% £250m index linked bond due April 2025
1.75% €1,300 bond due March 2026a
5.75% £600m bond due December 2028b
9.625% US$2,670m bond due December 2030a (minimum 8.625%c)
6.375% £500m bond due June 2037a

Total listed bonds

Finance leases

LIBOR + 0.95% £438m Syndicated loan facilities due April 2016
2.21% £350m bank loan due December 2017
Acquisition facility
Other loans
Bank overdrafts (note 24)

Total other loans and borrowings

Total loans and borrowings

2016
£m

2015
£m

14,269

9,768

(497)
(2,918)

(434)
(3,523)

10,854

5,811

(652)
(357)

(357)
(335)

9,845

5,119

2016
£m

2015
£m

–
–
419
696
348
398
525
775
510
558
464
800
300
1,190
873
396
1,032
741
1,910
522

508
758
406
695
337
–
525
750
–
541
–
730
299
–
–
392
–
751
1,850
522

12,457

9,064

240

438
354
181
561
38

1,572

238

–
–
–
439
27

466

14,269

9,768

a Designated in a cash flow hedge relationship.
b Designated in a fair value hedge relationship in 2014/15, de-designated in 2015/16.
c The interest rate payable on this bond attracts an additional 0.25% for a downgrade by one credit rating by either Moody’s or S&P to the group’s senior unsecured debt below A3/A– respectively.
In addition, if Moody’s or S&P subsequently increase the ratings then the interest rate will be decreased by 0.25% for each rating category upgrade by each rating agency. In no event will the
interest rate be reduced below the minimum rate reflected in the above table.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

212

25. Loans and other borrowings continued
Unless previously designated in a fair value hedge relationship, all loans and other borrowings are carried in the group balance sheet and
the table above at amortised cost. The fair value of listed bonds and other long-term borrowings is £14,500m (2014/15: £10,919m)
and the fair value of finance leases is £290m (2014/15: £273m).

The fair value of the group’s bonds and other long-term borrowings is estimated on the basis of quoted market prices, based on the same
or similar issues where they exist. Where the same or similar issues do not exist, the fair value is estimated based on the calculation of
future cash flows using blended discount rates in effect at the balance sheet date.

The carrying amount of other loans and bank overdrafts equates to fair value due to the short maturity of these items.

The interest rates payable on loans and borrowings disclosed above reflect the coupons on the underlying issued loans and borrowings and
not the interest rates achieved through applying associated cross-currency and interest rate swaps in hedge arrangements.

Loans and other borrowings are analysed as follows:

At 31 March

Current liabilities
Listed bonds
Finance leases
Syndicated loan facilities
Other loans and bank overdrafts

Total current liabilities

Non-current liabilities
Listed bonds
Finance leases
Bank loans
Other loans and borrowings

Total non-current liabilities

Total

2016
£m

2015
£m

2,013
8
619
597

3,237

10,444
232
354
2

11,032

14,269

1,422
13
–
465

1,900

7,642
225
–
1

7,868

9,768

The carrying values disclosed in the above table reflect balances at amortised cost adjusted for accrued interest and fair value adjustments
to the relevant loans or borrowings. These do not reflect the final principal repayments that will arise after taking account of the relevant
derivatives in hedging relationships which are reflected in the table below. Apart from finance leases, all borrowings as at 31 March 2016
and 2015 were unsecured.

The principal repayments of loans and borrowings at hedged rates amounted to £13,260m (2014/15: £9,074m) and repayments fall
due as follows:

At 31 March

Within one year, or on demand

Between one and two years
Between two and three years
Between three and four years
Between four and five years
After five years

Total due for repayment after more than one year

Total repayments
Fair value adjustmentsa

Total loans and other borrowings

a In 2015/16 includes a £49m adjustment to EE’s long-term debt on acquisition to reflect it at fair value.

2016
Principal
repayments
at hedged
rates
£m

Effect of
hedging
and
interest
£m

(232)

(216)
(72)
18
(26)
(302)

3,005

1,416
1,416
1,122
1,174
5,127

(598)

10,255

(830)

13,260

2015
Principal
repayments
at hedged
rates
£m

Effect of
hedging
and
interest
£m

(152)

(48)
(191)
(51)
89
(198)

(399)

(551)

1,748

1,383
1,060
498
1,122
3,263

7,326

9,074

Carrying
amount
£m

1,900

1,431
1,251
549
1,033
3,461

7,725

9,625
143

9,768

Carrying
amount
£m

3,237

1,632
1,488
1,104
1,200
5,429

10,853

14,090
179

14,269

BT Group plc Annual Report 2016

25. Loans and other borrowings continued
Obligations under finance leases are analysed as follows:

At 31 March

Amounts payable under finance leases:
Due within one year
Between two to five years
After five years

Less: future finance charges

Total finance lease obligations

213

2016

2015

Minimum lease payments
£m

£m

2015

2016
Repayment of
outstanding
lease obligations

£m

13
107
270

390

(150)

240

29
101
269

399

(161)

238

8
53
179

240

–

240

13
46
179

238

–

238

Assets held under finance leases mainly consist of buildings and network assets. The group’s obligations under finance leases are secured
by the lessors’ title to the leased assets.

26. Finance expense
Year ended 31 March

Finance expense
Interest on:
Financial liabilities at amortised cost
Finance leases
Derivatives
Fair value movements:
Bonds designated as hedged items in fair value hedges
Derivatives designated as hedging instruments in fair value hedges
Derivatives not in a designated hedge relationship
Reclassification of cash flow hedge from other comprehensive income
Unwinding of discount on provisions

Finance expense
Less: interest capitaliseda

Total finance expense before specific items

Specific items (note 8)

Total finance expense

2016
£m

2015
£m

2014
£m

489
14
11

–
–
(5)
3
8

520
–

520

229

749

516
15
7

82
(82)
7
26
8

579
(2)

577

299

876

560
16
13

(47)
47
(2)
9
8

604
(1)

603

235

838

a No interest was capitalised in 2015/16. Interest was capitalised at a weighted average rate of 6.0% in 2014/15 and 6.1% in 2013/14.

Reconciliation of net finance expense to net interest cash outflow
Net interest cash outflow of £548m (2014/15: £580m, 2013/14: £608m) is £65m higher (2014/15: £20m, 2013/14: £17m) than
the net finance expense in the income statement. This is mostly due to certain interest cash outflows and inflows being spread over a
number of years in the income statement.

Year ended 31 March

Net finance expense before specific items
Timing differences:
– Derivative restructuring costs
– Timing of coupon payments on bonds
– Timing of interest receipts
– Deferred income
Specific item (note 8)

Net interest cash outflow

2016
£m

483

(1)
27
22
9
8

2015
£m

560

–
4
–
9
7

2014
£m

591

14
(5)
–
8
–

548

580

608

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

214

27. Financial instruments and risk management
The group issues or holds financial instruments mainly to finance its operations; to finance corporate transactions such as dividends, share
buybacks and acquisitions; for the temporary investment of short-term funds; and to manage the currency and interest rate risks arising
from its operations and from its sources of finance. In addition, various financial instruments, for example trade receivables and trade
payables, arise directly from the group’s operations.

Financial risk management
The group’s activities expose it to a variety of financial risks: market risk (including interest rate risk and foreign exchange risk), credit risk
and liquidity risk.

Treasury operations
The group has a centralised treasury operation whose primary role is to manage liquidity and funding requirements as well as the group’s
exposure to associated financial and market risks, including credit risk, interest rate risk and foreign exchange risk.

Treasury policy
Treasury policy is set by the Board. Group treasury activities are subject to a set of controls appropriate for the magnitude of borrowing,
investments and group-wide exposures. The Board has delegated authority to operate these policies to a series of panels responsible for
the management of key treasury risks and operations. Appointment to and removal from the key panels requires approval from two of the
following: the Chairman, the Chief Executive or the Group Finance Director.

There has been no change in the nature of the group’s risk profile between 31 March 2016 and the date of approval of these financial
statements.

Interest rate risk management

Management policy
Interest rate risk arises primarily from the group’s long-term borrowings. Interest cash flow risk arises from borrowings issued at variable
rate, partially offset by cash held at variable rates. Fair value interest rate risk arises from borrowings issued at fixed rates.

The group’s policy, as set by the Board, is to ensure that at least 70% of net debt is at fixed rates. Short-term interest rate management
is delegated to the treasury operation while long-term interest rate management decisions require further approval by the Group Finance
Director, Director of Treasury and Risk Management or the BT Group Treasurer who each have been delegated such authority from the
Board.

Hedging strategy
In order to manage the group’s interest rate profile, the group has entered into cross-currency and interest rate swap agreements with
commercial banks and other institutions to vary the amounts and periods for which interest rates on borrowings are fixed. The duration
of the swap agreements matches the duration of the debt instruments. The majority of the group’s long-term borrowings have been, and
are, subject to fixed Sterling interest rates after applying the impact of these hedging instruments.

Foreign exchange risk management

Management policy
The purpose of the group’s foreign currency hedging activities is to protect the group from the risk that eventual future net inflows and
net outflows will be adversely affected by changes in exchange rates.

The Board’s policy for foreign exchange risk management defines the types of transactions which should normally be covered, including
significant operational, funding and currency interest exposures, and the period over which cover should extend for the different types of
transactions.

Short-term foreign exchange management is delegated to the treasury operation whilst long-term foreign exchange management
decisions require further approval from the Group Finance Director, Director of Treasury and Risk Management or the BT Group Treasurer
who have been delegated such authority by the Board.

Hedging strategy
A significant proportion of the group’s external revenue and costs arise within the UK and are denominated in Sterling. The group’s non-UK
operations generally trade and are funded in their functional currency which limits their exposure to foreign exchange volatility. Foreign
currency borrowings used to finance the group’s operations have been predominantly swapped into Sterling using cross-currency swaps.

The group also enters into forward currency contracts to hedge foreign currency, capital purchases, purchase and sale commitments,
interest expense and foreign currency investments. The commitments hedged are principally denominated in US Dollar, Euro and Asia
Pacific region currencies. As a result, the group’s exposure to foreign currency arises mainly on its non-UK subsidiary investments and on
residual currency trading flows.

BT Group plc Annual Report 2016215

27. Financial instruments and risk management continued
The table below reflects the currency and interest rate profile of our loans and borrowings after the impact of hedging.

At 31 March

Sterling
Euro
Total

Ratio of fixed to floating
Weighted average effective fixed interest rate – Sterling

Floating
rate
interest
£m

1,249
594
1,843

14%

2016

Fixed rate
interest
£m

Total
£m

12,666
594
13,260

100%

7,601
–
7,601

84%
6.3%

Fixed rate
interest
£m

11,417
–
11,417

86%
6.0%

Floating
rate
interest
£m

991
482
1,473

16%

2015

Total
£m

8,592
482
9,074

100%

The floating rate loans and borrowings bear interest rates fixed in advance for periods ranging from one day to one year, primarily by
reference to LIBOR and EURIBOR quoted rates.

Sensitivity analysis
The group is exposed to volatility in the income statement and shareholders’ equity arising from changes in interest rates and foreign
exchange rates. To demonstrate this volatility, management have concluded that the following are reasonable benchmarks for performing
sensitivity analysis:

– for interest, a 1% increase in interest rates and parallel shift in yield curves across Sterling, US Dollar and Euro currencies; and
– for foreign exchange, a 10% strengthening/weakening in Sterling against other currencies.
The impact of a 1% change in interest rates on the group’s annual net finance expense was insignificant in both 2015/16 and 2014/15.
The impact on equity, before tax, of a 1% increase in interest rates is as detailed below:

At 31 March

Sterling interest rates
US Dollar interest rates
Euro interest rates

2016
£m
Increase
(reduce)

626
(374)
(263)

2015
£m
Increase
(reduce)

428
(400)
(34)

A 1% decrease in interest rates would have broadly the same impact in the opposite direction.

The group’s exposure to foreign exchange volatility in the income statement, after hedging, and within shareholders’ equity (excluding
translation exposures) was insignificant in both 2015/16 and 2014/15.

Credit ratings
The group’s December 2030 bond contains covenants which have required the group to pay higher rates of interest once the group
ceased to be rated at least A3 in the case of Moody’s or at least A– in the case of Standard & Poor’s (S&P). Additional interest of 0.25%
per year accrues for each ratings category downgrade by each agency below those levels effective from the next coupon date following
a downgrade. Based on the total notional value of debt outstanding of £1.9bn at 31 March 2016, the group’s finance expense would
increase/decrease by approximately £9m a year if the group’s credit rating were to be downgraded/upgraded, respectively, by one credit
rating category by both agencies from the current ratings.

The group’s credit ratings were as detailed below:

At 31 March

Rating agency
Standard & Poor’s
Moody’s

Liquidity risk management

Rating

2016
Outlook

Rating

2015
Outlook

BBB
Baa2

Positive
Positive

BBB
Baa2

Stable
Positive

Management policy
The group ensures its liquidity is maintained by entering into short-, medium- and long-term financial instruments to support operational
and other funding requirements. The group determines its liquidity requirements by the use of both short- and long-term cash forecasts.
These forecasts are supplemented by a financial headroom analysis which is used to assess funding adequacy for at least a 12-month
period. On at least an annual basis the Board reviews and approves the maximum long-term funding of the group and on an ongoing
basis considers any related matters. Refinancing risk is managed by limiting the amount of borrowing that matures within any specified
period and having appropriate strategies in place to manage refinancing needs as they arise. The maturity profile of the group’s loans and
borrowings at 31 March 2016 is disclosed in note 25. The group has term debt maturities of £1.9bn in 2016/17.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

216

27. Financial instruments and risk management continued
Short and medium-term requirements are regularly reviewed and managed by the treasury operation within the parameters of the policies
set by the Board. The group holds cash, cash equivalents and current investments in order to manage short-term liquidity requirements.
At 31 March 2016 the group had undrawn committed borrowing facilities of £1.5bn (2014/15: £1.5bn) maturing in September 2020
with the option to renew to September 2021.

Maturity analysis
The following table provides an analysis of the remaining contractually-agreed cash flows including interest payable for the group’s non-
derivative financial liabilities on an undiscounted basis, which therefore differs from both the carrying value and fair value.

Non-derivative financial liabilities
At 31 March 2016

Due within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
After five years

Interest payments not yet accrued
Fair value adjustmenta
Impact of discounting

Carrying value on the balance sheetb

At 31 March 2015

Due within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
After five years

Interest payments not yet accrued
Fair value adjustment
Impact of discounting

Carrying value on the balance sheetb

Loans
and other
borrowings
£m

Interest on
loans
and other
borrowings
£m

Trade
and other
payables
£m

3,059
1,632
1,488
1,104
1,200
5,429

13,912

–
179
–

491
435
357
343
308
2,885

4,819

(4,641)
–
–

5,244
–
–
–
–
–

5,244

–
–
–

Provisions
£m

Total
£m

50
30
25
15
16
326

462

–
–
(166)

8,844
2,097
1,870
1,462
1,524
8,640

24,437

(4,641)
179
(166)

14,091

178

5,244

296

19,809

Loans
and other
borrowings
£m

Interest on
loans
and other
borrowings
£m

Trade
and other
payables
£m

1,706
1,431
1,251
549
1,033
3,461

9,431

–
143
–

513
458
392
315
302
2,973

4,953

(4,759)
–
–

3,784
–
–
–
–
–

3,784

–
–
–

Provisions
£m

Total
£m

32
19
15
15
13
218

312

–
–
(104)

6,035
1,908
1,658
879
1,348
6,652

18,480

(4,759)
143
(104)

9,574

194

3,784

208

13,760

a Includes a £49m adjustment to EE’s long-term debt on acquisition to reflect it at fair value.
b Foreign currency-related cash flows were translated at closing rates as at the relevant reporting date. Future variable interest rate cash flows were calculated using the most recent rate applied at the relevant

balance sheet date.

Trade and other payables are held at amortised cost. The carrying amount of these balances approximates to fair value due to the short
maturity of amounts payable.

BT Group plc Annual Report 2016

217

27. Financial instruments and risk management continued
The following table provides an analysis of the contractually agreed cash flows in respect of the group’s derivative financial instruments.
Cash flows are presented on a net or gross basis in accordance with the settlement arrangements of the instruments.

Derivative financial liabilities
At 31 March 2016

Due within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
After five years

Totalb

At 31 March 2015

Due within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
After five years

Totalb

Derivatives – Analysed by earliest payment datea

Derivatives – Analysed based on holding instrument
to maturity

Net settled
£m

Gross settled
outflows
£m

Gross settled
inflows
£m

Total
£m

Net settled
£m

Gross settled
outflows
£m

Gross settled
inflows
£m

268
386
371
60
81
–

263
38
38
838
17
165

(250)
(27)
(27)
(836)
(18)
(180)

281
397
382
62
80
(15)

91
88
88
90
84
725

263
38
38
838
17
165

(250)
(27)
(27)
(836)
(18)
(180)

Total
£m

104
99
99
92
83
710

1,166

1,359

(1,338)

1,187

1,166

1,359

(1,338)

1,187

Derivatives – Analysed by earliest payment datea

Derivatives – Analysed based on holding instrument
to maturity

Net settled
£m

Gross settled
outflows
£m

Gross settled
inflows
£m

Total
£m

Net settled
£m

Gross settled
outflows
£m

Gross settled
inflows
£m

215
471
273
177
48
–

1,421
39
38
38
838
390

(1,292)
(26)
(26)
(26)
(749)
(394)

344
484
285
189
137
(4)

88
109
92
94
111
690

1,320
42
42
42
842
476

(1,179)
(30)
(30)
(30)
(753)
(491)

Total
£m

229
121
104
106
200
675

1,184

2,764

(2,513)

1,435

1,184

2,764

(2,513)

1,435

a Certain derivative financial instruments contain break clauses whereby either the group or bank counterparty can terminate the swap on certain dates and the mark to market position is settled in cash.
b Foreign currency-related cash flows were translated at closing rates as at the relevant reporting date. Future variable interest rate cash flows were calculated using the most recent rate applied at the relevant

balance sheet date.

Credit risk management

Management policy
The group’s exposure to credit risk arises from financial assets transacted by the treasury operation (primarily derivatives, investments, cash
and cash equivalents) and from its trading-related receivables.

For treasury-related balances, the Board’s defined policy restricts exposure to any one counterparty by setting credit limits based on
the credit quality as defined by Moody’s and S&P and by defining the types of financial instruments which may be transacted. The
minimum credit ratings permitted with counterparties in respect of new transactions are A3/A– for long-term and P1/A1 for short-term
investments. Action is taken, where appropriate and cost effective if counterparties, in respect of existing transactions fall below the
permitted criteria.

The treasury operation continuously reviews the limits applied to counterparties and will adjust the limit according to the nature and credit
standing of the counterparty, and in response to market conditions, up to the maximum allowable limit set by the Board.

Operational management policy
The group’s credit policy for trading-related financial assets is applied and managed by each of the lines of business to ensure compliance.
The policy requires that the creditworthiness and financial strength of customers are assessed at inception and on an ongoing basis.
Payment terms are set in accordance with industry standards. Where appropriate, the group may endeavour to minimise risks by
requesting securities such as deposits, guarantees and letters of credit. The group takes proactive steps including constantly reviewing
credit ratings of relationship banks to minimise the impact of adverse market conditions on trading-related financial assets.

Exposures
The maximum credit risk exposure of the group’s financial assets at the balance sheet date is as follows:

At 31 March

Derivative financial assets
Investments
Trade and other receivablesa
Cash and cash equivalents

Notes

23
17
24

2016
£m

2015
£m

1,639
2,964
2,947
497

8,047

1,329
3,567
2,264
434

7,594

a The carrying amount excludes £233m (2014/15: £184m) of non-current trade and other receivables which relate to non-financial assets, and £1,116m (2014/15: £876m) of prepayments and other

receivables.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

218

27. Financial instruments and risk management continued
The credit quality and credit concentration of cash equivalents, current asset investments and derivative financial assets are detailed in the
tables below. Where the opinion of Moody’s and S&P differ, the lower rating is used.

Moody’s/S&P credit rating of counterparty

Aa2/AA and above
Aa3/AA–
A1/A+
A2/Aa
A3/A–
Baa1/BBB+
Baa2/BBB and below

2016
£m

2015
£m

2,878
120
64
939
160
492
–

4,653

3,133
206
248
793
121
439
11

4,951

a The group holds cash collateral of £553m (2014/15: £437m) in respect of derivative financial assets with certain counterparties.

The concentration of credit risk for trading balances of the group is provided in note 17, which analyses outstanding balances by line of
business.

Where multiple transactions are undertaken with a single financial counterparty or group of related counterparties, the group has entered
into netting arrangements to reduce the group’s exposure to credit risk by making use of standard International Swaps and Derivatives
Association (ISDA) documentation. The group has also entered into credit support agreements with certain swap counterparties whereby,
on a weekly and monthly basis, the fair value position on notional £1,882m of long dated cross-currency swaps and interest rate swaps is
collateralised. The related net cash inflow during the year was £79m (2014/15: cash inflow of £297m). The collateral paid and received is
recognised within current asset investments and loans and other borrowings, respectively.

Offsetting of financial instruments
The table below shows the group’s financial assets and liabilities that are subject to offset in the group’s balance sheet and the impact of
enforceable master netting or similar agreements.

Financial assets and liabilities
At 31 March 2016

Derivative financial assets
Derivative financial liabilities
Cash and cash equivalents
Bank overdrafts

Total

Financial assets and liabilities
At 31 March 2015

Derivative financial assets
Derivative financial liabilities
Cash and cash equivalents
Bank overdrafts

Total

Related amounts not set off in the balance sheet

Gross
amounts
£m

Amounts
set off
£m

Amounts
presented in
the balance
sheet
£m

Right of set off with
derivative
counterparties
£m

Cash
collateral
£m

1,639
(911)
643
(184)

1,187

–
–
(146)
146

1,639
(911)
497
(38)

–

1,187

(456)
456
–
–

–

(553)
40
–
–

(513)

Net
amount
£m

630
(415)
497
(38)

674

Related amounts not set off in the balance sheet

Gross
amounts
£m

Amounts
set off
£m

Amounts
presented in
the balance
sheet
£m

Right of set off with
derivative
counterparties
£m

Cash
collateral
£m

Net
amount
£m

1,329
(1,095)
588
(181)

641

–
–
(154)
154

1,329
(1,095)
434
(27)

–

641

(603)
603
–
–

–

(437)
30
–
–

(407)

289
(462)
434
(27)

234

Cash and cash equivalents and bank overdrafts include amounts set off of £146m (2014/15: £154m) as part of a master netting
agreement with Barclays Bank Plc. Balances held within this arrangement are pooled and interest is paid or received on the net balance.

BT Group plc Annual Report 2016

219

27. Financial instruments and risk management continued

Derivatives
All of the group’s derivative financial instruments are held at fair value on the group’s balance sheet. The fair values of outstanding swaps
and foreign exchange contracts are estimated using discounted cash flow models and market rates of interest and foreign exchange at the
balance sheet date.

Derivatives
At 31 March 2016

Designated in a cash flow hedge
Other

Total derivatives

Derivatives
At 31 March 2015

Designated in a cash flow hedge
Designated in a fair value hedge
Other

Total derivatives

Current
asset
£m

Non-current
asset
£m

Current
liability
£m

Non-current
liability
£m

166
11

177

1,158
304

1,462

40
8

618
245

863

Current
asset
£m

Non-current
asset
£m

Current
liability
£m

Non-current
liability
£m

86
6
5

941
143
148

1,232

161
–
7

168

698
–
229

927

All derivative financial instruments are categorised at Level 2 of the fair value hierarchy as defined in note 23, with the exception of a
derivative energy contract which is classified at Level 3. On initial recognition of this derivative energy contract a gain was deferred. At
31 March 2016 the amount deferred and not yet recognised in the income statement, was £nil (2014/15: £14m). The fair value of the
energy derivative at 31 March 2016 was £nil. It has been valued using assumptions on volumes, inflation and energy prices.

Hedging activities
Derivatives may qualify as hedges for accounting purposes if they meet the criteria for designation as fair value hedges or cash flow hedges
in accordance with IAS 39.

Cash flow hedges
Instruments designated in a cash flow hedge include interest rate swaps and cross-currency swaps hedging Euro- and US Dollar-
denominated borrowings. Forward currency contracts are taken out to hedge step-up interest on currency denominated borrowings
relating to the group’s 2030 US Dollar bond. The hedged cash flows will affect the group’s income statement as interest and principal
amounts are repaid over the remaining term of the borrowings (see note 25).

Forecast foreign currency purchases, principally denominated in US Dollar, Euro and Asia Pacific currencies are hedged 12 months forward,
with certain specific transactions hedged further forward. The related cash flows are recognised in the income statement over this period.

All cash flow hedges were effective in the period. See note 28 for details of the movements in the cash flow hedge reserve.

Fair value hedges
In 2014/15 fair value hedges consisted of interest rate swaps that are used to protect against changes in the fair value of the 2028
Sterling bond due to movements in market interest rates. These were de-designated on 1 April 2015.

Gains and losses arising on fair value hedges are disclosed in note 26.

Other derivatives
The group’s policy is not to use derivatives for speculative purposes. However, due to the complex nature of hedge accounting under IAS
39, some derivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is more
appropriate. Derivative instruments that do not qualify for hedge accounting are classified as held for trading and held at fair value
through profit or loss under IAS 39.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information220

28. Other reserves

At 1 April 2013
Exchange differences
Net fair value loss on cash flow hedges
Recognised in income and expense
Fair value movement on available-for-sale assets
Tax recognised in other comprehensive income

At 1 April 2014
Exchange differences
Net fair value gain on cash flow hedges
Recognised in income and expense
Fair value movement on available-for-sale assets
Tax recognised in other comprehensive income

At 1 April 2015
Exchange differencesd
Net fair value gain on cash flow hedges
Recognised in income and expense
Fair value movement on available-for-sale assets
Tax recognised in other comprehensive income

At 31 March 2016

Other comprehensive income

Capital
redemption
reserve
£m

Cash flow
a
reserve
£m

Available-
for-sale
b
reserve
£m

Translation
c
reserve
£m

27
–
–
–
–
–

180
–
(528)
384
–
6

42
–
207
(218)
–
24

55
–
381
(230)
–
(33)

173

38
–
–
–
(27)
–

11
–
–
–
7
–

18
–
–
–
(2)
–

547
(176)
–
–
–
(2)

369
5
–
–
–
13

387
49
–
–
–
38

474

Total
£m

792
(176)
(528)
384
(27)
4

449
5
207
(218)
7
37

487
49
381
(230)
(2)
5

690

a The cash flow reserve is used to record the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.
Amounts ‘recognised in income and expense’ include a net charge to the cash flow reserve of £255m (2014/15: net charge £244m, 2013/14: net credit of £374m) relating to fair value movements on
derivatives. The items generating these foreign exchange movements are in designated cash flow hedge relationships.
b The available-for-sale reserve is used to record the cumulative fair value gains and losses on available-for-sale financial assets. The cumulative gains and losses are recycled to the income statement on
disposal of the assets.
c The translation reserve is used to record cumulative translation differences on the assets and liabilities of foreign operations. The cumulative translation differences are recycled to the income statement on
disposal of the foreign operation.

d Excludes £3m of exchange differences in relation to retained earnings attributed to non-controlling interest.

29. Related party transactions
Key management personnel comprise executive and non-executive directors and members of the Operating Committee. Compensation of
key management personnel is disclosed in note 5.

Amounts paid to the group’s retirement benefit plans are set out in note 20.

BT Group plc Annual Report 2016

30. Financial commitments and contingent liabilities
Financial commitments were as follows:

At 31 March

Capital commitments
Other commitments
Device purchase commitments
TV programme rights commitments

Total

221

2016
£m

2015
£m

922
481
260
2,026

3,689

507
–
–
2,512

3,019

At 31 March 2016 TV programme rights commitments, mainly relating to football broadcast rights, are those for which the licence period
has not yet started.

Future minimum operating lease payments for the group were as follows:

Payable in the year ending 31 March:
2016
2017
2018
2019
2020
2021
Thereafter

Total future minimum operating lease payments

2016
£m

2015
£m

–
669
641
592
545
500
4,641

7,588

427
401
392
377
365
356
4,206

6,524

Operating lease commitments were mainly in respect of land and buildings which arose from a sale and operating leaseback transaction
in 2001. Leases have an average term of 16 years (2014/15: 17 years) and rentals are fixed for an average of 16 years (2014/15: 17
years).

Other than as disclosed below, there were no contingent liabilities or guarantees at 31 March 2016 other than those arising in the
ordinary course of the group’s business and on these no material losses are anticipated. The group has insurance cover to certain limits for
major risks on property and major claims in connection with legal liabilities arising in the course of its operations. Otherwise, the group
generally carries its own risks.

Under the Broadband Delivery UK programme, grants received by the group may be subject to reinvestment or repayment to the
customer depending on the level of take-up.

The group has provided guarantees relating to certain leases entered into by Telefónica UK Limited (formerly O2 UK Limited) prior to the
demerger of mmO2 from BT on 19 November 2001. mmO2 plc (now part of the Telefónica Group) has given BT a counter indemnity
for these guarantees. There is no exposure in the event of credit default in respect of amounts used to defease future lease obligations.
The guarantee lasts until Telefónica UK Limited has discharged all its obligations, which is expected to be when the leases end on
30 January 2017.

The group does not believe that there is any single current court action that would have a material adverse effect on the financial position
or operations of the group.

31. Subsequent events
From 1 April 2016, the group has reorganised and the reporting segments will change. The group will have the following six customer-
facing lines of business:

• BT Global Services has been renamed Global Services and is focused on multinational customers;
• BT Business has become Business and Public Sector and includes the UK corporate and public sector operations from BT Global Services

as well as EE’s business division;

• BT Consumer remains a separate segment, renamed Consumer;
• EE’s consumer division is a separate segment;
• BT Wholesale has become Wholesale and Ventures and includes EE’s MVNO operations and certain specialist businesses that were

previously in the BT Business segment; and

• Openreach.

In addition, EE’s technology team has been brought together with BT TSO to create a mobile technology unit.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
222

Independent auditors’ report to the
members of BT Group plc
Report on the company financial statements

Directors’ remuneration
Directors’ Remuneration Report – Companies Act 2006 opinion
In our opinion, the part of the Report on Directors’ Remuneration
to be audited has been properly prepared in accordance with the
Companies Act 2006.

Our opinion
In our opinion, BT Group plc’s company financial statements (the
financial statements).

• give a true and fair view of the state of the company’s affairs as at

31 March 2016;

• have been properly prepared in accordance with United Kingdom

Generally Accepted Accounting Practice; and

• have been prepared in accordance with the requirements of the

Companies Act 2006.

What we have audited
BT Group plc’s financial statements comprise:

• the BT Group plc company balance sheet as at 31 March 2016;
• the BT Group plc company reconciliation of movement in equity

shareholders’ funds for the year then ended; and

• the notes to the financial statements, which include a summary

of significant accounting policies and other explanatory
information.

The financial reporting framework that has been applied in
the preparation of the financial statements is United Kingdom
Accounting Standards, comprising FRS 101 “Reduced Disclosure
Framework”, and applicable law (United Kingdom Generally
Accepted Accounting Practice).

Other required reporting

Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report and
the Report of the Directors for the financial year for which the
financial statements are prepared is consistent with the financial
statements.

ISAs (UK & Ireland) reporting
Under International Standards on Auditing (UK and Ireland) (“ISAs
(UK & Ireland)”) we are required to report to you if, in our opinion,
information in the Annual Report & Form 20-F 2016 (the “Annual
Report”) is:

• materially inconsistent with the information in the audited

financial statements; or

• apparently materially incorrect based on, or materially

inconsistent with, our knowledge of the company acquired in the
course of performing our audit; or

• otherwise misleading.

We have no exceptions to report arising from this responsibility.

Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to you if,
in our opinion:

• we have not received all the information and explanations we

require for our audit; or

• adequate accounting records have not been kept by the

company, or returns adequate for our audit have not been
received from branches not visited by us; or

• the financial statements and the part of the Report on

Directors’ Remuneration to be audited are not in agreement
with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you if,
in our opinion, certain disclosures of directors’ remuneration specified
by law are not made. We have no exceptions to report arising from
this responsibility.

Responsibilities for the financial statements and the audit

Our responsibilities and those of the directors
As explained more fully in the Statement of directors’
responsibilities set out on page 149, the directors are responsible
for the preparation of the financial statements and for being satisfied
that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and ISAs (UK & Ireland).
Those standards require us to comply with the Auditing Practices
Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only
for the company’s members as a body in accordance with Chapter
3 of Part 16 of the Companies Act 2006 and for no other purpose.
We do not, in giving these opinions, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.

What an audit of financial statements involves
We conducted our audit in accordance with ISAs (UK & Ireland). An
audit involves obtaining evidence about the amounts and disclosures
in the financial statements sufficient to give reasonable assurance
that the financial statements are free from material misstatement,
whether caused by fraud or error. This includes an assessment of:

• whether the accounting policies are appropriate to the company’s
circumstances and have been consistently applied and adequately
disclosed;

• the reasonableness of significant accounting estimates made by

the directors; and

• the overall presentation of the financial statements.

We primarily focus our work in these areas by assessing the directors’
judgements against available evidence, forming our own judgements,
and evaluating the disclosures in the financial statements.

We test and examine information, using sampling and other auditing
techniques, to the extent we consider necessary to provide a
reasonable basis for us to draw conclusions. We obtain audit evidence
through testing the effectiveness of controls, substantive procedures
or a combination of both.

In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the
audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.

Other matter
We have reported separately on the group financial statements of
BT Group plc for the year ended 31 March 2016.

Paul Barkus (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
4 May 2016

BT Group plc Annual Report 2016223

Financial statements of BT Group plc

BT Group plc accounting policies

Accounting basis
As used in these financial statements and associated notes, the
term ‘company’ refers to BT Group plc. These separate financial
statements of the company are prepared in accordance with and
presented as required by the Companies Act 2006. For all periods
up to and including the year ended 31 March 2015, the Company
prepared its separate financial statements in accordance with UK
GAAP (United Kingdom Generally Accepted Accounting Practice).

The Company meets the definition of a qualifying entity under
Financial Reporting Standard 100 (FRS 100). Accordingly, in the
year ended 31 March 2016 the company has undergone transition
from reporting under previous UK GAAP to Financial Reporting
Standard 101 (FRS 101) ‘Reduced Disclosure Framework’. These
financial statements have been prepared in accordance with
FRS 101.

Previous UK GAAP differs in certain respects from FRS 101 and
comparative information has been re-presented as necessary in
accordance with FRS 101. There were no measurement differences
on transition from UK GAAP to FRS 101 and therefore no opening
reconciliation of Equity is presented.

FRS 101 incorporates, with limited amendments, International
Financial Reporting Standards (IFRS).

As permitted by FRS 101, the company has taken advantage of
the disclosure exemptions available under that standard in relation
to business combinations, share-based payments, non-current
assets held for sale, financial instruments, capital management,
and presentation of comparative information in respect of certain
assets, presentation of a cash flow statement, standards not yet
effective, impairment of assets and related party transactions.
The company intends to continue to take advantage of these
exemptions in future years. Further detail is provided below.

Where required, equivalent disclosures have been given in the
consolidated financial statements of BT Group plc.

IFRS 1 ‘First Time Adoption of International Financial Reporting
Standards’ requires an entity to develop policies based on the
standards and related interpretations effective at the reporting
date of its first annual IFRS financial statements. IFRS 1 also
requires that those policies be applied as of the transition date to
IFRS (which for BT Group plc is 1 April 2014) and throughout all
periods presented in the first IFRS financial statements.

As required by FRS 101, BT Group plc notified its shareholders of
the proposed change at the Annual General Meeting in July 2014.

Financial statements
The financial statements are prepared on a going concern basis and
under the historical cost convention as modified by the revaluation
of certain financial instruments at fair value.

As permitted by Section 408(3) of the Companies Act 2006,
the company’s profit and loss account has not been presented.

Exemptions
The BT Group plc consolidated financial statements for the
year ended 31 March 2016 contain a consolidated cash flow
statement. Consequently, as permitted by IAS 7 ‘Statement of Cash
flow’, the company has not presented its own cash flow statement.

The BT Group plc consolidated financial statements for the year
ended 31 March 2016 contain related party disclosures.

Consequently, the company has taken advantage of the exemption
in IAS 24, ‘Related Party Disclosures’ not to disclose transactions
with other members of the BT Group.

The BT Group plc consolidated financial statements for the year
ended 31 March 2016 contain financial instrument disclosures
which comply with IFRS 7, ‘Financial Instruments: Disclosures’.
Consequently, the company is exempt from the disclosure
requirements of IFRS 7 in respect of its financial instruments.

Investments in subsidiary undertakings
Investments in subsidiary undertakings are stated at cost and
reviewed for impairment if there are indicators that the carrying
value may not be recoverable.

Taxation
Full provision is made for deferred taxation on all temporary
differences which have arisen but not reversed at the balance
sheet date. Deferred tax assets are recognised to the extent that
it is regarded as more likely than not that there will be sufficient
taxable profits from which the underlying timing differences can be
deducted. The deferred tax balances are not discounted.

Dividends
Dividend distributions are recognised as a liability in the year in
which the dividends are approved by the company’s shareholders.
Interim dividends are recognised when they are paid; final dividends
when authorised in general meetings by shareholders.

Share capital
Ordinary shares are classified as equity. Repurchased shares of the
company are recorded in the balance sheet as part of Own shares
and presented as a deduction from shareholders’ equity at cost.

Cash
Cash includes cash in hand and bank deposits repayable on
demand.

Share-based payments
The company does not incur a charge for share-based payments.
However, the issuance by the company of share options and
awards to employees of its subsidiaries represents additional capital
contributions to its subsidiaries. An addition to the company’s
investment in subsidiaries is recorded with a corresponding increase
in equity shareholders’ funds. The additional capital contribution
is determined based on the fair value of options and awards at the
date of grant and is recognised over the vesting period.

New and amended accounting standards that have been issued but are
not yet effective
There are no standards or interpretations issued but not yet
effective which are expected to have a material impact on the
company.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information224

Other information

Dividends
The Board recommends that a final dividend in respect of the year
ended 31 March 2016 of 9.6p (2014/15: 8.5p) will be paid to
shareholders on 5 September 2016, taking the full year proposed
dividend in respect of 2015/16 to 14.0p (2014/15: 12.4p). This
dividend is subject to shareholder approval at the Annual General
Meeting and therefore the liability of approximately £956m
(2014/15: £712m) has not been included in these financial
statements.

Employees
The Chairman, the executive directors and the Group General
Counsel & Company Secretary of BT Group plc were the only
employees of the company during 2015/16 and 2014/15. The costs
relating to qualifying services provided to the company’s principal
subsidiary, British Telecommunications plc, are recharged to that
company.

Audit fees
The audit fee in respect of the parent company was £43,900
(2014/15: £42,900). Fees payable to PricewaterhouseCoopers
LLP for non-audit services to the company are not required to be
disclosed as they are set out in note 7 to the consolidated financial
statements of BT Group plc.

BT Group plc Annual Report 2016BT Group plc company balance sheet

At 31 March

Fixed assets
Investments in subsidiary undertakings
Loans to group undertakingsa

Total fixed assets

Current assets
Amounts owed by group undertakingsa
Cash at bank and in hand

Total current assets
Creditors: amounts falling due within one yearb

Net current (liabilities) assets

Total assets less current liabilities

Non-current liabilities
Amounts due to group undertakings

Total assets less long term liabilities

Capital and reserves
Called up share capital
Share premium account
Capital redemption reserve
Merger reserve
Own shares
Profit and loss account

Total equity shareholders’ fundsa

225

Notes

2016
£m

2015
£m

10,744
8,511

10,686
–

19,255

10,686

46
7

(8)

1,004
5

1,009

987

19,247

11,673

1,409

1,307

17,838

10,366

499
1,051
27
7,424
(115)
8,952

419
1,051
27
–
(165)
9,034

17,838

10,366

a Loans to group undertakings primarily relate to a £1.0bn equity placing raised in February 2015 and net proceeds of £7.5bn, before £3m of issue costs, relating to the sale of EE to British
Telecommunications plc on 29 January 2016.
b Creditors consist of loans from group undertakings of £32m (2014/15: £4m) and other creditors of £29m (2014/15: £18m).

The financial statements of the company on pages 223 to 227 were approved by the Board of Directors on 4 May 2016 and were
signed on its behalf by:

Sir Michael Rake
Chairman

Gavin Patterson
Chief Executive

Tony Chanmugam
Group Finance Director

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

226

BT Group plc company statement of changes in equity

Called
up share
a
capital
£m

Share
premium
account
£m

Capital
redemption
reserve
£m

Merger
reserve
£m

b
Own shares
£m

Profit
and loss
account
£m

b,c

At 1 April 2014
Profit for the financial year
Dividends paid
Capital contribution in respect of share-based payments
Issue of new shares
Net buyback of own shares

At 1 April 2015
Profit for the financial year
Dividends paid
Capital contribution in respect of share-based payments
Issue of new shares (note 2)
Net buyback of own shares

At 31 March 2016

408
–
–
–
11
–

419
–
–
–
80
–

499

62
–
–
–
989
–

1,051
–
–
–
–
–

1,051

27
–
–
–
–
–

–
–
–
–
–
–

–
–
–
–
7,424
–

7,424

(829)
–
–
–
–
664

(165)
–
–
–
–
50

(115)

9,693
979
(925)
70
–
(783)

9,034
1,213
(1,078)
58
–
(275)

8,952

17,838

a The allotted, called up and fully paid ordinary share capital of the company at 31 March 2016 was £499m (31 March 2015: £419m), representing 9,968,127,681 (31 March 2015: 8,373,227,252)
ordinary shares of 5p each.
b In 2015/16, 84,760,494 shares (2014/15: 332,679,857 ) were issued from Own shares to satisfy obligations under employee share schemes and executive share awards at a cost of £365m (2014/15:
£983m). At 31 March 2016, 24,771,632 shares (31 March 2015: 41,577,691) with an aggregate nominal value of £1m (31 March 2015: £2m) were held as part of Own shares at cost.
c As permitted by Section 408(3) of the Companies Act 2006, no profit and loss account of the company is presented. The profit for the financial year, dealt with in the profit and loss account of the company
after taking into account dividends received from subsidiary undertakings, was £1,213m (2014/15: £979m).

Total
£m

9,361
979
(925)
70
1,000
(119)

10,366
1,213
(1,078)
58
7,504
(225)

BT Group plc Annual Report 2016

Notes to the company financial statements

1. Investments in subsidiary undertakings
Cost

At 1 April 2014
Additions

At 31 March 2015

Additions
Disposals

At 31 March 2016

227

Total
£m

10,616
70

10,686

11,029
(10,971)

10,744

On 29 January 2016, the company acquired the entire share capital of EE Limited (EE) from T-Mobile Holdings Ltd, which is
owned by Deutsche Telekom A.G. (DT), and Orange Telecommunications Group Ltd (Orange), in exchange for the issue of 1,595m
Consideration Shares and £3,464m cash. The value of the Consideration Shares and cash allotted to DT and Orange at completion was
£10,971m. Subsequently on 29 January 2016 the company sold its entire investment in EE to its wholly owned subsidiary, British
Telecommunications plc at fair value in exchange for an intercompany loan.

Also included within additions is £58m (2014/15: £70m) capital contribution in respect of share-based payments.

The company held a 100% investment in BT Group Investments Limited, a company registered in England and Wales, throughout
2015/16 and 2014/15.

2. Merger reserve
On 29 January 2016, the company issued 1,594,900,429 ordinary shares of 5p at 470.7p per share resulting in a total of £80m being
credited to Share capital.

These shares were used as part consideration for the acquisition of EE, which completed on 29 January 2016 (note 1 above and note 14 to
the consolidated financial statements). As a result of this transaction, a merger reserve was created of £7,424m, net of £3m issue costs. The
acquisition of EE was structured by way of a share-for-share exchange and cash. This transaction fell within the provisions of section 612
of the Companies Act 2006 (merger relief) such that no share premium was recorded in respect of the shares issued. The company chose to
record its investment in EE at fair value and therefore recorded a merger reserve equal to the value of the share premium which would have
been recorded had section 612 of the Companies Act 2006 not been applicable (ie equal to the difference between the fair value of EE and
the aggregate nominal value of the shares issued).

This merger reserve was initially considered unrealised on the basis that it was represented by the investment in EE which is not considered
to be qualifying consideration (in accordance with Tech 02/10 (Guidance on the determination of realised profits and losses in the context
of distributions under the Companies Act 2006)).

Immediately following the acquisition of EE, the company transferred its investment in EE to its wholly owned subsidiary British
Telecommunications plc in exchange for an intercompany loan. To the extent the loan is settled in qualifying consideration, the related
proportion of the merger reserve is considered realised. Hence the merger reserve is an unrealised profit until it is realised by the
settlement of the intercompany loan by qualifying consideration.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information228

Related undertakings

Subsidiaries

Company name

Activity

Group interest
in allotted
capitala

Country of
incorporation

Holding company

100% ordinary

Held directly
BT Group Investments Limited
Held via other group companies
British Telecommunications plc
BT Group Nominees Limited
Albacom Holdings
América Inalámbrica S.A.

Atlanet SpA

Autumnwindow Limited
Autumnwindow No.2 Limited
Autumnwindow No.3 Limited
B. Telecomunicações, Cabo Verde, Sociedade
Unipessoal, SA
B.T. Communication Israel Ltd

Basictel SpA

Basilica Computing Limited
Basilica Distribution Limited
Belmullet Limited
Brightview Group Limited
Brightview Internet Services Limited
British Telecommunications Finance Limited

Bruning Limited
BT (Barbados) Limited

BT (CBP) Limited
BT (Germany) GmbH & Co. oHG
BT (Gibraltar) Limited
BT (India) Private Limited
BT (India) Private Limited Singapore Branchb
BT (International) Holdings Limited
BT (International) Holdings Limited & Co. LLC

BT (International) Holdings Limited (Jordan)

BT (Jersey) Jutland Limited
BT (Netherlands) Holdings B.V.
BT (Nigeria) Limited
BT (RRS LP) Limited
BT (SL) Limited
BT (Vietnam) Co. Ltd.
BT Albania Limited SH.P.K
BT Algeria Communications SARL
BT Americas Holdings Inc.
BT Americas Inc.

BT Argentina S.R.L.
BT Australasia Pty Limited

BT Australasia Pty Limited – New Zealand
Branchb
BT Austria GmbH

BT Azerbaijan Limited, Limited Liability
Company
BT Belgrade d.o.o

Communications related services and products provider
Dormant
In liquidation
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Property company
Finance company
Property company
In liquidation

Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
In liquidation
In liquidation
Investment company
In liquidation
In liquidation
In liquidation

Finance company
Communications related services, systems integration and
products provider
In liquidation
Communications related services and products provider
Communications related services and products provider
Communications related services and products provider
Communications related services and products provider
Investment/holding company
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
In liquidation
Holding company
Communications related services and products provider
Investment/holding company
Communications related services and products provider
Communications related services and products provider
Communications related services and products provider
Communications related services and products provider
Holding company
Communications related services, systems integration and
products provider
Communications related services and products provider
Communications related services and products provider

100% ordinary
100% ordinary
100% ordinary
100% common

99% ordinary

100% ordinary
100% ordinary
100% ordinary
100% ordinary

100% ordinary

99% ordinary

100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
ordinary
preference

90%
10%

100% ordinary
100% ordinary

100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% –
100% ordinary
100% ordinary

UK
UK
UK
Colombia

Italy

UK
UK
UK
Cabo Verde

Israel

Italy

UK
UK
Isle of Man
UK
UK
Jersey

UK
Barbados

UK
Germany
Gibraltar
India
Singapore
UK
Oman

100% ordinary

Jordan

100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% common
100% common

100% ordinary
ordinary
100%
100%
preference
100% –

Jersey
Netherlands
Nigeria
UK
Sierra Leone
Vietnam
Albania
Algeria
US
US

Argentina
Australia

New Zealand

100% ordinary

Austria

100% ordinary

Azerbaijan

100% ordinary

Serbia

Belarus

BT BELRUS Foreign Limited Liability Company Communications related services, systems integration and

100% ordinary

products provider

BT Group plc Annual Report 2016

229

Company name
BT Bilisim Hizmetleri Anonim Şirketi

BT Brasil Serviços de Telecomunicações Ltda

BT Broadband Luxembourg Sàrl
BT Bulgaria EOOD

BT Business Direct Limited
BT Cables Limited
BT Cables MEA FZE
BT Cameroon Limited
BT Canada Inc.
BT Centre Nominee 2 Limited
BT China Communications Limited
BT China Limited

BT China Limited – Shanghai Branch Officeb

BT Colombia Limitada

BT Commerce L.L.C.

BT Communications Bangladesh Limited

BT Communications do Brasil Limitada

BT Communications Ireland Group Limited
BT Communications Ireland Group Limited –
UK Branchb
BT Communications Ireland Holdings Limited
BT Communications Ireland Limited
BT Communications Kenya Limited

BT Communications Lanka (Private) Limited

BT Communications Philippines Incorporated

BT Communications Sales LLC

BT Communications Sales of Virginia LLC

BT Communications Sales, LLC Puerto Rico
branchb
BT Communications Services South Africa (Pty)
Limited
BT Conferencing Video Inc.
BT Conferencing Video Limited
BT Conferencing, Inc.
BT Convergent Solutions Limited
BT Cornwall Limited
BT Corporate Trustee Limited

BT Cote D’Ivoire

BT de Panama, S.R.L.

BT Denmark ApS

BT Deutschland GmbH

BT Directories Limited
BT Dominican Republic, S. A.

BT e-Serv (India) Private Limited

BT Eighty-Four Limited
BT El Salvador, Limitada de Capital Variable

Activity
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Holding company
Communications related services, systems integration and
products provider
Technology equipment retailer
Manufacture of telecommunications and rail signalling cables
Sale of telecommunications and rail signalling cables
In liquidation
Holding company
Property company
Trading company
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, technology consulting and
products provider
Holding company
Communications related services, systems integration and
products provider
Holding Company
Telecommunications service provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Audio, video and web collaboration service provider
In liquidation
Audio, video and web collaboration service provider
In liquidation
Employment company
Finance company

Group interest
in allotted
capitala

100% ordinary

Country of
incorporation
Turkey

100% quotas

Brazil

100% ordinary
100% ordinary

Luxembourg
Bulgaria

UK
100% ordinary
100% ordinary
UK
100% ordinary United Arab Emirates
Cameroon
100% ordinary
Canada
100% common
UK
100% ordinary
China
50% ordinary
China
100% registered

100% –

China

100% quotas

Colombia

100% ordinary

Bangladesh

100% quotas

100% ordinary
100% –

100% ordinary
100% ordinary
100% ordinary

Brazil

Ireland
UK

Ireland
Ireland
Kenya

100% ordinary

Sri Lanka

100% ordinary

Philippines

100% ordinary

100% notional

100% –

Puerto Rico

70% ordinary

South Africa

100% common
100% ordinary
100% common
100% ordinary
100% ordinary
100% limited by
guarantee

100% ordinary

US
UK
US
UK
UK
UK

Cote d’Ivoire

Panama

Denmark

Germany

100% ordinary
100% ordinary

UK
Dominican Republic

100% equity

India

100% ordinary
100% ordinary

UK
El Salvador

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information230

Activity
Communications related services
Communications related services and products provider

Company name
BT Enìa Telecomunicazioni S.P.A.
BT ESPAÑA, Compañia de Servicios Globales de
Telecommunicaciones, S.A
BT European Investments Limited
BT Facilities Services Limited
BT Federal Inc.
BT Fifty
BT Fifty-One
BT Fifty-Three Limited
BT Finance B.V.
BT Finance BV – UK Branchb
BT Fleet Limited
BT Forty-Nine
BT France S.A.S.

Investment/holding company
Provision of facilities management services
Trading vehicle for US government services
Finance company
Finance company
Holding company
Finance company
Finance company
Fleet management
Holding company
Communications related services, systems integration and
products provider
E-commerce software design, build and management
Communications related services, systems integration and
products provider
Dormant
In liquidation
Holding company
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services
BT Global Business Services Private Limited
BT Global Communications (Ireland) Limited
Dormant
BT Global Communications (Mauritius) Limited Communications related services, systems integration and

BT Gabon Limited
BT Gambia Limited
BT Garrick SE
BT Georgia Limited LLC

BT Fresca Limited
BT Frontline Outsourcing Sdn Bhd

BT Global (Venezuela) S.A.

BT Ghana Limited

BT Global Communications do Brasil Limitada

products provider
Communications related services, systems integration and
products provider

BT Global Communications India Private Limited Communications related services
BT Global Costa Rica SRL

Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider

BT Global Japan Corporation

BT Global Services (Dalian) Co. Ltd.

BT Global Services (M) Sdn Bhd

BT Global Services Botswana (Proprietary)
Limited
BT Global Services Korea Limited.

BT Global Services Limitedb

BT Global Services Limited

BT Global Services Limited Londra Sucursala
Bucurestib
BT Global Services Luxembourg SARL

BT Global Services Solutions Sdn Bhd

BT Global Services Technologies Pte. Ltd.

BT Global Solutions Pte. Ltd.

BT Global Technology (M) Sdn. Bhd.

BT GLOBALNE STORITVE, telekomunikacijske
storitve, obdelava podatkov, podatkovnih baz;
d.o.o.
BT Guatemala S.A.

BT Holdings Limited

Group interest
in allotted
capitala
88% ordinary
100% ordinary

100% ordinary
100% ordinary
100% common
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% –
100% ordinary
100% ordinary
100% ordinary

100% ordinary
100% ordinary

100% Franc CFA
100% ordinary
100% ordinary
100% –

100% ordinary

Country of
incorporation
Italy
Spain

UK
UK
US
UK
UK
UK
Netherlands
UK
UK
UK
France

UK
Malaysia

Gabon
Gambia
Germany
Georgia

Ghana

100% ordinary

Venezuela

100% ordinary
100% ordinary
100% ordinary

100% quotas

74% ordinary
100% ordinary

100% ordinary

100% registered

India
Ireland
Mauritius

Brazil

India
Costa Rica

Japan

China

100% ordinary

Malaysia

100% ordinary

Botswana

100% common

Republic of Korea

100% –

100% ordinary

Italy

100% –

Romania

100% ordinary

Luxembourg

100% ordinary

Malaysia

100% ordinary

Singapore

100% ordinary

Singapore

100% ordinary

Malaysia

Slovenia

Communications related services, systems integration and
products provider
Investment holding company

100% unique

Guatemala

100% ordinary

BT Group plc Annual Report 2016Company name
BT Hong Kong Limited

Activity
Communications related services and products provider

BT Hong Kong Ltd. – Macau Branchb

BT IT Services Limitedc
BT Italia S.p.A.
BT Jamaica Limited

BT Japan Corporation

BT Jersey Limited
BT Kazakhstan LLP
BT Lancashire Services Limited
BT LatAm (BVI) Corporation

BT LatAm (Nevada) Corp.

BT Latam Argentina S.A
BT LatAm Brasil Ltda.

BT LatAm Colombia S.A.

BT LatAm Costa Rica, S.A.

BT LatAm Dominicana, S.A.

BT LatAm El Salvador, S.A. de CV

BT LatAm Guatemala, S.A.

BT LatAm Holdings (Colombia) S. A.
BT LatAm Holdings Brasil Ltda
BT LatAm Holdings One, Inc.
BT LatAm Holdings Three, Inc.
BT LatAm Holdings Two, Inc.
BT LatAm Honduras, S.A.

BT LatAm México, S.A. de C.V.

BT LatAm Nicaragua, S.A.

BT LatAm Panama, Inc.

BT LatAm Peru S.A.C.

BT LatAm Services, Inc.

BT LatAm Venezuela, S.A.

BT LatAm, Inc.
BT Latvia Limited, Sabiedriba ar ierobezotu
atbildibu
BT Law Limited
BT Lease Holdings Limited
BT Leasing Limited
BT Lebanon S.A.L.

BT LGS Limited
BT Limitedb

BT Limited
BT Limitedb
BT Limited Hungarian Branch Officeb

BT Limited Taiwan Branchb

BT Limited, Beijing Officeb

Communications related services, systems integration and
products provider
IT solutions provider
Communications related services and products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services
Communications related services and products provider
Communications related services and products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services and products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Holding company
Holding company
Holding company
Holding company
Holding company
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Trading/holding company
Communications related services, systems integration and
products provider
Provision of third party claims handling services
Investment/holding company
Finance company
Communications related services, systems integration and
products provider
Employment company
Communications related services, systems integration and
products provider
International telecommunications network systems provider
Dormant
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider

231

Group interest
in allotted
capitala
39%
61%
100% –

ordinary
preference

100% ordinary
99% ordinary
100% ordinary

100% ordinary

Country of
incorporation
Hong Kong

Macao

UK
Italy
Jamaica

Japan

100% ordinary
100% –
100% ordinary
100% common

Jersey
Kazakhstan
UK
British Virgin Islands

100% common

100% common
100% quotas

Argentina
Brazil

100% common

Colombia

100% common

Costa Rica

100% common

Dominican Republic

100% common

El Salvador

100% common

Guatemala

100% common
100% common
100% common
100% common
100% common
100% common

Colombia
Brazil
US
US
US
Honduras

97% common

Mexico

100% common

Nicaragua

100% common

Panama

100% common

Peru

100% ordinary

Venezuela

100% common
100% ordinary

100% ordinary
100% ordinary
100% ordinary
100% ordinary

100% ordinary
100% –

100% ordinary
100% –
100% –

100% –

US
Latvia

UK
UK
UK
Lebanon

UK
Belgium

UK
South Africa
Hungary

Taiwan

China

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information232

Company name
BT Limited, organizacni slozkab

BT Luxembourg Investment Holdings Sarl
BT Malawi Limited

BT Managed Services (No.2) Limited
BT Managed Services Limited
BT Manx Investments Limited
BT MDV Limited

BT MEA FZ-LLC

BT Montenegro DOO

BT Moorgate LLC

BT Moorgate LLC – UK Branchb

BT Moorgate One Limited
BT Moorgate Two Limited
BT Mozambique, Limitada

BT Multimedia (Malaysia) Sdn Bhd
BT Nederland N.V.
BT Nederland N.V.b

BT Netherlands Investments B.V.
BT Newgate LLC

BT Newgate LLC – UK Branchb
BT Nicaragua S.A.

BT Niger
BT Nominees Limited
BT Nordics Finland Oy
BT Nordics Sweden AB
BT Pakistan (Private) Limited

BT Paraguay S.R.L.

BT Payment Services Limited
BT Peru S.R.L.

BT Poland Spólka Z Ograniczoną
Odpowiedzialnością
BT Portugal – Telecomunicações, Unipessoal,
Lda.
BT Professional Services (Germany) GmbH

BT Professional Services (Holdings) N.V.
BT Professional Services (India) Private Limited In liquidation
BT Professional Services (Luxembourg) S.A.

BT Professional Services Nederland B.V.

BT Property Limited
BT ROC Kft

BT Services S.A.S.
BT Seventy-Four Limited
BT Seventy-Three
BT Shank No.2 Limited
BT Siam Limited

BT Singapore Pte. Ltd.
BT Sixty-Four Limited
BT Sle Euro Limited

Activity
Communications related services, systems integration and
products provider
Holding company
Communications related services, systems integration and
products provider
Dormant
Communications related services and products provider
Finance company
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Finance company
Finance company
Communications related services, systems integration and
products provider
Dormant
Communications related services and products provider
Communications related services, systems integration and
products provider
Holding company
Communications related services, systems integration and
products provider
Finance company
Communications related services, systems integration and
products provider
Dormant
Dormant
Communications related services
Communications related services
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Payment services provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Holding company

Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Dormant
Communications related services, systems integration and
products provider
Technology consulting and engineering services
In liquidation
Investment/holding company
In liquidation
Communications related services, systems integration and
products provider
Communications related services and products provider
Finance company
Finance company

Group interest
in allotted
capitala
100% –

Country of
incorporation
Czech Republic

100% ordinary
100% ordinary

Luxembourg
Malawi

100% ordinary
100% ordinary
100% ordinary
100% ordinary

UK
UK
Isle of Man
Republic of Moldova

100% ordinary United Arab Emirates

100% –

Montenegro

100% common

100% –

100% ordinary
100% ordinary
100% quotas

100% ordinary
100% ordinary
100% –

100% ordinary
100% common

100% –
100% capital

100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary

UK
UK
Mozambique

Malaysia
Netherlands
Italy

Netherlands
US

UK
Nicaragua

Niger
UK
Finland
Sweden
Pakistan

100% quotas

Paraguay

100% ordinary
100% ordinary

100% ordinary

100% –

100% ordinary
100% ordinary
100% ordinary

UK
Peru

Poland

Portugal

Germany

Belgium
India
Luxembourg

100% ordinary

Netherlands

100% ordinary
100% business

100% ordinary
100% ordinary
100% ordinary
100% ordinary

69% preference

100% ordinary
100% ordinary
100% ordinary

UK
Hungary

France
UK
UK
Jersey
Thailand

Singapore
UK
UK

BT Group plc Annual Report 2016Company name
BT Sle USD Limited
BT Slovakia s.r.o.

BT Sociedad De Responsabilidad Limitada

BT Solutions Limitedb

BT Solutions Limited

BT Solutions Limited (Bahrain Branch)b

BT Solutions Limited – Kuwait Branchb

BT Solutions Limited – Morocco Branchb

BT Solutions Limited – Seychelles Branchb
BT Solutions Limited – Tanzania Branchb

BT Solutions Limited Branch Office in Skopjeb

BT Solutions Limited Eesti Filiaalb

BT Solutions Limited Liability Company

BT Solutions Limited Podruznica Hrvatskab

BT Solutions Limited Sucursal Boliviab

BT Solutions Limited Sucursal Uruguayb

BT Solutions Limited Útibú á Íslandib

BT Solutions Limited-Greek Branchb

BT Solutions Norway AS

BT South Tyneside Limited
BT Switzerland AG
BT Switzerland Limited
BT Systems (Malaysia) Sdn Bhd

BT Technology (Dalian) Company Limited.

BT Telconsult Limited
BT Telconsult Limited (Malaysia)b

BT Telconsult Limited – Botswana Branchb

BT Telecom Egypt LLC

BT Telecom India Private Limited

BT Telecommunications Kenya Limited
BT Telekom Hizmetleri Anonim Şirketi

BT Tunisia S.A.R.L

Activity
Finance company
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
In liquidation
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Employment company
Communications related services and products provider
In liquidation
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Dormant
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider

233

Group interest
in allotted
capitala

100% ordinary
100% ordinary

100% –

Country of
incorporation
UK
Slovakia

Honduras

Cyprus

Ecuador

Malta

Uganda

100% –

Trinidad and Tobago

100% –

100% ordinary

100% –

100% –
100% –

100% –

Namibia

Zambia

Bahrain

Kuwait

Morocco

Seychelles
Tanzania

Macedonia

Estonia

100% –

Russian Federation

100% –

100% ordinary

100% ordinary
100% ordinary
100% ordinary
100% ordinary

100% registered

100% ordinary
100% –

100% –

100% stakes

74% ordinary

100% ordinary
100% common

100% ordinary

Croatia

Bolivia

Uruguay

Iceland

Greece

Norway

UK
Switzerland
UK
Malaysia

China

UK
Malaysia

Botswana

Egypt

India

Kenya
Turkey

Tunisia

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information234

Company name
BT UAE Limited

BT UAE Limited – Abu Dhabi Branchb

BT UAE Limited – Dubai Branch (1)b

BT UAE Limited – Dubai Branch (2)b

BT Ukraine Limited Liability Company

BT United States L.L.C.
BTexact Technologies Limited
BTexact Venturing Limited
BTGS Mexico S.A. de C.V.

BTGS USVI Limited
BTIH Teleconsult Drustvo sa organicenom
odgovornoscu za posredovanje i zastupanje
d.o.o. Sarajevo
Canal Capital Investment Limited
Cegetel Holdings I B.V.
Cegetel Holdings I Sarl
Cegetel Holdings II B.V.
Cegetel Holdings II Sarl
Comms Factory Limited
Communications Global Network Services
Limited
Communications Global Network Services
Limited – UK Branchb
Communications Networking Services (UK)
Communicator Insurance Company Limited

Communicator Limited
Communicator Limitedb
Comsat de Guatemala S.A.
Customer Service Direct Limited
dabs.com plc
Deleteway Limited
Dublin London Network Limited

EE (Group) Limited
EE Communications (South Africa) Proprietary
Limited
EE Finance Plc
EE Limited
EE Pension Trustee Limited
EE Services Limited
ERPTech S.p.A.

ESAT Telecommunications (UK) Limited
ESPN Global Limited
Everything Everywhere Limited
Extraclick Limited
Frontline Solutions Pte Ltd

Green House Group Pte Ltd
Green House Solution Sdn Bhd
groupBT Limited

Holland House (Northern) Limited
I.N.S. Services N.V.
iASPire.Net Pte Ltd
IINS, Inc.
Ilford Trustees (Jersey) Limited
Infocom Telecom LLC

Group interest
in allotted
capitala

100% ordinary

Country of
incorporation
UK

100% –

United Arab Emirates

100% –

United Arab Emirates

100% –

United Arab Emirates

Investment company
Holding company
Holding company
Holding company
Holding company
In liquidation
Communications related services and products provider

100% stakes

100% common
100% ordinary
100% ordinary

2%
98%

fixed
variable
100% ordinary
100% –

100% ordinary
100% ordinary
100% –
100% ordinary
100% –
100% ordinary
100% ordinary

Communications related services and products provider

100% –

Communications related services and products provider
Investment company

Investment company
Insurance
Dormant
In liquidation
Technology equipment retailer
In liquidation
Communications related services, systems integration and
products provider
Dormant
Provision of call centre services

Finance company
Telecommunications
Pension trustee company
Dormant
Communications related services, systems integration and
products provider
Dormant
In liquidation
Dormant
Investment/holding company
Communications related services, systems integration and
products provider
Dormant
Dormant
Communications related services, systems integration and
products provider
Property/holding company
Communications related services
Dormant
Communications related services
Investment company
Communications related services, systems integration and
products provider

100% ordinary
ordinary
preference

99%
1%

100% ordinary
100% –
100% common
80% ordinary
100% ordinary
100% ordinary
55% ordinary

100% ordinary
100% ordinary

100% ordinary
100% ordinary
100% ordinary
100% ordinary
99% ordinary

100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary

100% ordinary
100% ordinary
100% ordinary

100% ordinary
100% ordinary
95% ordinary
100% ordinary
100% ordinary
100% charter

Ukraine

US
UK
UK
Mexico

Virgin Islands, US
Bosnia and
Herzegovina

Ireland
Netherlands
Luxembourg
Netherlands
Luxembourg
UK
Bermuda

UK
Isle of Man

Isle of Man
UK
Guatemala
UK
UK
UK
Ireland

UK
South Africa

UK
UK
UK
UK
Italy

UK
Ireland
UK
UK
Singapore

Singapore
Malaysia
UK

UK
Belgium
Singapore
US
Jersey
Russian Federation

BT Group plc Annual Report 2016Company name
Infonet Broadband Services Corporation

Infonet China Limited

Infonet China Limited Beijing Representative
Officeb
Infonet China Limited Shanghai Representative
Officeb
Infonet Italia S.p.A
Infonet Primalliance Beijing Co. Ltd.

Infonet Primalliance Co., Limited

Infonet Primalliance Holding Co. Ltd.
Infonet Services (Hong Kong) Limited

Infonet Services Corporation
Infonet USA Corporation

International Network Services S.r.l.
IT Holdings, Inc
Mainline Communications Group Limited
Mainline Digital Communications Limited
Mainline Limited
Mobilise Telecoms Limited
M-Viron Limited
Newgate (NZ) Holdings Limited
Newgate Communication (Sudan) Co. Ltd
Newgate Leasing Limited
Newgate Street Secretaries Limited
Numberrapid Limited

Numberrapid Limitedb

Nuova Societa di Telecomunicazioni SpA

Orange FURBS Trustees Limited
Orange Home UNITED KINGDOM Limited
Orange Personal Communications Services
Limited
Orange Services India Private Limited
Plusnet plc
Postgate Holding Company
Priestgate Limited
PSPI-Subic, Inc
PT BT Communications Indonesia

PT BT Indonesia

PT Sun Microsystems Indonesia
Radianz Americas Inc.
Radianz Italia S.r.l.

Radianz Limited
Radianz Spain S.L.

RDZ Netherlands BV

Activity
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Dormant
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Holding company
Communications related services, systems integration and
products provider
Communications related services and products provider
Communications related services, systems integration and
products provider
Dormant
Dormant
Holding company
Distribution of mobile telephones and services
Dormant
Dormant
Dormant
Dormant
In liquidation
Investment/holding company
Dormant
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Pension trustee company
Dormant
Holding company

Provision of call centre services
Broadband service provider
Investment/holding company
Holding company
Dormant
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Dormant
Global managed network service provider
Communications related services, systems integration and
products provider
Investment/holding company
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider

Sama Empreedimentos e Participações Limitada Dormant
Servicios de Telecomunicaciones BT Global
Networks Chile Limitada
Skeegle App Limited

Skeegle Holdings Limited
Skeegle Operations Limited

Southgate Developments Limited

Communications related services, systems integration and
products provider
Engages with end users and receives revenues generated by the
service
Holding company
Operates the Skeegle streaming platform and manages all
contracts; it owns skeegle IPR
Investment/holding company

235

Group interest
in allotted
capitala

100% ordinary

Country of
incorporation
US

100% ordinary

Hong Kong

100% –

100% ordinary
66% ordinary

China

Italy
China

100% ordinary

Hong Kong

100% ordinary
100% ordinary

100% common
100% ordinary

100% quotas
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary

China
Hong Kong

US
US

Italy
Philippines
UK
UK
UK
UK
UK
New Zealand
Sudan
UK
UK
UK

100% –

Zimbabwe

99% ordinary

100% ordinary
100% ordinary
100% ordinary

100% ordinary
100% ordinary
100% ordinary
100% ordinary
51% ordinary
100% ordinary

100% ordinary

60% ordinary
100% common
100% ordinary

100% ordinary
100% ordinary

Italy

UK
UK
UK

India
UK
UK
Isle of Man
Philippines
Indonesia

Indonesia

Indonesia
US
Italy

UK
Spain

100% ordinary

Netherlands

100% common
100% ordinary

100% ordinary

100% ordinary
100% ordinary

100% ordinary

Brazil
Chile

UK
UK

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information236

Company name
Stemmer GmbH

Sun Microsystems Philippines, Inc
Sun Vietnam Co., Ltd.
Sun Vietnam Pte. Ltd.
Syntegra.com Limited
Syntone S.A.R.L.
Tikit Group Limited
Tikit Limited
Tikit TFB Limited
Tikit, Inc.
Transcomm UK Limited
Tudor Minstrel
UAB BTH Vilnius

Whitestream Industries Limited

Activity
Communications related services, systems integration and
products provider
Dormant
Dormant
Dormant
In liquidation
Dormant
In liquidation
Software services products provider
In liquidation
Software services products provider
Communications related services and products provider
Finance company
Communications related services, systems integration and
products provider
Investment/holding company

Group interest
in allotted
capitala

100% ordinary

51% common
60% ordinary
60% ordinary
100% ordinary
99% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary

Country of
incorporation
Germany

Philippines
Vietnam
Singapore
UK
Morocco
UK
UK
UK
Canada
UK
UK
Lithuania

100% ordinary

Ireland

Joint ventures and joint operationsd

Company name

Activity

Group interest
in allotted
capitala

Country of
incorporation

Financial
year end

Address

Held via other group companies
BT OnePhone Limited

Communications related services and
products provider

70% ordinary

31 March

Mobile Broadband Network Limited

Joint venture between EE and
Hutchison 3G UK Limited to
manage network

50% ordinary

31 December

Rugby Radio Station (General Partner)
Limited
Rugby Radio Station (Nominee)
Limited
Rugby Radio Station LP

Property investment

50%

ordinary

31 December

Property company

50%

ordinary

Property company

50% –

31 December

81 Newgate Street
London EC1A 7AJ
United Kingdom
6 Anglo Office Park
67 White Lion Road
Amersham
Buckinghamshire
HP7 9FB
United Kingdom
No 1 Poultry
London EC2R 8EJ
United Kingdom

No 1 Poultry
London EC2R 8EJ
United Kingdom

BT Group plc Annual Report 2016

237

Interests in joint operations
EE Limited and Hutchison 3G UK Limited (together ‘the Companies’) each have a 50% share in the joint operation Mobile Broadband
Network Limited (‘MBNL’). MBNL’s ongoing purpose is the operation and maintenance of mobile networks through a sharing arrangement.
This includes the efficient management of shared infrastructure and networks on behalf of the Companies, acquiring certain network
elements for shared use, and coordinating the deployment of new infrastructure and networks on either a shared or a unilateral basis
(unilateral elements being network assets or services specific to one company only). The group is committed to incurring 50% of costs in
respect of restructuring the Shared Network, a similar proportion of the operating costs (which varies in line with usage), and 100% of
any unilateral elements.

Guarantees for the joint operation are given by Deutsche Telekom AG and Hutchison Whampoa Limited. Deutsche Telekom, Orange and BT
have agreed between them to manage any potential liability by arrangements between themselves.

The principal place of business of the joint operation is in the UK.

Associates

Company name

Activity

Held via other group companies
British Telecom Al-Saudia Limited

BT Global Services (North Gulf) LLC

BT Siam Communications Co. Ltd.

Collectively Limited

Digital Mobile Spectrum Limited
Ecquaria Limited

ePLDTSunphilcox JV, Inc
I2 S.r.l

Infonet Primalliance Shanghai Co. Ltd.

Infonet Primalliance Shenzhen Co. Ltd.

Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Not for profit venture – Promotion of sustainable development
for the benefit of the public
Mitigation of interference to digital terrestrial television
Communications related services, systems integration and
products provider
Dormant
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Communications related services, systems integration and
products provider
Not for profit venture

International Cable Protection Committee
Limited
Internet Matters Limited
Mahindra – BT Investment Company
(Mauritius) Limited
Midland Communications Distribution Limited Distribution and retailing of mobile telephones, associated

Not for profit venture
Investment/holding company

NICC Standards Limited
Opimus S.A. de C.V.

QXN S.c.p.A.
SunPhilcox JV, Inc
Youview TV Limited

equipment and airtime connections
Not for profit venture
Communications related services, systems integration and
products provider
Communications related services and products provider
Dormant
Not for profit venture – Development of software to provide TV
platform services

a The proportion of voting rights held corresponds to the aggregate interest in percentage held by the holding company and subsidiary undertakings.
b No shares issued for a branch.
c On 1 April 2016 BT IT Services Limited transferred its business operations to British Telecommunications plc.
d All joint ventures are governed by a joint venture agreement or shareholder agreement. MBNL is accounted for as a joint operation. See above.

Group interest
in allotted
capitala

Country of
incorporation

49% other

Saudi Arabia

49% ordinary

49% class B

20% –

Qatar

Thailand

25% ordinary
50% ordinary

UK
British Virgin Islands

20% ordinary
23% –

28% ordinary

35% ordinary

33% –

25% –
43% ordinary

35% ordinary

33% –
49% common

25% ordinary
20% ordinary
14% voting

Philippines
Italy

China

UK
Mauritius

UK
Mexico

Italy
Philippines
UK

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information238

BT Group plc Annual Report 2016Overview

The Strategic Report

Governance

Financial statements

Additional information

239239
239

Additional information

In this section you will find more financial
and operational statistics. We also provide
information for shareholders on subjects
such as dividends and location. We have
also included a glossary of terms we use in
this report.

240 Alternative performance measures

243 Selected financial data

245 Financial and operational statistics

248 Information for shareholders

264 Cross reference to Form 20-F

268 Glossary of terms

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information240

Alternative performance measures
Introduction
We assess the performance of the group using a variety of alternative performance measures. We principally discuss the group’s results on
an ‘adjusted’ basis. The rationale for using adjusted measures is explained below. Results on an adjusted basis are presented before specific
items.

We also explain financial performance using measures that are not defined under IFRS and are therefore termed ‘non-GAAP’ measures.
The non‑GAAP measures we use are: the trend in underlying revenue excluding transit, and in underlying operating costs excluding transit,
as well as in reported and adjusted EBITDA; reported and normalised free cash flow; and net debt. A reconciliation from these non-GAAP
measures to the nearest measure prepared in accordance with IFRS is presented below. The alternative performance measures we use may
not be directly comparable with similarly titled measures used by other companies.

Specific items
The group’s income statement and segmental analysis separately identify trading results before specific items. The directors believe that
presentation of the group’s results in this way is relevant to an understanding of the group’s financial performance, as specific items are
identified by virtue of their size, nature or incidence. This presentation is consistent with the way that financial performance is measured by
management and reported to the Board and the Operating Committee and assists in providing a meaningful analysis of the trading results
of the group. In determining whether an event or transaction is specific, management considers quantitative as well as qualitative factors
such as the frequency or predictability of occurrence.

Examples of charges or credits meeting the above definition and which have been presented as specific items in the current and/or prior
years include acquisitions/disposals of businesses and investments, regulatory settlements, historical insurance or litigation claims, business
restructuring programmes, asset impairment charges, property rationalisation programmes, net interest on pensions and the settlement of
multiple tax years. In the event that other items meet the criteria, which are applied consistently from year to year, they are also treated as
specific items.

Specific items are disclosed in note 8 to the consolidated financial statements.

Trends in underlying revenue and operating costs
Underlying revenue and underlying operating costs are measures which seek to reflect the underlying performance of the group that will
contribute to long‑term sustainable profitable growth. As such they exclude the impact of acquisitions or disposals, foreign exchange
movements and specific items. We focus on the trends in underlying revenue and underlying operating costs excluding transit, as transit
traffic is low‑margin and is affected by reductions in mobile termination rates.

A reconciliation from the increase in reported revenue and in reported operating costs, the most directly comparable IFRS measures, to the
increase in underlying revenue and underlying operating costs excluding transit, is set out below.

Year ended 31 March

Increase (decrease) in reported revenue
Specific items

Increase (decrease) in adjusted revenue
Transit revenue
Acquisitions and disposals
Foreign exchange movements

Increase (decrease) in underlying revenue excluding transit

Year ended 31 March

Increase (decrease) in reported operating costs
Depreciation and amortisation

Increase (decrease) in reported operating costs before depreciation and amortisation
Specific items

Increase (decrease) in adjusted operating costs before depreciation and amortisation
Transit costs
Acquisitions and disposals
Foreign exchange movements

Increase (decrease) in underlying operating costs before depreciation and amortisation excluding transit

2016
%

2015
%

2014
%

5.9
–

5.9
1.0
(5.6)
0.7

2.0

(1.7)
(0.7)

(2.4)
0.6
–
1.4

(0.4)

1.0
(1.3)

(0.3)
1.0
(0.1)
(0.1)

0.5

2016
%

2015
%

2014
%

5.6
0.4

6.0
0.5

6.5
1.0
(6.5)
1.4

2.4

(4.2)
0.3

(3.9)
(1.0)

(4.9)
1.0
–
1.5

(2.4)

(0.1)
1.2

1.1
(1.3)

(0.2)
1.4
(0.1)
–

1.1

BT Group plc Annual Report 2016241

EBITDA
In addition to measuring financial performance of the group and lines of business based on operating profit, we also measure performance
based on EBITDA and adjusted EBITDA. EBITDA is defined as the group profit or loss before depreciation, amortisation, net finance
expense and taxation. Adjusted EBITDA is defined as EBITDA before specific items. EBITDA is a common measure used by investors and
analysts to evaluate the operating financial performance of companies, particularly in the telecommunications sector.

We consider EBITDA and adjusted EBITDA to be useful measures of our operating performance because they approximate the underlying
operating cash flow by eliminating depreciation and amortisation. EBITDA and adjusted EBITDA are not direct measures of our liquidity,
which is shown by our cash flow statement, and need to be considered in the context of our financial commitments.

Within the lines of business we may also consider our performance using an underlying EBITDA measure, which additionally excludes the
impact of acquisitions and disposals and foreign exchange.

A reconciliation from group operating profit, the most directly comparable IFRS measure, to reported and adjusted group EBITDA, is set
out below. A reconciliation between operating profit and adjusted EBITDA for our lines of business is set out in note 4 to the consolidated
financial statements.

Year ended 31 March

Operating profit
Depreciation and amortisation

Reported EBITDA
Specific items

Adjusted EBITDA

2016
£m

2015
£m

2014
£m

3,735
2,630

6,365
215

6,580

3,480
2,538

6,018
253

6,271

3,145
2,695

5,840
276

6,116

Earnings per share
We also measure financial performance based on adjusted earnings per share, which excludes specific items. Basic and adjusted earnings
per share, and the per share impact of specific items, are as follows:

Year ended 31 March

Basic earnings per share/profita
Specific itemsb

Adjusted basic earnings per share/profit

Pence
per share

29.9
3.3

33.2

2016

£m

2,581
278

2,859

Pence
per share

26.5
5.0

31.5

2015

£m

2,135
406

2,541

Pence
per share

25.7
2.5

28.2

2014

£m

2,016
196

2,212

a The stated profit is the component of total profit which is attributable to equity shareholders excluding non‑controlling interests.
b Specific items are set out in note 8 to the consolidated financial statements.

We disclose reported earnings per share, both basic and diluted, in note 10 to the consolidated financial statements.

Free cash flow
Normalised free cash flow is one of the group’s key performance indicators by which our financial performance is measured. Normalised
free cash flow is defined as the net increase in cash and cash equivalents less: cash flows from financing activities (except net interest
paid), the acquisition or disposal of group undertakings, the net sale of short‑term investments and excluding: the cash impact of specific
items, purchases of telecommunications licences, and the cash tax benefit of pension deficit payments. For non‑tax related items the
adjustments are made on a pre-tax basis.

Normalised free cash flow is primarily a liquidity measure. However, we also believe it is an important indicator of our overall operational
performance as it reflects the cash we generate from operations after capital expenditure and financing costs, both of which are significant
ongoing cash outflows associated with investing in our infrastructure and financing our operations. In addition, normalised free cash
flow excludes cash flows that are determined at a corporate level independently of ongoing trading operations such as dividends, share
buybacks, acquisitions and disposals, and repayment and raising of debt. Normalised free cash flow is not a measure of the funds that are
available for distribution to shareholders.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information242

A reconciliation from net cash inflow from operating activities, the most directly comparable IFRS measure, to reported and normalised
free cash flow, is set out below.

Year ended 31 March

Net cash inflow from operating activities
Add back pension deficit payments
Included in cash flows from investing activities
Net capital expenditure
Interest received
Sales of non-current financial assets and dividend received from associates and joint ventures
Included in cash flows from financing activities
Interest paid

Reported free cash flow
Net cash outflow from specific items
Cash tax benefit of pension deficit payments

Normalised free cash flow

2016
£m

5,179
880

(2,459)
10
17

2015
£m

4,796
876

(2,318)
10
8

2014
£m

4,796
325

(2,346)
6
4

(558)

(590)

(614)

3,069
232
(203)

3,098

2,782
154
(106)

2,830

2,171
356
(77)

2,450

Net debt
Net debt consists of loans and other borrowings (both current and non‑current), less current asset investments and cash and cash
equivalents. Loans and other borrowings are measured as the net proceeds raised, adjusted to amortise any discount over the term of the
debt. For the purpose of this measure, current asset investments and cash and cash equivalents are measured at the lower of cost and net
realisable value.

Our net debt calculation starts from the expected future undiscounted cash flows that should arise when our financial instruments
mature. We adjust these cash flows to reflect hedged risks that are re‑measured under fair value hedges, as well as for the impact of the
effective interest method. Currency-denominated balances within net debt are translated to Sterling at swap rates where hedged.

Net debt is a measure of the group’s net indebtedness that provides an indicator of the overall balance sheet strength. It is also a single
measure that can be used to assess both the group’s cash position and its indebtedness. 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.

Net debt is considered to be an alternative performance measure as 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. A
reconciliation from these to net debt is given below.

At 31 March

Loans and other borrowings
Less:
Cash and cash equivalents
Current asset investments

Adjustments:
To retranslate debt balances at swap rates where hedged by currency swaps
To remove accrued interest applied to reflect the effective interest method and fair value adjustments

Net debt

2016
£m

2015
£m

14,269

9,768

(497)
(2,918)

(434)
(3,523)

10,854

5,811

(652)
(357)

(357)
(335)

9,845

5,119

BT Group plc Annual Report 2016Selected financial data
Summary group income statement

Year ended 31 March

Revenue
Adjusted
Specific items

Operating costs
Adjusted
Specific items

Operating profit
Adjusted
Specific items

Net finance expense
Adjusted
Specific items

Share of post tax profit (loss) of associates and joint ventures
Adjusted

Profit (loss) on disposal of interest in associates and joint ventures – specific items

Profit before taxation
Adjusted
Specific items

Taxation expense
Adjusted
Specific items

Profit for the year
Adjusted
Specific items

Basic earnings per share
Adjusted
Specific items

Average number of shares used in basic earnings per share (millions)
Average number of shares used in diluted earnings per share (millions)
Diluted earnings per share
Dividends per sharea
Dividends per share, US centsa,b

243

2016
£m

2015
£m

2014
£m

2013
£m

2012
£m

18,909
133

17,851
128

18,287
–

18,339
(236)

19,397
(410)

19,042

17,979

18,287

18,103

18,987

(14,959)
(348)

(14,118)
(381)

(14,866)
(276)

(15,039)
(116)

(16,335)
237

(15,307)

(14,499)

(15,142)

(15,155)

(16,098)

3,950
(215)

3,735

(483)
(229)

(712)

–

3,473
(444)

3,029

(607)
166

(441)

2,866
(278)

2,588

33.2p
(3.3)p

29.9p

8,619
8,714
29.6p
14.0p
20.1c

3,733
(253)

3,480

(560)
(299)

(859)

(1)

3,172
(527)

2,645

(631)
121

(510)

2,541
(406)

2,135

31.5p
(5.0)p

26.5p

8,056
8,191
26.1p
12.4p
18.4c

3,421
(276)

3,145

(591)
(235)

(826)

(3)

(4)

2,827
(515)

2,312

(613)
319

(294)

2,214
(196)

2,018

28.2p
(2.5)p

25.7p

7,857
8,231
24.5p
10.9p
18.2c

3,300
(352)

2,948

(653)
(119)

(772)

130

2,656
(341)

2,315

(597)
230

(367)

2,059
(111)

1,948

26.3p
(1.5)p

24.8p

7,832
8,203
23.7p
9.5p
14.4c

3,062
(173)

2,889

(681)
(98)

(779)

–

2,391
(271)

2,120

(576)
212

(364)

1,815
(59)

1,756

23.4p
(0.8)p

22.6p

7,763
8,201
21.4p
8.3p
13.3c

a Dividends per share represents the dividend paid and proposed in respect of the relevant financial year. Under IFRS, dividends are recognised as a deduction from shareholders’ equity when they are paid.
b Based on actual dividends paid and/or year end exchange rate on proposed dividends.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

244

Summary group balance sheet

At 31 March

Intangible assets
Property, plant and equipment
Other non-current assets

Total non-current assets
Current assets less current liabilities

Total assets less current liabilities
Non-current loans and other borrowings
Retirement benefit obligations
Other non-current liabilities

Total assets less liabilities

Ordinary shares
Share premium account
Own shares
Merger reserve
Other reserves
Retained (loss) earnings

Total equity (deficit)

2016
£m

2015
£m

2014
£m

2013
£m

2012
£m

15,436
16,010
3,012

34,458
(2,882)

31,576
(11,032)
(6,382)
(3,782)

10,380

499
1,051
(115)
8,422
690
(167)

3,170
13,505
3,045

19,720
(237)

19,483
(7,868)
(7,583)
(3,224)

3,087
13,840
2,265

19,192
(1,981)

17,211
(7,941)
(7,022)
(2,840)

3,258
14,153
2,794

20,205
(2,930)

17,275
(8,277)
(5,856)
(3,404)

3,127
14,388
1,902

19,417
(4,724)

14,693
(7,599)
(2,448)
(3,338)

808

(592)

(262)

1,308

419
1,051
(165)
998
487
(1,982)

408
62
(829)
998
449
(1,680)

408
62
(832)
998
792
(1,690)

408
62
(1,018)
998
758
100

10,380

808

(592)

(262)

1,308

BT Group plc Annual Report 2016245

Financial and operational statistics
Financial statistics

Year ended 31 March
(Increase) decrease in underlying revenue excluding transita,b
Adjusted EBITDAa,b
Free cash flowa
Normalised
Reported

Net debt at 31 Marcha
Operating costs excluding depreciation and amortisationb

Expenditure on research and development
Research and development operating expense
Capitalised software development costs

Total expenditure on research and developmentc

Capital expenditure
Additions to property, plant and equipment comprised:
Land and buildings
Network infrastructure
Transmission equipment
Exchange equipment
Other network equipment
Other
Computers and office equipment
Motor vehicles and other

Total additions to property, plant and equipment
(Increase) decrease in engineering stores

Software additions

Total capital expenditure before government grants
Government grants

Total capital expenditure net of government grants
(Decrease) increase in net payables and receivables

Cash outflow from capital expenditure before purchases of telecommunications licences
Purchases of telecommunications licences

Cash outflow from total capital expenditure

a Defined on pages 240 to 242.
b Before specific items.
c We have re-presented certain prior year information to be on a consistent basis.

2016
£m

2.0%

6,580

3,098
3,069

9,845

2015
£m

(0.4)%

6,271

2,830
2,782

5,119

2014
£m

0.5%

6,116

2,450
2,171

7,028

2013
£m

2012
£m

(3.1)%

(1.9)%

6,143

6,034

2,300
2,292

7,797

2,307
2,318

9,082

12,329

11,580

12,171

12,196

13,363

73
399

472

87
421

508

170
365

535

279
265

544

285
275

560

1,559
41
652

48
19

2,350
(3)

2,347
412

2,759
(109)

2,650
(184)

2,466
–

2,466

1,472
33
455

85
75

2,151
6

2,157
561

2,718
(392)

2,326
92

2,418
–

2,418

1,126
24
657

112
8

1,971
(5)

1,966
506

2,472
(126)

2,346
10

2,356
–

2,356

1,170
32
660

80
24

2,008
(9)

1,999
454

2,453
(15)

2,438
43

2,481
202

2,683

1,121
46
794

95
43

2,136
(1)

2,135
459

2,594
–

2,594
(16)

2,578
–

2,578

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

246

Financial ratios

Year ended 31 March
Return on capital employeda
Adjustedb – %
Reported – %
Interest coverc
Adjustedb – times
Reported – times
Net debt to adjusted EBITDAb – times
Capital expenditurec as a percentage of revenueb – %

2016

2015

2014

2013

2012

13.8
13.0

8.2
5.2
1.5
14.0

25.2
23.6

6.7
4.1
0.8
13.0

22.9
21.1

5.8
3.8
1.1
12.8

22.1
20.6

5.1
3.8
1.3
13.3

20.4
19.3

4.5
3.7
1.5
13.4

a The ratio is based on profit before taxation and net finance expense to capital employed. Capital employed is represented by total assets less current liabilities (excluding corporation tax, current borrowings,
derivative financial liabilities and finance lease creditors) less deferred and current tax assets, retirement benefit asset, cash and cash equivalents, derivative financial assets and investments.
b Before specific items.
c The number of times net finance expense is covered by operating profit.

BT Group plc Annual Report 2016
Operational statisticsa
All values in thousands unless otherwise stated.

Year ended 31 March

BT Global Services

Order intake (£m)

BT Business

Order intake (£m)

BT Consumer

247

2016

2015

2014

2013

2012

6,177

6,458

6,963

6,348

6,683

1,967

2,073

2,098

2,202

1,835

Average revenue per user (ARPU)b (£)
Active lines
BT TV customers

446
9,366
1,463

415
9,447
1,142

391
9,650
1,002

365
9,824
810

343
10,321
707

BT Wholesale

Order intake (£m)

Openreach

Physical lines
Internal
External
Fully unbundled

Total physical lines

BT Group

Broadband lines
Total retail
BT Wholesale (external)
Openreach

Total broadband lines

Broadband market share
Total retail share of net asset additionsc
Total retail share of installed base

Lines sold through BT lines of businessd
Consumer/EE
Business/corporate

Total exchange lines

Mobile base

1,505

1,908

1,910

2,031

748

12,860
3,563
8,921

12,245
4,509
8,586

12,700
4,580
7,846

13,217
5,125
6,702

14,130
5,229
5,631

25,344

25,340

25,126

25,044

24,990

9,041
906
9,979

7,713
1,831
9,761

7,281
1,872
9,302

6,704
2,066
8,859

6,280
2,262
8,253

19,926

19,305

18,455

17,629

16,795

65%
45%

51%
40%

69%
39%

51%
38%

55%
37%

10,411
3,228

9,633
3,503

9,908
3,784

10,207
4,165

10,919
4,551

13,639

13,136

13,692

14,372

15,470

30,445

n/a

a We have re-presented certain prior year information to be on a consistent basis. These are aligned with our operational performance measures that we publish on a quarterly basis.
b Rolling 12-month consumer revenue, less mobile POLOs, less BT Sport revenue from: satellite customers paying for the channels, our wholesale deals and from commercial premises.
This is divided by average number of primary lines.
c DSL and fibre excluding cable.
d Lines sold through BT lines of business include analogue lines and digital channels sold through BT Global Services, BT Business, BT Consumer, EE and BT Wholesale.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
248

Information for shareholders
Cautionary statement regarding forward-looking
statements
This Annual Report contains certain forward-looking statements
which are made in reliance on the safe harbour provisions of
the US Private Securities Litigation Reform Act of 1995. These
statements relate to analyses and other information which are
based on forecasts of future results and estimates of amounts not
yet determinable. These statements include, without limitation,
those concerning: current and future years’ outlook; revenue
and revenue trends; EBITDA; free cash flow; capital expenditure;
shareholder returns including progressive dividends and share
buyback; net debt; credit ratings; our group-wide restructuring
programme, cost transformation plans and restructuring
costs; investment in and roll out of our fibre network, and its
reach, innovations, increased speeds and speed availability; our
broadband-based service and strategy; our investment in TV,
enhancing our TV service and BT Sport; the BT Pension Scheme
recovery plan, operating charge, regular cash contributions and
interest expense; effective tax rate; growth opportunities in
networked IT services, the pay-TV services market, broadband,
and mobility and future voice; growth of, and opportunities
available in, the communications industry and BT’s positioning to
take advantage of those opportunities; anticipated financial and
other benefits to be realised from the EE acquisition; expectations
regarding competition, market shares, prices and growth;
expectations regarding the convergence of technologies; plans for
the launch of new products and services; network performance
and quality; the impact of regulatory initiatives, decisions and
outcomes on operations, including the regulation of the UK fixed
wholesale and retail businesses and the impact of the Undertakings
to Ofcom under the Enterprise Act; BT’s possible or assumed
future results of operations and/or those of its associates and
joint ventures; investment plans; adequacy of capital; financing
plans and refinancing requirements; demand for and access to
broadband and the promotion of broadband by third-party service
providers; and those statements preceded by, followed by, or that
include the words ‘aims’, ‘believes’, ‘expects’, ‘anticipates’, ‘intends’,
‘will’, ‘should’ ‘plans’, ‘strategy’, ‘future’, ‘likely’, ‘seeks’, ‘projects’,
‘estimates’ or similar expressions.

Although BT believes that the expectations reflected in these
forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to have been correct.
Because these statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied
by these forward-looking statements. Factors that could cause
differences between actual results and those implied by the
forward-looking statements include, but are not limited to:
material adverse changes in economic conditions in the markets
served by BT; future regulatory actions, decisions, conditions or
requirements in BT’s operating areas, including competition from
others; selection by BT of the appropriate trading and marketing
models for its products and services; technological innovations,
including the cost of developing new products, networks and
solutions and the need to increase expenditures for improving
the quality of service; the anticipated benefits and advantages
of new technologies, products and services not being realised;
developments in the convergence of technologies; external
threats to cyber security, data or resilience; political and geo-
political risks; prolonged adverse weather conditions resulting
in a material increase in overtime, staff or other costs or impact
on customer service; the timing of entry and profitability of BT in
certain markets; significant changes in market shares for BT or its
principal products and services; fluctuations in foreign currency
exchange rates or interest rates; the underlying assumptions and
estimates made in respect of major customer contracts proving
unreliable; the aims of the group-wide restructuring programme
not being achieved; the anticipated benefits and synergies of the
EE integration not being delivered; and general financial market
conditions affecting BT’s performance and ability to raise finance.
Certain of these factors are discussed in more detail elsewhere
in this Annual Report including, without limitation, in Our risks
on pages 46 to 56. BT undertakes no obligation to update any
forward-looking statements whether written or oral that may be
made from time to time, whether as a result of new information,
future events or otherwise.

BT Group plc Annual Report 2016249

Stock exchange listings
The principal listing of BT Group’s ordinary shares is on the London Stock Exchange. Trading on the London Stock Exchange is under the
symbol ‘BT.A’. American Depositary Shares (ADSs), have been issued by JPMorgan Chase & Co, as Depositary for the American Depositary
Receipts (ADRs) evidencing the ADSs, and are listed on the New York Stock Exchange. Trading on the New York Stock Exchange is under
the symbol ‘BT’.

In December 2015 BT changed the ratio of its NYSE-listed American Depositary Receipt (ADR) programme from the previous ratio of
one ADR per ten ordinary shares to one ADR per five ordinary shares. These changes to the ADR ratio have brought the ADR price broadly
in line with the market average. To implement the change, ADR holders on the record at the close of business on 30 November 2015
received two ADRs for every one ADR held. There was no change to the underlying ordinary shares.

Share and ADS prices

Financial years ended 31 March
2012
2013
2014
2015
2016

Financial year ended 31 March 2015
1 April – 30 June 2014
1 July – 30 September 2014
1 October – 31 December 2014
1 January – 31 March 2015

Financial year ended 31 March 2016a
1 April – 30 June 2015
1 July – 30 September 2015
1 October – 31 December 2015
1 January – 31 March 2016

Months
November 2015
December 2015
January 2016
February 2016
March 2016
April 2016
29 April 2016

Pence per ordinary share
Low
pence

High
pence

US$ per ADS
Low
US$

High
US$

232.10
281.00
418.10
470.55
499.80

406.10
397.80
420.00
470.55

470.00
479.15
499.80
496.00

499.80
492.25
487.25
496.00
496.00
454.90
443.20

161.00
200.70
265.70
356.20
404.00

356.20
367.90
360.10
385.90

438.80
404.00
417.20
432.95

460.50
455.05
452.00
448.25
432.95
429.10
–

36.89
42.76
69.75
70.18
37.49

68.19
67.46
65.43
70.18

36.92
37.35
37.49
35.87

37.49
37.18
35.29
35.87
34.96
32.86
32.80

25.69
31.02
40.70
57.99
31.18

59.68
61.48
57.99
58.60

32.82
31.30
31.91
31.18

34.89
34.02
32.38
32.37
31.18
31.15
–

a The ADS prices stated for 2015/16 reflect the change in ADR ratio.

The prices are the highest and lowest closing middle market prices for BT ordinary shares, as derived from the Daily Official List of the
London Stock Exchange and the highest and lowest closing sales prices of ADSs, as reported on the New York Stock Exchange.

Fluctuations in the exchange rate between Sterling and the US Dollar affect the US Dollar equivalent of the Sterling price of the company’s
ordinary shares on the London Stock Exchange and, as a result, are likely to affect the market price of the ADSs on the New York Stock
Exchange.

Background
BT Group plc is a public limited company registered in England and Wales and listed on the London and New York Stock Exchanges. It was
incorporated in England and Wales on 30 March 2001 as Newgate Telecommunications Limited with the registered number 4190816.
Its registered office address is 81 Newgate Street, London EC1A 7AJ. The company changed its name to BT Group plc on 11 September
2001. Following the demerger of mmO2 from BT in November 2001, the continuing activities of BT were transferred to BT Group plc.

British Telecommunications plc is a wholly-owned subsidiary of BT Group plc and encompasses virtually all the businesses and assets of
the BT group. The successor to the statutory corporation British Telecommunications, it was incorporated in England and Wales as a public
limited company, wholly owned by the Government, as a result of the Telecommunications Act 1984. Between November 1984 and July
1993, the Government sold all of its shareholding in British Telecommunications plc in three public offerings.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
250

Analysis of shareholdings at 31 March 2016

Range

1 – 399
400 – 799
800 – 1,599
1,600 – 9,999
10,000 – 99,999
100,000 – 999,999
1,000,000 – 4,999,999
5,000,000 and abovea,b,c,d
Totale

Percentage
of total
%

Ordinary shares of 5p each
Percentage
of total
%

Number of
shares held
millions

38.80
26.45
19.42
14.62
0.57
0.08
0.04
0.02

68
122
180
370
89
260
759
8,120

0.68
1.22
1.81
3.72
0.89
2.61
7.61
81.46

Number of
holdings

320,874
218,768
160,581
120,822
4,722
679
331
195

826,972

100.00

9,968

100.00

a 16.6m shares were held in trust by Ilford Trustees (Jersey) Limited for allocation to employees under the employee share plans.
b Under the BT Group Employee Share Investment Plan, 54.9m shares were held in trust on behalf of 43,866 participants who were beneficially entitled to the shares. 381.1m shares were held in the
corporate nominee BT Group EasyShare on behalf of 90,670 beneficial owners.
c 137.9m shares were represented by ADSs. An analysis by size of holding is not available for these.
d 8.2m shares were held as treasury shares.
e 7.73% of the shares were in 813,035 individual holdings, of which 54,168 were joint holdings, and 92.27% of the shares were in 13,937 institutional holdings.

As far as the company is aware, the company is not directly or indirectly owned or controlled by another corporation or by the UK
Government or any other foreign government or by any other natural or legal person severally or jointly. There are no arrangements known
to the company, the operation of which may at a subsequent date result in a change in control of the company.

The company’s major shareholders do not have different voting rights to those of other shareholders.

At 29 April 2016, there were 9,968,127,681 ordinary shares outstanding, including 6,928,112 shares held as treasury shares. At the
same date, approximately 27.5m ADSs (equivalent to 137.9m ordinary shares, or approximately 1.38% of the total number of ordinary
shares outstanding on that date) were outstanding and were held by 1,545 record holders of ADRs.

At 31 March 2016, there were 3,489 shareholders with a US address on the register of shareholders who in total hold 0.02% of the
ordinary shares of the company.

BT Group plc Annual Report 2016251

Dividends
A final dividend in respect of the year ended 31 March 2015 was paid on 7 September 2015 to shareholders on the register on
13 August 2015, and an interim dividend in respect of the year ended 31 March 2016 was paid on 8 February 2016 to shareholders
on the register on 29 December 2015. The final proposed dividend in respect of the year ended 31 March 2016, if approved by
shareholders, will be paid on 5 September 2016 to shareholders on the register on 12 August 2016.

The dividends paid or payable on BT shares and ADSs for the last five financial years are shown in the following table. The dividends on the
ordinary shares exclude the associated tax credit. The amounts shown are not those that were actually paid to holders of ADSs. For the tax
treatment of dividends paid, see Taxation of dividends on page 260. Dividends have been translated from Sterling into US Dollars using
exchange rates prevailing on the date the ordinary dividends were paid.

Financial years ended 31 March

2012
2013
2014
2015
2016

Interim
pence

2.60
3.00
3.40
3.90
4.40

Per ordinary share
Total
Final
pence
pence

5.70
6.50
7.50
8.50
9.60

8.30
9.50
10.90
12.40
14.00

Interim
£

0.260
0.300
0.340
0.390
0.220a

Final
£

0.570
0.650
0.750
0.850
0.480a

Per ADS
Total
£

0.830
0.950
1.090
1.240
0.700a

Interim
US$

0.390
0.451
0.534
0.573
0.296a

Final
US$

0.885
0.994
1.187
1.285
–b

Per ADS
Total
US$

1.275
1.445
1.721
1.858
–b

a The reduction in the dividend payment is to reflect the ratio change to BT ADRs
b Qualifying holders of ADSs on record as of 12 August 2016 are entitled to receive the final dividend which will be paid to ADS holders on 13 September 2016, subject to approval at the AGM. The US Dollar
amount of the final dividend of 48 pence per ADS to be paid to holders of ADSs will be based on the exchange rate in effect on 5 September 2016, the date of payment to holders of ordinary shares.

As dividends paid by the company are in Sterling, exchange rate fluctuations will affect the US Dollar amounts received by holders of ADSs
on conversion by the Depositary of such cash dividends.

Dividend mandate
Any shareholder wishing dividends to be paid directly into a bank or building society account should contact the Shareholder Helpline (see
page 263), or go to the Shareholder information page of our website.

Dividends paid in this way will be paid through the Bankers Automated Clearing System (BACS).

Share buyback

Calendar montha

April 2015
May
June
July
August
September
October
November
December
January 2016
February
March

Total number
of shares
purchased

Average price paid
per share (pence –
net of dealing costs)

Total number of shares
purchased as part of
publicly announced
plans or programmes

Maximum number
of shares yet to be
purchased under the
AGM authorityb

nil
11,479,300
31,439,600
2,500,000
8,813,000
nil
nil
5,500,000
1,720,600
nil
nil
6,502,000

67,954,500

n/a
464
452
465
470
n/a
n/a
482
492
n/a
n/a
461

460

nil
11,479,300
31,439,600
2,500,000
8,813,000
nil
nil
5,500,000
1,720,600
nil
nil
6,502,000

750,382,900
738,903,600
707,464,000
834,500,000
825,687,000
825,687,000
825,687,000
820,187,000
818,466,400
818,466,400
818,466,400
811,964,400

67,954,500

811,964,400

a Purchases made from 1 April 2015 to 15 July 2015 were made in accordance with a resolution passed at the AGM held on 16 July 2014. Own share purchases by BT from 16 July 2015 to 31 March
2016 were made in accordance with a resolution passed at the AGM on 15 July 2015.
b Authority was given to purchase up to 792m shares on 16 July 2014 and 837m shares on 15 July 2015. These authorities expire at the close of the following AGM.

A total of 68m own shares were purchased during 2015/16. Of these, 46m shares were purchased for a total consideration of £210m
(35.5m shares for a consideration of £160m under the authority given at the 2014 AGM and 10.5m shares for a consideration of £50m
under the authority given at the 2015 AGM), and 22m shares were purchased by the BT Group Employee Share Ownership Trust for a
consideration of £103m. Please see note 21 to the consolidated financial statements for further details.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
252

Dividend investment plan
Under the Dividend investment plan, cash from participants’ dividends is used to buy further BT shares in the market. Shareholders could
elect to receive additional shares in lieu of a cash dividend for the following dividends:

2011/12 interim
2011/12 final
2012/13 interim
2012/13 final
2013/14 interim
2013/14 final
2014/15 interim
2014/15 final
2015/16 interim

Date paid

Price per share
pence

6 February 2012
3 September 2012
4 February 2013
2 September 2013
3 February 2014
8 September 2014
9 February 2015
7 September 2015
8 February 2016

216.39
223.15
265.01
339.38
385.76
387.00
436.92
428.17
469.41

Global Invest Direct
Details of the direct purchase plan run by the ADR Depositary, JPMorgan Chase & Co, Global Invest Direct, including reinvestment of
dividends, are available from JPMorgan Chase & Co on +1 800 428 4237 (toll free within the US), or on written request to the ADR
Depositary.

Total shareholder return
Total Shareholder Return (TSR) is the measure of the returns that a company has generated for its shareholders, reflecting both movement
in the share price and dividends, which are assumed to be reinvested. We compare this against indexes for the UK market (FTSE100)
and the European telecommunications sector (FTSEurofirst 300 Telco Index). BT’s TSR for 2015/16 was positive 3.4%, compared with
the market which was negative 5.3% and the sector which was negative 8.2%. Over the last five financial years BT’s TSR was positive
180.7%, compared with the market’s TSR of positive 25.6% and the sector’s TSR of positive 49.9%.

BT’s TSR performance vs the FTSE100 and the Sector
over the last seven years
31 March 2009=100

450

400

350

300

250

200

150

100

Mar 09 Mar 10 Mar 11 Mar 12

Mar 13

Mar 14

Mar 15 Mar 16

FTSE100

Sector Index €

Source: Datastream
NB: Sector index is shown in Euro terms. The performance in Sterling is 19% worse than
in the graph shown above.

You can find contact details and
other shareholder information at
www.bt.com/investorcentre

BT Group plc Annual Report 2016
Results announcements
Expected announcements of results:

Results for the 2016/17 financial year

1st quarter
2nd quarter and half year
3rd quarter and nine months
4th quarter and full year
Annual Report 2016 published

a Dates may be subject to change.

253

Datea

28 July 2016
October 2016
January 2017
May 2017
May 2017

ShareGift
Small parcels of shares, which may be uneconomic to sell on their own, can be donated to ShareGift – the share donation charity
(Registered Charity number 1052686). ShareGift transfers these holdings into their name, aggregates them, and uses the proceeds to
support a wide range of UK registered charities based on donor suggestion. They can also accept larger donations of shares.

If you would like further details about ShareGift, please visit www.sharegift.org, email help@sharegift.org or telephone them on
020 7930 3737.

Exchange rates
BT publishes its consolidated financial statements expressed in Sterling. The following tables provide certain information concerning the
exchange rates between Sterling and US Dollars based on the noon buying rate in New York City for cable transfers in Sterling as certified
for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate).

Year ended 31 March

Period end
Averagea
High
Low

a The average of the Noon Buying Rates in effect on the last day of each month during the relevant period.

High
Low

2016

2015

2014

2013

2012

1.44
1.50
1.59
1.39

1.49
1.61
1.72
1.47

1.67
1.60
1.68
1.48

1.52
1.58
1.63
1.49

1.60
1.61
1.67
1.53

April
2016

1.59
1.39

March
2016

February
2016

January
2016

Month
December
2015

1.46
1.40

1.46
1.39

1.47
1.41

1.52
1.48

On 29 April 2016, the latest practicable date for this Annual Report, the Noon Buying Rate was US$1.46 to £1.00.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information
254

Articles of Association (Articles)
The following is a summary of the principal provisions of BT’s
Articles, a copy of which has been filed with the Registrar of
Companies. A ‘holder of shares’ and a ’shareholder’ is, in either
case, the person entered on the company’s register of members
as the holder of the relevant shares. Shareholders can choose
whether their shares are to be evidenced by share certificates (ie
in certificated form) or held in electronic (ie uncertificated) form in
CREST (the electronic settlement system in the UK).

BT adopted new Articles of Association with effect from July
2015, to provide additional flexibility for BT when trying to
trace shareholders and to amend the provisions in line with the
provisions of the UK Corporate Governance code by providing for
automatic retirement of all the directors at each AGM.

(a) Voting rights
Subject to the restrictions described below, on a show of hands,
every shareholder present in person or by proxy at any general
meeting has one vote and, on a poll, every shareholder present in
person or by proxy has one vote for each share which they hold.

Voting at any meeting of shareholders is by a show of hands unless
a poll is demanded by the chairman of the meeting or by at least
five shareholders at the meeting who are entitled to vote (or their
proxies), or by one or more shareholders at the meeting who are
entitled to vote (or their proxies) and who have, between them, at
least 10% of the total votes of all shareholders who have the right
to vote at the meeting.

No person is, unless the Board decides otherwise, entitled to
attend or vote at any general meeting or to exercise any other right
conferred by being a shareholder if they or any person appearing
to be interested in those shares has been sent a notice under
section 793 of the Companies Act 2006 (which confers upon
public companies the power to require information with respect to
interests in their voting shares) and they or any interested person
has failed to supply to the company the information requested
within 14 days after delivery of that notice.

These restrictions end seven days after the earlier of the date
the shareholder complies with the request satisfactorily or the
company receives notice that there has been an approved transfer
of the shares.

(b) Variation of rights
Whenever the share capital of the company is split into different
classes of shares, the special rights attached to any of those classes
can be varied or withdrawn either:

(i) with the sanction of a special resolution passed at a separate

meeting of the holders of the shares of that class; or

(ii) with the consent in writing of the holders of at least 75% in

nominal value of the issued shares of that class.

At any separate meeting, the necessary quorum is two persons
holding or representing by proxy not less than one-third in nominal
amount of the issued shares of the class in question (but at any
adjourned meeting, any person holding shares of the class or his
proxy is a quorum).

The company can issue new shares and attach any rights and
restrictions to them, as long as this is not restricted by special rights
previously given to holders of any existing shares. Subject to this,
the rights of new shares can take priority over the rights of existing
shares, or existing shares can take priority over them, or the new
shares and the existing shares can rank equally.

(i) divide all or any of its share capital into shares with a smaller

nominal value; and

(ii) consolidate and divide all or part of its share capital into shares

of a larger nominal value.

The company may also:

(i) buy back its own shares; and
(ii) by special resolution reduce its share capital, any capital
redemption reserve and any share premium account.

(d) Dividends
The company’s shareholders can declare dividends by passing
an ordinary resolution provided that no dividend can exceed the
amount recommended by the directors. Dividends must be paid
out of profits available for distribution. If the Board considers that
the profits of the company justify such payments, they can pay
interim dividends on any class of shares of the amounts and on
the dates and for the periods they decide. Fixed dividends will be
paid on any class of shares on the dates stated for the payments of
those dividends.

The directors can offer ordinary shareholders the right to choose
to receive new ordinary shares, which are credited as fully paid,
instead of some or all of their cash dividend. Before they can do
this, the company’s shareholders must have passed an ordinary
resolution authorising the directors to make this offer.

Any dividend which has not been claimed for ten years after it
was declared or became due for payment will be forfeited and will
belong to the company.

(e) Distribution of assets on winding up
If the company is wound up (whether the liquidation is voluntary,
under supervision of the court or by the court) the liquidator
can, with the authority of a special resolution passed by the
shareholders, divide among the shareholders all or any part of the
assets of the company. This applies whether the assets consist
of property of one kind or different kinds. For this purpose, the
liquidator can place whatever value the liquidator considers fair on
any property and decide how the division is carried out between
shareholders or different groups of shareholders. The liquidator can
also, with the same authority, transfer any assets to trustees upon
any trusts for the benefit of shareholders which the liquidator
decides. The liquidation of the company can then be finalised
and the company dissolved. No past or present shareholder can
be compelled to accept any shares or other property under the
Articles which could give that shareholder a liability.

(f) Transfer of shares
Certificated shares of the company may be transferred in writing
either by an instrument of transfer in the usual standard form or
in another form approved by the Board. The transfer form must
be signed or made effective by or on behalf of the person making
the transfer. The person making the transfer will be treated as
continuing to be the holder of the shares transferred until the
name of the person to whom the shares are being transferred is
entered in the register of members of the company.

The Board may refuse to register any transfer of any share held in
certificated form:

(i) which is in favour of more than four joint holders; or
(ii) unless the transfer form to be registered is properly stamped
to show payment of any applicable stamp duty and delivered
to the company’s registered office or any other place the
Board decide. The transfer must have with it: the share
certificate for the shares to be transferred; any other evidence
which the Board ask for to prove that the person wanting

BT Group plc Annual Report 2016to make the transfer is entitled to do this; and if the transfer
form is executed by another person on behalf of the person
making the transfer, evidence of the authority of that person
to do so.

Transfers of uncertificated shares must be carried out using
a relevant system (as defined in the Uncertificated Securities
Regulations 2001 (the Regulations)). The Board can refuse to
register a transfer of an uncertificated share in the circumstances
stated in the Regulations.

If the Board decide not to register a transfer of a share, the Board
must notify the person to whom that share was to be transferred
giving reasons for its decision. This must be done as soon as
possible and no later than two months after the company receives
the transfer or instruction from the operator of the relevant
system.

(g) Untraced shareholders
The company may sell any shares if the shares have been in issue
for at least ten years, during that period at least three dividends
have become payable on them and have not been cashed and BT
has not heard from the shareholder or any person entitled to the
dividends by transmission. BT must take all reasonable steps in the
circumstances, to trace shareholders. This can include engaging an
asset reunification company or other tracing agent to search for
shareholders who have not kept their details up-to date, or taking
any other steps the company considers appropriate. Shareholders
whose shares are sold following this process will not be able to
claim the proceeds of the sale. BT will be able to use the proceeds
in any way the Board from time to time thinks fit.

(h) General meetings of shareholders
Every year the company must hold an annual general meeting.
The Board can call a general meeting at any time and, under
general law, must call one on a shareholders’ requisition. At least
21 clear days’ written notice must be given for every annual
general meeting. For every other general meeting, at least 14 clear
days’ written notice must be given. The Board can specify in the
notice of meeting a time by which a person must be entered on
the register of shareholders in order to have the right to attend or
vote at the meeting. The time specified must not be more than 48
hours before the time fixed for the meeting.

(i) Limitations on rights of non-resident or foreign
shareholders
The only limitation imposed by the Articles on the rights of non-
resident or foreign shareholders is that a shareholder whose
registered address is outside the UK and who wishes to receive
notices of meetings of shareholders or documents from BT must
give the company an address within the UK to which they may be
sent.

(j) Directors

Directors’ remuneration
Excluding remuneration referred to below, each director will be
paid such fee for his services as the Board decide, not exceeding
£65,000 a year and increasing by the percentage increase of
the retail prices index (as defined by section 833(2) Income and
Corporation Taxes Act 1988) for any 12-month period beginning
1 April 1999 or an anniversary of that date. The company may
by ordinary resolution decide on a higher sum. This resolution can
increase the fee paid to all or any directors either permanently or
for a particular period. The directors may be paid their expenses
properly incurred in connection with the business of the company.

The Board can award extra fees to a director who: holds an
executive position; acts as chairman or deputy chairman; serves
on a Board committee at the request of the Board; or performs

255

any other services which the Board consider extend beyond the
ordinary duties of a director.

The directors may grant pensions or other benefits to, among
others, any director or former director or persons connected
with them. However, BT can only provide these benefits to any
director or former director who has not been an employee or held
any other office or executive position in the company or any of
its subsidiary undertakings, or to relations or dependants of, or
people connected to, those directors or former directors, if the
shareholders approve this by passing an ordinary resolution.

Directors’ votes
A director need not be a shareholder, but a director who is not a
shareholder can still attend and speak at shareholders’ meetings.

Unless the Articles say otherwise, a director cannot vote on a
resolution about a contract in which the director has an interest
(this will also apply to interests of a person connected with the
director).

If the legislation allows, a director can vote and be counted in the
quorum on a resolution concerning a contract:

(i)

(ii)

in which the director has an interest of which the director is
not aware; or which cannot reasonably be regarded as likely to
give rise to a conflict of interest;
in which the director has an interest only because the director
is a holder of shares, debentures or other securities of BT, or
by reason of any other interest in or through BT;
(iii) which involves: the giving of any security, guarantee or

indemnity to the director or any other person for money lent
or obligations incurred by the director or by any other person
at the request of or for the benefit of BT or the benefit of any
of its subsidiary undertakings; or a debt or other obligation
which is owed by BT or any of its subsidiary undertakings to
that other person if the director has taken responsibility for all
or any part of that debt or obligation by giving a guarantee,
security or indemnity;

(iv) where BT or any of its subsidiary undertakings is offering
any shares, debentures or other securities for subscription
or purchase to which the director is or may be entitled to
participate as a holder of BT securities; or where the director
will be involved in the underwriting or sub-underwriting;
relating to any other company in which the director has an
interest, directly or indirectly (including holding a position
in that company) or is a shareholder, creditor, employee or
otherwise involved in that company – these rights do not
apply if the director owns 1% or more of that company or of
the voting rights in that company;

(v)

(vi) relating to an arrangement for the benefit of BT employees or
former BT employees or any of BT’s subsidiary undertakings
which only gives the directors the same benefits that are
generally given to the employees or former employees to
whom the arrangement relates;

(vii) relating to BT buying or renewing insurance for any liability
for the benefit of directors or for the benefit of persons who
include directors;

(viii) relating to the giving of indemnities in favour of directors;
(ix) relating to the funding of expenditure by any director
or directors: on defending criminal, civil or regulatory
proceedings or actions against the director or the directors;
in connection with an application to the court for relief; or
on defending the director or the directors in any regulatory
investigations; or which enables any director or directors to
avoid incurring expenditure as described in this paragraph;
and
in which the director’s interest, or the interest of directors
generally, has been authorised by an ordinary resolution.

(x)

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information256

Subject to the relevant legislation, the shareholders can, by passing
an ordinary resolution, ratify any particular contract carried out in
breach of those provisions.

Directors’ appointment and retirement
Under BT’s Articles there must be at least two directors, who
manage the business of the company. The shareholders can vary
this minimum and/or decide a maximum by ordinary resolution.
The Board and the shareholders (by ordinary resolution) may
appoint a person who is willing to be elected as a director, either to
fill a vacancy or as an additional director.

At every annual general meeting, all directors must automatically
retire. A retiring director is eligible for re-election.

In addition to any power of removal under the 2006 Act, the
shareholders can pass an ordinary resolution to remove a director,
even though his or her time in office has not ended. They can
elect a person to replace that director subject to the Articles, by
passing an ordinary resolution. A person so appointed is subject to
retirement by rotation when the director replaced would have been
due to retire.

Directors’ borrowing powers
To the extent that the legislation and the Articles allow, the Board
can exercise all the powers of the company to borrow money, to
mortgage or charge its business, property and assets (present
and future) and to issue debentures and other securities, and
give security either outright or as collateral security for any debt,
liability or obligation of the company or another person. The Board
must limit the borrowings of the company and exercise all the
company’s voting and other rights or powers of control exercisable
by the company in relation to its subsidiary undertakings so as to
ensure that the aggregate amount of all borrowings by the group
outstanding, net of amounts borrowed intragroup among other
things, at any time does not exceed £35bn. These borrowing
powers may only be varied by amending the Articles.

(k) Sinking fund, liability to further calls and change of control
BT’s shares are not subject to any sinking fund provision under
the Articles or as a matter of the laws of England and Wales. No
shareholder is currently liable to make additional contributions of
capital in respect of BT’s ordinary shares in the future. There are no
provisions in the Articles or of corporate legislation in England and
Wales that would delay, defer or prevent a change of control.

(l) Disclosure of interests in shares
Under the Financial Services and Markets Act 2000 and the UK
Disclosure and Transparency Rules there is a statutory obligation
on a person who acquires or ceases to have a notifiable interest in
the relevant share capital of a public company like BT to notify the
company of that fact. The disclosure threshold is 3%. These Rules
also deal with the disclosure by persons of interests in shares or
debentures of companies in which they are directors and certain
associated companies. Under section 793 of the 2006 Act
(referred to in (a) above), BT may ascertain the persons who are or
have within the last three years been interested in its shares and
the nature of those interests. The UK City Code on Takeovers and
Mergers also imposes strict disclosure requirements with regard to
dealings in the securities of an offeror or offeree company on all
parties to a takeover and also on their respective associates during
the course of an offer period.

Material contracts
The contracts summarised below (not being entered into in the
ordinary course of business) have been entered into in the two
years preceding the date of this document by BT or another
member of the group and are, or may be, material to the group
or have been entered into by BT or another member of the group
and contain a provision under which a member of the group has

an obligation or entitlement which is, or may be, material to BT or
such other member of the group.

Definitions
The definitions apply to the following section titled: Acquisition of
EE – summary of the principal terms.

Acquisition: the acquisition by BT of EE

Articles: the articles of association of BT in force from time to time

Board: the Directors of the Company from time to time

BT Pension Scheme: BT’s main defined benefit pension scheme

Buy-Back Resolution: the resolution to approve the buy-back of
Ordinary Shares from Deutsche Telekom and/or Orange pursuant to
the CP Contracts

CP Contracts: the DT CP Contract and Orange CP Contract

Company: BT Group plc

Completion: completion of the Acquisition pursuant to the terms
of the Share Purchase Agreement which occurred on 29 January
2016

Consideration Shares: the Ordinary Shares to be issued by the
Company to the Sellers pursuant to the Share Purchase Agreement

Directors or Board of Directors: the directors of the Company whose
names appear in the section in the shareholder circular entitled
Directors, Company Secretary, Registered Office and Advisers

Financial Investor: a Qualified Institutional Buyer as defined in Rule
144A under the US Securities Act 1933 or a Qualified Investor
as described in Section I(1) of Annex II to Directive 2004/39/EC,
other than any activist fund, or any company licensed as a
telecommunications operator (or its affiliates)

Ordinary Shares: the ordinary shares of nominal value 5 pence each
in the capital of the Company, including, if the context requires, the
Consideration Shares

Sellers: Deutsche Telekom and Orange

Shareholder: a holder of Ordinary Shares and “Shareholders” shall
be construed accordingly

Sponsor: JP Morgan Cazenove

Transaction Documents: the Share Purchase Agreement, the
Relationship Agreement, the Standstill and Lock-up Agreement
and the CP Contracts

Acquisition of EE – summary of the principal
terms

Share Purchase Agreement
On 5 February 2015, the Share Purchase Agreement was entered
into between the Company, the Sellers, who held 100% of the
issued share capital of EE on a combined basis, Deutsche Telekom
AG as guarantor of Deutsche Telekom and Orange SA as guarantor
of Orange. Pursuant to the Share Purchase Agreement, the
Sellers agreed to sell, and the Company agreed to acquire, the
entire issued share capital of EE. The Acquisition completed on
29 January 2016.

1. Seller Warranties, Indemnities and Covenants

1.1 Warranties
The Share Purchase Agreement contains customary warranties
given by the Sellers, including in relation to authorisations, valid
obligations, filings and consents for the entry of the Sellers into the
Transaction Documents, and including in relation to the EE Group,
its share capital, accounts and financial condition, material licences

BT Group plc Annual Report 2016257

and approvals, compliance with laws, condition and sufficiency
of its network and assets, tax, material contracts, related party
arrangements, litigation, IP and IT systems, employees and benefit
arrangements, pension schemes, real estate and ownership and
conduct of the MBNL joint venture arrangement.

1.2 Indemnities
The Sellers agreed, amongst other things, to indemnify BT in the
event that BT suffers loss as a result of certain regulatory fines
being levied against BT or the EE Group, and against losses suffered
by BT or the EE Group as a result of certain other investigations and
disputes.

BT has also undertaken to Deutsche Telekom AG to provide, from
Completion, a back-to-back guarantee of Deutsche Telekom AG’s
guarantee to Hutchison, to a maximum value of £750 million.
Deutsche Telekom AG’s existing arrangement guarantees EE’s
obligations in respect of any liability incurred by EE under the
MBNL joint operation.

4. Guarantee
Deutsche Telekom AG agreed to guarantee the performance by
Deutsche Telekom, and Orange S.A. agreed to guarantee the
performance by Orange, of their respective obligations under the
Share Purchase Agreement.

The warranties and indemnities given by the Sellers are subject to
customary financial and other limitations.

Relationship Agreement

1.3 Covenants
The Share Purchase Agreement contains customary covenants
restricting the Sellers from competing with EE’s business for a
period of three years following Completion (subject to customary
exceptions for existing businesses and financial investments) and
from soliciting employees of the EE Group for a period of two years
following Completion (subject to customary exceptions).

The Share Purchase Agreement also contains a customary
tax covenant in respect of liability for taxes due pre and post-
Completion.

2. Company Warranties and Indemnity
The Share Purchase Agreement contains warranties given by the
Company as to, amongst other things, its capacity and authority
to enter into and perform its obligations under the Transaction
Documents, compliance by the Company in all material respects
with certain laws and regulations, the availability of financing for
the cash element of the consideration for the Acquisition, the
accuracy of its public filings, and there having been no material
adverse change to its financial position since its last accounts date.

BT also agreed that it will indemnify the Sellers in the event that
they suffer loss as a result of BT having taken certain actions in
respect of the EE defined benefit pension scheme or the BT defined
benefit pension scheme (but in relation to the BT Pension Scheme,
only where Deutsche Telekom is identified as being connected to
BT by virtue of the appointment of a Director to the Board by the
Deutsche Telekom Group).

The warranties and indemnity given by BT are subject to customary
financial and other limitations.

3. Other undertakings
The Sellers and BT agreed the scope and terms of certain
transitional services arrangements required after Completion. The
purpose of these transitional services agreements is to document
any services that are currently provided by a party (or a member
of its group) and that the recipient of those services wishes to
continue to receive for a transitional period from Completion. Any
services that a service recipient elects to continue to receive from
Completion will be provided on the current terms or agreement
applicable to the provision and receipt of those services. Unless
otherwise agreed, the maximum term of each service is between
six and 18 months depending on the type of service.

The Sellers (or the relevant members of their groups), BT, and EE
agreed appropriate conditions for the continued use of the Orange
or T-Mobile (as applicable) brands by EE. Such agreement included
appropriate modifications to the existing brand licences to reflect
the change in ownership of EE, and continued use of the brands
will be for the purpose of an orderly wind-down and extraction of
the Orange and T-Mobile brands from EE’s business and subject to
the continued payment of royalties.

1. Relationship Agreement with Deutsche Telekom AG and
Deutsche Telekom
At Completion, BT entered into the Relationship Agreement with
Deutsche Telekom AG and Deutsche Telekom, which regulates
aspects of the ongoing relationship between BT, Deutsche Telekom
AG and the Deutsche Telekom Group.

The Relationship Agreement will terminate if (a) the Ordinary
Shares are no longer listed on the premium listing segment of
the Official List and traded on the London Stock Exchange’s main
market for listed securities or (b) the Deutsche Telekom Group
ceases to be interested in more than 3% of the issued ordinary
share capital of BT.

The Relationship Agreement contains, among other things,
undertakings from Deutsche Telekom AG that for such period as
the Deutsche Telekom Group holds 10% or more of the issued
share capital of BT:

(i)

transactions and arrangements between BT and the Deutsche
Telekom Group will be entered into on an arm’s length basis
and on normal commercial terms;

(ii) neither it nor any member of the Deutsche Telekom Group will
take any action that would have the effect of preventing BT
from complying with its obligations under the Listing Rules;
and

(iii) neither it nor any member of the Deutsche Telekom Group will
propose or procure the proposal of a shareholder resolution
which is intended or appears to be intended to circumvent the
proper application of the Listing Rules (the “Independence
Provisions”).

Deutsche Telekom AG undertakes to procure the compliance of its
group members with the Independence Provisions.

2. Standstill Provisions
The Relationship Agreement contains standstill provisions pursuant
to which Deutsche Telekom AG undertakes on behalf of itself and
the Deutsche Telekom Group for a period of three years from the
date of the Relationship Agreement (the “Initial Standstill Period”),
subject to certain exceptions, not to:

(i)

acquire or offer to acquire any interest in any shares or other
securities of BT as a result of which the aggregate interest of
the Deutsche Telekom Group and any of its concert parties
increases above 12% of Ordinary Shares in issue at any time;

(ii) act in concert with any person with respect to the holding,
voting or disposition of any shares or other securities of BT;
(iii) solicit or participate in any solicitation of Shareholders to vote
in a particular manner at any meeting of Shareholders; or

(iv) actively or publicly make any proposals for any merger,

consolidation or share exchange involving shares or other
securities of BT (for the purposes of this Part only, the
“Standstill Provisions”).

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information258

The exceptions to the Standstill Provisions include circumstances:

(i) where the Deutsche Telekom Group acquires an interest in
any shares or other securities of BT from the Orange Group
provided that such acquisition does not increase the aggregate
interest of the Deutsche Telekom Group and its concert parties
above 15% of the Ordinary Shares in issue;

(ii) where the Deutsche Telekom Group announces an offer under
Rule 2.7 of the City Code on Takeovers and Mergers (the
“Code”) or takes any action requiring it to make an offer under
Rule 9 of the Code, in each case if such offer is recommended
by the Directors of BT;

(iii) where any third party makes or announces under Rule 2.7 of
the Code an offer to acquire the issued ordinary share capital
of BT, whether such offer is recommended by the Directors of
BT or not; and

(iv) where BT makes any offering or issue of shares or other

securities and the Deutsche Telekom Group takes up its rights
to subscribe for or acquire the shares or other securities
offered to it by BT.

Under the Relationship Agreement, Deutsche Telekom AG
undertakes, among other things, that for a period of two years
from the expiry of the Initial Standstill Period, in the event that
the Deutsche Telekom Group acquires (other than as a result of
a reduction or re-organisation of share capital or re-purchase of
shares or other securities of BT) any Shares in excess of 15% of the
Ordinary Shares in issue (the “Excess Shares”), it shall procure that
the votes attaching to such Excess Shares shall be exercised (subject
to the provisions of the Code and applicable law or regulation) in
accordance with the recommendation of the Board of Directors of
BT on all shareholder resolutions which relate to a transfer of an
interest in Ordinary Shares carrying in aggregate 30% or more of
the voting rights of BT and on all special resolutions of BT. After
expiry of the Initial Standstill Period, the Deutsche Telekom Group
will otherwise be free to increase its shareholding in BT.

3. Lock-up Provisions
The Relationship Agreement contains lock-up provisions pursuant
to which Deutsche Telekom AG and Deutsche Telekom undertake
for a period of 18 months from the date of the Relationship
Agreement, subject to certain exceptions, that neither they nor
any of their group members will, directly or indirectly, offer, sell,
contract to sell, grant or sell options over, purchase any option or
contract to sell, transfer, charge, pledge, grant any right or warrant
or otherwise transfer, lend or dispose of any shares in BT or any
securities convertible into or exercisable or exchangeable for such
shares, or announce or otherwise publish an intention to do any of
the foregoing (each of the above activities being a “Disposal”). The
exceptions include:

(i) where Deutsche Telekom AG or Deutsche Telekom accepts
any offer by a third party for the whole of the ordinary
share capital of BT, whether by tender offer or scheme of
arrangement, or provides an irrevocable undertaking or letter
of intent to accept or vote in favour of any such offer;
(ii) any Disposal to any member of the Deutsche Telekom Group,
provided that the transferee agrees to be bound by the
restrictions of the Relationship Agreement; and

(iii) any sale of shares via any single off-market trade to a Financial
Investor of no more than 5% each of the Ordinary Shares in
issue of BT (or, on one occasion only, the sale of two stakes
of not more than 5% each at the same time to two different
Financial Investors), provided that any transferee enters into
a lock-up agreement on substantially similar terms to the
lock-up provisions of the Relationship Agreement.

4. DT CP Contract
Prior to any Disposal by Deutsche Telekom AG, Deutsche Telekom
or any of their group members in accordance with paragraph 3(iii)
above, BT has a right of first offer in relation to the relevant shares
(subject to the passing of the Buy-Back Resolution), and such right
is set out in the DT CP Contract.

Pursuant to the DT CP Contract, prior to an intended Disposal to
Financial Investors, the relevant selling entity is obliged to issue a
notice to BT specifying the number of Ordinary Shares proposed
to be sold or transferred. BT has nine Business Days within which
to make an offer for all of the Ordinary Shares detailed in the
notice, or else its right to make an offer will lapse. If the offer is not
accepted, the selling entity may make the sale or transfer within
three months of the delivery of the notice to BT at a price equal
to or greater than the price offered by BT. If BT does not make
an offer within the allotted time, the selling entity may sell the
Ordinary Shares within three months of the delivery of the notice
to BT at any price. The DT CP Contract will terminate 18 months
from Completion.

The notice from the selling entity may be issued to BT during a
close period or prohibited period (as such terms are defined in the
Model Code of Chapter 9 of the Listing Rules) of BT. If any such
period does not expire prior to the end of the nine Business Day
period within which BT may elect to make an offer to buy-back the
shares, BT will not be able to exercise its right of first offer.

When exercised in conjunction with BT’s right of first offer in
relation to Ordinary Shares held by Orange and Orange SA, the
maximum amount of Ordinary Shares BT can acquire by exercise
of its rights of first offer is approximately 14% of BT’s share capital
on an enlarged basis post-Acquisition. The price at which Ordinary
Shares can be bought back shall be no more than the higher of
the closing price of the Ordinary Shares on (i) the date on which
BT makes an offer to buy-back the Ordinary Shares and (ii) the
last trading day before the buy-back takes place. In addition, BT
has separately undertaken to give the Sponsor prior notice of its
intention to make an offer for Ordinary Shares under the DT CP
Contract, to consult with the Sponsor regarding such offer and not
to make such offer unless at the relevant time the Board, having
been so advised by the Sponsor, considers such offer to be fair and
reasonable as far as Shareholders are concerned. After expiry of
the lock-up period described above, the Deutsche Telekom Group
will be free to dispose of its shareholding in BT without further
restriction.

5. Rights of Deutsche Telekom AG
Under the Relationship Agreement, subject to compliance with
any applicable regulatory requirements, Deutsche Telekom AG
is able to appoint one Non-Executive Director (the “Deutsche
Telekom Representative Director”) to the Board for so long as the
Deutsche Telekom Group holds 10% or more of the issued share
capital of BT (provided that, if the shareholding is reduced below
10% as a result of a non-pre-emptive share issuance by BT, the
board appointment right shall continue for as long as the Deutsche
Telekom Group holds at least 8% of BT’s shares but provided
further that such reduced shareholding shall not have occurred as
a result of the Deutsche Telekom Group selling Ordinary Shares,
and also provided that the Deutsche Telekom Group must top
up to 10% within 12 months or the right will lapse). Any such
appointment shall be made in consultation with the BT Nominating
& Governance Committee and the appointee must be approved by
the BT Chairman (such approval not to be unreasonably withheld or
delayed).

The Relationship Agreement provides for the establishment of a
new committee of BT (the “Conflicted Matters Committee”) which
shall assess whether and to what extent the Board papers and

BT Group plc Annual Report 2016259

Board meetings of BT are likely to consider or refer to any matter
in respect of which the Conflicted Matters Committee believes that
either:

(i) BT and the Deutsche Telekom Group are competitors; or
(ii)

there is an actual or potential conflict of interest between BT
and the Deutsche Telekom Group (a “Conflicted Matter”).

The Conflicted Matters Committee shall comprise of at least
three members including at all times the Secretary to the Board,
the Head of Competition and Regulatory Law and the Director
of Governance. The Deutsche Telekom Representative Director
shall not be a member of the Conflicted Matters Committee. The
Deutsche Telekom Representative Director shall not attend any
Board meeting of BT unless a senior compliance officer of Deutsche
Telekom AG has received prior confirmation that the Conflicted
Matters Committee has considered whether such attendance
raises any concerns in relation to a Conflicted Matter. In the event
that the Conflicted Matters Committee has a serious or immediate
concern in relation to a Conflicted Matter, the Deutsche Telekom
Representative Director shall not attend any Board meetings
in relation to the Conflicted Matter and shall not receive any
information in relation to the Conflicted Matter.

Deutsche Telekom AG is also entitled to receive, subject to
compliance by BT with its legal and regulatory obligations, such
financial or other information in relation to the BT Group as is
necessary or reasonably required by Deutsche Telekom AG in order
to comply with its reporting requirements and legal, regulatory or
tax obligations.

Standstill and Lock-up Agreement with Orange SA
and Orange

1. Standstill and Lock-up Agreement
BT entered into a Standstill and Lock-up Agreement with Orange
SA and Orange on Completion, which regulates the ability of the
Orange Group to deal in shares and other securities of BT. The
Standstill and Lock-up Agreement terminates if (a) the Ordinary
Shares are no longer listed on the premium listing segment of
the Official List and admitted to trading on the London Stock
Exchange’s main market for listed securities or (b) the Orange Group
ceases to be interested in more than 3% of the issued ordinary
share capital of BT.

2. Standstill Provisions
The Standstill and Lock-up Agreement contains standstill provisions
pursuant to which Orange SA undertakes on behalf of itself and its
group for a period of three years from the date of the Standstill and
Lock-up Agreement, subject to certain exceptions, not to:

(i)

acquire or offer to acquire any interest in any shares or other
securities of BT as a result of which the aggregate interest of
the Orange Group and its concert parties increases above 4%
of Ordinary Shares in issue at any time;

(ii) act in concert with any person in respect of the holding, voting

or disposition of any shares or other securities of BT;

(iii) solicit or participate in any solicitation of Shareholders to vote
in a particular manner at any meeting of the Shareholders; or

(iv) actively or publicly make any proposals for any merger,

consolidation or share exchange involving shares or other
securities of BT (for the purposes of this Part only, the
“Standstill Provisions”).

The exceptions to the Standstill Provisions include:

(i) where the Orange Group announces an offer under Rule

2.7 of the Code or takes any action requiring it to make an
offer under Rule 9 of the Code, in each case if such offer is
recommended by the Directors of BT;

(ii) where any third party makes or announces under Rule 2.7 of
the Code an offer to acquire the issued ordinary share capital
of BT, whether such offer is recommended by the Directors of
BT or not; and

(iii) where BT makes any offering or issue of shares or other
securities and the Orange Group takes up its rights to
subscribe for or acquire the shares or other securities offered
to it by BT.

After expiry of the standstill period, the Orange Group will
otherwise be free to increase its shareholding in BT.

3. Lock-up Provisions
The Standstill and Lock-up Agreement contains lock-up provisions
pursuant to which Orange SA and Orange undertake for a period
of 12 months from the date of the Standstill and Lock-up
Agreement, subject to certain exceptions, that neither they nor
any of their group members will, directly or indirectly, effect any
Disposal. The exceptions include:

any Disposal to the Deutsche Telekom Group;

(i)
(ii) where Orange SA or Orange accepts any offer by a third party
for the whole of the ordinary share capital of BT, whether
by tender offer or scheme of arrangement, or provides an
irrevocable undertaking or letter of intent to accept or vote in
favour of any such offer;

(iii) any Disposal to any member of the Orange Group, provided
that the transferee agrees to be bound by the restrictions of
the Standstill and Lock-up Agreement;

(iv) any sale of shares via any single off-market trade to a Financial
Investor of up to all the shares of BT in which the Orange
Group has an interest, provided that the transferee enters
into a lock-up agreement on substantially similar terms to the
lock-up provisions of the Standstill and Lock-up Agreement;
and
if the Orange Group owns 2% or less of the issued ordinary
share capital of the Company, any Disposal which is by way
of a swap or other agreement to transfer the economic
ownership of the shares.

(v)

4. Orange CP Contract
Prior to any Disposal by Orange SA, Orange or any of their group
members, in accordance with paragraph 3(iv) above, BT has a
right of first offer in relation to the relevant shares (subject to the
passing of the Buy-Back Resolution), and such right is set out in
the Orange CP Contract.

Pursuant to the Orange CP Contract, prior to an intended Disposal
to Financial Investors, the relevant selling entity is obliged to issue
a notice to BT specifying the number of Ordinary Shares proposed
to be sold or transferred. BT has nine Business Days within which
to make an offer for all of the shares detailed in the notice, or else
its right to make an offer will lapse. If the offer is not accepted, the
selling entity may make the sale or transfer within three months of
the delivery of the notice to BT at a price equal to or greater than
the price offered by BT. If BT does not make an offer within the
allotted time, the selling entity may sell the Ordinary Shares within
three months of the delivery of the notice to BT at any price. The
Orange CP Contract will terminate 12 months from Completion.

When exercised in conjunction with BT’s right of first offer in
relation to Ordinary Shares held by Deutsche Telekom AG and
Deutsche Telekom, the maximum amount of Ordinary Shares BT

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information260

can acquire by exercise of its rights of first offer is approximately
14% of BT’s share capital on an enlarged basis post-Acquisition.
The price at which Ordinary Shares can be bought back shall be no
more than the higher of the closing price of the Ordinary Shares on
(i) the date on which BT makes an offer to buy-back the Ordinary
Shares and (ii) the last trading day before the buy-back takes place.
After expiry of the lock-up period described above, the Orange
Group will be free to dispose of its shareholding in BT without
further restriction.

Taxation of dividends
Under current UK tax law, BT will not be required to withhold tax
at source from dividend payments it makes. Unless a US Holder of
ordinary shares or ADSs is resident in or ordinarily resident for UK
tax purposes in the UK or unless a US Holder of ordinary shares or
ADSs carries on a trade, profession or vocation in the UK through
a branch or agency, or, in the case of a company, a permanent
establishment in the UK, the holder should not be liable for UK tax
on dividends received in respect of ordinary shares and/or ADSs.

Taxation (US Holders)
This is a summary only of the principal US federal income tax and
UK tax consequences of the ownership and disposition of ordinary
shares or ADSs by US Holders (as defined below) who hold their
ordinary shares or ADSs as capital assets. It does not address
all aspects of US federal income taxation and does not address
aspects that may be relevant to persons who are subject to special
provisions of US federal income tax law, including: US expatriates;
insurance companies; tax-exempt organisations; banks; regulated
investment companies; financial institutions; securities broker-
dealers; traders in securities who elect a mark-to-market method
of accounting; persons subject to alternative minimum tax;
investors that directly, indirectly or by attribution own 10% or
more of the outstanding share capital or voting power of BT;
persons holding their ordinary shares or ADSs as part of a straddle,
hedging transaction or conversion transaction; persons who
acquired their ordinary shares or ADSs pursuant to the exercise of
options or otherwise as compensation; or persons whose functional
currency is not the US Dollar, amongst others. Those holders may
be subject to US federal income tax consequences different from
those set forth below.

For the purposes of this summary, a US Holder is a beneficial
owner of ordinary shares or ADSs that, for US federal income tax
purposes, is: a citizen or individual resident of the United States; a
corporation (or other entity taxable as a corporation for US federal
income tax purposes) created or organised in or under the laws
of the United States or any political subdivision thereof; an estate
the income of which is subject to US federal income taxation
regardless of its sources, or a trust if a US court can exercise
primary supervision over the administration of the trust and one or
more US persons are authorised to control all substantial decisions
of the trust. If a partnership holds ordinary shares or ADSs, the US
tax treatment of a partner generally will depend upon the status
of the partner and the activities of the partnership. A partner in a
partnership that holds ordinary shares or ADSs is urged to consult
its own tax adviser regarding the specific tax consequences of
owning and disposing of the ordinary shares or ADSs.

In particular, this summary is based on (i) current UK tax law and
the practice of Her Majesty’s Revenue & Customs (HMRC) and
US law and US Internal Revenue Service (IRS) practice, including
the Internal Revenue Code of 1986, as amended, existing and
proposed Treasury regulations, rulings, judicial decisions and
administrative practice, all as currently in effect and available, (ii)
the United Kingdom-United States Convention relating to estate
and gift taxes, and (iii) the United Kingdom-United States Tax
Convention that entered into force on 31 March 2003 and the
protocol thereto (the Convention), all as in effect on the date of this
Annual Report, all of which are subject to change or changes in
interpretation, possibly with retroactive effect.

US Holders should consult their own tax advisers as to the
applicability of the Convention and the consequences under UK,
US federal, state and local, and other laws, of the ownership and
disposition of ordinary shares or ADSs.

For US federal income tax purposes, a distribution will be treated
as ordinary dividend income. The amount of the distribution
includible in gross income of a US Holder will be the US Dollar value
of the distribution calculated by reference to the spot rate in effect
on the date the distribution is actually or constructively received
by a US Holder of ordinary shares, or by the Depositary. In the case
of ADSs, a US Holder who converts Sterling into US Dollars on the
date of receipt generally should not recognise any exchange gain or
loss. A US Holder who does not convert Sterling into US Dollars on
the date of receipt generally will have a tax basis in Sterling equal
to their US Dollar value on such date. Foreign currency gain or loss,
if any, recognised by the US Holder on a subsequent conversion or
other disposition of Sterling generally will be US source ordinary
income or loss. In addition, in a situation where US holders receive
distributions of previously taxed earnings and profits, foreign
currency gain or loss will generally be recognised as the same
source as the associated income included under Subpart F rules
for US federal income tax purposes. Dividends paid by BT to a US
Holder will not be eligible for the US dividends received deduction
that may otherwise be available to corporate shareholders.

For purposes of calculating the foreign tax credit limitation,
dividends paid on the ordinary shares or ADSs will be treated as
income from sources outside the US and generally will constitute
‘passive income’. US Holders who do not elect to claim a credit
with respect to any foreign taxes paid in a given taxable year may
instead claim a deduction for foreign taxes paid. A deduction does
not reduce US federal income tax on a Dollar for Dollar basis like a
tax credit. The deduction, however, is not subject to the limitations
applicable to foreign credits.

There will be no right to any UK tax credit or to any payment from
HMRC in respect of any tax credit on dividends paid on ordinary
shares or ADSs.

Certain US Holders (including individuals) are eligible for reduced
rates of US federal income tax (currently at a maximum of 20%)
in respect of qualified dividend income. There could also be a
3.8% net investment income tax on dividends to individuals and
other non-corporate holders with income above a certain amount.
For these purposes, qualified dividend income generally includes
dividends paid by a non-US corporation if, among other things,
the US Holders meet certain minimum holding periods and the
non-US corporation satisfies certain requirements, including that
either (i) the shares or ADSs with respect to which the dividend
has been paid are readily tradable on an established securities
market in the US, or (ii) the non-US corporation is eligible for the
benefits of a comprehensive US income tax treaty (such as the
Convention) which provides for the exchange of information. BT
currently believes that dividends paid with respect to its ordinary
shares and ADSs should constitute qualified dividend income for US
federal income tax purposes. Each individual US Holder of ordinary
shares or ADSs is urged to consult his own tax adviser regarding
the availability to him of the reduced dividend tax rate in light of
his own particular situation and regarding the computations of his
foreign tax credit limitation with respect to any qualified dividend
income paid by BT to him, as applicable.

BT Group plc Annual Report 2016261

Taxation of capital gains
Unless a US Holder of ordinary shares or ADSs is resident in or
ordinarily resident for UK tax purposes in the UK or unless a US
Holder of ordinary shares or ADSs carries on a trade, profession, or
vocation in the UK through a branch, agency, or in the case of a
company, a permanent establishment in the UK, and the ordinary
shares and/or ADSs have been used, held, or acquired for the
purposes of that trade, profession or vocation, the holder should
not be liable for UK tax on capital gains on a disposal of ordinary
shares and/or ADSs.

A US Holder who is an individual and who has ceased to be resident
or ordinarily resident for tax purposes in the UK on or after 17
March 1998 or who falls to be regarded as resident outside the
UK for the purposes of any double tax treaty (Treaty non-resident)
on or after 16 March 2005 and continues to not be resident or
ordinarily resident in the UK or continues to be Treaty non-resident
for a period of less than five years of assessment and who disposes
of his ordinary shares or ADSs during that period may also be liable
on his return to the UK to UK tax on capital gains, subject to any
available exemption or relief, even though he is not resident or
ordinarily resident in the UK or is Treaty non-resident at the time
of disposal.

For US federal income tax purposes, a US Holder generally will
recognise capital gain or loss on the sale, exchange or other
disposition of ordinary shares or ADSs in an amount equal to the
difference between the US Dollar value of the amount realised on
the disposition and the US Holder’s adjusted tax basis (determined
in US Dollars) in the ordinary shares or ADSs. Such gain or loss
generally will be US source gain or loss, and will be treated as long-
term capital gain or loss if the ordinary shares have been held for
more than one year at the time of disposition. Long-term capital
gains recognised by an individual US Holder generally are subject
to US federal income tax at preferential rates. The deductibility of
capital losses is subject to significant limitations. Non-corporate
US Holders may also be subject to a 3.8% tax on net investment
income in respect of any gains.

A US Holder’s tax basis in an ordinary share or ADS will generally
be its US Dollar cost. The US Dollar cost of an ordinary share or
ADS purchased with foreign currency will generally be the US
Dollar value of the purchase price on the date of purchase, or the
settlement date for the purchase, in the case of ordinary shares
or ADSs traded on an established securities market, as defined
in the applicable Treasury Regulations, that are purchased by a
cash basis US Holder (or an accrual basis US Holder that so elects).
Such an election by an accrual basis US Holder must be applied
consistently from year to year and cannot be revoked without
the consent of the IRS. The amount realised on a sale or other
disposition of ordinary shares or ADSs for an amount in foreign
currency will be the US Dollar value of this amount on the date
of sale or disposition. On the settlement date, the US Holder
will recognise US source foreign currency gain or loss (taxable as
ordinary income or loss) equal to the difference (if any) between
the US Dollar value of the amount received based on the exchange
rates in effect on the date of sale or other disposition and the
settlement date. However, in the case of ordinary shares or ADS
traded on an established securities market that are sold by a cash
basis US Holder (or an accrual basis US Holder that so elects), the
amount realised will be based on the exchange rate in effect on the
settlement date for the sale, and no exchange gain or loss will be
recognised at that time.

Passive foreign investment company status
A non-US corporation will be classified as a passive foreign
investment company for US federal income tax purposes (a PFIC)
for any taxable year if at least 75% of its gross income consists of

passive income or at least 50% of the average value of its assets
consist of assets that produce, or are held for the production
of, passive income. BT currently believes that it did not qualify
as a PFIC for the tax year ended 31 March 2016. If BT were to
become a PFIC for any tax year, US Holders would suffer adverse
tax consequences. These consequences may include having gains
realised on the disposition of ordinary shares or ADSs treated as
ordinary income rather than capital gains and being subject to
punitive interest charges on certain dividends and on the proceeds
of the sale or other disposition of the ordinary shares or ADSs.
Furthermore, dividends paid by BT would not be ‘qualified dividend
income’ which may be eligible for reduced rates of taxation as
described above. US Holders should consult their own tax advisers
regarding the potential application of the PFIC rules to BT.

US information reporting and backup withholding
Dividends paid on and proceeds received from the sale, exchange
or other disposition of ordinary shares or ADSs may be subject
to information reporting to the IRS and backup withholding at a
current rate of 28% (which rate may be subject to change). Certain
exempt recipients (such as corporations) are not subject to these
information reporting requirements. In addition, non-corporarte
US Holders may be required to report their investment on a Form
8938. Backup withholding will not apply, however, to a US Holder
who provides a correct taxpayer identification number or certificate
of foreign status and makes any other required certification or who
is otherwise exempt. Persons that are US persons for US federal
income tax purposes who are required to establish their exempt
status generally must furnish IRS Form W-9 (Request for Taxpayer
Identification Number and Certification). Holders that are not
US persons for US federal income tax purposes generally will not
be subject to US information reporting or backup withholding.
However, such holders may be required to provide certification of
non-US status in connection with payments received in the US or
through certain US-related financial intermediaries.

Backup withholding is not an additional tax. Amounts withheld as
backup withholding may be credited against a holder’s US federal
income tax liability. A holder may obtain a refund of any excess
amounts withheld under the backup withholding rules by timely
filing the appropriate claim for refund with the IRS and furnishing
any required information.

UK stamp duty
A transfer of or an agreement to transfer an ordinary share will
generally be subject to UK stamp duty or UK stamp duty reserve
tax (SDRT) at 0.5% of the amount or value of any consideration
provided rounded up (in the case of stamp duty) to the nearest £5.
SDRT is generally the liability of the purchaser. It is customarily also
the purchaser who pays UK stamp duty. A transfer of an ordinary
share to, or to a nominee for, a person whose business is or includes
the provision of clearance services or to, or to a nominee or agent
of, a person whose business is or includes issuing depositary
receipts gives rise to a 1.5% charge to stamp duty or SDRT of
either the amount of the consideration provided or the value of the
share issued rounded up (in the case of stamp duty) to the nearest
£5. No UK stamp duty will be payable on the transfer of an ADS
(assuming it is not registered in the UK), provided that the transfer
documents are executed and always retained outside the UK.

Transfers of ordinary shares into CREST will generally not be
subject to stamp duty or SDRT unless such a transfer is made for a
consideration in money or money’s worth, in which case a liability
to SDRT will arise, usually at the rate of 0.5% of the value of the
consideration. Paperless transfers of ordinary shares within CREST
are generally liable to SDRT at the rate of 0.5% of the value of the
consideration. CREST is obliged to collect SDRT from the purchaser
of the shares on relevant transactions settled within the system.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information262

The above statements are intended as a general guide to the
current position. Certain categories of person (including recognised
market makers, brokers and dealers) may not be liable to stamp
duty or SDRT or may, although not liable for the tax, be required
to notify and account for it under the Stamp Duty Reserve Tax
Regulations 1986.

Limitations affecting security holders
There are no government laws, decrees, regulations, or other UK
legislation which have a material effect on the import or export of
capital, including the availability of cash and cash equivalents for
use by the company except as otherwise described in Taxation (US
Holders).

There are no limitations under UK law restricting the right of non-
residents to hold or to vote shares in the company.

UK inheritance and gift taxes in connection with
ordinary shares and/or ADSs
The rules and scope of domicile are complex and action should not
be taken without advice specific to the individual’s circumstances.
A lifetime gift or a transfer on death of ordinary shares and/or ADSs
by an individual holder, who is US domiciled (for the purposes of
the UK/US Estate and Gift Tax Convention) and who is not a UK
national (as defined in the Convention) will not generally be subject
to UK inheritance tax if the gift is subject to US federal gift or US
estate tax unless the tax is not paid (otherwise than as a result of a
specific exemption, deduction, exclusion, credit or allowance).

BT Group plc Annual Report 2016Documents on display
All reports and other information that BT files with the US
Securities and Exchange Commission (SEC) may be inspected at the
SEC’s public reference facilities at Room 1580, 100 F Street NE,
Washington, DC 20549, US.

These reports may be accessed via the SEC’s website at
www.sec.gov

Publications
BT produces a series of reports on the company’s financial,
compliance, and social and environmental performance.

Document

Notice of meeting
Annual Report & Form 20-F
Delivering our purpose report
EAB Annual Report
Expected quarterly results releases
Current Cost Financial Statements
The Way We Work, a statement of
business practice

Publication date

May
May
May
May
July, October, January and May
July

For printed copies, when available, contact the Shareholder
Helpline on Freefone 0808 100 4141 or contact our Registrars in
the UK, at the address opposite.

Most of these reports (as well as the EAB Annual Report on BT’s
compliance with the Undertakings) can be accessed online at
www.bt.com/aboutbt. More detailed disclosures on BT’s
implementation of social, ethical and environmental policies and
procedures are available online through our independently verified
sustainability report at www.bt.com/deliveringourpurpose

Electronic communication
Shareholders can choose to receive their shareholder documents
electronically rather than by post.

Shareholders may elect to receive documents in this way by going
to www.bt.com/signup and following the online instructions, or
by calling the Shareholder Helpline.

Shareholder communication
BT is committed to communicating openly with each of its
stakeholder audiences in the manner most appropriate to their
requirements.

All investors can visit our website at www.bt.com/investorcentre
for more information about BT. There are direct links from this page
to sites providing information particularly tailored for shareholders,
institutional investors, financial analysts, industry analysts and
journalists.

263

Private shareholders
If private shareholders have any enquiries about their shareholding,
they should contact our Registrars, Equiniti, at the address below.
Equiniti maintain BT Group’s share register and the separate BT
Group EasyShare register. They also provide a Shareholder Helpline
service on Freefone 0808 100 4141.

Shareholder Helpline
Tel: Freefone 0808 100 4141
Fax: 01903 833371
Textphone: Freefone 0800 169 6907
From outside the UK:
Tel: +44 121 415 7178
Fax: +44 1903 833371
Textphone: +44 121 415 7028
https://help.shareview.co.uk

ADR Depositary
JPMorgan Chase & Co
PO Box 64504
St Paul, MN 55164-0854, US
Tel: +1 800 990 1135
(General)
or +1 651 453 2128
(From outside the US)
or +1 800 428 4237
(Global Invest Direct)
email:
jpmorgan.adr@wellsfargo.com
www.adr.com

The Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
www.equiniti.com

General enquiries
BT Group plc
BT Centre
81 Newgate Street
London EC1A 7AJ
United Kingdom
Tel: 020 7356 5000
From outside the UK:
Tel: +44 1793 596 931

Institutional investors, financial and industry analysts
Institutional investors and financial analysts may contact BT
Investor Relations on:

Tel: 020 7356 4909
email: ir@bt.com

Industry analysts and consultants may contact BT Analyst Relations
on:

Tel: 020 7356 4909
email: industryenquiry@bt.com

Find out more about the BT Supplier
Finance scheme at:
www.selling2bt.bt.com

You can find out more about the
Better Payment Practice Code at:
www.payontime.co.uk

www.btplc.com/TheWayWeWork

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information264

Cross reference to Form 20-F
The information in this document that is referred to in the following table shall be deemed to be filed with the Securities and Exchange
Commission for all purposes. None of the websites referred to in this Annual Report 2016, including where a link is provided, nor any of
the information contained on such websites is incorporated by reference in the Form 20-F.

Required item in Form 20-F
Item

Where information can be found in this Annual Report
Section

Page

Identity of directors, senior management and advisers

Not applicable

Offer statistics and expected timetable

Not applicable

Key information
Selected financial data

3
3A

3B
3C

Capitalisation and indebtedness
Reasons for the offer and use of proceeds

Information on the company

History and development of the company

Business overview

Organisational structure

Property, plants and equipment

Group performance

Financial highlights
Selected financial data
Information for shareholders

Exchange rates

Not applicable
Not applicable

Our lines of business
Information for shareholders

Background
Group performance

Capital expenditure

General information

Capital management and funding policy

Performance in the year
Our purpose
Our goal
Our strategy
Our culture
Our networks and physical assets
Research and development
Brand and reputation
Our lines of business
Stakeholders and relationships
Our markets and customers
Our suppliers
Human Rights
Our relationship with HM Government

Regulation

Consolidated financial statements
Notes to the consolidated financial statements

Segment information

Financial and operational statistics
Operational statistics
Information for shareholders

Cautionary statement regarding forward-looking statements

Operating Committee
Our business model
Our lines of business
Financial statements of BT Group plc
Notes to the company financial statements

Related Undertakings
Our networks and physical assets

Properties

Consolidated financial statements
Notes to the consolidated financial statements

Property, plant and equipment

Financial and operational statistics

Financial statistics

95
243

253

249

105

152
8
21
21
21
24
34
36
37
58

38
39
40
41
41

181

247

248
26
28
58

228

194

245

BT Group plc Annual Report 2016

Required item in Form 20-F
Item

Where information can be found in this Annual Report
Section

Operating and financial review and prospects

Operating results

Liquidity and capital resources

Research and development, patents and licences

Trend information

Off-balance sheet arrangements

Tabular disclosure of contractual obligations

Directors, senior management and employees

Directors and senior management

Compensation

Board practices

Employees

Share ownership

265

Page

58
96
43

45
240

248
96

Our lines of business
Group performancea b
Protecting the environment
Our performance as a sustainable and responsible business

(summary table)

Alternative performance measures
Information for shareholders

Cautionary statement regarding forward-looking statements

Group performancea b
Information for shareholders

Cautionary statement regarding forward-looking statements

248

Consolidated financial statements
Notes to the consolidated financial statements

Loans and other borrowings
Financial instruments and risk management
Financial commitments and contingent liabilities

Research and development
Financial and operational statistics

Financial statistics
Group performancea b
Selected financial data
Information for shareholders

210
214
221
36

245
96
243

Cautionary statement regarding forward-looking statements

248

General information
Off-balance sheet arrangements
Group performance

Contractual obligations and commitments

Board of Directors
The Board
Reports of the Board committees

Report on Directors’ Remuneration

Consolidated financial statements
Notes to the consolidated financial statements

Retirement benefit plans
Share-based payments

Board of Directors
The Board
Reports of the Board committees

Report on Directors’ Remuneration

Our people
Group performance

Income statement
Operating costs

Consolidated financial statements
Notes to the consolidated financial statements

Employees

Reports of the Board committees

Report on Directors’ Remuneration

Consolidated financial statements
Notes to the consolidated financial statements

Share-based payments

152

108

112
114

128

199
207
112
114

128
31

186

128

207

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

266

Required item in Form 20-F
Item

Where information can be found in this Annual Report
Section

Page

Major shareholders and related party transactions

Major shareholders

Shareholders and Annual General Meeting

Relations with shareholders
Substantial shareholdings

Information for shareholders

Analysis of shareholdings at 31 March 2016

Related party transactions

Directors’ information

Interests of experts and counsel

Financial information

Consolidated statements and other financial information

Significant changes

9B
9C

9D
9E
9F

The offer and listing

Offer and listing details

Plan of distribution
Markets

Selling shareholders
Dilution
Expenses of the issue

Additional information

10A
10B

Share capital
Memorandum and articles of association

10C

Material contracts

10D

Exchange controls

10E

Taxation

10F
10G
10H

Dividends and paying agents
Statement by experts
Documents on display

10I

Subsidiary information

Quantitative and qualitative
disclosures about market risk

Interest of management in certain transactions

Consolidated financial statements
Notes to the consolidated financial statements

Related party transactions

Not applicable

See Item 18 below
General information

Legal proceedings

Group performance
Dividendsb

Consolidated financial statements
Notes to the consolidated financial statements

Financial commitments and contingent liabilities

Information for shareholders

Dividends
Articles of Association (Articles)
Dividends
Directors’ information
Going concern

Information for shareholders
Stock exchange listings
Share and ADS prices

Not applicable
Information for shareholders
Stock exchange listings

Not applicable
Not applicable
Not applicable

Not applicable
Information for shareholders

Articles of Association (Articles)

Information for shareholders
Material contracts
Information for shareholders

Limitations affecting security holders

Information for shareholders
Taxation (US Holders)

Not applicable
Not applicable
Information for shareholders
Documents on display
Not applicable

Consolidated financial statements
Notes to the consolidated financial statements

Significant accounting policies
Financial instruments

Notes to the consolidated financial statements
Financial instruments and risk management

Description of securities other than equity securities

Not applicable

154

250

150

220

152

100

221

251

254

149

249

254

256

262

260

263

179

214

BT Group plc Annual Report 2016

Required item in Form 20-F
Item

Where information can be found in this Annual Report
Section

Page

267

Defaults, dividend arrearages and delinquencies

Not applicable

Material modifications to the rights of security holders
and use of proceeds

Controls and procedures

16A

Audit committee financial expert

16B

Code of ethics

16C

Principal accountants’ fees and services

16E

16F
16G

Purchases of equity securities by the issuer and
affiliated purchasers
Change in registrant’s reporting accountant
Corporate Governance

Financial statements

Not applicable

General information
US Regulation

US Sarbanes-Oxley Act of 2002
Disclosure controls and procedures
Internal control over financial reporting

Report of the independent auditors – Consolidated financial

statements

United States opinion

General information
US Regulation

US Sarbanes-Oxley Act of 2002

General information
US Regulation

US Sarbanes-Oxley Act of 2002

Consolidated financial statements
Notes to the consolidated financial statements

Audit, audit related and other non-audit services

Reports of the Board Committees

Audit & Risk Committee Chairman’s report

Information for shareholders

Share buyback

Not applicable
General information
US Regulation

New York Stock Exchange

Not applicable

Report of the independent auditors – Consolidated financial

statements

United States opinion
Financial statements

150
150
151

164

150

186

118

251

150

164
165

a Excluding the information under the sub-heading “Profit forecast considered within the Listing Prospectus” and “Outlook for 2016/17 and 2017/18” on page 96.
b Excluding the last sentence ending in “... in our Outlook on page 96.” under the sub-heading “Dividends” on page 100.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional information

268

Glossary of terms

•

2G: the second generation of mobile telephony systems. It
uses digital transmission to support voice, low-speed data
communications and short messaging services.
3G: the third generation of mobile systems. It provides high-speed
data transmission and supports multimedia applications like video,
audio and internet access as well as conventional voice services.
4G: the fourth generation of mobile systems. It is designed to
provide faster data download and upload speeds on mobile
networks.

FTTC: fibre-to-the-cabinet – a variant of GEA which uses fibre
to provide high connection speeds from the exchange to a street
cabinet near to a customer premises, and a copper line for the final
connection to the premises.
FTTP: fibre-to-the-premises – a variant of GEA which uses fibre
to provide high connection speeds for the whole route from the
exchange to the customer.

ADSL: asymmetric digital subscriber line – a digital technology
that allows the use of a standard telephone line to provide high-
speed data communications.
ARPU: average revenue per user.

G.Fast: an innovative technology that uses higher frequencies
than FTTC to provide faster broadband speeds over copper.
GEA: generic Ethernet access – Openreach’s wholesale fibre
broadband product.

BDUK: Broadband Delivery UK – the UK Government body
charged with helping to oversee the use of public money for rolling
out fibre broadband in harder-to-reach parts of the country.
BTPS: BT Pension Scheme – the defined benefit pension scheme
which was closed to new members on 31 March 2001.
BTRSS: BT Retirement Saving Scheme – the scheme set up on
1 April 2009 as a successor to the BT Retirement Plan. It is a
contract-based, defined contribution arrangement.

IP: internet protocol – a packet-based protocol for delivering data
– including voice and video – across networks.
IPTV: internet protocol television – the combination of broadcast
content with broadband content, delivering both through the
television.
IPX: IP exchange – a telecommunications interconnection model
for the exchange of IP-based traffic between customers of
separate mobile and fixed operators.

CP: communications provider – a provider of communications
services – telephony, broadband, video on demand and other
services.

Ladder pricing: Ladder pricing links the amounts that BT charges
mobile operators for mobile calls to 0800, 0845 and 08700
numbers terminating on our network to the retail price charged by
mobile operators to their customers.
LLU: local loop unbundling – the process by which CPs can rent
the copper lines between BT’s exchanges and customer premises
from Openreach to provide voice and broadband services using
their own equipment.

DSL: digital subscriber line – a broadband service where existing
wires between the local telephone exchange and a customer’s
telephone sockets are transformed into a high-speed digital line.

Ethernet: high-capacity, high-speed digital connections available
throughout the UK. They tend to be used by businesses and
offices for which a domestic connection is inadequate when large
numbers of devices have to be online.

M2M: machine-to-machine – M2M communications refers to
connecting electronic devices to one another. This can streamline
processes and enable tasks to be automated.
Managed Ethernet Access Service: a product that uses pseudo
wire technology to carry Ethernet traffic between the mobile
operators; cell and core sites in a single converged packet network.
MPLS: multi-protocol label switching – supports the rapid
transmission of data across network routers, enabling modern
networks to achieve high quality of service.
MVNO: mobile virtual network operator – an arrangement where a
retailer sells mobile services under its own brand but uses a mobile
network owned by another operator to do so.

BT Group plc Annual Report 2016269

Ofcom: the independent regulator and competition authority
in the UK communications industries, with responsibilities across
television, radio, telecommunications and wireless communications
services.

PIA: passive infrastructure access – this occurs when one company
accesses ducts owned by another and installs its own fibre optic or
other cables.
POLOs: payments to other licensed operators – typically refers to
payments by one CP to another CP when terminating voice traffic
on their network to carry the call to the customer receiving the call.
PoPs: points of presence – this refers to a location in a city where
BT has the ability to connect customers to one of its networks.

RFT: ‘Right First Time’ – the internal measure of whether we are
keeping our promises to our customers and meeting or exceeding
their expectations.

VDSL: very high speed DSL – a high-speed variant of DSL
technology. It provides a high headline speed by reducing the
length of the access line copper by connecting to fibre at the
cabinet.
VoIP: voice over internet protocol – a method of transporting
speech over the internet.
VPN: virtual private network – a secure way to create an apparent
dedicated network between nodes over a network infrastructure,
which is in reality shared with other services.

WAN: wide area network – a computer network that exists over
a relatively large geographical area that connects two or more
smaller networks. This enables computers and users in one location
to communicate with computers and users in other locations.
WBC: wholesale broadband connect – a product supplied by
BT Wholesale which provides high-speed, high-performance
broadband services.
WLR: wholesale line rental – a product supplied by Openreach
which is used by other CPs to offer telephony services using their
own brand, pricing structure and billing, but using BT’s network.

SIP: session initiation protocol – a method for creating, modifying
and terminating sessions with one or more participants. These
include internet telephone calls, multimedia distribution and
multimedia conferences.
SIP Trunk: this replaces the need for traditional analog, T1-based
Public Switched Telephone Network connections with termination
instead provided over a company’s public or private internet
connection through a SIP provider.

Undertakings: legally-binding commitments BT made to Ofcom,
designed to bring greater transparency and certainty to the
regulation of the telecommunications industry in the UK. They led
to the formation of Openreach.

OverviewThe Strategic ReportGovernanceFinancial statementsAdditional informationNotesNotesNotesIn this document, references to ‘BT Group’, ‘BT’, ‘the group’,
‘the company’, ‘we’ or ‘our’ are to BT Group plc (which
includes the activities of British Telecommunications plc) and
its subsidiaries and lines of business, internal service unit, or any
of them as the context may require.

A reference to a year expressed as 2015/16 is to the financial
year ended 31 March 2016 and a reference to a year expressed
as 2016 is to the calendar year. This convention applies similarly
to any reference to a previous or subsequent year. References
to ‘this year’, ‘the year’ and ‘the current year’ are to the financial
year ended 31 March 2016. References to ‘last year’ and ‘prior
year’ are to the financial year ended 31 March 2015.

BT Group plc
Registered ofﬁce: 81 Newgate Street, London EC1A 7AJ
Registered in England and Wales No. 4190816
Produced by BT Group

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