BT Group plc
Annual Report
& Form 20-F
2017
Welcome to BT Group plc’s
Annual Report and Form-20F
for 2017
Where to find more
information
www.btplc.com
www.bt.com/annualreport
Delivering our Purpose Report
We’re using the power of communications
to make a better world. That’s our purpose.
Read our annual update.
www.btplc.com/purposefulbusiness
Delivering our
Purpose Report
Update on our progress in 2016/17
Contents
This is the BT Annual Report for the year ended
31 March 2017. 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 third 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’ve focused on the resources and relationships that set us apart
and the outcomes we generate for our stakeholders. Icons provide
a mapping to the IIRC’s ‘capitals’.
The strategic report
Review of the year
How we’re organised
An introduction from our Chairman
A message from our Chief Executive
Operating Committee
Our strategy
Our strategy in a nutshell
How we’re doing
– Delivering great customer experience
– Investing for growth
– Transforming our costs
Key performance indicators
Our business model
Our business model
What we do
Resources, relationships and sustainability
– Financial strength
– Our people
– Our networks and physical assets
– Properties
– Research and development
– Brand and reputation
– Stakeholders
– Protecting the environment
– Our performance as a sustainable
and responsible business
Our risks
Our approach to risk management
Our principal risks
Our viability statement
Our lines of business
Consumer
EE
Business and Public Sector
Global Services
Wholesale and Ventures
Technology, Service and Operations
Openreach
– Openreach chairman’s introduction
Group performance
Group Finance Director’s introduction
Group performance
Governance
Financial statements
Additional information
Throughout the
report look out
for these.
Reference to other
pages within the report
Reference to further
reading online
Critical accounting
estimates and key
judgements
Please see the cautionary statement regarding
forward-looking statements on page 260.
Pages 2 to 102 form the Strategic Report. It includes
Our strategy, Our business model, Our risks, Our lines of business
and the Group performance section. The Governance section on
pages 103 to 152 forms the Report of the Directors.
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103
153
251
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BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
The strategic report
“ This has been a challenging year for BT. We’ve faced
headwinds in the UK public sector and international
corporate markets and must learn from what
we found in our Italian business. Openreach also
received a fine from Ofcom after an investigation
into historical Deemed Consent practices revealed it
fell short of the high standards we expect. We take
these issues extremely seriously and are putting
in place new measures, controls and people to
prevent them happening again. Learning from
the challenges of this year will make BT a stronger
company for the future.
However, we’ve also made good progress in a
number of areas. Our integration of EE is going
well, our UK consumer, SME and corporate
businesses are performing strongly, and we’ve
made significant progress in improving customer
experience across the group. Our agreement with
Ofcom on Openreach governance brings to an end
a period of uncertainty. And securing exclusive
rights to top-flight European football until 2021
puts our consumer businesses in a strong position.
BT is well positioned for the future, and we’ll
continue to seek business cases to invest more
in the UK’s digital infrastructure.”
This Strategic Report was
approved by the Board on
11 May 2017
By order of the Board
Dan Fitz
Group General Counsel
& Company Secretary
11 May 2017
Gavin Patterson
Chief Executive
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BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Review of the year
We announced that Jan du Plessis will join our Board on 1 June
2017 and become chairman of BT Group with effect from
1 November 2017.
PG106 to read more about our Board
Strategic progress
– Focused on improving customer
experience across the group.
– EE integration is going well,
we’re ahead of target on first-year
cost synergies.
– Restructuring announced,
accelerating our cost
transformation.
– Continued investment for growth
and aspiration to become the UK’s
digital champion.
PG16 to read more about our strategy
Openreach
– Enduring and comprehensive agreement
reached with Ofcom on future Openreach
governance.
– Openreach board created with Mike
McTighe appointed as Openreach chairman.
– Ofcom’s investigation into the historical
use of Deemed Consent by Openreach
resulted in a £42m fine and c£300m of
compensation payments that will be paid
in 2017/18.
PG83 to read more about Openreach
Annual Report 2017
BT Group plc
3
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Review of the year continued
Our investigation into our
Italian business
£268m
prior years’ adjustments
£260m
specific item charge
Adjustments relating to the investigation of our Italian business amount to
£268m for errors in prior years, for which we’ve revised prior periods, and
a specific item charge of £245m for changes in accounting estimates and
investigation costs of £15m.
To respond, our actions have included:
–
detailed balance sheet reviews in seven selected country operations in
Global Services. Issue isolated to Italy;
appointed a new CEO and CFO of our Italian business, as well as a new
president of European operations; and
reviewed and improved financial processes, systems and controls
across the group.
–
–
PG6 to read more
Market environment
Headwinds in the UK public sector and
international corporate markets.
Low interest rate environment
increasing our IAS 19 pension deficit
by £2.4bn net of tax.
EE integration
Cross-selling opportunities being
realised
– Business mobile net adds up strongly
over the year.
– Hundreds of thousands of EE
customers taking BT Sport.
– Trial of selling BT products in EE
stores has gone well.
c£150m per annum run-rate cost
synergies achieved in first year
– Ahead of £100m target due to
synergies being realised early.
– Early focus on renegotiating supplier
terms, insourcing and estate
rationalisation.
Taking the best of both cultures
PG93 to read more about the EE integration
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Annual Report 2017
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THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
100%
100% of EE calls now
handled in UK and Ireland
contact centres, and
Consumer now at 86%
7.7m
premises connected to
fibre broadband, 29%
of those passed
53%
of retail broadband
customers now on fibre
500,000
premises now built to
with ultrafast broadband
30m
mobile customers using
our network
18.6m
mobile customers
using 4G
80%
UK’s land mass now
covered by 4G
BT Sport
BT Sport won exclusive rights to UEFA Champions
League and UEFA Europa League until the end of
2020/21 season.
Global Services
strategic review
We have undertaken a strategic review
of Global Services, with the objectives
of improving its market and financial
performance, its risk profile, and the
long-term value that it delivers to BT.
Global Services is most differentiated
with large, multinational customers,
who demand high-quality, secure
communications. Its product portfolio
is industry-leading across a range of
areas, including networking, security,
cloud collaboration and contact
centres.
Technology trends mean that we
are now less dependent on owning
physical local network access assets
around the world, creating the
opportunity to reposition Global
Services as a more focused digital
business. We will prioritise innovation
of cloud-based platforms that deliver
our products and services, with
BT’s global network at the core, to
support the digital transformation
of our customers. As we implement
this strategy, we will ensure that we
optimise the value of our global and
our local network assets.
To enable this strategic repositioning,
we are restructuring our Global
Services organisation to a simpler
operating model. This will involve
a two-year restructuring of our
operations, the costs of which will
be treated as a specific item.
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BT Group plc
Annual Report 2017
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Review of the year continued
Our investigation into our Italian business
What we found
In the summer of 2016 we received a whistle-blower report of
inappropriate behaviours in our Italian business. We instigated an
investigation, which included an independent review by KPMG
LLP, with support and oversight from our Legal, Governance &
Compliance function and Freshfields Bruckhaus Deringer, reporting
directly to both the chair of the Audit & Risk Committee and BT
Group chairman, and our own comprehensive balance sheet review,
which revealed improper accounting practices and a complex set of
improper sales, purchase, factoring and leasing transactions in our
Italian business. The investigation identified collusion, circumvention
and override of controls within our Italian business that was not
identified by our monitoring controls thereby resulting in the
misstatement of results going undetected for a number of years.
These activities resulted in the overstatement of profits amounting
to £268m in our Italian business over a number of years. We
concluded that the errors were not individually material to any of
the group’s previously issued financial statements; however, we
did conclude that the correction of the full £268m in the current
year would materially misstate the current year. To avoid this we
corrected the errors by revising prior year income statements,
balance sheets and cash flow statements. The effect of these
revisions is set out in note 1 to the financial statements.
The findings from the investigation in Italy led us to review the
carrying value of the assets and liabilities on the balance sheet,
taking into account changes in facts or circumstances since 31
March 2016 and whether additional exposures had arisen due
to events in the current year. This exercise required a level of
judgement, in many cases taking a more cautious view based on
our current understanding of circumstances surrounding each item.
This exercise concluded that it was appropriate to write-down the
value of our balance sheet assets and increase our balance sheet
liabilities. The resulting charge of £245m is presented as a specific
item in the current year.
Changes in facts or circumstance of items arising in the current year
have been recorded in Global Services’ current year trading results.
How we responded
The inappropriate behaviour in our Italian business is an extremely
serious matter. It has no place in BT and we took immediate steps
to improve the financial processes and controls in that business.
We suspended a number of BT Italy’s senior management team
who have now left the business. The president of our European
operations has also left the business.
We have appointed a new president of our European operations and
a new CEO and CFO of BT Italy, from outside the Italian executive
management team, and they are working hard to reposition and
restructure the business for the future including implementing
improvements to the governance, compliance and control culture
and the capabilities of our people in the organisation.
To ensure independence, KPMG and our internal investigation
team, with support and oversight from the Legal, Governance &
Compliance function and Freshfields Bruckhaus Deringer, reporting
directly to both the chair of the Audit & Risk Committee and
BT Group chairman, conducted an investigation of the systems and
controls relating to our Italian business. We also conducted a broader
review of financial processes, systems and controls across the group.
We are acting on both the recommendations of KPMG and our own
observations and have taken steps to improve our controls within
Italy. We have also taken steps to enhance the wider controls that
monitor our overseas operations in our shared service centres,
Global Services and at a group level.
Beyond Italy, we have completed detailed balance sheet reviews in
seven selected country operations in Global Services outside of the
UK. These thorough reviews were supported by EY. Together with
the investigation in Italy these covered around two-thirds by asset
value of the operations outside the UK, representing 4% of the
group’s total assets. Our review did not identify any similar issues or
areas of concern elsewhere giving us comfort that the inappropriate
behaviours were isolated to Italy. This along with other additional
substantive assurance activities that we have undertaken enables
us to conclude that the financial results and balance sheet as of
31 March 2017 position give a true and fair view of the group.
As a result of our US listing we are required to make certain
assessments of our controls as of 31 March 2017 for the purposes
of the US Sarbanes-Oxley Act 2002 (Sarbanes-Oxley). Despite
the remediation steps we took, the controls had not operated
for sufficient time to allow assurance testing to confirm their
effectiveness under Sarbanes-Oxley. We have therefore concluded
for these purposes that our controls were ineffective as of
31 March 2017 due to a material weakness with regards to
our Italian business.
The BT Group Remuneration Committee has also considered the
wider implications of the BT Italy investigation; see page 122 for
further details.
What we will do going forward
While we have taken steps to improve our control environment,
we recognise we have more to do. We will continue to take steps
to improve further our control, governance and compliance
environment. These steps include increasing the resources and
improving the capabilities of the controlling function and the audit
function outside the UK, and further developing our integrated
risk and assurance reporting processes. We are also enhancing our
controls and compliance programme to strengthen awareness of the
standards we expect, the capabilities of our people, and to reinforce
the importance of doing business in an ethical, disciplined and
standardised way.
The new CEO and CFO of BT Italy will continue to review the Italian
management and finance teams and work with BT Group Ethics
and Compliance to improve the governance, compliance and
financial safeguards. Going forward, we will also continue to rotate
senior management among countries to ensure an independently
governed and rigorously controlled organisation throughout all
parts of Global Services.
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BT Group plc
Annual Report 2017
Annual Report 2017
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7
As a result of the findings, Openreach has agreed to compensate CPs
and Ofcom has imposed a fine of £42m, reflecting the seriousness
of the failings. This includes a 30% maximum discount for BT
admitting its liabilities and agreeing to compensate the affected
CPs in full. The precise amount of these compensation payments
will result from discussions with the affected parties and is currently
estimated at £300m. The fine and associated compensation
payments are treated as a specific item charge in this year’s income
statement, with the cash expected to be paid in 2017/18.
We take this matter very seriously and we’ve put in place additional
controls to safeguard against this happening again and to make sure
that we’re providing the highest standards in serving our customers.
Deemed Consent
On 26 March 2017, Ofcom published the findings of its investigation
into the historical use of Deemed Consent by Openreach. Deemed
Consent is an agreed process between Openreach and its
Communications Provider (CP) customers, which allows Openreach
to halt the installation and reschedule the delivery date for providing
dedicated business services (known as Ethernet) in a number of
specific circumstances which are beyond its control. Ofcom found that
Openreach had breached its contractual and regulatory obligations
by inadequately and retrospectively applying Deemed Consent to
reduce compensation payments to CPs between January 2013
and December 2014.
Financial results
Proposed final dividend of 10.55p, up 10%,
giving a full year dividend of 15.40p, also up 10%
Reported measures
Revenue
Profit before tax
Basic earnings per share
Adjusted measures
Change in underlying revenuec excluding transit adjusted for the acquisition of EE
Adjustedd EBITDA
Change in underlying EBITDAc adjusted for the acquisition of EE
Adjustedd profit before tax
Adjustedd basic earnings per share
Normalised free cash flowe
Net debt
PG91 to read the Group Performance
PG20 to read our KPIs
Performance against 2016/17 outlook
In January we revised our outlook as a result of the pressures in the UK public sector and
international corporate markets and the outcome of the investigation into our Italian business.
Year to
31 March 2017
£m
24,062
2,354
19.2p
(0.2)%
7,645
(2.9)%
3,532
28.9p
2,782
8,932
Changea,b
27%
(19)%
(33)%
18%
5%
(9)%
£(316)m
£(906)m
Outlook
Our outlook for
2017/18 is now
as follows:
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BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
7
a The results for the period include EE which we acquired on 29 January 2016. Unless referred to as underlying adjusted for the acquisition of EE, comparatives only include EE from the date of acquisition.
b Certain prior year results have been revised to reflect the outcome of the investigation into our Italian business. See note 1.
c Excludes specific items, foreign exchange movements and disposals and is calculated as though EE had been part of the group from 1 April 2015. This differs from how we usually adjust for acquisitions as
explained on page 252.
d Before specific items, which are defined on page 252.
e Before specific items, pension deficit payments and the cash tax benefit of pension deficit payments.
2016/17
initial outlook
2016/17
revised outlook
2016/17
performance
2017/18
outlook
Change in underlying
revenuec excluding transit
Growth
Adjustedd EBITDA
c£7.9bn
Normalised free cash flowe £3.1bn - £3.2bn
Dividend per share
Share buyback
Broadly flat
c£7.6bn
c£2.5bn
≥10% growth ≥10% growth 15.40p, +10%
£206m
c£200m
£206m
(0.2)%
Broadly flat
£7,645m £7.5bn - £7.6bn
£2,782m £2.7bn - £2.9bn
Progressive
c£100m
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
How we’re organised
We have six customer-
facing lines of business:
Consumer, EE, Business
and Public Sector, Global
Services, Wholesale
and Ventures, and
Openreach.
They’re supported by
our internal service unit,
Technology, Service and
Operations as well as
Group Functions.
PG56-90 to read more
about our lines of business
Employees by division
28% Openreach
4% Wholesale and Ventures
8%
Consumer
9%
EE
10% Business and Public Sector
12% TSO
13% Group Functions
16% Global Services
Consumer
We’re the largest provider of consumer fixed-
line voice and broadband services in the UK.
We’re also the second-largest provider of pay-TV sports
channels in the UK and a leading innovator in broadcasting
technology. During the year we secured an extension to our
broadcast rights for the UEFA Champions League and the UEFA
Europa League until 2021 which puts our business in a strong
position.
2nd
largest provider of
pay-TV sports channels
in the UK
Openreach
Business and Public Sector
We build the network that connects Britain’s
homes and businesses to the future.
We sell communications and IT services in
the UK and the Republic of Ireland.
We’re responsible for providing services over the local access
network, sometimes referred to as ‘the last mile’, as well as
installing and maintaining the fibre and copper communications
networks that connect homes and businesses.
We’ve around 1.2m business and public sector customers and lead
the field in fixed-voice, networking and broadband. We have three
customer-facing units providing communications solutions and IT
services to SMEs, corporates and public sector customers.
26.5m
premises passed by
our fibre network
c1.2m
customers
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BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Adjusted revenuea by line of business
Year ended 31 March 2017
Adjusted EBITDAa by line of business
Year ended 31 March 2017
20% Consumer
9% Openreach
21% Openreach (including internal)
8% Wholesale and Ventures
23% Global Services
19% Business and Public Sector
21% EE
a
Before specific items.
EE
15% EE
13% Consumer
34% Openreach
11% Wholesale and Ventures
7% Global Services
20% Business and Public Sector
a Before specific items.
Wholesale and Ventures
We’re the UK’s largest mobile network
operator and we also offer fixed broadband
and TV.
We help other companies provide fixed or
mobile telephony services, as well as running
a number of BT’s specialist business units.
We employ 9,000 people with 67% directly helping customers
through our shops and contact centres. Our 4G mobile network is
the biggest and fastest in the UK.
We provide wholesale fixed network services to over 1,400
customers. We support 30 mobile virtual network operators.
And our ventures provide mass market services such as directory
enquiries and payphones, as well as enterprise services.
80%
4G geographic coverage
(99% population coverage)
1,400
wholesale customers
Global Services
We’re a leading global business communications
provider, supplying ICT services to 5,500
multinational companies in 180 countries.
Our performance for the year has been impacted by the
challenges in the international corporate markets and the
outcome of our investigation into our Italian business. We will
be implementing a new operating model in response to these
challenges, explained on page 70.
Technology, Service and Operations
We’re the internal technology unit responsible
for creating and operating our global
networks, platforms and IT systems.
We work closely with each of our lines of business, creating
new products for them and making sure that services evolve
to reflect the changing needs of their customers. And we make
sure that BT’s networks and systems are reliable and resilient.
We also manage BT’s research and development and our
worldwide patent portfolio.
180
countries served
4,900
worldwide portfolio of
patents and applications
Annual Report 2017
BT Group plc
9
An introduction from our Chairman
As I write my tenth and final chairman’s letter,
I look back at the progress BT has made over
the past decade.
Investing in the UK’s digital future
As we look ahead to the UK’s exit from the
European Union, it is more important than
ever that we have strong British companies
investing in our country’s future. We
invested around £2bn in the UK’s fixed and
mobile communications networks this year,
taking fibre broadband further and vastly
expanding 4G mobile network coverage.
Looking ahead, we have bold ambitions to
reach 12 million premises with ultrafast
broadband by the end of 2020, as well as
covering 95% of the UK’s landmass with 4G.
We also take seriously our responsibility
to invest in the UK’s workforce. We hired
900 apprentices this year, with plans to
increase this to over 2,000 next year.
And our investment in people is leading
to better outcomes for our customers. We
hired 1,500 people into Openreach this
year, mostly engineers, helping to halve the
number of missed customer appointments in
the fourth quarter, year on year. Meanwhile,
we have also hired more than 5,000 new
people into customer-facing roles at our
contact centres in the UK and Ireland,
meaning that 100% of EE’s contact centre
calls are now handled in the UK and Ireland,
with considerable onshoring progress also
made at Consumer this year.
We are also investing in innovative
technologies, continuing BT’s proud history
in this area. We have been the UK’s third
largest investor in research and development
over the past decade, and this year launched
the Tommy Flowers Institute, a new Higher
Education ICT training institute at our
research laboratories at Adastral Park.
We are also using technology to support
communities. This year we helped generate
£95m towards good causes. We also
continue to train teachers in tech literacy,
giving more than a million children the skills
they will need for the future, with an aim to
reach five million by 2020.
As I write my tenth and final chairman’s
letter, I look back at the progress BT has
made over the past decade. It has been a
privilege to oversee a period in which BT
took the decision in 2008, at a time of
great macroeconomic uncertainty, to begin
a rollout that has now passed over 26.5
million premises with fibre broadband. Other
highlights include launching BT Sport in
2013 and acquiring EE in 2016. Over the
past decade, we have also returned over
£1 per share to shareholders in the form
of dividends. I am pleased to say that BT is
an immensely stronger company than it
was ten years ago.
However, 2017 has presented its
challenges. While we have made significant
progress in many areas, concluding the
Ofcom Openreach review and successfully
integrating EE into the BT Group, we
have also had to address some significant
issues. In particular the fraud in our Italian
business, trading in the UK public sector
and international corporates, and the fine
that we received from Ofcom for historical
process failures in Openreach are very
disappointing.
This report includes further information
on these matters, as well as details of the
measures we have put in place to resolve
them. The Board takes them very seriously
and has extensively investigated the causes
to ensure that they cannot happen again.
Changes to the Board
In March, we announced that Jan du
Plessis will join the Board on 1 June 2017,
before becoming chairman on 1 November
2017, when I retire. I am delighted Jan
has been chosen to succeed me as
chairman. He brings great experience,
having been chairman of British American
Tobacco, SABMiller and Rio Tinto. I wish
him every success as he leads BT at this
important time.
Simon Lowth joined the Board on
12 July 2016 as group finance director.
Simon brings a wealth of knowledge
having previously been CFO of BG Group,
AstraZeneca and ScottishPower.
10
BT Group plcAnnual Report 2017 As I leave BT I would like to thank my
colleagues on the Board, Gavin Patterson,
our CEO and the management team whose
support I have valued highly over the years.
In my first chairman’s message ten years ago,
I closed by saying there was every reason
for optimism. Looking forward, I have great
confidence that remains the case today.
Sir Michael Rake
Chairman
11 May 2017
Investigation into BT Italy
Following allegations of inappropriate
behaviours in our Italian business, we
conducted an investigation, including an
independent review by KPMG LLP. I am
very disappointed by what we discovered,
including extensive improper accounting
practices and a complex set of improper
sales, purchase, factoring and leasing
transactions. These activities led to the
overstatement of earnings and assets in our
Italian business. We have detailed on page 6
the issues that arose and the steps that we
have taken in relation to these matters.
Agreement with Ofcom on Openreach
governance
An important step this year was the
agreement reached in March with Ofcom
on the future governance of Openreach.
This agreement comes after two years of
discussions, and will see Openreach become
a distinct, legally separate company within
the BT Group. It will see Openreach assume
greater independence under its own board.
We appointed Mike McTighe as Openreach
chairman in November 2016. Sir Brendan
Barber, Edward Astle and Liz Benison
then joined the new Openreach board as
independent members in early 2017. Clive
Selley, the Openreach CEO, will report into
Mike McTighe, with accountability to the
BT Group, as the CEO of a wholly-owned
subsidiary. This includes accountability to
the BT Group chief executive with regards to
certain legal and fiduciary duties that
are consistent with BT’s responsibilities as
a listed company.
Rewarding our shareholders
Our goal remains to deliver sustainable,
profitable revenue growth. Together with
our cost transformation activities, this will
support long-term cash flow growth and
therefore create value for our shareholders.
The strength of our business means that
despite some difficulties this year, we can
still fulfil our policy of paying a progressive
dividend. The Board is proposing a final
dividend of 10.55p, up 10%. This gives
a full year dividend of 15.40p, also up
10%. However, given the importance
of maintaining flexibility for investment,
dividend growth in 2017/18 will be lower
than the 10% previously anticipated. The
rate of future dividend growth will reflect
a number of factors, including underlying
medium-term earnings growth, the level
of investment spending and other cash
commitments. The Board believes that this
dividend policy appropriately balances the
interests of all stakeholders and provides
a solid foundation for future growth,
underpinned by an ongoing commitment to
investment that delivers sustainable long-
term value for customers and shareholders.
Whilst we have undoubtedly faced
challenges this year, we must not lose sight
of the people, infrastructure and services
that make BT a great company, with an
important role to play in the future of how
people in the UK and around the world live
their lives.
11
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION A message from our Chief Executive
Whilst we’ve continued to bring new services to our customers, invested in
our digital infrastructure and made significant improvements to the customer
experience, I’d be the first to say that 2016/17 has been a challenging year,
and one that has been humbling for us all at BT.
The behaviours and practices we found
in our Italian business, as well as Ofcom’s
findings around Openreach’s use of the
Deemed Consent process a number of years
ago, have no place in BT. We take these
extremely seriously and have reviewed all
aspects of our governance, putting in place
new measures and controls to prevent them
from happening again. In addition, we’ve
also faced difficult market conditions in
both the UK public sector and international
corporate markets.
Despite these challenges though, I believe
we’ve made good progress in many areas
across the business.
After a two-year negotiation, we reached
a comprehensive and enduring agreement
with Ofcom on the long-term governance
of Openreach. This brings to a close a
period of uncertainty; protects the interests
of millions of UK households, businesses
and service providers who rely on our
infrastructure, and it’s good news for
pensioners and colleagues too.
We’ve continued to invest in the UK’s digital
future. We’ve now passed over 26.5 million
premises with our superfast fibre broadband
network. Our ultrafast deployment, which
provides speeds of 100Mbps and above, is
also making great progress, with 500,000
homes and businesses now passed – using
a mix of fibre-to-the-premises and G.fast
technologies.
Our mobile investment is also performing
strongly. Our 4G coverage now reaches
80% of the UK’s geographical coverage,
the largest of any UK operator. And we’re on
track to reach 92% by September 2017.
The integration of EE into the BT family
continues to go well, and we have delivered
cost synergies earlier than originally planned
in our first year.
We believe online usage through mobile
devices is set to increase in the future.
And we also believe that everyone in the
UK should be able to access superfast
broadband, wherever they are and as fast
as it can be. That’s why in May 2016 we
committed to invest £6bn in our wireless
and fixed networks over the next three
years. This investment will enable the UK
to make social and economic progress,
consolidate our position as the UK’s digital
champion and create growth over the long-
term for our stakeholders.
This year, through our continued innovation,
we’ve also launched a range of new
products, services and content.
Our new BT Call Protect service is proving
popular, helping two million customers avoid
nuisance calls.
We’ve secured exclusive rights to the UEFA
Champions League and UEFA Europa League
until the end of the 2020/21 season,
covering double-header nights during the
group stages and free-to-air broadcast.
These rights are in addition to FA Cup and
Premier League football, live rugby, cricket,
UFC and now boxing. And we’ve brought
BT Sport content to millions of additional
sport fans through digital channels such as
BT Sport’s YouTube channel, where we will
show this year’s UEFA Champions League
12
BT Group plcAnnual Report 2017 We remain committed to our strategy
of broadening and deepening customer
relationships and to using the power of
communications to make a better world.
This year has presented us with challenges
and we’ve learnt from them. I know we have
the ability to emerge stronger and better,
whatever challenge we face.
We take our role as the leading investor in
the UK’s digital infrastructure very seriously.
I’m determined to make sure that we remain
at the heart of what’s to come and that we
continue to add value for our customers and
employees and for shareholders and society
as a whole.
We’re excited about the opportunities we’ll
create to use our unique set of assets and
capabilities; the innovative new products
and services we’ll bring to customers and
the new skills and career possibilities we’ll
provide for our people.
Gavin Patterson
Chief Executive
11 May 2017
and UEFA Europa League finals. We’re also
pleased to be the first operator to offer
Dolby Atmos sound.
We’re working with local authorities to
launch our next generation of payphone
kiosks, which you’ll start to see shortly.
And we’ve built a unique security platform
that integrates best-in-class technology
from our partners, with our own award-
winning innovation – to protect our
multinational customers and the UK’s critical
national infrastructure.
Customer experience remains our top
priority. We’ve listened to criticism and
have a well-developed improvement plan
in place. Our efforts are starting to bear
fruit and customers are benefiting – with
significantly more calls answered onshore,
shorter call waiting times, faster repair
times, fewer missed appointments, and
our best Right First Time performance
this decade. All of this is showing in our
Group Customer Perception Score, the way
we measure customer experience, which
has improved for the last ten consecutive
months. While we’re making progress,
we know our service must continue to
get better and our focus will remain on
delivering further improvements in the
coming year.
We’ve also significantly invested in our
people – recruiting thousands into
engineering and customer-facing roles, and
providing thousands of hours of training and
development. We’ve also created more than
1,700 new apprenticeship and graduate
jobs and provided 2,000 vocational training
and work experience placements, mainly
for out-of-work youngsters. For so many
people, BT is a source of pride and honour
and we want that to always be the case.
13
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Operating Committee
This is our key management
committee. It meets weekly and
is chaired by the chief executive.
The Operating Committee
has collective responsibility
for running our business and
executing our strategy. It
monitors the group’s financial,
operational and customer
service performance, and has
cross-business oversight of all
our lines of business. It also
reviews the group’s principal
risks and considers potential
opportunities.
Gavin Patterson
Chief Executive
Appointed as chief executive in September
2013 and on the Board since June 2008.
Gavin 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). Prior to that, he spent nine years at
Procter & Gamble, rising to become European
marketing director.
Simon Lowth
Group Finance Director
Appointed to the Board as group finance
director in July 2016. Simon was CFO and
executive director of BG Group before the
takeover by Royal Dutch Shell in February
2016. Previously Simon was CFO and an
executive director of both AstraZeneca and
ScottishPower. Prior to that, Simon was a
director at McKinsey & Company.
Marc Allera
CEO, EE
Appointed February 2016. Marc was
formerly chief commercial officer for EE from
2011 to 2015. Prior to EE, Marc spent ten
years at Three UK where he held a number
of senior positions, including chief
commercial officer and sales and marketing
director. Prior to his 16 years’ experience in
the mobile industry Marc was GM for Sega UK
and Europe.
Luis Alvarez
CEO, Global Services
Appointed October 2012. Luis was formerly
president of the Europe, Middle East, Africa
and Latin America operations of BT Global
Services serving some of our biggest global
customers. Luis also led BT Global Services
Telecom Markets unit, managing business
with carriers and operators outside the UK.
Before joining BT, Luis worked at Ericsson,
IBM and Grupo Santander. Luis has a
telecommunications engineering degree.
Gerry McQuade
CEO, Wholesale and Ventures
Appointed March 2016. Gerry was
formerly chief sales and marketing officer at
EE responsible for the Business, Wholesale
Product and development areas which he had
overseen since the merger in 2010 of Orange
and T-Mobile. He joined the board of Orange
in January 2008, and prior to Orange he was
founding director of Virgin Mobile.
–
More specifically the Operating Committee:
develops BT’s strategy and budgets for
–
the Board’s approval;
recommends to the Board capital
expenditure and investment budgets;
allocates resources across BT within
plans agreed by the Board;
prepares and delivers major
programmes; and
reviews the senior talent base and
succession arrangements.
–
–
–
The Operating Committee can approve,
up to certain limits set by the Board,
capital expenditure, disposals of fixed assets,
investments and divestments. Some of these
approvals are passed to sub-committees
such as the Design Council (page 25) and
to senior executives.
Tony Chanmugam, formerly group finance
director, left during the year.
Ed Petter
Group Corporate Affairs Director
Appointed November 2016. Ed was
previously deputy director of corporate affairs
at Lloyds Banking Group and prior to that
had held corporate affairs roles at McDonald’s
Europe, McKinsey & Company and the Blue
Rubicon communications consultancy, having
previously worked as a news producer and
editor at the BBC.
John Petter
CEO, Consumer
Appointed September 2013. John was
formerly managing director, BT Consumer
(BT Retail) and prior to that, chief operating
officer in BT Consumer. John was appointed
chairman of the Plusnet Board in 2008 and
has overseen its development as a key part
of BT’s strategy. Prior to joining BT, John held
roles as marketing and commercial director
at Telewest (now Virgin Media) and brand
manager at Procter & Gamble.
Graham Sutherland
CEO, Business and Public Sector
Appointed September 2013. Graham was
formerly managing director, BT Business,
responsible for the small and medium-sized
enterprises unit within BT Retail and prior to
that, CEO of BT Ireland.
Before joining BT, Graham held a number
of senior management positions including
managing director of NTL in the Republic of
Ireland. Graham is qualified as a chartered
management accountant.
Howard Watson
CEO, Technology, Service & Operations
Appointed February 2016. Howard was
formerly chief architect and managing
director global IT systems and led the
technical teams behind the launch of
BT Sport in 2013. Howard joined BT in 2011
and has 30 years of telecoms experience
having spent time at Telewest (now Virgin
Media) and Cartesian, a telecommunications
consultancy and software company.
Alison Wilcox
Group HR Director
Appointed July 2015. Alison was formerly
regional HR director for Vodafone Europe
and prior to that, regional HR director for
Vodafone’s Africa, Middle East and Asia Pacific
footprint. Alison joined Vodafone in 2006 as
group director of leadership following a career
in consulting.
Sean Williams
Chief Strategy Officer
Appointed June 2016. Sean has led BT’s
Group strategy, product portfolio, regulation
and policy since 2011 and previously for BT
Retail. Before joining BT in 2008, Sean was
an executive director on the board of the OFT,
of Ofcom, a partner of the strategy consulting
firm LEK Consulting LLP and a non-executive
director of Williams Lea Group.
Dan Fitz
Company Secretary
Dan is the group general counsel &
company secretary of BT Group plc.
He joined BT in April 2010 as its
group general counsel and was
appointed company secretary in
November 2012. Dan previously
spent six years at Misys and 12 years
at Cable & Wireless. Dan attends all
Operating Committee meetings.
Clive Selley
Invitee, CEO, Openreach
Clive was appointed CEO, Openreach in
February 2016. He was formerly CEO, BT
Technology, Service & Operations, CEO
BT Innovate & Design and before that
president, BT Global Services Portfolio &
Service Design. He is an ‘invitee’ because
the CEO of Openreach cannot be a
member of the Operating Committee
under the provisions of the Undertakings.
14
15
BT Group plcBT Group plcAnnual Report 2017Annual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Our strategy
Our strategy has evolved since
last year. The three main pillars are
broadly the same but we’ve placed
more emphasis on the overall
customer experience (rather than
just on customer service). Following
the acquisition of EE, our investment
areas have evolved to focus on
having the best network in the UK
and being a fully converged
service provider.
In order to achieve our purpose and reach our goal we’ve
adopted a strategy based on broadening and deepening our
customer relationships.
To create sustainable profitable revenue growth, we need stronger
relationships with our customers.
The three pillars of our strategy help us build these relationships,
providing great customer experience, transforming our costs and
enabling us to invest for growth in the process. They work together:
the better our customers’ experience, the more we’ll sell and the
less time and money we’ll spend putting things right. And the
better we manage our costs, the more we can invest in improving
our customers’ experience and in products and services that will
create growth.
Our strategy in a nutshell
The diagram below shows the main elements of our strategy and how they work together
to support our purpose and goal. More details on our purpose and goal, in the context of
our business model, can be found on page 24.
Our purpose
Our goal
Our strategy
A healthy
organisation
To use the power of communications to make a better world
Growth – to deliver sustainable profitable revenue growth
Broaden and deepen our customer relationships
Deliver great
customer experience
Invest for
growth
Transform
our costs
Differentiated
content, services
and applications
Best network in
the UK
Fully converged
service provider
Market
leadership in all
UK segments
Focus on
multinational
companies
globally
Best place to work
16
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17
How we’re doing
1
Delivering great
customer experience
Everything we do influences our customers’
opinion of BT. Whether it’s fixing a fault,
marketing a new product or fulfilling a new
contract, it’s the total customer experience that
matters. That’s why it’s so important we work
together across our entire business to improve our
customers’ experience. As a result our strategy
now emphasises the importance of improving
every aspect of the customer experience.
Customer service is at the heart of this goal. We’ve really improved
our service levels this year, but we can do more. Our focus on
customer experience means that everyone in BT, from marketing
to contact centre, and front-line engineer to senior executive, has
a role to play – and this includes the digital experience offered by
online, apps and social media.
–
–
Deliver a consistent and reliable service
–
All our Consumer customers have been given an improved level
of care and on average, have landline faults fixed 24 hours
quicker than last year.
Consumer has created more than 2,200 new roles to help
answer 90% of customer calls in the UK and Ireland by Spring
of 2017. They are on track to meet this target, with around
86% of calls now answered in the UK and Ireland.
EE now handles 100% of its customer service calls in the UK
and Ireland.
Openreach achieved or is on track to achieve all of Ofcom’s
copper Minimum Service Levels (MSLs).
There’s been a material improvement in how we deliver Ethernet
with Openreach achieving five of the six Ofcom MSL targets.
Openreach has recruited over 1,500 people, mostly engineers.
It also halved its number of missed customer appointments by
the end of the financial year.
We’ve made it even easier to interact with us online, for example
9m customers have signed up to ‘My EE’ via the app or online.
–
–
–
–
–
–
A great customer experience from our network
–
We’ve improved the weather proofing of our networks. This
year we’ve halted the growth in network faults following six
consecutive years of increasing faults.
Global Services is enabling better monitoring of network, IT and
applications.
Openreach is offering to connect fibre-to-the-premises for free
to all developments of new sites with over 30 plotsa.
Products that improve customer experience
–
Consumer upgraded all its superfast broadband (Infinity 1)
customers from 38Mbps to 52Mbps where available.
Business and Public Sector upgraded over 80,000 UK Business
Fibre broadband customers from up to 38Mbps to speeds of up
to 76Mbps.
We launched BT Call Protect to divert nuisance and unwanted
calls to junk voicemail. It’s free to all our customers.
–
–
Our top priorities
Looking ahead, we’re focused on:
– improving every interaction between our contact centre
advisers and customers, with further investment in skills
and tools;
– developing all our digital channels to enable more customers
to adopt online as the best method of interacting with us;
– extending the reach of our fibre and mobile networks, and
reducing network faults;
– improving our Ethernet delivery processes, enhancing the
experience for our business and corporate customers; and
– enabling all our people to put customers’ needs at the
heart of their decision making.
We believe that improving our customers’ experience will create
more growth. That’s why it’s such an important part of how we judge
the group’s performance. Our key measures of customer experience
include customer perception (based mainly on the industry standard
of Net Promoter Score) and getting things done Right First Time.
How we did in the year
We’ve seen a steady improvement in our customers’ perception of
us, increasing by five points since last year, with improvements across
all lines of business.
Our Right First Time performance has also improved, by 6.4%
compared to -3.0% last year. EE and our corporate businesses
performed particularly well and we’ve prepared and responded
much better to difficult weather conditions in the UK.
What difference did our customers see?
Customers judge us on their day-to-day interaction with BT. They
want a consistent, reliable service, a network that offers a great
experience and products that improve their lives. It’s in these
three areas – service, network and products – where we can most
clearly see the progress we’re making, progress we’re committed to
continuing over the coming year.
a New sites with over 30 plots registered from 10 November 2016.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
How we’re doing continued
2
Investing for growth
We’re putting money and resources in five strategic
areas that we believe will deliver sustainable, profitable
revenue growth. They underpin our strategy and our
operational and financial performance, which in turn
contribute to our KPIs (on page 20).
Differentiated
content,
services and
applications
Launch of
BT Smart Hub
Launch of
BT Family SIM
BT Sport daily viewing
up 12%
My BT, My EE app
improvements
a MVNO World Congress 2016.
Best network
in the UK
Fully
converged
service
provider
Market
leadership in all
UK segments
Focus on
multinational
companies
globally
26.5m
premises passed
with fibre
£150m 37%
cost synergies in the first
year of EE integration
retail broadband
share
180
countries
PG88
PG93
PG56
PG70
G.fast
pilots in 17
locations
PG88
80%
of UK landmass now
covered by 4G
PG63
5G
research with a range
of partners
29%
mobile market
share
PG62
W&V
Cloud of Clouds
PG71
NFV
W&V named Best
Wholesale Operatora
Network Function
Virtualisation
PG76
3.8m
PG71
SDN
mobile customers of
Mobile Virtual Network
Operators we support
Software Defined
Networking
made available to EE
customers
£1.6bn
target Net Present Value
of revenue synergies
from EE acquisition
Trial of selling BT
products in EE shops
(PHOTO)
PG33
PG75
PG71
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We’ve insourced engineering roles in IT and networks
3
Transforming
our costs
Our approach to cost transformation
Operating as cost efficiently as possible is at
the heart of our strategy. We’ve honed our
approach and methodology over the past
decade. It’s focused on simultaneously driving
customer experience improvement and cost
transformation, and it’s underpinned by rigorous
analysis, operating management leadership and
strong governance.
Programmes this year included:
– realising the cost synergies created by bringing together BT and
EE, including buying synergies, rationalising our property estate,
insourcing roles in both IT and networks, and creating a shared
call centre planning function for the group;
– re-engineering important processes to improve our delivery of
Ethernet, which has led to shorter lead times, higher output and
improved quality of delivery;
– reducing our network costs in the UK and overseas by
consolidating our technical facilities and deploying tools to better
manage third-party costs; and
– reviewing the operating model for main areas of our business, see
pages 70 and 93.
We still benchmark our cost of doing business against other
companies inside and outside our sector to see where we can do
even better.
Our largest programmes span multiple lines of business or complex
changes within a single line of business. Continuous Improvement
(CI) provides a complementary ‘bottom-up’ approach, empowering
our people to make small but significant changes to how we do
things every day. The result improves customer service and employee
engagement while reducing the cost of failure.
Training is an important part of our approach, led by our in-house
Cost Transformation Faculty, part of the BT Academy (page 53). The
faculty is responsible for the continued development of both our
change methodology and our ‘change professionals’.
This year alone we trained and coached more than 1,000 people.
BT is the only UK organisation licensed by the British Quality
Foundation to certify qualifications on such a scale at the most
advanced levels in Leana, Six Sigmab and Change & Project
Management methodologies. We’re now sharing our approach with
other organisations.
How we did in the year
We’ve continued to pursue opportunities to further transform our
costs. Despite this, our underlying operating costs excluding transit
were up 1%, reflecting our investments in mobile, BT Sport and
customer experience.
You can read about cost transformation within Our lines of business
from page 56, and the group’s operating costs on page 94.
a Lean is a methodology for achieving small, incremental changes in processes in order to eliminate
waste and improve efficiency and quality.
b Six Sigma is a data-driven methodology for eliminating defects in processes.
Our top priorities
Looking ahead, we’re focused on:
– establishing a new unit that brings together our customer
experience and our group transformation teams. The new unit
will enable us to make investments and take decisions about
business performance that are more clearly aligned with our
customer experience and productivity priorities;
– continuing to create synergies from the integration of BT and
EE by sharing best practice on cost transformation;
– gaining greater efficiency from our shared service functions
and operating model in the UK and internationally; and
– addressing the customer experience and cost of failure
impacts in our consumer and business products.
Restructuring
We are also expanding and accelerating areas of our cost
transformation programme. We are simplifying our central Group
Functions and our internal service unit, Technology, Service &
Operations to improve the effectiveness and efficiency of the
services and infrastructure delivered to our lines of business.
We are also restructuring the Global Services organisation and
accelerating ongoing transformation programmes in other lines
of business. We anticipate that these transformation programmes
will save in total around £300m over two years, with a
restructuring charge of around £300m over the next two years,
with most of this being incurred in 2017/18. This restructuring
cost will be treated as a specific item. These changes will clarify
accountabilities, remove duplication and improve efficiencies,
removing around 4,000 roles mainly from managerial and
back-office areas. The cost savings will provide headroom to
offset market and regulatory pressures and support increased
investment in delivering great customer experience and
leading networks.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Key performance indicators
We’ve achieved our customer service
performance goal for the year, but
need to do better. We hit our revised
financial guidance set in January
2017, but fell short of our financial
targets set at the start of the year
due to the issues in our Italian business
and headwinds in UK public sector
and international corporate markets.
Progress against our KPIs
We use four key performance indicators (KPIs) to measure how we’re
doing against our strategy. Our financial KPIs include: the trend in
underlying revenue excluding transit adjusted for the acquisition of
EE; our adjusted earnings per share; and normalised free cash flow.
Customer service improvement is the 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 122).
We’ve outlined our performance against each KPI here, together
with an explanation 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 252 to 254.
Our key measure of the group’s revenue trend, underlying
revenue excluding transit adjusted for the acquisition of EE,
was down 0.2% (2015/16: up 1.9%c) which is broadly
consistent with our revised outlook.
Trend in underlying revenue excluding transit
Year ended 31 March
%
3
2
1
0
(1)
(2)
1
3
(3) (
.
5
0
.
)
9
1
.
)
4
0
.
(
)
.
2
0
(
(4)
2013a
2014a
2015a
2016a
2017b
Our customer service measure Right First Time was up 6.4%
compared with down 3.0% last year.
Customer service improvement
At 31 March
4
6
.
.
1
2
2
.
7
4
.
5
1
)
0
3
.
(
0
3
.
.
0
3
.
5
0
1
%
25
20
15
10
5
0
)
0
4
.
(
2010
2011
2012
2013
2014
2015
2016
2017
2017
Cumulative improvement from 1 April 2009.
Performance
Our revenue performance has been heavily impacted by the
challenging conditions we’ve seen in the UK public sector and
international corporate markets. This was offset by strong performance
in our customer-facing lines of business driven by EE and Consumer.
We explain more about the performance of our lines of business from
page 56.
Definition
Underlying revenue reflects the overall performance of the group
that will contribute to sustainable profitable revenue growth. We
exclude the impact of specific items, foreign exchange movements
and disposals and from 2016/17 this measure is calculated as though
EE had been part of the group from 1 April 2015. This differs from
how we usually adjust for acquisitions as explained on page 252. We
focus on the trend in underlying revenue excluding transit because
transit traffic is low margin and is affected by reductions in mobile
termination rates, which are outside our control.
Performance
Improving the service we deliver is key. Our Right First Time measure
was up 6.4% (2015/16: down 3.0%). We’re making good progress
in some areas. Openreach achieved or is on track for all 60 of
the minimum service levels (MSLs) set by Ofcom for copper, but
disappointingly we missed one of the six MSLs for Ethernet. 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 17.
Definition
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, completing orders when we
agreed or fixing faults within an agreed period. As well as improving
service and the customer experience, keeping our promises should
mean that there is less work to do to correct our mistakes, and so
reduces our costs.
a Calculated as though EE was not part of the group until 1 April 2016.
b Calculated as through EE had been part of the group from 1 April 2015.
c Certain prior year results have been revised to reflect the outcome of the investigation into our Italian business. See note 1 to the consolidated financial statements.
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21
Outlook for 2017/18
For 2017/18, we continue to expect underlying revenue excluding
transit to be broadly flat year on year. Adjusted EBITDA is expected to
be £7.5bn – £7.6bn.
Our outlook for normalised free cash flow over the cumulative two-
year period 2016/17 and 2017/18 remains broadly unchanged.
However, normalised free cash flow in 2016/17 of £2,782m was
almost £300m above our outlook of around £2.5bn, due to early
customer collections that will reverse in 2017/18. As such, normalised
free cash flow in 2017/18 is now expected to be £2.7bn – £2.9bn,
from £3.0bn – £3.2bn previously.
This outlook is provided on the basis of our existing investment plans.
However, we continue to evaluate a range of additional investment
opportunities. Our decision on whether to move forward with these will
be affected by a number of factors, including the outcome of Ofcom’s
Wholesale Local Access Market Review, responses to Openreach’s
consultations and the results of any future spectrum auctions.
Adjusted earnings per share decreased 9% to 28.9p.
Adjusted earnings per share
Year ended 31 March
pence
35
30
25
20
15
10
5
0
.
3
6
2
.
2
8
2
.
6
0
3
.
8
1
3
.
9
8
2
2013
2014
2015
2016
2017
Our underlying dividend policy remains unchanged: to deliver
progressive dividends while balancing the need to invest in the business,
support the pension fund and maintain a strong balance sheet. The
Board has concluded that a dividend increase of 10% in 2016/17
remains appropriate. However, given the importance of maintaining
flexibility for additional investment and the range of potential
outcomes, dividend growth in 2017/18 will be lower than the 10%
previously anticipated. The rate of future dividend growth will reflect
a number of factors, including underlying medium-term earnings
growth, the level of investment spending and other cash commitments.
The Board believes that this dividend policy appropriately balances the
interests of all stakeholders and provides a solid foundation for future
growth, underpinned by an ongoing commitment to investment that
delivers sustainable long-term value for customers and shareholders.
We expect to buy back around £100m of shares in 2017/18 to
help counteract the dilutive effect of all-employee share option plans
maturing in the year. This is below the £206m buyback we completed
in 2016/17 reflecting the lower number of shares that are expected to
be required for our share option plans.
Performance
Adjusted profit after tax grew 5% to £2,869m this year reflecting
the impact of the acquisition of EE.
Adjusted earnings per share decreased 9% to 28.9p. The weighted
average number of shares in the market increased 15%.
Definition
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.
We generated normalised free cash flow of £2,782m. This was
down £316m compared with last year, but is above our revised
outlook of around £2.5bn due to earlier than expected customer
collections which will reverse next year.
Normalised free cash flow
Year ended 31 March
£m
5,000
4,000
3,000
2,000
1,000
0
0
0
3
2
,
0
5
4
2
,
0
3
8
2
,
8
9
0
3
,
2
8
7
2
,
2013
2014
2015
2016
2017
Performance
The decrease of £316m or 10% in our normalised free cash flow
primarily reflects the impact of cash outflows in our Italian business
as we unwound the effects of inappropriate working capital practices,
as well as higher capital expenditure in relation to Emergency Services
Network (ESN) and EE integration, partially offset by the benefit of an
additional ten months of EE.
Definition
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.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
The resources and relationships that set us apart
What we do
Stakeholder outcomes
Our business model
We create value for our
stakeholders by developing
and selling products and
services that are an essential
part of modern life.
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
(see page 70).
Financial strength
We’re focused on growing our
cash flow over the long term.
£2,782m
normalised free cash flow
generated in 2016/17
Our people
Their commitment, expertise and
diversity are key to our success.
106,400
employees
IIRC Capitals
This key provides a mapping to the ‘capitals’ of the
IIRC’s Integrated Reporting (IR) Framework.
You can find out more at: www.theiirc.org
Networks and physical assets
We continue to invest in these to
improve the experience we offer
our customers.
26.5m
premises passed by our
fibre footprint
5.6m
BT Wi-fi hotspots
Financial
Human
Manufactured
Intellectual
Social
Natural
Our strategy
The main elements of our strategy
are outlined on page 16.
Our principal risks
Our approach to risk management and our
principal risks are described on page 45.
Our viability statement
Our directors’ assessment of the prospects
and viability of the group is on page 55.
Governance
How we govern the group is described
from page 103.
Remuneration
The report on directors’ remuneration
can be found on page 122.
Research and development
We’re one of the largest investors
in research and development in
the UK.
Stakeholders and relationships
Key stakeholders include our
customers, communities, shareholders,
lenders, our pension schemes,
suppliers, government and regulators.
Our brand
Our brands are a key asset.
Natural resources
We use some natural resources
in doing business.
c£520m
R&D spend
102
patents filed
790,000
shareholders
$18.6bn
Millward Brown
valuation of the
BT brand
82%
of the worldwide
electricity we buy
comes from renewable
sources
S
R
E
UR STAKE H O L D
L O
L
R A
O
F
E
U
L
A
V
G
N
I
T
A
E
R
C
Our purpose is to use the power of
communications to make a better world.
Our goal is growth, in particular the
creation of sustainable, profitable,
revenue growth.
In order to achieve our purpose and
reach our goal we’ve adopted
a strategy based on broadening
and deepening our
customer relationships.
IN
V
E
S
T
I
N
G
I
N
W
H
A
T
S
E
T
S
U
S
A
P
A
R
T
D E R N LIFE
O
SELLING SERVICES INTE G R A L T
Oversight and Gove r n a n c e
O M
How we’re organised
Our business is structured in a way
that enables us to serve our customers, respond to
their needs and consistently create value. We have six
customer-facing lines of business supported by
our internal service unit.
Customers
Consumer
EE
Business and Public Sector
Global Services
Wholesale and Ventures
Openreach
Technology, Service and Operations
Customers
6.4%
improvement in
Right First Time
performance
2m
BT Call
Protect
customers
Community
£35.6m
investment in
society
31%
BT volunteer
people
£471m
UK corporation
tax
£95m
raised for
good causes
Employees
71%
employee
engagement
outcome
52%
saveshare
participants
88%
maternity
return rate
6%
improvement in
sickness absence
Suppliers
£14.1bn
spent with
suppliers
65%
with top 100
suppliers
Shareholders
15.40p
full year dividend
10%
increase year
on year
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
What we do
In this section, we
provide more details
on our purpose, goal
and strategy in the
context of our business
model. It shows how
we create value for our
stakeholders over the
short, medium and
long term.
Our purpose, goal
and strategy
Investing in
what sets us apart
Our purpose
Our purpose is as simple as it is ambitious:
to use the power of communications to
make a better world.
We invest in building and maintaining
communications networks in the UK and
overseas, as well as developing products and
services that run over those networks.
Some investments, such as TV sports rights
(page 58), have a lifespan of just a few
years. Other investments, such as our fibre
broadband network, are much longer term,
with a pay-back period that lasts more than
a decade.
We have a strong combination of people,
technology, networks and other physical
assets that sets us apart from our
competitors. Importantly, we also have the
financial strength to continue to invest in
these areas.
Our most important resources and
relationships are described from page 26.
The world is changing. Political upheaval,
social and demographical changes, increasing
economic inequality and worsening
environmental impacts are becoming the
new norm. We believe that technology has
an important part to play in addressing these
challenges and creating opportunities.
Our goal
Our goal is growth, in particular the creation
of sustainable, profitable, revenue growth.
We aim to achieve profitable revenue growth
by delivering both a great experience
and valued products and services to our
customers. Profitable revenue growth,
combined with continued transformation
of our cost base and productivity, will drive
strong, sustainable operating cash flow.
We will reinvest a significant proportion
of our operating cash flow in networks,
products and services that will drive long-
term growth and value for our customers
and shareholders. We will use the residual
cash flow to fund our pensions, pay
dividends to shareholders and maintain a
strong balance sheet.
Our strategy
In order to achieve our purpose and deliver
our goal we’ve adopted a strategy based on
broadening and deepening our customer
relationships. To create sustainable
profitable revenue growth, we need stronger
relationships with our customers.
The three pillars of our strategy help us
build these relationships, providing a great
customer experience, transforming our costs
and enabling us to invest for growth in the
process. They work together: the better our
customers’ experience, the more we’ll sell and
the less time and money we’ll spend putting
things right. And the better we manage our
costs, the more we can invest in improving
our customers’ experience and in products
and services that will create growth.
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Selling services
integral to modern life
Creating value for
all our stakeholders
Oversight
and governance
We sell fixed-voice, broadband, mobile and
TV products and services to individuals and
households in the UK. For businesses we
offer a variety of communications services
ranging from phone and broadband through
to complex managed networks and IT
services and cyber security protection. Many
public services rely on our technologies and
in the UK we help other communications
providers to service their own customers.
We see growing demand for many of our
products and services because they play
such an integral role in modern life.
We sell our products and services through
our customer-facing lines of business,
and continuously improve our costs and
productivity to drive revenue, margins and
strong operating cash flow. We reinvest a
significant proportion of this operating cash
flow in the business, creating a virtuous
circle that delivers value for our stakeholders
over the short, medium and long term.
We use a range of channels to sell our
products and services, including online,
contact centres and account managers. We
also have around 570 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 for regulated products,
to five years or more for major managed
services deals.
Generating strong cash flow enables
us to invest in the business, reduce net
debt, support our pension fund and pay
progressive dividends (see page 26).
But there’s much more to what we do than
just making money. What we do matters. It
helps millions of people communicate, enjoy
entertainment, 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, supporting
suppliers, paying tax and encouraging our
employees’ volunteering activities.
All of which contribute to the strength
of our brands – which in turn influences
whether a potential customer buys from
us or one of our competitors.
Communications markets are dynamic and
very competitive, particularly in the UK.
There are multiple risks and opportunities, so
it’s important our business model is flexible
and sustainable. To help us we:
–
–
–
–
have a framework to identify and
mitigate the challenges we face (see
page 44);
use ‘insight’ teams to make sure we stay
in tune with market opportunities and
customer expectations;
undertake an annual materiality
review to understand the social and
environmental issues that are important
to our stakeholders; and
use governance committees, such as
our Design Council, to make sure we’re
making the right investments.
Together, these help us anticipate and
respond to changes in our markets including
‘macro events’ like Brexit and the prospect
of the UK leaving the single European
market. That’s why we’re confident we can
deliver value over the short, medium and
long term. It’s this confidence that underpins
our assessment of the future prospects and
viability of the group (see page 55).
Design Council
The Design Council is a sub-committee
of the Operating Committee (page 14). It
normally meets monthly and is responsible
for aligning our capital investments in our
networks, systems, platforms and products
so that they reflect our strategy, serve the
needs of our customers and are delivered
cost-effectively.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Resources, relationships and sustainability
In this section we describe the key resources and relationships
that underpin our business model. We also report on how our
purpose can help to protect the environment.
Financial strength
Our financial strength means we can take a
long-term view of investments.
Our goal is to deliver sustainable profitable revenue growth.
Together with further cost transformation, we aim to grow our
EBITDA and cash flow over the long term.
Our financial strategy has been consistent for a number of years:
Deliver sustainable profitable revenue growth
Our people
Our people help shape the modern world.
The products and services they create and
manage underpin everything from global trade
and industry, to economic growth and social
infrastructure.
Our people are a vital part of our ambition to deliver a great
customer experience and sustainable, profitable revenue growth.
Our people strategy supports this ambition by creating an
environment where great people can do brilliant things as
part of a dynamic business.
Grow EBITDA
Grow free cash flow
Invest in
business
Reduce net
debt
Support
pension
fund
Pay
progressive
dividends
We have a prudent financial policy and strong governance, both
of which help us make the right decisions in terms of planning
investments, managing our debt and growing our business.
Strategic investment, based on our financial strength, will ensure
the long-term growth and health of our business. At the same time,
we’re working hard to reduce our net debt, support our pension
fund in a responsible way and pay progressive dividends to our
shareholders.
Our financial strength 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 of our people.
We recruited 3,600 new people into customer-facing
roles at our BT UK contact centres
How our people make a difference
Our success isn’t just about what we do; it’s how we do things that
really makes the difference.
We want great people to work for BT. We want them to feel engaged
and inspired to be the best they can be. Together we create a high-
performing, thriving organisation, where difference is celebrated and
innovation is a big part of who we are.
At the heart of this are our people values. They’re aspirational, but
realistic, capturing the spirit of BT at our best and reflecting how our
customers want us to understand their needs, be easy to deal with
and show we care.
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This led us to three words:
Personal
Simple
Brilliant
Everyone in BT has a role to play in bringing these values to life.
That’s how we’ll deliver on our purpose and use the power of
communications to make the world a better place, every single day.
This year we were deeply disappointed with the improper practices
of a few individuals in our Italian business and the investigation
into historical Deemed Consent which identified poor processes at
Openreach. We know the vast majority of our people want to do,
and will do the right thing, but this highlights the necessity to live
our new values and work in an ethical way at all times.
Our workforce
At 31 March 2017 we had 106,400 full-time equivalent (FTE)
employees in 63 countries, with 82,800 based in the UK.
Like any successful business, we continually redeploy our people to
meet the needs of our customers and ensure they get a first-class
experience long into the future. Last year in the UK we redeployed
1,070 people, avoiding the need for redundancy.
An integrated workforce
Following the acquisition of EE we’re harmonising our policies,
cultures and working practices to achieve our goal of becoming a
truly integrated organisation. We’ve identified examples of best
practice from both organisations that will act as building blocks for
our ‘better than both’ ambition. Our new values reflect this.
Recruiting talented people
In December 2016 we launched an exciting new career website,
showing the world what makes BT such a great place to work.
This year, excluding acquisitions, we recruited nearly 17,500
people, almost 10,500 of whom are UK-based.
A customer-connected workforce
Improving the quality of our customer relationships remains central
to our people strategy.
We’ve recruited more than 1,500 people into Openreach and 3,600
new people into customer-facing roles at our BT UK contact centres.
We’ve also hired 1,400 people into EE stores and filled more than
1,700 positions in EE contact centres. Allowing for people leaving,
the result is a net increase of 200 FTE employees across EE.
Finally, we continue to recognise the importance of retaining
experience by converting almost 1,600 skilled agency workers to
permanent employees.
Hiring more graduates
In 2016/17 we hired 300 graduates globally. We have plans to hire
more than 450 in 2017/18 – our highest-ever intake.
Once again we’re in the top half of The Times
Top 100 Graduate Employers. We’re one of only
five companies in the IT and telecoms sector to
feature in the top 100.
Hiring more
apprentices
We hired 900 new apprentices across the
group in 2016/17. Our contribution to
the new Apprenticeship Levy Fund means
we’re able to offer more apprenticeship
opportunities than ever before – over
2,000 next year.
900
new apprentices hired
across the group
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Resources, relationships and sustainability continued
Investing for growth
At BT, we never stop learning – whether that’s on the job, with
colleagues or in a formal training environment. It’s how we adapt to
a changing world and rise to the challenges of tomorrow.
Around 25,000 of our people use our interactive Academy website
every month and 7,000 of our EE employees used the EE Digital
Academy this year. It’s a great way to build online learning communities
where learning materials and events can be easily shared.
Leadership
We’re still investing in our leadership capability, developing effective
leaders at all levels and in all parts of our business. Our main
leadership programmes, Challenging Leadership in Action and
Pioneers have reached 1,400 leaders globally over 2016/17.
As well as welcoming EE to the BT family and introducing our
new values, we’ve created two new leadership development
programmes: Future Leaders and Connected Leaders.
FUTURE LEADERS
Develops high-potential people,
enabling them to become leaders
for the first time.
CONNECTED LEADERS
Launching in 2017/18,
Connected Leaders emphasises
the importance of connection with
our customers, our people and
different parts of our organisation
as the key to creating a truly
aligned BT.
Engaging our people
During the year we revised our employee survey and approach;
the result (called Your Say) is shorter and features questions clearly
linked to our strategy and values. We’ve made our report simpler for
managers and their teams to understand so they can take action on
the key priorities that will improve levels of engagement and better
serve our customers.
– The first full Your Say survey using the revised format attracted
over 85,000 responses, representing around 80% of our
people.
– Almost 93,400 people (86%) responded to the January 2017
Your Say survey.
– The result has generated momentum in every engagement
driver category, with 18 of the 20 driver items starting to
move in the right direction; the following table provides a
snapshot of this:
DRIVER
Engagement outcome
Leading our people
Managing our people
Empowering and
equipping our people
Enabling outstanding
customer experience
Working together
Personal growth
SCORE
71%
53%
78%
58%
59%
60%
69%
PERCENTAGE
CHANGE SINCE
PREVIOUS
SURVEY
-1%
-1%
+3%
+3%
+3%
+4%
+3%
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.
EE was voted in the Top 3 in The Sunday Times’ Top 30 Best
Big Companies to Work For awards 2017
Awards won this year
Our Academy won a Silver Award at this year’s
Learning Awards for its social and collaborative
learning.
EE won a Princess Royal Training Award in
2016, training 358 employees over eight
days following our takeover of 58 stores.
EE’s Priority Launch programme which is
dedicated to improving employee performance
won another Princess Royal Training Award
in 2016.
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We’ve run recruitment campaigns for graduates and apprentices
that aim to attract more women and black and minority ethnic
background (BAME) candidates. We’ve also rolled out unconscious
bias training for all those involved in recruitment.
We’re proud that BT was named in The Times’ Top 50 Employers for
Women awards 2017. Over 27,000 women now work for us, that’s
25% of our entire workforce. Our management team includes more
than 10,000 women, representing 26% of the total, while our
Board is now 27% female, with women accounting for three out
of 11 Board members.
We want to create an environment where our people can feel
open about being themselves at work. As part of this, our LGBT+
employee network is asking people across the business to stand by
LGBT+ colleagues to create a respectful and supportive working
environment. The LGBT+ Allies programme calls on them to be
visible and vocal in their support, and take an active interest in
LGBT+ topics.
We’re a founder member of the Equality & Human Rights
Commission Working Forward initiative, and our maternity handbook
is being widely used as an example of best practice. Our maternity
return rate continues to improve and currently stands well above the
industry average at 88%, measured one year after women returned.
Along with Business in the Community, we sponsored The Race
at Work reporta that informs the development of our diversity
initiatives. We’ve also appointed a Race Champion to oversee this
work and have seen a rise in BAME employees to 12%.
We are a ‘Disability Confident’b 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.
An inclusive culture is fundamental to ensuring our diverse
workforce can develop and thrive. We’ve focused on embedding
themes of inclusivity within all our leadership development
programmes for senior management teams, with a specific focus
on developing diverse future talent.
Promoting wellbeing
We recognise that the wellbeing of our people feeds directly into
our customers’ experience of BT and helps ensure the ongoing
profitability of our business. We’ve looked at what we can do to
increase wellbeing through our refreshed people strategy, drawing
on the latest scientific evidence.
We’re working hard to eliminate all avoidable health and safety
incidents by investing in improved training and equipment. A safe
work environment is fundamental to our success, and we’re pleased
to say we’ve cut our accident rate even further this year by 18%.
Our sickness absence rate was rising but we’ve turned that around
this year and it’s now dropped by 6%. We’ve made particular
progress in reducing mental ill health, which is down by 13%
(excluding EE). Our other main sickness area is musculoskeletal
disorders; in response we’ve developed a major initiative to help
people avoid strains that’s part of our wider Fit for Life campaign.
We’re pleased to say that in January we hit our five-year target of
getting 10,000 people more active three years early.
a http://race.bitc.org.uk/all-resources/research-articles/race-work-report
Challenge
Cup
Challenge Cup is our flagship people
engagement programme. It’s an annual
competition that encourages people to
work as a team to develop new ideas
that improve customer experience,
save money and create innovation. Our
people genuinely love it. The number of
people taking part increases every year –
this year more than 5,500 people came
together to form over 1,100 teams
across 28 countries, including people
entering the competition for
the first time.
>5,500
participants this year
Volunteering
Our people can use up to three working days a year for volunteering
activities. Some choose to help charities with particular challenges
that need their expert input and knowledge. Others use their
energy and enthusiasm to make a practical difference in their
local communities.
This year more than 31% of our people spent over 39,000 days
volunteering their time, with more than 2,000 people helping
children and young adults improve their skills through our Tech
Literacy and Work Ready programmes (see page 35).
Our 2020 ambition
Inspire two-thirds (66%)
of our people to volunteer
their time and skills
66%
11,000 £5.1m
volunteers took part in our
Stand Up To Cancer and
Comic Relief campaigns
helping to raise £1.3m
and £3.8m respectively
Diversity at work
Diversifying the mix of our people continues to be a priority within
our people strategy. We’re particularly keen to encourage women
into technology careers through our Tech Women programme.
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b Disability Confident is an accreditation which includes Two Ticks that is given to organisations that are committed to employing disabled people.
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Resources, relationships and sustainability continued
We’ve extended our programmes to EE which has already helped
bring sickness absence down across the group. We’re always looking
for ways to improve, and have introduced prehabilitation - designed
to shorten recovery time for our people undergoing surgery. In short,
we know that keeping our people healthy and happy is good for
them, good for business and good for society.
Our networks and physical assets
Our network, service and IT platforms support
the products our customers rely on around
the world.
Pay and benefits
We regularly review our pay and benefits to make sure our
remuneration is competitive when compared to other companies
of a similar size and complexity.
Most of our UK-based engineering and support people are paid
using terms and conditions negotiated through collective bargaining
with our recognised trade unions, ensuring fairness for all. Our
managers’ pay ranges are also set at competitive levels. Bonuses are
determined through a combination of business performance and
their personal contribution to the company.
Our executives may also get long-term share awards to reward
the creation of shareholder value. The value they ultimately get 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 regulatory obligations, incentives for people in Openreach
are tied to a combination of personal contribution and Openreach’s
performance, rather than that of the wider group. These incentives
are paid in cash, as opposed to BT shares.
We support our people by providing a range of retirement savings
plans and country-specific benefits. In the UK, our main defined
benefit scheme is the BT Pension Scheme, while our main defined
contribution scheme is the BT Retirement Saving Scheme. You can
read more about these on page 101.
Sharing in success
Around 52% of our people take part in one or more of our savings-
related share option plans (known as saveshare), which operate in
over 25 countries. In August 2016 almost 9,000 people in our
2011 saveshare plan were able to buy shares at 156p, representing
an average gain of around £5,000 each.
Network platforms
Our UK fixed-line network is one of our most valuable assets and
our investment in fibre broadband is key to providing services to UK
consumers. Our fibre broadband network now passes more than
26.5m UK premises, and we provide FTTP to more customers than
any other UK service provider. To meet the demand from businesses,
we’re continuing to expand the availability of Ethernet.
This year we’ve had record levels of traffic across our UK network, yet
the investments we’ve made in broadband technology mean that
more customers continue to get faster speeds over our network.
Our global reach
Our global network is supported by in-country networks and
infrastructure. We offer our widest range of network services, access
technologies and coverage in the UK, with extensive networks in
Germany, Italy, the Netherlands, the Republic of Ireland and Spain.
The scale and reach of our global multi-protocol label switching
(MPLS) network is a key competitive differentiator, and we’ve
enhanced it this year with the launch of a software-defined wide
area network capability.
We’re selectively expanding the reach of our network to support
multinational companies in other regions. Virtual private network
(VPN) services are integral to our ‘Cloud of Clouds’ vision (see page
71). They 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 lease connections from telecoms operators in that
country. Where we need to serve customers in very remote locations,
we make use of our extensive satellite connections.
Security is an important part of our business. The expertise we’ve
gained from protecting our own networks helps us secure our
customers’ networks.
The EE network
is the UK’s largest
4G network, now
covering 80% of the
UK’s geography and
reaching over 99%
of the population
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Mobile network
We’ll keep investing in 4G geographic coverage and capability,
consolidating the EE network’s position as the biggest and fastest
in the UK. Specifically we aim to expand 4G to reach 95% of the
UK’s geography by the end of 2020. EE customers already enjoy the
fastest 4G speeds in the UK, while technology such as LTE Advanced
Pro gives them much greater capacity.
We have 120MHz of paired mobile spectrum. This means we’re able
to offer speeds of up to 360Mbps 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.
–
IT systems platforms
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.
We’ve been simplifying the different technologies we use across BT.
For example we’ve been migrating EE people to BT systems so we
can all benefit from using a single, consistent set of applications.
Progress this year
This year we’ve:
–
introduced systems and processes that mean we can sell BT
products to EE customers; and
delivered the technology behind the new BT Call Protect Service
(page 57).
And we’ve improved the way we maintain and manage key
mobile sites. By insourcing work and integrating the EE and BT
engineering workforce we’ve achieved real service and productivity
improvements.
Wi-fi
We run one of the world’s biggest wi-fi networks, with around 5.6m
BT Wi-fi hotspots.
Progress this year
This year we’ve:
–
upgraded almost 500 mobile basestations to offer up to
360Mbps. We’ve also switched on our first Gigabit-enabled
basestations in London, with Cardiff following in April 2017;
addressed the growing demand for digital transformation through
the introduction of a cloud-based unified communications service
for business customers offering voice, messaging, conferencing
and presence;
demonstrated a world-record speed of 2Tbps over a 700km
live network fibre between London and Dublin. This gives us
confidence that our core network will be able to cope with the
growth of data traffic; and
demonstrated the first live customer trial in Europe delivering
increased capacity by using three different passive optical network
technologies over the same fibre.
–
–
–
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.
Our BT TV platform supports a growing number of customers and
we’re increasing the range of services it delivers. We support BT
Mobile, Plusnet Mobile and EE with our Mobile platform; it also
underpins the Emergency Services Network (ESN).
Progress this year
This year we’ve:
–
extended our BT Sport app to provide extra features during
Premier League and FA Cup matches;
added Dolby Atmos surround sound to Ultra HD football matches;
and
carried over one billion minutes per month on our BT
Conferencing service platform.
–
–
Properties
We have around 7,000 properties in the UK
and 1,700 across the rest of the world.
We lease the majority of our UK properties from Telereal Trillium,
part of the William Pears group, as part of a sale and leaseback
arrangement we signed 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 busy rationalising office space, vacating offices
in Belfast, Darlington, Langley, Leeds, Newcastle-under-Lyme and
the former EE headquarters building in Paddington.
Outside the UK, we’ve consolidated a number of our key office
locations in Amsterdam, Hong Kong, Madrid and Sydney to improve
operational efficiency.
BT property portfolio (UK)a
6,126 operational sites
21
data centres
268 offices and depots
574 retail outlets
a
Excludes leased cell sites, retail concessions within other retailers’ premises and
franchisee-owned leases.
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Resources, relationships and sustainability continued
Research and development
Commercial success increasingly depends on
innovation – that’s why we invest so much in
research and development (R&D). The result
is a track record of scientific breakthroughs,
engineering successes and commercial progress.
Our proud history of innovation
We can trace our origins back to 1837, when Sir William Fothergill
Cooke and Sir Charles Wheatstone filed a patent for the world’s first
practical electric telegraph. From this they founded The Electric
Telegraph Company, the seed business that eventually grew into BT.
And we’ve kept innovating ever since – you can read more about our
innovation story here:
www.btplc.com/Innovation/Innovationstory/index.htm
You can also see some of our past innovations in the Science
Museum, including Cooke and Wheatstone’s electric telegraph and
parts from Colossus, the world’s first programmable computer.
This year we invested around £520m (2015/16: around £470m)
in R&D. Over the last ten years we’ve been one of the largest
investors in R&D both in the UK, and globally in the telecoms sectora.
Our research activities keep producing new inventions. In 2016/17
we filed patent applications for 102 inventions (2015/16: 97),
and as of 31 March 2017 had a worldwide portfolio of more than
4,900 patents and applications.
Open innovation
No-one has a monopoly on good ideas. That’s why we’re always keen
to work with partners, universities and customers from around the
world. We call it our open innovation model.
We have eight global development centres including Adastral Park,
our UK technology headquarters. It’s an innovation campus we share
with over 90 high-tech companies, and is a workplace for around
3,800 people. This year we continued to grow our development
centres in India.
We’ve 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.
102
4,900
patent applications for
inventions filed in 2016/17
patents and applications in
our worldwide portfolio
Innovation milestones
1926
1943
1968
We established the world’s
first two-way, Trans-Atlantic
conversation by radio
telephone, from our wireless
station near Rugby.
Tommy Flowers, working in
the telecoms division of the
GPO, developed the world’s
first programmable electronic
computer, Colossus.
The world’s first digital
telephone exchange was
installed by us in London.
1984
1980
We installed the world’s first
140Mbps commercial single-
mode optical fibre link between
Luton and Milton Keynes.
We laid the world’s first,
purpose-designed optical fibre
submarine cable in Loch Fyne.
1999
2013
2016
Our live data call over a GPRS
network was a world first.
We conducted the world’s first
G.fast trial in Ipswich, with our
partner Huawei. G.fast is one of
the technologies that underpins
our ultrafast broadband vision.
Our super-channel speed of
5.6Tbps in our core network
set the record for the fastest
data transmission over an
operational fibre link.
a Comparison based on total R&D spend 2006/07 to 2015/16.
Source: EU Industrial R&D Investment Scoreboard, http://iri.jrc.ec.europa.eu/scoreboard.html
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Tommy Flowers Institute
This year we launched the Tommy Flowers Institute, a new Higher
Education ICT training institute at Adastral Park.
Working with partners from across the ICT sector, we’ve designed the
Institute to create world-class research leaders who can collaborate
across multiple academic disciplines. They’ll focus on solving some of
the challenges facing UK businesses, exploring areas such as cyber-
security, ‘Big Data’, autonomics and converged networks.
Examples of our R&D activities this year include:
Long-reach VDSL trial
Building on last year’s lab tests, we’re trialling long-reach VDSL in
Isfield, Sussex and on the Isle of Lewis.
EAD Rapid
Ethernet Access Direct (EAD) is Openreach’s Ethernet product, offering
data rates from 100Mbps to 10Gbps on a single fibre (see page 86).
We’ve developed EAD Rapid, a method to quickly provision a second
EAD circuit where one already exists using the same fibre. This means
that customers don’t have to wait for a second fibre to be installed
before their new service will work.
Exchange
Filter
Customer
premises
Filter
Installed
fibre
Standard
circuit
EAD Rapid
circuit
Self-organising networks interworking
Self-organising network (SON) technology automates the
planning, set up, management and repair of mobile networks.
We’ve established a test lab at Adastral Park to test SON equipment.
This led to a world-first demonstration of SON interoperation
between different vendors’ 4G products.
Tommy Flowers was an engineer who
joined the General Post Office research
station at Dollis Hill in London in 1930.
He had a particular interest in the use
of electronics for telephone exchanges.
In November 1943 Flowers developed
‘Colossus’ at the Ministry of Defence’s
code-breaking facility in Bletchley
Park. The world’s first programmable
computer, Colossus was designed to
counter the reputedly unbreakable
Lorenz cipher. The thermionic
valve-based, programmable Colossus
successfully broke the Lorenz cipher
and went on to provide information
critical to the success of the D-Day
landings and Allied war effort.
After the war, Flowers went on to direct
ground-breaking research in the field
of telecommunications, including the
development of the first all-electronic
telephone exchange.
Macrocells
Macrocells
Who was
Tommy
Flowers?
5G
We’re working
with a range of
partners to deliver
our 5G service
ambitions,
conducting trials
of 5G-ready radio
equipment
at BT labs.
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Small cells
Interference coordination
Interference coordination
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Resources, relationships and sustainability continued
Brand and reputation
Our organisation is made up of three strong
brands: BT, EE and Plusnet. Between them,
they cover UK and global markets for consumers,
businesses and the public sector. We’ve worked
hard to position all three so they maximise
their reach while minimising overlap with
each other. This multi-brand approach gives
us greater agility in the market and increases
our overall consideration.
Stakeholders
As well as our own people, BT’s main stakeholders
are our customers, communities, shareholders,
lenders, pension schemes, suppliers, government
and regulatory authorities.
Our customers
Our customers include individuals, households, businesses of all sizes
and public sector organisations.
You can read about our markets, customers and the services we offer
them in our Lines of Business section, from page 56.
BT
BT is the biggest of our three brands in terms of
overall brand value. It stretches across consumer,
business and public sector markets and operates in
180 countries.
This year, BT Sport continued to grow its viewership
and win awards. These included the best TV or
media innovation award for the BT Sport app at the
Broadband World Forum.
In the UK business market, BT has the highest
awareness of any telecoms, networks and IT services
brand. We kept up the pace with strong business
wins such as network and ICT services for Royal
Mail Group and network infrastructure for the Co-
operative Group. BT was also positioned by Gartner,
Inc, as a Leader in the Magic Quadrant for Network
Services, Global for the 13th consecutive time (see
page 72).
Research company Millward Brown valued the BT
brand at $18.6 billion in 2016. It’s possible that the
impact of our Italian investigation may cause this to
decline when the 2017 valuation is published. We
describe what we’re doing to redress this on page 6.
EE
EE is the UK’s biggest mobile operator, positioned
firmly at the cutting edge of technology. EE is also
number one for spontaneous brand awareness,
despite being almost a decade younger than any
other major UK mobile brand.
Plusnet
Plusnet has a distinctive market position, offering
UK consumers brilliant service at a great price.
This year, Plusnet won 21 awards, including the
uSwitch awards for Best Customer Service and
Best Home Broadband, and a Silver at the IPA
Effectiveness Awards for effective advertising
and brand-building.
Interestingly, some of our customers are also our competitors.
That’s because we sell wholesale products and services to other
communications providers in the UK and overseas.
Communities and society
Our purpose influences our decisions and actions. This year we
invested £35.6m to help a number of initiatives that deliver social
and environmental benefits, as well as stimulating economic growth.
This investment is a mixture of cash, time volunteered, and in-kind
contributions. Over the past five years we’ve invested over £157m,
an average of 1.08% of our adjusted profit before tax.
Total investment in society
Year ended 31 March
£m
1.12%
1.01%
1.15%
1.10%
1.03%
.
1
7
2
.
2
7
2
.
5
2
3
.
0
5
3
.
6
5
3
40
30
20
10
0
2013
2014
2015
2016
2017
Percentage of previous year’s adjusted profit before taxation
Investment – time, cash and in-kind support
Connecting society
Our 2020 ambitions
More than 9 out of 10 people
in the UK will have access
to our fibre-based products
and services
We will help 10m people
overcome social disadvantage,
through the benefits our
products and services can bring
9/10
10m
5m
Working together
We’re working on synergies and opportunities for our three big brands to
support each other wherever possible. You can read more about this in
the Consumer and EE sections on pages 56 and 62.
We will help 5m children
receive better teaching in
computing and tech skills
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in India that’s reached over 700,000 people. We’ve also delivered
wi-fi connectivity and services to refugee centres in Serbia, reaching
317,000 people.
Building a culture of tech literacy for the next generation
Today the UK faces a major challenge. The next generation are great
tech consumers, but few are active creators. In a world where so
much of our life and work depends on technology, that may be the
difference between getting ahead or being left behind. The answer is
to build a culture of tech literacy, so that young people grow up with
the tech know-how to step up to the jobs of the future and to shape
a more inclusive society that works for them. We’re helping to do
that by championing tech literacy as a new cornerstone of modern
education in primary schools, and by connecting to popular culture
to inspire young people about the relevance of tech.
We believe that tech literacy is a fundamental skill for young minds, as
important as reading and writing. That’s why the Barefoot Computing
Project helps primary school teachers get confident with tech literacy
concepts such as computational thinking which provides the building
blocks of the digital world; like logic, sequencing, abstraction and
programming. We’ve been providing a combination of free teaching
materials and volunteer-led, face-to-face training. We’ve now reached
more than 39,000 teachers, and through them more than a million
children. And we know it’s having a positive impact:
Teachers are more confident after using Barefoot resources:
%
4
8
%
7
5
%
2
8
%
7
6
%
2
9
%
1
8
%
100
80
60
40
20
0
Confident
with computing
curriculum
Understand
computational
thinking
Use computational
thinking in
computing lessons
All teachers
Teachers who accessed Barefoot resources
Teachers who use computational thinking in lessons see positive
impacts on pupils’ learning:
99%
say it helps pupils
solve problems
96%
say it improves pupils’
numeracy skills
82%
say it helps pupils work together
more collaboratively
69%
say it improves pupils’
literacy skills
Providing access to fast broadband
We recognise how important it is for everyone to have access to fast
broadband. We continue to progress towards our 2020 ambition,
with 88% of UK premises now able to access our fibre-based
products and services. The acquisition of EE gives us the opportunity
to extend our reach even further through mobile broadband.
Promoting digital inclusion
Digital transformation has the power to improve our quality of life,
boost the economy and protect the environment. Research we
published last year suggests that access to e-health applications
could provide better healthcare for nearly 20m more people in the
UK by 2030a.
It’s always been our aim to make sure no-one is left out,
especially vulnerable groups like the elderly, disabled or financially
disadvantaged. We continue to develop products and services
to help people overcome barriers to inclusion, such as BT Basic +
Broadband, 4GEE WiFi, and our social housing proposition.
We also create awareness and collaboration through our presence on
the UK Government’s Council for Digital Inclusion. Our partnership
with Doteveryone is offering skills training to homeless people in
the London Borough of Croydon. The ‘BT and Barclays Wi-Fi in our
community’ programme now supports 100 libraries and community
centres across the UK. The Tech4Good awards that we co-founded
are now in their sixth year and still recognise organisations and
individuals who use technology to improve the lives of others.
Our EE stores run Techy Tea Parties to help boost people’s
confidence in going online. And because we want to make sure
children use the internet safely, we’re working with partners like
Internet Matters and Unicef UK through our programme The Right
Click: Internet Safety Matters.
Outside the UK, we’ve completed the implementation of the
healthcare management system within our Connecting Africa
programme, winning the ‘Changing Lives’ award at the Broadband
World Forum. Our insight is helping shape the World Economic
Forum’s Internet4All initiative in Sub-Saharan Africa. As a partner in
One Million Community Health Workers (1mCHW), we’re providing
mobile health tools in Ghana. And we’ve helped provide IT training
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a The role of ICT in Reducing Carbon Emissions in the UK, BT, 2016 – available at www.bt.com/deliveringourpurpose
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Resources, relationships and sustainability continued
We’re also focusing on the transition to work, so that the next
generation can fulfil future job needs. Work Ready gives 16-24
year olds, particularly from disadvantaged backgrounds, skills
development and hands-on work experience of what it takes to
thrive in a world of work powered by tech. So far more than 2,000
young people have taken part in this initiative.
Manchester
Community
Academy
Research shows that interest drops off
and career aspirations narrow in the
early years of secondary school. Using
the power of BT Sport, we delivered
a pilot projecta at the Manchester
Communication Academy to bring
alive the tech behind the things
young people love – using an Outside
Broadcast truck to lift the lid on how
much tech it takes to bring the best
sporting action to their screens. We’re
now working on plans for a national
rollout to help more young people think
again about how tech might show up in
their futures.
Supporting charities and communities
Our 2020 ambition
Use our skills and technology to
help generate more than £1bn
for good causes
£1bn
This year we helped generate £95m towards good causes, in support
of our £1bn target. £62.6m of this was raised via MyDonate, our
commission-free online fundraising and donations platform. That
means we’ve now helped to generate £422m for good causes since
we set ourselves this ambition in 2012.
As well as creating scaleable opportunities to put something back
into the community, this can also provide great content for our TV
channels and improve public perception of our company.
We again used MyDonate and our communications technology –
with help from our volunteers – to support various large telethons.
These included Stand Up To Cancer, Comic Relief and Children
in Need.
In the UK, we supported a number of smaller charities by providing
discounted calls and line rental charges to members of The Charities
Club, saving those charities almost £1.3m on their phone bills.
We see sport as a positive vehicle for change in young people’s lives.
This year we launched a new programme, in partnership with the
Premier League, to help disabled people become more active in the
sport of their choice, creating opportunities for them to develop the
skills and build the confidence needed to realise their potential.
Our shareholders
We have more than 790,000 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 also keep our shareholders informed.
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;
– site visits and ‘teach-ins’ on key topics; and
– meetings and conference calls with investors both in the UK and
around the world.
In 2016/17, we held 507 meetings or events with institutional
investors. This compares with 353 in 2015/16.
We were voted the best company for investor
relations in England for the third year running in
the Extel Survey 2016. We also maintained our
second place in the European telecoms sector of
the same survey.
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 our business and meeting
our liquidity needs. You can find out more about this on page 97.
Our pension schemes
We operate defined benefit and defined contribution pension
schemes. The largest by membership is the BT Pension Scheme
(BTPS) which has around 300,000 members. You can read more
about this on page 204.
a www.techliteracy.co.uk
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Our suppliers
Our suppliers provide the products and services that are so
important in executing our strategy. We source from across the
world and currently have suppliers in over 150 countries. We spent
around £14.1bn with our suppliers this year (2015/16: £10.2bn).
Around 65% of our spend is with our top 100 suppliers.
This year we consolidated the EE and BT supplier base. As part
of the EE integration, we’ve combined the best practices and
processes from both procurement teams to remove duplication
and support synergies.
Our approach to procurement
We have around 360 BT people in 27 countries working with
suppliers. As part of our cost transformation activities we aim to
make the most of our relationships with our largest suppliers,
demonstrating our commitment to them by establishing a specialist
in-life contract management team. In-life contract management of
our top 130 suppliers has helped us save around £10m.
Our Central Business Services Centre reviewed
around 80,000 purchase orders accounting
for £3.8bn of spend, helping us save more
than £15m.
We’ve worked with other companies through our membership of
an industry-recognised thought-leadership organisation. This gives
us the peer benchmarking support, market insight and innovative
techniques we need to optimise our procurement strategy.
Choosing our suppliers
We want to know who we’re doing business with and who’s acting on
our behalf. So we:
– choose suppliers using principles that make sure we 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, as well as working with them to improve these.
You can find out more at: www.selling2bt.bt.com
Ethical standards in our supply chain
We want our suppliers’ employees to experience working conditions
that are safe and fair. To help us assess the risks, we send an ethical
standards questionnaire to suppliers of higher and medium-risk
products and services. We follow up with suppliers identified as
high or medium risk, based on their responses. This year we met
our target of 100% follow-up within three months. We also visit
supplier sites to make sure they meet our standards. This year we
visited 63 sites (2015/16: 47 sites) around the world.
We published our first Modern Slavery Act Statement this year. We
conducted a detailed risk assessment of our categories of spend,
and as a result, engaged with more than 500 suppliers to improve
our understanding of forced labour and human trafficking in our
supply chains.
Number of on-site supplier assessments
7
4
7
4
3
6
70
60
50
40
30
20
10
0
2015
2016
2017
We continued our compliance with the Dodd-Frank Act and our
Security and Exchange Commission (SEC) obligations by asking
suppliers whether their products contained certain minerals that
may have been sourced from conflict areas. In June 2016 we filed
a report covering 2015 with the SEC, which described our conflict
minerals approach and reflected the responses we got from our
suppliers.
Paying our suppliers
This year the average time between invoice date and supplier
payment was 67 days globally (2015/16: 62 days) with 50 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 cuts
financing costs for participating suppliers, large or small, and is
particularly attractive for SMEs (who make up around 48% of our
supply base). We remain a signatory of the UK Prompt Payment
Code, and are supporting Government initiatives to encourage small
business growth.
Human rights
We’re committed to respecting human rights. We’re steered by the
UN Guiding Principles on Business and Human Rights (UN Guiding
Principles).
We believe our communications services have a positive impact on
society, empowering people to exercise their rights and freedoms.
At the same time we recognise that as a global company our work
could adversely impact human rights, either directly or through our
wider business relationships.
The importance of privacy and free expression
Privacy and free expression are still the rights most at risk from
communication services. The Investigatory Powers Act 2016 (IPA)
made significant changes to the investigatory powers regime in the
UK, in a way that could have a considerable impact on the privacy
of customer communications. We want our customers to know they
can trust us with their information, which is why we played a
central role in lobbying for changes to the IPA before it became
law. To enhance our own processes, we’ve created a formal board
committee (the Investigatory Powers Governance Committee),
chaired by Sir Michael Rake, to oversee the role we play in the use of
investigatory powers.
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What we’ve been doing
We’ve continued to champion free expression through our discussions
with the Government on the Digital Economy Act. We’ve also
reviewed our Acceptable Use Policya to make it easier for customers
to understand how they should use our online services to express
themselves.
The directives include rules covering:
– access and interconnection;
– universal service obligations; and
– 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.
We continue to review our processes, including our approach to
human rights in our global activities. We’ve launched our enhanced
human rights due diligence tool. And we’re leading the broadcast
element of an international initiative looking at the impact of large-
scale sporting events on human rightsb. We’ve also joined The Global
Network Initiative on privacy and free expression as an observer.
Our first Modern Slavery Act statementc describes our approach to
preventing modern slavery in our supply chain and our business. We
want to play our part in tackling this so we’re proud to be partnering
with the charity Unseen to set up and resource the Modern Slavery
Helpline and Resource Centred.
Our relationship with HM Government
We’re one of the largest suppliers of networked IT services to the UK
public sector. We work with almost 1,800 organisations across central,
local and devolved government, supporting some of the UK’s most
vital services including health and social care, police and defence.
One of our most important contributions is helping organisations
deliver better public services while keeping data secure.
For example:
– in Islington we’re linking up information systems to improve
health and social care for the borough’s residents in a way that
enables them to access their personal electronic health record.
– in Essex, thanks to new smartphones supplied by BT, police
are spending more time fighting crime and being visible in
their communities.
Another aspect of our relationship with government is that we can
be required by law to do certain things and provide certain services.
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 states 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 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.
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
transmission.
Companies with SMP typically have a market share of 40% or more
and could, without regulation, be able to do things such as increase
prices without losing business to competitors (as would happen in a
fully competitive market).
Review
of the
European
Common
Regulatory
Framework
In September 2016, the EC published
proposals for its review of 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. A directive embodying the new
code is expected to be adopted in mid-
2018, taking effect mid- to late-2019.
The UK’s
exit from
the EU
When the UK leaves the EU, depending
on the nature of any trade agreement
reached, the UK may no longer be
required to abide by the EU Regulatory
Framework and other relevant EU rules.
The existing regulations are widely
recognised as having helped make the
UK communications market one of the
most competitive in the world, providing
consumers with low prices and the best
coverage of superfast broadband in the
major EU countries. Therefore, while the
existing regulations could be fine-tuned
to suit specific UK market conditions, we
do not expect fundamental changes.
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 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.
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 issues
such as protecting consumers, access and interconnection, and
allocating and transferring phone numbers.
a www.productsandservices.bt.com/products/static/terms/
b www.ihrb.org/programmes/mega-sporting-events/white-paper-3.2-broadcasters
c www.btplc.com/Thegroup/Ourcompany/Ourvalues/ModernSlaveryAct/ModernSlaverystatement.pdf
d www.modernslaveryhelpline.org/
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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.
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 that role is taken by 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.
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). That’s why
Ofcom’s market reviews are so 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.
CPs affected by Ofcom decisions can appeal them through a number
of routes, including the Competition Appeal Tribunal (CAT) and 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 the UK telecoms industry
clarity and certainty about the way we provide wholesale regulated
products. This in turn supports effective and fair competition in related
retail markets. Ofcom has published a consultation proposing to
release BT from the Undertakings in light of the new Commitments
we made to Ofcom on 10 March 2017.
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 keep pressing incumbent operators around
the world, and their national regulatory authorities, for fairer,
cost-related wholesale access to their networks.
Ofcom’s Strategic
review of Digital
Communications
In March 2015 Ofcom announced it would
carry out a strategic review of the digital
communications industry, looking at ways
to improve investment, innovation and
competition across fixed-line, broadband
and mobile markets.
In February 2016 Ofcom published its initial
conclusions. These covered the wide range
of issues originally flagged by Ofcom, as well
as a conclusion that BT’s model of functional
separation should be strengthened to allow
Openreach to take its own decisions on budget,
investment and strategy, in consultation with
its communications provider customers. This
became the focus of the review, with the other
issues taken forward through separate Ofcom
initiatives.
In July 2016 Ofcom consulted on proposed
reforms of Openreach, including Openreach
becoming a distinct legal entity. Also in July
2016, we announced that we intended
to implement changes to address Ofcom’s
concerns, including:
–
a new Openreach board as a board
committee of BT plc, with a majority of
independent members including the
chairman;
greater delegation of strategic, operational
and budgetary responsibilities to
Openreach; and
an enhanced process for industry
consultation on large investment plans.
–
–
On 29 November 2016 Ofcom announced it
was planning to make a formal notification to the
European Commission in 2017 seeking approval
to mandate legal separation of Openreach,
stating that the changes we announced in July
would not fully address its concerns.
At the same time, we announced that as the
first step in the delivery of our changes, we had
appointed Mike McTighe as the first chairman
of the Openreach board. We said we were
also continuing to seek to reach a voluntary
agreement with Ofcom that would avoid the
lengthy and complex processes involved in a
notification to the Commission.
Following further discussions, BT and Ofcom
agreed a new settlement, announced on
10 March 2017. This agreement, based
on voluntary commitments by BT, will see
Openreach become a distinct, legally separate
company within the BT Group. We will consult
all Openreach employees on the transfer of
their employment to Openreach Limited once
all the necessary pensions’ protections and
arrangements have been put in place. Once the
agreement is implemented:
–
Openreach Limited will have its own
branding, which will not feature the BT logo.
The Openreach CEO will report to the
Openreach chairman with accountability
to the BT Group, as the CEO of a
wholly-owned subsidiary. This includes
accountability to the BT Group chief
executive with regards to certain legal and
fiduciary duties that are consistent with BT’s
responsibilities as a listed company.
–
The agreement is intended to be comprehensive
and enduring. It will provide BT and other
companies with greater regulatory clarity and
certainty which is vital for investment. This
will help the UK retain its position as a leading
digital economy, with the largest superfast
network among major European nations.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Resources, relationships and sustainability continued
speed GEA 40/10 service. Ofcom expects to publish its final decision
in early 2018 with new measures taking effect from 1 April 2018.
On 31 March 2017, Ofcom also published a consultation on a new
fair and reasonable charge for MPF rental at service level 1 for the
period 1 April 2017 to 31 March 2018.
Wholesale broadband access (WBA) market review
The current control set by Ofcom for the WBA market (ie IPStream)
expired on 31 March 2017. Ofcom is expected to undertake a
review of this market in calendar Q2 2017. Meanwhile we gave
Ofcom a commitment to maintain a cap on the relevant price
baskets of CPI-CPI until 31 December 2017, or the conclusion
of Ofcom’s review if earlier.
Narrowband market review
Ofcom is currently reviewing the narrowband market that covers
fixed call origination, call termination and WLR, and published a
consultation in December 2016. This review was delayed and had
not been completed by the time the existing charge control was
due to end. We gave Ofcom a commitment to maintain a cap on
the relevant price baskets of CPI-CPI until 31 December 2017,
or the conclusion of Ofcom’s review if earlier.
Mobile regulation
The current charge control on mobile call termination applies until
31 March 2018 and Ofcom intends to review the market again in
the coming year and will set new regulation, if required. We are also
subject to regulation when our customers travel within the European
Union, for the retail prices we charge our customers and the
wholesale prices between operators. The EU regulations cover voice,
text and data prices, with a cut to the retail price caps on 30 April
2016. From 15 June 2017, under EU regulations, customers will
be able to ‘Roam like home’ within the EU, paying domestic prices
when travelling with no extra fees. At the wholesale level, price caps
will remain in place, on an agreed glide path, reducing to 1 January
2022.
Standalone landline telephone services
On 1 December 2016 Ofcom announced a review of the retail
market for consumers who buy telephone services in a standalone
contract and not part of a bundle with other services such as
broadband or pay-TV. This affects around 2.9m UK households.
Ofcom has provisionally concluded that this is a separate retail
market in which BT has SMP. Ofcom has consulted on a number of
possible remedies including requiring us to cut the line rental charge
by between £5 and £7 per month for customers taking these
services in a standalone contract.
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’ve been
found to have SMP.
Product
Fixed call originationa
Fixed call terminationa
Mobile call termination
Wholesale Line Rentala (WLR)
Annual charge
control
Current charge control
ends
RPI–3.6%
30 September 2016
RPI–3.1%
30 September 2016
CPI–3.1%
CPI–3.0%
31 March 2018
31 March 2017
IPStreama rental in Market Ab only
CPI–10.7%
31 March 2017
Metallic Path Facility rentala (MPF)
CPI+0.3%
31 March 2017
Shared Metallic Path Facility rentala
(SMPF)
Ethernetc
CPI–33.4%
31 March 2017
CPI–13.5%
31 March 2019
Partial Private Circuits (PPCs)d
CPI–3.5%
31 March 2019
a See WLA, WBA and Narrowband market reviews in the next section ‘Other regulatory decisions
and activities’.
b 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.
c Outside central London and ≤1Gbps.
d <8Mbps.
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. This broadly confirmed Ofcom’s proposals set out
in its Draft Statement published in March, including:
– the charge controls that apply from 1 May 2016 until
31 March 2019;
– the introduction of minimum service levels for Openreach relating
to the installation and repair of Ethernet services; and
– a requirement for Openreach to provide access to its fibre network
for providers of high-speed services to businesses (known as ‘dark
fibre’) from 1 October 2017.
We disagree with some aspects of Ofcom’s BCMR statement,
including Ofcom’s proposals on Dark Fibre and have appealed these
points to the Competition Appeal Tribunal (CAT). We expect Ofcom’s
Cost Attribution Review assessment to also have an effect on other
future price controls.
Wholesale local access market review
The current charge control set by Ofcom for the WLA market
(ie MPF and SMPF) expired on 31 March 2017. Ofcom is currently
undertaking a review of this market, but was not able to complete it
by that date. As a result, we gave Ofcom a commitment to maintain
a cap on the relevant price baskets of CPI-CPI until 31 December
2017, or the conclusion of Ofcom’s review if earlier. Generic
Ethernet Access (GEA) rental has not previously been subject to
price regulation but Ofcom’s consultation proposals, published on
31 March 2017, include introducing price regulation on the lower
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Margin squeeze test
In May 2015 we made an appeal to the CAT on Ofcom’s decision
to introduce the VULA margin squeeze test. In March 2016 the
CAT found that Ofcom was entitled to impose a regulatory margin
squeeze test. In June 2016 the CMA published its determination
on the remaining pricing grounds. It agreed with us that Ofcom
had made an error in setting the relevant compliance period and
determined that this should be extended to six months from the
current one month. It dismissed our other grounds. On 25 July
2016 the CAT completed its appeals process by issuing directions
to Ofcom to amend the VULA margin squeeze test in line with the
CMA determination.
Broadband USO
The UK Government has continued with its plans for a broadband
Universal Service Obligation (USO) that includes a minimum line
speed. The Digital Economy Act – which includes the provisions for
the USO – gained Royal Assent on 27 April 2017. We’ve proposed
an alternative approach to achieving universal 10Mbps broadband
coverage and continue to discuss this with the UK Government.
Protecting the environment
We believe that the Information and
Communications Technology (ICT) industry plays
a vital and ever-growing role in tackling climate
changea. We continue to participate in UN
climate negotiations (eg COP22 in Marrakech),
sharing our research and highlighting that
investment in ICT can cut carbon emissions while
creating social and economic value.
Our #go100percent campaign aims to inspire people to act more
sustainably. In partnership with Sir Ben Ainslie and Land Rover BAR,
we encouraged spectators at the America’s Cup World Series sailing
event in Portsmouth to make pledges and to share their stories on
sustainable ways of living, working and playing.
Deemed Consent
On 26 March 2017 Ofcom published the findings of its investigation
into the historical use of Deemed Consent by Openreach.
Deemed Consent is an agreed process between Openreach and its
communications provider (CP) customers, which allows Openreach
to halt the installation and reschedule the delivery date for providing
dedicated business services (known as Ethernet) in a number of
specific circumstances which are beyond its control. Ofcom found
that Openreach had breached its contractual and regulatory
obligations by inadequately and retrospectively applying Deemed
Consent to reduce compensation payments to CPs between January
2013 and December 2014.
As a result of the findings, Openreach has agreed to compensate CPs
and Ofcom has imposed a fine of £42m, reflecting the seriousness
of the failings. This includes a 30% maximum discount for BT
admitting its liabilities and agreeing to compensate the affected
CPs in full. The precise amount of these compensation payments
will result from discussions with the affected parties and is currently
estimated at £300m. The fine and associated compensation
payments are treated as a specific item charge in this year’s income
statement, with the cash expected to be paid in 2017/18.
We take this matter very seriously and we’ve put in place additional
controls to safeguard against this happening again and to make sure
that we’re providing the highest standards in serving our customers.
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
3:1 ambition
2015/16
2016/17
Customer savings (Mt CO2e)
Our impact (Mt CO2e)
Ratio
7.6
4.8
1.6:1
10.0
5.5
1.8:1
Reducing our customers’ carbon footprint
Adding EE to our carbon footprint has impacted progress towards
our 2020 ambition (see below); nevertheless our underlying
performance is still strong. Revenue from products contributing to
carbon abatement totalled £5.3bn this year. This represents 22%
of our total revenue.
Reducing our own carbon footprint
We report all the greenhouse gas (GHG) emission sources required
under UK regulations. The following chart shows the increase
this year in our total operational worldwide CO2 equivalent
(CO2e) emissions due to the inclusion of EE.
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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, available at www.bt.com/deliveringourpurpose
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Resources, relationships and sustainability continued
Our worldwide energy usea
Year ended 31 March
6
1
6
2
,
6
2
5
2
,
GWh
2,700
2,600
2,500
2,400
2,300
)
8
5
3
=
E
E
(
0
3
6
2
,
2
1
4
2
,
8
3
3
2
,
2013
2014
2015
2016
2017
Key: Addition due to EE
Conserving natural resourcesa
Reducing water usage
Most of our direct water usage is for office and catering facilities, or
to cool equipment (for example, in telephone exchanges). We ask all
our suppliers what actions they’re taking to cut water usage, as one
of the improvement areas we look for through the Better Future
Supplier Forum. We continue to target and reduce leaks, using
half-hourly meter readings through our automatic monitoring and
reporting programme. This has reduced our water consumption by
more than 5% compared to last year but, including EE, our overall
consumption has risen by nearly 17% compared to last year.
Managing waste products
Supporting the principles of the circular economy, we work with
our suppliers to minimise the materials we use, and we reuse or
recycle equipment and materials wherever possible. We also offer
take-back schemes, both for consumer products like our BT Hub,
and for mobile handsets. We’ve achieved our UK target, to send zero
qualifying waste directly to landfill by year-end. We use specialist
contractors to manage hazardous waste responsibly, complying with
relevant regulations.
Last year we reported the early achievement of our science-based
climate stabilisation intensity (CSI) target: that by 2020 we’d cut our
operational worldwide carbon emissions per unit of value-added (our
contribution to GDP) by 80% compared to 1996/97. We’re currently
exploring a new target that includes EE.
On our second intensity measure, our scope 1 & 2 emissions this year
totalled 12.3 tonnes CO2e per £m revenue. This is a decrease of
1.5% from last year, and of 86% since our base year of 1996/97.
Our worldwide greenhouse gas emissionsa
Year ended 31 March
CO2e
Ktonnes
2,000
1,500
1,628
117
1,000
1,097
500
0
414
1997
(Base)
391
147
62
182
2014
387
148
65
174
2015
343
119
51
172
2016
428
132
121
175
2017
Scope 3: Other operational indirect emissions (eg air and rail travel)
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. Scope 2 data uses market-based calculation.
For full methodology, see www.bt.com/deliveringourpurpose
Reducing our energy use
We estimate that our energy savings programme has saved nearly
£25m on our overall energy bill this year, contributing a total of
£221m savings since 2009/10. This has helped us cut consumption
by 2.7% this year, but is offset by the addition of EE’s energy use:
overall, our consumption has risen by 12.5%. In Great Britain, we
spent around £341m on energy and fuel (2015/16: £307m).
We maintain our commitment to buy our electricity from 100%
renewable sources, in the UK and globally, where markets allow. This
year, our acquisition of EE has reduced the UK figure from 100%
to 84% and our worldwide figure from 95% to 82%. We’ve plans
in place to move over 98% of EE’s directly-billed electricity supply
onto renewables during 2017 and have increased our renewable
contracts outside of the UK.
a We restate previous years’ data when subsequent information is deemed to be materially significant, such as replacing previous estimates with measured figures.
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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.
Our 2020 ambitions
2015/16 performance
2016/17 performance
Status
Page
Target met
Target failed
Ongoing
Supporting
charities and
communities
Use our skills and technology to help generate more than
£1bn for good causes
£94m raised for
good causes
£95m raised for
good causes
Inspire 66% (two-thirds) of our people to volunteer
Creating a
connected
society
More than 9/10 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
Help 5m children to receive better teaching in computer skills
Creating a culture
of tech literacy
Delivering
environmental
benefits
Enable customers to reduce their carbon emissions by at least
three times the end-to-end carbon impact of our business
1.6:1 achieved
1.8:1 achieved
Cumulative total:
£327m since 2012
Cumulative total:
£422m since 2012
27% of BT people
volunteering
8.5 out of 10
UK premises passed
2.6m
people reached
344,000
children reached
31% of BT people
volunteering
8.8 out of 10
UK premises passed
3.9m
people reached
1.1m
children reached
36
29
34
34
35
41
Our foundation measures
2015/16 performance
2016/17 performance
Status
Page
Our investment
Investment to accelerate our purposeful business approach;
to be more than 1% of adjusted profit before tax (PBT)
1.10% of PBT invested
1.03% of PBT invested
Our customers
Our employees
Customer service: to consistently improve RFT across our
entire customer base
Employee engagement index: to maintain or improve our
relationship with our employees
3.0% reduction
6.4% improvement
3.81/5 achieved
71% favourablea
Sickness absence rate: to maintain or reduce % of
calendar days lost to sickness
2.33% calendar days
lost to sickness
2.32% calendar days
lost to sickness
Our suppliers
Ethical performance: to maintain or improve our
employees’ perception
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
4.31/5 achieved
76% favourablea
100% follow-up
within three months
100% follow-up
within three months
Our environmental
impact
CO2e emissions: a measure of our climate change impact.
We’ll reduce our worldwide CO2e emission intensity by 80%
by December 2020b
81% reduction in net
CO2e emission intensity
vs base levels (1996/97)
n/a (new target being
developed)
34
17
28
29
45
37
41
To find out more about our 2020 ambitions, our methodologies and how our
results are calculated, take a look at www.bt.com/deliveringourpurpose
a From our new employee survey (January 2017); not comparable with last year’s result.
b After achieving our 2020 target last year, we’re currently developing a new target to include EE.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Our approach to risk management
Like any business, we face a number
of risks and uncertainties. Some
come from outside our organisation,
others from within. Some we can’t
control, some we can. Many of our
risks are similar to those felt by similar
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 that are either
currently unknown, or currently seen as less important but with the
potential to become more so in the future.
Events outside BT present both risks and opportunities. We focus
our efforts on predicting and reducing risks while aiming to take
advantage of any opportunities that may emerge.
We’ve also seen more interaction between our risks. For example
increased costs of regulation, coupled with the risk of increased
pension deficit payments, could impact our ability to invest to improve
customer experience and drive revenue growth. We’ve also seen a
growing interplay between our regulation and political risks.
In the section below, we explain what we’re doing to prevent our main
risks from materialising, or to limit their impact if they’re unavoidable.
Our biggest risks and uncertainties should be considered alongside
the risk management process, the forward-looking statements in this
document and the associated cautionary statement (see page 260).
How we manage risk
To meet our objectives, build shareholder value and promote our
stakeholders’ interests, it’s essential we manage risk. To help us we’ve
developed a group-wide risk management process with four stages:
Identification
Monitoring
Business activities
Evaluation
Response
Changes over the year
In 2015/16 we improved the way we manage risk through our
response to the changes to the UK Corporate Governance Code,
trialling the use of risk modelling software, and providing risk
management training to colleagues. Specific improvements for
2016/17 included:
Investment cases
We’ve been helping our colleagues understand the risks linked to
their investment cases. In doing so, we’re helping our investment
committees make better decisions on where to invest and how we
can keep any risks linked to those investments to a minimum.
Root cause analysis
This year we’ve trialled a new way of learning from incidents and
‘near misses’. We believe it will help us learn some important risk
management lessons, which we can then use to stop other risks
materialising in the future.
Sharing good practice
In May we held a conference for everybody involved in the BT
risk management process, introduced by Gavin Patterson.
We’re now exploring other ways of sharing good practice
across our risk community.
Enterprise risk framework
Line of business and TSO
audit and risk committees
Line of business and
TSO leadership teams
Our lines of business and TSO follow
our process for managing risk as part
of our Enterprise Risk Management
framework. That means identifying
and responding to the key risks
affecting their business. They record
the risks for their leadership teams
to review. Audit & risk committees
in each line of business, TSO and
our group functions, make sure this
process is effective.
Group Risk Panel
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.
Operating Committee
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 and 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 TSO.
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Our principal risks
Compliance risks
Trend indicates our perception
of pre-mitigation risk
Increasing/worsening
Lessening/improving
At a similar level
Ethical culture and controls
Link to strategy
– Deliver great customer experience
– Transform our costs
1
2
Trend
Link to business model
– Financial capital
– Human capital
– Social capital
It’s crucial that we maintain high ethical standards. We don’t tolerate
fraud, bribery, any form of corruption or any illegal or unethical
activity.
We follow local and international law, including anti-corruption and
bribery laws. The UK Bribery Act and US Foreign Corrupt Practices
Act (FCPA) 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.
We also face the risks associated with inappropriate and unethical
behaviour in local and other markets by our people or associates,
such as suppliers or agents, which can be difficult to detect as well
as facing the risks that our controls are designed to prevent, detect
and correct such behaviour may be circumvented. Controls and
procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and there can
be no assurance that any design will succeed in achieving its stated
goals under all potential conditions, regardless of how remote.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore
even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation
and presentation. 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.
Impact
If our people, or associates like suppliers or agents, breach anti-
corruption, bribery, sanctions or other legislation there could
be significant penalties, criminal prosecution and damage to our
brand. This could have an 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, bribery,
violating sanctions regulations or other laws, that could lead to
reputational damage with investors, regulators and customers. If
fraud is committed, there is a risk of financial misstatement which
if undetected can have a material financial impact and potential
litigation and regulatory consequences.
Financial and other controls play an important part in our ability
to prevent and detect inappropriate and unethical behaviour. This
includes fraud, deliberate financial misstatement and improper
accounting practices, as well as breaches of anti-corruption, bribery,
or sanctions legislation. If the design, operation or the assurance
over these controls is ineffective or they are circumvented, there is
a greater risk that the impacts described above may materialise, as
they did this year with respect to our Italian business.
What’s changed over the last year?
During the year we identified inappropriate behaviour in our Italian
business. Our investigation identified collusion and override of
controls within our Italian business and that our monitoring controls
did not identify the circumvention and override, resulting in the
misstatement of results going undetected for a number of years. As
a result of our US listing we are required to make certain assessments
of our controls as of 31 March 2017 for the purposes of Sarbanes-
Oxley. Despite the remediation steps we took, the controls had not
operated for sufficient time to allow assurance testing to confirm
their effectiveness under Sarbanes-Oxley. We have therefore
concluded for these purposes that our controls were ineffective as
of 31 March 2017 due to a material control weakness with regard
to our Italian business.
For further details of what we found, how we’ve responded, and
what our ongoing plans are, see page 6.
Our acquisition of EE has grown our UK business, and we’ve made
EE a part of our ACB compliance programme and financial and
disclosure control environment. In terms of ACB enforcement
generally, we’ve seen the first significant cases stemming from the
UK Bribery Act, and in the US 27 companies paid about $2.5 billion
to resolve FCPA cases. 2016 was the biggest enforcement year in
FCPA history – both the number of enforcement actions and the
overall amounts paid to resolve them.
How we’re mitigating the risks
We’ve put a number of controls in place to address risk in this area.
These include the steps we have taken to improve our controls within
Italy. We have also taken steps to enhance our wider controls that
monitor our overseas operations in our shared service centres, Global
Services and at a group level. While we have taken steps to improve
our control environment, we recognise we have more to do. Further
activities will include increasing and improving the capabilities of
the controlling function and the audit function outside the UK,
and further developing our integrated risk and assurance reporting
processes. We are also enhancing our controls and compliance
programme to strengthen awareness of the standards we expect,
the capabilities of our people, and to reinforce the importance of
doing business in an ethical, disciplined and standardised way.
Our relevant controls include an anti-corruption and bribery
programme and ‘The Way We Work’, our ethical code, available in 14
languages. We ask all our people to complete training and sign up to
The Way We Work which includes our zero tolerance to bribery and
corruption. We have policies covering gifts, hospitality, charitable
donations and sponsorship. We run tailored 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. All ‘Speak Up’ reports are passed
to the director of ethics and compliance for action. Our confidential
hotline is operated by a third party and is available to employees
and third-party contractors who can remain anonymous if they
choose to. Any reports received direct by BT are also dealt with in
accordance with our Speak Up procedures.
Our internal audit team regularly runs checks on our business. External
providers also assess areas we think are higher risk (such as the use of
agents), to make sure people understand our policies and that controls
are working. We do due diligence checks on third parties like suppliers,
agents, resellers and distributors. Our policy is that procurement
contracts include anti-corruption and bribery clauses.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Our principal risks continued
Compliance risks continued
Our sanctions policy helps us keep track of trade sanctions and export
controls that apply to us. That means all bids involving a country with
sanctions imposed by the EU and/or the US need approval. The policy
also mandates everyone in BT must use our internal shipping system to
arrange international exports, as it runs compliance checks and flags
any orders which need an export licence.
BT Italy – our response
In response to the inappropriate behaviours we identified in
our Italian business, we suspended a number of BT Italy’s senior
management team who have now left the business. The president
of our European operations has also left the business. We have
appointed a new president of our European operations and a
new CEO and CFO of BT Italy, from outside the Italian executive
management team.
We appointed KPMG, with support and oversight from our Legal,
Governance and Compliance function and Freshfields Bruckhaus
Deringer, reporting directly to both the chair of the Audit & Risk
Committee and BT Group chairman, to perform an independent
investigation of the systems and controls relating to our Italian
business. We also conducted a broader review of financial processes,
systems and controls across the group. We are acting on both the
recommendations of KPMG and our own observations and have
taken steps to improve our controls within Italy. We have also taken
steps to enhance our wider controls that monitor our overseas
operations in our shared service centres, Global Services and at a
group level.
As a result of our US listing we are required to make certain
assessments of our controls as of 31 March 2017 for the purposes
of Sarbanes-Oxley. Despite the remediation steps we took, the
controls had not operated for sufficient time to allow assurance
testing to confirm their effectiveness under Sarbanes-Oxley. We
have therefore concluded for these purposes that our controls were
ineffective as of 31 March 2017 due to a material weakness with
regards to our Italian business.
Beyond Italy, we have completed detailed balance sheet reviews
in seven selected country operations in Global Services outside of
the UK. These thorough reviews were supported by EY, and did not
identify any similar issues or areas of concern elsewhere giving us
comfort that the inappropriate behaviours were isolated to Italy.
While we have taken steps to improve our control environment,
we recognise we have more to do. Further activities will include
increasing the resources and improving the capabilities of the
controlling function and the audit function outside the UK, and
further developing our integrated risk and assurance reporting
processes. We are also enhancing our controls and compliance
programme to strengthen awareness of the standards we expect,
the capabilities of our people, and to reinforce the importance of
doing business in an ethical, disciplined and standardised way.
The new CEO and CFO of BT Italy will continue to review the Italian
management and finance teams and work with BT Group Ethics and
Compliance to improve the governance, compliance and financial
safeguards. Going forward, we will also continue to rotate senior
management among countries to ensure an independently governed
and rigorously controlled organisation throughout all parts of Global
Services.
Processing our customers’ data
Link to strategy
– Deliver great customer experience
1
Trend
Link to business model
– Financial capital
– Social capital
We control and process huge quantities of customer data around
the world, so observing data privacy laws is something we take
extremely seriously. It’s essential that individuals and businesses
can trust us to do the right thing with their data.
Firstly, we must make sure our customers’ data is secure, and
protected against both internal and external threats (eg cyber attacks).
Being trusted with our customers’ data goes further than that though.
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.
Different parts of the world approach privacy and data protection
differently. An individual’s fundamental right to privacy is reflected
in the fact that 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 web of national
data laws and society’s ethical expectations.
Impact
Failing to stick to data protection and privacy laws could result in
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.
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 that 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 growth of data threats, with several big organisations
suffering incidents.
There’s been a general trend toward bigger financial penalties and
more frequent public shamings for organisations who break global
privacy and data protection laws.
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How we’re mitigating the risks
We’ve introduced governance to clarify responsibilities for data
activities across our 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, our 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 privacy
training focuses on the individual’s role, and uses relevant scenarios
to 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 BT Group.
Impact
Failure to implement and maintain effective health and safety
management could have a huge 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 result in our people and third parties making
compensation claims against us, and fines or other sanctions being
issued by regulators. 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.
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. If we do
that, there’s a much better chance of data compliance becoming
‘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.
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,
as well as new contracts requiring us 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 at
height.
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.
The integration of EE has introduced new elements such as high
street retail and an expansion of existing risks such as operating
customer contact centres.
Our mitigations against cyber attacks are described in our Security
and resilience risk (page 52).
Health and safety
Link to strategy
– Deliver great customer experience
– Transform our costs
1
2
Trend
Link to business model
– Financial capital
– Human capital
– Social capital
– Natural capital
Our business – and in particular our UK engineering workforce – does
a lot of work where our people could be injured or their health could
be damaged. It’s essential we do all we can to keep our people safe;
not only is it the law but it also means they’ll be better at their jobs.
Acquiring EE has also raised the exposure of our customers and
staff to radio frequency emissions from wireless mobile devices and
mobile telecoms sites. Media reports have suggested these emissions
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 Organization’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. Even so, we can’t provide absolute assurance that
research in the future won’t establish links between radio frequency
emissions and health risks.
We’re continuing to implement a strategy which embeds effective
management of health and safety into all our operations
and promotes health and wellbeing to help improve business
performance. Two prosecutions against us for past incidents
concluded in 2016 resulting in guilty verdicts and fines. Levels
of sickness absence rose in the first part of the year but this trend
reversed in the second half. Our workforce has also lost less time
from injuries as a result of accidents.
How we’re mitigating the risks
We’re implementing the next stage of a Board-endorsed health,
safety and wellbeing strategy. As part of this, each year every 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 our people undertake training in basic health and safety.
Wherever we do business around the world, we put in place
policies and programmes to make sure we adhere to our own
standards and that those standards meet or exceed minimum legal
requirements. We also work to make sure our products comply with
safety regulations, including meeting industry standards for radio
frequency emissions.
We provide advice 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.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Our principal risks continued
Strategic and financial risks
Growth in a competitive market
Link to strategy
– Invest for growth
3
Link to business model
– Financial capital
– Intellectual Capital
Trend
Our markets are characterised by:
– constant, rapid change;
– strong, 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
It’s important we grow our revenue profitably and sustainably to
protect our cash flow. Failure to do so could limit our ability to invest
in the business or pay dividends. It’s also important that we manage
our cost base to be able to invest in growth opportunities.
What’s changed over the last year?
We’ve been executing our strategy by:
–
–
extending our 4G and fibre broadband coverage;
making good progress on integrating EE and hitting our synergy
targets; and
investing to improve customer experience and the products
we offer.
–
Our leading competitors have also been very active. Important
developments included:
–
–
–
Virgin Media expanding its UK network;
Sky and Gamma launching new mobile services;
21st Century Fox’s bidding for the share in Sky it didn’t
already own;
Sky launching a Now-TV branded triple-play bundle without
a contract; and
TalkTalk’s continued success at growing its data revenues.
–
–
It also means transforming our costs. We take a forensic approach,
supported by a team of specialists, to identifying opportunities to
better manage our cost base and maximise our ability to invest in
customer experience and growth. However, these opportunities
are becoming more challenging to identify and deliver as our cost
transformation programme matures.
If we do all this, we’ll grow our revenue profitably and sustainably.
We’ve been investing in five key areas: providing differentiated
content, services and applications, making our UK network the best
in the country, becoming a fully converged service provider, securing
market leadership in all our UK segments and meeting the needs of
multinational customers. Our transformation programmes continue
to drive service and productivity improvement. We can also seek
changes in regulation to make things fairer.
Communications industry regulation
Link to strategy
– Deliver great customer experience
– Transform our costs
1
2
Trend
Link to business model
– Financial capital
– Manufactured capital
Regulation affects much of what we do.
In the UK, where Ofcom identifies concerns with the competitiveness
of markets, it can set regulatory rules that require us to provide
certain services on specified terms to our customers. The rules it
imposes are assessed every three years via a series of market reviews
focused on the supply of network access services to wholesale
customers (for example, the supply of fixed access lines to support
the provision of phone or broadband services, or the supply of
business connectivity services). Ofcom can extend or remove rules as
a result of its findings in a market review. Where controls are placed
on our prices, these can be tightened or relaxed following a review
of the expected costs of future supply. Ofcom will investigate our
compliance with any regulatory rules in place and can impose fines
and restitution on us if we don’t comply.
The level of competitive risk facing the business has worsened over
the last 12 months. Some of our leading telecoms competitors have
taken important steps to grow their revenues. In addition the threat
from new competitors, enabled by disruptive technologies, continues
to increase. Leading players, operating in adjacent markets, still view
telecoms services as an attractive growth opportunity. In particular
OTT providers, who already dominate messaging, are
now increasingly turning their attention to voice.
Ofcom also has powers to regulate the terms on which we get
supplied with certain services by others – for instance, mobile
call termination and wholesale access to certain pay-TV channels.
This can increase our costs and affect 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.
There are also economic risks that could threaten revenue growth:
Downside risks to the UK and global economy are bigger than
–
they were 12 months ago.
It’s unclear how much the UK economy will be impacted by the
vote to leave the European Union, nor is it clear what trade
arrangements will be agreed after the UK leaves.
–
How we’re mitigating the risks
We stick to our strategy, which means:
–
–
–
broadening and deepening our customer relationships;
providing a great customer experience; and
investing for growth.
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
Certain of our revenues come from supplying wholesale services
to markets where Ofcom has found us to have significant market
power. Most of these revenues relate to services where regulatory
rules require us to cut average prices each year by a specific, real-
term percentage for a three-year period.
Where other telecoms providers ask Ofcom to resolve disputes
with us, there’s a risk that Ofcom may set the prices at which we
supply services, and/or make us provide additional services. In some
circumstances, Ofcom can adjust past prices and make us pay back
amounts to wholesale customers.
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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.
What’s changed over the last year?
There’s been a lot of regulatory activity in different areas over the
last year. Ofcom has started market reviews in relation to wholesale
narrowband access, wholesale local access and wholesale broadband
access. We’ve summarised this in the Regulation section on page 38.
In March 2017 Ofcom found that Openreach had breached
its contractual and regulatory obligations by inadequately and
retrospectively applying Deemed Consent between January
2013 and December 2014; and that Openreach then failed to
compensate communications providers fully. As a result of the
findings, Ofcom imposed a fine on BT and Openreach agreed to
compensate communications providers outside of BT in full. See
page 41 for further information.
Alongside the standard cycle of market reviews, in March 2015
Ofcom announced an overarching strategic review of the digital
communications market. In March 2017 we reached agreement
with Ofcom on the legal separation of Openreach, subject to
consultation by Ofcom and changes to legislation to retain the
Crown Guarantee on Openreach employees. Under this arrangement
Openreach will have its own board and make its own investment
decisions, within an overall budget set by BT. Although we believe
that this is a good solution for BT and the UK communications
market, we will face the risks and challenges that come with
operating an independent business within BT.
How we’re mitigating the risks
Our team of regulatory specialists includes economists, accountants
and lawyers. Together with legal experts and external advisers
they check for potential disputes with other CPs and look for
opportunities to change regulatory rules. They talk regularly with
regulators and other key influencers to understand their outlook
and to make our position clear. Their insight also helps us to forecast
future regulatory outcomes. We can then build sensible expectations
into our financial plans and investment decisions.
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,
albeit the basis upon which these appeals are judged in the UK
has changed under the Digital Economy Act. We can also raise
disputes or complain (under the relevant regulatory framework
or competition law) where we have problems getting access to
wholesale services – such as wholesale pay-TV channels or to
other access networks.
We’re also working hard to deliver a great customer experience,
going beyond our minimum regulatory obligations.
Pensions
Link to strategy
– Transform our costs
2
Link to business model
– Financial capital
– Human capital
– Social capital
Trend
We have a large funding obligation to our defined benefit (‘DB’)
pension schemes. The largest of these, the BT Pension Scheme (BTPS
or Scheme), represents over 97% of our pension obligations. The
BTPS faces similar risks to other UK DB 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
The last funding valuation of the BTPS, as at 30 June 2014,
provides certainty over scheme funding until the forthcoming
valuation, due to start in June 2017, is concluded.
If there’s an increase in the pension deficit at the next valuation date,
we may have to increase deficit payments into the Scheme. Higher
deficit payments could mean less money available to invest, pay out
as dividends or repay debt as it matures, which could in turn affect
our share price and credit rating.
We’re considering a number of options for funding the deficit after
the next valuation, as at 30 June 2017. These options include
considering whether there are alternative approaches to only making
cash payments, including arrangements that would give the BTPS a
prior claim over certain BT assets.
What’s changed over the last year?
The pension deficit of the BTPS is calculated as the value of the
assets less the value of the liabilities. The deficit at the valuation date
will influence the deficit payments we agree.
A number of things affect the liabilities, including expected future
investment returns at the valuation date. When considering
expected future returns, we review different factors including yields
(or returns) on government bonds, which have fallen in the year and
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.
Asset returns have been positive over the year with strong returns
from equities and government bonds.
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 investment
strategy aims to mitigate the impact of increases in the liabilities,
for example by investing in assets that will increase in value if future
inflation expectations rise. The assets held are also 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 we calculate
liabilities on a prudent basis.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Our principal risks continued
Strategic and financial risks continued
Political risk
Link to strategy
– Deliver great customer experience
– Invest for growth
1
2
Trend
Link to business model
– Financial capital
– Human capital
– Social capital
Across our operations we are exposed to the effects of political and
geopolitical risks, in particular:
–
In the UK, internet access is increasingly seen as an essential
part of people’s lives. As a result, the level of political debate and
focus on issues such as quality and speed of service has increased.
As well as providing a critical element of the UK’s national
infrastructure, we are also engaged in supporting high profile
programmes such as BDUK and the Emergency Services Network.
The result of the UK referendum to leave the European Union
(‘Brexit’) has significantly increased political uncertainty. This has
been exacerbated by the possibility of further political change
across the United Kingdom, most notably a second referendum
that may be held on Scottish independence.
Outside the UK, political and geopolitical risk can impact our
business through changes in the regulatory and competitive
landscape, but also as a direct threat to our people and assets as
a result of social unrest or a break down in the rule of law.
–
–
Potential impact
Political uncertainty can have direct financial consequences across
the economy, impacting for example foreign exchange rates, the
availability and cost of capital, interest rates and also resulting in
changes in the tax regime. For BT specifically, the most significant
impact of political risk is its potential interaction with some of our
other Principal Risks. In the UK, we are seeing an increasing overlap
between political debate and the regulatory environment, with the
potential that our Communications Industry Regulation risk increases
as a result.
The impacts of Brexit are still uncertain while the UK’s future
relationship with the EU is determined. However, there is the
potential for our costs to increase (for example through any changes
required to our systems to reflect new taxes or customs duties);
regulatory risk to increase as a result of any future divergence with
the EU regime, including on data flows; supplier disruption to occur
as a result of challenges in suppliers’ own organisations and supply
chains; and for delivery of a great customer experience to become
more challenging if it becomes harder for us to recruit and retain
talent.
Geopolitical risk outside the UK can most clearly impact our
Communications Industry Regulation risk, but also our Security and
Resilience risks where it poses a threat to the continuity of our operations.
What’s changed over the last year?
The most significant development was the referendum on
23 June 2016 by which the UK voted to leave the EU. That was
immediately followed by political change, a fall in sterling, UK bond
credit rating downgrades and uncertainty for business and foreign
direct investment. On 29 March 2017, Article 50 was triggered
initiating a two-year period of negotiation for the UK to leave the
EU. In the same month, Scottish First Minister Nicola Sturgeon
confirmed she would seek the approval of the Scottish Parliament
to open discussions with the UK Government on legislating for a
second Scottish independence referendum. UK Prime Minister Theresa
May has said that permission would not be forthcoming during Brexit
negotiations, potentially opening the possibility of a referendum in
2019 or 2020. Further change may also now follow as a result of the
General Election called for 8 June 2017. From a telecoms perspective,
this has been played out against the backdrop of the progression of
the Digital Economy Act and in particular debate around Ofcom’s
Digital Communications Review (see page 39), and of dialogue on the
European Electronic Communications Code revisions.
How we’re mitigating the risks
We maintain strong engagement with the UK Government, key
departments such as DCMS and BDUK, MPs, peers, the media and
with consumer bodies; and with Governments and politicians in
Brussels and in our key markets around the world. We seek to inform
public debate around telecommunications through fact-based
evidence concerning the market and BT’s role within it.
As explained in the case study on page 51, we have set up a
programme across the business to help us understand and manage
the risks associated with Brexit. This will also consider other
potential impacts such as those associated with a second Scottish
Independence referendum, and is led by a steering group chaired
by the group finance director. We’ve also offered our views to
Government and business groups on related policy areas, including
responding to Parliamentary inquiries.
Outside the UK, our Public Affairs and regulatory teams work to
help support governments and regulators in ensuring that markets
work in an open and fair way for the benefit of customers and
competition. Geopolitical risks are tracked by a committee, with
our security and business continuity teams particularly focused on
protecting our people and our assets.
Financial risk
Link to strategy
– Transform our costs
– Invest for growth
1
2
Link to business model
– Financial capital
– Social capital
Trend
In common with other major international businesses, we are
exposed to a variety of financial risks. These include treasury risks,
which arise principally from market risk (including interest rate risk
and foreign exchange risk), credit risk, and liquidity risk. They also
include tax risk, principally that we need to understand fully the
current and future tax consequences of business decisions to comply
with tax rules and avoid financial and reputational damage.
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Potential impact
If there is an adverse movement in foreign exchange and interest
rates there could be a negative impact on the group’s profitability,
cash flow, and balance sheet. Sensitivity in the income statement
and shareholders’ equity arising from interest rate and foreign
exchange volatility is shown in note 27 to the Consolidated Financial
Statements.
The failure of Treasury counterparties to honour financial obligations
could have an adverse impact on the group’s liquidity (for example
from the loss of cash deposits) and profitability (for example from
increased finance expenses). A deterioration in liquidity could have
an adverse impact on the Board’s assessment of going concern,
particularly if combined with an inability to refinance maturing debt.
If we fail to comply with tax rules then we could face financial
penalties and reputational damage. Beyond compliance, if we
don’t adequately reflect the current and future tax consequences
in our business decisions, we might make bad decisions resulting
in financial loss and potentially financial misstatements, as well as
reputational damage.
What’s changed over the last year?
Following the UK referendum to leave the European Union, we saw
increased volatility in foreign exchange rates. However, we continue
to face the same treasury risks as in financial year 2015/16.
From a taxation perspective, BT’s business continues to evolve
rapidly, creating different tax consequences, for example the
acquisition of EE and the DCR. Global tax rules also continue to
evolve, for example the OECD’s Base Erosion and Profit Shifting
project and the prospect of US tax reform, changing the current and
future tax consequences of business decisions.
How we’re mitigating the risks
We have a centralised treasury function whose primary role is to
manage liquidity and funding requirements as well as our exposure
to associated financial and market risks, including credit risk, interest
rate risk and foreign exchange risk in-line with Board approved
policies. These risk management policies are described in detail in
note 27 to the Consolidated Financial Statements. The Board reviews
liquidity and funding requirements of the group on an ongoing basis.
A strong governance framework is also at the heart of our mitigation
approach to tax risk. We’ve a framework for managing taxes that is
set centrally and agreed by the Board. We employ specialist teams
to manage and assure the operation of this framework. We pay tax
in accordance with the laws of the countries where we do business.
However, in some areas these laws aren’t clear, and it can take many
years to agree an outcome with a tax authority or through litigation.
Nevertheless, we always seek to deal with tax authorities in an open
and constructive manner, engaging specialist external advice where
required.
Brexit
Once the Government decided to hold a
referendum on the UK’s membership of the
European Union, we realised this would create
potential uncertainty for BT. The risk of this
increased after Britain voted to leave the EU.
How we managed the risk
We decided early on that we needed to understand what risks
and opportunities Brexit might create for us, so ahead of the
vote we set up a programme bringing together functions
across the business.
The results of this work were reported to the Operating
Committee. We then ramped up the activity after the vote,
forming a steering group chaired by the group finance director.
This continues to meet on a regular basis, overseeing work that
is being done by our various sub-projects. These are looking
at areas such as the tax, people, procurement, systems and
commercial impacts of Brexit. We’ve also offered our views to
Government on related policy areas, including responding to
Parliamentary inquiries.
The result, and what we learnt
We had trialled similar approaches during previous events such
as the Eurozone crisis and the Scottish independence
referendum.
This experience helped us make sure that senior leaders across BT
understand how geopolitical events such as Brexit can impact us.
We’ve also been able to explain to Government what we believe
their priorities should be for our sector when negotiating with
the EU.
More broadly, we’ve recognised that we need to work together as
a business to manage such risks. And we also appreciate that our
customers can take confidence from us developing plans to get
through uncertain times.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Our principal risks continued
Operational risks
Security and resilience
Link to strategy
– Deliver great customer experience
1
Trend
Link to business model
– Financial capital
– Intellectual capital
– Manufactured capital
The security and continuity of our services are critical factors in
our commercial success. Our networks and systems are constantly
exposed to many different threats, and our customers expect the
highest standards of protection and recovery planning to minimise
any impact on our services.
Cyber-attacks on our own IT systems and those of our customers
are becoming more frequent and sophisticated, and we’re
investing heavily to keep pace with this growing threat to steal
data or equipment or damage our infrastructure. However, service
interruption can result from many other sources. These include
physical threats like fire, explosion, flooding, overheating, extreme
cold or power failure; logical threats such as equipment failure or
problems encountered with software upgrades or major changes;
or disruptions in our supply chain.
Potential impact
In the event that our protective measures fail to prevent or contain a
major security or continuity incident we might incur major financial
loss, long-term damage to reputation and loss of market share.
Regulatory sanctions, fines and contract penalties might be applied,
contracts might be terminated, and costly concessions might be
needed, together with unplanned and rapid improvements to retain
business and rebuild trust. We might also miss opportunities to grow
revenue and launch new services ahead of the competition.
What’s changed over the last year?
The acquisition of EE has substantially changed our security risk,
adding large volumes of bank account and credit card data which
are attractive to hackers. The rapidly escalating cyber threat is
recognised as a major risk faced by organisations across the world,
and we’re clearly seen as a legitimate target for cyber-incidents.
We’re also exposed to collateral damage from attacks on our
suppliers and customers by highly motivated and well-resourced
nation state actors and criminal gangs. We responded to several
potentially serious cyber-attacks during the year, and attempts to
compromise our systems using known hacking tools have repeatedly
failed. We’ve made real progress on improving risk controls, but
more needs to be done to make sure we can keep up with the
growing threat. The two major data breaches announced by Yahoo
in September and December 2016 both included BT mail account
records dating from 2013 and 2014. Some of these accounts
are still vulnerable because their owners have never changed their
passwords. The customers affected were quickly advised to reset
their passwords, and forced resetting of passwords will be applied
where necessary.
Following the impacts of the winter storms of 2016/17, and the
publication of the UK National Flood Resilience Review, it’s clear that
the risk of extreme weather events is increasing. In response, our
flood preparedness programme has seen major enhancements in
our defence and response capabilities.
How we’re mitigating the risks
We’re investing in improvements across the full range of technology,
processes and people for both security and continuity risks.
Our cyber defence programme is focused on segmenting our IT
estate to enhance access control and limit the spread of attacks.
We’ve improved our strategic defences against Denial of Service
(DoS) attacks in order to limit the disruption from high volumes
of malicious traffic and from slower, more sophisticated attacks
that mimic legitimate data flow. We’ve deployed more scanning,
monitoring and logging tools to identify intrusions and to detect
anomalous data traffic as early as possible. We’ve also invested in
the development of cyber security skills that are deployed around
the clock to apply threat intelligence to our defences and manage
live incidents.
We’ve completely revised the frequency and scope of our
vulnerability testing using a risk-based approach to setting priorities,
and we’ve increased resources for proactive penetration testing
and ethical hacking. We’re adopting a more rigorous approach to
auditing our suppliers’ security and are increasingly asking suppliers
to substantiate their responses with evidence of compliance with our
security policies and contract terms.
Our flood preparedness programme has seen us double the size of our
Emergency Response Team and their associated capabilities. We’ve
enhanced our extreme weather monitoring processes and our ability
to map warnings to specific assets. This, together with the production
of specific flood defence plans for our critical sites, allows us to
respond more rapidly and appropriately to fast-changing weather-
related risks. We’ve also enhanced our ability to provide emergency
communications support to local communities should these become
isolated following storm damage. We continue to invest in resilience
and recovery capabilities in response to a range of threats.
Major contracts
Link to strategy
– Deliver great customer experience
– Transform our costs
– Invest for growth
1
2
3
Trend
Link to business model
– Financial capital
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 achieving agreed milestones owing
to factors either in or out of our control; changes in customers’
needs, 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.
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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’s a
substantial performance risk in some of these highly-complex
contracts.
Potential impact
If we don’t manage to 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 fulfilling
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.
One of our largest and highest risk contracts is the delivery of a key
element of the UK Emergency Services Network (ESN) on our EE
mobile network. The complexities described above all apply to this
programme. So far delivery has gone well, but there are still plenty
of challenging parts of the programme to be delivered including
aspects of the contract that are not in our control.
We’re still delivering contracts with local authorities through regional
fibre deployment programmes, including the Broadband Delivery UK
programme (BDUK). As with our other major contracts, if we fail 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.
What’s changed over the last year?
We’ve acquired EE and with it the Emergency Services Network
(ESN) programme, which is a high-profile contract delivered with
several partners and managed by the Home Office. To date we’ve
delivered on our commitments but it’s still a high-risk programme
and is being managed as such.
Tough market conditions continue and the impact of the UK voting
to leave the EU has meant some customer programmes have been
delayed, which has had an impact on the business. Customers are
requiring more flexibility in their contracts.
The majority of our first phase of BDUK contracts have now
completed deployment, with the remainder closing in 2017/18.
We’re now mid-delivery of the second phase of contracts (SEP).
Whilst these contracts are smaller in scale and coverage, the
deployment challenges are significantly greater in terms of the
geography encountered as we reach further into the final 5%.
While our broadband contracts and ESN 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 the result to senior management. A separate,
dedicated team provides assurance for our BDUK and ESN 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.
In fact we’ve invested in risk training, and assess the management
of our contracts against a best practice framework we’ve developed
based on our knowledge of running and managing major
programmes.
Contract management and automation
Our ability to successfully manage
major contracts is critical to maintaining
performance and providing a great customer
experience.
How we managed the risk
How we handle both contractual obligations and risk is key to
success. To help our management community we’ve introduced
a ‘contract lifecycle management’ system. This will centralise the
storage, access and retention of all contract documents.
The result, and what we learnt
Our ‘contract lifecycle management’ system promises many
benefits. Once it’s rolled out across the business, it’ll help us
understand our contractual obligations and make sure every
contract has a dedicated owner. It’ll also help with allocating
work and by providing an online risk register, make sure risks
are understood and agreed across the business. Finally, it should
make it simpler to develop our expertise as we adopt a single
way of working across contract management.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Our principal risks continued
Operational risks continued
Supply chain
Link to strategy
– Deliver great customer experience
– Transform our costs
1
2
Trend
Link to business model
– Financial capital
– Social capital
– Natural capital
We operate in a global supply market, with a variety of supply chains
ranging from simple to very complex. Guaranteeing their integrity
and continuity is critical to our operations.
Global markets expose us to global risks, including different
standards in labour, environmental and climate change practices. We
weigh up the impact and likelihood of external market forces on our
suppliers’ ability to support us. A global supply market means better
sourcing opportunities, but brings challenges if suppliers become
more geographically and culturally remote from our customers – or
if governments put barriers in the way of doing business to protect
national economic interests.
Our dealings with suppliers – from the way we choose them, to the
contracts we sign and how we pay them – follow our trading and
ethical policies. For more detail, see Our suppliers on page 37.
Impact
If something goes wrong in our supply chain, the speed and scale
of impact can vary. We need to determine the potential damage to
customer experience, the likelihood of higher costs and the potential
damage to our brand. If losing an important supplier meant that
we had to change technologies, it could cost us a lot of money. If
we couldn’t find an alternative supplier, it might compromise the
commitments we make to our customers, which could in turn 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.
What’s changed over the last year?
We dedicate time to assessing emerging geo-political threats and
the impact they could have on our supply chain. These include the
impacts of the UK leaving the EU; economic problems in countries
like Venezuela; increasing regulation over the privacy of personal
data; and the growing threat of cyber-attacks on networked
ICT systems.
We note the continuing trend of mergers and acquisitions in some
of the global markets in which we source products and services.
It highlights the risk of us becoming too dependent on single
or monopolistic suppliers – particularly those less constrained
by regulation and who might charge us more than their
domestic customers.
How we’re mitigating the risks
We have a few really critical suppliers. We keep a close watch 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 such events.
We make sure we exercise the right due diligence when it comes
to introducing new suppliers and continuing to do business with
existing ones. That includes checks on company finances, business
systems, accreditations, media reputation and ethical practices.
We manage our top suppliers according to the contracts they’ve
signed. We work with them to find better ways of working, reducing
our exposure to risks around poor supplier practices in the process.
The increasing focus on human rights, following legislation like the
Modern Slavery Act 2015, means that we must keep examining the
potential risk of both modern slavery and human trafficking in our
supply chain.
We must also ensure that our products are free of components that
could be sourced from areas of armed conflict, or sourced using
methods that are unsustainable or ethically questionable.
Employee engagement
Link to strategy
– Deliver great customer experience
1
Trend
Link to business model
– Human capital
Our people are a vital part of our ambition to deliver a positive
customer experience and sustainable, profitable revenue growth.
Our people strategy supports this ambition by creating an
environment where people can thrive as part of a dynamic business.
Great employee engagement is necessary to ensure we meet our
strategic aims.
Potential impact
If we fail to recruit, retain and engage our workforce it could impact
our ability to deliver a great customer experience and continue to
grow the business. Furthermore, a failure to develop and retain
talent could result in a greater need for external recruitment, which
would add cost to the business. Poor engagement also raises the risk
of general industrial unrest and action.
What’s changed over the last year?
Following the acquisition of EE we’re working to bring these two
businesses together into a truly integrated company. We’ve identified
examples of best practice from both organisations that will act as
building blocks for our ‘better than both’ ambition. We’ve launched
a new set of values to reflect this. We’ve launched a new employee
survey and approach which make it easier for managers and their
teams to see the key things they need to do to improve levels of
engagement and better serve our customers.
How we’re mitigating the risks
As we explain in the Our people section on page 26, we provide
comprehensive support and training to help our people deliver to
the best of their ability. We regularly review our pay and benefits to
make sure our remuneration is competitive when compared to other
companies of a similar size and complexity. We seek a positive and
enduring relationship with our people and their representatives. We
have a very comprehensive global engagement strategy in pursuit of
that aim. This involves both our employees and their representatives
(Unions, Works Councils and Employee Fora). We also have a
comprehensive business continuity function.
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Our viability statement
Assessment of prospects
An understanding of the group’s strategy and business model is central
to assessing its prospects, and details can be found on pages 16
and 22.
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.
Our business model provides resilience that is relevant to any
consideration of our prospects and viability. In the UK, we benefit from
diversification across a number of markets and products, which has
increased as we moved into ‘quad play’ through the launch of
BT Sport and the acquisition of EE. We also have a broad spread
of customers and suppliers across different geographic areas and
market sectors, serving the needs of customers in more than 180
countries worldwide.
Our strategy of delivering great customer experience, transforming
our cost base and investing for growth is designed to support
long-term and sustainable cash flow growth.
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,
and is reviewed by the Board during the year. 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.
Beyond our core three-year planning horizon, the group also makes
investments that have business cases covering a longer time period,
such as our network investments. Significant capital expenditure
investment cases are approved by the Design Council, a pan-BT
investment board and, where appropriate, the Operating Committee
and the Board after taking into account longer-term risks and
opportunities such as the economy, technology and regulation.
Finally, our business and financial planning also takes into account our
longer-term obligations, including the funding of our defined benefit
pension schemes.
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 2020. The Board
believes this is an appropriate timeframe as it aligns with the group’s
financial planning processes. In addition, a number of our principal
risks share a natural three-yearly cycle: for example the BTPS funding
valuation and Ofcom’s market review cycle.
In support of this statement we have stress tested our forecast cash
flows by assessing, through a probabilistic analysis, the range of
potential combined impacts 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 existing projected cash flows and
cash management activities provide us with a buffer against the
impact of our most likely 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 ensure
additional liquidity. These actions could include, for example, sale
of assets, limiting or delaying discretionary capital expenditure and
marketing activities, restricting share buyback programmes and
reducing or ceasing dividend payments.
In our viability assessment we have 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 have only
taken into account the control activities that we have in place today.
We have not factored in any of the extensive future mitigation activity
that we are undertaking to address these risks, thereby assuming such
activity proves ineffective. Whilst we do not expect this to happen, we
have adopted these pessimistic assumptions to add greater stress to
our viability testing.
We have also assumed that, should the need arise, we would have
both the ability to renew existing debt facilities which mature over the
three-year period and be able to raise new debt.
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.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Lines of business
Consumer
We’re the largest provider of consumer fixed-line voice and
broadband services in the UK. We’re also the second-largest
pay-TV sports broadcaster in the UK and a leading innovator in
broadcasting technology.
Consumer and Plusnet (our award-winning second brand) connect
our customers to information, entertainment, friends and family,
both at home and on the move.
We buy access to fixed-line and broadband infrastructure from
Openreach, and we use EE’s mobile network to provide mobile phone
services.
Consumer, Plusnet and EE all provide home phone, broadband, TV
and mobile services.
Consumer brands
Markets and customers
Our broadband (copper and fibre) products are
available to over 99% of UK premises, and our
home phone and mobile services are available to
all. Everyone who has a BT internet connection
with a sufficient broadband speed can sign up
to watch BT TV.
The UK consumer telecoms market is highly competitive. In
December 2016, Ofcom found that UK prices for telecoms and TV
services compared well to international benchmarks. In 2016 the UK
ranked second among six comparator countries (France, Germany,
Italy, Spain, UK and the US) for a combination of standalone,
bundled and ‘lowest-available’ prices.
Home phone
Home phone
Home phone
Broadband
Broadband
Broadband
BT retail market share
See page 62
Within the UK market, our three consumer brands mean we’re well placed
to compete with the likes of Sky, Virgin Media, Talk Talk and Vodafone.
BT TV
BT Sport
Mobile
YouView TV on
Plusnet
EE TV
BT Sport
Mobile
BT Sport app
Mobile
Our Consumer line of business offers products and services from both
BT and Plusnet. Subscriber numbers and market share data for home
phone, retail broadband and pay-TV are reported at group level and
can be found in this section. Figures for mobile (also reported at
group level) can be found in the EE section on page 62.
Consumer sells a range of devices including telephones, baby
monitors and wi-fi extenders via high street retailers, the online
BT Shop and on our website, BT.com. We work closely with our
suppliers to make our products and business operations as sustainable
as possible, from the first link in the supply chain through to the
end customer.
We also sell services to commercial premises, such as pubs and
hotels, so they can access BT Sport or BT Wi-fi.
We employ over 11,000 full-time equivalent employees.
Around 10,000 of these directly help our customers through
our contact centres.
%
40
30
20
10
0
%
9
3
%
7
3
%
9
Home phonea
Retail broadbandb
Pay-TVc
Source: BT and Ofcom data.
Home phone
According to Ofcom, the number of home phone lines in the UK is
26.4m. The number of minutes of residential fixed line calls made in
2016 fell by 12.8% year on year to 43.5bn, as people increasingly
prefer to use mobile phones, voice over IP or instant messaging
services instead of landlines.
Broadband
There were 25.3m fixed broadband (residential and SME)
connections in 2016, an increase of 2.2% from the previous year.
Of these, 46% were fibre broadband connections.
TV and content
There are approximately 18m pay-TV subscriptions in the UK.
a Home phone includes Consumer and EE analogue and ISDN channels (WLR), including customers in Northern Ireland and Plusnet.
b Retail broadband – Consumer (including Plusnet and Northern Ireland), EE, B&Ps, and broadband lines sold by Global Services.
c TV refers to the total number of customers either with a BT Vision, YouView or EE TV box registered and enabled to receive video on demand including YouView from Plusnet.
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FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Subscription video on demand (SVoD) content providers such as Netflix
and Amazon Prime are becoming increasingly popular, although
this is largely as a complement to traditional pay-TV rather than
as a replacement.
Broadband
We offer an ADSL broadband service, delivered over copper lines;
and BT Infinity, our superfast broadband service which uses fibre
to deliver higher speeds and a more reliable service.
Data published by Ofcom found that 75% of SVoD users also had
a subscription to a pay-TV service.
Mobile
We describe the UK mobile market, including BT’s overall position,
in the EE section of this report starting on page 62.
Products and services
One size rarely fits all. That’s why we sell home
phone, broadband, TV and mobile services to our
customers in a variety of packages.
Home phone
We sell a range of home phone products and calling plans which
let our customers choose the right service for their particular
household needs. We offer unlimited call packages and add-ons such
as discounted international calls and calls to mobiles. 82% of all
call minutes are made to UK geographic numbers (ie excluding 03,
0845 and 0870 numbers). Of these, 89% are made without an
additional charge as they form part of inclusive calling plans.
Consumer home phone services include:
– BT Basic – discounted line rental and inclusive calls to recipients
of certain state benefits. We’re the only company to offer this
sort of service in the UK. This year, we improved our BT Basic
package by including more types of calls to the services and
adding a cap on spend;
– BT Call Protect – a new, free service, available to all customers,
that diverts nuisance calls to a junk voicemail box; and
– Home Phone Saver 2020 – a telephone-only package offering
line rental, unlimited calls and calling features. The price is
guaranteed until 2020.
Plusnet and EE also offer a home phone service with a variety of
different calling plans.
Examples of our broadband services include BT Broadband
Unlimited, which has speeds of up to 17Mbps, and our premium
package, BT Infinity 2 Unlimited, which uses fibre broadband for
speeds of up to 76Mbps. Where available, fibre-to-the-premises
packages offer download speeds of up to 300Mbps.
In July 2016 we launched the BT Smart Hub. Boasting the UK’s
most powerful wi-fi signal versus major broadband providers, it uses
the latest technology to help customers enjoy wi-fi in more places in
the home.
BT Smart Hub
Our broadband packages also include the following products:
– BT Wi-fi – free, unlimited wi-fi access at around 5.6m UK
hotspots;
– BT Cloud – secure online and on-the-go access to data and
photos; and
– BT Web Protect – a suite of security services which help to keep
our customers and their families safe online.
We offer targeted support to vulnerable customers and work
with industry groups, such as Internet Matters, to promote
internet safety.
Plusnet broadband is sold in three packages – unlimited, with
a download speed of up to 17Mbps; and two fibre broadband
packages, fibre unlimited, with download speeds of up to 38Mbps,
and unlimited fibre extra, with download speeds of up to 76Mbps.
EE broadband offers three similar products.
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Lines of business continued
Consumer continued
TV
BT TV is available exclusively to our broadband customers. TV content
is delivered via a YouView box, which includes content from a number
of third parties, including Netflix. Our ambition is to provide a
selection of pay content at an attractive price.
A good example of innovation in action was our coverage of the
2016 UEFA Champions League final. We made this the most social
sports broadcast ever by live-streaming the match on BT Sport’s
YouTube channel and breaking new ground across social media.
BT TV comes in three different packages:
Starter + BT Sport
Over 70 Freeview channels, plus BT Sport channels; AMC;
BoxNation and access to BT Store. This package comes with a
YouView box which lets people pause and rewind live TV.
Entertainment Plus
Includes 110 channels, as well as a YouView+ box, which lets
customers record up to 300 hours of programmes, pause and
rewind live TV, and access seven days’ worth of catch-up TV.
It also includes access to the BT TV app.
Total Entertainment
Offers 141 channels, including 21 in HD. Also includes additional
recording space on the set-top box; BT Sport in 4K Ultra HD and
BT Kids TV.
Entertainment Plus and Total Entertainment are only available to BT
Infinity broadband customers.
YouView TV on Plusnet is available to Plusnet’s fibre customers.
It includes over 70 Freeview channels, plus BT Sport 1, as well
as pay-TV channels.
EE TV provides more than 70 Freeview channels, as well as
pay-TV channels. The EE TV app works seamlessly on up to
four devices.
BT Sport
There are four main live BT Sport channels.
The BT Sport channels are available on BT TV, the BT Sport app (to
BT and EE customers), btsport.com. Sky, TalkTalk and Virgin Media
TV customers can also purchase a BT Sport subscription. There’s a
discount on BT Sport for existing broadband customers, and an even
bigger discount for customers who take broadband and BT TV.
BT Sport 4K UHD is the UK’s first Ultra HD TV channel. It has four
times the detail of HD and is available exclusively to BT TV Total
Entertainment customers with BT Infinity broadband.
BT Sport is the exclusive live broadcaster of the UEFA Champions
League and UEFA Europa League in the UK, with the rights secured
until the end of the 2020/21 season. We also broadcast games
from the Premier League and the FA Cup. As well as football, BT
Sport offers coverage of a range of different sports including Aviva
Premiership Rugby, MotoGP, Cricket Australia, WTA tennis and most
recently, boxing. This year, we broadcast over 11,000 hours of
live sport.
Innovation is a key part of our strategy at BT Sport. Over the course
of this year, we’ve run trials broadcasting content using virtual
reality. We’ve also launched Dolby Atmos sound on our Ultra HD
channel. Our BT Sport app and Ultra HD channel have won awards
for innovation.
BT Mobile
BT Mobile is available as both SIM-only and a range of service plans
with a choice of market-leading handsets. BT broadband customers
get a £5/month discount on BT Mobile service plans. This year
we launched BT Family SIM – a service plan which lets BT Mobile
customers purchase two or more SIM cards at a discounted price.
Plusnet entered the quad-play market in November 2016 with
the launch of Plusnet Mobile.
Performance in the year – strategic
Customer experience remains our top priority.
1
Delivering great customer experience
Last year we made an important investment in customer care. This
year we’ve made real progress in this area. Even so, we continue to
focus on making improvements.
We’ve added more than 2,200 additional FTE call centre roles in the
UK and Ireland. We’ve also made important gains by making sure
we’re easy to deal with, a key part of our Net Promoter Score.
Investing in online support
1.4m customers have the My BT app and can use it to get in touch
with us, while the percentage of online contacts that reach us via
chat has grown from 6% in 2015/16 to 20% today.
Better systems and tools for our agents
We’re in the process of deploying a new system to our frontline
agents so they can help customers even more quickly and accurately.
This system is now live for more than 4,500 agents.
New diagnostics to help us detect and resolve faults
Diagnostics are still progressing, while on-time repair performance
improved by six percentage points over the course of the year. On
average, our customers now have landline faults fixed 24 hours
quicker than last year.
Simplifying our organisation
We’ve broadened the skillsets of our agents and empowered them
to take ownership of customers’ needs.
Even so, work continues in this area
Although a lot of progress has been made in the year on customer
experience, the criticism we’ve received from both the media and the
regulatory authorities over the year reinforces the need to redouble
our efforts. One specific issue we need to address is the growing
number of customers contacting us to discuss their monthly package
price. The increasing number of contacts offset the progress made in
other areas (such as fault resolution and providing services on time)
and lowered the Right First Time score achieved by Consumer.
58
BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
2
3
Investing for growth
This year we continued to focus on sustainable long-term growth,
making several investments for the future. The table below
summarises the progress made on the top priorities we set out
in last year’s report.
Transforming our costs
Last year our costs went up by 10%, reflecting both our revenue
growth and our investment in the mobile market and customer
experience.
Review of last year’s priorities
WHAT WE SAID
WHAT WE DID
We said we’d
transform customer
services.
We’ve invested in systems and process to
improve customer experience, and we’ve
employed more people to make sure that
by spring of 2017, 90% of customer calls
are answered in the UK or Ireland. We’re on
track to meet this target, with over 86% of
calls now answered in the UK and Ireland.
We’ve also made it easier for customers to
interact with us online.
To partly offset this we cut costs by:
–
–
consolidating suppliers shared by both Consumer and EE;
encouraging customers to adopt a self-service approach – more
than 1.4m of them now have the My BT app; and
finding production and insourcing efficiencies in our TV business.
–
Performance in the year – operating
We won several awards for our products and
services over the course of the last year.
Organisation/Publication
Award
BT product/service
This year we provided over 800,000 hours
of training to our contact centre agents.
Mobile Industry
Awards
Hottest New
MVNO
BT Mobile
We said we’d launch
our new Premier
League rights and
Australian cricket on
BT Sport.
This football season we aired 42 Premier
League matches and 130 live games
from the UEFA Champions League. We
also broadcast 16 international Australian
cricket games exclusively in the UK.
We said we’d trial
and launch ultrafast
broadband using
Openreach G.fast
products.
We said we’d launch
mobile handsets to
create new market
opportunities and
synergies with EE.
Following successful trials of G.fast-
powered ultrafast broadband, with over
300 customers already connected across
two locations in the UK (Gillingham
and Cherry Hinton), we’re extending
to another 15 sites in our plan prior
to our launch.
We launched handsets with BT Mobile
and created synergies with EE by
consolidating suppliers. We also launched
BT Family SIM.
In November 2016, we launched Plusnet
Mobile.
We said we’d
introduce a new
YouView user
interface.
In February 2017 we started to roll out
the new BT TV YouView user interface
to our customers, a process that’s now
complete.
Known as BT Call Protect, we launched
this innovative new service in January
2017.
We’re making good progress towards this
aspiration, but we’re not there yet.
We said we’d
launch our new
breakthrough
service to help home
phone customers
avoid nuisance calls.
We said we’d
increase the
number of ‘revenue
generating units’ by
2.5m over the next
three years.
PC Pro
Recommended
BT Smart Hub
Expert Reviews
Recommended
BT Smart Hub
Tech Advisor
Recommended
BT Smart Hub
Alphr
Recommended
BT Smart Hub
Expert Reviews
Recommended
BT Halo phone
Mobile Choice Awards Best Network
BT Mobile
Deal Under £25
Mother & Baby
Silver Award
BT 7500 Baby
Monitor
Expert Reviews
Best Buy
Whole Home Wi-Fi
Alphr
uSwitch
Recommended
Whole Home Wi-Fi
Most Popular
Broadband
Provider
BT Broadband
Broadband World
Forum
Best TV or media
innovation
BT Sport App
TV Connect Awards
Best Content
Discovery Service
BT TV
YouView interface
The Connies
The Connies
Contribution to
User Experience
Best TV/Video
Service Update
(Silver)
YouView on BT TV
YouView on BT TV
Sports Technology
Awards
Most innovative
live event
BT Sport
D&AD
Wood pencil
Ultra HD
Annual Report 2017
BT Group plc
59
Lines of business continued
Consumer continued
Plusnet also won several awards:
Organisation/publication
Award
Home phone, broadband and TV are reported on a group-wide
basis in the section below. Mobile performance is also reported on
a group-wide basis and can be found in the EE section on page 62.
Broadband Genie Survey
Awards 2017
uSwitch Broadband and
Mobile Awards 2017
Best broadband provider
Best customer care
Most recommended provider
Best technical support
Most trustworthy provider
Best value provider
Broadband provider of the year
Best provider customer service
Best value broadband provider
Cable.co.uk Awards 2016
Best broadband provider
Best reliability
Best customer service
Best value
BT Sport is the only place to watch
the Premier League, Champions
League, Europa League and FA Cup
all season long
BT Sport channels
5
Home phone
As of 31 March 2017, BT Group had a combined
total of 10.3m home phone customers. This
represents a market share of 39%.
home phone
customers
10.3m
Broadband
This year we maintained our position as the UK’s
largest provider of retail fixed broadband services
with 9.3m customers, representing a market share
of 37%.
Over half of our retail broadband customers have a
fibre broadband connection and benefit from faster
internet speeds than ever before.
broadband
customers
9.3m
TV
We have 1.7m TV customers, divided between
BT TV, YouView TV on Plusnet and EE TV. 29,800
commercial premises have a BT Sport subscription,
up from 27,000 last year.
BT Sport’s average daily viewing figures went up by
12% in 2016. During this time, our BT Sport app
was downloaded more than 2.2m times.
BT Sport’s daily
viewing figures
+12%
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61
Priorities for the year ahead
Over the next 12 months we’ll carry on
investing for the future and doing everything
possible to ensure a great customer
experience and sustainable business growth.
Our top priorities for 2017/18 are:
Keeping the household connected
–
we’ll carry on moving customers from copper to fibre
broadband and grow our base through customer
acquisitions;
we’ll also launch an ultrafast broadband product in the form
of G.fast and, where possible, via fibre-to-the-premises; and
we’ll carry on promoting our BT Mobile proposition to give
existing BT customers more for their money.
Enhance sport and TV content
–
exclusive sport is a key point of differentiation, giving
potential customers an excellent reason to choose BT; and
at the same time we’ll improve the TV viewing experience
for our customers.
Transform customer experience
–
we’ll complete the deployment of our new frontline systems
and operating structure to simplify the way we work; and
we’ll make further investments to cut the time it takes to
get through to a contact centre agent.
–
–
–
Performance in the year – financial
In 2016/17, our revenue went up by 7%, with
a particularly strong growth across broadband,
TV and BT Mobile. EBITDA decreased 4%.
Year ended 31 March
Revenue
Operating costs
EBITDA
Depreciation and amortisation
Operating profit
Capital expenditure
Free cash flow
2017
£m
4,934
3,922
1,012
209
803
237
709
2016
£m
4,608
3,553
1,055
207
848
207
781
2015
£m
4,293
3,249
1,044
218
826
207
828
Broadband and TV revenue increased by 13% (2015/16: 17%),
reflecting the growth in our customer bases. Our calls and lines
revenue increased by 4% (2015/16: 2%), in part reflecting the
growth of our BT Mobile business. Other revenue decreased by
6% (2015/16: 8%) reflecting the declining fixed handset market.
Consumer 12-month rolling ARPU increased 8% to £39.9 per
month driven by broadband, BT Sport and BT Mobile. We’ve also
seen growth of 3% in the number of revenue generating units per
customera, which is now at 1.95.
Operating costs increased by 10% (2015/16: 9%) as a result of
investment in our new mobile handset business and increases in
sports rights costs in relation to our UEFA rights and our new Premier
League contract, which commenced in August 2016. Our cost base
also went up because of our investment in improving customer
experience and contact centre onshoring.
–
Our EBITDA decreased 4% (2015/16: increased 1%) over the year,
with a strong performance across voice, broadband and BT Sport
more than offset by our investment in contact centre onshoring,
increases in sports rights costs and our investment in mobile
handsets.
Capital expenditure increased by 14% (2015/16: flat).
60
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61
a Revenue generating units are voice lines, broadband, TV and mobile.
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Lines of business
EE
We’re the UK’s largest mobile network operator,
and we also offer fixed broadband and TV.
At BT we report mobile customer numbers on a group-wide basis,
including those from our other lines of business. We have over 30m
connections, 18.6m of which are 4G. In EE, new mobile customers
join 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 around 570 shops, our website and contact
centres, and through third parties, such as Dixons Carphone. To
improve customer experience, all EE customer service calls have
been handled in the UK and Ireland since the end of 2016.
By September 2016, total UK mobile call volumes were steady at
around 37bn minutes per quarter. SMS and MMS messages were
down 4% to an average of 24bn messages per quarter. Mobile
telephony services generated £3.9bn in retail revenue in the quarter
to September 2016, up 1% compared to last year.
According to Akamai’s latest State of the Internet report, the UK has
the fastest mobile connection speed of the 61 countries it surveyed
around the world.
We have 9,000 people, with 67% directly helping our customers
through our shops and contact centres. And we were named the
third best employer in the Sunday Times Best Big Companies to Work
For 2017 awards, up from seventh in 2016.
The market is subject to a number of existing and potential
structural changes:
– rapid adoption of 4G devices as 4G networks are deployed.
That means nearly all handsets sold are smartphones;
Starting in September 2017 we’ll support the Emergency Services
Network contract by providing a resilient 4G network for 300,000
emergency services workers.
Our mobile network has been independently recognised as the
fastest network by Ofcom in its Smartphone Cities 2016 report, and
best overall network by RootMetrics in its report for the second half
of 2016.
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.
Markets and customers
With four mobile network operators
and numerous mobile virtual network
operators (MVNOs), the UK mobile market
is very competitive. Of the UK’s 91m mobile
connections, 87% are consumer and 13%
business.
Our main competitors are O2, Vodafone, Three, Tesco Mobile, Virgin
Media and TalkTalk. Sky also entered the market in January 2017
as an MVNO. Competition for customers is further increased by
third-party distributors selling mobile services on behalf of mobile
operators, from high street shops and online.
Around 93% of adults in the UK use a mobile phone. Over 70% of
adults in the UK use a smartphone, and 59% of homes also have
a tablet. Smartphones are now the most widely-used device by UK
adults for accessing the internet. Consequently, total mobile data
use went up 64% in 2015. According to Ofcom, 63% of mobile
connections are on postpaid tariffs.
– growth of connected devices, including tablets;
– significant growth in mobile data use;
– continued decline in the prepaid market as customers move to
postpaid tariffs;
– blurring of postpaid and prepaid customer types with rolling
postpaid tariffs and auto-renewing prepaid bundles;
– popularity of SIM-only tariffs. Smartphones are evolving at
a slower pace so people are keeping their mobile phones for
longer; and
– regulatory pressure on the prices charged to customers and other
telecoms companies.
BT has a 29% share of the UK mobile market, measured on a
subscriber basis.
Mobile subscriber UK market share by operator
At 31 December 2016
29% BT including EE
1% TalkTalk
4% Virgin Mobile
6% Tesco Mobile
11% Three
22% Vodafone
27% O2
Source: EE and market data.
The consumer fixed line voice and broadband market is discussed in
the Consumer section of this report on page 56.
62
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Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Products and services
We provide mobile services in the UK, now
covering up to 99% of the population with 2G,
98% with 3G and over 99% with 4G, or 80%
on a geographic basis. We also sell broadband
services, fixed-voice and a TV service. The
wholesale services previously provided by EE
are now managed by Wholesale and Ventures.
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:
– 4GEE Essentials plans give access to 4G speeds of up to
20Mbps, unlimited texts and tiered bundles of voice and
data use;
– 4GEE plans offer unlimited UK minutes and texts and 4G speeds
of up to 60Mbps; and
– 4GEE Max plans combine the largest data bundles, inclusive
access to the BT Sport App and ‘roam like home’ voice, text and
data usage when abroad in the EU.
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
seven to 30-day periods; and
– Data packs ranging from 100MB to 4GB over seven to 30-day
periods.
We also operate a loyalty programme where customers get extra data
added to their packs in return for staying with us and topping up.
Devices
We offer a wide range of 4G mobile phones, tablets, connected
devices and mobile broadband devices from leading manufacturers
including Apple, Samsung and Google. Customers may also choose to
use their own device and then connect via a SIM-only plan.
Broadband and TV
We sell fixed-voice, broadband (including superfast fibre broadband)
and TV services. To reward loyalty, 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, as well as 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.
One of EE’s Rapid Response Vehicles
Emergency Services Network
In December 2015 EE was awarded the network part of the
Emergency Services Network (ESN).
Some of the applications that our 4G network will enable include:
– an ambulance crew sending vital data to a hospital to help staff
prepare for a patient’s arrival;
– a policeman recording an arrest on a body-worn camera and live-
streaming to nearby officers for support; and
– a fire and rescue crew assessing a burning building based on
live helicopter camera footage and digital blueprints viewable
via tablets.
To deliver the ESN service we’re:
– building a new, dedicated core network;
– constructing up to 500 new sites to expand coverage;
– switching on 800MHz on more than 3,500 sites to improve
outdoor and indoor coverage;
– using new 4G voice services, such as ‘push to talk’;
– providing a fleet of Rapid Response Vehicles to ensure maximum
service availability; and
– using satellite backhaul for remote sites.
Annual Report 2017
BT Group plc
63
Lines of business continued
EE continued
Performance in the year – strategic
We’ve grown financially, improved customer
experience and extended our mobile network
while integrating with the group.
Performance in the year – operating
We report mobile customer numbers on a total
BT Group basis, including those from other lines
of business.
1
At 31 March 2017 we had over 30m connections. Here’s how they
break down:
Delivering great customer experience
Improving customer service is one of our top priorities. While we’ve
made strong progress on mobile services, we believe there’s always
more we can do, particularly for our fixed broadband customers.
During the year we worked on projects across four key areas:
– Call centres – all EE customer service calls are now handled in
UK and Ireland contact centres;
– Self-service – we now have 9m customers using My EE;
– Shops – we’re improving our service; and
– IT – we’re enhancing our customer-facing IT systems.
We’ve made real improvements across the business in the way we
design, build and communicate our products and services to our
customers. We’ve improved the way we engage with them, whether
that’s by phone, in store or online, and upgraded the information and
tools our advisers use to help them with customer queries.
Together these steps have helped cut the number of customer
calls to our contact centres, and cut the number of complaints
our postpay customers make to Ofcom by 43%. At the same time
our postpaid net promoter score has improved, with many more
promoters than detractors.
2
Investing for growth
We’ve built the UK’s best mobile network and we’re continuing to
invest to keep our number one position.
We’ve extended 4G geographic coverage to 80% and plan to
increase this to 95% by the end of December 2020. As part of
the ESN contract we’ll also increase the resilience of the network,
benefiting all of our customers. We’ve also enabled new features like
‘4G calling’ (Voice Over LTE) and some parts of our network now let
customers achieve download speeds of up to 360Mbps.
3
Transforming our costs
Since becoming part of BT we’ve started a cost reduction programme
to deliver planned synergies and identify other savings.
We delivered savings this year by:
– improving customer self-service to cut the volume of calls to our
contact centres;
– answering all EE customer calls in the UK and Ireland, rather than
overseas, to resolve more queries first time and cut subsequent calls;
– improving efficiency within our shops, through better staff
planning and reduced facilities costs; and
– reducing the number of head office employees.
Customer base by type
000
2,439
3,760
6,921
M2M
MVNO
Prepay
Postpay
of which 4G
16,916
18,628
0
5,000
10,000
15,000
20,000
Our postpay base grew by 803,000 to 16.9m, supported by growth
in the EE and BT brands. The prepay base continued to decline in line
with industry trends, partly as a result of customers moving
to postpay.
The machine-to-machine base grew 78,000 to 2.4m as the Internet
of Things market starts to grow.
Our base of MVNO customers stood at 3.8m, up 40,000, as our
MVNO partners continued to do well in the mobile market.
Customer base movements
000
3
0
8
0
3
3
1
,
y
a
p
t
s
o
P
y
a
p
e
r
P
31,500
31,000
30,500
30,000
29,500
29,000
5
4
4
0
3
,
6
1
0
2
l
i
r
p
A
1
t
a
s
A
0
4
O
N
V
M
8
7
M
2
M
6
3
0
0
3
,
7
1
0
2
h
c
r
a
M
1
3
t
a
s
A
64
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
65
Revenue was £5,090m which includes postpaid mobile revenue
of £4,140m, prepaid mobile revenue of £402m, fixed broadband
revenue of £276m and equipment sales of £272m. Our
performance for the year benefited from additional revenue from
our ‘more for more’ pricing strategy. Monthly mobile ARPUs for the
final quarter of the year were £26.3 for postpaid customers, £4.4
for prepaid and £19.8 on a combined basis.
Operating costs were £3,934m giving EBITDA of £1,156m, a
margin of 23%.
Capital expenditure was £616m. Adjusted for the acquisition of EEc
capital expenditure was up 22% as we extend 4G coverage and as
our investment in ESN increased. Preparation for our part of the
Emergency Services Network contract continued in line with agreed
milestones.
Operating cash flow, which excludes interest and tax, was £570m.
Priorities for the year ahead
Over the next 12 months we’ll continue to
invest in the network and further improve the
customer experience.
Our top priorities for 2017/18 are:
Maintain network leadership
– we’ll further extend 4G geographic coverage to 95% of the
UK by 2020.
–
Carry on improving customer experience
– in the medium term we aim to become the mobile network
operator with the best postpaid net promoter score.
–
Deliver the EE part of the Emergency Services Network
contract
– we’re aiming to finish building and testing by the end of
September 2017.
In last year’s report, we set out our top priorities for this year. In the
table below we summarise the progress we’ve made.
Review of last year’s priorities
WHAT WE SAID
WHAT WE DID
We now answer 100% of EE calls in UK
and Ireland contact centres.
We’ve cut the rate of postpay complaints
to Ofcom by 43%.
We’ve now extended 4G geographic
coverage to 80% of the UK.
EE is still ranked as the best UK mobile
network by RootMetrics.
We remain on track to deliver our part of
the ESN contract by September 2017.
We said we’d
improve the
customer
experience.
We said we’d extend
4G coverage and
retain our position as
the UK’s best quality
mobile network.
We said we’d
progress the build
phase of the ESN
contract, working
closely with TSO.
We said we’d launch
a range of combined
mobile, fixed-line
and TV products.
We’ve refreshed the EE mobile tariffs,
offered BT Sport to EE customers and
trialled the sale of Consumer broadband
and TV products in EE shops.
Performance in the year – financial
Revenue for the year was £5,090m and
EBITDA was £1,156m. Underlying revenuea
and EBITDAa adjusted for the acquisition of EE
went up by 1% and 6% respectively.
Year ended 31 March
Revenue
Underlying revenue excluding transit adjusted
for the acquisition of EE
Operating costs
EBITDA
Depreciation and amortisation
Operating profit
Capital expenditure
Free cash flow
2017
£m
5,090
1%
3,934
1,156
780
376
616
570
2016b
£m
841
n/a
668
173
146
27
96
238
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Annual Report 2017
Annual Report 2017
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65
a Excludes specific items, foreign exchange movements and disposals. Calculated as though EE had been part of the group from 1 April 2015.
b
Includes EE results from acquisition on 29 January 2016.
c
Includes EE’s historical financial information as though it had been part of the group from 1 April 2015, under the new organisational structure.
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Lines of business
Business and Public Sector
We sell communications and IT services in the UK and
the Republic of Ireland. We’ve around 1.2m business and
public sector customers and lead the field in fixed voice,
networking and broadband.
We’re passionate about helping all our customers succeed – from
large government departments, big household names and public
sector organisations right through to small businesses and new
start-ups.
Markets and customers
We have around 1.2m customers, including over
half of the FTSE 350.
We created our Business and Public Sector line of business on
1 April 2016 by combining three organisations into one: the original
BT Business organisation, EE’s business division, and parts of Global
Services’ UK corporate and public sector teams. Our 10,000 people
provide local, regional and national coverage across the UK.
We now have three customer-facing units focused on providing
communication solutions and IT services to help create business
outcomes for our customers:
TRADING UNIT
CUSTOMERS
Small & Medium
Enterprises
Corporate
Public Sector and
Major Business
– Businesses in the UK with up to
100 employees, ranging from sole
traders through to more complex
organisations (including schools
and colleges).
– Businesses in the UK with between
100 and 1,000 employees.
–
Public sector (central and local
government, health, higher
education, defence).
– Businesses in the UK with over 1,000
employees.
– Multinational corporates with
majority of BT business in the UK.
–
–
Corporates and public sector in
Northern Ireland.
Corporates, public sector and
wholesale customers in the
Republic of Ireland.
Major customers include:
–
–
–
–
–
retailers like the Co-Operative Group;
utilities like Northumbrian Water;
public sector organisations like Norfolk County Council;
financial organisations like eSure; and
educational institutions like Kingston University.
The telecoms market we serve has revenue of £8bn, and we
estimate the adjacent IT services market has revenue of £14.5bn.
Convergence of these markets to create more integrated services is
already underway, a trend we expect to accelerate.
At £10bn, the public sector market for IT and telecoms is a
substantial part of our addressable market. Challenges in the
public sector remain substantial as the market continues to
change. For example, larger systems integration contracts are
being disaggregated and replaced by smaller contracts, while the
devolution agenda is increasingly shifting procurement decisions and
spend to the regions.
Overall we’re focused on four main product markets: Fixed voice;
Mobility; Fibre and connectivity; and Networked IT services.
Fixed voice
For some time the market for fixed voice services has been
transitioning from traditional voice to Future / IP Voice. Market
analysts such as IDC believe that IP Voice will become the dominant
business voice service by 2018.
The fixed voice market is largely fragmented – as the market leader,
we compete against more than 950 resellers and fixed network
operators, including companies such as Azzurri, Colt Group, Daisy
Group, Gamma, KCOM Group, O2 and Unicom.
Mobility
Mobility and mobile device usage continues to grow as a way for
customers to cut costs, improve productivity and deliver a richer
customer experience. This growth is taking place against a backdrop
of increasing risks concerning security, privacy and compliance.
Our main competitors in this area are O2 and Vodafone. Both
offer fixed products as well as mobile and are increasingly selling
converged services.
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Mobility
Our mobile portfolio offers a range of handsets and tablets and a
choice of voice and data tariffs.
BT One Phone is a converged proposition combining office
switchboard and mobile needs into one cloud-based solution mainly
delivered through the customer’s mobile phone.
Fibre and connectivity
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.
Our networking solutions are ideal for customers who want to
connect offices together or connect to the internet over dedicated
leased lines. Products include Ethernet, IP Virtual Private Network
services, SIP trunking (which transports voice calls over IP networks),
leased lines, cabling infrastructure and local area networking
solutions.
Networked IT services
Our specialist IT services team provide solution design, 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.
Fibre and connectivity
Broadband services are still migrating to fibre in order to meet the
need for faster communication speeds. We’re the largest business
broadband provider in the UK.
Networking is moving from physical provision to software-based,
virtual provision. It’s expanding into the wide area networking space
through technologies such as Software Defined Networking (SDN).
See page 71 for more details.
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.
Networked IT services
The IT services market is diverse, ranging from off-the-shelf
hardware sales to large outsourced solutions.
Areas of the market experiencing growth include cloud services,
hosting, infrastructure and security, all of which offer attractive
opportunities for us to expand our share of the overall market.
Competition is fragmented, with providers often focused on specific
customer-types, industries or technologies. Our main competitors are
Computacenter, Dimension Data, CDW, Logicalis, SCC and Softcat.
Security is increasingly important for companies as they face an
evolving range of cyber security threats.
Products and services
We offer a wide choice of voice, connectivity and
IT-related services.
These range from standalone products and converged propositions
to managed services and customised solutions. Together these meet
the needs of our customer base that varies from small start-ups to
large enterprises and public sector organisations.
Fixed voice
Our fixed-voice services range from calls and lines, to fully-managed
office phone systems and contact centre solutions across both
our traditional and IP Voice portfolio. We’ve a broad Future Voice
portfolio of Cloud Unified Communications services, BT Cloud Phone
and BT Cloud Voice, aimed at the full spectrum of customers
we serve.
BT Cloud Voice, a feature-rich, cloud-based phone system with
the flexibility to meet the demands of the modern, agile business
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Lines of business continued
Business and Public Sector continued
Performance in the year – strategic
Our continued investments in our people and
our portfolio has helped improve the customer
experience we provide while positioning us to
exploit the market move to convergence.
1
Delivering great customer experience
We’ve made good progress on our journey to become the market
leader for customer experience.
Our Net Promoter Score has improved by 12.4 points and our Right
First Time measure by 6.1%. We’re resolving complaints 11% more
quickly than last year.
This year we’ve:
–
followed up with 20,000 customers on specific ‘pain points’ to
improve their end-to-end experience;
launched our first Customer Experience Lab in Dundee to
trial innovative customer service solutions and new ways of
supporting our customers;
invested in people with more than 200 new advisers joining our
service teams, including new apprentices; and
delivered over 30,000 hours of training to our customer service
advisers to improve the customer experience.
2
Investing for growth
We’re still investing to improve and future-proof our products and
services. Whatever tomorrow brings, we aim to be ready.
This year we’ve:
–
enriched our Future Voice portfolio by adding new features such
as portal and app enhancements;
upgraded our Infinity Broadband portfolio to address the
demand for higher speeds, offering up to 76Mbps as standard;
improved the wi-fi performance and reliability of our Business
Hub and expanded our Smart Diagnostics capability to fix issues
proactively; and
expanded our range of cloud-based services for SME customers,
for example Mozy Backup, our new flexible cloud back-up
solution.
–
–
–
–
–
–
Performance in the year – operating
Our order intake of £3.4bn was up 7% with the
inclusion of EE orders offsetting public sector
decline. During the year weaker trading in the
public sector, driven by a number of contracts
coming to an end, contributed to our revised
group outlook.
Business & Public Sector 12-month rolling order intake
Year ended 31 March
6
2
7
3
,
7
7
4
3
,
5
7
4
3
,
£m
3,800
3,600
3,400
3,200
3,000
2,800
8
2
2
3
,
3
6
1
3
,
4
9
0
3
,
9
6
3
3
,
2
1
2
3
,
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2016
2017
Contracts we won or re-signed this year include:
CUSTOMER
CONTRACT
Royal Mail.
Glanbia.
Ardagh Group.
A four-year deal for wide-ranging
network and ICT services, covering voice,
data, and customer contact centres.
Renewal of existing WAN and managed
services deal by adapting our service
model to meet Glanbia’s global expansion
needs (particularly in the US).
Extension of existing WAN contract,
addition of global SIP, completion of
a Cisco PBX replacement project and
deployment of BT Microsoft One Cloud.
Metropolitan Police. £100m networking and IT contract to
deliver high-speed fixed and wireless
networks, together with a range of Cloud
and IT services, to help underpin its
technology transformation programme.
Our public services network contract was
extended for a further two years, growing
to 500 sites.
3
Transforming our costs
We’ve achieved major cost synergies by integrating EE and Business
and Public Sector.
Surrey County
Council.
The creation of Business and Public Sector gave us the opportunity
to align our customer service operations more effectively. The first
stage of this reorganisation brought together around 2,000 of our
people into a single centre of excellence for UK and Republic
of Ireland managed services.
We’ve brought around 800 engineers from across BT Group into
Business and Public Sector. The result is a unified field service
team focused on the provision and maintenance of equipment on
customers’ premises. These changes will allow us to better serve our
customers while driving efficiency and reducing costs.
The number of business lines we provide fell by 9% as customers
continue to migrate to VoIP. This has been partly offset by growth in
the number of IP lines, up 78%. We’re seeing strong take-up of our
BT Cloud Voice and BT Cloud Phone services with user numbers up
258% and 94% respectively.
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SME revenue was up 37% due to growth in mobile from the
addition of EE customers, while also benefiting from an increase in
revenue from IP lines, partly offset by a decline in traditional switch
revenue.
Corporate revenue was up 37% with growth in mobile revenue
driven by EE offset by a reduction in equipment sales.
Public Sector and Major Business revenue was down 12%, with the
inclusion of EE revenue more than offset by the decline in public
sector revenue. Public sector still faces challenges as we have a small
number of large contracts coming to an end.
Foreign exchange movements had a £52m positive impact on
Republic of Ireland revenue, where underlying revenuea excluding
transit was down 2%.
Operating costs were up 12% (2015/16: 0%) and EBITDA was up
8% (2015/16: 2%) as a result of EE. Underlying EBITDAa adjusted
for the acquisition of EE was down 10%, reflecting the revenue
decline in public sector. Depreciation and amortisation went up by
24% (2015/16: 21%) reflecting the impact of EE.
Capital expenditure went up by £122m (2015/16: £7m decrease)
and adjusted for the acquisition of EEb was up £81m. Operating
cash flow went up 17% (2015/16: 3%) reflecting the higher
EBITDA and the timing of working capital movements.
Priorities for the year ahead
Over the next 12 months we’ll continue
to invest for the future to deliver a great
customer experience and sustainable
business growth.
Our top priorities for 2017/18 are:
–
Drive growth from greater sales coverage, acquiring and
cross-selling to customers
–
increase the average number of products sold per customer.
Differentiate through an integrated experience and portfolio,
delivered on the best network
–
growth in the strategic portfolio areas of IP Voice, Mobile,
Networking and IT services.
Continue to improve the customer experience we provide
–
further improvements in NPS.
In last year’s report, we set out our top priorities for this year, the
table below summarises the progress we’ve made against them.
Review of last year’s priorities
WHAT WE SAID
WHAT WE DID
We said we’d
successfully launch
our new Business
and Public Sector
organisation.
We said we’d
introduce our full
portfolio of fixed,
mobile and IT
services to existing
BT customers and
those acquired
with EE.
We said we’d
develop and
integrate our
portfolio of
products and
managed services.
We said we’d carry
on improving
the customer
experience
we provide.
We integrated 1,600 people within 60
days of concluding the EE acquisition
and the new organisation went live on
1 April 2016. However, lower trading in
Public Sector driven by the completion
of a number of large contracts led to a
decline in underlying profits and a revised
performance outlook.
We’ve made our full range of propositions
available across BT and EE.
We’ve upgraded Infinity Broadband to
up to 76Mbps as standard, expanded
our range of cloud-based services and
introduced new features to BT Cloud
Voice.
Our Net Promoter Score has improved
by 12.4 points and our Right First Time
measure by 6.1%.
Performance in the year – financial
Revenue was up 11% (2015/16: 1%) while
underlying revenue excluding transit adjusted
for the acquisition of EE was down 6%
(2015/16: 2%). Underlying profits declined
in the year, impacted by a number of large
public sector contracts coming to an end. The
remaining business performed well, led by good
growth in mobile.
Year ended 31 March
Revenue
Underlyinga excluding transit adjusted for
the acquisition of EE
Operating costs
EBITDA
Depreciation and amortisation
Operating profit
Capital expenditure
Free cash flow
2017
£m
2016
£m
2015
£m
4,758
4,294
4,247
(6)%
(2)%
3,230
1,528
352
2,880
1,414
284
n/a
2,867
1,380
235
1,176
1,130
1,145
275
153
160
1,293
1,101
1,070
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a Excludes specific items, foreign exchange movements and disposals and from 2016/17 is calculated as though EE had been part of the group from 1 April 2015.
b Includes EE’s historical financial information as though it had been part of one group from 1 April 2015, under the new organisational structure.
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Lines of business
Global Services
We’re a leading global business communications provider,
supplying ICT services to 5,500 multinational companies
in 180 countries.
By combining our global strengths in networks, ICT and innovation
with our deep expertise and global delivery model we’ve become
a trusted partner for our customers. We provide them with the
services they need to create the digital transformation of their
businesses.
around 7,200 people across key European business hubs, and have
an extensive network of more than 1,000 PoPs.
In the UK, we serve multinational companies and financial services
organisations.
During the year, we identified inappropriate behaviour in our Italian
business. This is an extremely serious matter and has no place in BT.
For full details of what we found, how we responded and what we
will do going forward see page 6.
Global Services serves multinational companies headquartered
around the world. We’ve been simplifying how we work to provide a
sharper focus on our global customers. We’re structured around four
regional operations providing expertise in key industry sectors.
The Americas is important because 70% of our top customers have
a presence in the region. We operate in 28 countries in Latin America
and the Caribbean, as well as the US and Canada.
In Asia, Middle East and Africa we’re helping multinationals expand
into these areas, while supporting local companies as they grow
internationally. We help our customers from 26 offices.
Outside the UK, use of the incumbent’s access network under
non-discriminatory terms and conditions is important to provide
a competitive service to our customers. We still campaign for fair
markets as we expand our business.
Global Services revenue by region
Year ended 31 March 2017
30% UK
12% AMEA
21% Americas
Americas
Continental Europe
Key industry sectors:
– Financial Services
– Automotive
– Energy and Resources
– Manufacturing
UK
Asia, Middle East & Africa
– Media and Business Services
– Retail and Consumer Goods
– Technology and Telecoms
– Travel, Transport and Logistics
Markets and customers
Customers
We work with 5,500 customers across 180 countries worldwide. Our
focus is on our major accounts, which generated 78% of our revenue
in 2016/17. 72% of revenue was from customers served in multiple
geographies.
We also keep focusing on growing our share of customer spend by cross-
selling products and services in line with our Cloud of Clouds strategy.
Regions
We’ve over 17,000 people worldwide in 63 countries. Our 20 highest
priority countries, including the UK and other key countries where our
major customers are based, generate over 90% of our revenue.
Continental Europe is our largest region by revenue. We employ
37% Continental Europe
Global Services strategic review
We have undertaken a strategic review of Global Services, with the
objectives of improving its market and financial performance, its risk
profile, and the long-term value that it delivers to BT. Global Services
is most differentiated with large, multinational customers, who
demand high quality, secure communications. Its product portfolio
is industry-leading across a range of areas, including networking,
security, cloud collaboration and contact centres.
Technology trends mean that we are now less dependent on owning
physical local network access assets around the world, creating the
opportunity to reposition Global Services as a more focused digital
business. We will prioritise innovation of cloud-based platforms that
deliver our products and services, with BT’s global network at the
core, to support the digital transformation of our customers. As we
implement this strategy, we will ensure that we optimise the value of
our global and our local network assets.
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To enable this strategic repositioning, we are restructuring our Global
Services organisation to a simpler operating model. This will involve a
two-year restructuring of our operations, the costs of which will be
treated as a specific item.
Key market trends
Our customers are globalising and transforming their businesses.
They’re using services from the cloud to gain competitive advantage
by increasing efficiencies and decreasing IT costs. They want:
–
–
–
–
a greater choice of cloud service providers;
high performance across their network and IT service;
flexible, end-to-end secure service; and
a trusted partner to provide ICT services.
The network continues to be the critical infrastructure that connects
our customers to their cloud services, their sites, their employees,
customers and suppliers. As customers seek more flexible and agile
models, they’re increasingly adopting software-based network
technologies to achieve the right balance between performance,
service, security and cost.
In this market, our main competitors are global telecoms companies
such as AT&T, NTT, Orange and Vodafone. We also compete against
regional telecoms companies such as Singtel.
Products and services
Our portfolio strategy, known as Cloud of Clouds,
brings together our six core product families and
a network of partners to support the delivery of
global network and IT infrastructure services.
Our six core product families
BT
Compute
BT
Security
BT
Connect
BT
Contact
BT
One
BT for
Industries
Service from B T
BT Advise
Innovation fro m B T
BT Connect
Network services are at the core of our Cloud of Clouds strategy.
They connect our customers to their people, their own customers
and the cloud. We offer a range of flexible, intelligent hybrid and
secure IP, Ethernet and internet virtual private network services.
These include direct connectivity to third-party cloud services
providers and the latest Network Function Virtualisation (NFV) and
Software Defined Networking (SDN) solutions – the new generation
of networking technologies that are giving us a new way to build
and manage corporate networks that are fit for the digital age.
We use a range of access technologies to deliver our network
services to over 180 countries.
BT Security
With cyber-attacks a daily event, cyber security is firmly on the
boardroom agenda for many companies.
We use the expertise we’ve gained from protecting BT to deliver
managed security services, threat intelligence analysis and
management, and consultancy services, helping our customers
protect their organisations from this growing threat.
BT One
People communicate using technology in many different ways – by
phone, instant messaging, email, audio and video conferencing and
data-sharing, 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 improve productivity and
cut costs by transforming the way they communicate with their
customers, colleagues, partners and suppliers.
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, 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 Compute
Businesses want reliable but flexible ICT platforms and services for
their applications, data storage and security. We provide ICT services
across our global network from 48 data centres around the world,
with 22 of them supporting our cloud services. Our services range
from traditional telehousing and colocation to the latest public,
private and hybrid cloud solutions.
BT Advise
Our global team of around 2,000 consultants work closely
with customers to understand their business needs and current
capabilities so we can create a set of recommendations based on our
portfolio. We develop a plan to help customers achieve benefits such
as cutting costs, increasing productivity or becoming more agile.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Lines of business continued
Global Services continued
BT for Industries
Our industry-specific solutions help customers overcome particular
challenges.
For example:
–
–
our Digital Consumer solution enables retailers to provide an
online experience to shoppers in physical stores;
our Field Force Automation solutions provide mobile workers
with access to corporate applications regardless of their location;
and
– BT Radianz, the world’s largest secure, financial services cloud
community, helps customers cut costs, get to market faster and
perform the best trading options.
Supporting
our customers’
digital
transformation
Our footprint and product portfolio
mean we can take the role of
leader and trusted partner to our
customers, helping them at every
stage of their digital transformation
journey. We support that journey in
three areas:
We’re also recognised as a Leader in the IDC ITMarketScape: Asia/
Pacific Managed Security Services 2016 Vendor Assessment.
Our cloud collaboration portfolio is now being used by more than
one million employees of global organisations.
Performance in the year – strategic
1
Delivering great customer experience
We’re using customer feedback and insight to inform our decisions
and enhance our customers’ experience.
– We implemented the Net Promoter Score (NPS) system in
April 2016, so we conduct monthly online surveys to gauge
customer loyalty and identify actionable insight.
– We also use Customer Thermometer, our transactional survey
programme, to regularly gauge customer experience at key
points of interaction.
Finally, we use Right First Time (RFT) measures and operational
KPIs, such as speed of delivery and repair, billing and product
quality to provide a snapshot of how we’re performing.
–
Digital customer – creating a richer experience for end
customers.
Digital business – increasing business agility and innovation
through cloud-based solutions.
During the year we improved:
–
–
–
– RFT measures by 3.4%.
IP Connect Global on-time delivery by 18%;
the performance of our complex contracts by 22%;
baseline NPS by 13 percentage points: and
Digital employee – creating a productive business
environment through seamless employee collaboration.
We do this by providing high-performance, integrated
and secure network and IT infrastructure services to global
customers – our Cloud of Clouds portfolio strategy.
Performance in the year
We’re a global leader for managed networked
IT services.
In the last year we’ve been named as:
–
a Leader in Gartner’s February 2017 Magic Quadrant for
Network Services, Globala;
a Leader in the August 2016 Gartner Global Magic Quadrant for
Unified Communications as a Service, Worldwidea;
a Leader in the October 2016 Gartner Magic Quadrant for
Contact Center as a Service, Western Europea; and
a Leader in the June 2016 Gartner Magic Quadrant for
Managed Hybrid Cloud Hosting, Europe.a
–
–
–
At the same time we recognise there’s more to be done, so we’ve
put a rigorous plan in place to help us continually improve. This plan
addresses key areas of focus, such as lead times, on-time delivery,
project management skills and service delivery communications.
2
Investing for growth
We’ve invested in a new generation of networking technologies,
giving us an innovative way to build and manage corporate
networks.
Our network
We’re investing in dynamic network services to give our customers
greater choice, security, resilience, service and agility in the rollout
of high-performance networks. We’re using our expertise in SDN
and NFV technology, as well as our global infrastructure, to further
improve our portfolio of network services.
We work with a range of organisations to deliver our dynamic
network services, including Cisco and Nokia, who will contribute
technology to our software-defined WAN service.
a 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 organisation 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, (the ‘Gartner Report(s)’) 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.
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Our products and services
– We completed the acquisition of IP Trade SA, a provider of
unified communications and collaboration solutions for trading
floor environments.
– We launched a mobile collaboration service in the UK as well as
a new mobile roaming service for our global customers, building
on our acquisition of EE.
– We’re accelerating our efforts to be the world’s leading cloud
services integrator, and expanded our network of partners to
include Oracle, Microsoft and T-Systems.
– We’re helping our customers understand what digital can mean
for their organisation and how best to use it as an enabler for
growth and change through an Advise two-day workshop.
– We introduced Trend Micro’s Deep Security protection for
physical, virtual, and cloud servers on our Cloud Compute
platform.
– We also integrated Zscaler cloud security access points into
our global network, and Symantec’s latest technology into our
managed security services.
High-growth regions
We’re continuing to invest for our customers across Latin America,
helping them increase productivity and become more competitive.
For example, we’ve opened a contract design hub in Brazil and
added a unified communications service node in São Paulo.
3
Transforming our costs
We’ve continued to focus on reducing our costs, with underlying
operating costs excluding transit adjusted for the acquisition of EE
down 1%.
Our cost transformation programme uses our tried-and-tested
approach to improve process efficiency, reduce the cost of failure,
enhance the network and improve the value for money we get from
our suppliers. For example:
– Operating model review in AMEA. We’ve established a
–
–
consistent and standardised set of principles to improve our
performance in countries where we have a low number of
resources.
Service delivery. We’ve combined our design and delivery
functions to enable faster, more consistent delivery of services
at lower cost.
Contract reviews. We’ve reviewed opportunities across
shared services and third-party costs. We’ve also introduced
improvements in the delivery and in-life support stages of
contracts to improve their profitability.
– Data centres. We’re evaluating our existing global data centre
estate and consolidating our sites to lower our cost base while
improving our service offering.
Performance in the year – operating
We achieved a total order intake of £4.6bn,
down 10% reflecting challenging international
corporate market conditions.
The table below summarises the progress we’ve made on the top
priorities we set out in last year’s report.
Review of last year’s priorities
WHAT WE SAID
WHAT WE DID
We’re on track to achieve this ambition.
We’ve been focusing on deepening
customer relationships and cross-selling
our portfolio.
We achieved double-digit growth across
cloud unified communications and
Cloud Compute. Excluding the delay of
milestone-related revenue with a major
customer, we also achieved double-digit
growth across security.
We raised our baseline net promoter score
by 13 percentage points in 2016/17.
We said we’d
grow our share of
spending with our
Global Accounts by
10% over the next
three years.
We said we’d
achieve double-
digit percentage
annual growth
rates in the revenue
we generate from
security, cloud unified
communications and
Cloud Compute over
the next three years.
We said we’d
increase our net
promoter score by at
least ten points over
the next three years.
Contracts we won this year include:
CUSTOMER
CONTRACT
Alstom
(BT One).
Unified communications and
collaboration services for 30,000
users at 300 locations.
Bridgestone Europe
(BT Connect, BT One,
BT Contact).
Network infrastructure and managed
cloud services connecting more than
200 sites across 20 countries in Europe,
Middle East and Africa.
Grupo Santander
(BT Connect).
We consolidated our relationship with
Grupo Santander.
International
Airlines Group
(BT Connect).
Network outsourcing contract to help
the company simplify its IT systems and
processes and improve efficiency.
Komatsu
(BT Connect,
BT Compute).
Michelin
(BT Connect).
Randstad
(BT Connect,
BT One).
Global IT infrastructure covering 26 sites
across 15 countries in Europe, Asia-
Pacific and South-America.
Comprehensive managed network services
connecting 216 sites in 43 countries.
Global IT infrastructure providing cloud
connectivity to more than 3,500 sites
across 37 countries.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Lines of business continued
Global Services continued
Performance in the year – financial
Revenue went up by 8% (2015/16: decreased
3%) including a £470m positive impact from
foreign exchange movements and a £17m
decline in transit revenue. Our key revenue
measure, underlying revenue excluding transit
adjusted for the acquisition of EE, decreased
by 2% (2015/16: was flat), and excluding the
revenue of our Italian business was flat.
EBITDA increased 3% (2015/16: 3%). Underlying EBITDAc adjusted
for the acquisition of EE was down 11% and excluding the results of
our Italian business was up 1%. We have described the issues in
Italy on page 6. Depreciation and amortisation was up 4%
(2015/16: down 5%). Operating profit decreased by £1m
(2015/16: up £36m).
Capital expenditure went up by 2% (2015/16: down 13%). EBITDA
less capital expenditure increased by £10m to £134m compared
with an increase of £65m last year.
Our operating cash outflow of £245m was £396m worse than last
year, as we have unwound the effects of improper working capital
transactions in our Italian business.
2017
£m
2016a
£m
2015a
£m
Priorities for the year ahead
Over the next 12 months we’ll continue to
focus on delivering improved operational
efficiency and great customer experience.
Our top priorities for 2017/18 are:
–
–
–
implement a leaner and more customer-focused operating
model;
grow our cloud-based services and our security portfolio at
double-digit rates; and
launch a new digital customer experience, leveraging
automation and portfolio innovation eg NFV/SDN.
Year ended 31 March
Revenue
Underlying revenue excluding transit
adjusted for the acquisition of EE
Operating costs
EBITDA
Depreciation and amortisation
Operating profit
Capital expenditure
Free cash flow
5,479
5,074
5,218
(2)%
0%
n/a
4,984
4,595
4,753
495
439
56
361
(245)
479
422
57
355
151
465
444
21
406
28
In AMEAb underlying revenuec decreased by 4% (2015/16:
up 10%) due to milestone-related revenue in the prior year. In
Continental Europe, underlying revenuec excluding transit decreased
5% (2015/16: down 1%) and, excluding the revenues of our Italian
business, was up 3% (see page 6).
Underlying revenue excluding transit adjusted for the acquisition of
EE in the UK was up 5% (2015/16: 2%). The Americasd decreased
6% (2015/16: decreased 10%) due to the ongoing impact of a
major customer insourcing services.
Operating costsa went up by 8% (2015/16: down 3%) reflecting
EE, the impact of foreign exchange movements and the impact of
our investigation into our Italian business. Underlying net operating
costs excluding transit adjusted for the acquisition of EE were
down 1%.
a Revised to reflect the outcome of the investigation into our Italian business and reorganisation of our segments, see note 1 to the consolidated financial statements.
b Asia Pacific, the Middle East and Africa (AMEA).
c Excludes specific items, foreign exchange movements and disposals and for 2016/17 is calculated as though EE had been part of the group from 1 April 2015.
d United States & Canada and Latin America (Americas).
74
BT Group plc
Annual Report 2017
Lines of business
Wholesale and Ventures
At Wholesale and Ventures (W&V) we help other companies
provide fixed or mobile telephony services, as well as running
a number of BT’s specialist business units.
On 1 April 2016 we integrated BT Wholesale with EE’s wholesale
team and some of BT’s specialist business units to form Wholesale
and Ventures. We’ve 3,800 people, including 900 in BT Fleet and
700 in BT Supply Chain.
Markets and customers
Our wholesale business helps communications
providers (CPs) and other organisations to
provide fixed or mobile telephony services. Our
ventures provide mass-market services such
as directory enquiries and payphones, and
enterprise services including BT Fleet and BT
Redcare.
Wholesale: Fixed network services
We provide wholesale fixed network services to over 1,400
customers including Sky, TalkTalk, Telefonica O2, Three and Virgin
Media, as well as overseas CPs operating in Great Britain.
We also provide specialist media and broadcast services to
organisations including the BBC, Channel 4, ITV, Sky, Premier League
Productions and Viacom18.
Ventures
Our ventures provide a range of solutions to over 1,000 enterprise
customers including law firms, energy providers and mobile payment
companies. We also handle millions of directory enquiries and
999 calls, and deliver the Phone Book to over 21m homes and
businesses.
Market trends
The key wholesale market trends this year were:
–
fewer calls, more IP voice services. This year people made
14% fewer calls. But takeup of business-grade IP voice services
is accelerating;
bandwidth in demand. 46% of all our wholesale broadband
lines ordered this year were delivered over fibre, while average
data usage over our fibre lines rose by 18%; and
–
– more mobile. The MVNO market is expanding as existing
MVNOs add 4G and new MVNOs launch.
1,000
we provide a range of solutions to
over 1,000 enterprise customers
Wholesale: Mobile network services
We help Mobile Virtual Network Operators (MVNOs) that want to
offer own-brand mobile plans but don’t own a mobile network. We
support 30 MVNO brands with 3.8m mobile customers between
them.
21m
We also use the EE network to provide machine-to-machine services,
as explained on page 76.
we deliver the Phone Book
to over 21m homes and businesses
1,400
we provide wholesale fixed network
services to over 1,400 customers
3.8m
we support MVNOs with 3.8m
mobile customers between them
46%
wholesale broadband lines
delivered over fibre
+18%
data usage over fibre lines rose
by 18%
PB
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
75
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Wholesale Ethernet: presence in BT exchanges
Lines of business continued
Wholesale and Ventures continued
Products and services
Broadband and Ethernet
We provide CPs with broadband and Ethernet connections between
their core network and their customers. Wholesale Broadband
Connect can serve 96% of premises with copper-based broadband
(2015/16: 95%) and more than 26.5m premises with fibre. Our
older broadband network brings our total coverage to more than
99% of all premises.
Wholesale Ethernet lets customers connect over 99% of business
premises at speeds of up to 10Gbps. Wholesale Optical extends those
speeds to 100Gbps. This year we extended our own fibre-based
Ethernet to many more exchanges and third-party datacentres.
Wholesale Ethernet: present in BT exchanges
As at 31 March
Virgin
Mobile
In December we announced a five-
year deal to provide wholesale mobile
network services to Virgin Media, whose
Virgin Mobile service has more than 3m
subscribers. This replaces an existing
MVNO agreement between EE and
Virgin Media and extends its exclusivity
to 2021.
Machine-to-machine
Machine-to-machine services support the exchange of information
between devices. Companies can securely communicate with their
devices and improve their services’ features and reliability using our
mobile and fixed networks.
2
3
2
1
,
6
0
3
1
,
2
8
4
1
,
2,000
1,500
1,000
500
0
1
1
9
1
,
Media services
Our 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.
Elsewhere, local partners help us link TV stations to major sports
venues worldwide.
We also offer media services such as cloud-based content playout
and media file acceleration.
2014
2015
2016
2017
Our Managed Ethernet Access Service (MEAS) uses Ethernet
technology to carry mobile voice and data traffic to and from mobile
operators’ transmission masts.
Voice
CPs use our IP Exchange (IPX) platform to carry their customers’
voice calls beyond the reach of their own voice network. IPX is now
used by over 170 CPs, including most of the UK’s biggest operators.
CPs without their own voice network can use Wholesale Calls,
which routes calls for them end to end. The CP maintains the
customer relationship through its own sales, customer service
and billing.
Hosted communications
Traditionally, businesses have made and received calls over phone
lines via a switchboard. Wholesale SIP-Trunking delivers the calls
over broadband or Ethernet while Wholesale Hosted Centrex moves
the switchboard capability into BT’s network. Similarly, our Hosted
Contact Centres replace the systems and services needed to handle
large numbers of inbound or outbound customer calls.
Mobile Virtual Network Operator
We were named Best Wholesale Operator at MVNO World Congress
2016. Customers can use their brand, build their own retail
propositions, sell mobile plans through their channels and own
the relationship with the end customer, while we do the rest.
Premier
League
Productions
This year we installed the UK’s first
uncompressed outside broadcast
network for Premier League
Productions (PLP), a partnership
between the Premier League and
international sports production
company IMG.
We now provide live HD video feeds
between all 20 Premier League
football stadiums and IMG’s studios in
London. This means IMG can move its
production facilities from the stadium
to its studios; while PLP can eliminate
the issues associated with distributing
compressed video, such as delays and
reduced image quality.
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77
2,000
1,500
1,000
500
0
Voice
Products and services
Broadband and Ethernet
We provide CPs with broadband and Ethernet connections between
their core network and their customers. Wholesale Broadband
Connect can serve 96% of premises with copper-based broadband
(2015/16: 95%) and more than 26.5m premises with fibre. Our
older broadband network brings our total coverage to more than
99% of all premises.
Wholesale Ethernet lets customers connect over 99% of business
premises at speeds of up to 10Gbps. Wholesale Optical extends those
speeds to 100Gbps. This year we extended our own fibre-based
Ethernet to many more exchanges and third-party datacentres.
Wholesale Ethernet: present in BT exchanges
As at 31 March
1
1
9
,
1
2
3
2
,
1
6
0
3
,
1
2
8
4
,
1
2014
2015
2016
2017
Our Managed Ethernet Access Service (MEAS) uses Ethernet
technology to carry mobile voice and data traffic to and from mobile
operators’ transmission masts.
CPs use our IP Exchange (IPX) platform to carry their customers’
voice calls beyond the reach of their own voice network. IPX is now
used by over 170 CPs, including most of the UK’s biggest operators.
CPs without their own voice network can use Wholesale Calls,
which routes calls for them end to end. The CP maintains the
customer relationship through its own sales, customer service
and billing.
Hosted communications
Traditionally, businesses have made and received calls over phone
lines via a switchboard. Wholesale SIP-Trunking delivers the calls
over broadband or Ethernet while Wholesale Hosted Centrex moves
the switchboard capability into BT’s network. Similarly, our Hosted
Contact Centres replace the systems and services needed to handle
large numbers of inbound or outbound customer calls.
Mobile Virtual Network Operator
We were named Best Wholesale Operator at MVNO World Congress
2016. Customers can use their brand, build their own retail
propositions, sell mobile plans through their channels and own
the relationship with the end customer, while we do the rest.
Ventures
Several of our ventures provide well-known services nationwide:
999: we handle the nation’s 999 calls on behalf of BT and all other
CPs.
Directory Enquiries: calling 118 500 gives people easy access to all
listed phone numbers.
Payphones: we provide most of the UK’s payphones, whether in
public places or on private premises.
The Phone Book: we deliver this to over 21m UK homes and
businesses.
Other ventures are more enterprise-oriented:
BT Cables: we manufacture, source and supply cabling for telcos,
railways and other industries.
BT Fleet: we source, manage and maintain BT’s fleet of 33,000
vehicles. We manage a further 58,000 vehicles for external
customers including the AA and National Grid.
BT Redcare: we provide secure signalling between on-site alarm
systems and central alarm receiving centres.
Pelipod
Wholesale Ethernet: presence in BT exchanges
This year we bought Pelipod, a data-
driven secure storage company. Pelipod
specialises in delivering items directly to
a secure box that’s easy to access and
close to an engineer’s place of work.
BT Supply Chain: we hold and dispatch products such as mobile
handsets and smart meters. If companies have a large field
engineering team we can manage their vehicles, supply their
engineers, return any surplus supplies to base and provide real-time
data for route management.
Tikit: we provide IT solutions to law and accountancy firms in the
UK, where we supply more than two-thirds of the top 100 law firms,
and across Europe, North America and Australia.
Big data and messaging: our data scientists help companies’ and
local authorities’ planning and decision-making.
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.
33,000
vehicles sourced, managed and
maintained for BT Fleet
58,000
vehicles managed for
external customers
Performance in the year – strategic
1
Delivering great customer experience
Right First Time (RFT) tracks our ability to deliver orders and repair
faults on time, every time.
This year we achieved our best RFT result for many years, up 7.5%,
including fulfilling 93% of broadband orders on time (up from 91%
last year).
We changed the way we measure customer satisfaction. We now
measure customers’ Net Satisfaction, as the difference between
those who score us very high (9+) and those who score us lower (six
or less). Our score in the former BT Wholesale business was +36.6,
up by 2.6. During the year we extended the measure to include
three of our ventures. On this basis, our score overall was +44.8.
3D
printing
We’re using 3D printing to improve the
customer experience in our Supply Chain
business. 3D printing shortens the time
it takes to get practical ideas off the
drawing board and out into the field. Now
Openreach, a Supply Chain customer, is
trialling a range of 3D printed prototypes
– for example, a cable-threading needle
which makes it easier for engineers to add
new circuits in a roadside cabinet without
snagging other wires.
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77
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Lines of business continued
Wholesale and Ventures continued
2
Investing for growth
This year we’ve invested in both new connectivity options for
wholesale networks and the services needed to run those networks.
Looking further ahead, we’re developing a new strategy for the
Internet of Things.
Network services
This year we’ve trialled two new access options from Openreach:
G.fast and Single Order Generic Ethernet Access. We’re ready to
offer them as soon as Openreach launches them. Meanwhile we’ve
been developing the capability to run Ethernet services over 4G
mobile networks so we can provide them more quickly and switch
over to 4G if the fixed network fails.
We’ve also invested in a range of new features for our Hosted
Communications Services which we’ll launch during 2017/18.
We have a long track record of running networks on our customers’
behalf. This year we created a new team to offer these services on
a bigger scale. These range from taking over a single function like
order management, through to outsourcing and transforming a
customer’s entire network.
Internet of Things (IoT)
W&V leads strategy development for IoT across BT. IoT is a network
of connected objects that exchange data to drive insight and
action. We’re involved in major IoT projects including MKSmart in
Milton Keynes and CityVerve in Manchester.
In December we added 25 locations, including the BT Tower, to the
London ‘Things Connected’ network, which local communities can
use to transform their business or daily lives.
3
Transforming our costs
Our many ongoing cost transformation projects continued to deliver
savings through:
–
reduction in supplier cost by renegotiating better terms and
changing or consolidating suppliers;
lowering our network cost by re-engineering existing platforms
and improving their utilisation;
consolidation of legacy and end-of-life platforms; and
better productivity, together with rationalisation of support
functions and overheads.
–
–
–
Performance in the year – operating
While usage of our more traditional products
declined as expected, in other areas we were
able to drive revenue growth as well as a healthy
order book.
New BT
digital street
units
In October we announced a deal with
two partners to replace hundreds of
our phone boxes with new digital units
which will offer free ultrafast wi-fi,
free phone calls and free mobile
phone charging.
The first units will be deployed in
London in 2017. We expect them
to generate substantial advertising
revenue while benefiting the
communities in which they operate.
This year we signed almost £2bn of orders. Deals included:
–
–
extending our MVNO deals with Virgin Media and ASDA;
supplying an Avaya Cloud Solution for thousands of contact
centre staff at a major utility provider;
re-signing a number of large Ethernet contracts, securing those
circuits for the future;
new IoT solutions for major corporate clients; and
taking over management of the Environment Agency’s 1,350
vehicles.
–
–
–
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79
Our Ethernet base grew by 14% this year, well ahead of the market.
Ethernet circuits are still replacing the shrinking number of Partial
Private Circuits (PPCs). The number of broadband lines we provide
over fibre grew by over 60,000; but our total broadband base fell
by 25,000, mainly as a result of some customers’ own LLU network
expansion.
In last year’s report we set out our top priorities for this year.
In the table below we report back on what we’ve achieved.
Review of last year’s priorities
WHAT WE SAID
WHAT WE DID
Ethernet installed base
Year ended 31 March
0
0
4
1
3
,
0
0
7
4
2
,
50,000
40,000
30,000
20,000
10,000
0
0
0
9
6
1
,
0
0
8
3
4
,
0
0
5
8
3
,
We said we’d
integrate the various
business units that
now comprise W&V.
We said we’d create
revenue and cost
synergies as a
result of the new
organisation.
We launched the new W&V organisation
on 1 April 2016.
The many services provided by our new,
digital street units (page 78) draw on
a wide range of BT capabilities. These
include payphone sites, BT Wi-fi, the fibre
networks that connect the payphone
to the internet and to the BT platform
providing IP voice calls, BT’s Next
Generation Text Service, and end-to-end
service management. And we’ve made
good progress in creating cost synergies
in our Supply Chain operations.
2013
2014
2015
2016
2017
IPX carried 22bn voice minutes. This was up 9% on last year,
excluding minutes carried for EE. IPX growth has slowed now that
more of the UK’s major operators have completed their transition
from Time-Division Multiplexing (TDM) to IP voice networks.
Meanwhile the number of voice minutes that we carried over
traditional TDM networks fell.
Our SIP Trunks and Hosted Centrex users grew by 24% and 40%
respectively.
In BT Fleet the number of vehicles under management grew
by 15%. We implemented round-the-clock working in some
garages, recruited over a hundred extra technicians and appointed
47 Modern Apprentices.
We provided professional services to help upgrade and/or install over
5,000 4G basestation sites for mobile network operators.
22bn
voice minutes carried by IPX.
Up 9% on 2016
5,000
we helped upgrade and/or install
over 5,000 4G transmission sites
We said we’d
continue to
improve customer
experience,
especially in
Ethernet delivery.
We achieved our best RFT result for
many years. For Ethernet specifically we
implemented a new and much improved
ordering system. And we designed a new
Ethernet service that will run over 4G;
we’ll be trialling this with customers early
in the new financial year.
We said we’d further
expand our Ethernet
network.
We said we’d
increase the number
of customers using
fibre rather than
copper broadband.
We said we’d further
strengthen our
defences against
attempted cyber
attacks and fraud.
We said we’d
continue our cost
transformation
activities.
We expanded our Ethernet network to
another 429 exchanges.
Our fibre broadband base rose by over
60,000 this year.
We’ve upgraded many of our internet-
facing systems with additional firewall
protection.
We further reduced our own network
costs and overheads, as well as third-
party supplier costs.
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79
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION EBITDA grew quarter on quarter throughout the year. It was up on
the prior year by 10% but down 6% adjusted for the acquisition
of EE. This reflected lower revenues and the continuing migration
to lower-margin IP services, offset by growth in Wholesale Mobile
and Ventures.
Depreciation and amortisation was up 21% (2015/16: 3%),
primarily due to the inclusion of Ventures assets such as BT Fleet
vehicles. Operating profit went up by 5% (2015/16: flat).
Capital expenditure was up 8% because of investment in new
MVNO platforms. Working capital was impacted by timing on
managed solutions invoicing and VAT; this contributed to a 10%
increase in free cash flow.
Priorities for the year ahead
Over the next 12 months we’ll carry on
investing for the future and further enhancing
our customer experience.
Our top priorities for 2017/18 are:
Roll out new services
–
–
start to deploy our new digital street units; and
expand our managed services capacity, to help customers
run their networks and operations.
Develop new solutions
–
helping mobile network operators prepare for the next
generation of 5G mobile networks;
adding 4G mobile access to our Hosted Communications
Portfolio; and
for the Internet of Things.
–
–
Improve our customer experience
–
in particular our RFT delivery for Wholesale Ethernet and
Hosted Communications Services.
Lines of business continued
Wholesale and Ventures continued
Performance in the year – financial
Revenue was down 7%, or 3% adjusted for the
acquisition of EE, compared with a 4% decline
last year. This included £30m or 37% less transit
revenue than the year before.
Last year our reported numbers included all revenues from EE as a
customer until the end of January 2016. Where appropriate, we give
yearly comparisons both including and excluding those revenues.
Year ended 31 March
Revenue
Underlying revenuea excluding transit
adjusted for the acquisition of EE
Operating costs
EBITDA
Depreciation and amortisation
Operating profit
Capital expenditure
Free cash flow
2017
£m
2016
£m
2015
£m
2,109
2,274
2,361
(3)%
0%
n/a
1,275
1,519
1,615
834
306
528
226
587
755
253
502
209
536
746
245
501
294
416
Revenue was down 7% or 3% adjusted for the acquisition of EE.
This reflects the market decline in legacy products offset by growth
in Ventures.
Managed Solutions revenue declined 33%. MEAS saw a 6% fall:
mobile networks have now largely completed this phase of their
network installation programme, so they added capacity at fewer
sites and connected fewer new sites. This was partially offset by
growth in other contracts.
Data and Broadband revenue was down 5%, driven largely by Partial
Private Circuits, though there was good growth in fibre broadband.
Ethernet saw a 14% increase as the rental base grew to 43,800.
Voice revenue was down 22% due to the market decline in call
volumes and the inclusion of ladder revenues in last year’s numbers.
Wholesale Mobile revenue was £223m, supported by growing data
usage and more customers moving to 4G.
Ventures revenue of £312m was up 7% compared to last year. This
was driven by growth in BT Fleet, thanks to new strategic alliances,
and in BT Supply Chain which enlarged its external customer base.
These were offset by a £6m reduction in BT Cables because of lower
demand for copper cabling, and another £6m reduction as our
Phone Book, Payphones and BT Redcare businesses declined in line
with their markets.
Operating costs decreased 16%, while underlying operating costs
excluding transit were down by 15%.
a Excludes specific items, foreign exchange movements and disposals and from 2016/17 is
calculated as though EE had been part of the group from 1 April 2015.
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PB
Lines of business
Technology, Service and Operations (TSO)
TSO is our internal technology unit. It’s responsible for creating
and operating our global networks, platforms and IT systems.
We work closely with each of our lines of business, creating new
products for them and making sure that services evolve to reflect
the changing needs of their customers. And we make sure that BT’s
networks and systems are reliable and resilient.
We manage BT’s research and development and our worldwide
patent portfolio. Find out more on page 32.
There are more than 13,000 people in TSO, and this year we
recruited over 220 graduates and apprentices. TSO people work on
a wide variety of rapidly-changing technologies so we’ve developed
comprehensive training and career pathways to attract and retain the
best talent. For example, we now offer Degree Apprenticeships that
allow apprentices to achieve a full bachelor’s degree while training on
the job.
Products and services
We manage the infrastructure for BT’s products,
services and internal systems, such as our IT
systems and voice, data and TV networks.
2
Investing for growth
This year we’ve completed the rollout of our new Ethernet switches.
They’re now installed in 585 exchanges so even more businesses can
access BT Ethernet services.
We’re also embracing new technologies such as programmable
networks. These deliver services faster and provide real-time visibility
and control of a customer’s network. With the launch of Dynamic
Network Services we’re offering these capabilities to Global Services’
customers.
We’ve also completed the first voice calls on our single fixed and mobile
infrastructure which enables us to offer new converged services such as
high-definition voice calling.
3
Transforming our costs
Following the acquisition of EE we’ve taken the opportunity to
review and rationalise the number of applications we use.
BT manages networks for many of the world’s top companies.
Our people design and deliver the solutions that make this happen.
We’re also migrating applications onto our Enterprise Cloud, making
them easier to manage and lowering their running cost.
Performance in the year – strategic
1
Delivering great customer experience
To overcome wi-fi problems that people can encounter in the
home, we developed and launched the BT Smart Hub. This uses
smart technology such as improved antennas to improve wi-fi
performance.
We also developed the systems behind the new BT Call Protect
service, designed to stop companies that regularly pester our
customers with nuisance calls. Find out more on page 57.
Performance in the year – operating
We’re always looking for new ways to maintain
and refresh the technology in our networks and
service platforms.
We’ve seen record levels of data traffic sustained throughout the year, and
our investments have been focused to maintain high levels of performance.
For example, we installed infrastructure that cuts congestion in the
core network to improve the UK broadband experience. See page 30
for more on the improvements we’ve been making to our networks.
We’ve improved the reliability of the IT systems we use to trade with
our customers for the fourth year in a row. We’ve also continued to
cut our costs and the group’s energy consumption. See page 42 for
more details.
PB
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Lines of business continued
Technology, Service and Operations (TSO) continued
The table below summarises the progress we’ve made on the top
priorities we set out in last year’s report.
Priorities for the year ahead
Review of last year’s priorities
WHAT WE SAID
WHAT WE DID
We successfully trialled Long-Reach VDSL
at Isfield, Sussex and North Tolsta on the
Isle of Lewis.
Over the next 12 months we’ll carry on
improving our networks, platforms and IT
systems, and doing everything possible to
help deliver a great customer experience.
Our top priorities for 2017/18 are:
We said we’d develop
technology solutions
that increase the
broadband speeds
for homes at the end
of long copper lines.
We said we’d move
from a technology
trial to a live
customer trial of an
all-IP voice service.
We said we’d
investigate
technology that
could provide better
picture quality on
our TV platform.
We said we’d
enhance the cloud-
based services
that we offer to
businesses.
We said we’d
continue
our network
rationalisation.
We’ve started running wholesale and
communications provider trials of
IP voice.
Enhance the UK broadband experience
– deploy architectural and infrastructure improvements to cope
with broadband traffic growth and improve the quality of the
UK broadband experience.
Extend 4G coverage
– deliver upgrades to existing mobile cell sites and deploy new
cell sites to increase 4G coverage in support of the Emergency
Service Network contract.
Improve systems reliability
– continue to improve the reliability of our IT and network
platforms, ensuring they’re as resilient as possible.
We’ve performed perception tests to
see what viewers think of the latest
developments in TV technology.
We added a new software-defined
WAN service to Global Services’ dynamic
network services portfolio.
We turned off some of the equipment
in our PSTN network that we no longer
needed, saving over £1m in energy
costs. By removing this older equipment,
we’ve also released spares to avoid repair
costs and help contribute to the best
performance of the PSTN in eight years.
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Lines of business
Openreach
As the people responsible for building and maintaining much of the country’s
digital infrastructure, we have continued to provide the foundation for
Britain’s booming digital economy against a backdrop of profound changes
to our business.
member of the Equality of Access Board
(EAB); and Liz Benison, chief executive, UK
& Europe, Local & Regional Government at
Serco.
Our new board will work closely with Clive
Selley and his executive team, and we’ll be
responsible for setting the Openreach strategy
whilst overseeing its performance. We’ll also
make sure the business treats all customers
equally and continues to invest in Britain’s
digital future.
Rising to the challenge
We’re responsible for services that are
hugely important to people and businesses
throughout the country. The scale of what
we manage is huge – overseeing 158m
kilometres of telecommunications wires
and fibre cables and more than 25,000
customer interactions every day.
We recognise the importance and size of
the challenge before us.
We’re making progress in moving Openreach
forwards and our renewed focus on service
is starting to deliver improvements for our
Communication Provider customers and
their customers. Clive’s team halved the
number of missed appointments Openreach
is responsible for by the end of the financial
year. And we’ve halted a historical rise in faults
across our network. We’ve also continued to
build our superfast broadband network for
homes and businesses, and we’re increasingly
upgrading the most remote and hard-to-
reach areas of the country in partnership with
both government – via the BDUK programme
– and with individual communities and
housebuilders.
We made our fibre network available to over a
million more premises this year and we won’t
stop there. We’re also continuing with our
ambitions to scale ultrafast technologies, to
make speeds of over 100Mbps available to up
to 12 million homes and businesses by 2020.
In 2016 Ofcom reported that the UK already
had the highest fibre broadband availability
of all the major European economies and,
thanks to our open wholesale network,
we have one of the most competitive
telecommunications markets anywhere in
the world. I’m confident that continuing
to invest in our broadband network and
working more closely and collaboratively
with our customers and the wider industry
will provide the national telecommunications
infrastructure necessary to support
the future growth of the UK economy,
something that will be particularly important
as we leave the EU.
Financial investment in our network alone
will not deliver the change we need – we’ll
invest in our people too. This year we’ll
expand our engineering workforce by
hiring 1,500 trainees and we’ll train more
engineers to complete more tasks in a single
visit. That will play a pivotal role in ensuring
we meet our customers’ expectations.
Finally, I want to address the issue of
Deemed Consent. Ofcom’s investigation into
Deemed Consent practices showed that
in the past, Openreach made a number of
mistakes when processing orders for high-
speed business connections. This simply
shouldn’t have happened and we apologise
wholeheartedly to the communications
providers affected. During my short
time in Openreach, I’ve seen significant
improvements being made to the way
we deliver these connections and we are
determined to make sure the same mistakes
aren’t repeated in future.
We’re committed to fixing the issues of the
past, delivering better service, and investing
in our network – and we recognise that to be
successful in these goals, we need to work in
closer partnerships with our customers, the
wider industry, regulators and government.
By working as a team, we can achieve success
collectively and build the telecommunications
infrastructure that will power Britain’s leading
digital economy for years to come.
Mike McTighe
Chairman
11 May 2017
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This has been a momentous year for
Openreach
Over the past 12 months, we’ve made
big strides in our strategy to deliver better
service, broader coverage and faster speeds
for the UK. At the same time, how we
operate and how the market should be
regulated have been fiercely debated topics.
The major theme in Ofcom’s once-in-a-
decade Digital Communications Review
became the extent to which we should
operate more independently from BT – and
in March 2017, a long-term regulatory
settlement was agreed that will see us
become a distinct, legally separate company
within BT Group.
Fundamental governance changes
Under this agreement, we’re gaining
more control of our strategy, investments
and plans within a strategic and financial
framework defined by BT. This means we
can make more of our own decisions and
be more autonomous, transparent, and
accountable to everyone who has a stake
in us. This will strengthen our ability to
work in partnership with all our customers
and deliver the communications
infrastructure that is the foundation of the
UK’s vibrant internet economy.
Central to these changes are a first-class
governance structure and a new board
with a majority of independent members.
I was delighted to be appointed as the first
Openreach chair back in November 2016.
I’m also pleased to have appointed three
independent board members of the highest
calibre: Sir Brendan Barber, former general
secretary of the Trades Union Congress and
current chair of Acas; Edward Astle, a former
board member of National Grid and current
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Lines of business continued
Openreach continued
We build the network that connects Britain’s
homes and businesses to the future.
We’re responsible for providing services over the
local access network, sometimes referred to as
‘the last mile’, installing and maintaining the
fibre and copper communications networks that
connect homes and businesses.
Communications Providers (CPs) access our network on equivalent
terms, which means they have access to the same products, prices
and levels of service. They use our network to deliver services ranging
from home broadband, television and telephone to high-speed data
connections for businesses of all sizes.
Openreach local access network
Exchange
FTTC
PCP G.fast
DP
c26.5m premises
can access fibre
Business
FTTP
Splitter
DP
c5,500 exchanges
c97,800
PCPs
c4.7m
DPs
c30m
premises
Fibre
Copper
FTTC
PCP
FTTP
DP
G.fast
Fibre-to-the-cabinet
Primary connection point
Fibre-to-the-premises
Distribution point
G.fast side pod
Delivering a more independent Openreach
We’re pleased that the proposals to further enhance the
organisational structure of our business have been accepted
by Ofcom as a pragmatic solution to meeting its DCR concerns.
We’re fully committed to implementing the requirements of the
Commitments and Governance Protocol which includes a focus
on compliance, increased transparency and improved customer
engagement as quickly as possible.
We’ve already started to introduce new governance and measures,
where possible and appropriate, in advance of full implementation
of the DCR agreement. For example, we’ve made a number of
governance reforms to make Openreach a more transparent and
autonomous business. In November 2016 we appointed our first
chairman, Mike McTighe, who is leading our newly-formed board.
The board has a majority of independent members and will be
responsible for setting Openreach’s strategy and overseeing its
performance. It will make sure we treat all customers equally while
investing in better service, broader coverage and faster broadband
speeds for the UK.
Other activity underway includes the development of a new CP
consultation process for major new strategic investments and the
redesign of the Openreach brand to remove the reference to
BT Group and the associated logo.
We’re also preparing for the implementation of the remainder of
the DCR agreement, including incorporation of Openreach Limited
and the transfer of employees to it, once the preconditions have
been met.
Markets and customers
The UK has the highest share of GDP generated
by the digital economy of any country in the
G20, and the highest superfast availability
and take-up compared to our major European
peersa. We’re playing our part in this success
story by building and operating the largest
superfast network in the country.
At the end of December 2016 there were 25.3m broadband lines in
the UK. 80% of these, excluding Hull, use the Openreach network
with the rest mainly on Virgin Media’s cable network.
Total UK broadband market
As at 31 March
.
9
1
2
.
9
2
2
.
.
9
9
3
3
2
2
.
7
4
2
.
3
5
2
m
26
25
24
23
22
21
20
2013
2014
2015
2016
2017*
* As at December 2016.
Source: Company data.
Our customers are the CPs who provide communications services to
end customers, and property developers building new properties.
a France, Germany, Italy and Spain.
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There are more than 580 CPs using our network. They operate in
three markets:
– Consumer – made up of households using fixed-line broadband
and telephone services. Our largest customers include BT’s
Consumer division, Sky and TalkTalk;
– Business – consisting of the 5.5m businesses in the UK. Most of
our customers serve business clients; and
– Infrastructure – including firms building network infrastructure
to data centres and mobile cell sites, and property developers
connecting new developments.
We also have relationships with communities throughout the
UK who co-fund investment in fibre networks with us through
Community Fibre Partnerships.
The market trends are:
– ongoing demand for connectivity as total fixed broadband
ownership steadily rises;
– increasing data usage, propelled by video streaming driving
demand for faster connections and major investment in backhaul
capacity and network reach;
– cloud computing increasing corporate demand for connectivity;
– a fast-growing data centre market creating a new need for high-
capacity circuits (1Gbps or more); and
– strong demand for Ethernet and optical service products as
businesses seek better speeds and reliability.
Average monthly fixed data usage
per residential connection
As at 30 June
2
3
1
7
9
8
5
GB
140
120
100
80
60
40
20
0
3
2
0
3
2012
2013
2014
2015
2016
Source: Ofcom Connected Nations reports 2013-2016.
Competitors
Our main competitors are other network builders, the largest being
Virgin Media. Its cable network covers around half of UK homes,
with plans to reach around 17m premises by 2019.
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 across
urban and rural areas, increasing the competition we face.
Competitors in the business and infrastructure markets include Virgin
Media, Colt Group and Vodafone. CityFibre’s prominence in this
market continues to grow as it fulfils its plans to cover 50 ‘Gigabit
cities’ by 2020.
Pricing, service delivery and product innovation remain competitive
themes. The ‘price per Gigabit’ is being pushed down by intense
competition, particularly in urban areas. The introduction of a Dark
Fibre product later in 2017 will increase price competition further.
Products and services
We provide network access and engineering
services as well as four main products and
services: copper access, fibre access, Ethernet and
optical, and infrastructure solutions. Our network
can carry broadcast and on-demand internet
protocol television (IPTV). Our multicast service
over fibre cuts the cost of broadcast TV. We also
provide access to our network via our ducts and
poles and will be launching a new Dark Fibre
product in October 2017 (subject to CAT ruling).
Copper access
– 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.
– Local Loop Unbundling (LLU) provides CPs with a direct
connection to the local network, or local loop. CPs can install their
own equipment in, or near to, our exchanges, and use it
to provide phone and broadband services to their customers.
Fibre access
Our wholesale fibre product is called Generic Ethernet Access. We
offer a number of versions:
– Fibre-to-the-cabinet (FTTC) uses fibre from the exchange to
the street cabinet and the existing copper network for the final
link to the customer.
– Fibre-to-the-premises (FTTP) uses fibre all the way from
the exchange to the property and offers ultrafast speeds from
100Mbps up to 1Gbps. We’ve launched 500Mbps and 1Gbps
speed tiers for smaller businesses needing ultrafast speeds at
lower price points than Ethernet.
This allows us to offer superfast broadband (speeds over 24Mbps) via
FTTC and FTTP and ultrafast broadband (speeds over 100Mbps) via
G.fast and FTTP.
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Openreach continued
Ethernet and Optical
CPs use these high-speed fibre connections to build and extend
their networks and provide high-quality, high-bandwidth services to
businesses and the public sector.
– Ethernet Access Direct (EAD) offers competitive services, from
10Mbps to 10Gbps, to all UK businesses and infrastructure
markets.
– Optical Spectrum Services (OSS) are scalable wavelength
solutions offering up to 100Gbps at any distance.
TBC
Infrastructure solutions
Our infrastructure solutions let CPs build their own networks. They
allow third parties to request rearrangements of our network and for
us to work on their networks.
– Flexible Co-mingling allows CPs to place their equipment in
our exchanges.
– Physical Infrastructure Access (PIA) lets CPs use our ducts and
telephone poles to deploy their own fibre networks. PIA has been
available since 2011.
– Mobile Infill Infrastructure Solution (MiiS) lets CPs install
their radio equipment in special cabinets linked to antennas
on telephone poles and use their spectrum to improve
mobile coverage.
– Network rearrangements help third parties to progress their
projects by moving or removing our network.
Performance in the year – strategic
1
Delivering great customer experience
The internet is an essential part of modern life. Every year, customers
expect more from the service we provide, and we’re committed to
meeting their needs.
The table on page 87 shows Openreach’s service performance on a
number of key measures known as Minimum Service Levels (MSLs).
These are quality of service standards for installation and repair
which are set by Ofcom and increase annually. In May 2016, six
Ethernet MSLs were added to the existing set of 60 copper MSLs.
We publish this data quarterly with additional levels of detail.
This year we exceeded all 40 of Ofcom’s copper MSLs that were due in
the year, for the third year in a row. And we remain ahead on the other
20 which are measured to March 2018.
We keep making progress with our Ethernet delivery, improving quality
of service, providing more Ethernet circuits than ever before, and
reducing the average age and number of jobs in our workstack.
Even so, we’re disappointed that we’ve missed one of the Ethernet
MSLs due to the impact of our most complex Ethernet orders, where
we experience delays that aren’t fully within our control such as road
traffic management.
We launched the ‘Better service’ campaign to make real improvements
in our customer service. We halved missed appointments by the end
of the financial year. And we invested £32m to improve resilience
and halt a historical rise in network faults. We also cut the number
of customers waiting over 90 days for new orders by 60%a.
Our Customer Satisfaction Score is provided by end customer surveys
from our CP customers. The CPs’ sampling strategy has changed
through the year making a like-for-like comparison difficult and has
resulted in our performance being under reported. We’re working
with the CPs to standardise sampling to enable future year-on-year
comparisons.
Right First Time, improved by 5.1% (down 6% in 2015/16), focusing
particularly on time to repair. We completed 79% of repairs on timeb,
a four percentage point increase compared with last year, and reduced
the average time to restore service by five hours. We see the MSLs as
a baseline and set ourselves a more challenging RFT target because
we know there’s more to be done to deliver the service our customers
expect.
We’ve proactively improved our PIA processes by providing greater
flexibility and self-service options. These include a digital map of our
network which makes it quicker and easier for CPs to understand
where our ducts and poles can help them to roll out fibre.
a For copper-based services.
b For LLU, WLR, PSTN and NGA services.
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Improvement
Steady performance – maintaining focus
Further improvement needed – plans in place to get back on track
Openreach performance against service responsibilities
Home and smaller businesses
Average time to install with an engineer (working days)
Average time to install without an engineer (working days)
Movement
Q4
2016/17
Q4
2015/16
13.22
14.44
9.64
9.49
Installation requiring an engineer where wait is 22 days or longer for an appointment
0.37%
1.12%
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 not cleared after 31 days or more Maintenance level 1
Faults not cleared after 31 days or more Maintenance level 2
6.82
8.51
1.65%
1.34%
1.99
1.72
2.82
1.94
0.62%
1.60%
0.94%
1.79%
Home and smaller businesses Minimum Service Levels
New lines installed on time (WLR3)
New lines installed on time (MPF)
First available appointment date for new installation
(working days) 12 days or less (WLR3)
First available appointment date for new installation (working days)
12 days or less (MPF)
Movement
Ofcom
minimum
standard
Q4
2016/17
Q4
2015/16
89%
94.55%
93.84%
89%
94.14%
93.02%
79%
92.91%
86.54%
79%
95.38%
89.65%
Faults fixed within agreed time Maintenance level 1
77%
86.54%
74.53%
Faults fixed within agreed time Maintenance level 2
77%
81.87%
76.14%
Larger business Minimum Service Levels
Average time to install (working days)
Delivery date certainty
Circuits provided in 30 working days
Circuits provided in more than 159 working days
Average time to initial CDDa (working days)
Faults fixed within agreed time
Notes:
The homes and smaller businesses tables compare performance in the quarter and are not annual measures.
The larger business measures have had an ‘adjustment’ applied to them in line with the Ofcom measurement methodology.
a Contractual Delivery Date.
Ofcom
minimum
standard
2016/17
full year
46
80%
40%
3%
61
41.4
85.4%
57.4%
3.2%
40.2
94%
94.2%
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Lines of business continued
Openreach continued
2
3
Investing for growth
We’ve invested £11bn in Britain’s digital infrastructure over the
last ten years, committing over £3bn to create a fibre network that
provides affordable high-speed broadband to the vast majority of
the UK.
Our ambition is to deliver ultrafast speeds to 12m homes and
businesses by 2020 using FTTP and G.fast. Our G.fast technology
can deliver ultrafast speeds of 300-500Mbps over existing copper
wires with minimal disruption. This technological capability will allow
us to offer speeds of over 100Mbps to 10m homes by 2020. After
a successful trial we’re rolling out G.fast to 17 locations as part of
our pilot deployment phase.
We keep extending, upgrading and maintaining our copper network
which underpins most of our services in the UK. We’ve raised
preventative maintenance spend by 104% compared to last year
and this will make our network more weather resilient in future.
Our new Dark Fibre product will launch in October 2017 (subject to
CAT rulinga). This will provide a dedicated, unmonitored, unlit optical
fibre path between two sites up to 86km apart. CPs can use this to
build connectivity solutions.
Investing in our people
We’ve a workforce of 30,400 people, including skilled network
engineers and planners who maintain our access network.
This year we invested in hiring over 1,500 people including around
250 apprentices and graduates. Our apprentices are trained on
a wide range of skills relating to provision and repair activities to
improve customer service. Our graduates complete a variety of
project roles in order to learn the business, before taking on roles
within our operational teams.
Most of our new recruits, including 50 apprentices, have moved into
front-line customer service engineering roles across the country.
Another 75 will increase our in-house civil engineer capability. We’re
training 100 apprentices on fibre jointing to improve Ethernet
delivery and another 65 have been trained on connectorised fibre
for our superfast broadband network build.
We also launched our Fibre Academy and showcase to give our
apprentices and engineers the training and hands-on experience
they need.
Transforming our costs
We keep reviewing the way we work, simplifying our business to cut
the cost of delivery while improving customer experience.
This year we:
– completed a ‘civils insourcing trial’. As a result we’re now
insourcing certain civils activities to improve customer experience;
– consolidated desk-based teams from over 400 locations down
to 32 larger ‘centres of excellence’. This will better support the
sharing of best practice and create better working environments;
and
– cut the number of Ethernet orders awaiting completion by
improving our operational processes.
Performance in the year – operating
This year we made our fibre network available
to a further 1.1m premises. We achieved 1.8m
fibre broadband net additions, with a total of
7.7m homes and businesses in the UK choosing
to take a fibre service. We grew our Ethernet
base by 13% and exceeded all the increased
copper MSLs set by Ofcom.
External CPs accounted for 923,000 of the 1.8m fibre broadband
net additions, an increase in share of 4% from last year,
demonstrating the market-wide demand for fibre.
The physical line base decreased by 153,000 following a 29,000
increase the year beforeb.
Investing in fibre
We keep investing heavily in our fibre network which now passes
more than 26.5m premises nationwide.
This year we launched new ultrafast products for SMEs and business
parks. Our FTTP network is the largest in the UK and we delivered
more FTTP this year than in any previous year.
In May 2016 we launched our offer to connect fibre-to-the-
premises for free to all developments of new sites with over
100 plots, then lowered the threshold to over 30 plotsc in
November 2016.
a This relates to our appeal to the Competition Appeal Tribunal of Ofcom’s BCMR market review decision – see page 40. ‘Other regulatory decisions and activities – Business connectivity market and cost
attribution’.
b Last year’s report stated a 2,000 line increase and this has been amended to include FTTP lines.
c New sites with over 30 plots registered from 10 November 2016.
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Ofcom investigation into historical use of Deemed Consent
On 26 March 2017 Ofcom published the findings of its investigation
into the historical use of Deemed Consent by Openreach.
Deemed Consent is an agreed process between Openreach and its
communications provider (CP) customers, which allows Openreach
to halt the installation and reschedule the delivery date for providing
dedicated business services (known as Ethernet) in a number of
specific circumstances which are beyond its control. Ofcom found
that Openreach had breached its contractual and regulatory
obligations by inadequately and retrospectively applying Deemed
Consent to reduce compensation payments to CPs between January
2013 and December 2014.
As a result of the findings, Openreach has agreed to compensate CPs
and Ofcom has imposed a fine of £42m, reflecting the seriousness
of the failings. This includes a 30% maximum discount for BT
admitting its liabilities and agreeing to compensate the affected
CPs in full. The precise amount of these compensation payments
will result from discussions with the affected parties and is currently
estimated at £300m. The fine and associated compensation
payments are treated as a specific item charge in this year’s income
statement, with the cash expected to be paid in 2017/18.
We take this matter very seriously and we’ve put in place additional
controls to safeguard against this happening again and to make sure
that we’re providing the highest standards in serving our customers.
Extending our reach
We’re still working in partnership with the BDUK programme to bring fibre
broadband to communities who can’t currently access it, completing 39
of our 45 contracts this year. We’re also deploying our Superfast Extension
Programme (SEP) in partnership with the Government.
We’re committed to working with local communities to deploy
co-funded solutions under our Community Fibre Partnerships
programme. To date we’ve worked with over 200 communities,
and have over 100 more in the pipeline for upgrades
In last year’s report we set out our top priorities for this year. In the
table below we report back on what we’ve achieved.
Review of last year’s priorities
WHAT WE SAID
WHAT WE DID
We said we’d achieve
our goal of 95% on-
time installations by
the end of December
2017, ahead of
Ofcom’s minimum
service level.
We said we’d work
with Government
to help take fibre
broadband to 95%
of the country by
the end of December
2017.
We said we’d get
ultrafast broadband
to 10m premises,
with an ambition of
12m, by the end of
2020.
We said we’d recruit
1,000 frontline
engineers to
deliver further
improvements in
service.
We said we’d work
to deploy FTTP
using microfibre
technology.
We’re on track to hit this RFT goal.
We’ve made our fibre network available to
another 1.1m premises this year, bringing
the total to 26.5m across the UK.
We’ve built ultrafast broadband to
500,000 premises and have more than
98,000 customers, a 77% increase
compared to last year.
We recruited over 1,500 people, mostly
engineers, to enable faster repairs and
provide greater contingency. Around 250
of these new recruits were apprentices
and graduates.
We’ve introduced connectorised FTTP
technology and halved the mean time to
provide on our existing network this year.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Priorities for the year ahead
Over the next 12 months, we’ll continue to
invest in our fibre network and ensuring a
great customer experience.
Our top priorities for 2017/18 are:
Connecting Britain to the future
– getting ultrafast broadband to 10m premises using G.fast
and an ambition to reach a further 2m via FTTP, by the end of
2020; and
– working to deploy FTTP using microfibre technology.
Delivering a great customer experience
– achieving our RFT goal of 95% on-time installations by the
end of 2017, ahead of Ofcom’s minimum service level;
– recruiting 1,500 frontline engineers to deliver further
improvements in service; and
– driving higher investment in fibre skills and growing our Fibre
Academy.
Working with Government and industry
– working with the Government to support its objective for a
Universal Broadband Commitment; and
– launching a consultation with industry to inform on future
FTTP planning.
Lines of business continued
Openreach continued
Performance in the year – financial
Despite around £230m of regulatory price
changes, we held revenue flat thanks to strong
demand for fibre products.
Year ended 31 March
Revenue
Operating costs
EBITDA
Depreciation and amortisation
Operating profit
Capital expenditure
Free cash flow
2017
£m
5,098
2,465
2,633
1,369
1,264
1,573
1,349
2016
£m
5,100
2,441
2,659
1,301
1,358
1,447
1,415
2015
£m
5,011
2,414
2,597
1,348
1,249
1,082
1,497
Revenue was flat (2015/16: 2% increase) with a 35% increase in
fibre broadband revenue being offset by regulatory price drag which
had an overall negative impact of around £230m, equivalent to 5%
of our revenue.
Operating costs were up 1% (2015/16: 1%) reflecting the
investment we made to deliver our copper minimum service levels,
halve missed appointments by the end of the financial year and
upskill our workforce. We also saw higher service level guarantee
costs associated with the delay in fulfilling a number of older and
more complex Ethernet orders.
EBITDA decreased 1% (2015/16: 2% increase). With depreciation
and amortisation up 5% (2015/16: down 3%), operating profit was
down 7% (2015/16: up 9%).
Capital expenditure was £1,573m, up £126m or 9% (2015/16: up
£365m or 34%) reflecting our ongoing investment in fibre coverage
and speed, and the delivery of more complex Ethernet circuits. This
was after gross grant income of £159m (2015/16: £320m) directly
related to our activity on the BDUK programme build and offset
by the deferral of £185m of the total grant income (2015/16:
£227m) due to strong levels of fibre broadband take-up. This is
primarily because we increased our base-case assumption for take-
up to 39% 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 5% (2015/16: 5% decrease) largely
due to the timing of BDUK funding receipts and other working
capital movements.
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BT Group plcAnnual Report 2017 Group performance
Group Finance Director’s introduction
Our results this year have been significantly impacted by the findings from our
investigation into our Italian business, Openreach’s historical practices on Deemed
Consent and the headwinds we face in the UK public sector and international corporate
markets. The performance of our UK consumer, business and wholesale activities have
been in line with our expectations and the integration of EE into the group is going well.
Our results for the year were below our
expectations. We saw good performance
from our UK consumer, business and
wholesale activities but this was more
than offset by what we found in our Italian
business, Openreach’s historical practices on
Deemed Consent and the headwinds we face
in the UK public sector and international
corporate markets.
Reported revenue increased by 27% to
£24.1bn. Our key measure of the group’s
revenue trend, underlying revenuea
excluding transit adjusted for the acquisition
of EE, was down 0.2%.
Our investigation into our Italian business
identified £268m of prior year errors, for
which we revised the prior periods, and
a specific item charge of £260m in the
current year for changes in accounting
estimates and investigation costs. We’ve
also recorded a specific item charge of
£342m following Ofcom’s investigation
into Openreach’s historical practices on
Deemed Consent. Our reported operating
profit, which includes specific items, was
down 12%. Our adjustedb operating profit
was up 8% reflecting a strong first year
contribution from EE.
Reported profit before tax was down 19%
to £2.4bn and adjustedb profit before tax
was £3.5bn, up 5%. Reported EPS of 19.2
pence was down 33% and adjusted EPS of
28.9 pence was down 9%.
Net cash inflow from operating activities
was £6.2bn, up 20%, whilst normalised free
cash flowc was £2.8bn, down 10% which
includes earlier than expected customer
collections that will reverse next year.
In addition, we are also expanding and
accelerating areas of our cost transformation
programme. We are simplifying our central
Group Functions and our internal service
unit, Technology, Service & Operations. We
are also restructuring the Global Services
organisation and accelerating ongoing
transformation programmes in other lines
of business. We anticipate that these
transformation programmes will cost around
£300m over the next two years, with most
of this being incurred in 2017/18. This
restructuring cost will be treated as a specific
item and will payback in about 2 years.
For 2017/18, we continue to expect
underlying revenue excluding transit to
be broadly flat year on year and adjusted
EBITDA to be in the range £7.5bn to
£7.6bn.
Simon Lowth
Group Finance Director
11 May 2017
Alternative Performance Measures
We assess the performance of the group using a variety of performance measures. These measures are not defined under IFRS and
therefore termed ‘non-GAAP’ measures. A reconciliation from these non-GAAP measures to the nearest prepared measure in accordance
with IFRS is presented on pages 252 to 254. The alternative performance measures we use may not be directly comparable with similarly
titled measures used by other companies.
a Excludes specific items, foreign exchange movements and disposals and is calculated as though EE had been part of the group from 1 April 2015.
b Before specific items, which are defined on page 252.
c Before specific items, pension deficit payments and the cash tax benefit of pension deficit payments.
91
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Group performance continued
Summary financial performance for the year
Performance against our outlook
We did not achieve the financial guidance we set out at the beginning of the
year. We were in line with the revised guidance we issued in January 2017.
Adjusted EBITDA grew 18% to £7.6bn. This was below our original
outlook of approximately £7.9bn and in line with the outlook we
revised in January.
2016/17 performance against our outlook
Outlook provided
in May 2016
Outlook provided
in January 2017
Result
Change in underlying revenue
excluding transita
Adjusted EBITDAa
Growth
Broadly flat
(0.2)%
c£7.9bn
c£7.6bn
£7.6bn
Normalised free cash flowa £3.1bn – £3.2bn
c£2.5bn
£2.8bn
Dividend per share
≥10% growth
≥10% growth
15.40p,
+10%
Share buyback
c£200m
c£206m
£206m
a Defined on pages 252 to 254.
Reported revenue increased by 27% to £24.1bn. Underlying revenue
excluding transit adjusted for the acquisition of EE was down 0.2%,
below our original outlook of growth. This was in line with the outlook
we revised in January of broadly flat.
Normalised free cash flow was £2.8bn, down 10% and below our
original outlook, but almost £300m above our revised outlook, due to
early customer collections that will reverse in 2017/18.
Outlook for 2017/18
Change in underlying revenue
excluding transita
Adjusted EBITDAa
Normalised free cash flowa
Dividend per share
Share buyback
a Defined on pages 252 to 254.
Broadly flat
£7.5bn – £7.6bn
£2.7bn – £2.9bn
Progressive
c£100m
Revenue
Year ended 31 March
Cash flow
Year ended 31 March
£m
30,000
25,000
20,000
15,000
10,000
5,000
0
7
7
6
3
2
,
8
6
9
7
1
,
0
4
8
7
1
,
2
9
6
3
2
,
2
1
0
9
1
,
9
7
8
8
1
,
2015
2016
a
reported
adjusteda,b
adjusteda,b,c
Profit
Year ended 31 March
4
6
6
7
,
3
9
1
6
,
4
9
0
3
,
7
6
5
2
,
£m
10,000
8,000
6,000
4,000
2,000
0
6%
6%
0%
6
2
8
7
,
9
5
4
6
,
1
5
3
3
,
7
0
9
2
,
2
6
0
4
2
,
2
8
0
4
2
,
2017
27%
28%
2%
5
4
6
7
,
2
3
5
3
,
4
5
3
2
,
8
8
7
4
,
2
8
7
2
,
0
3
8
2
,
1
5
1
5
,
9
6
0
3
,
8
9
0
3
,
4
7
1
6
,
7
8
6
2
,
2
8
7
2
,
£m
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2015
2016
2017
free cash flow
normalised free cash flowd
net cash inflow from operating activities
8
3
8
9
,
2
3
9
8
,
Net debt
At 31 March
£m
10,000
8,000
6,000
4,000
2,000
3
1
1
5
,
2015
2016
2017
0
2015a,e
2016a,f
2017
adjusted EBITDA
a,b
a,b,c
adjusted EBITDA
profit before taxa
adjusted profit before taxa,b
4%
2%
13%
0%
18%
2%
19%
5%
a Certain prior year results have been revised to reflect the outcome of the investigation into our Italian business. See note 1 to the consolidated financial statements.
b Items presented as adjusted are stated before specific items. See page 252 for further details.
c Calculated as though EE had been part of the group from 1 April 2014. For 2016/17, no separate measure is shown as EE was part of the group for the full year and there is no difference to the adjusted
measures.
d See definition on page 254 and summarised cash flow statement on page 96.
e Includes the impact of the £1.0bn equity placing we made in February 2015.
f Reflects the impact from EE.
92
BT Group plcAnnual Report 2017 For 2017/18, we continue to expect underlying revenue excluding
transit to be broadly flat year on year. Adjusted EBITDA is expected
to be £7.5bn - £7.6bn.
Our outlook for normalised free cash flow over the cumulative two
year period 2016/17 and 2017/18 remains broadly unchanged.
However, normalised free cash flow in 2016/17 of £2,782m was
almost £300m above our outlook of around £2.5bn, due to early
customer collections that will reverse in 2017/18. As such, normalised
free cash flow in 2017/18 is now expected to be £2.7bn - £2.9bn,
from £3.0bn - £3.2bn previously.
cash commitments. The Board believes that this dividend policy
appropriately balances the interests of all stakeholders and provides
a solid foundation for future growth, underpinned by an ongoing
commitment to investment that delivers sustainable long-term value
for customers and shareholders.
We expect to buy back around £100m of shares in 2017/18 to
help counteract the dilutive effect of all-employee share option plans
maturing in the year. This is below the £206m buyback we completed
in 2016/17 reflecting the lower number of shares that are expected
to be required for our share option plans.
This outlook is provided on the basis of our existing investment plans.
However, we continue to evaluate a range of additional investment
opportunities. Our decision on whether to move forward with these
will be affected by a number of factors, including the outcome of
Ofcom’s Wholesale Local Access Market Review, responses
to Openreach’s consultations and the results of any future
spectrum auctions.
Our underlying dividend policy remains unchanged: to deliver
progressive dividends while balancing the need to invest in the
business, support the pension fund and maintain a strong balance
sheet. The Board has concluded that a dividend increase of 10%
in 2016/17 remains appropriate. However, given the importance
of maintaining flexibility for additional investment and the range
of potential outcomes, dividend growth in 2017/18 will be lower
than the 10% previously anticipated. The rate of future dividend
growth will reflect a number of factors, including underlying medium
term earnings growth, the level of investment spending and other
Earnings per share
Year ended 31 March
.
6
0
3
5
5
2
.
.
8
1
3
.
5
8
2
.
9
8
2
.
2
9
1
.
3
6
2
.
8
4
2
.
2
8
2
.
7
5
2
pence
35
30
25
20
15
10
5
0
2013
2014
2015
2016
2017
a
reported
adjustedb
Proposed full year dividend
Year ended 31 March
15.4p +10%
2017
14.0p
2016
Transforming our costs
Our integration of EE is going well. We’ve achieved around £150m
of run-rate cost synergies in our first year, exceeding our target of
£100m, as we’ve been able to realise synergies earlier than originally
planned. We continue to expect cost synergies to reach a run-rate of
around £400m in the fourth year. We’ve delivered savings this year
through renegotiating supplier terms and reducing the number of
head office employees. We’ve also insourced a number of activities
where possible, including all roaming management, EE Facilities
management and core mechanical and engineering field operations.
We are also expanding and accelerating areas of our cost
transformation programme. We are simplifying our central Group
Functions and our internal service unit, Technology, Service &
Operations to improve the effectiveness and efficiency of the services
and infrastructure delivered to our lines of business. We are also
restructuring the Global Services organisation and accelerating ongoing
transformation programmes in other lines of business. We anticipate
that these transformation programmes will save in total around
£300m over two years, with a restructuring charge of around £300m
over the next two years, with most of this being incurred in 2017/18.
This restructuring cost will be treated as a specific item. These changes
will clarify accountabilities, remove duplication and improve efficiencies,
removing around 4,000 roles mainly from managerial and back office
areas. The cost savings will provide headroom to offset market and
regulatory pressures and support increased investment in delivering
great customer experience and leading networks.
Prior year revision and re-classifications
Investigation into our Italian business
Our investigations into our Italian business revealed inappropriate
behaviour and improper accounting practices. We identified £268m
of errors in relation to prior years and a specific items charge of
£260m in the current year for changes in accounting estimates
and investigation costs.
Revised presentation of cash pooling arrangements
We’ve also revised the presentation of our cash pooling
arrangement following the release of an IFRIC clarification on IAS
32 ‘Financial instruments presentation offsetting and cash pooling
arrangements’ in April 2016. This requirement resulted in us
grossing up cash and cash equivalents and short-term loans and
other borrowings by £499m at 31 March 2016 and £414m at
31 March 2015 with no impact on the income statement.
EE purchase price accounting
Subsequent to our 29 January 2016 acquisition of EE, we’ve
finalised our purchase price accounting within the period allowed
under IFRS 3 ‘Business Combinations’. We also received £20m from
the previous owners of EE as a result of the finalisation of the audit
of the completion balance sheet. The changes after considering
taxation resulted in an increase in goodwill of £29m as of 31 March
2016 with no material impact on the income statement.
The effect on prior years’ income statement, balance sheet and
cash flow statements is set out in page 172 to 176 in note 1 to
the financial statements.
93
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Group performance continued
Summarised income statement
Year ended 31 March
Before specific items
Revenue
Operating costsb
EBITDA
2017
£m
2016a
£m
2015a
£m
24,082
18,879
17,840
(16,437)
(12,420)
(11,647)
7,645
6,459
6,193
Depreciation and amortisation
(3,510)
(2,631)
(2,538)
Operating profit
Net finance expense
4,135
3,828
3,655
(594)
(483)
(560)
Associates and joint ventures
(9)
6
(1)
Profit before taxation
3,532
3,351
3,094
Taxation
Profit for the year
(663)
(607)
(631)
2,869
2,744
2,463
a The comparative information of the current period results has been revised to reflect the outcome
of the investigation into our Italian business.
b Excluding depreciation and amortisation.
Revenue
Reported revenue, which includes specific items, was up 27%.
Adjusted revenue was up 28% at £24,082m. Both of these
increases were driven by the impact of EE being part of the group for
the full year.
We had a £522m positive impact from foreign exchange movements
and a £64m reduction in transit revenue. Excluding these,
underlying revenue excluding transit adjusted for the acquisition of
EE was down 0.2% (2015/16: up 1.9%) which is consistent with
our expectation of being broadly flat in the current year. This outlook
was revised in our third quarter results following the challenging
conditions in the UK public sector and international corporate
markets and the impact of the issues in our Italian business.
Consumer revenue was up 7% with a 13% increase in broadband
and TV revenue and a 4% increase in calls and lines. EE underlying
revenue adjusted for the acquisition of EE was up 1% mainly due to
the success of our ‘more for more’ pricing strategy. Openreach revenue
was flat with the impact of regulatory price reductions offsetting
the continued growth in fibre. Underlying revenue excluding transit
adjusted for the acquisition of EE was down 3% in Wholesale and
Ventures as a result of the continuing decline in Partial Private Circuits
and call volumes. Business and Public Sector underlying revenue
excluding transit adjusted for the acquisition of EE was down 6% due
to the decline in UK public sector revenue. Global Services underlying
revenue excluding transit adjusted for the acquisition of EE was down
2% and excluding revenue from our Italian business was 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
Reported operating costs were up 36% while adjusted operating costs
before depreciation and amortisation increased 32%.
Our adjusted operating costs before depreciation and amortisation
were £16,437m, up £4,017m (2015/16: £773m) driven by the
acquisition of EE and adverse impact of foreign exchange. For the
group, other operating costs were up £2,308m or 61%, primarily
reflecting EE’s subscriber acquisition and retention costs, and adverse
foreign exchange movements.
94
Underlying operating costs excluding transit adjusted for the
acquisition of EE were up 1%. This reflects additional UEFA rights
costs and the new Premier League rights contract, increased
investment in mobile handsets and continued investment in
improving customer experience, offset by the benefits of our cost
transformation programme.
Operating costs before depreciation,
amortisation and specific items
Year ended 31 March
£m
17,000
16,000
15,000
14,000
13,000
12,000
11,000
0
2
4
2
1
,
6
1
0
2
2
5
5
s
t
s
o
c
r
u
o
b
a
l
t
e
N
8
0
3
2
,
7
3
4
6
1
,
0
7
4
8
7
1
9
3
3
0
7
1
s
O
L
O
P
y
g
r
e
n
e
&
y
t
r
e
p
o
r
P
T
I
&
k
r
o
w
t
e
N
e
m
m
a
r
g
o
r
P
s
e
g
r
a
h
c
s
t
h
g
i
r
a
r
e
h
t
O
7
1
0
2
a Includes all other movements in costs.
Programme rights charges increased £170m to £714m, primarily
reflecting our investment in BT Sport. Property and energy costs were
up 17%, payments to telecommunications operators (POLOs) were up
22% and network, operating and IT costs were up 53%, with these
all being impacted by EE. Net labour costs increased by 13% despite
a reduction in leaver costs of £23m (2015/16: £109m) due to the
impact of EE.
2016/17 operating costsa
29% Net labour costs
37% Other
5% Programme rights charges
6% Network operating and IT costs
7% Property & energy
16% POLOs
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.
BT Group plcAnnual Report 2017
EBITDA
Adjusted EBITDA, which is before specific items, was £7.6bn which is
in line with the 2016/17 outlook as revised in January.
Underlying EBITDA adjusted for the acquisition of EE was down 3%. This
is mainly as a result of declines in UK public sector and our investment in
improving customer experience.
You can see further details for EBITDA for the lines of business on
pages 56 to 90.
Specific items
As we’ve explained on page 91, 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:
2017
£m
2016
£m
2015
£m
22
(2)
–
20
481
238
215
30
(16)
–
–
–
948
210
–
(203)
70
(133)
203
–
116
–
–
29
–
–
348
229
–
(128)
–
(128)
75
–
19
–
(6)
45
315
(67)
381
299
Year to 31 March
Specific revenue
Italian business investigation (see page 6)
Regulatory matters
EE fair value adjustment
Specific revenue
Specific operating costs
Regulatory matters (see page 7)
Italian business investigation (see page 6)
EE acquisition and integration costs
Out of period irrecoverable VAT
Profit on disposal of businesses
Property rationalisation costs
Restructuring charges
Profit on disposal of property
Specific operating costs
Specific net finance expense
Profit on disposal of interests in
associates and joint ventures
Tax credit
Net specific items charged after tax
We incurred £215m of EE integration costs (2015/16: EE
acquisition-related costs £99m and integration costs of £17m).
This includes a £62m (2015/16: £nil) specific amortisation charge
relating to the write off of IT assets as we integrate the EE and BT IT
infrastructure.
We recognised an out of period irrecoverable VAT charge of £30m
during the year (2015/16: £nil) and a £1m interest expense. In
addition to the above, we also treated a number of other items as
specific, such as the net interest expense on pensions of £209m
(2015/16: £221m). The decrease from 2015/16 mainly reflects
a fall in the IAS 19 discount rate between 31 March 2016 and
31 March 2017.
We also recognised a tax credit of £63m (2015/16: £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 17% from 1 April 2020. The tax credit on specific items (excluding the
re-measurement of deferred tax) was £154m (2015/16: £70m).
In 2015/16, we recognised a fair value adjustment on the acquisition
of EE which reduced the amount of revenue recognised between
acquisition and 31 March 2016.
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
Reported profit before tax (which includes specific items) was down 19%
to £2,354m while adjusted profit before tax was up 5% at £3,532m,
due to the contribution from EE.
We discuss depreciation, net finance expense and tax in later
sections of this performance review.
Earnings per share
Reported earnings per share, which includes specific items, was 19.2p,
down 33%, while adjusted earnings per share decreased 9% to 28.9p.
–
(217)
961
–
(166)
278
(25)
(121)
406
Adjusted earnings per share is one of our key performance indicators
(see pages 20 and 21) and has decreased by 6% over the past two
years. The graph below shows the key drivers of this decrease.
This year, specific items resulted in a net charge after tax of £961m (2015/16:
£278m).
There was a net charge of £260m (2015/16: nil) arising from changes
in accounting estimates regarding the carrying value of the assets and
liabilities of our Italian business, including professional fees incurred.
We’ve recognised a net cost of £479m (2015/16: £nil) in relation to
regulatory matters. These are made up of the following:
– Deemed Consent: A charge of £342m was recognised (2015/16:
£nil) in relation to Ofcom’s March 2017 findings on our
historical practices over the use of Deemed Consent. This includes a
fine of £42m which has been imposed and we’ve also agreed
to compensate Communication Providers, with the precise
amount of the compensation to be determined but currently
estimated at £300m.
– Re-assessment of other regulatory risks: We’ve also re-assessed our
regulatory risks in light of recent regulatory decisions by Ofcom and
the Competitions Appeals Tribunal. As a result we’ve increased our
net provision by £137m (2015/16: £nil) in the year.
– Ladder pricing agreements: In 2016/17 we recognised revenue
and costs of £8m (2015/16: £203m) being the prior year impacts
of ladder pricing agreements with the other UK mobile operators.
Adjusted earnings per share
Year ended 31 March
pence
50
.
8
3
1
45
40
35
30
25
.
6
0
3
5
1
0
2
3
3
.
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)
.
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5
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.
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a Other primarily reflects the impact of the change in the weighted average number of shares.
95
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Group performance continued
Dividends
The Board is proposing a final dividend to shareholders of 10.55p, up
10%. This brings the full year dividend to 15.40p, also up 10%, and
compares with an increase in the 2015/16 full year dividend of 13%.
This year’s dividend is in line with our outlook. It will be paid, subject to
shareholder approval, on 4 September 2017 to shareholders on the
register on 11 August 2017.
Dividends per share
Year ended 31 March
pence
16
14
12
10
8
6
4
2
0
.
4
2
1
13%
.
0
4
1
10%
5
8
.
9
3
.
2015
6
9
.
4
4
.
2016
Interim
Final
.
4
5
1
.
6
0
1
9
4
.
2017
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. BT Group plc has sufficient
distributable reserves to support the dividend policy.
We’ve set out our dividend expectations for 2017/18 in our Outlook
on page 92.
Cash flow
We generated a net cash inflow from operating activities of £6,174m
and normalised free cash flow of £2,782m, down £316m or 10%,
which is above our outlook as revised in January of c£2.5bn for the
year due to earlier than expected customer collections that we will
now not receive next year.
Free cash flow
Normalised free cash flow decreased 10% to £2,782m, partly
reflecting increased payments for the Premier League, UEFA
Champions League and UEFA Europa League broadcast rights.
The net cash cost of specific items was £205m (2015/16: £232m).
This included: EE acquisition and integration related costs of £111m
(2015/16: £114m); restructuring costs of £51m (2015/16: £85m);
and ladder pricing payments of £1m (2015/16: £41m receipts).
Summarised cash flow statement
Year ended 31 March
Before specific items
EBITDA
Capital expenditureb
Net interest
Taxationc
Working capital movements
Other non-cash and non-current
liabilities movements
2017
£m
2016a
£m
2015a
£m
7,645
6,459
6,193
(3,119)
(2,431)
(2,403)
(622)
(661)
(382)
(541)
(459)
(12)
(573)
(415)
(150)
(79)
82
178
Normalised free cash flow
2,782
3,098
2,830
Cash tax benefit of pension deficit
payments
Specific items
Free cash flow
Pension deficit payments
Dividends
Disposals and acquisitions
110
(205)
203
(232)
106
(154)
2,687
3,069
2,782
(274)
(880)
(1,435)
(1,075)
51
(3,379)
(876)
(924)
10
Share buyback programme
(206)
(315)
(320)
Proceeds from issue of own shares
70
90
1,201
Reduction (increase) in net debt from
cash flows
893
(2,490)
1,873
Net debt at 1 April
(9,838)
(5,113)
(7,023)
Reduction (increase) in net debt from
cash flows
Non-cash movements
Net debt at 31 March
893
13
(2,490)
1,873
(2,235)
37
(8,932)
(9,838)
(5,113)
a Certain prior year results have been revised to reflect the outcome of the investigation into our
Italian business. See note 1 to the consolidated financial statements.
b Net of government grants.
c Excluding cash tax benefit of pension deficit payments.
Free cash flow, which includes specific item outflows of £205m
(2015/16: £232m) and a £110m (2015/16: £203m) tax benefit
from pension deficit payments, was £2,687m (2015/16: £3,069m).
We made pension deficit payments of £274m (2015/16: £880m)
and paid dividends to our shareholders of £1,435m (2015/16:
£1,075m).
We spent £206m (2015/16: £315m) 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 £70m (2015/16: £90m).
Non-cash movements within net debt in the prior year 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 254.
96
BT Group plcAnnual Report 2017
Capital expenditure
We continue to make significant investments in line with our strategy
including a focus on improving customer experience.
Non-network infrastructure
–
Investment in our property estate, including integration of EE and
BT people into the same locations.
Capital expenditure was £3,454m (2015/16: £2,622m). This consists
of gross expenditure of £3,426m (2015/16: £2,731m) which has
been increased by net grant deferral of £28m (2015/16: £109m
decreased by net grant funding) mainly relating to deferral of grant
funding in the BDUK programme. This is driven by the base-case
assumption for take-up in BDUK areas being increased to 39% of total
homes passed following our review of the level of customer take-up.
While we have recognised gross grant funding of £160m (2015/16:
£338m) in line with network build in the year, we have also deferred
£188m (2015/16: £229m) of the total grant funding to reflect
higher take-up levels on a number of contracts. The increase in take-up
assumption shows the high demand on our fibre network driven by
customers taking advantage of faster speeds to consume more data. To
date we have deferred £446m (2015/16: £258m).
Of the total group capital expenditure £69m (2015/16: £5m) related
to the integration of EE. Additionally, £272m, (2015/16: £248m,
2014/15: £231m) arose outside the UK. Capital expenditure
contracted but not yet incurred was £889m at 31 March 2017
(2015/16: £922m, 2014/15: £507m).
Depreciation and amortisation
Depreciation and amortisation has increased by 33% to £3,510m
(2015/16: £2,631m, 2014/15: £2,538m) due to the inclusion of
EE depreciation and amortisation for the full financial year.
Net debt
Net debt decreased by £906m to £8,932m, reflecting strong cash
generation by the business.
We have achieved this while making investments for the future of
our business including research and development, and sports and
TV content, supporting our pension fund and funding our share
buyback programme. We have also paid progressive dividends
to our shareholders.
Gross debt, translated at swap rates and excluding fair value
adjustments, at 31 March 2017 was £10,980m. This comprises term
debt of £9,680m, finance leases of £229m, bank loans of £350m,
and other loans of £721m.
Bond maturities in June 2016, December 2016 and February 2017
resulted in a total cash outflow of £1,787m.
We have decreased our current investments and cash and cash
equivalent by £1,866m, reflecting the funding of bond maturities
and cash requirements of the business.
The Design Council is accountable to the Operating Committee
for delivering an efficient and optimised investment plan, aligning
investment decisions across our networks, systems, platforms and
products so that they are directed towards our strategic priorities.
2016/17 is the first full year including EE. Capital expenditure
therefore includes the investment EE is making to expand coverage,
improve network speed and performance while continuing to offer
innovative products and excellent customer experience. We’re also
investing in the integration of EE into the wider group to drive both
revenue and cost synergies.
For the year, our capital expenditure, inclusive of net grant deferral
was £3,454m (2015/16: £2,622m, 2015/14: £2,317m). The table
below shows the split of our investments by major category.
Capital expenditure
Year ended 31 March
£m
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
151
451
943
772
2014/15
Capacity/Network
Customer Driven
119
640
1,260
1,435
2016/17
97
463
1,076
986
2015/16
Systems/IT
Infrastructure
In recent years we’ve prioritised our capital expenditure to underpin
our strategy to deliver sustainable revenue growth, and to expand
coverage and capacity while enhancing speed and resilience of both
our fixed access network and our mobile network. Key investments
this year include:
Capacity/network investments
–
increasing the footprint of our superfast fibre broadband network,
including extending the reach of superfast broadband to rural
areas under the BDUK programme. We’ve now passed more than
26.5m homes and businesses;
– the launch of our Ultrafast broadband trial now with 500K
premises passed;
– enhancing and expanding our mobile network coverage, including
the delivery of the ESN contract; and
– continued investment in convergence of fixed and mobile services.
Customer driven investments
– continued development of customer contract-specific
infrastructure for our global clients; and
– deployment of Ethernet, including reduction in the existing
workstack, and copper/fibre connections to homes and businesses.
Systems/IT investments
–
improving customer experience by enhancing our online contact
systems, order and repair journeys as well developing new
products, such as our nuisance calls blocker.
97
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Group performance continued
The table below shows the key movements in net debt over the past two years.
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10,500
9,500
8,500
7,500
6,500
5,500
4,500
3,500
2,500
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The table below shows the key components of our net debt and of the £906m decrease this year.
£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 and cash equivalents
Current assets investments
Net debt
At
1 April
2016
Term debt
issuance/
(maturities)
Other
cash flow
Fair value
move-
ments
Foreign
exchange
3,736
(1,787)
(1,038)
11,025
(652)
(357)
–
–
–
4
–
–
13,752
(1,787)
(1,034)
(996)
–
(2,918)
1,787
9,838
–
505
(364)
(893)
–
(29)
–
29
–
–
–
–
333
471
(767)
–
37
(38)
(29)
(30)
Transfer
to within
one year
1,399
(1,399)
–
–
–
–
–
–
Other
move-
ments
At
31 March
2017
(11)
2,632
9
–
14
12
1
4
10,081
(1,419)
(314)
10,980
(528)
(1,520)
17
8,932
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.
The impact of foreign exchange on net debt includes the impact of translation on finance leases, short-term borrowings, investments and cash
balances. This also includes the benefit of translating our debt balances to Sterling at swap rates.
98
BT Group plcAnnual Report 2017
Financing and debt maturity
The main source of our cash inflow in recent years has been the cash generated from our operations.
We increased our undrawn revolving committed credit facility from £1.5bn to £2.1bn in June 2016. This facility has been extended by one
year and will now mature in September 2021. In addition, we entered into a new 364-day revolving bridge facility of £1.5bn maturing in
March 2018, with the option to renew to March 2019. The bridge facility contains mandatory prepayment and cancellation clauses in certain
circumstances, such as the issuance of public debt securities. This facility was undrawn as at 31 March 2017.
In July 2016 the remaining £181m of the EE acquisition facility was repaid.
We have term debt of £1,399m, at swap rates, and other debt of £735m maturing in 2017/18.
Maturity profile of term debt and average coupon rate
At 31 March
£m
1,800
1,500
1,200
900
600
300
0
%
7
5
.
%
7
3
.
%
3
4
.
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3
2
.
%
7
2
.
%
8
3
.
%
2
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.
%
9
3
.
%
4
6
.
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
£ debt
$ swapped to £
€ swapped to £
Net finance expense
Reported net finance expense has increased £92m to £804m.
Adjusted net finance expense of £594m increased by £111m due
to our average net debt being higher than last year as a result of our
acquisition of EE.
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 reduced from 7.4% to 5.9% 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.
Taxation
Our effective tax rate before specific items was 18.8% (2015/16:
18.1%). We paid income taxes of £551m (2015/16: £256m).
Our tax contribution
We are proud to be a major contributor of taxes to the UK economy.
In 2016 we bore UK taxes of £893m and collected £2,985m of
taxes. The One Hundred Group 2016 Total Tax Contribution Survey
ranked us as the 5th highest contributor in the UK.
We paid UK corporation tax of £471m. We benefited from £117m
of EE’s historical tax losses (2015/16: £20m) and £110m from tax
deductions associated with employee pension and share schemes
(2015/16: £208m).
Year ended 31 March
Before specific items
Average gross debt
Weighted average interest
rate on gross debt
Average investments and
cash balances
Weighted average interest rate on
investments
Average net debt
Weighted average interest rate
on net debta
2017
£m
2016
£m
2015
£m
12,217
9,030
9,007
4.6%
5.4%
6.0%
2,817
2,616
2,446
0.3%
0.4%
0.4%
9,400
6,414
6,561
5.9%
7.4%
8.1%
a Excludes interest relating to unwinding of discount on provisions and derivatives not in a
designated hedge relationship.
Our approach to tax
We seek to ensure that our business develops in a tax-efficient manner
that embodies our wider corporate purpose. In doing this we, comply
with the tax rules of the countries where we do business and deal with
their tax authorities in an open and constructive manner. We take the
benefit of widely claimed tax incentives and apply OECD principles.
Tax governance
We maintain a limited appetite for tax risk by requiring a strong
connection between tax planning and our business, and by requiring
reasonably likely publicity to be neutral in nature. We seek out
opportunities that meet these requirements where there is reasonable
tax technical merit and we are confident that we can manage any
organisational complexities.
We have a framework for managing taxes that is set centrally and
agreed by the Board. We employ suitably qualified professionals to
manage the operation of this framework, who report to the group
finance director. Compliance with this framework is tested by our
internal audit function.
99
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Group performance continued
Tax expense
Our tax expense recognised in the income statement before specific
items was £663m (2015/16: £607m). In addition we recognised
a £445m tax credit (2015/16: tax charge of £235m) in the
statement of comprehensive income, principally in relation to our
pension scheme.
Summarised balance sheet
Our balance sheet reflects our significant 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.
It also reflects the longer-term strategy with which we finance our
investment, and our obligation to the pension fund.
At 31 March
2017
£m
2016a
£m
Movement
£m
Property, plant & equipment, software
and telecommunications licences
20,884
20,531
Goodwill and other intangible assets
10,643
10,890
Other non-current and current assets
3,067
2,288
Trade and other receivables
4,195
4,196
353
(247)
779
(1)
Investments, cash and cash equivalents
2,048
3,914
(1,866)
Total assetsb
40,837
41,819
(982)
Loans and other borrowings
(12,713)
(14,761)
2,048
Trade and other payables
(7,437)
(7,418)
Other current and non-current liabilities
(2,398)
(2,288)
Provisions
Deferred tax liability
(1,161)
(743)
(1,240)
(1,262)
(19)
(110)
(418)
22
Pensions, net of deferred tax
(7,553)
(5,235)
(2,318)
Total liabilities
Total equity
(32,502)
(31,707)
(795)
8,335
10,112
(1,777)
a Revised. See note 1 to the consolidated financial statements.
b 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. These assets were held at a net book value of £20.9bn at
31 March 2017. The net increase of £353m in the year primarily
reflects capital expenditure of £3,454m exceeding the related
depreciation and amortisation charge of £3,189m, and a net
foreign exchange gain of £87m.
Goodwill and other acquisition-related intangible assets decreased
by £247m, primarily reflecting the impact of foreign exchange
translation of overseas non-current assets. This also reflects the
outcome of our re-assessment of the provisional assets and liabilities
fair values recognised in our 31 March 2016 financial statements as
part of the acquisition of EE.
We review the recoverable amounts of goodwill annually across our
cash generating units which hold goodwill, which are Consumer,
EE, Business and Public Sector, Global Services, and Wholesale and
Ventures, and are satisfied that these support the carrying value of
goodwill (see note 12 to the consolidated financial statements).
We expect our income statement effective tax rate before specific
items to be around the UK rate of corporation tax, as the majority of
our business occurs in the UK. In the current year, our rate is lower
than this because we recognised tax credits in respect of historical
overseas tax losses and prior period tax items.
The UK tax rate fell to 19% on 1 April 2017 and will fall to 17% on
1 April 2020, which should reduce our expected effective tax rate.
Recognition of further deferred tax assets on historical overseas tax
losses would also reduce our future rate. Changes to our estimates of
uncertain tax positions may increase or reduce our future rate.
Year ended 31 March
Before specific items
Tax at UK statutory rate
Non-UK results taxed at different rates
Net permanent differences
Changes to prior year estimates
Deferred tax accounting
for non-UK losses
Effective tax rate
2017
%
20.0
0.3
0.7
21.0
(1.1)
(1.1)
18.8
2016
%
20.0
(0.2)
0.3
20.1
(2.5)
0.5
18.1
2015
%
21.0
0.6
–
21.6
(1.1)
(0.1)
20.4
We have booked a tax benefit of £39m in respect of UK patent
incentives (2015/16: £37m). We do not expect this to be affected
materially by the OECD’s Base Erosion and Profit Shifting project.
Key tax risks
Our key uncertainties are whether EE’s tax losses will be available
to us, whether our intra-group trading model will be accepted by
a particular tax authority and whether intra-group payments are
subject to withholding taxes.
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 £270m relating to tax losses on our balance
sheet. This relates mainly to historical tax losses acquired with EE.
We expect to be able to use this against future profits of EE.
In addition we have £4.2bn of income tax losses that we’ve not given
any value to on our balance sheet. We might be able to use these
losses to offset future profits, however we currently do not consider
this probable. We also have £17.0bn of UK capital losses, which we
have no expectation of being able to use.
We’ve given more details in note 9 to the consolidated financial
statements.
100
BT Group plcAnnual Report 2017 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 £38m as outlined in note 16 to the consolidated
financial statements.
Trade and other receivables decreased by £1m to £4,195m while
trade and other payables of £7,437m were £19m higher. Despite
these movements, the unwinding of the effects of improper working
capital transactions in our Italian business resulted in a working capital
outflow of £382m. Investments, cash and cash equivalents, loans and
other borrowings are reconciled to net debt of £8,932m in note 25 to
the consolidated financial statements. We’ve discussed net debt
on pages 97 to 98.
Provisions increased by £418m to £1,161m mainly due to an
increase in regulatory provisions which was treated as a specific item.
We have a significant property portfolio which includes both office
buildings and former telephone exchanges (see page 31). Property
provisions, which mainly comprise onerous lease provisions, amounted
to £292m. There are also asset retirement obligations of £83m
relating to leased mobile sites forming part of the EE network. You
can find more information about these provisions in note 19 to the
consolidated financial statements.
We’ve shown deferred tax movements in note 9 to the consolidated
financial statements. Pensions, net of deferred tax, increased by
£2.3bn to £7.6bn and are discussed below. Equity has deteriorated
compared with the prior year due to the actuarial losses relating to
retirement benefit obligations, being more than the profit for the year.
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 32,500 active members, 199,500
pensioners and 64,000 deferred members.
– The BT Retirement Saving Scheme (BTRSS) is a contract-based,
defined contribution arrangement operated by Standard Life. This
is the current arrangement for UK employees who joined BT after
1 April 2001. It has around 32,500 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 11,000 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 BTPS
and EEPS are managed by separate and independent Trustee bodies
while savings in the BTRSS are managed directly by members.
Details of the governance of the BTPS, its financial position and the
performance of its investments are available in the BTPS Annual
Report published by the Trustee in December 2016, 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
is 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.
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 and March 2017.
Accounting position under IAS 19
The accounting deficit, net of tax, rose over the year from £5.2bn to
£7.6bn. The movements in the deficit for the group’s defined benefit
plans are shown below.
Movements in IAS 19 deficit
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7
.
Deficit
(£bn)
(20)
(18)
(16)
(14)
(12)
(10)
(8)
(6)
(4)
(2)
0
)
2
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101
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Adoption of IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 15 ‘Revenue from Contracts with Customers’ will be effective
for BT on 1 April 2018. We are planning to adopt this new standard
retrospectively, applying it to each prior reporting period presented in
our 2018/19 financial statements, namely 2016/17 and 2017/18.
On adoption in 2018/19, this will require a cumulative transitional
adjustment at 1 April 2016. We are still in the process of quantifying
the implications of this standard and the financial impact is not yet
reasonably estimable, but we anticipate that the resulting accelerated
revenues and deferred costs are likely to significantly exceed deferred
revenues, and there will be a resulting cash tax impact in 2018/19
and 2019/20.
More detail over our approach to this new standard as well as others
is outlined in note 1 to the consolidated financial statements.
Group performance continued
The actual investment return in the year to 31 March 2017 of around
21% was higher than the discount rate assumption at 31 March
2016 of 3.30%, leading to a reduction in the deficit recognised
as a remeasurement in other comprehensive income. The return
reflects strong asset performance across all asset classes, in particular
equities and government bonds which increased by c16% and c23%
respectively.
The actuarial losses on liabilities in 2016/17 primarily reflect a fall over
the year in the real discount rate from 0.44% to 0.78%.
Contractual obligations and commitments
We’ve shown in the table below our principal contractual financial
obligations and commitments at 31 March 2017. You can see further
details on these items in notes 20, 25 and 30 to the consolidated
financial statements.
At 31 March 2017
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 12,334
2,618
2,756 1,281 5,679
Finance lease obligations
229
14
24
26
165
Operating lease obligations
7,160
650
1,168 1,037 4,305
Capital commitments
Other commitments
Device purchase commitments
Programme rights
commitments
Pension deficit obligations
889
367
423
2,644
7,686
811
231
423
77
127
–
–
9
–
1
–
–
–
641 1,405
598
710
1,460 1,410 4,106
Total
31,732
5,457
6,253 5,168 14,854
a Excludes fair value adjustments.
We have unused committed borrowing facilities totalling £3.6bn.
We expect that these resources and our future cash generation will
allow us to settle our obligations as they fall due.
102
BT Group plcAnnual Report 2017 Governance
Chairman’s governance report
How we govern the group
Board of directors
The Board
104
105
106
108
Reports of the Board committees
– Audit & Risk Committee chairman’s report 112
– Nominating & Governance Committee
chairman’s report
– BT Pensions Committee chair’s report
– Committee for Sustainable and Responsible
116
118
Business chairman’s report
119
120
– Technology Committee chairman’s report
121
– Integration Committee chairman’s report
122
– Report on Directors’ Remuneration
146
Directors’ information
General information
148
Shareholders and Annual General Meeting 152
Financial statements
Additional information
153
251
Governance
In this section we describe our governance
structure. We talk about the people on the
Board, how it works and what the Board
focused on during the year. We also report
on the work of our Board committees.
Our directors
Our directors’ skills and experience, together with their wide
range of backgrounds, help them challenge constructively BT’s
management and develop our effective strategy for the future.
Our committees
The Board gives certain responsibilities and authorities to a
number of Board committees.
Our governance framework
Our governance and internal control framework helps the Board
exercise proper oversight. The Board retains accountability.
Our corporate governance statement
Notwithstanding the very disappointing findings of issues in our
Italian business, we remain 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. The directors
also consider that BT has applied the main principles of the Code
as described on pages 103 to 152 of this report. In particular, for
details of our internal controls as affected by the issues identified
in our Italian operations, see US Regulation on page 148.
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 2016/17.
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
PB
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
103
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Chairman’s governance report
“ This has been a challenging year. The Board
has focused on a number of key areas to
ensure BT remains a strong company.”
As I write my final chairman’s governance report, coming to the end
of my tenth year at BT, I am delighted that Jan du Plessis will join the
Board on 1 June 2017 as a non-executive director, before becoming
chairman from 1 November 2017, when I retire. He brings great
experience, having been chairman of British American Tobacco,
SABMiller and Rio Tinto. I wish Jan every success as he leads BT at
this important time.
Simon Lowth joined the Board on 12 July 2016 as group finance
director. Simon brings a wealth of knowledge to BT; having
previously been CFO and served on the boards of BG Group,
AstraZeneca and ScottishPower. Simon replaced Tony Chanmugam
who stood down as group finance director in July 2016 and left the
company on 31 March 2017.
I am very disappointed by the findings in our Italian business and by
the issues that arose in Openreach around Deemed Consent, which
led to a considerable fine. We take these matters extremely seriously
and we have taken immediate steps to strengthen our financial
processes and controls. You can read more on these on pages 6
and 7.
I continually review the membership of the Board and its range of
skills. We look to appoint outstanding candidates with a diverse
range of experience, as we recognise the importance of diversity in
the widest sense to maximise Board effectiveness. We currently have
27% female representation on the Board.
The Board has played an active role, particularly in relation to the
key issues the company has faced this year, and the search for and
appointment of my successor. Board members have also ensured
they are available to support and engage with the management
team.
In addition to our forward programme of key items, updates from
each line of business CEO and updates on customer experience,
we also had in-depth discussions on BT Italy, the Digital
Communications Review, Deemed Consent and BT Sport. You can
read more about what we have done on pages 109 to 111.
For 2016/17, the company secretary and I carried out a Board
evaluation. We discussed the resulting report and noted that, overall,
the results were positive. We also identified a number of areas of
focus and you can find our actions in these areas on page 111. We
have carried out the triennial external evaluation of the Board for
2017/18. This was conducted by ‘Independent Board Evaluation’.
You will find further details on this evaluation process on page 117.
We keep our governance framework under review to ensure
it enhances the Board’s ability to exercise proper oversight. In
accordance with our proposals to Ofcom on the DCR, we discussed
the independent appointments to the Openreach board, and
approved the appointment of Mike McTighe as the first Openreach
chairman. We created the Investigatory Powers Governance
Committee as a result of the new Investigatory Powers Act. You
will find further details on this on page 37. We also reviewed our
Board committee structure and approved changes to some of the
committees’ terms of reference.
As I leave BT, I would like to thank all members of the Board for their
continued support in what has been a challenging year. I believe the
Board has the right range of skills and experience to keep developing
and delivering our strategy under Jan’s leadership. I look forward to
following with interest BT’s progress in the coming years.
Sir Michael Rake
Chairman
11 May 2017
104
104
BT Group plc
BT Group plc
Annual Report 2017
Annual Report 2017
THE STRATEGIC REPORT
THE STRATEGIC REPORT
GOVERNANCE
GOVERNANCE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
ADDITIONAL INFORMATION
How we govern the group
Our governance structure
The Board
The Board is responsible for managing the group, agreeing strategy, overseeing performance, and discharging
certain legal responsibilities.
The Board delegates day-to-day responsibility for running the group to BT’s executive management, with
specialist tasks passed to various Board committees.
PG106 and 107 For the Board biographies
PG109To read about the Board activities for the year
PG116 For Board diversity
www.btplc.com for Board news
Equality of
Access Board
Audit & Risk
Committee
The Equality of
Access Board (EAB)
monitors, reports
and advises on BT's
compliance with the
Undertakings given
by BT to Ofcom.
The EAB reports
regularly to the
Board and publishes
an annual report to
Ofcom.
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.
Nominating
& Governance
Committee
The Nominating
& Governance
Committee makes
sure the Board has
the right balance
of skills, experience,
independence
and knowledge.
It also oversees
BT’s governance
framework.
Remuneration
Committee
BT Pensions
Committee
The Remuneration
Committee agrees
the remuneration
framework for our
chairman, executive
directors and certain
senior executives.
The BT Pensions
Committee is
responsible for
overseeing the BT
Pension Scheme
(BTPS).
Technology
Committee
The Technology
Committee agrees
the development
and implementation
of BT’s major
technology
strategies.
Committee for
Sustainable and
Responsible
Business
The Committee
for Sustainable
and Responsible
Business provides
the strategic
oversight necessary
to make sure BT
is a sustainable
and responsible
business.
www.bt.com/eab
PG112
PG116
PG122
PG118
PG119
PG120
Operating
Committee
The Operating Committee (OC) is our key management committee. It makes decisions on operational issues
and other matters within the framework established by the Board.
PG14 For the OC biographies
Conflicted Matters Committee
Integration Committee
Investigatory Powers
Governance Committee
Following the appointment of Tim Höttges
to the Board, we established the Conflicted
Matters Committee to review all Board
papers and agenda items that could give
rise to a conflicted matter.
The Integration Committee monitors and
oversees the integration of EE and BT.
This committee is responsible for overseeing
BT’s role in the use of official investigatory
powers.
PG109
PG121
www.bt.com/privacyandfreeexpression
Annual Report 2017
Annual Report 2017
BT Group plc
BT Group plc
105
105
Board of Directors
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Key to membership of Board committees
ARC
IC
PEN
Audit & Risk
Integration
BT Pensions
CSRB
NAG
REM
Sustainable & Responsible Business
Nominating & Governance
Remuneration
EAB
OC
TC
Equality of Access Board
Operating
Technology
Committee Chair
CSRB NAG
PEN
IC
OC
TC
CSRB
IC
OC
PEN
REM
IC
NAG
TC
ARC
NAG
TC
Sir Michael Rake
Chairman
Appointed to the Board as chairman in
September 2007. Age 69.
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 S&P
Global (formerly McGraw Hill Financial).
Gavin Patterson
Chief Executive
Appointed chief executive in September
2013 and on the Board since June 2008.
Age 49.
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). Prior to that
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.
Simon Lowth
Group Finance Director
Appointed to the Board as group finance
director in July 2016. Age 55.
Skills and experience
Simon has experience in finance, accounting,
risk, corporate strategy and mergers and
acquisitions. He was CFO and executive
director of BG Group before the takeover
by Royal Dutch Shell in February 2016.
Simon was CFO and an executive director
of AstraZeneca from 2007 to 2013, and
an executive director of ScottishPower from
2003 to 2007, and was appointed finance
director in 2005. Prior to that, Simon was a
director of McKinsey & Company.
Other appointments
None outside BT.
Tony Ball
Independent non-executive director
Appointed to the Board in July 2009. Age 61.
Iain Conn
Independent non-executive director
Appointed to the Board in June 2014. Age 54.
Skills and experience
Tony brings international business expertise
in addition to financial, operational, sales,
marketing and media 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.
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
Senior adviser to Providence Equity Partners,
chairman of the advisory council of Portland
PR, Ambassadors Theatre Group and Bite
Group.
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.
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
2000. From 2009 until his appointment
as CEO, he was a member of the board of
management responsible for finance and
controlling. From 2006 to 2009 he was
a member of the board of management
responsible for the T-Home unit. In this
position, he was in charge of fixed-network
and broadband business, as well as
integrated sales and service in Germany.
Other appointments include
Chairman of T-Mobile US and a supervisory
board member of FC Bayern München AG
and of Henkel AG & Co. KGaA.
EAB
PEN
NAG
REM
REM
TC
ARC
REM
TC
ARC
IC
NAG
REM
ARC
CSRB
Isabel Hudson
Independent non-executive director
Appointed to the Board in November 2014.
Age 57.
Mike Inglis
Independent non-executive director
Appointed to the Board in September 2015.
Age 57.
Karen Richardson
Independent non-executive director
Appointed to the Board in November 2011.
Age 54.
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, Standard Life and an executive
director of Prudential Assurance Company in
the UK.
Other appointments include
Executive chair of National House Building
Council and senior independent director of
RSA Insurance. Isabel is also an ambassador
for the disability charity, SCOPE.
Skills and experience
Mike’s technology experience includes
serving on the board of ARM Holdings from
2002 to 2013, with 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.
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 AYASDI, Exponent, HackerRank,
and Worldpay Group.
Nick Rose
Independent non-executive director
Appointed to the Board in January 2011
and senior independent director since March
2014. Age 59.
Jasmine Whitbread
Independent non-executive director
Appointed to the Board in January 2011.
Age 53.
Jan du Plessis
Jan will join BT on 1 June 2017 as a
non-executive director and will become
chairman from 1 November 2017.
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.
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
Chief executive of London First and non-
executive director of Standard Chartered.
Dan Fitz
Company Secretary
Dan is the group general counsel &
company secretary. He joined BT in April
2010 as its group general counsel.
106
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
107
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Leadership
The Board
Who we are
Gender diversity
Read more about the Board directors and the skills and experience
they bring to BT on pages 106 and 107.
Balance of non-executive directors/executive directors
Composition
Tenure (years) (chairman and non-executive directors)
73% Male
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. The Board is supported by the company secretary.
27% Female
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.
Simon Lowth joined the Board on 12 July 2016. He’s also a member
of the BT Pensions, Integration and Operating Committees.
Following the Nominating & Governance Committee’s
recommendation, we approved the re-appointments of Nick Rose
and Jasmine Whitbread on the expiry of their second three-year
terms.
The majority of the Board is made up of independent non-executive
directors. We judged the chairman to be independent at the time of
his appointment, and consider all other non-executive directors to
be independent under the terms of the Code, with the exception of
Tim Höttges, a non-independent, non-executive.
Read about the roles of the Board members and the company
secretary below.
The Chairman
The chairman’s role is to:
– lead the Board and create a culture of openness characterised by
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 to implement its strategy;
– make sure that the Board receives accurate, timely and clear
Composition
information, and is consulted on all relevant matters;
12.5%
– monitor the contribution and performance of Board members;
– make sure that BT communicates clearly with shareholders, and
discusses their views and concerns with the Board; and
– acts as a key contact for important stakeholders, as well as
87.5%
working with the chief executive and senior independent director
to 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 strategies;
– develop and promote compliance with BT’s policies on conducting
business around the world;
– maintain an effective framework of internal controls and risk
management;
– lead the Operating Committee in the day-to-day running of every
part of the business; and
– lead, motivate and monitor the performance of BT’s senior
management team, as well as overseeing succession planning for
roles on the Operating Committee.
Gender diversity
73% Male
27% Female
Balance of non-executive directors/executive directors
1
Chairman
2
Executive directors
1 Non-independent non-executive director
7
Independent non-executive directors
12.5%
87.5%
Balance of non-executive directors/executive directors
Composition
Tenure (years) (chairman and non-executive directors)
1
Chairman
2
Executive directors
1 Non-independent non-executive director
7
Independent non-executive directors
45% 0-3
11% 3-6
33% 6-9
11% 9-12
45% 0-3
11% 3-6
33% 6-9
11% 9-12
12.5%
87.5%
1
Chairman
2
Executive directors
1 Non-independent non-executive director
7
Independent non-executive directors
Gender diversity
73% Male
27% Female
Tenure (years) (chairman and non-executive directors)
45% 0-3
11% 3-6
33% 6-9
11% 9-12
www.btplc.com for more information
108
BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
The Independent Non-Executive Directors
The independent non-executive director’s role is to:
– bring experience and independent judgement to the Board; and
– develop and constructively challenge strategy proposals.
Each non-executive director is appointed for an initial three-year
term but they are all subject to annual re-election by shareholders
at the Annual General Meeting. Provided each director
is re-elected by shareholders every year, their appointment may
be extended.
The Senior Independent Director
The senior independent director is a non-executive director whose
role is to:
– meet with BT’s major institutional shareholders and shareholder
representative bodies, to discuss matters that wouldn’t be
appropriate for discussion with the chairman or chief executive;
– act as a sounding board for the chairman and as an intermediary
between the chairman and other directors; and
– review the chairman’s performance during the year, taking
account of feedback from other Board members.
The Non-Independent Non-Executive Director
After acquiring EE, we appointed Deutsche Telekom’s nominated
director Tim Höttges to the Board. Tim owes a fiduciary duty to both
BT and Deutsche Telekom. As a non-independent, non-executive
director, Tim has the same responsibilities as the other directors;
we’ve set up a Conflicted Matters Committee to identify potential or
actual conflicts of interest. Read more about this committee below.
The Company Secretary
The company secretary’s role is to:
– manage the flow of timely, accurate and well-considered
information to the Board;
– recommend corporate governance policies and practices to the
chairman and the chief executive;
– put in place and promote corporate governance policies across
the group;
– advise the Board and its committees on corporate governance
and compliance across the group; and put in place the right
procedures for managing their meetings and duties.
The company secretary’s appointment and removal is a matter for
the whole Board.
What we’ve done
The Board is responsible for deciding the group’s strategy and
overseeing its performance, while passing the responsibility for day-
to-day operations to executive management. The Board is directly
involved with approving major acquisitions, providing oversight
and control, growing shareholder value and promoting corporate
governance.
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
21% Strategy
20% Governance, risk and audit
4% People, health and safety
33% Business and CEO updates
22% Finance and investor relations
The Board has a flexible forward programme of business that makes
sure key areas get the time they need, and that items can be added
to agendas as necessary. During 2016/17 we spent considerable
time discussing our Italian business, the issues around Deemed
Consent and Ofcom’s Strategic Review of Digital Communications.
Read more about these matters on pages 6, 7 and 39.
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
– BT Sport
– Succession planning
– Customer experience
– Regulation
– Governance and compliance
– Approach to tax
– Annual Report & Form 20-F
– Human rights
– Board evaluation
– Investing for the future
We also received updates from the respective chairs on key matters
discussed at the Board committees.
The Board also sets time aside to hold a strategy offsite, giving
directors the opportunity to focus solely on strategic issues and
challenges and opportunities in the short and longer term areas of
particular focus were Global Services, Business and Public Sector, the
network and market developments.
Conflicted Matters Committee (CMC)
The CMC is chaired by the company secretary. It’s responsible for
deciding to what extent Board meetings and papers are likely to
consider or refer to a conflict of interest between BT and DT or
their respective affiliates. The committee considers both actual
and potential conflicts of interest including situations where BT
and DT or their respective affiliates are considered competitors.
The CMC helps the non-independent, non-executive director
Tim Höttges comply with his fiduciary duties (although ultimate
responsibility rests with him), supports good governance and
protects the group’s competitively sensitive information.
If a conflict arises the CMC makes sure the non-independent,
non-executive director doesn’t receive related documents or
information and that he absents himself from related Board
discussions.
During the year a number of Board papers were identified as
containing conflicted material. Tim either didn’t receive these
documents or he received a redacted version.
Tim also didn’t receive any reports regarding Global Services
which contained conflicted material and wasn’t present when
these reports were discussed by the Board.
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Investigatory Powers Governance Committee
The Investigatory Powers Act 2016 made changes to the
investigatory powers regime in the UK. To enhance our own
processes we have created the Investigatory Powers Governance
Committee, chaired by Sir Mike Rake, to help ensure we strike the
right balance between complying with the law and respecting
human rights, including the right to privacy.
We reviewed our Board committee structure and approved changes
to some committees’ terms of reference.
Director election and re-election
Jan du Plessis (appointed to the Board with effect from 1 June
2017) will be proposed for election. All other directors will be
proposed for re-election by shareholders at the AGM in line with the
Code.
Length of appointment of chairman and non-executive directors
Sep 2007
Jul 2009
Jan 2011
Jan 2011
Nov 2011
June 2014
Nov 2014
Sep 2015
Jan 2016
lain Conn
Isabel Hudson
Mike Inglis
Tim Höttges
2007
2008
2009 2010 2011 2012 2013 2014 2015 2016 2017
Calendar year
We include details of all directors’ contracts/letters of appointment in
the Report on Directors’ Remuneration.
Board members
Member
Sir Michael Rake (chairman)
Gavin Patterson
Tony Chanmugama
Simon Lowthb
Tony Ball
Iain Conn
Tim Höttges
Isabel Hudson
Mike Inglis
Sir Michael Rake
Tony Ball
Jasmine Whitbread
Nick Rose
Karen Richardson
Karen Richardson
Nick Rose
Attendance at Board meetings
The following table shows each director’s attendance at Board
meetings during the financial year. The chairman meets privately
with independent non-executive directors before most scheduled
Board meetings. We encourage directors who can’t attend a Board
meeting to give the chairman their views in advance.
Meetings
Eligible to
attend
Attended
12
12
5
8
12
12
12
12
12
12
12
12
12
12
5
8
12
11
10
12
12
12
12
12
Jasmine Whitbread
a Tony stepped down from the Board on 13 July 2016.
b Simon was appointed to the Board from 12 July 2016.
The chairman reviews the directors’ attendance, contribution and
performance. He currently considers that each of them continues
to make an effective contribution to the Board on a wide range of
issues, as well as demonstrating commitment to their role.
Nick Rose reviewed and discussed the chairman’s performance
during the year, taking into account feedback from other Board
members.
Board induction
On appointment, directors take part in an induction programme
to increase their understanding of our business. Meetings are
arranged with the chairman, chief executive, senior independent
director and company secretary, as well as other Board members
and senior members of management to ensure directors gain a
thorough overview 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, the membership of
our main Board committees and matters reserved for decision by the
Board, the Board committees or BT’s most senior executives.
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GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Training and information
We encourage all directors to regularly update their skills and
knowledge. As part of this the Board and individual directors receive
ongoing training as required. The chairman works with individual
directors to identify any specific training they need to perform
their role. The chief executive regularly includes information on the
business in his report to the Board. This can include updates on
operational matters, the competitive and regulatory environment
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.
Board evaluation
The chairman and company secretary carried out a Board evaluation
in 2016 through an electronic questionnaire. We discussed the
resulting report and noted that the overall results were positive.
Directors commented positively on the effective operation of the
Board. They felt that Board members work well together as a unit,
and that the non-executive directors strike a good balance between
supporting and challenging management. Directors commented
favourably on the Board strategy day, and they felt that the Board
played an important and positive role in the EE transaction.
The table below shows progress against the main actions:
The company secretary provides briefings during the year on any
significant developments in legal, governance and compliance areas.
KEY AREAS
ACTIONS
Non-executive directors regularly meet with management and
increase their understanding of the business through formal briefing
sessions, breakfast meetings with senior staff and site visits which
this year included a meeting at the BT Sport studios. In addition
to the private session the chairman holds with the independent
non-executive directors before Board meetings, Board dinners are
held before most Board meetings which are also attended by the
non-independent, non-executive director and the chief executive.
The group finance director attends most dinners. At least once a year,
a dinner is held for members of the Board and Operating Committee.
Regulation
Integration of EE
Improving customer
experience
Succession planning and
senior management
The Board spent considerable time on
the Digital Communications Review.
The Board has received regular updates
from the chair of the Integration
Committee and have heard from the
CEO, EE.
The Board continued to focus on
customer experience throughout
the year.
This has been an area of significant
focus for the Board during the year.
We have appointed a new chairman
as well as the chair of the Openreach
board. The chief executive has also
given regular updates on senior
management changes.
We have commissioned the triennial external evaluation of the
Board for 2017/18. This is being conducted by ‘Independent Board
Evaluation’. You will find further details on this evaluation process on
page 117.
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Chairman’s report
“ My report this year is dominated by the clear
deficiencies in relation to the financial control
of our Italian business. We have focused on the
independent investigation led by KPMG and
other advisers, and our internal investigations
into the deficiencies, the subsequent
accounting adjustments that the company has
needed to make, and the actions which the
company has already taken. We will continue
to give these actions the highest priority in
2017/18 to ensure that issues such as these
will never re-occur in BT.”
Who we are
I chair the Audit & Risk Committee and have recent and relevant
financial experience as required by the provisions of the Code and am
the designated financial expert for Sarbanes Oxley Act purposes. The
committee acts independently of the executive and all its members
are independent non-executive directors with diverse skills and
experience.
Although they aren’t members of the committee, the company
secretary, group finance director, deputy finance director, group
financial controller 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 discuss key
areas for discussion with the committee. The external auditors are
not present at meetings when we discuss their performance and/or
remuneration.
Committee members
Member
Nick Rose (chairman)
Iain Conn
Karen Richardson
Jasmine Whitbread
Meetings
Eligible to
attend
Attended
9
9
9
9
9
6
9
9
What we’ve done
We met nine times during the year and the chart below shows how we
allocated our time. Meetings are scheduled in line with the financial
reporting timetable and after each meeting, I report to the Board on
the main issues that we discussed.
During the year, we hold separate sessions with the internal and
external auditors in the absence of management.
Allocation of time
24% Risk and controls
27% Financial matters
13% Internal audit matters
13% External audit matters
23% Governance and compliance
The committee has an annual work plan. This includes standing items
that the committee considers regularly in addition to any specific mat-
ters that require the committee’s attention and topical items on which
we have chosen to focus.
Activities during the year
BT Italy
Italy has been a major area of focus for the committee and the
improper practices that came to light in our Italian business via a
whistle-blower are extremely disappointing. A large part of our work
in the second half of the year has been in relation to the financial
irregularities that were discovered and which are detailed on page 6. In
October, the committee instructed KPMG, with support and oversight
from our Legal, Governance & Compliance function and Freshfields
Bruckhaus Deringer, to commence an independent investigation.
Throughout the investigation, KPMG reported directly to me and
the BT Group chairman and the full committee has received regular
reports from both KPMG and from the management team. This
investigation is now complete. The investigation identified collusion,
circumvention and override of controls within our Italian business that
was not identified by our monitoring controls thereby resulting in
the misstatement of results going undetected for a number of years.
There are a number of recommendations arising from the KPMG work
and our own observations that we are acting on. We are undertaking
steps to improve the group’s systems, processes and controls, not only
in Italy but also in our shared service centres, in Global Services and
at a group level. This includes increasing the resources and improving
the capabilities of the controlling function and the audit function
outside the UK, and further developing our integrated risk and
assurance reporting processes. We are also enhancing our controls and
compliance programme to strengthen awareness of the standards we
expect, the capabilities of our people, and to reinforce the importance
of doing business in an ethical, disciplined and standardised way. The
committee has specifically focused on:
– understanding and investigating the override of controls and
accounting processes in Italy;
– understanding how the financial irregularities have accumulated
over time. We considered management’s conclusions in
determining the accounting treatment and disclosure of the prior
year errors;
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– reviewing management’s assessment of the nature of the specific
items in the 2016/17 financial year and the judgements taken in
determining these changes on estimates;
– ensuring, in discussion with the chief executive, group finance
director, the internal auditors, the external auditors, and other
advisors that the remedial steps proposed are appropriate and
sufficient to prevent a repetition of these issues;
– satisfying itself that the issues in BT Italy are discrete and isolated
and do not exist across our business more widely; and
– examining the culture and behaviours that have come to light in
the investigation into BT Italy and analysing the culture across BT
more widely.
In the course of and following the investigation into BT Italy, the
business took immediate steps to strengthen the financial processes
and controls in BT Italy and a number of BT Italy’s senior management
team have now left the business. A new chief executive and chief
finance officer of BT Italy are in place having moved from other parts
of BT and they will report back to us on the improvements that have
been made to the governance, compliance and financial safeguards in
our Italian business.
Other key matters considered by the committee
A summary of key matters we considered and discussed at each
meeting during the financial year are set out below:
MEETING
April 2016
April 2016
June 2016
July 2016
AREAS OF FOCUS
– External audit & non-audit fees
– Sarbanes Oxley update
– Draft Annual Report & Form 20-F 2016
– Major contracts
– External audit report
– Internal audit plan of work
– Ethics & Compliance & Speak up cases
– Anti-corruption & bribery update
– Full year results statement
– Going concern and viability statement
– Annual Report & Form 20-F 2016 including a
review to ensure the report was fair, balanced and
understandable
– External and internal audit reports
– Internal control requirements under the UK Corporate
Governance Code including risk management
processes
– Internal audit performance report
– Regional Governance Committee update
– Review of the Regulatory Financial Statements
– Security risk management
– Regional Governance Committee update
– External and internal audit reports
– Sarbanes Oxley update
– First quarter results
– Ethics and Compliance & Speak Up cases
September 2016 – Risk updates from the chief executive and the lines of
business
October 2016
December 2016
– BT Italy
– Major contract review
– Going concern assessment
– Half year results
– External and internal audit report
– Internal controls
– BT Italy
– Major contracts
– Data protection update
– Regional Governance Committee effectiveness review
January 2017
March 2017
– BT Italy
– Third quarter results
– Audit tender update
– External and internal audit reports
– Ethics and Compliance & Speak Up cases
– Accounting policies and reporting developments
– BT Italy
– Regional Governance Committee update
– External audit report
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 the appropriateness of the group’s accounting policies
and critical accounting estimates and key judgements; 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.
In addition to BT Italy, other significant issues we considered in relation
to the financial statements for the year ended 31 March 2017 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, including a paper from
management and the disclosures in the consolidated financial
statements that relate to critical accounting estimates and judgements,
and re-confirmed they remained appropriate for the group. In particular
we reviewed and challenged the judgements and assumptions in
relation to provisions, including regulatory risks and litigation, and the
assumed level of take-up in the BDUK programme which affects the
value of the potential obligation to re-invest or repay grant funding.
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 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 146.
Viability statement
We received a paper from management which summarised how we
meet the requirement in the UK Corporate Governance Code to include
a viability statement in the annual report. We were satisfied that the
viability statement could be provided and endorsed the continued
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 55.
Regulatory reporting
We reviewed and were supportive of the changes across people,
processes and systems that were put in place to ensure that we met
our 2016/17 regulatory financial obligations.
Goodwill impairment
We reviewed management’s process and methodology for assessing
the carrying value of goodwill. This included the impact of the re-
organisation of the group on 1 April 2016. We also considered the
cash flow forecasts for the group’s cash generating units (CGUs)
that hold goodwill, being Consumer, EE, Business and Public Sector,
Global Services, and Wholesale and Ventures. We considered the key
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Chairman’s report continued
assumptions, resulting headroom and the sensitivities applied by
management in forming its assessment that no goodwill impairment
charges were required. With regards to Global Services we reviewed
the impact of the deterioration in international corporate markets
and the outlook for our Italian business. We agreed 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 Global Services in note 12 to the financial
statements.
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 2016/17 balance sheet statement
and 2017/18 income statement and the related disclosures. We were
satisfied that these were appropriate.
Major contracts
In addition to our review of the appropriateness of accounting policies,
management provided regular updates on the performance of major
contracts within Business and Public Sector and Global Services. This
included an overview of the trading and operational performance
of the contracts, the assessment of the recoverability of dedicated
contract assets, 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. We considered
whether specific items are appropriately categorised. 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.
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 audit fees, external audit findings and the
letter of engagement; and
– considered and approved the letter of representation.
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 154 to 164.
Audit tender
PricewaterhouseCoopers (PwC) and its predecessor firms have been
BT’s auditors since BT listed on the London Stock Exchange in 1984
and their reappointment has not been subject to a tender in that
time. I reported to you last year that we proposed to tender the audit
no later than 2019 but that the committee would keep the external
audit arrangements under review annually. In our annual review,
we recommended to the Board that the audit tender process be
accelerated with a view to appointing new auditors for the financial
year 2018/19. We expect the audit tender process to be completed
by the company’s Annual General Meeting in July 2017, such that
there can be an effective transition by the selected audit firm during
the 2017/18 audit process.
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 focused on: robustness
of the audit process, quality of delivery, reporting and people and
services. Based on the committee’s own view and the survey input,
PwC have been informed of some specific “areas for improvement”
which will ensure that they are able to deliver the very best outcomes
for BT in the coming year.
Independence and objectivity
BT has agreed policies in place on what non-audit services can be
provided by the external auditors. 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 interest. There are internal procedures in place for
the approval of work given to the external auditors.
During the year we have considered independence matters and areas
which could give rise to a conflict of interest. We noted the safeguards
that the external auditors have in place to prevent compromising their
independence and objectivity.
We reviewed and approved changes to BT’s non-audit fee policy in
light of the new FRC Revised Ethical Standard for auditors issued in
June 2016 which applied to BT from 1 April 2017.
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 which
included the audit of the Regulatory Financial Statements, 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 20% of the total fees (2015/16: 26%).
The most significant changes year on year relate to services performed
on the EE acquisition prospectus in the prior year and advice in relation
to Ofcom’s Digital Communications Review in the current year. 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 when assessed against all relevant
factors, 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.
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Internal audit
We monitor and review the effectiveness of internal audit annually and
endorse 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. Going forward the
committee has asked for greater emphasis to be given to the audit of
financial controls, and our overseas operations.
We receive regular reports from the internal auditors and monitored
management’s responsiveness to the findings and recommendations
as well as discussing with them the action required to bring matters to
resolution.
As mentioned above, in light of the learnings arising from BT Italy,
we are increasing the resources and improving the capabilities of the
controlling function and audit function outside the UK and further
developing our integrated risk and assurance reporting processes.
Internal audit will also play a critical role as we move towards a more
integrated risk and assurance reporting processes.
Internal controls and risk management
In accordance with the provisions of the UK Corporate Governance
Code, 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.
As set out in the description of the committee’s activities during
the year the investigations into the irregular practices in the Italian
business identified a number of control deficiencies which were
not identified by our monitoring controls thereby resulting in the
misstatement of results going undetected for a number of years.
Immediate steps were taken to strengthen the financial processes
and controls in our business and control improvement plans have
been instituted where appropriate. Steps will continue to be taken to
improve further our control, governance and compliance environment.
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.
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 149 and for details of the assessment of
internal controls, as affected by the issues identified in our Italian
business for the purposes of the Sarbanes-Oxley Act, see US
Regulation on page 148.
Governance & Compliance
We received and considered reports from management on:
– ethics and compliance plan of work;
– anti-corruption and bribery;
– Speak Up arrangements, 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. We will review our whistleblowing arrangements in
light of the issues found in our Italian business and consider if
improvements are needed;
– data protection; and
– the effectiveness of our Regional Governance Committees
which monitor governance and compliance in their respective
regions. We were also updated on the work of several of these
committees.
Committee review
We review our performance annually by inviting members and
regular attendees at our meetings, including the external auditors, to
complete online questionnaires. The results, as expected, reflect the
disappointment concerning the issues found in our Italian business.
We will ensure that we act upon the lessons learnt from this issue to
enhance the role of the committee.
Conclusion
The events in 2016/17 surrounding BT Italy are a matter of
substantial disappointment to the committee. We have undertaken
a significant number of actions in response to these events and to
thoroughly investigate and deal with the issues identified, including:
– the commissioning and oversight of KPMG’s comprehensive
investigation into the nature, extent and causes of the issues;
– the oversight of multiple other related internal workstreams,
including scrutiny of the accounting treatment of the issues
identified, analysis of the controls framework in Italy and across
Global Services, and testing and review to satisfy ourselves that
the issues are isolated to BT Italy;
– driving forward how we can learn from this issue, including to
reflect the recommendations of the KPMG investigation and our
own observations; and
– the acceleration of the company’s audit tender.
We believe that these actions will ensure that the events surrounding
BT Italy will never be repeated in the company.
We also continue and will continue to work on a number of specific
areas to further strengthen our systems, controls and culture
including:
– analysis of the culture of the company in the context of the
events in BT Italy and how this can be improved; and
– an increased focus on integrated assurance across a range of
functions, together with the development of a system to better
integrate the range of financial and non-financial risk factors that
exist across the group to enable a better understanding of them.
Going forward, the committee will seek to ensure that all the lessons
that need to be learnt from the events surrounding BT Italy have been
learnt.
Nick Rose
Chairman of the Audit & Risk Committee
11 May 2017
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Nominating & Governance Committee
Chairman’s report
This chart shows how we allocated our time.
Allocation of time
56% Succession
10% Committee governance
8% Board membership
26% Governance structure and effectiveness
“ We have focused on succession, Board
membership, and our governance structures
for BT and Openreach. I believe the decisions
we have made this year will have a meaningful
impact in setting BT and Openreach up for long
term future success.”
Who we are
I chair the Nominating & Governance Committee at the request of the
Board. Our role is to ensure our Board and committee members have
the right balance of skills, experience, independence and knowledge to
effectively discharge their duties and responsibilities. We also oversee
BT’s governance framework.
Our members and their meeting attendance are set out below. The
company secretary attends our meetings, as does the chief executive
where appropriate.
Committee members
Member
Sir Michael Rake (chairman)
Tony Ball
Iain Conn
Isabel Hudson
Nick Rose
Meetings
Eligible to
attend
Attended
5
5
5
5
5
5
5
5
5
5
What we’ve done
We met five times this year. We spent a considerable amount of time
discussing and agreeing the appointment of my successor. This process
was led by Nick Rose as our senior independent director, who chaired
the meetings when the appointment of my successor was discussed.
In accordance with our proposals to Ofcom on the DCR, we discussed
the independent appointments to the Openreach board, and approved
the appointment of Mike McTighe as the first chairman of Openreach
from January 2017. Mike is an experienced telecoms executive and
brings a wealth of industry and regulatory knowledge to this role.
Succession
Our senior independent director, Nick Rose, led the process to find and
appoint my successor. We engaged with external search consultants
MWM Consulting to identify potential candidates. BT instructs
MWM Consulting from time to time for search assignments, but
they otherwise have no connection to the company. The committee
discussed the process used to compile the candidate list, and agreed
that MWM Consulting’s methodology and rationale were appropriate
and that there was sufficient diversity in the proposed field of
candidates.
Nick Rose, Gavin Patterson and other Board members then met
with potential candidates. MWM Consulting also commissioned an
independent report from Montrose Associates, to provide a thorough
profile on each candidate.
Following this comprehensive process the committee was able to make
a clear recommendation with which the Board agreed. As a result,
I’m delighted to welcome Jan du Plessis as a non-executive director
of the Board from 1 June 2017, before he becomes chairman on my
retirement on 1 November 2017. Jan has led a number of high profile
organisations, having been chairman of British American Tobacco,
SABMiller and Rio Tinto. I wish Jan every success as he joins BT at this
important time.
Board membership
We keep the composition of our Board under close review. In order
to best serve all of our customers, we believe the composition of
our Board should support diversity in its widest sense. As part of
our gender diversity policy we aim to have at least 25% female
representation on the Board. We currently have 27% female
representation, with 3 female members out of 11. Gender diversity
on our Board continues to be in line with the Davies Report target and
we make sure that our external search consultants consider diversity
as part of the candidate shortlisting process as we work towards Lord
Davies’s new target of 33% female Board representation by 2020.
Read more about BT’s approach to diversity on page 29.
Our Board members each contribute individual knowledge, skills
and experience, which we regularly review using a skills matrix. This
covers the skills needed 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. This year, we asked Board members to
re-evaluate their own skills, and considered the skills we may wish to
prioritise when evaluating potential new candidates.
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We believe our Board currently has an appropriate composition and
mix of skills and we continue to keep under review the retirement
dates of our non-executive directors.
The following table summarises our progress against the key areas of
focus:
This year, we recommended that Nick Rose’s appointment as senior
independent director be extended for a further three-year term
starting from 1 January 2017, and that Jasmine Whitbread’s
appointment as a non-executive director should also be extended
for a further three-year term starting on 19 January 2017. Nick
did not participate in any discussions regarding his reappointment.
The UK Corporate Governance Code states that any term beyond six
years should be subject to a particularly rigorous review, therefore this
recommendation followed a thorough appraisal of Nick’s and Jasmine’s
performance. We concluded that both make a valuable and broad
ranging contribution to the Board and the various committees of
which they’re members, as well as to the business as a whole.
We also reviewed Nick and Jasmine’s roles outside BT, and as a result
we're confident that these don’t prevent either Nick or Jasmine from
effectively discharging their Board responsibilities and making a full
contribution in their roles. We were able to assure ourselves that Nick
and Jasmine continue to be independent in character and judgement,
and that there are no conflicts of interest that could affect their
decision making.
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.
Governance structure and effectiveness
We keep our governance structure and the membership of our Board
committees under continuous review:
– In light of the new Investigatory Powers Act passed in November
2016, we recommended that the Board approve the creation of
an Investigatory Powers Governance Committee with immediate
effect. This will help us to develop and refine our governance of
investigatory powers requests so that we meet our new legal
obligations and our human rights commitments.
– After reviewing the terms of reference of this committee we
recommended a change to allow any independent non-executive
director to attend its meetings, unless the topic being discussed
relates to their appointment. The Board approved this change in
October 2016.
– We also reviewed the terms of reference of our Regional
Governance Committees (RGCs) which monitor governance and
compliance in their respective regions. We approved a number of
changes to help improve the effectiveness of the RGCs.
Committee evaluation 2016/17
As part of our internal Board review in June 2016, we evaluated the
committee’s effectiveness. 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 noted the results of the questionnaire in October 2016, and in
March 2017 we reviewed our progress in addressing the various
challenges and priorities it highlighted.
KEY AREAS OF FOCUS
ACTIONS
Succession planning
Chairman succession
This has been a key focus of the
committee this year; Nick Rose, our
senior independent director has led the
succession planning process.
The impact of Ofcom’s DCR on Openreach and Group governance
Openreach board
In line with our proposals to Ofcom
on the DCR, the committee received
updates on the Openreach board
appointment process. Mike McTighe’s
appointment as chairman was approved
by the committee and announced on
29 November 2016. The appointment
of the remaining three independent
non-executives was completed in
January.
Integrating BT’s and EE’s governance cultures post EE acquisition
Integration Committee
The Integration Committee oversees the
integration of EE and BT, and has met
four times this year.
Governance arrangements for a non-independent non-executive
director
Conflicted Matters Committee
The Conflicted Matters Committee
reviews all Board papers and agenda
items to make sure we don’t share
any conflicted matters with the non-
independent, non-executive director.
The committee reviewed the role of
the Conflicted Matters Committee at its
meeting in March.
Governance requirements for data privacy and data protection
Investigatory Powers Governance
Committee
In December 2016, the committee
recommended, and the Board
subsequently approved, the formation
of the Investigatory Powers Governance
Committee. Its role is to make sure we
balance our legal obligations under the
new investigatory powers legislation,
and our human rights commitments,
particularly the right to privacy.
Board evaluation 2017/18
In line with the UK Corporate Governance Code, we have
commissioned an external evaluation of our Board effectiveness for
2017/18. We agreed that the company secretary would conduct
the tender exercise and recommend an external facilitator to the
chairman. Following the tender exercise, we chose ‘Independent
Board Evaluation’ to conduct the evaluation, which comprised an
interview with each Board member, and observations of the Board and
certain committees. The review focused on Board accountability and
composition, the Board’s role in setting strategy, risk management,
succession planning, and the effectiveness of the Board committees.
The evaluation took place in March and April 2017. The Board will
receive a full report in June 2017, and will discuss the results at a
future Board meeting.
The chairman will also conduct one-to-one interviews with directors
on their individual performance and the senior independent director,
Nick Rose, will conduct the annual evaluation of the chairman.
Sir Michael Rake
Chairman of the Nominating & Governance Committee
11 May 2017
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Chair’s report
“ During the year the committee focused on a
number of areas, including how we’ll approach
the 30 June 2017 valuation, and the potential
implications of Ofcom’s Strategic Review
of Digital Communications for our pension
arrangements.”
Who we are
I chair the BT Pensions Committee. We’re responsible for BT’s
interactions with the Trustee of the BT Pension Scheme (BTPS). The
BTPS is a defined benefit pension scheme with around 300,000
members. It pays out over £2bn a year of pensions and has liabilities
of around £60bn.
I’d like to welcome Simon Lowth who joined the committee during
the year. I’d also like to thank Tony Chanmugam, who stepped down
on 13 July 2016, for his contribution to the committee’s work. Our
membership and meeting attendance are set out below.
Committee members
Member
Isabel Hudson (chair)
Sir Michael Rake
Simon Lowtha
Alison Wilcox
Tony Chanmugamb
Meetings
Eligible to
attend
Attended
6
6
4
6
2
6
5
4
6
2
a Simon Lowth was appointed to the committee from 12 July 2016.
b Tony Chanmugam retired from the committee on 13 July 2016.
Further information
You can find out more about BT’s pension schemes in note 20 to the
accounts.
What we’ve done
BT management provides regular updates on BT’s performance and
strategy at BTPS Trustee meetings, and held extra sessions with the
Trustee Board over the course of the year, including reporting on
Ofcom’s Strategic Review of Digital Communications.
We met six times during the year. The chart below shows how we
allocated our time.
Allocation of time
38% Risk management and investment performance
5% Other
8% BTPS administration
18% Governance, legal and regulatory
31% Funding
Areas of work
Key areas of work carried our in the year include:
Risk management and investment strategy: At each meeting
we reviewed the investment performance and risk associated with
the BTPS. During the year we agreed enhancements to the Trustee’s
reporting of investment performance and strategy to the committee.
We received an improved information pack, updated each quarter,
together with presentations from the BTPS management team
every six months. Investment return was around 21% for the year to
31 March 2017.
We reviewed the BTPS’s approach to reducing risk over the year, which
included increasing its interest rate and inflation hedging levels. Over
the course of the year we provided views to the Trustee on various
elements of the investment strategy, including the Trustee’s approach
to hedging. We also received a presentation from the CEO of Hermes
– the investment management company wholly owned by the BTPS –
on its financial performance and future strategy.
Funding: We received regular updates on the development of the
funding position throughout the year. We also started planning our
approach to the next funding valuation that will take place as at an
effective date no later than 30 June 2017, including how we might
deal with an increased deficit given the continued low interest rate
environment.
Governance, legal and regulatory: We looked at the potential
impact of Ofcom’s Strategic Review of Digital Communications on
the BTPS. We also dealt with other governance matters, including
reviewing trustee appointments.
BTPS administration: We monitored BTPS Trustee progress on
improving administration services to members.
Isabel Hudson
Chair of the BT Pensions Committee
11 May 2017
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Committee for Sustainable and Responsible Business
Chairman’s report
2020 ambitions. We’re focused in particular on the central role that
we can play in shaping the world’s digital future, and how we can
energise and inspire all of our people to help deliver our purpose, so
that it becomes fully part of our culture at all levels.
The chart below shows how we allocated our time.
Allocation of time
33% Strategy and governance
9% Delivering environmental benefits
11%
Volunteering
13% Supporting charities and communities
17% Creating a connected society
17% Engagement and advocacy
The CSRB met twice this year and visited the EE contact centre in
Merthyr Tydfil. As well as spending time with our employees, we saw
how The Supporters Club is helping local schools by combining fun,
action-packed rugby sessions with education pathways and mentoring
sessions to drive social change.
This year, we made an investment in society of £35.6m, made up of a
mix of cash, time volunteered by BT people and in-kind contributions.
2020 Ambitions
We’re making good progress toward our 2020 ambitions. We helped
3.9m people to overcome social disadvantage through our services in
2016/17, and since 2012, we’ve used our skills and technology to
generate £422m for good causes. By 2020, we hope to have raised
£1bn in total.
To find out more about on our 2020 ambitions and our progress so
far, please see BT’s Delivering Our Purpose Report 2016/17.
Tech Literacy
As part of our commitment to help build a culture of tech literacy
in the UK, we’re on track to reach 5m kids by 2020. Through the
Barefoot Computing Project, which brings computer science alive
across the curriculum, we’ve already reached over 1m primary school
children. This year we’ve helped over 2050 young people, many from
disadvantaged backgrounds, get better prepared for the world of work
through our Work Ready programme and partnership with the Rio
Ferdinand Foundation.
Volunteering
Our people are essential to help us create a lasting positive impact
on society and the environment; that’s why we offer them up to
three volunteering days a year. To support this we’ve launched a new
volunteering portal to make it easier for them to find opportunities
and register their volunteering time.
In 2016/17, over 31.8% of BT people volunteered over 39,000 days,
worth over £11.5m to support charities and communities around the
world. Find out more information about volunteering on page 29.
Sir Michael Rake
Chairman of the Committee for Sustainable and Responsible
Business
11 May 2017
“ BT’s purpose is to use the power of
communications to make a better world. This
remains at the heart of everything we do and
inspires our customers, partners and employees
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
Sir Michael Rake (chairman)
Tony Chanmugama
Niall Dunneb
Phil Hodkinsonc
Baroness Margaret Jayc,d
Lisa MacCallumc,e
Gavin Neathc,f
Gavin Patterson
Gunhild Stordalenc,g
Jasmine Whitbread
Alison Wilcoxb
Meetings
Eligible to
attend
Attended
2
1
2
2
2
2
2
2
2
2
2
2
0
2
2
2
2
2
2
0
2
2
a Tony stepped down from the CSRB from 13 July 2016.
b BT employee.
c Independent member.
d Margaret stepped down from the CSRB from 14 April 2017.
e Lisa was appointed to the CSRB from 6 July 2016.
f Gavin stepped down from the CSRB from 31 December 2016.
g Gunhild was unfortunately unable to attend meetings this year due to poor health. She receives
the materials for the meetings and feeds back her comments to the chairman.
I’m pleased to welcome Lisa to the CSRB, who brings a fresh new
perspective. It is with regret that we say goodbye to Tony Chanmugam,
Gavin Neath and Baroness Margaret Jay; on behalf of the CSRB I would
like to thank all three for their contribution over the years.
What we’ve done
We’ve continued to bring our purpose to life through our Purposeful
Business strategy, as well as monitoring our progress towards our
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Technology Committee
Chairman’s report
What we’ve done
We met twice this year. The chart below shows how we allocated our
time.
Allocation of time
19% Governance
24% Future technology
37.61%
31.62%
17.95%
“ We’re proud of the role BT plays in shaping
the success of the UK’s digital economy. Our
ambition is to be the first to build a truly
converged fixed and mobile network. We want
to give our customers a seamless service on a
trusted network with the best connectivity.”
Who we are
I chair the Technology Committee. Our role is to agree the
development and implementation of BT’s technology strategies, and
oversee technology risk management across the group.
This table shows our membership and meeting attendance.
Committee members
Member
Gavin Patterson (chairman)
Tony Ball
Iain Conn
Mike Inglis
Karen Richardson
Howard Watson
Meetings
Eligible to
attend
Attended
2
2
2
2
2
2
2
2
2
2
2
2
19% Technology risk
38% Technology strategy
Technology strategy
This year, we reviewed our ultrafast broadband programme, which
is on track to deliver G.fast technology to 10m homes, with an
ambition to deliver Fibre to the Premises (FTTP) to a further 2m
locations by 2020. We looked at ways we will improve the capability
and agility of our core IP network, and agreed our vision for 5G
mobile services.
Future technology
It’s important we understand emerging future technologies, to
identify potential opportunities for investment and growth. We
spent time looking at the future of mobile, the Internet of Things
and other emerging technologies such as transportation and finance
technology.
Cyber security
The threat of cyber-attacks has continued to increase this year, as
we see attacks growing in both scale and sophistication. We receive
regular updates on cyber security to improve our understanding of
the nature of these attacks, and how to prevent them.
We’ve several major programmes underway to help us protect our
systems, people and customers. Our focus is on prevention, so
we’re working to detect pro-actively and repair vulnerabilities in our
systems and networks.
Gavin Patterson
Chairman of the Technology Committee
11 May 2017
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Integration Committee
Chairman’s report
“ I’m pleased with the progress we’ve made
this year integrating EE and BT. We can now
offer exciting converged propositions such
as BT Sport to EE customers and Plusnet
Mobile, and we’re realising the cost savings and
efficiencies set out in our deal case.”
Who we are
I chair the Integration Committee. We oversee the integration of
EE and BT, including monitoring progress towards financial synergy
targets, creating a fit for future organisation, improving customer
experience, and integrating the cultures of the two organisations.
Our membership and meeting attendance are set out below. The
group HR director and integration project director, although not
members of the committee, attend meetings at my invitation.
What we’ve done
We met four times this year. This chart below shows how we allocated
our time.
Allocation of time
20% Financial performance and synergies
11% Governance
14% People and culture
17% Technology
19% Customers
19% Strategy
The first year of our integration has gone well. We’ve delivered £152m
of run rate cost synergies, which is higher than our public commitment
of £100m in year 1.
We’ve successfully launched converged propositions such as BT Sport
for EE customers and Plusnet Mobile, which support our strategy of
improving our entire customer experience. We want the combined EE
and BT to remain a great place to work, with exciting opportunities for
development. There are many things we can learn from each other, so
we’re using a ‘best of both’ approach to integrate EE and BT’s cultures
and policies.
In 2017/18, our priorities are to:
– continue to launch converged propositions to improve our
customers’ experience;
– deliver revenue and cost synergies;
– continue to integrate the two organisations and cultures to create
a brilliant place to work; and
– preserve EE’s tax losses through the integration activities.
Committee members
Member
Gavin Patterson (chairman)
Tony Ball
Thomas Dannenfeldta
Simon Lowth
Nick Rose
a Deutsche Telekom member.
Meetings
Eligible to
attend
Attended
Gavin Patterson
Chairman of the Integration Committee
11 May 2017
4
4
4
4
4
4
4
4
4
4
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Application of malus due to Italian issues: In January we published
revised results for 2014/15 and 2015/16 after our investigations
into accounting irregularities in our Italian business. The committee
has recalculated the annual bonuses for the years in question and
the outcome of vesting for the 2013 ISP to reflect the revised
results. This clearly showed that the payouts based on the revised
results would have been lower than those actually paid at the time.
The committee has therefore decided to exercise its discretion and
apply the malus provisions in the Deferred Bonus Plan to reduce
the number of shares under award, for the executive directors,
plus the Operating Committee members who received payments
under the bonus arrangements and/or the ISP, and for the company
secretary. This action ensures the restitution of overpayments to
these recipients and places them in the same position they would
otherwise have been in had the awards been based on the revised
results. Further details are shown on page 133.
The committee will keep under active review whether any additional
employees’ awards should be adjusted. In addition, where employees
have been dismissed or resigned as a result of our investigations into
the issues in Italy, shares and incentives have been lapsed in full as a
result.
Looking ahead
The committee considered the base salaries of the executive
directors in the context of the UK employee population. We have
agreed a 2.1% annualised pay settlement for our team members in
the UK. However, the budget for increases for our managerial and
professional team will be lower than this and any increases will be
more targeted and discretionary. The executive directors’ salaries will
remain unchanged.
Good progress has been made on the integration of the EE business
and the realisation of the associated cost synergies. As we move into
the second year of integration, the committee is satisfied that EE is
well embedded into the business, such that it is now business-as-
usual, and has elected to remove the specific integration synergy
target and increase the weighting of the earnings per share and free
cash flow targets for the annual bonus for 2017/18.
Finally, we agreed the remuneration package for the incoming
chairman, Jan du Plessis, who joins the board on 1 June and
becomes chairman on 1 November, the details of which are set out
on page 135. This remuneration arrangement will remain fixed for
five years.
Renewal of Remuneration Policy
Throughout the year we have continued to operate within the
shareholder approved Remuneration Policy. We have conducted a
comprehensive review of the Policy ahead of the 2017 AGM where
shareholders will again have the opportunity to vote on it.
The committee has concluded that the existing Policy (with some
minor changes), remains aligned to the business strategy and
current best market practice and therefore no material changes are
proposed.
The committee continues to maintain the link between pay and
performance and remains committed to doing so in the future.
Tony Ball
Chairman of the Remuneration Committee
11 May 2017
Review of the year
The past year has been challenging. Although good progress has been
made in a number of areas unfortunately our performance has been
significantly affected by the accounting irregularities in our Italian
business, the issues that arose in Openreach around Deemed Consent
and the significant challenges we faced in the UK public sector and
international corporate markets. Our adjusted EBITDA was £7,645m
compared with our initial outlook for the year of around £7.9bn and
our normalised free cash flow was £2,782m compared with our initial
outlook for the year of £3.1bn to £3.2bn. We have also seen a 28%
fall in the share price over the last year.
Outcomes for the year
The committee has made a number of difficult decisions this year in
light of these circumstances and these are summarised below.
2016/17 Bonus: The annual bonus is determined by a number of
factors including profit, cash flow, revenue, customer experience
and EE integration synergies. The threshold targets for revenue,
customer experience and for the EE synergies were achieved.
However the committee used its discretion to reduce the bonus
payable to the group chief executive and outgoing group finance
director to zero.
In the case of the new group finance director, Simon Lowth, who
joined the company in July 2016, the committee has calculated a
bonus based on the formulaic outcome of the company performance
measures and an assessment of his personal performance. This
resulted in an annual bonus of 38.2% of maximum for Simon
Lowth.
Details of the outcome of performance against the targets for the
2016/17 annual bonuses for the group chief executive, the new
group finance director and the outgoing group finance director are
set out on page 126.
2014–2017 ISP vesting: The group returned below threshold
performance against all of the performance measures for the 2014
ISP. This resulted in none of the shares under the award vesting.
More information on the 2014 ISP is on pages 126 to 127.
2017–2020 ISP award: The level of ISP award for the chief
executive was reduced from 400% of salary to 350% of salary for
this year in light of the share price fall over the last year.
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GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Focus on Remuneration
Fixed pay
Base salary
Pension
Other benefits
Annual bonus*
2016/17 maximum
award
2016/17 performance
measures
No increases for executive directors in 2017/18. Base salaries during the year were Gavin Patterson
£996,825, Simon Lowth £700,000 and Tony Chanmugam £646,000.
Pension arrangements during the year were the same for all executive directors, each receiving a cash
allowance of 30% of salary. There are no changes proposed to the pension arrangements for 2017/18.
Benefits include company car, fuel or driver, personal telecommunication facilities and home security,
medical and dental cover (for the directors and immediate family), life cover, professional subscriptions,
personal tax advice and financial counselling. There are no changes proposed to the benefit framework for
2017/18.
The maximum level of bonus opportunity was 240% for the chief executive, 210% for the outgoing
group finance director (pro-rated for time) and 180% for the new group finance director (pro-rated for
time).
Group performance was based on:
– 60% financial (adjusted earnings per share,
normalised free cash flow, revenue (excluding transit)
and integration synergies)
–
40% non-financial (personal
objectives and customer
experience)
Deferral
One-third of the bonus is deferred into shares for three years.
Award in respect of
2016/17
Changes for 2017/18
Despite some of the performance targets being met, the committee exercised discretion and determined
that no bonus would be awarded to the chief executive and the outgoing group finance director and a
bonus representing 38.2% of maximum would be awarded to the new group finance director.
No changes are being proposed to the maximum bonus opportunities. Now that EE is well embedded
into the business, the committee has elected to remove the integration synergy measure and increase the
weightings of the earnings per share and free cash flow measures.
Incentive Share Plan (ISP)*
2016/17 maximum
award
The Policy provides for a maximum annual ISP award of 500% for an executive director. The chief
executive received an award of 400% of salary. The new group finance director received an award of
350% of salary. No award was made to the outgoing group finance director.
2016/17 performance
measures
Awards are subject to performance conditions: 40% based on relative TSR, 40% based on normalised
free cash flow and 20% based on growth in underlying revenue excluding transit adjusted for the
acquisition of EE over a three year period.
Vesting of 2014 award
The 2014 ISP lapsed in May 2017 as the threshold target was not met for any of the performance
conditions.
Changes for 2017/18
The award to the chief executive will be reduced from 400% of salary to 350% of salary as a result of
the share price fall over the last year. It is expected that the award level will return to 400% in 2018.
The award to the group finance director will remain at 350% of salary. No changes are proposed to the
performance measures or operation of the ISP for awards to be granted in 2017/18.
Shareholding
Shareholding
requirements
The chief executive is required to build up a holding equal to 300% of salary and the new group finance
director a holding of 250% of salary.
Malus and clawback
Application of malus
and clawback
In the context of the publication of revised results for 2014/15 and 2015/16, the committee has
exercised its discretion and applied malus to outstanding deferred bonus awards to ensure restitution of
overpayments of previous incentive awards.
* Annual bonus and ISP awards are subject to malus and clawback provisions in certain circumstances. The ISP has an additional holding period of two years
post vesting. More detail is available on page 145.
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Remuneration Principles
Our remuneration principles are to maintain a
competitive remuneration package that promotes
the long-term success of the business, avoids excessive
or inappropriate risk taking and aligns managements’
interests with those of shareholders.
We believe in pay for performance against
challenging targets and stretching goals for
the annual bonus (including deferred shares)
and long-term incentive shares. 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 currently 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 pay and
employment conditions of all our employees,
the performance of the group and the individual,
the current views and guidelines of shareholders
and their representatives, and general market
conditions. Remuneration arrangements at other
companies of a similar size and complexity are
also reviewed for guidance.
The committee continues to keep under review
the relationship of risk to remuneration. The
chair of the Audit & Risk Committee is currently
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 which typically includes
the environmental, social, health and safety and
governance agenda.
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.
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Executive Directors
G Pattersonf
S Lowthg
Non-executive
directors
T Ball
I Conn
T Höttgesh
I Hudsoni
M Inglisi
K Richardsonj
N Rosei
J Whitbread
Sub-total
Former executive
director
T Chanmugamk
Total
Annual Remuneration Report
This part of the Report summarises key elements of the directors’ remuneration in 2016/17.
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 2016/17 and
2015/16 are set out in the table below.
Basic salary
and fees
(2016/17)
£000
Basic salary
and fees
(2015/16)
£000
Benefits
excluding
pension
(2016/17)
£000
Benefits
excluding
pension
(2015/16)
£000
Annual
Bonusa,b
(2016/17)
£000
Annual
Bonusa
(2015/16)
£000
ISPc
(2016/17)
£000
ISPd
(2015/16)
£000
Pension
allowance net
of pension
contributionse
(2016/17)
£000
Pension
allowance net
of pension
contributionse
(2015/16)
£000
Chairman
Sir Michael Rake
675
675
Total
2016/17
£000
Total
2015/16
£000
710
706
31
57
–
16
35
54
17
1
1
18
2
993
499
124
121
–
179
86
126
159
102
969
–
112
103
–
99
47
114
152
97
–
343
1,057
–
–
–
2,906
–
298
151
291
–
1,345
1,010
5,280
–
124
121
–
180
87
144
161
102
112
103
–
99
47
130
152
97
3,064
2,368
128
104
343
1,057
184
643
3,248
3,011
19
147
32
136
–
587
343
1,644
–
–
–
2,906
449
291
3,984
6,726
1,351
4,257
55
504
193
484
258
4,242
2,806
9,532
a Annual bonus shown includes both the cash and deferred share element as reported in the 2015/16
Remuneration Report. The deferred element of the 2016/17 bonus includes the value of deferred
shares to be granted in June 2017. Further details of the deferred element are set out below.
b As a result of investigations into improper accounting practices in BT’s Italian business, the committee
has exercised its discretion and applied the malus provisions under the Deferred Bonus Plan. This will
be applied in 2017/18 and reflected in the single figure table in the Annual Report 2018. Further
details can be found on page 133.
c The ISP 2014 granted in June 2014 will lapse in full. Further details are provided on pages 126
to 127.
d Vesting of ISP 2013 granted in June 2013 and vested in May 2016 at a share price of £4.45. The
value shown last year of £3,022 for the chief executive and £1,405 for the then group finance
director were based on an estimated share price of £4.63.
Additional disclosures relating to the single
figure table
Salaries
We reviewed Gavin Patterson’s salary and increased it to
£996,825 in June 2016. This was an increase of 2.5% from the
prior year. The salary increase was consistent with the approach
taken for substantially all of our UK employees who received an
average increase of 2.5%. No salary increase was made to Tony
Chanmugam in light of his stepping down during the year.
We agreed Simon Lowth’s salary (£700,000) at the time of his
appointment in July 2016.
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), life cover, professional subscriptions, personal tax
advice and financial counselling.
e Pension allowance paid in cash for the financial year – see ‘Total pension entitlement’ on page 127.
f The 2015/16 ISP figure reflects two awards granted in 2013. One as CEO BT Retail and one as
chief executive.
g Simon Lowth was appointed as a director on 12 July 2016.
h 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.
i Value shown relates to reimbursement of reasonable travelling and other expenses (including any
relevant tax) incurred in carrying out their duties.
j Includes an additional fee for regular travel to Board and Board Committee meetings.
k Tony Chanmugam retired as a director on 13 July 2016. Under the terms of his service contract,
he continued to receive his salary and contractual benefits until the end of his notice period, being
31 March 2017. Further details are provided on page 128.
Annual bonus
The annual bonus opportunities for the executive directors in
2016/17 were as follows:
Level of
2016/17 bonus
Chief executive
New group
finance director
Outgoing group
finance director
Annual cash bonus
Target 80% of salary
Target 80% of salary
Target 70% of salary
Maximum 160% of salary Maximum 120% of salary Maximum 140% of salary
Deferred bonus in shares Target 40% of salary
Target 40% of salary
Target 35% of salary
Maximum 80% of salary Maximum 60% of salary Maximum 70% of salary
Total bonus
Target 120% of salary
Target 120% of salary
Target 105% of salary
Maximum 240% of salary Maximum 180% of salary Maximum 210% of salary
125
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Annual Remuneration Report continued
The bonus payment for the outgoing group finance director is pro-
rated in respect of the period for which he was performing full-time
duties. The bonus payment for the new group finance director is
pro-rated in respect of the period for which he was in full-time
employment. One third of any bonus paid is deferred into shares for
three years with the remaining two-thirds paid in cash.
The weighting of the annual bonus structure for 2016/17 is set out
below.
Simon Lowth achieved 80% of the maximum score for his personal
contribution. The result for the personal contribution score was for
significant contribution to commercially sensitive strategic programmes.
As set out in the table opposite, the committee applied the EPS gateway
and no payment was made in respect of the customer experience
performance. This resulted in a total annual bonus, paid in both cash
(two-thirds) and deferred shares (one-third) representing 68.8% of his
salary (pro-rated to reflect the period he was in full-time employment
during the year) and 38.2% of the maximum opportunity. The deferred
shares will be granted in June 2017.
Chief Executive and Group Finance Director
% Weighting
20% Adjusted earnings per share
20% Personal objectives
20% Customer experience
10% Integration synergies
10% Revenue (excluding Transit)
20% Normalised free cash flow
As a result of the accounting irregularities in our Italian business,
the issues that arose in Openreach around Deemed Consent and
the significant challenges we faced in the UK public sector and
international corporate markets, the committee has exercised its
discretion and moved not to award bonuses to the chief executive
and the outgoing group finance director in respect of 2016/17
despite some of the performance targets being met.
The table below provides an overview of performance against the
targets for the 2016/17 annual bonus.
Measure
Adjusted EPS (p)b
Normalised free cash
flow (£m)c
Revenue (£m)d
Threshold
Target Maximum Outcome
Result %
of maxa
30.9
32.5
34.9
28.9
0%
3,064
3,225
3,467
2,782
0%
23,661
23,900
24,259 23,678 26.7%
111
117
126
152
Integration synergies
Customer experiencee
50
a Threshold represents 25% of maximum. Target represents 50% of maximum.
b Adjusted EPS is defined on page 21.
c Normalised free cash flow is defined on page 21.
d Revenue is defined on page 20.
e The committee applied the EPS gateway and no payment was made to executive directors in
respect of Customer Experience performance.
100
200 124.33 62.2%
100%
As described above, the committee moved not to award bonuses
to the chief executive and the outgoing group finance director
in respect of 2016/17. The chief executive and outgoing group
finance director both understood the committee’s decision not to
award a bonus and indicated that they would not have accepted a
bonus should one have been approved. For Simon Lowth, the new
group finance director who joined the company in July 2016, the
committee calculated a bonus based on the formulaic outcome
of the company performance measures and an assessment of his
personal performance.
126
Bonus award and proportion of value
Element of bonus
EPS
Normalised free cash flow
Revenue growth
Intergration synergies
Customer experiencec
Gavin
Patterson
Simon
Lowtha
Tony
Chanmugamb
0%
0%
0%
0%
0%
0%
0%
9.25%
34.9%
0%
0%
0%
0%
0%
0%
Personal contribution
a New group finance director.
b Outgoing group finance director.
c The committee applied the EPS gateway and no payment was made to executive directors in
respect of Customer Experience performance.
55.85%
0%
0%
Incentive share plan 2014
The ISP is a conditional share award. The performance conditions are
assessed to 31 March 2017 and the awards would ordinarily vest in
May 2017. 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 threshold performance target in respect of each measure
was not met and therefore the awards will lapse in full.
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 2014 ISP comprised the
following companies:
Accenture
AT & T
Belgacom
IBM
Telefónica
National Grid
Telekom Austria
Pharol (formerly
Portugal Telecom)
Telenor
Cap Gemini
Royal KPN
TeliaSonera
Centrica
Sky
Deutsche Telekom
Swisscom
France Telecom
TalkTalk
Hellenic Telecom
Telecom Italia
Verizon
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.
BT Group plcAnnual Report 2017
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.
The following graph shows the vesting schedule for the TSR
element of the 2014 ISP awards.
TSR vesting schedule 2014 awards
g
n
i
t
s
e
v
d
r
a
w
a
e
r
a
h
s
f
o
%
40%
20%
0%
0
5
10
15
20
25
TSR ranking position
The company’s TSR performance was -5.63%. This was 18th out
of 23 companies during the three-year period and resulted in the
threshold target for TSR not being met.
Normalised free cash flow
When we set the performance measures for the 2014 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. Following
completion of the EE acquisition in January 2016, the free cash
flow measure was revised to reflect the enlarged group. We
disclosed the adjustment in the 2016 Annual Report. We achieved
a three-year cumulative normalised free cash flow outcome of
£8.4bn. This resulted in the threshold target of £8.67bn for
normalised free cash flow not being met.
Underlying revenue excluding transit
This measure reflects the group’s aim to drive sustainable profitable
revenue growth. Following completion of the EE acquisition in
January 2016, the revenue measure was revised to reflect the
enlarged group. The measure excludes specific items, foreign
exchange movements and disposals and is calculated as though EE
has been part of the group from 1 April 2015. We disclosed the
adjustment in the 2016 Annual Report. The measure was based on
growth in underlying revenue excluding transit measured against
the baseline of 2013/14, with the threshold set as growth of
2.35% cumulative over the three years.
Over the three-year period we grew underlying revenue by 1.39%,
resulting in the threshold target for revenue not being met.
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 and benefitted from death in service cover which has now
ceased.
New UK employees are eligible to join a defined contribution
scheme. These are typically personal pension plans. 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.
Gavin Patterson receives an annual allowance equal to 30% of salary
in lieu of pension provision as set out in the table on page 125.
Gavin has previously been a member of the BTRSS but neither he
nor the company has made any contribution to the scheme during
2016/17. 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.
Simon Lowth receives an annual allowance equal to 30% of salary in
lieu of pension provision as set out in the table on page 125. Simon
has not previously been a member of any of the company pension
schemes. 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 was 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 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 125. Tony still had deferred
payment of the BTPS benefit payable from his 60th birthday. BT
provided death in service cover of a lump sum of four times his salary
which would cease if his BTPS benefits were put into payment.
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.
Deferred pension benefits at 31 March 2017
(audited)
The table below shows Tony Chanmugam’s pension benefits at
31 March 2017. 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
60
258
775
a Tony Chanmugam’s contributions in 2016/17 were £nil (2015/16: £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.
127
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Annual Remuneration Report continued
Awards granted during the year (audited)
2016 ISP awards
The 2016 ISP awards were made in June and July 2016 as set out
below and on page 131. The award to Gavin Patterson represented
400% of his salary and for Simon Lowth it was 350% of salary. No
award was made to the outgoing group finance director.
Director
Gavin Patterson
Simon Lowth
Date of award
ISP award
(shares)
Face value
of awarda
20 June 2016
988,954
£3,987,297
Deferred shares
A proportion of the 2015/16 annual bonus was awarded in
deferred shares. The table below provides further details. No award
was made to the new group finance director, having joined in July
2016.
Director
Date of award
DBP award
(shares)
Face value of
awarda
Gavin Patterson
20 June 2016
87,412
£352,430
Tony Chanmugam
20 June 2016
48,564
£195,802
a Face value based on share price at grant of 403.18p. The grant price is calculated using the
29 July 2016
604,366
£2,449,978
average middle-market price of a BT share for the three days prior to grant.
a Face value based on share price at the date of grant of 403.18p and 405.38p respectively. The
grant price is calculated using the average middle-market price of a BT share for the three days
prior to grant.
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 from
1 April 2016 to 31 March 2019. The performance conditions are
the same for each director. The target ranges for TSR; the normalised
free cash flow and underlying revenue growth excluding transit for
the three-year performance period 2016/17–2018/19 is set out in
the table below.
TSR vesting schedule 2016 awards
40%
20%
g
n
i
t
s
e
v
d
r
a
w
a
e
r
a
h
s
f
o
%
0%
0
5
10
15
20
25
TSR ranking position
Measure
2016/17–2018/19
Threshold
Level of
vesting
Maximum
Level of
vestinga
Normalised free
cash flow
Revenueb growth
£10.7bn
2.1%
25%
25%
£11.7bn
7.6%
100%
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 pages 126 to 127 for details of how TSR is calculated.
With one change, the TSR comparator group for the 2016 ISP
awards was the same for awards granted in June 2015. The
committee agreed the removal of Pharol (formerly Portugal Telecom)
on the basis of scale compared to others in the group.
When ISP awards vest, additional shares representing the value of
reinvested dividends on the underlying shares are added.
128
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 130.
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 £482,762 in 2016/17 (2015/16: £477,038).
Baroness Jay retired as a non-executive director on 13 January
2008 and was a member of the Committee for Sustainable and
Responsible Business until standing down on 14 April 2017. She
received an annual fee of £10,000 as a member of the Committee
for Sustainable and Responsible Business.
Phil Hodkinson retired as a non-executive director on 31 January
2016 but continues to be a member of the Committee for
Sustainable and Responsible Business, for which he receives an
annual fee of £10,000.
Payments for loss of office (audited)
Tony Chanmugam retired as a director on 13 July 2016. Under
the terms of his service contract, he continued to receive his salary
and contractual benefits until the end of his notice period, being
31 March 2017. These payments totalled £462,000 basic salary
and fees, £15,000 benefits (excluding pension) and £139,000
pension allowance. As outlined above, no payment will be made in
respect of his 2016/17 annual bonus. All payments made to him as
a director in respect of 2016/17 are reported in the single figure of
remuneration on page 125.
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 new group finance director
250% 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.
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.
BT Group plcAnnual Report 2017
At 31 March 2017, the chief executive met his shareholding
requirement, as set out in the table below. Having joined the
company in July 2016, the group finance director will build his
shareholding over time.
Executive director
Gavin Patterson
Simon Lowth
Tony Chanmugama
a As at 13 July 2016.
Personal shareholding as a percentage
of salary
1,103%
0%
216%
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 130 to 131.
Unvested interests in shares (audited)
ISP (subject to performance)
DBP (not subject to
performance)
1 April
2016
31 March
2017
1 April
2016
31 March
2017
–
376,092
3,046,654
2,734,526
Gavin Patterson
Simon Lowtha
Tony Chanmugamb
a Simon Lowth was appointed to the Board on 12 July 2016. Details of Simon Lowth’s ISP and DBP
awards are set out on pages 130 to 131.
b Tony Chanmugam retired on 13 July 2016 and the number reflects his awards at that date.
Details of Tony Chanmugam’s ISP and DBP awards are set out on pages 130 to 131.
1,270,600
900,663
337,943
628,928
245,143
334,944
–
–
The table below shows share options held by the directors under the
company’s all employee sharesave plans as at 31 March 2017. None
of the directors held share options with performance conditions.
Share options held without performance conditions – saveshare
(audited)
Directors’ interests at 31 March 2017 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 2017
and 1 April 2016, or at date of appointment if later, are shown
below:
Beneficial holdings
Sir Michael Rakea
G Pattersona
T Chanmugama,b
S Lowthc
T Ball
I Conn
T Höttges
I Hudson
M Inglis
N Rose
K Richardsond
J Whitbread
Number of shares
31 March 2017
1 April 2016
148,721
132,957
2,871,032
2,448,772
310,684
445,268
–
93,871
19,442
–
8,424
2,600
125,000
13,525
7,990
–
23,652
4,442
–
3,552
1,200
50,000
10,250
7,990
3,601,289
Total
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 Tony Chanmugam retired on 13 July 2016 and the number reflects his holding at that date.
c Simon Lowth joined the Board on 12 July 2016.
d Shares are held as 2,705 American Depositary Shares (ADS). One ADS equates to five BT ordinary
shares.
3,128,083
During the period from 1 April 2017 to 11 May 2017, there were
no movements in directors’ beneficial holdings. The directors, as a
group, beneficially own less than 1% of the company’s shares.
Share
options
at 1 April
2016
5,172
5,642
Options
granted
during year
Options
exercised
during year
Value at
date of
exercise (£)
31 March
2017
–
–
–
–
–
–
5,172
5,642
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.
Sir Michael Rake
Gavin Patterson
–
Simon Lowtha
Tony Chanmugamb
a Simon Lowth joined the Board on 12 July 2016.
b Tony Chanmugam retired on 13 July 2016 and the number reflects his options at that date.
6,525
–
–
–
–
–
–
–
6,525
No saveshare options were exercised by the directors during the
year. There were no vested but unexercised options at the year end.
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.
129
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Annual Remuneration Report continued
Deferred Bonus Plan awards at 31 March 2017
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. Simon Lowth joined the Board on 12 July 2016 and is due to be
granted his first DBP award in June 2017.
1 April 2016
Awardeda
Dividends
re-invested
Vested
Lapsed
Total number of
award shares
31 March 2017b
Vesting date
Price at
grant
Market price
at vesting
Monetary
value of
vested award
£000
141,639
133,526
100,927
–
–
–
–
87,412
–
141,639
5,426
4,101
3,552
–
–
–
141,364
142,055
54,524
–
–
–
–
48,564
–
141,364
5,773
2,215
1,973
–
–
–
–
–
–
–
–
–
–
–
– 01/08/2016 315.00p 413.01p
585
138,952 01/08/2017 384.20p
105,028 01/08/2018 449.50p
90,964 01/08/2019 403.18p
–
–
–
–
–
–
– 01/08/2016 315.00p 413.01p
584
147,828 01/08/2017 384.20p
56,739 01/08/2018 449.50p
50,537 01/08/2019 403.18p
–
–
–
–
–
–
Gavin Patterson
DBP 2013
DBP 2014
DBP 2015
DBP 2016
Former Director
Tony Chanmugam
DBP 2013
DBP 2014
DBP 2015
DBP 2016
a Awards granted on 20 June 2016. 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 2017 will be calculated using the average middle market price of a BT share for the three days prior to grant.
b As a result of investigations into improper accounting practices in BT’s Italian business, the committee has exercised discretion and applied the malus provisions under the Deferred Bonus Plan. This will be
applied in 2017/18. Further details can be found on page 133.
130
BT Group plcAnnual Report 2017 Share awards under long-term incentive schemes held at 31 March 2017
Details of the company’s ordinary shares under conditional share awards made to directors, as participants under the ISP are as follows:
1 April 2016
Awarded
Dividends
re-invested
Vested
Lapsed
Total number
of award shares
31 March 2017
Performance
period end
Price on
grant
Market price
at vesting
394,139
401,669
1,047,567
891,151
–
–
–
–
–
988,954
42,574
36,216
40,192
–
604,366
24,562
–
–
323,233 70,906
329,409 72,260
– 31/03/2016 315.00p
445.31p
– 31/03/2016 372.00p
445.31p
–
–
–
–
–
–
–
–
1,090,141 31/03/2017 384.20p
927,367 31/03/2018 449.50p
1,029,146 31/03/2019 403.18p
628,928 31/03/2019 405.38p
–
–
–
–
Monetary
value of
vested
award
£000
1,439
1,467
–
–
–
–
369,937
486,290
414,373
–
–
–
–
303,385 66,552
– 31/03/2016 315.00p
445.31p
1,351
19,763
16,840
–
–
–
–
506,053 31/03/2017 384.20p
431,213 31/03/2018 449.50p
–
–
–
–
Gavin Patterson
ISP 2013a
ISP 2013b
ISP 2014c
ISP 2015d
ISP 2016e
Simon Lowth
ISP 2016f
Former Director
Tony Chanmugamg
ISP 2013a
ISP 2014c
ISP 2015d
a 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 315.00p. 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. The awards vested in May 2016.
b Award granted on 12 November 2013 following appointment as chief executive. The number of shares subject to award 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 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. The award vested in May 2016.
c 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 384.20p. 40% of each
award is linked to TSR compared with a group of 22 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. Performance against the TSR, normalised free cash flow and revenue targets resulted in the threshold targets not being met and none of the shares vesting under the 2014 ISP. The
awards lapsed in May 2017.
d 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 22 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.
e Award granted on 20 June 2016. The number of shares subject to award was calculated using the average middle market price of a BT share for the three days prior to grant of 403.18p. 40% of each
award is linked to TSR compared with a group of 21 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.
f Award granted on 29 July 2016. The number of shares subject to award was calculated using the average middle market price of a BT share for the three days prior to grant of 405.38p. 40% of each
award is linked to TSR compared with a group of 21 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.
g Tony Chanmugam retired from the Board on 13 July 2016 and details of the ISP 2013 award vesting are set out on page 125.
Share options held at 31 March 2017
Number of shares under option:
Sir Michael Rake
Gavin Patterson
Simon Lowth
Former director
Tony Chanmugam
1 April 2016
5,172a
5,642a
–
6,024b
501a
Granted
Lapsed
Exercised
31 March 2017
Option price
per share
Market price
at date of
exercise
Usual date
from which
exercisable
Usual expiry
date
–
–
–
–
-
–
–
–
–
–
–
–
–
–
–
5,172
5,642
–
6,024
501
319p
319p
–
249p
359p
–
–
–
–
–
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 26 June 2014 under the employee saveshare scheme, in which all employees of the company are entitled to participate.
b Option granted on 27 June 2013 under the employee sharesave scheme, in which all employees of the company are entitled to participate.
131
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Annual Remuneration Report continued
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 eight
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 eight-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.
Percentage change in Chief Executive
remuneration (comparing 2016/17 to
2015/16)
The table below 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 22,800 people. We believe this broad group provides the
most meaningful comparison as they also participate in performance
related pay arrangements on a similar basis as executive directors.
% Change in chief executive
remuneration
Salary
Benefitsa
Bonusb
2.5%
–5.26% –100%
% Change in comparator groupc
2.5%
a The decrease in benefits for the chief executive was around £3,000.
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
22,800 individuals.
0% -25.7%
Relative importance of spend on pay
The table below illustrates the change in total remuneration and
dividends and share buyback paid.
Area
2016/17 (£m)
2015/16 (£m)
% Change
Remuneration paid to all
employees
Dividends/share buybacks
5,189
1,642
4,639
1,390
11.9%
18%
BT’s TSR performance vs the FTSE100
700
600
500
400
300
200
100
0
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16 Mar 17
BT
FTSE100
Source: Datastream
The graph shows the relative TSR performance
of BT and the FTSE100 over the past eight years.
History of chief executive remuneration
Year end
2017
2016a
2015
2014b
2013
2012
2011
2010
Chief Executive
Gavin Patterson
Gavin Patterson
Gavin Patterson
Gavin Patterson
Ian Livingston
Ian Livingston
Ian Livingston
Ian Livingston
Ian Livingston
Total rem
£000
Annual bonus
(% of max)
ISP vesting
(% of max)
1,345
5,396
4,562
2,901
4,236
9,402
8,520
4,009
3,556
0%
45%
58%
62%
35%
65%
73%
79%
71%
0%
82.01%
67.4%
78.7%
63.4%
100%
100%
0%
0%
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.
132
BT Group plcAnnual Report 2017 Implementation of Remuneration Policy in
2017/18
Base salary
The committee decided not to increase salaries for the chief
executive and group finance director which will remain at £996,825
and £700,000 respectively.
Benefits
The committee has set benefits in line with the Remuneration Policy
set out on pages 139 to 145. There are no changes proposed to the
benefit framework for 2017/18.
Pension
Current levels of pension provision for 2017/18 are the same as for
2016/17. Executive directors receive an annual amount equal to
30% of salary in lieu of pension provision.
Clawback and malus
The clawback provisions introduced in 2015/16 will continue for
annual bonus payments relating to the 2017/18 financial year, and
for the ISP awards that are expected to be made in June 2017.
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.
In January 2017 we published revised results for 2014/15 and
2015/16 as a result of our investigations into improper accounting
practices in BT’s Italian business. The committee has recalculated the
annual bonuses for the years in question and the outcome of the
2013 ISP award vesting to reflect the revised results. This showed
that the payouts based on the revised results would have been lower
than those actually paid at the time.
The committee has therefore decided to exercise its discretion
and apply the malus provisions in the Deferred Bonus Plan (DBP)
to reduce the number of shares under award in recompense for
payments and awards otherwise due under the annual bonus
arrangements (for both cash and the deferred share element) and
(where relevant) the ISP. These malus provisions will be applied in
2017/18 to previous awards made to the executive directors, plus
the other Operating Committee members who received payments
under the bonus arrangements and/or the ISP, and for the company
secretary. This action ensures full restitution of the overpayments
for the annual bonus (for the cash and the deferred share elements)
and for the 2013 ISP award through the enforcement of the malus
provisions in the DBP. This places the recipients in the same position
they would otherwise have been in had the annual bonus and
the ISP award been based on the revised results. The application
of the malus provisions are calculated based on the share price at
the original grant. For the cash element of the annual bonus, the
calculation is based on the share price of the corresponding deferred
share award.
The committee will keep under active review whether any additional
employees’ awards should be adjusted. In addition, where employees
have been dismissed or resigned due to the outcome of our
investigations into the issues in Italy, shares and incentives have
lapsed in full as a result.
The table below sets out the number of shares under the relevant
DBP awards following the application of malus as explained above
and as agreed by the committee. 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. Simon Lowth
joined on 12 July 2016 and did not receive a bonus in 2016/17
for the 2015/16 financial year.
Shares under award at
31 March 2017
Shares lapsed
following application
of malus
Total number
of award shares
remaining
Value of shares lapsed
following application
of malusa
Vesting date
Price at grantb
Gavin Patterson
DBP 2014
DBP 2015
DBP 2016
Total
Former Director
Tony Chanmugam
DBP 2014
DBP 2015
DBP 2016
138,952
105,028
90,964
334,944
147,828
56,739
50,537
7,243
15,867
59,339
82,449
3,367
9,214
34,490
131,709
89,161
31,625
252,495
144,461
47,525
16,047
Total
a The value of the shares lapsed following the application of malus has been calculated using the are price at the time of grant.
b The grant price is calculated using the average middle market price of a BT share for the three days prior to grant.
208,033
255,104
47,071
£27,828
£71,327
£239,243
£338,398
£12,936
£41,420
£139,057
£193,412
01/08/17
01/08/18
01/08/19
01/08/17
01/08/18
01/08/19
384.20p
449.53p
403.18p
384.20p
449.53p
403.18p
133
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Annual Remuneration Report continued
Annual bonus
The level of bonus opportunity for the chief executive and group
finance director is set out in the table below. One-third of any bonus
will be deferred into shares for a period of three years.
Level of
2017/18 bonus
Chief executive
Group
finance director
Annual cash bonus
Target 80% of salary
Target 80% of salary
Maximum 160% of salary Maximum 120% of salary
Incentive Share Plan
Acknowledging the fall in the share price over the last year, the
2017 ISP award for the chief executive will be reduced from 400%
to 350% of salary and for the group finance director will be 350%
of salary. We expect to grant the awards in June 2017. 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. Any shares
acquired on the vesting of the 2017 ISP awards will be subject to a
holding period of two years, commencing from the end of the three-
year performance period.
Deferred bonus in shares
Target 40% of salary
Target 40% of salary
Maximum 80% of salary Maximum 60% of salary
Total bonus
Target 120% of salary
Target 120% of salary
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 2016 ISP:
40% based on relative TSR; 40% based on normalised free cash
flow; and 20% growth in underlying revenue excluding transit over
a three-year performance period.
BT’s TSR comparator group for the 2017 ISP will be the same as
for 2016 and comprise the companies listed below.
Accenture
KPN
Telecom Italia
AT & T
National Grid
Telefónica
Cap Gemini
Centrica
Orange
Proximus
Telekom Austria
Telenor
Deutsche Telekom
Sky
Telia Company
Hellenic Telecom
Swisscom
IBM
TalkTalk
Verizon
Vodafone
TSR vesting schedule 2017 awards
For the 2017 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 2017 awards
40%
40%
20%
20%
0%
0%
0
5
10
15
20
25
TSR ranking position
Maximum 240% of salary Maximum 180% of salary
The 2017/18 annual bonus structure and weighting is set
out below.
Chief executive and group finance director
% Weighting
25% Adjusted earnings per share
20% Personal objectives
20% Customer experience
10% Revenue (excluding Transit)
25% Normalised free cash flow
Adjusted earnings per share; normalised free cash flow; and
revenue excluding transit have a direct impact on shareholder value.
Customer experience (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 pages 20 to 21.
Good progress has been made on the integration of the EE business
and the realisation of associated cost synergies. The committee is
satisfied that the EE is well embedded into the business, such that
it is now business-as-usual, and elected to remove the specific
integration synergy target and increase the weighting of the
earnings per share and free cash flow targets for the annual bonus
for 2017/18.
g
n
i
t
s
e
v
d
r
a
w
a
e
r
a
h
s
f
o
%
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 2018 so that
shareholders can evaluate performance against those targets.
The personal contribution measure is aligned to our strategy and
is assessed by the chairman for the chief executive and by the
chief executive for the group finance director and each senior
executive. Performance against the personal contribution element is
assessed individually and is based on achievement against individual
objectives, organisational culture and growth measures.
134
BT Group plcAnnual Report 2017
The target ranges for the normalised free cash flow and underlying
revenue growth excluding transit revenue are set out below:
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. As outlined in the Remuneration Policy, we are
proposing to increase this fee to up to £6,000.
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.
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 five times during
the year.
Our membership and meeting attendance are set out below. Isabel
Hudson and Mike Inglis became members of the committee with
effect from 1 April 2017.
Committee members
Member
Tony Ball (chairman)
Karen Richardson
Nick Rose
Meetings
Eligible to attend
Attended
5
5
5
5
5
4
Measure
2017/18–2019/20
Threshold
Level of
vesting
Maximum
Level of
vestinga
£7.92bn
Normalised free
cash flowb
Revenue growthc
1.8%
4.0 %
a Vesting level between threshold and maximum will be on a straight line basis.
b Normalised free cash flow is defined on page 21.
c Growth in underlying revenue excluding transit is defined on page 20.
£8.92bn
25%
25%
100%
100%
The committee continues to believe that the free cash flow and revenue
performance measures are challenging, and the financial performance
necessary to achieve awards is stretching. In setting these targets the
committee took into account the revised outlook for the Group.
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 2016. 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. Following the review, it was agreed no
increase should be applied. 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.
Jan du Plessis joins the company on 1 June 2017 as a non-executive
director and will become chairman on 1 November 2017. On
appointment, he will receive the basic fee per year for a non-
executive director (£72,000). On becoming chairman, he will receive
a fee of £700,000 per year, fixed for five years. The incoming
chairman’s fee was reviewed and agreed by the committee.
The basic fee for non-executive directors is £72,000 per year. There
are additional fees for membership and chairing a Board committee,
details of which are given in the table below:
Committee
Audit & Risk
Integration
Nominating & Governance
Pensions
Remuneration
Sustainable & Responsible Business
Technology
Chairman’s fee
Member’s fee
£35,000
n/aa
n/aa
£25,000
£28,000
n/aa,b
n/aa
£25,000
£10,000
£10,000
£10,000
£15,000
£5,000
£14,000
Equality of Access Board
a Where the chairman or chief executive acts as chair of a board committee, no additional committee
£72,500
n/a
chair fee is payable.
b External members of the CSRB receive a fee of £10,000 a year.
135
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Voting at the 2016 Annual General Meeting
The votes cast in respect of the Annual Remuneration Report at the
Annual General Meeting held on 13 July 2016 were:
Votes cast in
favour
%
Votes cast
against
%
Approve Annual
Remuneration Report
6,638,116,690
98.52%
99,928,946
1.48%
246,127,946 votes were withheld. A vote withheld is not counted
when calculating voting outcomes.
Committee evaluation
The committee reviews its performance with Board members and
other participants, including through the annual Board evaluation.
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. 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 137.
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.
Annual Remuneration Report continued
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.
The committee regularly consults the chief executive, the group
HR director, the HR director, reward and pensions, and the group
general counsel & company secretary.
Advisers
During the year, the committee received independent advice on
executive remuneration matters from Deloitte LLP. Deloitte
received £103,450 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 2016/17, 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 2017/18. Shares
held in the Trust do not have any voting rights.
At the end of 2016/17, shares equivalent to 1.89% (2015/16:
1.98%) of the issued share capital (excluding treasury shares) would
be required for all share options and awards outstanding.
Of these, we estimate that for 2017/18, shares equivalent to
approximately 0.45% (2016/17: 0.30%) of the issued share
capital (excluding treasury shares) will be required for the
all-employee share plans.
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.
136
BT Group plcAnnual Report 2017
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
Simon Lowth
6 July 2016
Non-executive directors
Tony Ball
Nick Rose
16 July 2009
1 January 2011
Karen Richardson
1 November 2011
Jasmine Whitbread
19 January 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.
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.
Letter of appointment was for an initial period of three years. The appointment
was extended for a further three years in December 2013.
Iain Conn
Isabel Hudson
Mike Inglis
Tim Höttges
1 June 2014
Letters of appointment are for an initial period of three years.
1 November 2014
1 September 2015
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. Jan du Plessis joins the board as a non-executive director on 1 June 2017 and
will become chairman with effect from 1 November 2017. 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 London on 12 July 2017.
Tony Ball
Chairman of the Remuneration Committee
11 May 2017
137
BT Group plcAnnual Report 2017THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Annual Remuneration Report continued
Remuneration policy
The following pages set out our directors’ remuneration policy (the
‘Policy’) which will be put forward for shareholder approval at the
2017 AGM on 12 July 2017 in accordance with section 439A
of the Companies Act 2006. Subject to approval at the AGM, this
Policy will apply from the date of the AGM. The Policy is divided into
separate sections for the executive directors and the chairman and
the non-executive directors.
Minor changes have been made to the Policy to align it with the
business strategy and evolving investor and HMRC guidance.
The Policy was previously approved by shareholders at the AGM in
2014 and votes cast 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. A vote withheld is not counted
when calculating voting outcomes.
Legacy matters
The committee reserves the right to make any remuneration
payments and/or payments for loss of office (including exercising
any discretions available to it in connection with such payments)
notwithstanding that they are not in line with the Policy where
the terms of the payment were agreed (i) before the AGM in 2014
(the date the company’s first shareholder-approved directors’
remuneration policy came into effect); (ii) before this Policy came
into effect, provided that the terms of the payment were consistent
with the shareholder-approved directors’ remuneration policy
in force at the time they were agreed; or (iii) at a time when the
relevant individual was not a director of the company and, in the
opinion of the committee, the payment was not in consideration
for the individual becoming a director of the company. For these
purposes “payments” includes the committee satisfying awards
of variable remuneration and, in relation to an award over shares,
the terms of the payment are “agreed” at the time the award is
granted. 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.
138
BT Group plcAnnual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Remuneration Policy
Executive Directors and Chairman
Policy Element
Operation and Opportunity
Performance measures or basis of payment
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.
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.
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, life cover, professional subscriptions, personal
tax advice and financial counselling up to a maximum of £5,000
(excluding VAT) a year.
Annual bonus
Purpose –
to incentivise and
reward delivery of
our business plan
on an annual basis.
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 147.
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 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. 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 and clawback provisions is
set out on page 145. 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
experience, 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.
Annual Report 2017
BT Group plc
139
Remuneration Policy continued
Policy Element
Operation and Opportunity
Performance measures or basis of payment
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 period of at least three years.
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 2017/18 are set out on page 134.
In respect of ISP awards made to executive directors there is
normally a further holding period of two years, commencing from
the end of the 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.
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 and clawback provisions is
set out on page 145.
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.
Pension
Purpose –
to attract and
retain executive
directors of the
right calibre by
providing market
competitive
post-retirement
income.
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.
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.
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Annual Report 2017
THE STRATEGIC REPORT
THE STRATEGIC REPORT
GOVERNANCE
GOVERNANCE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
ADDITIONAL INFORMATION
Policy Element
Operation and Opportunity
Performance measures or basis of payment
Save As You Earn
Saveshare Scheme
Purpose –
to encourage
employee share
ownership.
ESIP (directshare)
Purpose –
to encourage
employee share
ownership.
Executive directors and the chairman may participate in the
all-employee saveshare (HMRC approved savings related share
option plan) on the same basis as other eligible employees.
All participants may invest up to the limits operated by the
company at the time set in line with HMRC guidance.
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 set in line with HMRC guidance.
There are no performance measures attached
to these awards.
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 pages 139 and 140.
2. No performance measures are applicable to salary, benefits, pension, BT saveshare and BT
directshare in line with market practice.
3. Common award terms
Awards under any of the company’s share plans referred to in this report may:
– incorporate the right to receive the value of dividends that would have been paid on the shares
subject to an award that vests, which may be calculated assuming the shares were reinvested in
shares on a cumulative basis. This value will normally be delivered in the form of additional shares;
– be granted as conditional share awards or in such other form that the committee determines has
the same economic effect;
– have any performance conditions applicable to them varied or substituted by the committee if an
event occurs which causes the committee to determine that the performance conditions no longer
achieve their original purpose, provided that the varied or substituted performance condition
would be not be materially less difficult to satisfy;
– be settled in cash at the committee’s discretion; and
– be adjusted in the event of any variation of the company’s share capital or any demerger, special
dividend or other event that may affect the current or future value of awards.
Annual Report 2017
BT Group plc
141
Remuneration Policy continued
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
Directors’ 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
awards 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 135.
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 normally 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; and
– 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, injury or disability, 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 whether, when, and to
what extent, awards vest. Where a director leaves where some of his
shares acquired under an ISP award are subject to a holding period,
that holding period will continue to apply unless the committee
determines otherwise.
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.
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THE STRATEGIC REPORT
GOVERNANCE
GOVERNANCE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
ADDITIONAL INFORMATION
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 participant’s 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 individual’s
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 HR 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 or her appointment or
termination of his or her appointment.
There are no other service agreements, letters of appointment or
material contracts, existing or proposed, between the company and
any of the executive director
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 notice to which the director was entitled if he or she had received
salary 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, company car, fuel or driver,
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.
Annual Report 2017
BT Group plc
143
Remuneration Policy continued
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:
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
Minimum
Minimum
£1.3m
On-Target
On-Target
Maximum
Maximum
£3.5m
£7.7m
0
1
2
3
4
5
6
7
8
9
Fixed remuneration
Variable remuneration
Long-term incentives
– Base salary – salary effective as
Group finance director - performance scenario chart
at June 2017
– Benefits – amount received by
each director in 2016/17
–
Pension – cash supplement in
lieu of pension provision for
2016/17
Minimum
Minimum
£0.9m
On-Target
On-Target
Maximum
Maximum
£2.4m
£5.1m
0
1
2
3
4
5
6
Variable
pay
Minimum
– No payout under the annual
bonus
– No vesting under the ISP
Fixed remuneration
Variable remuneration
Long-term incentives
On-target
– On target payout under the
Fixed pay is calculated as follows:
Chief executive
Group finance
director
Salary
£000
997
700
Benefits
£000
Pension
£000
Total
fixed pay
54
24
298
1,349
210
934
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 the purposes of the scenarios chart for the group finance director, we have increased the
amount received in 2016/17 on a pro-rata basis to reflect a full financial year.
The chief executive has a target bonus of 120% of salary, with a maximum bonus of 240%
of salary. The group finance director has a target bonus of 120% of salary, with a maximum
bonus of 180%.of salary.
For these purposes, we have assumed a usual maximum ISP award of 400% of base salary
for the chief executive and 350% of base salary for the group finance director. The absolute
maximum ISP award under our remuneration policy is 500% of base salary
144
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THE STRATEGIC REPORT
GOVERNANCE
GOVERNANCE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
ADDITIONAL INFORMATION
Other Remuneration Policies
Malus and clawback
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, mis-statement of
the financial accounts, fraud or material failure of risk management.
Clawback provisions are also in place for the cash part of the annual
bonus and ISP awards granted from June 2015 onwards. Under the
annual bonus, clawback will normally 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. The
circumstances in which the committee may consider it appropriate
to apply clawback include, but are not limited to i) the behaviour
of the participant which fails to reflect the company’s governance
and business values; ii) material adverse change in the financial
performance of the company or any division in which the participant
Non-executive director fees
works and/or worked; iii) a material misstatement of the company’s
audited financial accounts (other than as a result of a change in
accounting practices); iv) misconduct of a participant which results
in or is likely to result in reputational damage to the company;
v) a material failure in risk management; vi) negligence or gross
misconduct of a participant; and/or vii) fraud effected by or with
knowledge of a participant.
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
Policy or other relevant matters.
Element/purpose and link to strategy
Operation
Opportunity
Purpose
Core element of remuneration,
paid for fulfilling the relevant role
– 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 of up to £6,000 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.
– Expenses incurred in the performance of
non-executive duties for the company may be
reimbursed (including any relevant tax) or paid
directly by the company, as appropriate.
Report on Remuneration on page 135.
– 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 payable. The maximum
is based on NED fees benchmarked as at
1 April 1999 with increases linked to the
Retail Price Index.
Annual Report 2017
BT Group plc
145
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 line 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. They’ve also prepared parent company financial statements
in accordance with UK Generally Accepted Accounting Practice
(UK GAAP), including Financial Reporting Standard 101 Reduced
Disclosure Framework (FRS 101), and applicable law. 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’re satisfied that it gives
a true and fair view of the group and the company and of the profit
or loss of the group and the company for that period.
To prepare these financial statements, the directors:
– 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 any disclosure exemptions of FRS 101 used in the preparation
of financial statements; and
– prepare financial statements on a ‘going concern’ basis unless it’s
inappropriate to presume that the group and the company will
continue in business.
The directors are responsible for keeping adequate accounting
records that show and explain the group and 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’re also responsible for safeguarding the assets
of the company and the group and for taking reasonable steps to
prevent and detect 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 106 to 107 confirms that, to the best of their knowledge:
– the company financial statements, which have been prepared in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising
FRS 101 “Reduced Disclosure Framework”, and applicable law),
give a true and fair view of the assets, liabilities, financial position
and profit of the company;
– the consolidated financial statements, which have been prepared
in accordance with IFRS, and Article 4 of the IAS Regulation and
International Accounting Standards, 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 2 to 102 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 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. We describe these processes and procedures on
page 113.
Based on the advice of the Audit & Risk Committee the Board
considers that the Annual Report, as a whole, is fair, balanced
and understandable, and provides the information necessary for
shareholders to assess the group’s position, performance, business
model and strategy.
Critical accounting estimates and key
judgements, and significant accounting
policies
Our critical accounting estimates, key judgements, and significant
accounting policies conform with IFRS and are set out on page
176 of the consolidated financial statements. The directors have
reviewed these policies and applicable estimation techniques and
have confirmed them to be appropriate for the preparation of the
2016/17 consolidated financial statements.
Disclosure of information to auditors
As far as each of the directors is aware, there is no relevant
information (as defined by section 418(3) of the Companies Act
2006) 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 2 to 102 includes information on
the group structure, strategy and business model, the performance
of each line of business, the impact of regulation and competition
and principal risks and uncertainties. The Group Performance section
on pages 91 to 102 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 line 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 main risks
affecting the group (including any that could 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 44 to 55.
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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 such situations. These 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 on any authorisations granted by
directors and the scope of any approvals given; and
– regularly review conflict authorisation.
In addition, we have a Conflicted Matters Committee. Tim Höttges
owes duties to both BT and Deutsche Telekom and the Conflicted
Matters Committee helps him comply with his fiduciary duties
(although ultimate responsibility rests with him). You can find more
details about the Conflicted Matters Committee on page 109.
Having assessed the main risks and other matters discussed
in connection with the viability statement, in accordance with
the UK Corporate Governance Code and the FRC guidance, the
directors considered it appropriate to adopt the going concern
basis of accounting when preparing the financial statements. This
assessment covers the period to May 2018, which is consistent with
the FRC guidance.
Independent advice
The Board has a procedure that allows directors to seek independent
professional advice, 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 bought insurance cover for the directors,
officers and employees in positions of managerial supervision of BT
Group plc and its subsidiaries. This is intended to protect 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 individuals serving as
directors of other companies or of joint ventures or on boards of
trade associations or charitable organisations at BT’s request. The
insurance protects the directors and officers directly in circumstances
where, by law, BT cannot provide an indemnity. It 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 8 May 2017, and throughout 2016/17, the company’s
wholly-owned subsidiary, British Telecommunications plc, has
provided an indemnity for 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 2016/17, 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 explained below, Tim Höttges is a member of the Board as well as
the CEO of Deutsche Telekom.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 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 pages 116 to 117). 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.
Controls and Procedures
Background
Our assessment of our controls and procedures for this year has been
affected by the issues that have been identified in our Italian business.
In October 2016 we reported that following an initial investigation
we had identified improper accounting practices in our Italian business
and had appointed KPMG, with support and oversight from our Legal,
Governance and Compliance function and Freshfields Bruckhaus
Deringer, reporting directly to both the chair of the Audit & Risk
Committee and BT Group chairman, to perform an independent
investigation, alongside our own detailed balance sheet review and
continuing investigation.
In January 2017 we reported that the investigations had revealed
that the extent and complexity of the improper practices were
greater than previously identified and that these had resulted in
an overstatement of profits over a number of years. We concluded
that the errors were not individually material to any of the group’s
previously issued financial statements, but that the correction of
£268m in the current year would materially misstate the current year.
Therefore in our financial statements for and as of 31 March 2017,
we have revised our prior year income statements, balance sheets and
cash flow statements.
As part of the investigation, we also commissioned KPMG, with
support and oversight from our Legal, Governance and Compliance
function and Freshfields Bruckhaus Deringer, reporting directly to
both the chair of the Audit & Risk Committee and BT Group chairman,
to conduct a detailed independent review to determine how the
collusion and override of controls within our Italian business remained
undetected, while management conducted its own review. These
controls, investigations and reviews are now completed.
Management had implemented a series of remedial and compensating
actions after the issues were first identified in October 2016
and, informed by the results of their own review and the recently
completed KPMG investigation, has since implemented, and plans to
implement, further such actions. These actions include suspending
the key members of the senior management team in Italy (who have
now left the business) and appointing a new senior management
team in Italy, strengthening the monitoring controls and escalation
mechanisms in our finance shared services centres, transferring Italy
customer billing activities to group billing services and performing
detailed substantive reviews of the balance sheet of our Italian
business and other large country operations outside the UK.
As a result of the implementation of these remedial and compensating
actions, management has made all necessary adjustments in our
consolidated financial statements. Management has concluded that
our consolidated financial statements for the year ended, and as of,
31 March 2017 fairly present, in all material respects, our financial
condition and results of operations. Management also concluded that
the impact of all facts known to management to date are reflected in
the consolidated financial statements.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934 (Exchange Act), and the
rules and regulations thereunder, is recorded, processed, summarised
and reported within the time periods specified in the SEC’s rules and
forms and that such information is accumulated and communicated
to our management, including our chief executive and group finance
director to allow for timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures,
management recognises that any controls and procedures, no
matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily
applies its judgement and makes assumptions about the likelihood of
future events. There can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions,
regardless of how remote.
We have evaluated the effectiveness of our disclosure controls and
procedures. Based upon that evaluation, our chief executive and group
finance director concluded that as a result of the material weakness
described below, as of 31 March 2017, our disclosure controls and
procedures were not effective to provide reasonable assurance that
information required to be disclosed by us in the reports that we file
or furnish under the Exchange Act is recorded, processed, summarised
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and reported, within the time periods specified in the applicable rules
and forms.
Management’s Report on Internal Control over Financial
Reporting
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
consolidated financial statements for external reporting purposes in
accordance with IFRS as issued by the IASB and IFRS as adopted by
the EU.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore even
those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation. 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.
Management conducted an assessment of the effectiveness of our
internal control over financial reporting as of 31 March 2017 based
on the criteria established in “Internal Control – Integrated Framework”
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Following this assessment, management has concluded that our
internal control over financial reporting was not effective as of
31 March 2017 due to the material weakness described below.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our consolidated financial
statements will not be prevented or detected on a timely basis.
Our Italian business is managed by a local management team within
the Global Services line of business. Individuals in Italy colluded to
override the period end financial close controls and overstate the
results, and the monitoring controls which include the review of
reconciliations, journals, results and financial position, did not operate
effectively to identify the overstatement in a timely manner.
The group did not maintain effective controls to prevent or detect the
collusive circumvention or override of controls related to our Italian
business. Specifically management has identified the following internal
control deficiencies related to our Italian business and the failure
to detect the circumvention or override of controls that together
constitute a material weakness in the control environment (i) failure in
the review of reconciliations (ii) failure in the review of journals and (iii)
failure in our monitoring controls over the results and financial position
of our Italian business.
This material weakness could result in a misstatement of the account
balances and disclosures relating to our Italian business that would
represent material misstatements in our annual consolidated financial
statements that would not be prevented or detected.
Audit of the Effectiveness of Internal Control over Financial
Reporting
Our independent registered public accounting firm,
PricewaterhouseCoopers LLP, has audited the effectiveness of our
internal control over financial reporting, as stated in their report as of
31 March 2017, which is included herein.
Remediation
Since October 2016, and later informed by the results of the
recently completed KPMG investigation and management’s own
review, management has been actively engaged in the design and
implementation of remediation efforts that are intended to address
the identified material weakness. The design and implementation of
these and other remedial efforts are the responsibility of management.
The actions are intended to strengthen our internal control,
governance and compliance environment and remediate the material
weakness described above. These include the following:
1. We suspended a number of BT Italy’s senior management team
(who have now left the business). The president of our European
operations has also left the business. We have appointed a new
president of our European operations and a new CEO and CFO of
BT Italy from outside the Italian executive management team.
2. We strengthened our monitoring controls and escalation
mechanisms as they relate to our Italian business, including in
relation to the reviews of reconciliations and journals.
3. We transferred the Italy customer billing activities to our group
billing services function.
We also are in the process of evaluating additional actions to remediate
the material weakness and strengthen our internal control, governance
and compliance environment, including increasing the resources and
improving the capabilities of the controlling function and the audit
function outside the UK, and further developing our integrated risk
and assurance reporting processes. We are also enhancing our controls
and compliance programme to reinforce the importance of doing
business in an ethical, disciplined and standardised way.
Notwithstanding the identified material weakness, management has
concluded that our consolidated financial statements for the year
ended, and as of 31 March 2017 fairly present, in all material respects,
our financial condition and results of operations. Management has also
concluded that the impact of all facts known to management to date
are reflected in the consolidated financial statements.
Changes in Internal Control Over Financial Reporting
Changes in our internal control over financial reporting that occurred
during 2016/17, which have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting
are described in points 2 and 3 above under “Remediation.”
UK 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.
For details of our assessment of our internal controls, as affected by
the issues identified in our Italian business, see US Regulation on
page 148.
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 26 to 38 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
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION General information 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 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 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 TSO;
– 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 2016/17; and
– the Audit & Risk Committee, on behalf of the Board, reviews the
effectiveness of risk management arrangements across the group.
In support of this, an annual review meeting is held with the
group chief executive and the CEOs of each line of business.
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 176 to 181.
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 112 to 115.
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.
Capital management and funding policy
The objective of our capital management policy is to target an overall
level of debt consistent with our credit rating objectives 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 and committed
borrowing facilities to fund the group. When issuing debt, group
treasury will take into consideration the maturity profile of the group’s
debt portfolio as well as forecast cash flows to avoid refinancing risk.
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. 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
The group is involved in various legal proceedings, including actual or
threatened litigation, government or regulatory investigations. For
further details of legal and regulatory proceedings to which the group
is party please see note 30 to the consolidated financial statements on
pages 229 to 231.
Save as disclosed below and in note 30 to the consolidated financial
statements, the group does not currently believe that there are any
legal proceedings, government or regulatory investigations that may
have a material adverse impact on the operations or financial condition
of the group. In respect of each of the claims described in note 30
the nature and progression of such proceedings and investigations
can make it difficult to predict the impact they will have on the group.
There are many reasons why we cannot make these assessments with
certainty, including, among others, that they are in early stages, no
damages or remedies have been specified, and/or the often slow pace
of litigation.
Italian business
Following the group’s announcement with respect to our investigation
into our Italian business in January 2017, three purported securities
class action complaints were filed against the company and certain
current and former officers in United States courts. All three actions
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The following disclosures aren’t covered elsewhere in this Annual
Report:
– BT has two employee share ownership trusts that 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. If there is an offer for
the shares or other transaction which would lead to a change of
control of BT, participants may direct the Trustee 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’s an offer for the shares, the Trustee doesn’t 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 266).
– Any amendment of BT’s Articles of Association requires
shareholder approval in accordance with applicable legislation.
– 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 have no agreements with directors providing for
compensation for loss of office or employment as a result of
a takeover. There is similarly no provision for this in standard
contracts for employees.
– We aren’t aware of any agreements between shareholders that
may result in restrictions on the transfer of shares or on voting
rights.
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, enhancing their understanding of BT.
The authority for political donations we are requesting at the AGM
isn’t intended to change this 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 2016/17, the company’s wholly
owned subsidiary, British Telecommunications plc, paid the costs of
attending corporate days at (i) the Conservative party conference;
(ii) the Labour party conference and (iii) costs associated with
participating in an event as part of the EU referendum debate. These
costs totalled £6,870 (2015/16: £4,192). No loans were made to
any political party by any company in the BT group.
are purportedly brought on behalf of purchasers of BT Group ADRs
between May 2012 or May 2013 and January 2017. The actions
allege that the company made materially false and/or misleading
statements between 2012 and 2016 regarding its internal controls,
ethics and corporate governance, and financial outlook in its submissions
to and filings with the US Securities and Exchange Commission and
other public disclosure. Plaintiffs’ counsel have filed motions to appoint
lead plaintiff and lead counsel, and decisions on these motions have not
yet been made. We intend to defend these claims vigorously.
The issues in Italy have also resulted in engagement with certain of our
regulators and other authorities in the UK and elsewhere. As would
be expected, we are cooperating fully with these bodies including the
Italian authorities.
Other information – Listing Rules
For the purposes of LR 9.8.4CR, the information required to be
disclosed by LR 9.8.4R is on these pages:
Section Information
Interest capitalised
Page
Not material for
the group
(1)
(2)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
Publication of unaudited financial information
20 to 21
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
92 and 234
Non pre-emptive issue by a major subsidiary
undertaking
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
Shareholder waiver of dividends
Shareholder waiver of future dividends
Not applicable
See below
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 that are added to the relevant share awards.
Other statutory information –
Companies Act 2006
Certain provisions of the 2006 Act require us to make additional
disclosures. These are described on the pages listed below:
Information
Page
Structure of BT’s share capital (including the rights and
obligations attaching to the shares)
168 and 266
to 268
Restrictions on the transfer of BT shares and voting rights 266 to 268
Significant direct or indirect shareholdings
152
Appointment and replacement of directors
Significant agreements to which BT Group plc is a party
that take effect, alter or terminate upon a change of
control following a takeover
137 and 268
268 to 269
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 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. In 2016/17 we held 507 meetings or events with
institutional investors. This included a number of meetings held
with investors by our chairman and senior independent director. This
marks a significant increase on 353 in 2015/16. Following Simon
Lowth joining as group finance director in July 2016, we saw an
increased number of introductory meetings. The announcement of
our updated outlook in January 2017 then also led to an increased
number of requests for meetings. All non-executive directors have
an invitation to attend investor meetings if they wish.
We control contact with institutional investors (as well as financial
analysts, brokers and the media) through written guidelines that
ensure the protection of commercial and inside information that has
not already been made generally available to the market.
During the year, we surveyed 13,000 private shareholders selected at
random to help us improve shareholder engagement. We’ve continued
to include more information on BT’s financial performance, strategy,
our purpose and future plans in our shareholder communications.
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’ve put procedures in place to ensure the timely
release of inside information and for the publication of financial results
and regulatory financial statements. The Disclosure Committee made
up of the group chief executive, group finance director and other
senior executives, is chaired by the company secretary and reviews all
significant announcements for accuracy and compliance requirements.
Substantial shareholdings
At 11 May 2017, BT had received notice, under the Financial Conduct
Authority’s Disclosure Guidance & Transparency Rules, in respect of the
following holding of shares:
BlackRock Inc
27 April 2017 497,222,381
4.99%
Date
Shares
% of total
voting rights
At 31 March 2017, BlackRock’s interest was 547,375,427 shares
representing 5.50% 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 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, T-Mobile Holdings Limited holds
1,196,175,322 shares representing 12% of total voting rights and
Orange SA and Orange Telecommunications Group Limited holds
399,070,327 shares representing 4% of total voting rights.
No changes to these holdings were notified to BT in 2016/17.
As partial consideration for our purchase of EE Limited in January
2016, we issued 1,594,900,429 new ordinary shares to T-Mobile
Holdings Limited and Orange Telecommunications Group Limited.
As part of our policy to involve shareholders fully in the affairs of the
company, at our AGM we give them the opportunity to ask questions
about BT’s activities. We also give shareholders the opportunity to
vote on every important issue by proposing a separate resolution for
each. Before the AGM, we count the proxy votes for and against each
resolution, as well as votes withheld, and make the results available at
the meeting. As with the 2016 AGM, we’ll take votes on all matters at
the 2017 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’s our policy for all directors to attend the
AGM if 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
questions. All directors attended the 2016 AGM.
The separate Notice of meeting 2017 which we send to all
shareholders who have requested shareholder documents by post
contains the 23 resolutions we will propose at the 2017 AGM on
12 July, together with explanatory notes. 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).
At the AGM we’ll propose 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 13 July 2016, for BT
to purchase in the market 996m of its shares, representing 10% of
the issued share capital, expires on 12 July 2017. Shareholders will be
asked to give a similar authority at the 2017 AGM.
During 2016/17, 34m shares of 5p each were purchased under this
authority (0.34% of the share capital) for a consideration of £150m,
at an average price of £4.41 per share. During 2016/17, 34.5m
treasury shares were transferred to meet BT’s obligations under our
employee share plans. At 8 May 2017, we held a total of 7.6m shares
as treasury shares. All of those shares were purchased in an on-market
buyback programme from May 2016 to March 2017.
In addition, the BT Group Employee Share Ownership Trust purchased
12.9m BT shares for a total consideration of £55m, of which 14.3m
shares continued to be held in the Trust at 8 May 2017.
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 96);
– an indication of likely future developments in the business of the
company (see the Strategic Report on pages 2 to 102);
– an indication of our R&D activities (page 32);
– information about our people (page 26); and
– information about greenhouse gas emissions (page 42).
Annual General Meeting
Resolutions
We’ll ask our shareholders to vote on both the Annual Report and the
Report on Directors’ Remuneration at our AGM. Approval of the latter
will be sought in two parts and will include the Remuneration Policy.
By order of the Board
Dan Fitz
Group General Counsel & Company Secretary
11 May 2017
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Financial
statements
Financial statements
Auditors’ reports
– consolidated financial statements
United Kingdom opinion
United States opinion
154
164
Group income statement
165
Group statement of comprehensive income 166
167
Group balance sheet
168
Group statement of changes in equity
169
Group cash flow statement
170
Notes to the consolidated financial statements
Basis of preparation
Critical accounting estimates
and key judgements
Significant accounting policies
Segment information
Operating costs
Employees
Audit, audit related and other non-audit
176
176
182
186
187
188
services
189
Specific items
191
Taxation
194
Earnings per share
195
Dividends
195
Intangible assets
198
Property, plant and equipment
199
Business combinations
200
Programme rights
200
Inventories
200
Trade and other receivables
202
Trade and other payables
203
Provisions
204
Retirement benefit plans
214
Own shares
215
Share-based payments
216
Investments
218
Cash and cash equivalents
218
Loans and other borrowings
221
Finance expense
Financial instruments and risk management 222
228
Other reserves
Related party transactions
229
Financial commitments and contingent
liabilities
Auditors’ report
– parent company financial statements
Financial statements of BT Group plc
Related undertakings
229
232
234
238
Additional information
251
PB
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Independent auditors’ report
Report on the group financial statements
United Kingdom
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 2017 and of its profit and cash flows for the year then
ended;
– have been properly prepared in accordance with International
Financial Reporting Standards (“IFRSs”) 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 IFRSs as issued by the IASB
As explained in note 1 to the financial statements, the group, in
addition to applying IFRSs as adopted by the European Union,
has also applied IFRSs as issued by the International Accounting
Standards Board (IASB).
In our opinion, the financial statements comply with IFRSs as issued
by the IASB.
What we have audited
The financial statements, included within the Annual Report & Form
20-F 2017 (the “Annual Report”), comprise:
– the group balance sheet as at 31 March 2017;
– 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 IFRSs as adopted by the
European Union, and applicable law.
Our audit approach
Context
We took into consideration the ongoing integration of EE into the
wider group and that 2016/17 was the first full year of EE’s results
being consolidated into the group’s financial statements. EE was
also included in the group’s internal control over financial reporting
framework for the first time.
In addition, in October 2016, the group announced that following
allegations of inappropriate management behaviour in BT’s Italian
business, it had conducted an initial internal investigation. This initial
investigation included a review of accounting practices during which
group management had identified certain historical accounting
errors and reassessed certain areas of management judgement. In
January 2017, the group announced that its investigations had
revealed that the extent and complexity of inappropriate behaviour
in the Italian business was greater than previously identified and
had resulted in the overstatement of earnings in the Italian business
over a number of years. We considered the impact of these matters
on the group audit risk assessment, the scope of the audit (in
determining which reporting units required audit work and the
extent of the work to be performed in Italy specifically and in other
reporting units) and the audit response to the issues identified.
Overview
– Overall group materiality: £130 million (2015/16: £130 million)
which represents approximately 4% of profit before tax.
– Full scope audits were performed in three reporting units – the
main BT UK trading company (British Telecommunications plc), EE
and the principal reporting unit in Italy. These units accounted for
over 80% of the group’s revenue and group’s profit before tax.
– Specific audit procedures were performed in four reporting
units – Spain, Germany, Ireland and the US. These units
accounted for 7% of the group’s revenue.
– Specific audit procedures over certain operating costs were
performed in one additional reporting unit in the UK.
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:
– Assessment of the carrying value of goodwill and acquired
intangible assets in EE;
– Assessment of the carrying value of goodwill in Global Services;
– Major contracts in Global Services, Business & Public Sector and
EE;
– Accuracy of revenue due to complex billing systems;
– Pension scheme obligations and unquoted investments in the
BT Pension Scheme;
– Litigation and regulatory provisions (including historical use of
deemed consent);
– Recognition and measurement of potential tax exposures and
deferred tax assets;
– Cost capitalisation and asset lives for property, plant and
equipment and software intangible assets; and
– Irregular accounting practices in BT Italia.
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.
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FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Area of focus
How our audit addressed the area of focus
Assessment of the carrying value of goodwill and acquired
intangible assets in EE
The group acquired EE on 29 January 2016 and finalised the purchase
price accounting in the current year. The goodwill acquired was £6.5bn
and other intangible assets with finite useful lives of £5.9bn were also
recognised on acquisition.
As a result of the group reorganisation effective 1 April 2016, the
group allocated goodwill of £2.1bn relating to the acquisition of EE
to other cash generating units (CGUs) on a relative fair value basis in
accordance with IAS 36 ‘Impairment of assets’.
The carrying value of goodwill and other intangible assets is generally
considered to be at higher risk of impairment in the first year following
any acquisition.
Management prepared an impairment assessment, for both the
goodwill and the intangible assets acquired, that was based on a
value in use calculation. Management concluded that there was no
impairment. The disclosures in respect of this are included in note 12.
Assessment of the carrying value of goodwill in Global Services
As at 31 March 2017, goodwill relating to the Global Services
CGU amounted to £571m out of a total goodwill balance of
£8bn. Management prepared an impairment assessment for the
Global Services CGU, as required under accounting standards,
which was based on a value in use calculation. Similar assessments
were performed by the directors for the other goodwill balances.
Management concluded that there was no impairment of goodwill in
any CGU, including Global Services.
We focused on the impairment assessment for Global Services as
the headroom (of value in use over carrying value) was limited and
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).
We evaluated the design and tested the operating effectiveness
of management’s controls in assessing the carrying value of
goodwill and other intangible assets. We determined that the
controls were designed and operating effectively.
We tested the allocation of EE goodwill to other CGUs. In testing
this we assessed whether management’s approach was in
compliance with IAS 36 and tested the calculation.
We assessed and challenged management on the assumptions
reflected in the future cash flows of the businesses transferred
between CGUs as a result of the reorganisation.
In testing the impairment assessment we agreed the cash flow
forecasts used in the impairment model to Board approved
forecasts. We considered management’s expectations in respect
of developments in the business and corroborated certain
information with third party sources where possible and tested
internal data. We considered planned operational improvements
and the reasonableness of these in generating future cash flows
and whether these were appropriately reflected in the cash flow
forecasts.
We compared actual historical cash flows with previous forecasts.
We used internal specialists to independently calculate an
appropriate pre-tax discount rate by making reference to
market data, and to verify the long-term growth rate used by
management to observable market data.
For the other intangible assets, we considered management’s
assessment of whether there is any indication of an impairment
trigger, considering both internal and external sources of
information.
We assessed the sufficiency of the sensitivity analyses performed
by management, focusing on what we consider to be reasonably
possible changes in key assumptions.
Overall we considered the assumptions adopted by management
to be within a reasonable range. We also considered the
appropriateness of the disclosure in note 12.
As a result of our work, we determined that the conclusions
reached by management in the reallocation of goodwill between
CGUs, and that there was no impairment of goodwill or the
acquired finite-lived intangible assets, were supportable.
We evaluated the design and tested the operating effectiveness
of management’s controls in assessing the carrying value of
goodwill. We determined that the controls were designed and
operating effectively.
We focused on the key assumptions included in the impairment
assessment, being the cash flows for each year of management’s
detailed forecast, the long-term growth rate and the discount
rate.
To determine the appropriateness of the future operating cash
flows, we:
– Agreed the cash flow forecasts used in the impairment model
to Board approved forecasts;
– Considered management’s expectations in respect of
developments in the business and corroborated certain
information with third party sources. We considered planned
operational improvements and the reasonableness of these
in generating future cash flows and whether these were
appropriately reflected in the cash flow forecasts; and
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Independent auditors’ report continued
Area of focus
How our audit addressed the area of focus
Assessment of the carrying value of goodwill in Global Services
continued
Major contracts in Global Services, Business & Public Sector
and EE
We focused on these contracts as they involve significant estimates
in respect of:
– the completeness and adequacy of provisions against contracts
projected to be loss making; and
– the recoverability of contract-specific assets, including deferred
costs and property, plant and equipment.
Consideration of the completeness and adequacy of provisions
against contracts and the recoverability of contract-specific assets
is dependent on the quantum and timing of recognition of contract
profits and the assumptions underpinning the lifetime profitability
forecasts for the contracts.
The group has deferred costs in respect of major contracts totalling
£163m at 31 March 2017.
–
Compared actual historical cash flow results for the
Global Services CGU with previous forecasts to determine
forecasting accuracy.
We used internal specialists to independently verify the long
term growth rate to market data and to independently calculate
the pre-tax discount rate used by management by reference to
market data.
We assessed the sufficiency of the sensitivity analysis performed
by management and performed further sensitivity analyses,
focusing on what we considered to be reasonably possible
changes in the key assumptions. As noted in note 12, the
conclusion reached by management that no impairment has
arisen is highly sensitive to relatively small changes in the
assumptions.
Overall we considered the assumptions made to be within a
reasonable range. We also considered the appropriateness of the
disclosures in note 12.
We tested a sample of major contracts, focusing our work on
those which were material by size, and then those which we
regarded as higher risk because of the nature of the contract, its
stage of delivery or the related assets on the balance sheet. In
performing this sample testing we assessed the appropriateness
of the assumptions and judgements underpinning the accounting
for these major contracts as follows:
– We evaluated the design and tested the operating
effectiveness of controls 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 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 certain contracts in our
scope with the actual results to assess the performance of the
contract and the historical accuracy of forecasting.
We assessed the recoverability of contract-specific assets
dedicated to the sampled contracts by examining future forecast
profitability of the related contract and the associated deferred
revenue.
We assessed the reasonableness of lifetime profitability forecasts
by analysing historical contract performance relative to
overall contractual commitments. We assessed management’s
assumptions on future contract costs, including any forecast
savings, by assessing the actions required to achieve these
forecasts. We assessed whether the provisions for loss making
contracts are adequate.
Based on our work we did not identify any material misstatement
in the related financial statement amounts and found them to be
recorded in line with the group’s accounting policies as set out in
note 3.
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FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Area of focus
How our audit addressed the area of focus
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.
Pension scheme obligations and unquoted investments in the
BT Pension Scheme
We focused on the BT Pension Scheme (BTPS) because the
valuation of the BTPS obligations (£58.6bn at 31 March 2017)
and unquoted assets, comprised of unquoted equity investments
and property assets, (£21.8bn at 31 March 2017) require the
use of estimates and significant judgement, and a small change in
the key assumptions can have a material impact on the financial
statements.
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
into 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 supporting evidence (e.g. customer orders, contracts
or subsequent customer communications from the group
confirming changes to prices) and cash received. Our testing
included customer bills for consumers, corporate customers and
wholesale customers.
Based on our work, we noted no significant issues in the accuracy
of revenue recorded in the year.
We evaluated the design and tested the operating effectiveness
of controls in respect of the determination of the BTPS net
deficit. We determined that the operation of the controls
provided us with evidence over the valuation of the obligations
and the assets and thereby also the accuracy of the amounts
recorded in Other Comprehensive Income.
We used our actuarial experts to assess the reasonableness
of the actuarial assumptions used in valuing the BTPS
obligations. This included comparing the assumptions with our
internally developed benchmarks. All the assumptions used by
management fell within acceptable ranges.
We tested the existence of the unquoted investments and the
valuation of these investments on a sample basis. Specifically:
– For property assets, we:
– obtained and read valuation reports prepared by third
party specialist valuers for management. We assessed the
methods and assumptions used by the valuers and the
competence and objectivity of those third party experts;
– tested the carrying amount of other property assets by
validating these to audited financial statements;
– For direct investments held by the BTPS, the valuations of the
investments are derived from discounted cash flow models.
These models use assumptions including discount rates and
cash flow forecasts. We assessed the assumptions used in
the valuations by checking that the assumptions used were
consistent with our internally developed range of discount
rates (with the support of internal specialists), by comparing
the cash flows with 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; and
– For other unquoted investments we tested internal controls,
obtained confirmations of the valuation from the custodians
and the investment managers, and tested the carrying
amount by validating these to audited financial statements.
We considered the estimates and judgements used by
management for the obligations and the unquoted investments
to be within an acceptable range.
We also considered the appropriateness of the disclosure in
note 20.
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Independent auditors’ report continued
Area of focus
How our audit addressed the area of focus
Litigation and regulatory provisions (including historical use of
deemed consent)
The group has regulatory provisions of £479m relating to regulatory
risks, including an additional £300m provision arising in the current
year from the findings of the Ofcom investigation related to the
historical use of deemed consent in the delivery of Ethernet services.
Included within the group’s other provisions of £246m are provisions
for litigation risks.
These provisions are based on judgements and accounting estimates
made by management in determining the likelihood and magnitude
of claims, and consequently we focused on the judgements and
estimates involved.
In particular, the current telecommunications regulatory environment
has seen an increased frequency and magnitude of matters brought
to Ofcom and the Competition Appeal Tribunal (CAT) in the UK.
We evaluated the design and tested the operating effectiveness
of controls in respect of the determination of the provisions. We
determined that the operation of the controls provided us with
evidence over the completeness, accuracy and valuation of the
provisions.
For regulatory provisions, we read correspondence and
pronouncements from the regulator Ofcom and the CAT and
correspondence from other communication providers (CPs).
We evaluated the regulatory risk exposures identified by
management against observable data. We also assessed
management’s regulatory risk likelihood assessment by
comparing its assessment against historical disputes, open claims
from CPs, current pronouncements issued by Ofcom and the CAT
and by considering the nature of the identified regulatory risk
exposure.
In relation to the historical use of deemed consent in the delivery
of Ethernet services, we assessed the provision calculation by
comparison to the findings included in the correspondence
with Ofcom, examining the methodology applied, testing
inputs to source data and testing assumptions by comparison
with supporting evidence. We engaged our statistical experts
to review the findings of a third party expert appointed by
management to determine an appropriate approach to sampling
deemed consent orders.
For litigation provisions, we read the summary of litigation
matters provided by management and held discussions with
the group’s general counsel and head of litigation. We held
discussions with each of the group’s external legal advisors
with respect to the matters included in the summary. Where
appropriate we examined correspondence connected with the
cases.
For regulatory and litigation provisions, we tested the calculation
of the provisions, assessed the assumptions against third party
data, where available, and assessed the estimates against
historical trends.
We considered management’s judgements on the level
of provisioning to be appropriate. We also considered the
appropriateness of the disclosures in note 19.
Recognition and measurement of potential tax exposures and
deferred tax assets
The group operates in a complex multinational tax environment
and is subject to a range of tax risks. There is inherent judgement
involved in determining provisions for uncertain tax positions.
We evaluated the design and tested the operating effectiveness
of controls in place for the determination and recognition of
deferred tax balances and uncertain tax positions. We determined
these controls provided us with evidence for the purposes of our
audit.
The group has material unrecognised deferred tax assets in respect
of brought forward trading losses and other temporary differences,
as set out in note 9. The recognition of deferred tax assets involves
judgement regarding the likelihood of the realisation of these assets,
in particular whether there will be taxable profits in future periods
that support recognition of these assets.
The group has deferred tax assets of £172m relating to EE. The
recognition of these assets requires estimates to be applied in
relation to the associated assessed future profitability of this legal
entity, including the potential impact of the ongoing integration of
the EE operations into the wider group.
We tested the underlying data for the key deferred tax and
uncertain tax provision calculations.
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 in the markets in which the group operates. We
utilised our specialist tax knowledge and experience of similar
situations elsewhere to examine tax planning arrangements
and the global transfer pricing model and assess management’s
judgements. We found that the level of provisioning overall was
appropriate.
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FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Area of focus
How our audit addressed the area of focus
Recognition and measurement of potential tax exposures and
deferred tax assets continued
Cost capitalisation 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 judgement by management.
These manifest themselves in the following two audit risks:
– the risk that amounts being capitalised do not meet capitalisation
criteria, including the recognition and deferral of related grants;
and
– the risk that the useful economic lives assigned to assets are
inappropriate.
We focused on the recognition of capital grants associated with
the Broadband Delivery UK (BDUK) and Superfast Extension (SEP)
programmes, as the grants may be subject to re-investment or
repayment depending on the level of take-up requiring calculation
of grant income to be deferred.
Irregular accounting practices in BT Italia
As further explained on page 6 of the Annual Report, on
27 October 2016 BT announced that an initial internal
investigation of accounting practices in its Italian business had
identified certain historical accounting errors, and areas of
management judgement that merited reassessment. At that time,
management announced the write down of items on the Italian
balance sheet by £145 million.
In assessing management’s conclusions with respect to the
recognition 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 EE deferred tax asset we tested controls over
the calculation of the asset and management’s assessment of its
recoverability, using our tax specialists and our knowledge of the
group as a whole.
We considered management’s judgement on the recoverability
of the EE deferred tax asset to be appropriate.
We also considered the appropriateness of the disclosure in
note 9.
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
of costs.
We tested costs capitalised in the year and considered the ageing
of assets in the course of construction. We assessed the nature
of costs incurred in capital projects through testing of amounts
recorded and considering whether the expenditure met the
criteria for capitalisation under accounting standards. We found
no material misstatements from our testing.
We tested the controls over the annual review of asset lives. In
addition, we tested whether management’s views on asset lives
are supportable by considering our knowledge of the business
and results of the wider telecoms industry. We also tested
whether the prior year asset life review has been appropriately
applied and assessed the judgements made by management
in the current year review. We found that the asset lives were
consistent with those commonly used in the industry and
appropriately reflected technological developments.
We tested the controls in place over the recording and
reconciliation of grant income deferral. We assessed the key
assumption of the forecast level of end user take-up applied by
the management to calculate the deferral. In addition, we tested
other key inputs to supporting evidence and the accuracy of the
calculation. We considered the level of grant recognition to be
appropriate.
We incorporated our forensic specialists into our audit team to
assess the structure, scope, approach and independence of the
investigation commenced by the Board, and to satisfy ourselves
that it considered the risk that the issues identified may be
more pervasive across the BT Group, and that the conclusions
reached were appropriate. We also used our forensics specialists
to support us in considering the associated audit risks arising
from each of the matters identified by the investigation and
determining the impact on our audit risk assessment and
developing an appropriate audit response.
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Independent auditors’ report continued
Area of focus
How our audit addressed the area of focus
Irregular accounting practices in BT Italia continued
In January 2017, management reported that the investigation
into the financial position of the Italian business was substantially
complete and further adjustments had been identified. The total
impact amounted to £268m in relation to prior year errors, and
£245m for changes in accounting estimates. The prior year errors
were reflected in the relevant comparative periods and the impact
is set out in note 1. The specific items are described in note 8.
Further details of the investigation commissioned by the Board,
which reported to the chairman of the Audit & Risk Committee
and the BT Group chairman, are set out on pages 112 and 113.
Management's response to the findings of the investigation,
including the associated control deficiencies that were identified,
is set out on pages 148 and 149.
Our audit focussed on evaluating the impact on the financial
statements and addressing the risk of similar issues in other
reporting units.
We considered the scope of the audit and, in particular, assessed
which reporting units required additional audit procedures to be
performed, including in Italy specifically. We also instructed our
component teams to perform additional procedures to respond
to the risk of fraud, including testing additional manual journals
throughout the year.
We considered the impact of the investigation on management’s
internal control environment both in Italy and in other locations.
Where deficiencies in controls were identified, we tested
compensating controls where these existed and performed
additional substantive testing where there were no appropriate
compensating controls.
Taking the above into account, consistent with our original
audit plan, we instructed our component audit team in Italy
to perform a full scope audit on the reporting unit’s complete
financial information, and evaluated the component team’s work.
In addition, we performed a significant level of oversight, with
senior members of the group engagement team spending time
in Italy during the planning, execution and completion phases
of the component audit. As part of these oversight activities, we
were involved in the component audit team’s risk assessment to
identify significant risks of material misstatement, evaluated the
appropriateness of the audit procedures to be performed by the
component team to respond to the identified significant risks,
reviewed certain working papers of the component audit team to
evaluate the work performed and held regular meetings with our
component audit team and with local, Global Services and Group
management to consider the component team’s audit work and
findings. Our component team in Italy also specifically tested the
prior year revisions and the specific items recorded.
As a result of our work, we satisfied ourselves that the
adjustments posted by management following the
investigation are materially appropriate. We also considered the
appropriateness of the disclosures made by management in the
financial statements, in particular in note 1 and determined
that they provided an adequate explanation of the issue and the
results of management’s investigation.
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 geographic structure of the group, the accounting processes and controls including those performed at the
group’s shared service centres, and the industry. The group comprises a number of reporting units, in both the UK and overseas, which relate
to the geographic markets in which the group operates.
The group’s accounting process is structured around a finance function in each of the reporting units who are supported by one of the group’s
shared service centres. The reporting units 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 under our instruction (including PwC UK
for EE). 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 financial statements as a whole.
For three reporting units (the main BT UK trading company (British Telecommunications plc), EE and Italy) an audit of the complete financial
information was performed. These accounted for over 80% of the group’s revenue and the group’s profit before tax.
In four reporting units (Germany, Ireland, Spain and the US) specific audit procedures on revenue and related balance sheet accounts
were performed. These accounted for 7% of the Group’s revenue. In one reporting unit (based in the UK) specific audit procedures on certain
operating costs and related balance sheet accounts were performed.
This, together with additional procedures performed on centralised functions and at the group level (on the consolidation and other areas of
significant judgement including tax and goodwill), gave us the evidence we needed for our opinion on the financial statements as a whole.
160
BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
The group engagement team performed the audit of British Telecommunications plc. The group engagement team also performed the work
on the US reporting unit and the UK reporting unit.
For EE, the group engagement team met regularly with the audit team, who are UK based, and attended meetings with management,
including the year end clearance meeting.
As explained in the area of focus “Irregular accounting practices in BT Italia” above, the group engagement team was heavily involved in
oversight of the work performed on the Italy reporting unit.
Senior members of the group engagement team also visited Spain, Germany and Ireland and communicated with our teams on a regular
basis. We also reviewed certain component auditor working papers and participated in the audit clearance meetings for Spain, Germany and
Ireland by conference call. In addition, the group engagement team visited the shared service centres relevant to those reporting units in
scope for the group audit.
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
£130m (2015/16: £130m)
How we determined it
Approximately 4% of profit before tax.
Rationale for benchmark
applied
We consider that profit before tax is the primary measure used by the shareholders in assessing the performance of
the group. In our view, using profit before tax ensures that where certain specific items are recurring in nature our
audit work is performed to the lower materiality level that results from using a reported profit before tax measure
rather than an adjusted profit before tax measure.
In 2015/16 and previous years we used profit before tax as the benchmark, but used an average of profit
before tax for the then current year and the previous 3 years. The acquisition of EE significantly changed the
composition of the group and in light of this we changed the period from the historical approach of using a four
year average of profit before tax to now using only the current year’s profit before tax.
Component materiality
For each reporting unit in our audit scope, we allocated a materiality that was less than overall Group
materiality. For British Telecommunications plc and EE, the materiality allocated to these units was £110m and
£100m respectively. For all other reporting units the materiality allocated was between £10m and £20m.
We agreed with the Audit & Risk Committee that we would report to them misstatements identified during our audit above £10m
(2015/16: £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 pages 146 and 147, 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 state-
ments are not a guarantee as to the group’s ability to continue as a going concern.
Other required reporting
Consistency of other information and compliance with applicable requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of the audit:
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; and the Strategic Report and the Report of the Directors have been prepared in accordance with applicable
legal requirements.
In addition, in light of the knowledge and understanding of the group and its environment obtained in the course of the audit, we are required to report
if we have identified any material misstatements in the Strategic Report and the Report of the Directors. We have nothing to report in this respect.
Annual Report 2017
BT Group plc
161
Independent auditors’ report continued
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
information in 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 group acquired in the course of performing our audit; or
– otherwise misleading.
– the statement given by the directors on page 146, in accordance with provision C.1.1 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.
We have no exceptions to report.
We have no exceptions to report.
– the section of the Annual Report on pages 112 to 114, 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.
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 146 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 55 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.
We have nothing material to add or to
draw attention to.
We have nothing material to add or to
draw attention to.
Under the Lisg 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.
162
BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
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 146, 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. With
respect to the Strategic Report and the Report of the Directors, we
consider whether those reports include the disclosures required by
applicable legal requirements.
Other matter
We have reported separately on the parent company financial
statements of BT Group plc for the year ended 31 March 2017 and
on the information in the Report on Directors’ Remuneration that
is described as having been audited.
Richard Hughes (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
11 May 2017
Annual Report 2017
BT Group plc
163
Independent auditors’ report continued
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
2017 and 31 March 2016, and the results of their operations and
their cash flows for each of the three years in the period ended
31 March 2017 in conformity with International Financial Reporting
Standards as issued by the International Accounting Standards Board
and International Financial Reporting Standards as adopted by the
European Union. Also in our opinion, the company did not maintain,
in all material respects, effective internal control over financial
reporting as of 31 March 2017, based on criteria established
in Internal Control – Integrated Framework 2013 issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) because a material weakness in internal control related to the
Group’s failure to maintain effective controls to prevent or detect the
collusive circumvention or override of controls related to the group’s
Italian business existed as of that date.
A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or
interim financial statements will not be prevented or detected on a
timely basis. The material weakness referred to above is described in
Management’s Report on Internal Control over Financial Reporting
on page 149 of the Report of the Directors, General Information of
the BT Group plc Annual Report & Form 20-F 2017. We considered
this material weakness in determining the nature, timing, and extent
of audit tests applied in our audit of the 31 March 2017 group
financial statements, and our opinion regarding the effectiveness
of the company’s internal control over financial reporting does
not affect our opinion on those group financial statements. 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 report referred to
above. 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.
As set out in note 1, the group has adopted the IFRS Interpretations
Committee agenda decision on IAS 32 para 42(a) with effect from
1 April 2016.
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.
PricewaterhouseCoopers LLP
London, United Kingdom
11 May 2017
164
BT Group plc
Annual Report 2017
Group income statement
Year ended 31 March 2017
Revenue
Operating costs
Operating profit (loss)
Finance expense
Finance income
Net finance expense
Share of post tax loss of associates and joint ventures
Profit (loss) before taxation
Taxation
Profit (loss) for the year
Earnings per share
Basic
Diluted
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
a For a definition of specific items, see page 252. An analysis of specific items is provided in note 8.
b See note 1.
Notes
4
5
4
26
9
10
Notes
4
5
4
26
9
10
Before
specific
items
£m
24,082
(19,947)
4,135
(607)
13
(594)
(9)
3,532
(663)
2,869
Specific
a
items
£m
Total
£m
(20)
(948)
(968)
(210)
–
(210)
–
(1,178)
217
24,062
(20,895)
3,167
(817)
13
(804)
(9)
2,354
(446)
(961)
1,908
19.2p
19.1p
Before
specific items
b
Revised
£m
Specific
a
items
£m
Total
b
Revised
£m
18,879
(15,051)
3,828
(520)
37
(483)
6
3,351
(607)
2,744
133
(348)
(215)
(229)
–
(229)
–
(444)
166
(278)
19,012
(15,399)
3,613
(749)
37
(712)
6
2,907
(441)
2,466
28.5p
28.2p
PB
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
165
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Group income statement
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 See note 1.
b For a definition of specific items, see page 252. 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 (loss) income
Items that will not be reclassified to the income statement
Remeasurements of the net pension obligation
Tax on pension remeasurements
Items that have been or may be reclassified 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
– recognised in income and expense
Tax on components of other comprehensive income that have been or may be reclassified
Other comprehensive (loss) income for the year, net of tax
Total comprehensive (loss) income for the year
a See note 1.
Before
specific items
a
Revised
£m
Notes
Specific
b
items
£m
Total
a
Revised
£m
4
5
4
26
8
9
10
Notes
20
9
28
28
28
28
9, 28
17,840
(14,185)
3,655
(577)
17
(560)
(1)
–
3,094
(631)
2,463
128
(381)
(253)
(299)
–
(299)
–
25
(527)
121
(406)
17,968
(14,566)
3,402
(876)
17
(859)
(1)
25
2,567
(510)
2,057
25.5p
25.1p
2017
£m
2016
a
Revised
£m
2015
a
Revised
£m
1,908
2,466
2,057
(2,789)
416
755
(240)
(1,051)
208
237
(3)
884
(938)
29
(2,164)
29
(2)
381
(230)
5
698
16
7
207
(218)
37
(794)
(256)
3,164
1,263
166
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
167
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
a See note 1.
Notes
2017
£m
2016
a
Revised
£m
2015
a
Revised
£m
12
13
27
23
17
9
15
16
17
27
23
24
25
27
18
19
25
27
20
18
9
19
21
28
15,029
16,498
1,818
44
31
360
1,717
15,450
15,971
1,462
46
24
218
1,247
3,170
13,498
1,232
44
26
179
1,559
35,497
34,418
19,708
264
227
3,835
73
428
1,520
528
225
189
3,978
65
177
2,918
996
118
94
3,093
65
97
3,523
848
6,875
8,548
7,838
2,632
34
7,437
197
625
3,736
48
7,418
271
178
10,925
11,651
2,314
168
5,348
222
142
8,194
31,447
31,315
19,352
10,081
869
9,088
1,298
1,240
536
11,025
863
6,382
1,106
1,262
565
7,862
927
7,583
929
948
422
23,112
21,203
18,671
499
1,051
(96)
6,647
884
(650)
499
1,051
(115)
8,422
685
(430)
419
1,051
(165)
998
502
(2,124)
8,335
10,112
681
31,447
31,315
19,352
166
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
167
The consolidated financial statements on pages 165 to 231 and 234 to 249 were approved by the Board of Directors on 11 May 2017 and were
signed on its behalf by:
Sir Michael Rake
Chairman
Gavin Patterson
Chief Executive
Simon Lowth
Group Finance Director
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Group statement of changes in equity
Notes
Share
a
capital
£m
Share
b
premium
£m
Own
c
shares
£m
Merger
d
reserve
£m
Other
e
reserves
£m
At 1 April 2014 – previously reported
Revisions
At 1 April 2014 – revised
Profit for the yearf
Other comprehensive gain (loss) – before taxf
Tax on other comprehensive gain (loss)
Transferred to the income statement
Total comprehensive income for the yearf
Issue of new sharesg
Dividends to shareholders
Share-based payments
Tax on share-based payments
Net buyback of own shares
Other movements
At 1 April 2015f
Profit for the yearf
Other comprehensive gain – before taxf
Tax on other comprehensive gain
Transferred to the income statement
Total comprehensive income for the yearf
Issue of new sharesh
Dividends to shareholders
Share-based payments
Tax on share-based payments
Net buyback of own shares
Other movementsf
At 1 April 2016f
Profit for the year
Other comprehensive gain (loss) – before tax
Tax on other comprehensive gain (loss)
Transferred to the income statement
Total comprehensive income (loss) for the year
Transfers to realised profit
Dividends to shareholders
Share-based payments
Tax on share-based payments
Net buyback of own shares
9
11
22
9
21
9
11
22
9
21
9
11
22
9
21
408
–
408
–
–
–
–
–
11
–
–
–
–
–
62
–
62
–
–
–
–
–
989
–
–
–
–
–
(829)
–
(829)
–
–
–
–
–
–
–
–
–
664
–
998
–
998
–
–
–
–
–
–
–
–
–
–
–
449
4
453
–
230
37
(218)
49
–
–
–
–
–
–
Retained
(loss)
earnings
£m
(1,680)
(64)
(1,744)
2,057
(1,051)
208
–
1,214
–
(925)
70
54
(783)
(10)
Total
equity
(deficit)
£m
(592)
(60)
(652)
2,057
(821)
245
(218)
1,263
1,000
(925)
70
54
(119)
(10)
419
1,051
(165)
998
502
(2,124)
681
–
–
–
–
–
80
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
50
–
–
–
–
–
–
7,424
–
–
–
–
–
499
1,051
(115)
8,422
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
19
–
–
–
–
–
(1,775)
–
–
–
–
–
408
5
(230)
183
–
–
–
–
–
–
685
–
1,108
29
(938)
199
–
–
–
–
–
884
2,466
755
(240)
–
2,981
–
(1,078)
58
12
(275)
(4)
2,466
1,163
(235)
(230)
3,164
7,504
(1,078)
58
12
(225)
(4)
(430)
10,112
1,908
(2,779)
416
–
(455)
1,775
(1,436)
57
(6)
(155)
1,908
(1,671)
445
(938)
(256)
–
(1,436)
57
(6)
(136)
(650)
8,335
At 31 March 2017
499
1,051
(96)
6,647
a The allotted, called up, and fully paid ordinary share capital of BT Group plc at 31 March 2017 was £499m comprising 9,968,127,681 ordinary shares of 5p each (2016: £499m comprising
9,968,127,681) 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. In 2016/17, there was a transfer of £1,775m of merger reserve to realised profit following the settlement of an intercompany loan by qualifying
consideration.
e For further analysis of other reserves, see note 28.
f Revised, see note 1.
g 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.
h 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.
168
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Annual Report 2017
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BT Group plc
169
Group cash flow statement
Year ended 31 March
Cash flow from operating activities
Profit before taxation
Profit on disposal of interest in associates and joint ventures
Share of post tax loss (profit) of associates and joint ventures
Net finance expense
Operating profit
Other non-cash charges (credits)
(Profit) loss on disposal of businesses
Depreciation and amortisation
Increase in inventories
Increase in programme rights
Decrease (increase) in trade and other receivables
(Decrease) increase in trade and other payables
Decrease in other liabilitiesb
Increase (decrease) 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 subsidiariesc
Proceeds on disposal of subsidiariesc, associates and joint ventures
Acquisition of joint ventures
Proceeds on disposal of current financial assetsd
Purchases of current financial assetsd
Proceeds on disposal of non-current asset investments
Purchases 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 borrowingse
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 (outflow) inflow from financing activities
Net increase (decrease) in cash and cash equivalents
Opening cash and cash equivalentsf
Net increase (decrease) in cash and cash equivalents
Effect of exchange rate changes
Closing cash and cash equivalentsf
Note
2017
£m
2016
a
Revised
£m
2015
a
Revised
£m
2,354
–
9
804
3,167
20
(16)
3,572
(33)
(95)
168
(152)
(307)
401
2,907
–
(6)
712
3,613
39
–
2,631
–
(44)
(83)
124
(810)
(63)
2,567
(25)
1
859
3,402
(19)
1
2,538
(13)
(40)
(263)
199
(727)
19
6,725
5,407
5,097
(551)
(256)
(309)
6,174
5,151
4,788
7
2
18
46
(13)
10,834
(9,411)
–
(22)
26
(3,145)
10
17
(3,371)
–
(8)
8,918
(8,252)
–
–
7
(2,438)
10
–
(6)
26
(10)
8,124
(9,898)
8
–
100
(2,410)
(1,658)
(5,117)
(4,056)
(1,435)
(629)
(1,805)
–
3
119
–
(181)
(438)
70
(206)
(4,502)
14
459
14
38
511
(1,075)
(558)
(1,283)
–
3,023
79
3,200
(3,019)
(100)
90
(315)
42
76
407
76
(24)
459
(924)
(590)
(1,166)
(338)
812
297
–
–
–
1,201
(320)
(1,028)
(296)
684
(296)
19
407
19
14
24
168
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
169
a See note 1.
b Includes pension deficit payments of £274m (2015/16: £880m, 2014/15: £876m).
c Acquisitions and disposals of subsidiaries are shown net of cash acquired or disposed of and includes £20m true-up of consideration following the audit of the completion balance sheet relating to the
acquisition of EE.
d Primarily consists of investment in and redemption of amounts held in liquidity funds.
e Repayment of borrowings includes the impact of hedging and repayment of lease liabilities.
f Net of bank overdrafts of £17m (2015/16: £537m, 2014/15: £441m).
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
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 effective during
the year
During the year we revised the presentation of cash pooling
arrangements under IAS 32, refer to the prior year revision and re-
classifications below. There are no other new or amended standards
of interpretations adopted during the year that have a significant
impact on the financial statements.
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 2017 and are
expected to have an impact on the group financial statements.
IFRS 15 ‘Revenue from Contracts with Customers’
Background
In May 2014, IFRS 15 ‘Revenue from Contracts with Customers’ was
issued. It was subsequently amended in September 2015 and April
2016. It will be effective for periods beginning on or after 1 January
2018. Transition to IFRS 15 for BT Group plc will take place on 1 April
2018. Results in the 2018/19 financial year will comply with IFRS 15,
with the first Annual Report and Form 20-F published in accordance
with IFRS 15 being that for the year ended 31 March 2019.
IFRS 15 sets out the requirements for recognising revenue and costs
from contracts with customers and includes extensive disclosure
requirements. The standard requires entities to apportion revenue
earned from contracts to individual promises, or performance
obligations, on a relative stand-alone selling price basis, based on a
five-step model.
Transition
BT is planning to adopt IFRS 15 retrospectively and apply the new
standard to each prior reporting period presented, ie 2016/17 and
2017/18, in accordance with IAS 8 ‘Accounting Policies, Changes in
Accounting Estimates and Errors’. In the year of adoption, the group
will record a cumulative transitional adjustment at 1 April 2016 to
revise historical financial data. All customer contracts in progress but not
completed or starting after this date will need to be revised.
Our decision to adopt retrospectively depends on a number of factors
considering the time, effort and cost involved in doing so when
compared to the benefits to users of the financial statements.
The group intends to use the following practical expedients on
transition, because in the view of the group, the costs of providing
the information significantly outweigh any benefits:
(a) completed contracts that begin and end within the same annual
reporting period will not be revised;
(b) for completed contracts that have variable consideration, the
transaction price at the date the contract was completed will be
used rather than estimating variable consideration amounts in the
comparative reporting periods; and
(c) for all reporting periods presented before the date of initial
application, BT will not disclose the amount of the transaction price
allocated to the remaining performance obligations or identify when
it expects to recognise that amount as revenue.
IFRS 15 Project
The group has determined its planned revenue and cost accounting
policies under IFRS 15. Following the acquisition of EE in January
2016, the group has extended its future IFRS 15 accounting
policies to cover EE.
The group has deployed a cross-functional project team dedicated
to the implementation of IFRS 15. This team has been engaged
in determining accounting policies under the new standard,
quantifying the transitional adjustments and selecting and
implementing suitable systems solutions. The team is also reviewing
the impact on tax, intragroup trading, forecasting, the bid and
tender process and HR and remuneration plans. There will be
a significant impact on the group’s billing data and accounting
platforms. An IT-based solution is in development for certain areas
and lines of business. New processes and controls are being designed
in addition to complement this solution.
Performance obligations
IFRS 15 requires that at contract inception, we assess the goods or
services promised in a contract with a customer and identify as a
performance obligation each promise to transfer to the customer.
Promises in a contract can be explicit, or implicit if the promises create a
valid expectation to provide a good or service based on the customary
business practices, published policies, or specific statements.
IFRS 15 will require disclosures relating to the group's performance
obligations.
We continue to review our disclosure of revenue by products
and services in the segment disclosure note in the light of the
requirements of IFRS 15.
The stand-alone selling prices of the group’s products and services are
being determined. These may be regulated prices, list prices, a cost-
plus derived price, the price of similar products when sold on a stand-
alone basis by BT or a competitor or in some cases the contract price
where the price contracted represents a bespoke price that would be
the same for a similar customer in a similar circumstance.
Financial Impact
The group is in the process of quantifying the implications of the
standard and the financial impact is not yet reasonably estimable.
Based on our analysis to date we expect the acceleration of revenues
(notably handset revenues) and deferral of costs (notably third party
contract acquisition costs associated with handset revenues) will
significantly exceed deferred connection revenues on the adoption
date. This will:
– pull forward profits in the periods being restated;
– lead to the recognition of a contract asset; and increase equity
reserves at 1 April 2016.
This will give rise to a one-off additional cash tax charge payable split
between 2018/19 and 2019/20.
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171
Notes to the consolidated financial statements 1. Basis of preparation continued
An update on the financial impact of each business area is as follows:
– Under our current accounting policy, mobile handset revenue
is recognised based on the amount the customer pays for the
handset when it is delivered to the customer. Generally mobile
handsets are either provided for free or for a small upfront charge.
Under IFRS 15, additional revenue will be allocated to the mobile
handset at the start of the contract. This is calculated with
reference to its relative standalone value within the contract,
regardless of the contract pricing. For each mobile handset
contract the revenue recognition profile will change with
greater day one recognition of revenue for the handset and a
corresponding reduction in ongoing mobile service revenue over
the contract period. The difference between the mobile handset
revenue recognised and the amounts charged to the customer
will be recognised as a contract asset.
On adoption of IFRS 15, this change will pull forward profits in
the periods being restated, and we will recognise a contract asset
for all open contracts at 1 April 2016.
Over time, the contract asset generated is expected to remain
at similar levels as old contracts expire and new ones are signed.
However we will see short term volatility, for example around key
handset launches.
This will be the most significant impact of the IFRS 15 adoption
on the group and will primarily impact EE. To a lesser extent
this will also impact mobile handset revenues in Business and
Public Sector, in respect of the legacy EE business division,
and Consumer. The impact in these lines of businesses is less
significant due to the lower handset base.
We expect to see a similar trend in respect of subsidised equipment
although we expect this to have a less significant impact due to the
lower relative standalone value for this equipment.
– Currently, sales commissions and other third party acquisition
costs resulting directly from securing contracts with customers are
expensed when incurred.
Under IFRS 15 sales commissions and other third party contract
acquisition costs will be recognised as an asset, and amortised
over the period in which the corresponding benefit is received,
resulting in earlier profit recognition.
The impact is greatest in EE in respect of third-party acquisition
costs associated with handset revenues.
– Currently, the group recognises connections revenue upon
performance of the connection activity. Under IFRS 15
connections revenue will be deferred and recognised on a
straight-line basis over the associated line/circuit contractual
period. This will mean that revenue and profits will be recognised
later and on transition leads to the recognition of a contract
liability as revenue and profits are deferred to future periods.
Wholesale and Ventures and Openreach deliver the majority of this
service and therefore will experience the majority of the impact.
Over time, this liability is expected to remain at similar levels as old
contracts expire and new ones are signed.
On the adoption date we expect the impact of this deferral to be
significantly less than the impact of handset revenue and third
party acquisition costs for handsets noted above.
– We recognised a customer relationship intangible asset during
our acquisition of EE. This represents our expectation of future
revenue from customers existing on acquisition. Upon adoption
of IFRS 15, we would need to identify how much of the
customer relationship intangible asset needs to be reclassified as
contract assets. This is to avoid double counting. The reduction
in customer relationship intangible asset will result in a lower
amortisation charge.
– Recognised contract assets will be subject to impairment under
IFRS 9 as set out below.
– There will be a corresponding effect on tax in relation to the
above impacts. The group anticipates a higher tax charge in
2018/19 and 2019/20 as a result of our expectation that
accelerated revenues and deferred costs are likely to significantly
exceed deferred revenues, thus increasing taxable profit in the
periods being restated.
IFRS 15 will impact other areas but we do not expect them to be
material. These include certain contract fulfilment costs which will
be recognised as an asset and amortised over the period in which
benefit is received and certain expenses will be recognised as a
deduction from revenue.
IFRS 15 also provides more detailed guidance on how to account for
contract modifications than the 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 previously recorded
revenues), prospectively with a reallocation of revenues amongst
identified performance obligations, or prospectively as separate
contracts which will not require any reallocation. We expect contract
modifications would primarily relate to changes in the agreed
products and services to be provided to customers for long-term IT
and networking solution contracts.
IFRS 9 ‘Financial instruments’
IFRS 9 will be effective for BT from 1 April 2018. It is applicable to
financial assets and financial liabilities and covers the classification,
measurement, impairment and de-recognition of financial assets
and liabilities together with a new hedge accounting model.
With the exception of the impact on IFRS 15 contract assets we do
not expect the standard to have a material impact on our results,
with the key issues for BT being around documentation of policies,
hedging strategy and new hedge documentation.
Providing for loss allowances on our existing financial assets is not
expected to have a material impact. However, we have not yet
quantified the impact on contract assets which will be recognised
under IFRS 15. This is being considered as part of the wider IFRS 15
project.
IFRS 16 ‘Leases’
IFRS 16 was published in January 2016 and will be effective for BT
from 1 April 2019, replacing IAS 17 ‘Leases’. We do not expect to
early-adopt the standard and so transition to IFRS 16 will take place
on 1 April 2019. Results in the 2019/20 financial year will be IFRS
16 compliant, with the first Annual Report and 20-F published in
accordance with IFRS 16 being the 31 March 2020 report.
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.
The group is still in the process of quantifying the implications of this
standard. However, we expect the following indicative impacts:
– There is expected to be an increase in total assets, as leased assets
which are currently accounted for off balance sheet (ie classified
as operating leases under IAS 17) will be recognised on balance
sheet. The biggest asset category impacted for the group is
expected to be land and buildings.
– There is expected to be an increase in debt, as liabilities relating to
existing operating leases are recognised. This is still under review.
The increase in total debt will have an impact on gearing ratios.
– Operating lease expenditure will be reclassified and split between
depreciation and finance costs. Therefore EBITDA will increase.
Future depreciation and finance costs for our historic leases are
also affected by our choice of transition method, which is still
under review.
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171
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 1. Basis of preparation continued
– There may be a corresponding effect on tax balances in relation to
all of the above impacts.
We also made changes in estimates resulting from the reassessment of
the financial position and outlook for the Italian business amounting
to £245m. This is presented within specific items in the year given its
size and one-off nature. See note 8.
Revised presentation of cash pooling arrangements
An IFRIC clarification on IAS 32 ‘Financial Instruments presentation
Offsetting and cash pooling arrangements’ was released in April
2016. This confirmed a requirement to gross up cash and overdraft
balances associated with notional cash pooling arrangements when
there is no intention to settle the period end balance.
As a result we revised the comparative balance sheet at 31 March
2016. The impact is to increase cash and cash equivalents and
short-term loans and other borrowings by £499m at 31 March
2016 and £414m at 31 March 2015.
EE purchase price accounting
IFRS 3 ‘Business Combinations’ allows us to recognise provisional
fair values if the initial accounting for the business combination
is incomplete. In the period ended 31 March 2016, we reported
that the fair vales recognised for our 29 January 2016 acquisition
of EE were provisional. The fair values were to be finalised over a
period not exceeding one year from the acquisition date. During
the year, we’ve finalised our assessment within the measurement
period. This resulted in a revision to previously recognised brand,
customer relationships and prepaid assets. Our reassessment also
resulted in a net decrease in trade and other receivables and an
increase in provisions related to unfavourable contracts. We also
received a £20m refund from the previous owners of EE following
the finalisation of the audit of the completion balance sheet. The net
impact of the adjustments including the deferred tax effect resulted
in an increase in goodwill of £29m as of 31 March 2016 with no
material impact on the income statement. See note 14.
Revision of segment results
From 1 April 2016, the group has been reorganised and the
reporting segments have changed. The group has six customer-
facing lines of business:
– BT Consumer remains a separate segment, renamed Consumer;
– EE’s consumer division is a separate segment;
– 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 Global Services has been renamed Global Services and is
focused on multinational customers;
– 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, remains unchanged.
In addition, EE’s technology team is now the mobile technology unit
of our internal service unit, Technology, Service and Operations.
The comparative results for all six customer facing lines of business in
the segment information note have been revised to be presented on
a consistent basis. See note 4.
Presentation of specific items
Our income statement and segmental analysis separately identify
trading results before specific items. The directors believe
that presentation of our results in this way is relevant to an
understanding of our 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 our trading results. 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, we consider 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.
Prior year revision and re-classifications
Investigation into our Italian business
During the year our investigations into our Italian business have
revealed inappropriate behaviour and improper accounting practices.
The improper practices included a complex set of improper sales,
purchase, factoring and leasing transactions.
The effect of the prior years’ errors on the income statement, balance
sheet and cash flow statements for the prior periods is set out in the
Summary on pages 173 to 176. In total we identified prior period
errors that amounted to a £268m reduction in total equity in our 31
March 2016 balance sheet.
The prior years’ errors have resulted from profits, and therefore equity,
being overstated for a number of years. These errors affected the
Consolidated Group Balance Sheets and Consolidated Group Income
Statements included in the Annual Report and Form 20-F for a
number of years including the years ended 31 March 2016 and
31 March 2015, and in each of the quarterly results announcements
of those years. We have concluded that errors were not material
to these or any other of the group’s previously issued financial
statements.
We have also assessed whether the correction of the cumulative effect
of these errors in the current year would be material to the current
year and concluded that correcting these in the current year would be
material. Therefore we consider it appropriate to correct the errors by
revising the prior years to avoid mis-stating the current year.
172
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Annual Report 2017
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BT Group plc
173
Notes to the consolidated financial statements continued 1. Basis of preparation continued
Summary of adjustments
The following tables reconcile the 31 March 2016 and 31 March
2015 financial years from previously published to the revised
position reflecting the three prior year revisions. All subsequent
comparative information has been revised accordingly.
Group income statement
For the year ended
31 March 2016
As publisheda
£m
Revenue
Operating costs
Operating profit
Profit before tax
Profit for the period
Earnings per share – basic
Earnings per share – diluted
19,042
(15,307)
3,735
3,029
2,588
29.9p
29.6p
Italian
business
adjustment
£m
(30)
(92)
(122)
(122)
(122)
(1.4)p
(1.4)p
For the year ended
31 March 2015
Revenue
Operating costs
Operating profit
Profit before tax
Profit for the period
Earnings per share – basic
Earnings per share – diluted
As publisheda
£m
Italian
business
adjustment
£m
17,979
(14,499)
3,480
2,645
2,135
26.5p
26.1p
(11)
(67)
(78)
(78)
(78)
(1.0)p
(1.0)p
a After specific items, which are defined on page 252.
Revised
£m
19, 012
(15,399)
3,613
2,907
2,466
28.5p
28.2p
Revised
£m
17,968
(14,566)
3,402
2,567
2,057
25.5p
25.1p
172
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
173
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
1. Basis of preparation continued
Group balance sheet
As at 31 March 2016
Non-current assets
Intangible assets
Property, plant and equipment
Trade and other receivables
Other non-current assets
Current assets
Trade and other receivables
Cash and cash equivalents
Other current assets
Current liabilities
Loans and other borrowings
Trade and other payables
Other current borrowings
Total assets less current liabilities
Non-current liabilities
Loans and other borrowings
Retirement benefit obligations
Other non-current liabilities
Equity
Ordinary shares
Retained loss
Other components of equity
Total equity
As published
£m
Italian
business
adjustment
£m
Cash pooling
adjustment
£m
EE purchase
price accounting
adjustment
£m
Revised
£m
15,436
16,010
233
2,779
34,458
4,063
497
3,574
8,134
3,237
7,289
490
11,016
31,576
11,032
6,382
3,782
21,196
499
(167)
10,048
10,380
31,576
–
(39)
(15)
–
(54)
(91)
–
–
(91)
–
129
–
129
(274)
(7)
–
1
(6)
–
(263)
(5)
(268)
(274)
–
–
–
–
–
–
499
–
499
499
–
–
499
–
–
–
–
–
–
–
–
–
–
14
–
–
–
14
6
–
–
6
–
–
7
7
13
–
–
13
13
–
–
–
–
13
15,450
15,971
218
2,779
34,418
3,978
996
3,574
8,548
3,736
7,418
497
11,651
31,315
11,025
6,382
3,796
21,203
499
(430)
10,043
10,112
31,315
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175
Notes to the consolidated financial statements continued
1. Basis of preparation continued
Group balance sheet
As at 31 March 2015
Non-current assets
Intangible assets
Property, plant and equipment
Trade and other receivables
Other non-current assets
Current assets
Trade and other receivables
Cash and cash equivalents
Other current assets
Current liabilities
Loans and other borrowings
Trade and other payables
Other current borrowings
Total assets less current liabilities
Non-current liabilities
Loans and other borrowings
Retirement benefit obligations
Other non-current liabilities
Equity
Ordinary shares
Retained loss
Other components of equity
Total equity
As published
£m
Italian
business
adjustment
£m
Cash pooling
adjustment
£m
Revised
£m
3,170
13,505
184
2,861
19,720
3,140
434
3,897
7,471
1,900
5,276
532
7,708
–
(7)
(5)
–
(12)
(47)
–
–
(47)
–
72
–
72
19,483
(131)
7,868
7,583
3,224
18,675
419
(1,982)
2,371
808
19,483
(6)
–
2
(4)
–
(142)
15
(127)
(131)
–
–
–
–
–
–
414
–
414
414
–
–
414
–
–
–
–
–
–
–
–
–
–
3,170
13,498
179
2,861
19,708
3,093
848
3,897
7,838
2,314
5,348
532
8,194
19,352
7,862
7,583
3,226
18,671
419
(2,124)
2,386
681
19,352
174
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175
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
1. Basis of preparation continued
Group cash flow statement
For the year ended 31 March
Net cash flow from operating activities
Net cash flow from investing activities
Net cash flow from financing activities
Net increase in cash and cash equivalents
Opening cash and cash equivalents
Effect of exchange rate changes
Closing cash and cash equivalents
As published
£m
Italian
business
adjustment
£m
5,179
(5,145)
42
76
407
(24)
459
(28)
28
–
–
–
–
–
2016
Revised
£m
5,151
(5,117)
42
76
407
(24)
459
As published
£m
Italian
business
adjustment
£m
4,796
(4,064)
(1,028)
(296)
684
19
407
(8)
8
–
–
–
–
–
2015
Revised
£m
4,788
(4,056)
(1,028)
(296)
684
19
407
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 our 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 and Risk Committee. The
areas involving a higher degree of judgement or complexity are
described in the applicable notes to the financial statements.
Critical accounting estimates and key judgements can be identified
throughout the notes by the following symbol.
We have the following critical accounting estimates and key
judgements:
– Revenue from multiple element arrangements, see note 4
– Subscriber acquisition and retention costs, see note 5
– Current and deferred income tax, see note 9
– Goodwill, see note 12
– Useful lives for property, plant and equipment and software, see
note 13
– Government grants relating to Broadband Delivery UK (BDUK)
contracts, see note 13
– Business combinations, see note 14
– Long-term customer contracts, see note 17
– Providing for doubtful debts, see note 17
– Provisions and contingent liabilities, see note 19
– Pension obligations, see note 20
3. Significant accounting policies
The significant accounting policies applied in the preparation of our
consolidated financial statements are set out below. These policies
have been consistently applied to all the years presented, unless
otherwise stated.
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.
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.
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Notes to the consolidated financial statements continued
3. Significant accounting policies continued
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
depends on the analysis of the facts and circumstances surrounding
these transactions.
Where we act as an agent in a transaction, we recognise revenue net
of directly attributable costs.
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.
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 our
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 our network.
Revenues from telephone service and internet access subscription
fees as well as those from 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
more 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.
Multiple element arrangements and bundles
Revenue from multiple element arrangements and bundles is
described in note 4.
Operating and reportable segments
Our operating segments are reported based on financial information
provided to the Operating Committee, as detailed on page 14,
which is the key management committee and represents the ‘chief
operating decision maker’.
Our organisational structure reflects the different customer groups
to which we provide communications products and services via our
customer-facing lines of business: Consumer, EE, Business and Public
Sector, Global Services, Wholesale and Ventures and Openreach.
The customer-facing lines of business are supported by an internal
service unit: Technology, Service & Operations (TSO).
The customer-facing lines of business are our reportable segments
and generate substantially all of our revenue. We aggregate the
remaining operations and include within the ‘Other’ category to
reconcile to the consolidated results of the group. The ‘Other’
category includes TSO and our centralised functions including
procurement 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 252.
The costs incurred by TSO are recharged to the customer-facing lines
of business to reflect the services it provides to them. Depreciation
and amortisation incurred by 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 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. 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.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 3. Significant accounting policies continued
The estimated useful lives assigned to principal categories of assets
are as follows:
Land and buildings
– Freehold buildings
– Short-term leasehold improvements
– Leasehold land and buildings
14 to 50 years
Shorter of 10 years or
lease term
Unexpired portion of lease or
40 years, whichever is the shorter
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.
Network infrastructure
Transmission equipment
– Duct
– Cable
– Fibre
Exchange equipment
Other network equipment
The comparative results for all six customer facing lines of business
have been revised to reflect the 1 April 2016 reorganisation of the
reporting segments, see note 1.
Other assets
– Motor vehicles
– Computers and office equipment
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
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 net 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.
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 note 13.
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 Cash Generating
Units (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.
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.
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Notes to the consolidated financial statements continued
3. Significant accounting policies continued
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 or where our usage can extend beyond
the licence period, over the period we expect to benefit from the
use of the licences, which is typically 20 years. 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 32.
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, this is generally 12 months. 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 below.
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 either the first in first out
(FIFO) cost or average 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.
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 costs to dispose.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 3. Significant accounting policies continued
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. Market-
based performance criteria and non-vesting conditions (for example,
the requirement for employees to make contributions to the share
purchase programme) are reflected in this measurement of fair
value. The fair value determined at the grant date is recognised as
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 more 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.
No adjustment is made to total equity for awards that lapse or are
forfeited after the vesting date.
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.
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Notes to the consolidated financial statements continued 3. Significant accounting policies continued
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 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.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 4. Segment information
The definition of our operating and reportable segments is provided on page 177.
What has changed in our segment information?
From 1 April 2016, the group has been reorganised and the reporting segments have been changed. This was in addition to the revision
disclosed in note 1 for our Italian business. The comparative results for 2015/16 and 2014/15 for all six customer facing lines of business
have been revised and presented on a consistent basis. The impact on line of business results in 2015/16 was to increase revenue, EBITDA
and operating profit in Consumer by £10m, £18m and £17m (2014/15: £8m, £13m and £13m), to reduce revenue, EBITDA and
operating profit in EE by £204m, £88m and £58m (2014/15: £nil, £nil and £nil), to increase revenue, EBITDA and operating profit in
Business and Public Sector by £1,442m, £338m and £252m (2014/15: £1,402m, £339m and £284m), to reduce revenue, EBITDA and
operating profit in Global Services by £1,427m, £569m and £473m (2014/15: £1,532m, £582m and £507m), to increase revenue,
EBITDA and operating profit in Wholesale and Ventures by £162m, £213m and £172m (2014/15: £124m, £185m and £164m), to
reduce EBITDA and operating profit in Openreach by £5m (2014/15: £3m) and to reduce revenue, EBITDA and operating profit in Other by
£13m, £28m and £27m (2014/15: £13m, £30m and £29m). Intra group revenues were decreased by £342m in 2015/16 (2014/15:
£295m).
We have set out below information regarding the results of each reportable segment.
Segment revenue and profit
Year ended 31 March 2017
Segment revenue
Internal revenue
Revenue from external customersa
EBITDAb
Depreciation and amortisation
Operating profit (loss)a
Specific items (note 8)
Consumer
£m
EE
£m
4,934
(63)
4,871
1,012
(209)
803
5,090
(37)
5,053
1,156
(780)
376
Business
and Public
Sector
£m
4,758
(122)
4,636
1,528
(352)
1,176
Global
Services
£m
Wholesale
and Ventures
£m
Openreach
£m
5,479
–
5,479
495
(439)
56
2,109
(138)
1,971
834
(306)
528
5,098
(3,036)
2,062
2,633
(1,369)
1,264
Operating profit
Net finance expensec
Share of post tax loss of associates and joint ventures
Profit before tax
Year ended 31 March 2016
Segment revenue
Internal revenue
Revenue from external customersa
EBITDAb
Depreciation and amortisation
Operating profit (loss)a
Specific items (note 8)
Consumer
£m
4,608
(65)
4,543
1,055
(207)
848
Business
and Public
Sector
£m
d
EE
£m
Global
Services
£m
Wholesale
and Ventures
£m
Openreach
£m
841
(7)
834
173
(146)
27
4,294
(99)
4,195
1,414
(284)
1,130
5,074
–
5,074
479
(422)
57
2,274
(94)
2,180
755
(253)
502
5,100
(3,058)
2,042
2,659
(1,301)
1,358
Operating profit
Net finance expensec
Share of post tax profit of associates and joint ventures
Profit before tax
a Before specific items.
b EBITDA is stated before specific items and is the group’s profitability measure for segments.
c Net finance expense includes specific item expense of £210m (2015/16: £229m, 2014/15: £299m). See note 8.
d EE reflects results for the period from acquisition on 29 January to 31 March 2016.
Other
£m
10
–
10
(13)
(55)
(68)
Other
£m
11
–
11
(76)
(18)
(94)
Total
£m
27,478
(3,396)
24,082
7,645
(3,510)
4,135
(968)
3,167
(804)
(9)
2,354
Total
£m
22,202
(3,323)
18,879
6,459
(2,631)
3,828
(215)
3,613
(712)
6
2,907
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Annual Report 2017
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183
Notes to the consolidated financial statements continued
4. Segment information continued
Year ended 31 March 2015
Segment revenue
Internal revenue
Revenue from external customersa
EBITDAb
Depreciation and amortisation
Operating profit (loss)a
Specific items (note 8)
Consumer
£m
4,293
(62)
4,231
1,044
(218)
826
Business
and Public
Sector
£m
4,247
(99)
4,148
1,380
(235)
1,145
Global
Services
£m
5,218
–
5,218
465
(444)
21
Wholesale
and Ventures
£m
2,361
(80)
2,281
746
(245)
501
Openreach
£m
5,011
(3,064)
1,947
2,597
(1,348)
1,249
Other
£m
15
–
15
(39)
(48)
(87)
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
a Before specific items.
b EBITDA is stated before specific items and is the group’s profitability measure for segments.
c Net finance expense includes specific item finance expense of £210m (2015/16: £229m, 2014/15: £299m). See note 8.
Total
£m
21,145
(3,305)
17,840
6,193
(2,538)
3,655
(253)
3,402
(859)
(1)
25
2,567
What are our internal revenue and costs?
Most of our 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 TSO
which is included within the ‘Other’ segment. Wholesale and Ventures internal revenue arises from EE for mobile ethernet access and TSO
for transmission planning services. Internal revenue in Business and Public Sector relates primarily to the use of BT Ireland’s network by other
lines of business. Internal revenue arising in Consumer relates primarily to employee broadband and wi-fi services, while internal revenue in
Global Services relates primarily to conferencing services.
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 tables below show internal revenue and costs recorded by each line of line of business.
Year ended 31 March 2017
Internal revenue recorded by
Consumer
EE
Business and Public Sector
Global Services
Wholesale and Ventures
Openreach
Total
Consumer
£m
EE
£m
Internal cost recorded by
Business
and Public
Sector
£m
Global
Services
£m
Wholesale
and Ventures
£m
Openreach
£m
Other
£m
Total
£m
–
–
60
–
–
910
970
–
–
3
–
–
–
3
21
–
–
–
2
236
259
20
–
39
–
23
158
240
4
37
20
–
–
260
321
–
–
–
–
39
–
39
18
–
–
–
74
1,472
1,564
63
37
122
–
138
3,036
3,396
182
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183
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
4. Segment information continued
Year ended 31 March 2016
Internal revenue recorded by
Consumer
EEa
Business and Public Sector
Global Services
Wholesale and Ventures
Openreach
Total
Consumer
£m
–
–
60
–
–
905
965
a
EE
£m
–
–
1
–
12
–
13
Internal cost recorded by
Business
and Public
Sector
£m
Global
Services
£m
Wholesale
and Ventures
£m
Openreach
£m
Other
£m
Total
£m
20
–
–
–
5
262
287
23
–
18
–
22
173
236
4
7
19
–
–
264
294
–
–
1
–
55
–
56
18
–
–
–
–
1,454
1,472
65
7
99
–
94
3,058
3,323
a EE reflects results for the period from acquisition on 29 January 2016 to 31 March 2016.
Year ended 31 March 2015
Internal revenue recorded by
Consumer
Business and Public Sector
Global Services
Wholesale and Ventures
Openreach
Total
Revenue by products and services
Internal cost recorded by
Consumer
£m
Business
and Public
Sector
£m
Global
Services
£m
Wholesale
and Ventures
£m
Openreach
£m
Other
£m
Total
£m
–
61
–
1
939
1,001
20
–
–
4
282
306
20
18
–
28
187
253
3
19
–
–
266
288
–
1
–
46
–
47
19
–
–
1
1,390
1,410
62
99
–
80
3,064
3,305
What critical accounting judgements do we make when we have revenue from multiple element arrangements?
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. Total contract consideration is allocated between the separate elements
based on their fair value. We apply judgement in both identifying separate elements and allocating consideration between them.
Sales of bundled offers in our mobile businesses 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.
For offers that cannot be separated into identifiable elements, revenues are recognised in full over the life of the contract. The main example
is connection to a service where this does not represent a separately identifiable transaction from the subscription.
Year ended 31 March
ICT and managed networks
Broadband and TV
Mobile
Calls, lines and connections
Transit
Other products and services
Revenuea
a Before specific items.
2017
£m
2016
£m
2015
£m
5,927
4,477
6,358
5,069
404
1,847
6,193
3,535
1,326
5,920
419
1,486
6,493
3,112
314
5,881
555
1,485
24,082
18,879
17,840
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185
Notes to the consolidated financial statements continued
4. Segment information continued
Capital expenditure
Year ended 31 March 2017
Intangible assets
Property, plant and equipment
Capital expenditurea
Year ended 31 March 2016
Intangible assets
Property, plant and equipment
Capital expenditurea
Year ended 31 March 2015
Intangible assets
Property, plant and equipment
Capital expenditurea
Consumer
£m
92
145
237
EE
£m
133
483
616
Consumer
£m
88
119
207
b
EE
£m
29
67
96
Consumer
£m
85
122
207
Business
and Public
Sector
£m
64
211
275
Business
and Public
Sector
£m
36
117
153
Business
and Public
Sector
£m
35
125
160
Global
Services
£m
Wholesale
and Ventures
£m
Openreach
£m
126
235
361
77
149
226
74
1,499
1,573
Global
Services
£m
Wholesale
and Ventures
£m
Openreach
£m
62
293
355
70
139
209
62
1,385
1,447
Global
Services
£m
Wholesale
and Ventures
£m
Openreach
£m
209
197
406
84
210
294
55
1,027
1,082
Other
£m
55
111
166
Other
£m
65
90
155
Other
£m
93
75
168
Total
£m
621
2,833
3,454
Total
£m
412
2,210
2,622
Total
£m
561
1,756
2,317
a Net of government grants.
b EE reflects results for the period from acquisition on 29 January to 31 March 2016.
How do we determine our geographic information?
The UK is our country of domicile and we generate the majority of our revenue from external customers in the UK. The geographic analysis
of revenue is based on 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, is 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.
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 from 2015 to 2016 is primarily due to the acquisition of EE.
2017
£m
2016
£m
2015
£m
19,421
2,841
1,148
672
14,814
2,442
1,011
612
13,827
2,383
1,049
581
24,082
18,879
17,840
2017
£m
2016
£m
2015
£m
28,810
2,535
424
149
28,575
2,349
548
191
13,977
2,172
555
169
31,918
31,663
16,873
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185
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
5. 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 costsb
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 assetsc
Total operating costs before specific items
Specific items
Total operating costs
Operating costs before specific items include the following:
Leaver costsd
Research and development expendituree
Operating lease charges
Foreign currency gains
Government grants
Notes
2017
£m
a
2016
£m
2015
£m
20
22
13
13
12
8
4,134
477
521
57
5,189
(813)
4,376
399
4,775
2,653
1,202
983
714
6,297
(187)
2,382
10
1,118
3,689
398
494
58
4,639
(720)
3,919
304
4,223
2,183
1,024
644
544
4,017
(215)
2,000
10
621
3,574
440
467
70
4,551
(691)
3,860
324
4,184
2,144
968
605
330
3,640
(224)
1,997
11
530
19,947
15,051
14,185
948
348
381
20,895
15,399
14,566
86
638
692
(12)
(5)
109
574
441
(1)
(6)
8
580
388
(1)
(7)
a Certain cost items have been represented following the acquisition of EE and the reorganisation of the reporting segments as set out in note 1.
b Net of capitalised indirect labour costs of £463m (2015/16: £430m, 2014/15: £451m).
c Excludes £62m (2015/16: £nil, 2014/15: £nil) of amortisation presented as specific items which relate to a write off of software costs as a result of the integration of EE. Refer to note 8.
d Leaver costs are included within wages and salaries and social security costs, except for leaver costs of £37m (2015/16: £nil, 2014/15: £237m) associated with restructuring in prior years and leaver
costs associated with the EE Integration costs in 2017, which have been recorded as specific items.
e Research and development expenditure reported in the income statement, includes amortisation of £577m (2015/16: £501m, 2014/15: £493m) in respect of internally developed computer software
and operating expenses of £61m (2015/16: £73m, 2014/15: £87m). In addition, the group capitalised software development costs of £457m (2015/16: £399m, 2014/15: £421m).
Why is the treatment of our subscriber and retention costs a critical judgement?
Subscriber acquisition and retention costs are recognised as an expense within other operating costs for the period in which they are
incurred. If 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. In some cases, contractual clauses with retailers provide for profit-sharing
based on the recognised and paid revenue. In these cases we recognise an expense when the revenue is earned from the customer and a
corresponding liability to pay that retailer. In some cases we need to exercise judgement in assessing whether we have an upfront obligation
based on the contractual terms.
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187
Notes to the consolidated financial statements continued
5. Operating costs continued
Who are our key management personnel and how are they compensated?
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
2017
£m
10.5
1.3
5.6
–
17.4
2016
£m
2015
£m
9.4
1.1
5.5
0.6
9.7
1.1
5.7
0.5
16.6
17.0
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 page 122), which forms part of these
consolidated financial statements.
6. Employees
Number of employees in the groupa
UK
Non-UK
Total employees
Number of employees in the groupa
Consumer
EE
Business and Public Sector
Global Services
Wholesale and Ventures
Openreach
Other
Total employees
Year end
000
82.8
23.6
2017
Average
000
82.2
22.8
Year end
000
81.4
21.1
106.4
105.0
102.5
Year end
000
2017
Average
000
Year end
000
8.7
9.2
10.3
17.5
3.8
30.2
26.7
7.7
9.1
10.2
17.4
3.7
30.9
26.0
6.7
9.0
10.3
16.8
3.7
31.5
24.5
106.4
105.0
102.5
2016
Average
000
71.8
19.2
91.0
2016b
Average
000
6.3
1.3
9.3
16.5
3.8
32.1
21.7
91.0
Year end
000
70.9
17.6
88.5
Year end
000
6.2
–
9.2
16.3
3.9
32.7
20.2
88.5
2015
Average
000
72.2
16.5
88.7
2015b
Average
000
6.0
–
9.9
17.2
4.2
32.4
19.0
88.7
a These reflect the full-time equivalent of full and part-time employees.
b Prior year numbers have been revised to reflect the reorganisation of our reporting segments as set out in note 1.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
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
2017
£000
2016
£000
2015
£000
4,316
5,675
9,991
3,915
5,084
8,999
2,925
4,809
7,734
1,865
2,210
1,639
366
111
200
2,332
3,009
412
156
1,611
1,665
3,844
350
401
3,199
570
4,520
14,865
15,053
13,893
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.
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 include fees payable to PricewaterhouseCoopers LLP as Reporting Accountants in 2015/16 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 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 2017 PricewaterhouseCoopers LLP received total
fees from the BT Pension Scheme of £2.1m (2015/16: £1.7m, 2014/15: £2.5m) in respect of the following services:
Year ended 31 March
Audit of financial statements of associates
Audit-related assurance services
Taxation compliance services
Taxation advisory services
Other non-audit services
Total services
2017
£000
2016
£000
2015
£000
251
–
210
493
1,168
2,122
213
10
198
681
603
1,705
265
10
374
227
1,605
2,481
188
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
189
Notes to the consolidated financial statements continued
8. Specific items
Year ended 31 March
Revenue
Italian business investigation
Regulatory matters
EE fair value adjustment
Operating costs
Regulatory matters
Italian business investigation
EE acquisition and integration costs
Out of period irrecoverable VAT
Profit on disposal of businesses
Property rationalisation costs
Restructuring charges
Profit on disposal of property
Operating loss
Net finance expense
Interest expense on retirement benefit obligation
EE related finance cost
Interest on out of period irrecoverable VAT
Share of results of associates and joint ventures
Profit 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
2017
£m
2016
£m
2015
£m
22
(2)
–
20
481
238
215
30
(16)
–
–
–
948
968
209
–
1
210
–
1,178
(154)
(63)
(217)
961
–
(203)
70
(133)
203
–
116
–
–
29
–
–
348
215
221
8
–
229
–
444
(70)
(96)
(166)
278
–
(128)
–
(128)
75
–
19
–
(6)
45
315
(67)
381
253
292
7
–
299
(25)
527
(121)
–
(121)
406
Italian business investigation
Our investigation into our Italian business revealed prior-period errors from inappropriate behaviour and improper accounting practices as
set out in note 1. During the year, we also reviewed the carrying value of the assets and liabilities on the balance sheet of our Italian business
including reassessing the recoverability of trade and other receivables and reconsidering other exposures, principally sales taxes. We took
into account any changes in facts or circumstances since 31 March 2016 in determining whether there was a need to change an estimate
and whether additional exposures had arisen in the current year. This exercise required a level of judgement, in many cases taking a more
cautious view based on our current understanding of circumstances in the business. We have set out in note 17 details of estimates we make
in accounting for the recoverability of trade and other receivables. We have made estimates for the potential other exposures, principally
sales taxes, which represent the group’s best estimate of the amount that may be required to settle the obligation and are included within
other payables as set out in note 18. The total impact of £245m is presented within specific items given the size and one-off nature. We
have also incurred fees in relation to the investigation of £15m which have been included in specific items.
Regulatory matters
We’ve recognised £479m (2015/16: £nil, 2014/15: revenue of £53m) of net costs in relation to regulatory matters. These are made up of
the following:
Deemed Consent
A charge of £342m was recognised (2015/16: £nil, 2014/15: £nil) in relation to Ofcom’s March 2017 findings of its investigation
into our historical practices on Deemed Consent by Openreach. A fine of £42m has been imposed and we’ve also agreed to compensate
Communication Providers. The precise amount of these compensation payments will be determined from discussion with the affected parties
and is currently estimated at £300m.
188
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189
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
8. Specific items continued
Ladder pricing agreements
In 2016/17 we recognised revenue and costs of £8m (2015/16: £203m and in 2014/15: £128m revenue) being the prior year impacts
of ladder pricing agreements with the other UK mobile operators. This was following a Supreme Court judgment in July 2014 which
overturned a Court of Appeal judgment made in July 2012. The Court of Appeal’s ruling had disallowed our ladder pricing policy relating to
0800, 0845 and 0870 calls from mobile phones terminating on our network.
Other regulatory matters
We’ve also re-assessed our regulatory risk provision in light of recent regulatory decisions by Ofcom and by the Competition Appeal Tribunal
(CAT). As a result we’ve increased our net provision by £137m (2015/16: £nil) for the year.
In 2014/15 the CAT handed down judgment on various appeals brought against a December 2012 Ofcom determination on the pricing of
certain Ethernet products. 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.
EE fair value adjustment
In 2015/16 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 with no cash impact. 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.
EE acquisition and integration costs
We incurred £215m (2015/16: £116m, 2014/15: £19m) of acquisition and integration related costs for EE. This includes a £62m
(2015/16: £nil, 2014/15: £nil) amortisation charge relating to the write-off of IT assets as we integrate the EE and BT IT infrastructure.
Integration costs include EE related restructuring and leaver costs in year.
Out of period irrecoverable VAT
We recognised a £30m charge (2015/16: £nil, 2014/15: £nil) for out of period irrecoverable VAT and a further £1m (2015/16: £nil,
2014/15: £nil) related interest charge.
Profit on disposal of businesses
During the year we disposed of non-core businesses with a gain on disposal of £16m (2015/16: £nil, 2014/15: £6m).
Property rationalisation costs
In 2015/16 we recognised a £29m charge (2014/15: £45m) relating to the rationalisation of the group’s property portfolio.
Restructuring charges
There were no restructuring charges for the current year or in 2015/16. The components of the restructuring charges recognised in
2014/15 were: people and property charges of £294m, principally comprising leaver costs of £237m, and property exit costs and
networks, products and procurement channels rationalisation charges of £21m.
Profit on disposal of property
In 2014/15 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 obligation
See note 20 for more details.
Profit 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.
190
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Annual Report 2017
Annual Report 2017
BT Group plc
PB
Notes to the consolidated financial statements continued 9. Taxation
Current and deferred income tax
What critical judgements and estimates do we make in accounting for taxation?
We pay tax in accordance with the laws of the countries where we do business. In some areas these laws aren’t clear, and it can take many
years to agree an outcome with a tax authority or through litigation. We estimate our tax on country-by-country and issue-by-issue
bases. Our key uncertainties are whether EE’s tax losses will be available to us, whether our intra-group trading model will be accepted by a
particular tax authority and whether intra-group payments are subject to withholding taxes. We provide for the most likely outcome where
an outflow is probable, but the agreed amount can differ materially from our estimates. Approximately 80% by value of the provisions are
under active tax authority examination and are therefore likely to be re-estimated or resolved in the coming 12 months. £281m (2015/16:
£278m) is included in current tax liabilities in relation to these uncertainties.
Under a downside case an additional amount of £372m could be required, of which £273m would relate to EE losses. This amount is not
provided as we don’t consider this outcome to be probable.
Deciding whether to recognise deferred tax assets is judgemental. We only recognise them when we believe it is probable that they can be
recovered. In making this judgement we consider evidence such as historical financial performance, future financial plans and trends, the
duration of existing customer contracts and whether our intra-group pricing model has been agreed by the relevant tax authority.
The value of the group’s income tax assets and liabilities is disclosed on the Group balance sheet on page 167. The 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 below.
Analysis of our taxation expense for the year
Year ended 31 March
United Kingdom
Corporation tax at 20% (2015/16: 20%, 2014/15: 21%)
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 17% (2015/16: 19%, 2014/15: 20%)
Total deferred taxation credit
Total taxation expense
2017
£m
2016
£m
2015
£m
(555)
33
(109)
–
(631)
96
26
63
185
(446)
(617)
59
(80)
29
(655)
35
(60)
18
(609)
(662)
70
2
96
168
(441)
170
(18)
–
152
(510)
PB
BT Group plc
Annual Report 2017
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BT Group plc
191
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
9. Taxation continued
Factors affecting our 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% (2015/16: 20%, 2014/15: 21%)
Effects of:
(Higher) lower taxes on non-UK profitsa
Net permanent differences between tax and accountingb
Adjustments in respect of earlier yearsc
Non-UK losses used against current year profitsa
Non-UK losses not recogniseda,d
Other deferred tax assets not recognised
Lower taxes on profit on disposal of business
Re-measurement of deferred tax balances
Other non-recurring items
Total taxation expense
Exclude specific items (note 8)
2017
£m
2016
£m
2015
£m
2,354
2,907
2,567
(471)
(581)
(539)
(29)
(183)
59
120
(8)
–
3
63
–
(446)
(217)
4
(12)
90
9
(34)
6
–
96
(19)
(4)
(4)
35
28
(50)
9
7
–
8
(441)
(166)
(510)
(121)
Total taxation expense before specific items
a Earlier years re-presented to reflect adjustments for BT Italia.
b 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.
c 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.
d Reflects losses made in countries where it has not been considered appropriate to recognise a deferred tax asset, as future taxable profits are not probable.
(631)
(607)
(663)
Tax components of other comprehensive income
Year ended 31 March
Tax on items that will not be reclassified to the income statement
Pension remeasurements
Tax on items that have been or 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 £110m (2015/16: £217m, 2014/15: £220m) relating to cash contributions made to reduce retirement benefit obligations.
2017
Tax credit
(expense)
£m
2016
Tax credit
(expense)
£m
2015
Tax credit
(expense)
£m
416
(240)
208
21
(131)
139
445
122
323
445
38
(72)
39
(235)
231
(466)
(235)
13
(28)
52
245
268
(23)
245
192
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Annual Report 2017
Annual Report 2017
BT Group plc
193
Notes to the consolidated financial statements continued
9. Taxation continued
Tax (expense) credit recognised directly in equity
Year ended 31 March
Tax (expense) credit relating to share-based payments
Deferred taxation
At 1 April 2015
(Credit) expense recognised in income statement
Expense (credit) recognised in other comprehensive income
Expense recognised in equity
Acquisition
At 31 March 2016
Non-current
Deferred tax asset
Deferred tax liability
At 1 April 2016
(Credit) expense recognised in the income statement
(Credit) expense recognised in other comprehensive income
Expense recognised in equity
Exchange differences
At 31 March 2017
Non-current
Deferred tax asset
Deferred tax liability
At 31 March 2017
2015
£m
54
Total
£m
(611)
(168)
466
30
298
15
2017
£m
(6)
2016
£m
12
Fixed asset
temporary
differences
£m
Retirement
benefit
a
obligations
£m
Share-
based
payments
£m
Tax
losses
£m
Other
£m
Jurisdictional
offset
£m
1,041
(63)
(4)
–
644
(1,483)
(107)
457
–
(16)
1,618
(1,149)
(81)
1,699
1,618
(181)
(5)
–
–
(1,149)
–
(1,149)
(82)
(306)
–
–
1,432
(1,537)
(117)
1,549
(1,537)
–
1,432
(1,537)
(86)
2
–
30
–
(54)
(54)
–
(54)
14
–
23
–
(17)
(17)
–
(17)
(44)
34
(2)
–
(313)
(325)
(325)
–
(325)
65
(3)
–
(7)
(270)
(270)
–
(270)
(39)
(34)
15
–
(17)
(75)
–
–
–
–
–
–
(102)
27
464
(464)
(1,247)
1,262
(75)
(1)
(9)
–
–
(85)
(96)
11
(85)
–
–
–
–
–
–
15
(185)
(323)
23
(7)
(477)
320
(320)
(1,717)
1,240
–
(477)
a Includes a deferred tax asset of £2m (2015/16: £2m) arising on contributions payable to defined contribution pension plans.
The majority of the deferred tax assets and liabilities noted above are anticipated to be realised after more than 12 months.
We’ve recognised a deferred tax asset at 31 March 2017 of £172m 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 £273m 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 our pension schemes which is disclosed within deferred
tax assets.
What factors affect our future tax charges?
The rate of UK corporation tax changed from 20% to 19% on 1 April 2017 and will change to 17% 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 2017 have
been calculated at the rate at which the relevant balance is expected to be recovered or settled. This reduction in rate has been recognised as a
deferred tax credit specific item of £63m in the income statement (note 8) and as a deferred tax expense in reserves.
192
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BT Group plc
193
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
9. Taxation continued
What are our unrecognised tax losses and other temporary differences?
At 31 March 2017 we had operating losses and other temporary differences carried forward in respect of which no deferred tax assets were
recognised amounting to £4.5bn (2015/16: £4.1bn). Our 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 2017
Restricted losses
Europe
Americas
Total restricted losses
Unrestricted operating losses
Other temporary differences
Total
£m
Expiry
2018–2026
2021–2036
19
220
239
3,961
No expiry
173
No expiry
4,373
At 31 March 2017 we had UK capital losses carried forward in respect of which no deferred tax assets were recognised amounting to
£17.0bn (2015/16: £17.0bn). These losses have no expiry date, but we consider the future utilisation of these losses to be remote.
At 31 March 2017 the undistributed earnings of non-UK subsidiaries were £3.5bn (2015/16: £3.3bn). 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. Under current tax rules, tax of £26.2m (2015/16: £23.1m) would arise if these earnings
were to be repatriated to the UK. On 29 March 2017, the UK Government notified the EU of its intention to withdraw membership from the
EU. Depending on the outcome of negotiations we could cease to benefit from the EU Parent Subsidiary directive on dividends paid by our EU
subsidiaries. In this event, additional tax of up to £17.7m could arise if the undistributed earnings of EU subsidiaries of £619m were to be
repatriated to the UK.
10. Earnings per share
How are earnings per share calculated?
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 27m shares (2015/16: 15m shares, 2014/15: 13m 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
2017
2016
2015
9,938
27
29
9,994
19.2p
19.1p
8,619
58
37
8,714
28.5p
28.2p
8,056
80
55
8,191
25.5p
25.1p
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 £1,908m (2015/16: £2,466m,
2014/15: £2,057m) and profit after tax attributable to non-controlling interests was £1m (2015/16: £7m, 2014/15: £nil). Profit
attributable to non-controlling interests is not presented separately in the financial statements as it is not material.
194
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
195
Notes to the consolidated financial statements continued
11. Dividends
What dividends have been paid and proposed for the year?
The Board recommends that a final dividend in respect of the year ended 31 March 2017 of 10.55p per share will be paid to shareholders
on 4 September 2017, taking the full year proposed dividend in respect of 2016/17 to 15.4p (2015/16: 14.0p, 2014/15: 12.4p)
which amounts to approximately £1,532m (2015/16: £1,324m, 2014/15: £1,028m). This final dividend is subject to approval by
shareholders at the Annual General Meeting and therefore the liability of approximately £1,050m (2015/16: £954m, 2014/15: £712m)
has not been included in these financial statements. The proposed dividend will be payable to all shareholders on the Register of Members
on 11 August 2017 .
The value of £1,436m (2015/16: £1,078m, 2014/15: £925m) for the final and interim dividends is disclosed in our 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.
Year ended 31 March
Final dividend in respect of the prior year
Interim dividend in respect of the current year
12. Intangible assets
pence
per share
9.60
4.85
2017
£m
954
482
pence
per share
8.50
4.40
2016
£m
710
368
pence
per share
7.50
3.90
14.45
1,436
12.90
1,078
11.40
2015
£m
609
316
925
Cost
At 1 April 2015
Acquisitionsa
Additions
Disposals and adjustments
Transfers
Exchange differences
At 31 March 2016
Additions
Acquisitions
Disposals and adjustments
Transfers
Exchange differences
At 31 March 2017
Accumulated amortisation
At 1 April 2015
Charge for the year
Disposals and adjustments
Exchange differences
At 31 March 2016
Charge for the yearb
Disposals and adjustments
Exchange differences
At 31 March 2017
Carrying amount
At 31 March 2017
At 31 March 2016
Customer
relationships
and brands
£m
Telecoms
licences
and other
£m
Internally
developed
software
£m
Goodwill
£m
Purchased
software
£m
390
2,524
1
–
–
15
2,930
–
–
–
–
15
3,680
129
331
(63)
(4)
–
4,073
483
–
(131)
(66)
4
1,230
286
80
(27)
4
37
1,610
138
–
2
62
41
Total
£m
7,095
12,395
412
(90)
–
109
19,921
621
5
(152)
(4)
226
2,945
4,363
1,853
20,617
96
27
–
8
131
140
–
9
280
2,401
437
(91)
–
2,747
556
(114)
4
1,092
79
(28)
32
1,175
101
(7)
33
3,925
621
(119)
44
4,471
1,180
(121)
58
3,193
1,302
5,588
1,396
6,459
–
–
–
52
7,907
–
5
(23)
–
145
8,034
399
2,997
–
–
–
5
3,401
–
–
–
–
21
3,422
336
78
–
4
418
383
–
12
813
8,034
7,907
2,609
2,983
2,665
2,799
1,170
1,326
551
435
15,029
15,450
194
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
195
a Relates to the fair value of intangible assets identified on acquisition of EE on 29 January 2016. See note 14.
b Includes a £62m (2015/16: £nil) specific item amortisation charge relating to the write-off of internally developed software as we integrate the EE and BT IT infrastructure.
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
12. Intangible assets 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.
How do we determine our CGUs?
The determination of our CGUs is judgemental. The identification of CGUs involves an assessment of whether the asset or group of assets
generate largely independent cash inflows. This involves consideration of how our core assets are operated and whether these generate
independent revenue streams. Our CGUs are deemed to be Consumer, EE, Business and Public Sector, Global Services and Wholesale and
Ventures which are the same units we report in our segmental reporting.
For impairment purposes goodwill is tested at the lowest level within the entity at which the goodwill is monitored for internal management
purposes, and cannot be larger than our operating segments. We test goodwill at the CGU level.
What other critical estimates and assumptions have we made?
During the year we re-allocated goodwill among our CGUs based on the relative fair value of the business transferred to reflect our new line
of business structure effective as of 1 April 2016. We estimated the relative fair values on a discounted cash flow basis using the three-year
financial plans effective at the time of the re-organisation. The assumptions used were set in the same way as those used in our value in use
calculations as set out below.
Our value in use calculations require estimates in relation to uncertain items, including management’s expectations of future revenue
growth, operating costs, profit margins, operating cash flows, and the discount rate for each CGU.
Future cash flows used in the value in use calculations are based on our latest Board approved three-year financial plans. Expectations about
future growth reflect the expectations of growth in the markets to which the CGU relates. The future cash flows are discounted using a pre-
tax discount rate that reflects current market assessments of the time value of money. The discount rate used in each CGU is adjusted for the
risk specific to the asset, including the countries in which cash flow will be generated, for which the future cash flow estimates have not been
adjusted.
The group is required to test goodwill acquired in a business combination annually for impairment. This was carried out as at 31 March
2017. The carrying value of goodwill and the key assumptions used in performing the annual impairment assessment and sensitivities are
disclosed below.
How have we carried out our goodwill impairment review?
We perform an annual goodwill impairment review, based on our CGUs.
From 1 April 2016, we re-organised our lines of business resulting in the change of the CGUs that have associated goodwill. We’ve now
allocated goodwill to Consumer, EE, Business and Public Sector, Global Services and Wholesale and Ventures. Previously no goodwill was
allocated to Wholesale and Ventures. In addition to this new CGU, to which goodwill has been allocated, there have been changes to the
amount allocated to the other CGUs as a result of the re-organisation.
These CGUs represent 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 these CGUs as follows:
At 31 March 2015
Acquisitions (note 14)
Exchange differences
At 31 March 2016
Re-organisation
Exchange differences
Acquisitions and disposals
At 31 March 2017
Consumer
£m
EE
£m
80
1,103
–
1,183
–
–
–
1,183
–
4,917
–
4,917
(2,149)
–
–
2,768
Business
and Public
Sector
£m
220
439
3
662
1,921
10
(23)
2,570
Global
Services
£m
Wholesale
and Ventures
£m
1,096
–
49
1,145
(709)
135
–
571
–
–
–
–
937
–
5
942
Total
£m
1,396
6,459
52
7,907
–
145
(18)
8,034
How do we calculate the 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. The value in use calculation includes a fourth year
estimate of cash flows 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.
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Notes to the consolidated financial statements continued
12. Intangible assets continued
What discount rate have we used?
The pre-tax discount rates applied to the cash flow forecasts are derived from our 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 pre-tax
discount rate used in performing the value in use calculation in 2016/17 was 8.6% (2015/16: 8.8%). We’ve used the same discount
rate for all CGUs except Global Services where we have used 9.0% reflecting higher risk in some of the countries in which Global Services
operates.
What growth rates have we used?
The perpetuity growth rates are determined based on the forecast market growth rates of the regions in which the CGU operates, and they
reflect an assessment of the long-term growth prospects of that market. The growth rates have been benchmarked against external data for
the relevant markets. None of the growth rates applied exceed the expected long-term average growth rates for those markets or sectors.
The perpetuity growth rate for Global Services was 2.4% (2015/16: 2.3%) and 2.0% (2015/16: 2.0%) for Business and Public Sector,
Consumer and EE and 2.0% (2015/16: nil) for Wholesale and Ventures.
What sensitivities have we applied?
There is significant headroom in Business and Public Sector, Consumer, Wholesale and Ventures and EE. No reasonably possible changes in
the key assumptions would cause the carrying amount of the CGUs to exceed the recoverable amount. For Global Services, the value in use
exceeds the carrying value of the CGU by approximately £594m (2015/16: £6,900m). Any of the following changes in assumptions would
cause the recoverable amount for the CGU to equal its carrying amount:
– reduction in the perpetuity growth rate from the 2.4% assumption applied to a revised assumption of no growth;
– an increase in the discount rate from the 9.0% assumption applied to a revised assumption of 11%; and
– shortfalls in trading performance against forecast resulting in operating cash flows decreasing by 27% each year and in perpetuity.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 13. Property, plant and equipment
What critical estimates have we made for property plant and equipment?
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 support the products and services provided
to our customers.
Our annual depreciation and amortisation charge is sensitive to the estimated service life we allocate to each type of asset. If an asset life
is extended this would reduce the annual depreciation or amortisation charge; reducing a life would increase the charge. Asset lives are
assessed annually and changed when necessary to reflect our current thinking on technological change, network investment plans (including
the group’s fibre rollout programme), prospective economic utilisation and the physical condition of the assets concerned. Changes to the
service lives of assets implemented in the year had no significant impact on our results for the year ended 31 March 2017.
The carrying values of software, property, plant and equipment are disclosed below and in note 12. The useful lives applied to the principal
categories of assets are disclosed on pages 178 and 179.
Cost
At 1 April 2015
Acquisitions
Additionsc
Transfers
Disposals and adjustmentsd
Exchange differences
At 31 March 2016
Additionsc
Transfers
Disposals and adjustmentsd
Exchange differences
At 31 March 2017
Accumulated depreciation
At 1 April 2015
Charge for the year
Disposals and adjustmentsd
Exchange differences
At 31 March 2016
Charge for the year
Disposals and adjustmentsd
Exchange differences
At 31 March 2017
Carrying amount
At 31 March 2017
Engineering stores
Total at 31 March 2017
At 31 March 2016
Engineering stores
Total at 31 March 2016
Land and
a
buildings
£m
Network
a
infrastructure
£m
Assets in
course of
b construction
£m
Other
£m
Total
£m
48,626
2,270
2,213
–
(948)
289
45,179
1,772
78
1,810
(879)
234
1,788
43
67
9
(60)
23
527
357
2,055
(1,841)
8
2
48,194
1,870
1,108
52,450
40
2,393
(1,637)
382
128
(1)
(106)
47
2,672
(2,402)
30
5
2,846
4
(1,758)
483
1,132
98
13
22
(17)
30
1,278
6
14
(45)
49
1,302
49,372
1,938
1,413
54,025
687
53
(17)
27
750
64
(36)
39
817
485
–
485
528
–
528
33,069
1,856
(848)
210
1,446
101
(56)
22
34,287
1,513
2,224
(1,627)
330
104
(104)
41
35,214
1,554
–
–
–
–
–
–
–
–
–
14,158
–
14,158
13,907
–
13,907
384
–
384
357
–
357
1,413
58
1,471
1,108
71
1,179
35,202
2,010
(921)
259
36,550
2,392
(1,767)
410
37,585
16,440
58
16,498
15,900
71
15,971
a The carrying amount of the group’s property, plant and equipment includes an amount of £73m (2015/16: £83m) in respect of assets held under finance leases, comprising land and buildings of £45m
(2015/16: £52m) and network infrastructure of £28m (2015/16: £31m). The depreciation expense on those assets in 2016/17 was £10m (2015/16: £10m), comprising land and buildings of £3m
(2015/16: £4m) and network infrastructure of £7m (2015/16: £6m).
b Other mainly comprises motor vehicles, computers and fixtures and fittings.
c Net of grant deferral of £28m (2015/16: £109m net grant funding).
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 off, reducing cost and accumulated depreciation by £1.1bn (2015/16: £0.7bn).
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Notes to the consolidated financial statements continued
13. Property, plant and equipment continued
At 31 March
The carrying amount of land and buildings, including leasehold improvements, comprised:
Freehold
Leasehold
Total land and buildings
2017
£m
2016
£m
269
216
485
296
232
528
Network infrastructure
Some of our network assets are jointly controlled by EE Limited 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 £591m (2015/16: £519m)
and is recorded within network infrastructure. Included within this is £179m (2015/16: £128m), being the group’s share of assets owned by
its joint operation MBNL.
Within network infrastructure are assets with a net book value of £8.0bn which have useful economic lives of more than 18 years.
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’ve
achieved certain service levels, or delivered the network more efficiently than anticipated, we’ve an obligation to either re-invest or repay
grant funding. Where this is the case, we assess and defer the income with a corresponding increase in capital expenditure.
What estimates and critical judgements have we made in accounting for our BDUK contracts?
Assessing the timing of whether and when we change the estimated take-up assumption is judgemental as it involves considering information
which is not always observable. Our consideration on whether and when to change the base case assumption is dependent on our expectation
of the long term take-up trend.
Our assessment of how much grant income to defer includes consideration of the difference between the take-up percentage agreed with the
local authority and the likelihood of actual take-up. The value of the government grants deferred is disclosed in note 18.
We receive grant funding mainly under the BDUK programme which reduces the capital expenditure incurred by Openreach. 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 take-up achieved. In the current year we had a net grant deferral of £28m (2015/16: £109m net grant funding) mainly related to our
activity on the BDUK programme. Our base case assumption for take-up in BDUK areas has been increased to 39% following our review of
the level of customer take-up. To date we have deferred £446m (2015/16: £258m).
14. Business combinations
All business combinations are accounted for using the acquisition method regardless of whether equity instruments or other assets are
acquired.
What critical judgements do we apply in accounting for business combinations?
We exercise judgement in allocating the purchase consideration to acquired assets and liabilities. We also take into account future integration
and our plan on how goodwill will be monitored post acquisition. Assessing how much of the estimated synergies are buyer or market specific
is also judgemental as it requires us to determine what a market participant could reasonably achieve, which is inherently judgemental. Buyer
specific synergies support the goodwill amount recognised while market specific synergies are factored into the fair value measurement of the
acquired assets and liabilities. We also exercise judgement in identifying all of the intangible assets we have acquired.
What other critical estimates and assumptions have we made?
We initially measure identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination, with limited
exceptions, 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 the price paid to transfer a liability in an orderly transaction between market participants.
In determining the fair value of the intangible assets acquired for EE we generally used risk-adjusted future cash flows discounted using
discount rates specific to the asset. In determining the cash flows, we have used a combination of historical data and estimates regarding
revenue growth, profit margins and operating cash flows. Tangible assets were valued by estimating current cost to purchase or replace the
assets. We used independent valuers to assist in the valuation for EE.
We didn’t make any material acquisitions in the year ended 31 March 2017. We have however revisited the provisional fair values ascribed
to our acquisition of EE which took place on 29 January 2016. This acquisition resulted in us acquiring the entire share capital of EE Limited
(EE) from Deutsche Telekom and Orange. The total purchase consideration amounted to £10,971m with a goodwill value of £6,430m
after considering the provisional fair values of the identifiable net assets acquired of £4,541m. During the year, we’ve received a purchase
consideration refund from the previous owners of £20m following the finalisation of the audit of the completion balance sheet and have also
finalised our reassessment of the provisional fair values within the measurement period. This resulted in a revision to previously recognised brand,
customer relationship and prepaid assets which decreased by £15m. Our reassessment also led to a £14m decrease in receivables and an
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 14. Business combinations continued
increase in provisions related to unfavourable contracts in the amount of £20m. The net impact of the adjustment including the deferred tax
effect resulted in an increase of £29m in goodwill with no material impact on the income statement for the period ended 31 March 2016.
In the prior year, we 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).
The excess of the consideration transferred over the fair value of the net identifiable assets acquired is recorded as goodwill. For the
acquisition of EE this amounted to £6,430m. The fair values ascribed and the resulting goodwill were recognised on a provisional basis which
the group had one year from the acquisition date to re-measure. As discussed above we completed this in 2016/17 resulting in an increase of
£29m in goodwill.
15. Programme rights
At 1 April 2015
Additions
Amortisation
At 1 April 2016
Additions
Amortisation
At 31 March 2017
Total
£m
118
651
(544)
225
753
(714)
264
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
2017
£m
24
23
180
227
2016
£m
2015
£m
26
11
152
189
25
10
59
94
Inventories recognised as an expense during the year ended 31 March 2017 amounted to £2,680m (2015/16: £1,369ma). These were
included in ‘Operating costs’ in our income statement.
a We have revised prior year information to be on a consistent basis.
17. Trade and other receivables
We’ve made various judgements in accounting for trade and other receivables. These include long-term contracts and bad debt provisions.
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 judgements and estimates made.
What critical judgements have we made?
We’ve exercised judgement in assessing when the transition or transformation phase of a contract ends. This influences the timing of recognition of
revenue and costs which are deferred until the transition or transformation phase ends unless these elements of a contract have standalone value.
Judgements are also required in assessing the lifetime profitability of a contract when determining whether we have an onerous contract liability.
Where we have an onerous contract liability this would be classified in provisions.
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Notes to the consolidated financial statements continued
17. Trade and other receivables continued
How do we estimate and recognise contract losses?
We estimate and recognise immediately the entire estimated loss for a contract when we have evidence that the contract is unprofitable. Also
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. We perform ongoing profitability reviews of our 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 below.
At 31 March
Non-current
Other assetsa
2017
£m
2016
£m
2015
£m
360
218
179
a Other assets includes costs relating to the initial set-up, transition or transformation phase of long-term networked IT services contracts of £163m (2015/16: £111m, 2014/15: £89m), and prepayments
and leasing debtors of £197m (2015/16: £107m, 2014/15: £90m).
At 31 March
Current
Trade receivables
Prepayments
Accrued income
Other receivablesa
a Other receivables includes assets held for sale of £22m (2015/16: £nil, 2014/15: £nil).
Trade receivables are stated after deducting allowances for doubtful debts, as follows:
At 1 April
Expense
Utilised
Exchange differences
At 31 March
2017
£m
2016
£m
2015
£m
1,774
733
955
373
3,835
1,803
702
1,072
401
3,978
1,410
502
810
371
3,093
2017
£m
195
211
(114)
11
303
2016
£m
196
77
(89)
11
195
2015
£m
192
78
(58)
(16)
196
Included within the expense above are amounts for exposures relating to the Italian business investigation, as set out in note 8.
How do we assess recoverability of our receivables?
We provide 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 trade receivables and
whether a provision for doubtful debts may be required.
In estimating a provision for doubtful debts we consider historical experience alongside other factors such as the current state of the economy
and particular industry issues. The value of the provision for doubtful debts is disclosed above.
Trade receivables are continuously monitored and allowances applied against trade receivables consist of both specific impairments and
collective impairments based on our 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.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
17. Trade and other receivables continued
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 our gross trade receivables.
Trade receivables are due as follows:
At 31 March
2017
2016
2015
Past due and not specifically impaired
Trade
receivables
specifically
impaired net
of provision
£m
Between
0 and 3
months
£m
Between
3 and 6
months
£m
Between
6 and 12
months
£m
146
98
1
292
368
305
17
51
50
41
44
127
Not past due
£m
1,184
1,152
817
Over 12
months
£m
94
90
110
Total
£m
1,774
1,803
1,410
Gross trade receivables which have been specifically impaired amounted to £238m (2015/16: £192m, 2014/15: £159m).
Trade receivables not past due and accrued income are analysed below by line of business.
At 31 March
Consumer
EE
Business and Public Sector
Global Services
Wholesale and Ventures
Openreach
Other
Total
Trade receivables not past due
Accrued income
2017
£m
2016
£m
2015
£m
2017
£m
2016
£m
2015
£m
128
335
200
444
75
1
1
138
267
115
555
76
1
–
1,184
1,152
119
–
134
460
87
15
2
817
90
170
151
297
167
78
2
955
83
312
146
351
99
79
2
1,072
85
–
160
333
155
75
2
810
Given the broad and varied nature of our 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 (2015/16: £4m, 2014/15: £4m).
18. Trade and other payables
At 31 March
Current
Trade payables
Other taxation and social security
Other payables
Accrued expenses
Deferred incomea
At 31 March
Non-current
Other payablesb
Deferred incomea
2017
£m
2016
£m
2015
£m
4,205
704
672
382
1,474
7,437
4,331
682
552
418
1,435
7,418
2,875
416
565
414
1,078
5,348
2017
£m
2016
£m
2015
£m
885
413
876
230
1,298
1,106
855
74
929
a Includes £71m (2015/16: £71m, 2014/15: £nil) current and £375m (2015/16: £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.
b Other payables relate to operating lease liabilities and deferred gains on a 2001 sale and finance leaseback transaction.
Included within other payables are amounts for exposures relating to the Italian business investigation, principally sales taxes, as set out in
note 8.
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Notes to the consolidated financial statements continued
19. Provisions
Provisions and contingent liabilities
As disclosed below, our provisions principally relate to obligations arising from property rationalisation programmes, restructuring programmes,
asset retirement obligations, network assets, insurance claims, litigation and regulatory risks.
What critical judgements have we made in accounting for provisions?
We exercise judgement in determining the timing and quantum of all provisions to be recognised. Our assessment includes consideration of
whether we have a present obligation, whether payment is probable and if so whether the amount can be estimated reliably. As part of this
assessment, we also assess the likelihood of contingent liabilities occurring in the future which are not recognised as liabilities on our balance
sheet. By their nature, contingencies will be resolved only when one or more uncertain future events occur or fail to occur. We assess the
likelihood that a potential claim or liability will arise and also quantify the possible range of financial outcomes. We’ve disclosed our assessment
of contingent liabilities in note 30.
What other critical estimates and assumptions have we made?
Under our property rationalisation programmes we’ve 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
potential 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
ongoing activities.
Asset retirement obligations involve an estimate of 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.
Network asset provisions represent our future operational costs and vacant site rentals arising from obligations relating to network share
agreements. Costs are expected to be incurred over a period of up to 20 years.
Our regulatory provision represents our best estimate of the cost to settle our present obligation in relation to historical regulatory matters.
Included within the increase for the year is a £300m charge in relation to estimated compensation payments to other Communication
Providers as a result of Ofcom’s March 2017 findings on historical practices on Deemed Consent by Openreach. The precise amount of the
compensation payments will result from discussions with the affected parties. A related fine of £42m has been imposed and is recognised as
a payable rather than as a provision. The fine and associated compensation payments totalling £342m are treated as a specific item charge in
this year’s income statement. The remaining provision reflects management’s estimates of regulatory risks across a range of issues, including
price and service issues. These increased by £126m, also treated as specific items, resulting from our re-assessment of these other regulatory
risks and in light of the regulatory decisions by Ofcom and by the Competition Appeal Tribunal. Refer to note 8 for further information on
specific items.
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.
The estimates are discounted using a rate that reflects the passage of time and risk specific to the liability. An estimate is also required in
assessing the timing of when a provision is recognised. The outcome of our estimate of the provisions is disclosed below.
At 31 March 2015
Acquisitions
Income statement expense
Unwind of discount
Utilised or released
Transfers
Exchange differences
At 31 March 2016
Income statement expense
Unwind of discount
Utilised or released
Transfers
Exchange differences
At 31 March 2017
Restructuring
£m
Property
£m
Network
ARO
£m
Network
share
£m
Regulatory
£m
a
Other
£m
Total
£m
45
–
–
–
(25)
–
–
20
–
–
(10)
–
1
11
217
72
28
8
(29)
–
–
296
38
12
(54)
–
–
292
–
81
2
–
(5)
–
–
78
27
2
(24)
–
–
83
–
63
-
–
(3)
–
–
60
5
2
(17)
–
–
50
84
–
–
–
(20)
–
–
64
426
–
(11)
–
–
479
218
23
15
–
(26)
(7)
2
225
40
–
(19)
(3)
3
246
564
239
45
8
(108)
(7)
2
743
536
16
(135)
(3)
4
1,161
a Other provisions include amounts provided for legal or constructive obligations arising from insurance claims and litigation which will be utilised as the obligations are settled.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Notes to the consolidated financial statements continued
19. Provisions continued
At 31 March
Analysed as:
Current
Non-current
2017
£m
2016
£m
2015
£m
625
536
1,161
178
565
743
142
422
564
20. Retirement benefit plans
Background to BT’s pension plans
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.
What are they?
How do they impact BT’s financial statements?
Defined contribution plans
Defined benefit plans
Benefits in a defined contribution plan
are linked to:
–
–
contributions paid;
the performance of each
individual’s chosen investments;
and
the form in which individuals
choose to take their benefits.
–
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 group has no exposure to investment and other experience
risks.
Contributions are paid into an
independently administered fund.
Benefits in a defined benefit plan are:
determined by the plan rules,
–
dependent on factors such as age,
years of service and pensionable
pay; and
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.
Amounts in the financial statements
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
Service cost (including administration expenses & PPF levy):
– defined benefit plans
– defined contribution plans
Past service credita
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.
2017
£m
2016
£m
2015
£m
281
240
–
521
209
730
301
193
–
494
221
715
296
176
(5)
467
292
759
Group statement of comprehensive income
Remeasurements of the net pension 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.
204
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Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
20. Retirement benefit plans continued
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
50,090
748
274
(58,649)
(973)
(578)
51,112
(60,200)
Assets
£m
Present value
of liabilities
£m
43,121
596
251
(49,119)
(710)
(521)
43,968
(50,350)
2017
Deficit
£m
(8,559)
(225)
(304)
(9,088)
–
1,535
(7,553)
2016
Deficit
£m
(5,998)
(114)
(270)
(6,382)
–
1,147
(5,235)
a Included in the present value of liabilities of other plans is £104m (2015/16: £90m) 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.
Included within trade and other payables in the group balance sheet is £15m (2015/16: £10m) in respect of contributions payable to defined
contribution plans.
What is IFRIC 14 and how does it impact BT?
For some pension schemes, IFRIC 14 potentially:
– limits the surplus in a pension scheme that can be recognised on the balance sheet; and/or
– requires additional pension liabilities to be recognised where scheduled future deficit contributions are greater than the unadjusted accounting
deficit.
BT is not required to limit any pensions surplus or recognise additional pensions liabilities in individual plans as economic benefits are available in
the form of either future refunds or reductions to future contributions.
In any event, for both the BTPS and the EEPS, the net present value (using the IAS 19 discount rate) of scheduled future deficit contributions
agreed with the schemes’ trustee are less than the accounting deficit at 31 March 2017, and therefore IFRIC 14 would have no effect on the
figures disclosed.
In 2015, the International Accounting Standards Board (IASB) published an Exposure Draft setting out proposed changes to IFRIC 14. We
understand there have been subsequent discussions around further changes by the IFRS Interpretations Committee and a revised version of
IFRIC 14 is expected to be published in 2017.
Annual Report 2017
BT Group plc
205
Notes to the consolidated financial statements continued
20. Retirement benefit plans continued
Movements in defined benefit plan assets and liabilities
The table below shows the movements on the pension assets and liabilities and shows where they are reflected in the financial statements.
At 31 March 2015
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 statement
Actuarial gain arising from changes in financial assumptionsa
Actuarial gain arising from changes in demographic assumptionsa
Actuarial gain arising from experience adjustmentsb
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
Service cost (including administration expenses and PPF levy)
Interest on pension deficit
Included in the group income statement
Return on plan assets above the amount included in the group income statement
Actuarial loss arising from changes in financial assumptionsa
Actuarial loss arising from changes in demographic assumptionsa
Actuarial gain arising from experience adjustmentsb
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 2017
Assets
£m
Liabilities
£m
Deficit
£m
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)
(44)
1,413
(237)
(1,622)
7,475
–
–
–
313
274
–
(10,221)
(206)
163
–
–
8
(2,315)
20
(8)
2,315
(34)
(281)
(209)
(490)
7,475
(10,221)
(206)
163
(2,789)
313
274
587
–
–
(14)
(14)
51,112
(60,200)
(9,088)
a 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.
b 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.
206
BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
20. Retirement benefit plans continued
How do we value our retirement benefit plans?
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.
What are our critical judgements, estimates and assumptions?
The accounting cost of these benefits and the present value of our pension liabilities involve judgements about uncertain events including 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 uncertain events in determining the pension costs and liabilities
in our financial statements. Our assumptions reflect historical experience and our judgement regarding future expectations.
We also estimate the fair value of some of our pension assets which are made up of quoted and unquoted investments. The latter require more
judgement as their values are not directly observable. The assumptions used in valuing unquoted investments are affected by current market
conditions and trends which could result in changes in fair value after the measurement date.
How do we value the assets?
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.
– Bonds are measured using a combination of broker quotes and pricing models making assumptions for credit risk, market risk and market
yield curves.
– Pooled investment vehicles are valued at fair value which is typically the Net Asset Value provided by the investment manager.
– Certain unlisted investments are valued using a model based valuation such as a discounted cash flow.
– The value of the longevity insurance contract held by the BTPS is measured by discounting the projected cash flows payable under the
contract (projected by an actuary, consistent with the terms of the contract).
Overview and governance of the BTPS
What is the profile of the BTPS?
At 31 March 2017 there were 296,000 members of the BTPS. Members belong to one of three sections depending upon the date they first
joined the BTPS. The membership is analysed below.
Analysis of BTPS
Sections A and B liabilities (£bn)a
Section C liabilities (£bn)
Total IAS 19 liabilities (£bn)
Total number of members
a Sections A and B have been aggregated in this table as Section A members have typically elected to take Section B benefits at retirement.
Active
members
Deferred
members
Pensioners
Total
5.5
7.2
12.7
4.9
5.3
10.2
32.2
3.5
35.7
42.6
16.0
58.6
32,500
64,000
199,500
296,000
Annual Report 2017
BT Group plc
207
Notes to the consolidated financial statements continued
20. Retirement benefit plans continued
The estimated duration of the BTPS liabilities, which is an indicator of the weighted average term of the liabilities, is around 16.5 years although
the benefits payable by the BTPS are expected to be paid over more than 70 years. Whilst benefit payments are expected to increase over the
earlier years, the value of the liabilities is expected to reduce.
The chart below illustrates the estimated benefits payable from the BTPS forecast using the IAS 19 assumptions.
Forecast benefits payable by the BTPS at 31 March 2017 (unaudited)
£m
3,000
2,500
2,000
1,500
1,000
500
0
a
s
t
n
e
m
y
a
p
t
fi
e
n
e
B
£m
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
a
n
o
i
t
a
g
i
l
b
o
t
fi
e
n
e
b
d
e
n
fi
e
d
e
h
t
f
o
e
u
a
v
l
t
n
e
s
e
r
P
2017
2037
2057
2077
2097
Forecast benefit payments (Left axis)
Liabilities (Right axis)
a Based on accrued benefits to date.
What are the benefits under the BTPS?
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.
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.
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
pensionable 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%
208
BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
20. Retirement benefit plans continued
How is the BTPS governed and managed?
BT Pension Scheme Trustees Limited (the Trustee) has been appointed by BT as an independent trustee to administer and manage the BTPS on
behalf of the members in accordance with the terms of the BTPS Trust Deed and Rules and relevant legislation (principally the Pension Schemes
Act 1993, the Pensions Act 1995 and the Pensions Act 2004).
Under the terms of the Trust Deed there are nine Trustee directors, all of whom are appointed by BT, as illustrated below. Trustee directors are
usually appointed for a three-year term but are then eligible for re-appointment.
Chairman of the Trustees
Appointed by BT after consultation
with, and with the agreement of,
the relevant trade unions.
Member nominated Trustees
Appointed by BT based on nominations
by trade unions.
Employer nominated Trustees
Appointed by BT. Two normally hold senior
positions within the group and two normally
hold (or have held) senior positions in commerce
or industry.
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 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).
Growth
Equities
Property
Other growth assets
Liability matching
Active
Passive
Private Equity
UK Property
Overseas Property
Absolute Return
Non Core Credit
Mature Infrastructure
Government bondsc
Corporate bonds
Cash, derivatives and other
Total
2017a
Total assets
£bn
of which
b
quoted
£bn
Total
%
Total assets
£bn
of which
b
quoted
£bn
2.9
7.4
1.9
4.1
1.7
2.3
3.5
1.7
12.3
7.6
4.7d
50.1
2.1
7.2
–
–
–
–
1.1
–
12.0
5.9
n/a
28.3
6
15
4
8
3
5
7
3
25
15
9
100
6.5
6.7
1.5
4.2
1.4
1.8
3.5
1.1
10.0
7.1
(0.7)
43.1
5.0
6.3
–
–
–
–
1.3
–
9.9
5.6
n/a
28.1
2016a
Total
%
15
15
4
10
3
4
8
3
23
17
(2)
100
a At 31 March 2017 and 31 March 2016, the Scheme’s assets did not include any directly held ordinary shares of the company. The Scheme held £10m (2015/16: £9m) of index-linked bonds issued by
the group.
b Assets with a quoted price in an active market.
c Comprises primarily of UK index-linked government bonds.
d Comprises primarily of collateral relating to derivatives held by the Scheme and physical cash of £1.6bn.
Annual Report 2017
BT Group plc
209
Notes to the consolidated financial statements continued
20. Retirement benefit plans continued
IAS 19 assumptions
The table below summarises the approach used to set the key IAS 19 assumptions for the BTPS.
Approach to set the assumption
Discount rate
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.
RPI inflation
CPI inflation
Salary increases
Pension increases
Longevity
The assumption is calculated by applying the projected BTPS benefit cash flows to a corporate bond yield
curve constructed based on the yield on AA-rated corporate bonds.
In setting the yield curve, judgement is required on the selection of appropriate bonds to be included in the
universe and the approach used to then derive the yield curve.
The approach to set the RPI inflation assumption has been revised at 31 March 2017 to use the entire
inflation curve, weighted by projected BTPS benefit cash flows, and making an adjustment for an inflation
risk premium (to reflect the extra premium paid by investors for inflation protection), currently 20bps.
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.
Benefits are assumed to increase in line with the RPI or CPI inflation assumptions, based on the relevant
index for increasing benefits, as prescribed by the rules of the BTPS and summarised above.
The longevity assumption takes into account:
– the actual mortality experience of the BTPS pensioners, based on a formal review conducted at the
last triennial valuation; and
– future improvements in longevity based on a model published by UK actuarial profession’s Continuous
Mortality Investigation (using the CMI 2013 Mortality Projections model with a 1.25% per year long-
term improvement parameter).
The key financial assumptions used to measure the liabilities of the BTPS 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.
b Assumed to be 0.5% higher until 31 March 2019.
c Assumed to be 0.2% higher until 31 March 2017.
Nominal rates (per year)
Real rates (per year)a
2017
%
2.40
3.20
2.00b
2016
%
3.30
2.85
1.65c
2015
%
3.25
2.85
1.65c
2017
%
(0.78)
–
(1.2)b
2016
%
0.44
–
(1.2)c
2015
%
0.39
–
(1.2)c
The BTPS represents over 97% of the group’s retirement benefit obligation. While the financial assumptions may vary for each plan, the nominal
financial assumptions weighted by liabilities across all plans are equal to the figures shown in the table above (to the nearest 0.05%).
Based on the IAS 19 longevity assumptions, 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
210
BT Group plc
Annual Report 2017
2017
Number of
years
2016
Number of
years
26.2
27.5
28.9
28.9
29.2
1.0
26.1
27.4
28.8
28.8
29.1
1.0
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
20. Retirement benefit plans continued
Risks underlying the assumptions
The BTPS faces similar risks to other UK DB 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. Further details are set out on page 49.
Changes in external factors, such as interest rates, can have an impact on the IAS 19 assumptions, impacting the measurement of BTPS
liabilities. These factors can also impact the Scheme assets. The BTPS hedges some of these risks, including longevity and currency using financial
instruments and insurance contracts.
Some of the key financial risks, and mitigations, for the BTPS are set out in the table below.
Changes in bond yields
A fall in yields on AA-rated corporate bonds, used to set the IAS 19 discount rate, will lead to an increase
in the IAS 19 liabilities.
The BTPS’s assets include corporate bonds, government bonds and interest rate derivatives which are
expected to partly offset the impact of movements in the discount rate. However, yields on these assets
may diverge compared to the discount rate in some scenarios.
Changes in inflation
expectations
A significant proportion of the benefits paid to members are currently increased in line with RPI or CPI
inflation. An increase in long-term inflation expectations will lead to an increase in the IAS 19 liabilities.
Changes in life expectancy
The BTPS’s assets include index-linked government bonds and inflation derivatives which are expected to
partly offset the impact of movements in inflation expectations.
An increase in the life expectancy of members will result in benefits being paid out for longer, leading to
an increase in the BTPS liabilities.
The BTPS holds a longevity insurance contract which covers around 25% of the BTPS’s total exposure
to improvements in longevity, providing long-term protection and income to the BTPS in the event that
members live longer than currently expected.
Other risks include volatile asset returns (ie where asset returns differ from the discount rate) and changes in regulation which impact the
measurement of the liabilities or value of the assets.
BT’s independent actuary has assessed the potential negative impact of the key risks that might occur no more than once in every 20 years. The
impact shown under each scenario assumes this is the only change in assumptions – in practice a combination of changes to assumptions could
arise.
Sensitivity analysis of the principal assumptions used to measure
BTPS liabilities
£bn
10
6
9
.
8
6
4
2
0
.
9
2
9
6
.
.
2
2
.
9
22
2
.
1 percentage point
a
fall in discount rate
0.9 percentage point
increase to inflation rate
b
1.35 year increase
to life expectancy
Increase in liabilities
Increase in deficit
a Scenario assumes a 1 percentage point fall in the yields on both government and corporate bonds.
b Assuming RPI, CPI, pension increases and salary increases all increase by 0.9 percentage points.
The sensitivity of the deficit allows for both the change in the liabilities and the assumed change in the assets. For example, the increase in the
deficit under the life expectancy scenario incorporates the expected movement in the value of the insurance contract held to hedge longevity risk.
The sensitivities have been prepared using a similar approach as 2015/16 which involves calculating the liabilities and deficit using the
alternative assumptions stated.
Annual Report 2017
BT Group plc
211
Notes to the consolidated financial statements continued
20. Retirement benefit plans continued
BTPS funding
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 BTPS 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
(47.2)
40.2
(7.0)
85.2%
63.0%
June
2011
valuation
£bn
(40.8)
36.9
(3.9)
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 BTPS’s liabilities which more than offset the increase in the BTPS’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.
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
June
2014
assumptions
June
2011
assumptions
26.1
27.5
29.0
28.9
29.2
1.3
26.3
28.1
28.7
1.2
212
BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
20. Retirement benefit plans continued
Payments made to the BTPS
Year ended 31 March
Ordinary contributions
Deficit contributions
Total contributions in the year
Future funding obligations and recovery plan
2017
£m
303
250
553
2016
£m
215
875
1,090
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
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Deficit contribution (£m)
688
699
711
724
670
670
670
495
495
495
495
495
289
The ordinary contribution rate to meet the benefits of current employed members is:
– 16.0% of pensionable salaries (including employee contributions) from 1 April 2015 through to 30 June 2017; and
– 16.9% of pensionable salaries from 1 July 2017. This will be reviewed as part of the 2017 triennial valuation.
Based on the 2014 funding valuation agreement, the group expects to make contributions of approximately £850m to the BTPS in
2017/18, comprising ordinary contributions of approximately £162m and deficit contributions of £688m. This will be reviewed as part of
the 2017 funding valuation.
Other protections
The 2014 funding agreement with the Trustee included additional features for BT to provide support to the BTPS. These include:
Feature
Detail
Shareholder
distributions
In the event that shareholder distributions exceed an agreed threshold, BT will provide matching payments to the BTPS. 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 BTPS 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 BTPS; 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 BTPS.
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 BTPS 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.
Annual Report 2017
BT Group plc
213
Notes to the consolidated financial statements continued
20. Retirement benefit plans continued
In the highly 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 the benefits of members of the BTPS 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 BTPS.
The Crown Guarantee is not taken into account for the purposes of the actuarial valuation of the BTPS 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 BTPS 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 provided under
the BTPS Rules.
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.
EE Pension Scheme (EEPS)
The EEPS is the second largest defined benefit plan sponsored by the group with defined benefit liabilities of around £1bn. The EEPS also has a
defined contribution section with around 11,000 active members.
The defined benefit section’s assets are invested across a number of asset classes including global equities (27%), property (19%), an absolute
return portfolio (27%) and a liability driven investment portfolio (27%).
The triennial valuation of the defined benefit section was performed as at 31 December 2015, and agreed in March 2017. This showed a
funding deficit of £141m. To meet the deficit, the group will contribute:
– c£1.667m each month until March 2018 (inclusive); and
– £1.875m each month thereafter until November 2020.
The next funding valuation will have an effective date of no later than 31 December 2018.
Other schemes
The BT Retirement Saving Scheme (BTRSS) is the largest defined contribution scheme maintained by the group with around 32,500 active
members. In the year to 31 March 2017, the group contributed £139m to the BTRSS.
21. Own shares
At 31 March 2015
Own shares purchasedb
Share options exercisedb,c
Executive share awards vested
At 31 March 2016
Own shares purchasedb
Share options exercisedb,c
Executive share awards vested
At 31 March 2017
Treasury sharesa
millions
Employee share ownership
trusta
Total
£m
millions
£m
millions
£m
1
46
(39)
–
8
35
(35)
–
8
(4)
(211)
176
–
(39)
(151)
155
–
(35)
41
22
(24)
(22)
17
12
–
(15)
14
(161)
(104)
102
87
(76)
(55)
–
70
(61)
42
68
(63)
(22)
25
47
(35)
(15)
22
(165)
(315)
278
87
(115)
(206)
155
70
(96)
a At 31 March 2017, 7,690,097 shares (2015/16: 8,170,876) with an aggregate nominal value of £nil (2015/16: £nil) were held at cost as treasury shares and 14,303,068 shares (2015/16:
16,600,756) with an aggregate nominal value of £1m (2015/16: £1m) were held in the Trust.
b See group cash flow statement on page 169. In 2016/17 the cash paid for the repurchase of ordinary share capital was £206m (2015/16: £315m). The cash received for proceeds on the issue of
treasury shares was £70m (2015/16: £90m).
c Includes share option exercises of £1m (2015/16: £nil) 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 our obligations under employee share plans. Further details on
Employee Saveshare Plans and Executive share plans are provided in note 22.
214
BT Group plc
Annual Report 2017
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
22. Share-based payments
What share incentive arrangements do we have?
Our plans include savings-related share option plans for employees and those of participating subsidiaries, further share option plans for
selected employees and a stock purchase plan for employees in the US. We also have 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
2017
£m
2016
£m
2015
£m
40
–
9
8
57
27
21
4
6
58
25
32
9
4
70
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 our 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 2016/17,
2015/16 and 2014/15: 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. 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
Weighted average exercise price
2017
millions
2016
millions
2015
millions
2017
pence
2016
pence
2015
pence
197
44
(18)
(33)
(1)
189
–
226
47
(12)
(63)
(1)
197
–
459
81
(9)
(304)
(1)
226
–
287
362
345
208
345
313
237
226
385
306
139
247
287
140
102
326
239
65
163
226
74
The weighted average share price for all options exercised during 2016/17 was 357p (2015/16: 463p, 2014/15: 382p).
The following table summarises information relating to options outstanding and exercisable under Employee Saveshare plans at 31 March 2017.
Normal dates of vesting and exercise (based on calendar years)
2017
2018
2019
2020
2021
Total
Exercise price per
share
168p – 359p
249p – 423p
319p – 397p
376p
353p
Weighted
average
exercise
price
Number of
outstanding
options
millions
Weighted
average
remaining
contractual life
228p
310p
236p
376p
353p
313p
45
8 months
31 21 months
66 33 months
25 44 months
22 56 months
189 29 months
Annual Report 2017
BT Group plc
215
22. Share-based payments continued
Executive share plans
Movements in executive share plan awards during 2016/17 are shown below:
At 1 April 2016
Awards granted
Awards vested
Awards lapsed
Dividend shares reinvested
At 31 March 2017
ISP
43
18
(12)
(5)
1
45
Number of shares (millions)
DBP
Other
8
2
(3)
–
–
7
–
4
–
–
–
4
Total
51
24
(15)
(5)
1
56
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 2016/17, 2015/16 and 2014/15.
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
2017
ISP
Employee
Saveshare
2016
ISP
Employee
Saveshare
72p
422p
362p
2.9% – 3.4%
0.5% – 0.8%
19.0% – 21.5%
328p
426p
n/a
n/a
0.6%
81p
454p
385p
3.2% – 3.7%
0.7% – 1.6%
21.8% 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%
2015
ISP
309p
393p
n/a
n/a
1.2%
24.3%
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. 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 2016/17 was 421p (2015/16: 451p, 2014/15: 393p).
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
2017
£m
2016
£m
2015
£m
37
7
44
39
7
46
36
8
44
1,437
83
1,520
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 £35m (2015/16: £10m, 2014/15: £360m), in US Dollars of £30m (2015/16:
£30m, 2014/15: £30m) and in other currencies £18m (2015/16: £nil, 2014/15: £nil).
216
BT Group plcAnnual Report 2017Notes to the consolidated financial statements continued
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
23. Investments continued
Fair value hierarchy
At 31 March 2017
Non-current and current investments
Available-for-sale investments
Fair value through profit or loss
Total
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
Level 3
£m
Total held at
fair value
£m
21
7
28
1,437
–
1,437
16
–
16
1,474
7
1,481
Level 1
£m
Level 2
£m
Level 3
£m
Total held at
fair value
£m
24
7
31
2,878
–
2,878
15
–
15
2,917
7
2,924
Level 1
£m
Level 2
£m
Level 3
£m
Total held at
fair value
£m
26
8
34
3,133
–
3,133
10
–
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 £900m (2015/16:
£2,430m 2014/15: £2,784m) and in Euros of £537m (2015/16: £448m 2014/15: £349m).
Level 3 balances consist of available-for-sale investments of £16m (2015/16: £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.
Annual Report 2017
BT Group plc
217
Notes to the consolidated financial statements continued
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
2017
£m
469
32
1
26
59
528
(17)
511
2016
£m
900
44
20
32
96
996
(537)
459
2015
£m
749
28
28
43
99
848
(441)
407
The group’s cash and cash equivalents include restricted cash of £43m (2015/16: £51m, 2014/15: £82m), of which £41m (2015/16:
£44m, 2014/15: £73m) was held in countries where local capital or exchange controls currently prevent us from accessing cash balances.
The remaining balance of £2m (2015/16: £7m, 2014/15: £9m) was held in escrow accounts, or in commercial arrangements akin to
escrow.
The classification of the items noted above represents a change in our definition of restricted cash. We previously included in our definition
cash held in countries where capital or exchange controls imposed local compliance obligations upon the group. Upon further review, we
have concluded these controls do not necessarily restrict access providing these obligations are satisfied. We now also include cash balances
held in arrangements akin to escrow as well as balances physically held in escrow accounts. We have updated the comparative balances to
reflect this change by reducing reported restricted cash by £50m in 2015/16 and £61m in 2014/15.
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
What’s our capital management policy?
The objective of our capital management policy is to target an overall level of debt consistent with our credit rating target while investing in
the business, supporting the pension scheme and paying progressive dividends. In order to meet this objective, we may issue or repay debt,
issue new shares, repurchase shares, or adjust the amount of dividends paid to shareholders. We manage the capital structure and make
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 2016/17, 2015/16 or 2014/15. For details of share
issues and repurchases in the year see note 21.
Our capital structure consists of net debt and shareholders’ equity. The analysis below summarises the components which we manage as
capital.
2016
£m
2015
£m
2017
£m
8,932
8,305
9,838
10,090
17,237
19,928
5,113
669
5,782
At 31 March
Net debt
Total parent shareholders’ equitya
a Excludes non-controlling interests of £30m (2015/16: £22m, 2014/15: £12m).
218
BT Group plc
Annual Report 2017
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.
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%b)
3.5% €500m bond due February 2017a
1.25% US$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% £450m 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 2028
9.125% US$2,670m bond due December 2030a (minimum 8.625%b)
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
2017
£m
2016
£m
2015
£m
12,713
14,761
10,176
(528)
(1,520)
(996)
(2,918)
(848)
(3,523)
10,665
10,847
5,805
(1,419)
(314)
(652)
(357)
(357)
(335)
8,932
9,838
5,113
2017
£m
2016
£m
2015
£m
–
–
–
–
–
–
526
891
539
642
460
863
300
1,282
942
403
1,113
731
2,191
522
–
–
419
696
398
348
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
11,405
12,457
9,064
229
–
352
–
710
17
233
438
354
181
561
537
1,079
2,071
232
–
–
–
439
441
880
12,713
14,761
10,176
a Designated in a cash flow hedge relationship.
b 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.
Annual Report 2017
BT Group plc
219
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Notes to the consolidated financial statements continued
25. Loans and other borrowings continued
Unless previously designated in a fair value hedge relationship, all loans and other borrowings are carried on our balance sheet at amortised
cost and in the table on page 219. The fair value of listed bonds and other long-term borrowings is £13,496m (2015/16: £14,500m,
2014/15: £10,919m) and the fair value of finance leases is £273m (2015/16: £284m, 2014/15: £268m).
The fair value of our 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
Bank loans
Syndicated loan facilities
Other loans and bank overdraftsa
Total current liabilities
Non-current liabilities
Listed bonds
Finance leases
Bank loans
Other loans
Total non-current liabilities
Total
2017
£m
2016
£m
2015
£m
1,539
15
352
–
726
2,632
9,866
214
–
1
2,013
8
–
619
1,096
3,736
10,444
225
354
2
10,081
11,025
1,422
13
–
–
879
2,314
7,642
219
–
1
7,862
12,713
14,761
10,176
a Includes collateral received on swaps of £702m (2015/16: £553m, 2014/15: £437m).
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 2017,
2016 and 2015 were unsecured.
The principal repayments of loans and borrowings at hedged rates amounted to £10,980m (2015/16: £13,752m, 2014/15: £9,482m)
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
Effect of
hedging
and
interest
£m
(498)
(197)
(43)
(121)
–
(724)
2017
Principal
repayments
at hedged
rates
£m
2,134
1,417
1,123
1,174
12
5,120
Carrying
amount
£m
2,632
1,614
1,166
1,295
12
5,844
Effect of
hedging
and
interest
£m
2016
Principal
repayments
at hedged
rates
£m
(232)
3,504
(216)
(72)
18
(26)
(302)
1,416
1,416
1,121
1,173
5,122
Carrying
amount
£m
3,736
1,632
1,488
1,103
1,199
5,424
Carrying
amount
£m
2,314
1,431
1,251
549
1,031
3,457
9,931
(1,085)
8,846
10,846
(598)
10,248
7,719
Total repayments
Fair value adjustments
12,563
150
Total loans and other borrowings
12,713
(1,583)
10,980
14,582
179
14,761
(830)
13,752
10,033
143
10,176
Effect of
hedging
and
interest
£m
2015
Principal
repayments
at hedged
rates
£m
(152)
2,162
(48)
(191)
(51)
89
(198)
(399)
(551)
1,383
1,060
498
1,120
3,259
7,320
9,482
220
BT Group plc
Annual Report 2017
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
2017
2016
2015
2017
2016
2015
Minimum lease payments
£m
£m
£m
Repayment of outstanding
lease obligations
£m
£m
£m
29
102
237
368
(139)
229
13
105
265
383
(150)
233
29
100
264
393
(161)
232
14
50
165
229
–
229
8
51
174
233
–
233
13
45
174
232
–
232
Assets held under finance leases mainly consist of buildings and network assets. Our 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 and associated derivatives
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
2017
£m
2016
£m
2015
£m
567
15
12
–
–
(2)
(1)
16
607
–
607
210
817
489
14
11
–
–
(5)
3
8
520
–
520
229
749
516
15
7
82
(82)
7
26
8
579
(2)
577
299
876
a No interest was capitalised in 2016/17 or 2015/16. Interest was capitalised at a weighted average rate of 6.0% in 2014/15.
Reconciliation of net finance expense to net interest cash outflow
Net interest cash outflow of £622m (2015/16: £548m, 2014/15: £580m) is £28m higher (2015/16: £65m, 2014/15: £20m) 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 – EE-related financing costs (note 8)
Net interest cash outflow
2017
£m
594
1
19
–
8
–
2016
£m
483
(1)
27
22
9
8
2015
£m
560
–
4
–
9
7
622
548
580
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221
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
27. Financial instruments and risk management
We issue or hold financial instruments mainly to finance our operations; to finance corporate transactions such as dividends, share buybacks and
acquisitions; for the temporary investment of short-term funds; and to manage currency and interest rate risks. In addition, various financial
instruments, for example trade receivables and payables arise directly from operations.
How do we manage financial risk?
Our activities expose us to a variety of financial risks: market risk (including interest rate risk and foreign exchange risk), credit risk and
liquidity risk.
Treasury operation
We have a centralised treasury operation whose primary role is to manage liquidity and funding requirements as well as our 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 our risk profile between 31 March 2017 and the date of approval of these financial statements.
How do we manage interest rate risk?
Management policy
Interest rate risk arises primarily from our long-term borrowings. Interest cash flow risk arises from borrowings issued at variable rates, partially
offset by cash held at variable rates. Fair value interest rate risk arises from borrowings issued at fixed rates.
Our policy, as set by the Board, is to ensure that at least 70% of ongoing 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 group treasurer who each have been delegated such authority from the Board.
Hedging strategy
In order to manage our interest rate profile, we have entered into cross-currency and interest rate swap agreements 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 are subject to fixed Sterling interest rates after applying the impact of these hedging
instruments.
How do we manage foreign exchange risk?
Management policy
Foreign currency hedging activities protect the group from the risk that changes in exchange rates will adversely affect future net cash flows.
The Board’s policy for foreign exchange risk management defines the types of transactions typically covered, including significant operational,
funding and currency interest exposures, and the period over which cover should extend for each type of transaction.
The Board has delegated short-term foreign exchange management to the treasury operation and long-term foreign exchange management
decisions require further approval from the group finance director, director of treasury and risk management or the group treasurer.
Hedging strategy
A significant proportion of our external revenue and costs arise within the UK and are denominated in Sterling. Our non-UK operations generally
trade and are funded in their functional currency which limits their exposure to foreign exchange volatility.
We enter 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, our exposure to foreign currency arises mainly on non-UK subsidiary investments and on residual currency trading flows.
We use cross-currency swaps to swap foreign currency borrowings into Sterling.
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223
Notes to the consolidated financial statements continued 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
2017
Floating
rate
interest
£m
706
641
1,347
12%
Fixed rate
interest
£m
9,633
–
9,633
88%
4.9%
Total
£m
Fixed rate
interest
£m
10,339
641
10,980
100%
11,417
–
11,417
83%
6.0%
2016
Floating
rate
interest
£m
1,748
587
2,335
17%
Total
£m
Fixed rate
interest
£m
13,165
587
13,752
100%
7,601
–
7,601
80%
6.3%
2015
Floating
rate
interest
£m
1,405
476
1,881
20%
Total
£m
9,006
476
9,482
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 quoted rates.
Sensitivity analysis
The income statement and shareholders’ equity are exposed to volatility 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 2016/17, 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
2017
£m
Increase
(reduce)
554
(348)
(229)
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.
Our exposure to foreign exchange volatility in the income statement, after hedging, and within shareholders’ equity (excluding translation
exposures) was insignificant in 2016/17, 2015/16 and 2014/15.
Credit ratings
We continue to target a BBB+/Baa1 credit rating over the medium term. We regularly review the liquidity of the group and our funding strategy
takes account of medium-term requirements. These include the pension deficit and shareholder distribution.
Our December 2030 bond contains covenants which require us to pay higher rates of interest since our credit ratings fell below A3 in the case
of Moody’s or 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 £2.1bn at 31 March 2017, our finance expense would increase/decrease by approximately £11m a year if the group’s credit
rating were to be downgraded/upgraded, respectively, by one credit rating category by both agencies.
Our credit ratings were as detailed below:
At 31 March
Rating agency
Moody’s
Standard & Poor’s
2017
2016
2015
Rating
Outlook
Rating
Outlook
Rating
Outlook
Baa1
BBB+
Negative
Negative
Baa2
BBB
Positive
Positive
Baa2
BBB
Positive
Stable
How do we manage liquidity risk?
Management policy
We maintain liquidity by entering into short and long-term financial instruments to support operational and other funding requirements,
determined using 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 long-term funding
requirements of the group and on an ongoing basis considers any related matters. We manage refinancing risk 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 our loans and borrowings at 31 March 2017 is disclosed in note 25. We have term debt maturities of £1.8bn in 2017/18.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
27. Financial instruments and risk management continued
Our treasury operation reviews and manages our short-term requirements within the parameters of the policies set by the Board. We hold
cash, cash equivalents and current investments in order to manage short-term liquidity requirements. At 31 March 2017 we had undrawn
committed borrowing facilities of £2.1bn (2015/16: £1.5bn, 2014/15: £1.5bn) maturing in September 2021. We also have an undrawn
364-day revolving bridge facility of £1.5bn maturing in March 2018, with the option to renew to March 2019. The bridge facility contains
mandatory prepayment and cancellation clauses in certain circumstances, such as the issuance of public debt securities.
Maturity analysis
The following table provides an analysis of the remaining contractually-agreed cash flows including interest payable for our 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 2017
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 sheeta
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 adjustment
Impact of discounting
Carrying value on the balance sheeta
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 sheeta
Loans
and other
borrowings
£m
Interest on
loans
and other
borrowings
£m
Trade
and other
payables
£m
Provisions
£m
Total
£m
2,468
1,614
1,166
1,295
12
5,844
12,399
–
150
–
507
415
364
327
319
2,726
4,658
(4,494)
–
–
5,259
–
–
–
–
–
5,259
–
–
–
12,549
164
5,259
Loans
and other
borrowings
£m
Interest on
loans
and other
borrowings
£m
Trade
and other
payables
£m
3,558
1,632
1,488
1,103
1,199
5,424
14,404
–
179
–
491
435
357
343
308
2,885
4,819
(4,641)
–
–
5,301
–
–
–
–
–
5,301
–
–
–
62
41
21
18
17
310
469
–
–
(177)
292
8,296
2,070
1,551
1,640
348
8,880
22,785
(4,494)
150
(177)
18,264
Provisions
£m
Total
£m
50
30
25
15
16
326
462
–
–
(166)
9,400
2,097
1,870
1,461
1,523
8,635
24,986
(4,641)
179
(166)
14,583
178
5,301
296
20,358
Loans
and other
borrowings
£m
Interest on
loans
and other
borrowings
£m
Trade
and other
payables
£m
Provisions
£m
Total
£m
2,120
1,431
1,251
549
1,031
3,457
9,839
–
143
–
513
458
392
315
302
2,973
4,953
(4,759)
–
–
3,854
–
–
–
–
–
3,854
–
–
–
32
19
15
15
13
218
312
–
–
(104)
6,519
1,908
1,658
879
1,346
6,648
18,958
(4,759)
143
(104)
9,982
194
3,854
208
14,238
a 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.
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225
Notes to the consolidated financial statements continued
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.
Derivatives – Analysed by earliest payment datea
Derivatives – Analysed based on holding instrument to maturity
Derivative financial liabilities
At 31 March 2017
Net settled
£m
Gross settled
outflows
£m
Gross settled
inflows
£m
Total
£m
Net settled
£m
Gross settled
outflows
£m
Gross settled
inflows
£m
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 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
Total
£m
98
134
92
88
83
679
291
296
198
114
104
123
582
1,139
–
–
–
–
(576)
(1,097)
–
–
–
–
297
338
198
114
104
123
92
92
92
88
83
679
582
1,139
–
–
–
–
(576)
(1,097)
–
–
–
–
1,126
1,721
(1,673)
1,174
1,126
1,721
(1,673)
1,174
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
268
386
371
60
81
–
263
38
38
838
17
165
(250)
(27)
(27)
(836)
(18)
(180)
Total
£m
281
397
382
62
80
(15)
Net settled
£m
Gross settled
outflows
£m
Gross settled
inflows
£m
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.
How do we manage credit risk?
Management policy
Our exposure to credit risk arises from financial assets transacted by the treasury operation (primarily derivatives, investments, cash and cash
equivalents) and from 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. 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. If counterparties in respect of existing transactions fall below the permitted criteria we will
take action where appropriate.
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
Our 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, we may minimise risks by requesting securities such as deposits, guarantees and
letters of credit. We take proactive steps including constantly reviewing credit ratings of counterparties to minimise the impact of adverse market
conditions on trading-related financial assets.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 27. Financial instruments and risk management continued
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
2017
£m
2016
£m
2015
£m
2,246
1,564
2,729
528
7,067
1,639
2,964
2,875
996
8,474
1,329
3,567
2,220
848
7,964
a The carrying amount excludes £360m (2015/16: £218m, 2014/15: £179m) of non-current trade and other receivables which relate to non-financial assets, and £1,106m (2015/16: £1,103m,
2014/15: £873m) of prepayments and other receivables.
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+a
A2/Aa
A3/A–a
Baa1/BBB+a
Baa2/BBB and below
2017
£m
2016
£m
2015
£m
1,444
208
952
370
204
561
86
3,825
2,878
120
64
939
160
492
–
4,653
3,133
206
248
793
121
439
11
4,951
a We hold cash collateral of £702m (2015/16: £553m, 2014/15: £437m) in respect of derivative financial assets with certain counterparties.
The concentration of credit risk for our trading balances 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, we enter into netting
arrangements to reduce our exposure to credit risk by making use of standard International Swaps and Derivatives Association (ISDA)
documentation. We have also entered into credit support agreements with certain swap counterparties whereby, on a daily and weekly basis,
the fair value position on notional £1,742m of long dated cross-currency swaps and interest rate swaps is collateralised. The related net cash
inflow during the year was £100m (2015/16: £79m, 2014/15: £297m). The collateral paid and received is recognised within current asset
investments and loans and other borrowings, respectively.
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227
Notes to the consolidated financial statements continued
27. Financial instruments and risk management continued
Offsetting of financial instruments
The table below shows our 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 2017
Derivative financial assets
Derivative financial liabilities
Total
At 31 March 2016
Derivative financial assets
Derivative financial liabilities
Total
At 31 March 2015
Derivative financial assets
Derivative financial liabilities
Total
Related amounts not set off in the balance sheet
Amounts
presented in the
balance sheet
£m
Right of set off
with derivative
counterparties
£m
2,246
(903)
1,343
(693)
693
–
Cash
collateral
£m
(702)
64
(638)
Net
amount
£m
851
(146)
705
Related amounts not set off in the balance sheet
Amounts
presented in the
balance sheet
£m
Right of set off
with derivative
counterparties
£m
1,639
(911)
728
(456)
456
–
Cash
collateral
£m
(553)
40
(513)
Net
amount
£m
630
(415)
215
Related amounts not set off in the balance sheet
Amounts
presented in the
balance sheet
£m
Right of set off
with derivative
counterparties
£m
1,329
(1,095)
234
(603)
603
–
Cash
collateral
£m
(437)
30
(407)
Net
amount
£m
289
(462)
(173)
Derivatives
All of our derivative financial instruments are held at fair value on the 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.
At 31 March 2017
Designated in a cash flow hedge
Other
Total derivatives
At 31 March 2016
Designated in a cash flow hedge
Other
Total 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
417
11
428
1,508
310
1,818
25
9
34
616
253
869
Current
asset
£m
Non-current
asset
£m
Current
liability
£m
Non-current
liability
£m
166
11
177
1,158
304
1,462
40
8
48
618
245
863
Current
asset
£m
Non-current
asset
£m
Current
liability
£m
Non-current
liability
£m
86
6
5
97
941
143
148
1,232
161
–
7
168
698
–
229
927
226
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
27. Financial instruments and risk management continued
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. The energy derivative was renegotiated during the year and has been designated as a cash flow
hedge. On initial recognition of this contract a loss of £8m was deferred. The fair value of the energy derivative at 31 March 2017 was a liability
of £8m (31 March 2016: £nil, 2014/15: asset of £14m). 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).
We hedge forecast foreign currency purchases, principally denominated in US Dollar, Euro and Asia Pacific currencies 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 reserve.
Fair value hedges
Gains and losses arising on fair value hedges are disclosed in note 26.
Other derivatives
Our 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.
28. Other reserves
At 1 April 2014
Revisionsd
At 1 April 2014 – Revised
Exchange differencese
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 2015d
Exchange differencese
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 2016d
Exchange differencese
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 2017
Other comprehensive income
Capital
redemption
reserve
£m
Cash flow
a
reserve
£m
Available-
for-sale
b
reserve
£m
Translation
c
reserve
£m
27
–
27
–
–
–
–
–
27
–
–
–
–
–
27
–
–
–
–
–
27
42
–
42
–
207
(218)
–
24
55
–
381
(230)
–
(33)
173
–
884
(938)
–
8
127
11
–
11
–
–
–
7
–
18
–
–
–
(2)
–
16
–
–
–
(3)
–
13
369
4
373
16
–
–
–
13
402
29
–
–
–
38
469
227
–
–
–
21
717
Total
£m
449
4
453
16
207
(218)
7
37
502
29
381
(230)
(2)
5
685
227
884
(938)
(3)
29
884
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 £941m (2015/16: £255m, 2014/15: £244m) 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 Revised, see note 1.
e Excludes £10m (2015/16: £nil, 2014/15: £nil) of exchange differences in relation to retained earnings attributed to non-controlling interests.
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Notes to the consolidated financial statements continued
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.
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
2017
£m
2016
£m
889
367
423
2,644
4,323
922
481
260
2,026
3,689
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 were as follows:
Payable in the year ending 31 March:
2017
2018
2019
2020
2021
2022
Thereafter
Total future minimum operating lease payments
a We have revised prior year information to be on a consistent basis.
2017
£m
a
2016
£m
–
650
610
558
532
505
4,305
7,160
642
614
564
517
493
453
4,188
7,471
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 15 years (2015/16: 16 years) and rentals are fixed for an average of 15 years (2015/16: 16 years).
Other than as disclosed below, there were no contingent liabilities or guarantees at 31 March 2017 other than those arising in the ordinary
course of the group’s business and on these no material losses are anticipated. We’ve insurance cover to certain limits for major risks on property
and major claims in connection with legal liabilities arising in the course of our operations. Otherwise, the group generally carries its own risks.
Commitments and guarantees
BDUK
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.
Telefónica UK Limited leases
We’ve 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.
Legal proceedings
The group is involved in various legal proceedings, including actual or threatened litigation, government or regulatory investigations. However,
save as disclosed below, the group does not currently believe that there are any legal proceedings, government or regulatory investigations that
may have a material adverse impact on the operations or financial condition of the group. In respect of each of the claims below, the nature
and progression of such proceedings and investigations can make it difficult to predict the impact they will have on the group. There are many
reasons why we cannot make these assessments with certainty, including, among others, that they are in early stages, no damages or remedies
have been specified, and/or the often slow pace of litigation.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
30. Financial commitments and contingent liabilities continued
Italian business
Following the group’s announcement with respect to our investigation into our Italian business in January 2017, three purported securities
class action complaints were filed against the company and certain current and former officers in United States courts. All three actions are
purportedly brought on behalf of purchasers of BT Group ADRs between May 2012 or May 2013 and January 2017. The actions allege that
the company made materially false and/or misleading statements between 2012 and 2016 regarding its internal controls, ethics and corporate
governance, and financial outlook in its submissions to and filings with the US Securities and Exchange Commission and other public disclosure.
Plaintiffs’ counsel have filed motions to appoint lead plaintiff and lead counsel, and decisions on these motions have not yet been made. We
intend to defend these claims vigorously.
The issues in Italy have also resulted in engagement with certain of our regulators and other authorities in the UK and elsewhere. As would be
expected, we are cooperating fully with these bodies including the Italian authorities.
Phones 4U
In December 2016, the administrators of Phones 4U Limited (P4U) started legal proceedings in the High Court in the United Kingdom
against EE, claiming £66m in payments under a retail trading agreement, which relate to a revenue share for certain customers prior to P4U’s
insolvency. We are contesting these claims and have brought counter-claims against P4U, including damages arising from P4U ceasing trading.
The administrators have also indicated an intention to start separate High Court proceedings, alleging that EE and other mobile network
operators colluded to procure P4U’s insolvency. We also dispute these allegations vigorously.
Hutchison 3G Limited
In May 2016, Hutchison 3G Limited (H3G) brought legal proceedings in the High Court in the United Kingdom against EE, alleging breach
of contract relating to alleged delays in the roll out of certain free carrier coverage to H3G. H3G is entitled to this free carrier coverage under
arrangements agreed following the merger of Orange and T-Mobile, predecessors of EE. The litigation is also at a relatively early stage and we
are contesting the claims. H3G claims damages relating to loss of business of £167m, although we dispute that there is a basis for the claim and
the substantiation of the claimed damages.
Brazilian tax claims
The Brazilian state tax authorities have made tax demands against certain Brazilian subsidiaries relating to the Tax on Distribution of Goods and
Services (ICMS), an indirect tax imposed on the provision of telecommunications services in Brazil. The state tax authorities are seeking to impose
ICMS on revenues earned on activities that the company does not consider as being part of the provision of telecommunications services, such
as equipment rental and managed services. We have disputed the basis on which ICMS is imposed and the rate which the tax authorities are
seeking to apply. We are currently contesting 35 cases, eight of which are pending appeal to the Sao Paulo Court of Appeal; and the judicial
process is likely to take many years. The current potential total of the claims is £232m. We are vigorously contesting these tax demands.
Regulatory matters
In respect of 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. Estimates are used in assessing the likely value of the regulatory risk. The ultimate liability may vary
from the amounts provided and will be dependent upon the eventual outcome of any settlement.
We hold provisions for regulatory risks of £479m at 31 March 2017. These provisions cover the following issues:
Deemed Consent
Deemed Consent is an agreed process between Openreach and its Communications Provider (CP) customers, which allows Openreach to halt the
installation and reschedule the delivery date for providing dedicated business services (known as Ethernet) in a number of specific circumstances
where it is beyond its control. Ofcom found that Openreach had breached its contractual and regulatory obligations by inadequately and
retrospectively applying Deemed Consent to reduce compensation payments to CPs between January 2013 and December 2014.
We hold a provision of £300m for Deemed Consent relating to estimated compensation payments to CPs resulting from Ofcom’s deemed
consent investigation. The precise amount will result from discussions with affected parties, and could result in lower or higher payments than
the £300m provided. We also hold £42m within trade payables being the Ofcom fine in relation to their investigation into Ethernet deemed
consent, and is therefore certain.
Court of Appeal judgment on Ethernet Dispute
On 20 December 2012, Ofcom made determinations resolving disputes between BT and five communications providers (C&W Worldwide, Sky,
TalkTalk, Virgin Media, and Verizon) concerning BT’s charges for certain Ethernet services. The Determinations found that BT had overcharged
C&W Worldwide, Sky, TalkTalk, Virgin Media, and Verizon for certain Ethernet services for varying periods from April 2006 to March 2011. All
parties appealed the determinations to the Competition Appeal Tribunal (CAT), which largely confirmed Ofcom’s assessment of overcharging, and
ordered BT to pay interest on the amounts overcharged. BT and TalkTalk appealed the CAT’s judgment to the Court of Appeal, the hearing took
place in March 2017.
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231
Notes to the consolidated financial statements continued 30. Financial commitments and contingent liabilities continued
On 4 May 2017, the Court of Appeal handed down its judgment, dismissing TalkTalk’s appeal that Ofcom should have used a different cost
standard in assessing cost orientation, which would have resulted in higher repayments to CPs. The Court of Appeal also dismissed BT’s appeal
(which would have reduced the repayments). This confirmed our view that no additional amounts were payable in relation to TalkTalk’s appeal.
Both BT and TalkTalk may appeal the Court of Appeal judgment to the Supreme Court.
Other regulatory matters
The remaining provision reflects management’s estimates of regulatory risks across a range of issues, including price and service issues. The
precise outcome of each matter depends on whether it becomes an active issue, and the extent to which negotiation or regulatory decision will
result in financial settlement.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Independent auditors’ report to the members of BT Group plc
United Kingdom opinion
Independent auditors’ report to the members of BT Group plc
Report on the parent company financial statements
Our opinion
In our opinion, BT Group plc’s parent company financial statements
(the financial statements):
– give a true and fair view of the state of the parent company’s
affairs as at 31 March 2017;
– 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
The financial statements, included within the Annual Report & Form
20-F 2017 (the Annual Report), comprise:
– the BT Group plc company balance sheet as at 31 March 2017;
– the BT Group plc company 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.
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 and compliance with applicable
requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of the
audit:
– 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; and
– the Strategic Report and the Report of the Directors have been
prepared in accordance with applicable legal requirements.
In addition, in light of the knowledge and understanding of the
parent company and its environment obtained in the course of the
audit, we are required to report if we have identified any material
misstatements in the Strategic Report and the Report of the
Directors. We have nothing to report in this respect.
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 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 parent 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 parent
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 Directors’
Remuneration Report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Directors’ remuneration report - Companies Act 2006 opinion
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with the
Companies Act 2006.
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 146, 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
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 parent
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.
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233
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. With
respect to the Strategic Report and Report of the Directors, we
consider whether those reports include the disclosures required by
applicable legal requirements.
Other matter
We have reported separately on the group financial statements of
BT Group plc for the year ended 31 March 2017.
Richard Hughes (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
11 May 2017
232
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233
233
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Financial Statements of BT Group plc
BT Group plc company balance sheet
Registered number 04190816
At 31 March
Investments
Trade and other receivablesa
Current assets
Trade and other receivablesa
Cash and cash equivalents
Current liabilities
Trade and other payablesb
Total assets less current liabilities
Non-current liabilities
Loans and other borrowingsc
Equity
Ordinary shares
Share premium
Capital redemption reserve
Merger reserve
Own shares
Retained profit
Total equity
Notes
2
3
2017
£m
2016
£m
10,801
6,783
10,744
8,511
17,584
19,255
283
2
285
78
78
46
7
53
61
61
17,791
19,247
1,371
1,371
499
1,051
27
5,649
(96)
9,290
1,409
1,409
499
1,051
27
7,424
(115)
8,952
16,420
17,838
17,791
19,247
a Trade and other receivables primarily relate to a £1,010m equity placing raised in February 2015 and net proceeds of £7,507m, before £3m of issue costs relating to the sale of EE to British
Telecommunications plc on 29 January 2016. During the year £1,775m of the loan receivable relating to the sale of EE was repaid. The balance consists of two loans to group undertakings of £1,024m
(2015/16: £1,004m) repayable on 31 January 2058 and £5,578m (2015/16: £7,507m) repayable on 21 December 2064. The loans attract interest of LIBOR plus 90 basis points (2015/16: Libor
plus 102.5 basis points).
b Trade and other payables consists of loans from group undertakings of £32m (2015/16: £32m) and other creditors of £46m (2015/16: £29m).
c Loans and other borrowings consist of a loan from group undertakings of £1,371m (2015/16: £1,409m). The loan is repayable on 31 January 2058 and attracts interest of LIBOR plus 90 basis points
(2015/16: LIBOR plus 102.5 basis points).
The financial statements of the company on pages 234 to 237 were approved by the Board of Directors on 11 May 2017 and were signed on
its behalf by:
Sir Michael Rake
Chairman
Gavin Patterson
Chief Executive
Simon Lowth
Group Finance Director
234
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235
235
BT Group plc company statement of changes in equity
Called up share
a
capital
£m
Notes
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 2015
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 2016
Profit for the financial year
Transfer to realised profit
Dividends paid
Capital contribution in respect of
share-based payments
Net buyback of own shares
At 31 March 2017
3
3
419
–
–
–
80
–
499
–
–
–
–
–
1,051
–
–
–
–
–
1,051
–
–
–
–
–
499
1,051
27
–
–
–
–
–
27
–
–
–
–
–
27
–
–
–
–
7,424
–
7,424
–
(1,775)
–
–
–
5,649
(165)
–
–
–
–
50
(115)
–
–
–
–
19
(96)
9,034
1,213
(1,078)
58
–
(275)
8,952
97
1,775
(1,436)
57
(155)
Total
£m
10,366
1,213
(1,078)
58
7,504
(225)
17,838
97
–
(1,436)
57
(136)
9,290
16,420
a The allotted, called up and fully paid ordinary share capital of the company at 31 March 2017 was £499m (31 March 2016: £499m), representing 9,968,127,681 (31 March 2016:
9,968,127,681) ordinary shares of 5p each.
b In 2016/17, 49,758,963 shares (2015/16: 84,760,494) were issued from Own shares to satisfy obligations under employee share schemes and executive share awards at a cost of £225m (2015/16:
£365m). At 31 March 2017, 21,993,165 shares (31 March 2016: 24,771,632) with an aggregate nominal value of £1m (31 March 2016: £1m) 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 was £97m (2015/16: £1,213m).
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Notes to the company financial statements
1. BT Group plc accounting policies
Principal activity
The principal activity of the company is to act as ultimate holding
company of the BT group.
The BT Group plc consolidated financial statements for the year
ended 31 March 2017 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.
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. These financial statements
have been prepared in accordance with Financial Reporting Standard
101 (FRS 101). 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.
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 2017 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 2017 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.
Investments
Investments are stated at cost and reviewed for impairment if there
are indicators that the carrying value may not be recoverable. An
impairment loss is recognised to the extent that the carrying amount
can not be recovered either by selling the asset or by continuing to
hold the asset and benefiting the net present value of the future cash
flows of the investment.
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. Dividend income is
recognised on receipt.
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 on 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.
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2. Investments
Cost
At 1 April 2015
Additions
Disposals
At 31 March 2016
Additions
At 31 March 2017
Total
£m
10,686
11,029
(10,971)
10,744
57
10,801
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.
Included within additions is £57m (2015/16: £58m) of capital contributions 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 2016/17
and 2015/16.
3. 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 2 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. During 2016/17 £1,775m (2015/16: £nil) of merger reserve was transferred to
realised profit following the settlement of an intercompany loan by qualifying consideration.
4. Other information
Dividends
The Board recommends that a final dividend in respect of the year ended 31 March 2017 of 10.55p per share will be paid to shareholders
on 4 September 2017, taking the full year proposed dividend in respect of 2016/17 to 15.4p (2015/16: 14.0p, 2014/15: 12.4p) which
amounts to approximately £1,532m (2015/16: £1,324m, 2014/15: £1,028m). This final dividend is subject to approval by shareholders
at the Annual General Meeting and therefore the liability of approximately £1,050m (2015/16: £954m, 2014/15: £712m) has not been
included in these financial statements. The proposed dividend will be payable to all shareholders on the Register of Members on 11 August
2017.
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 2016/17 and 2015/16. The costs relating to qualifying services provided to the company’s principal subsidiary, British
Telecommunications plc, are recharged to that company.
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237
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Related undertakings
Subsidiaries
Company name
Activity
Group interest in
allotted capitala
Registered Address and
Country of incorporation
Held directly
BT Group Investments Limited
Held via other group companies
British Telecommunications plc
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
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
(Jordan)
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
Holding company
100% ordinary
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Communications related services and
products provider
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
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
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
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% ordinary
100% common
BDO LLP, 55 Baker Street, London, W1U 7EU
Calle 113, 7 - 21 Piso 11, Bogota, Torre A. Oficina,
Colombia
99% ordinary
Via Pianezza n° 123, Torino, Italy
100% ordinary
100% ordinary
100% ordinary
100% ordinary
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Avenida Andrade Corvo, 30, Praia, CP63, Cabo Verde
100% ordinary
99% ordinary
Beit Oz, 14 Abba Hillel Silver Rd, Ramat Gan, 52506,
Israel
Via Tucidide 56, Torre 7, 20134, Milano, Italy
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
1 More London Place, London, SE1 2AF
1 More London Place, London, SE1 2AF
Third Floor, St Georges Court, Upper Church Street,
Douglas, IM1 1EE, Isle of Man
1 More London Place, London, SE1 2AF
1 More London Place, London, SE1 2AF
81 Newgate Street, London, EC1A 7AJ, United Kingdom
The Gabbles, Haggatt Hall, St Michael, BB11063,
Barbados
1 More London Place, London, SE1 2AF
Barthstraße 4, 80339, Munich, Germany
100% ordinary Montagu Pavilion, 8-10 Queensway, Gibraltar
100% ordinary
100% –
100% ordinary
100% ordinary
11th Floor, Eros Corporate Tower, Opp. International Trade
Tower, Nehru Place, New Delhi, 110019, India
8 Changi Business Park Ave (South Tower), #08-51 UE
Bizhub East, Singapore, 486018, Singapore
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Al Mirad Building – Second Floor, Wadi Saqra Street
Amman – P.O.Box 962178 Amman 11196, Jordan
100% ordinary Minerva & Mercurius building, Herikerbergweg 2,
100% ordinary
100% ordinary
100% ordinary
1101CM, Amsterdam Zuidoost, Netherlands
ADOL House, 15 CIPM Avenue, Central Business District,
Alausa, Ikeja, Lagos, Nigeria
81 Newgate Street, London, EC1A 7AJ, United Kingdom
84 Dundas Street, Freetown, Sierra Leone
100% ordinary
100% ordinary
16th Floor, Saigon Tower, 29 Le Duan Road, District 1
Ho Chi Minh City, Socialist Republic of Vietnam
Rr. Murat Toptani, Eurocol Center, Kati 8, Tirana, Albania
100% ordinary
100% common
100% common
100% ordinary
100%
100%
ordinary
preference
20 Micro zone d'Activités Dar El Madina, Bloc B, Loc N01
Hydra, Alger, 16000, Algeria
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
Lola Mora 421, 15th Floor, Puerto Madero, Buenos Aires,
Buenos Aires, C1107DDA, Argentina
Level 1, 76 Berry Street, North Sydney NSW 2060,
Australia
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239
Company name
BT Australasia Pty Limited – New
Zealand Branchb
BT Austria GmbH
BT Azerbaijan Limited, Limited
Liability Company
BT Belgrade d.o.o
BT BELRUS Foreign Limited Liability
Company
BT Bilisim Hizmetleri Anonim Şirketi
BT Brasil Serviços de
Telecomunicações Ltda
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
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 Broadband Luxembourg Sàrl
BT Bulgaria EOOD
BT Business Direct Limited
Holding company
Communications related services, systems
integration and products provider
Technology equipment retailer
BT Cables Limited
BT Cables MEA FZE
BT Canada Inc.
Manufacture of telecommunications
and rail signalling cables
Sale of telecommunications and rail
signalling cables
Holding company
BT Centre Nominee 2 Limited
BT China Communications Limited
Property company
Trading company
BT China Limited
BT China Limited – Shanghai Branch
Officeb
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
Group interest in
allotted capitala
100% –
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% quotas
100% ordinary
100% ordinary
Registered Address and
Country of incorporation
c/- BDO Auckland, 8th Floor 120 Albert St, Auckland,
New Zealand
Handelskai. 94-96, Millennium Tower 32. OG,
Top 324, 1200, Wien, Austria
The Landmark III Building, 8th Floor, c/o Deloitte &
Touche, 96 Nizami Street, Baku, AZ 1010, Azerbaijan
Dimitrija Georgijevica Starike 20, Belgrade, 11070,
Serbia, Republic of
Office 13, ul. M. Bogdanovicha 1, Minsk, 220029,
Belarus
Yenisahra Mahallesi, Yavuz Selim Caddesi No 19/A,
Atasehir, Istanbul, Turkey
Rodovia SP 101, KM 9,5, Trecho Campinas- Monte Mor,
Unidade 27, Bloco Beta, Distrito Industrial, Hortolandia -
SP- CEP, Sao Paolo, 13185-900, Brazil
12 rue Eugene Ruppert, L 2453, Luxembourg
51B Bulgaria Blvd., fl. 4, Sofia, 1404, Bulgaria
100% ordinary
100% ordinary
Alpha & Beta House, Enterprise Park, Horwich, Bolton,
Lancs, BL6 6PE
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% ordinary
100% common
100% ordinary
50% ordinary
Office No. TPOFCB0505, Jabal Ali, Dubai, United Arab
Emirates
200 King St W, Suite 1904, Toronto ON M5H 3T4,
Canada
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Unit 1537B, Floor 15th, No. 55, Xili Road, Shanghai Free
Trade Zone, Shanghai, China
100% registered Room 702A, Tower W3, Oriental Plaza, 1 East Chang An
100% –
BT Colombia Limitada
BT Commerce L.L.C.
Communications related services, systems
integration and products provider
Dormant
100% quotas
100% units
BT Communications Bangladesh
Limited
BT Communications do Brasil Limitada Communications related services,
Communications related services, systems
integration and products provider
100% ordinary
100% quotas
BT Communications Ireland Group
Limited
BT Communications Ireland Group
Limited – UK Branchb
BT Communications Ireland Holdings
Limited
BT Communications Ireland Limited
technology consulting and products
provider
Holding company
100% ordinary
Communications related services, systems
integration and products provider
Holding company
100% –
100% ordinary
Telecommunications service provider
100% ordinary
BT Communications Kenya Limited
BT Communications Lanka (Private)
Limited
BT Communications Philippines
Incorporated
BT Communications Sales LLC
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
100% ordinary
100% ordinary
100% ordinary
100% units
BT Communications Sales of Virginia
LLC
Communications related services
100% units
Avenue, Dongcheng, Beijing, 100738, China
Room 2101-2103, 21/F, International Capital Plaza, No.
1318 North Sichuan Road, Hong Kou District, Shanghai,
200080, China
Calle 113 #7 - 21, Torre A, Of. 1112, Bogota, Colombia
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
House 51 (3rd Floor), Road 9, Block F, Banani, Dhaka,
1213, Bangladesh
Avenida das Nações Unidas, nº 4777, 14° Andar, Sao
Paulo, SP, 05477-000, Brazil
2 Grand Canal Plaza, Upper Grand Canal Street, Dublin 4,
Republic of Ireland
81 Newgate Street, London, EC1A 7AJ, United Kingdom
2 Grand Canal Plaza, Upper Grand Canal Street, Dublin 4,
Republic of Ireland
2 Grand Canal Plaza, Upper Grand Canal Street, Dublin 4,
Republic of Ireland
6th Floor, Virtual Offices, Morningside Office Park,Ngong
Road, Nairobi, Kenya
65/2, Sir Chittampalam A., Gardiner Mawatha, Colombo,
2, Sri Lanka
27th Floor, BPI Buendia Center,, 372 Sen. Gil Puyat
Avenue, Makati City, 1226, Philippines
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
c/o Corporation Service Company, 1111 East Main Street,
Richmond, VA 23219, United States
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239
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Company name
BT Communications Sales, LLC Puerto
Rico branchb
Activity
Communications related services
BT Communications Services South
Africa (Pty) Limited
BT Conferencing Video Inc.
BT Conferencing Video 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
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 Fleet Limited
BT Forty-Nine
BT France S.A.S.
BT Frontline Outsourcing Sdn Bhd
Communications related services, systems
integration and products provider
Audio, video and web collaboration
service provider
In liquidation
Employment company
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
In liquidation
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
Communications related services and
products provider
Investment/holding company
Provision of facilities management
services
Communications related services for
US federal government
Finance company
Finance company
Holding company
Fleet management
Holding company
Communications related services, systems
integration and products provider
In liquidation
BT Gabon Limited
Dormant
BT Garrick GmbH
BT Georgia Limited LLC
BT Ghana Limited
BT Global (Venezuela) S.A.
Holding company
Communications related services, systems
integration and products provider
Provision of IT network services and IT
solutions
Communications related services, systems
integration and products provider
Group interest in
allotted capitala
100% –
70% ordinary
100% common
100% ordinary
100% ordinary
100% limited by
guarantee
100% ordinary
100% ordinary
100% ordinary
Registered Address and
Country of incorporation
The Prentice-Hall Corporation System of Puerto Rico, Inc.,
c/o FGR Corporate Services Inc., Oriental Center, Suite
P1 -, 254 Munoz Rivera Ave, San Juan, PUERTO RICO,
00918, Puerto Rico
BT Building North Office Park, 54 Maxwell Drive,
Woodmead, 2191, South Africa
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
BDO LLP, 55 Baker Street, London, W1U 7EU
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
29 Boulevard Clozel, 01 BP 3586, Abidjan 01,
Cote d’Ivoire
Edificio Credicorp Bank, Piso 3, Oficina 301, Cuidad de
Panama, Panama
Havnegade 39, 1058, Kobenhavn K, Denmark
100% ordinary
Barthstraße 4, 80339, Munich, Germany
100% ordinary
100% ordinary
100% equity
100% ordinary
100% ordinary
87% ordinary
100% ordinary
BDO LLP, 55 Baker Street, London, W1U 7EU
Calle Jose Amado Soler, Esquina Abraham Lincoln,
Edificio Progresus, Suite No. 3A, Ensanche Seraller, Santo
Domingo, Dominican Republic
11th Floor, Eros Corporate Tower, Opp. International Trade
Tower, Nehru Place, New Delhi, 110019, India
1 More London Place, London, SE1 2AF
Edificio Centro Profesional Madre Tierra, Local 10, Piso 1,
Santa Elena, Antiguo Cuscatlan, El Salvador
Strada S. Margherita n° 6/a, Parma, Italy
C/ Isabel Colbrand 6-8, 28050, Madrid, Spain
100% ordinary
100% ordinary
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% common
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Tour Ariane, 5 place de la Pyramide, La Defense Cedex,
92088 PARIS, France
100% ordinary Menara BT, Level 8, Tower 3, Avenue 7, Bangsar South,
No.8, Jalan Kerinchi, 59200, Kuala Lumpur, Malaysia
100% Franc CFA Centre Ville Avenue Alfred, Marche Imm. 2 AG BP 3927,
100% ordinary
100% –
Libreville, Gabon
Barthstraße 4, 80339, Munich, Germany
74 Ilia Chavchavadze Avenue, Tbilisi, Georgia
100% ordinary
11 Adaman Loop, Tesano, Accra, Ghana
100% ordinary
Edificio Parque Cristal, Torre Este, Piso 1, Ofic. 06,
Av. Francisco de Miranda, Los Palos Grandes, Caracas,
Venezuela
11th Floor, Eros Corporate Tower, Opp. International Trade
Tower, Nehru Place, New Delhi, 110019, India
2 Grand Canal Plaza, Upper Grand Canal Street, Dublin 4,
Republic of Ireland
10 Frere Felix De Valois Street, Port Louis, Mauritius
Av. das Nações Unidas, 4777 - 17th floor, São Paulo /
SP, Brazil
BT Global Business Services Private
Limited
BT Global Communications (Ireland)
Limited
BT Global Communications (Mauritius)
Limited
BT Global Communications do Brasil
Limitadaa
Communications related services
100% ordinary
Property company
100% ordinary
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
100% ordinary
100% quotas
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241
Related undertakings continued Company name
BT Global Communications India Private
Limited
BT Global Costa Rica SRL
BT Global Japan Corporation
BT Global Services (Dalian) Co. Ltd.
Activity
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
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
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 Services Limited Londra
Sucursala Bucurestib
BT Global Services Luxembourg SARL Communications related services, systems
Group interest in
allotted capitala
74% ordinary
100% ordinary
100% ordinary
Registered Address and
Country of incorporation
11th Floor, Eros Corporate Tower, Opp. International Trade
Tower, Nehru Place, New Delhi, 110019, India
Centro Corporativo Internacional, Piso 1, Avenida 6 y 8,
Calle 26 y 28, Barrio Don Bosco, Costa Rica
ARK Mori Building, 12-32 Akasaka, 1-Chome,
Minato-Ku, Tokyo, 107 - 6024, Japan
100% registered No. 31 Software Park Road, Tower A, Science &
Technology Building, Dalian Software Park, Dalian,
116023, China
100% ordinary Menara BT, Level 8, Tower 3, Avenue 7, Bangsar South,
100% ordinary
100% common
100% –
No.8, Jalan Kerinchi, 59200, Kuala Lumpur, Malaysia
Plot 113, Unit 28 Kgale Mews, Gaborone International
Finance Park, Gaborone, PO BOX 1839, Botswana
8th Floor, KTB Building, 66 Yeoui-daero,
Yeongdeungpo-gu, Seoul, 07325, Korea, Republic of
Via Mario Bianchini 15, 00142 Roma, Italy
100% ordinary
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% –
100% ordinary
35-37 Oltenitei Str., Cladirea A1, Biroul Nr. 52, Bucharest,
Sector 4, Romania
12 rue Eugene Ruppert, L 2453, Luxembourg
BT Global Services Solutions Sdn Bhd Communications related services, systems
100% ordinary Menara BT, Level 8, Tower 3, Avenue 7, Bangsar South,
integration and products provider
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 Group Nominees Limited
BT Guatemala S.A.
BT Holdings Limited
BT Hong Kong Limited
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
Dormant
Communications related services, systems
integration and products provider
Investment holding company
Communications related services and
products provider
BT Hong Kong Ltd. – Macau Branchb Communications related services, systems
BT International Holdings Limited &
Co. LLC
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
integration and products provider
Communications related services, systems
integration and products provider
Dormant
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
Communications related services and
products provider
100% ordinary
100% ordinary
No.8, Jalan Kerinchi, 59200, Kuala Lumpur, Malaysia
8 Changi Business Park Ave (South Tower), #08-51 UE
Bizhub East, Singapore, 486018, Singapore
8 Changi Business Park Ave (South Tower), #08-51 UE
Bizhub East, Singapore, 486018, Singapore
100% ordinary Menara BT, Level 8, Tower 3, Avenue 7, Bangsar South,
100% ordinary
No.8, Jalan Kerinchi, 59200, Kuala Lumpur, Malaysia
CESTA V MESTNI LOG 1, 1000 LJUBLJANA, Slovenia
100% ordinary
100% unique
100% ordinary
ordinary
preference
39%
61%
100% –
100% ordinary
100% ordinary
99% ordinary
81 Newgate Street, London, EC1A 7AJ, United Kingdom
3ra Avenida 13-78, Zona 10 Torre Citibank, Nivel 2,
Oficina No. 206, Guatemala
81 Newgate Street, London, EC1A 7AJ, United Kingdom
38 Floor Dorset House, Taikoo Place, 979 King’s Road,
Quarry Bay, Hong Kong
Av.Praia Grande,No. 369,, Keng Ou Commercial
Building,17 flr, Macau, Macao
413, 4th Floor, Maktabi Building, Wattayah, PC 112,
Muscat, 2188, Oman
3 Midland Way, Barlborough Links, Barlborough,
Chesterfield, S43 4XA, United Kingdom
Via Tucidide 56, Torre 7, 20134, Milano, Italy
100% ordinary
26 Beechwood Avenue, PO Box 351, Kingston 5, Jamaica
100% ordinary
100% ordinary
100% –
100% ordinary
100% common
100% common
100% common
ARK Mori Building, 12-32 Akasaka, 1-Chome,
Minato-Ku, Tokyo, 107 - 6024, Japan
PO Box 264, Forum 4, Grenville Street, St Helier, JE4 8TQ,
Jersey
36 Al Farabi Ave., Bldg. B, Almaty Financial District,
Almaty, Republic of Kazakhstan, 050059, Kazakhstan
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Sea Meadow House, Blackburne Highway (P.O. Box 116),
Road Town, Tortola, Virgin Islands, British
c/o Corporation Service Company, 2215-B Renaissance
Drive, Las Vegas, NV 89119, United States
Lola Mora 421, 15th Floor, Puerto Madero, Buenos Aires,
Buenos Aires, C1107DDA, Argentina
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Company name
BT LatAm Brasil Ltda.
BT LatAm Colombia S.A.
BT LatAm Costa Rica, S.A.
BT LatAm Dominicana, S.A.
Activity
Communications related services, systems
integration and products provider
Group interest in
allotted capitala
100% quotas
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
100% common
100% common
100% common
BT LatAm El Salvador, S.A. de CV
BT LatAm Guatemala, S.A.
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
100% common
100% common
BT LatAm Holdings (Colombia) S. A.
Holding company
100% common
BT LatAm Holdings Brasil Ltda
Holding company
100% common
BT LatAm Holdings One, Inc.
Holding company
100% common
BT LatAm Holdings Three, Inc.
Holding company
100% common
BT LatAm Holdings Two, Inc.
Holding company
100% common
BT LatAm Honduras, S.A.
Communications related services, systems
integration and products provider
100% common
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.
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
100% common
100% common
100% common
100% common
100% common
Communications related services, systems
integration and products provider
100% ordinary
BT LatAm, Inc.
Communications related services
100% common
Registered Address and
Country of incorporation
Rodvia SP 101, KM 9,5, Trecho Campinas - MonteMor,
Unidade 27, Bloco Alfa, Distrito Industrial, Hortolandia-
SP- CEP, 13185-900
Calle 113 #7 - 21, Torre A, Of. 1112, Bogota, Colombia
Centro Corporativo Internacional, Piso 1, Avenida 6 y 8,
Calle 26 y 28, Barrio Don Bosco, Costa Rica
Calle Jose Amado Soler, Esquina Abraham Lincoln,
Edificio Progresus, Suite No. 3A, Ensanche Seraller, Santo
Domingo, Dominican Republic
Edificio Centro Profesional Madre Tierra, Local 10, Piso 1,
Santa Elena, Antiguo Cuscatlan, El Salvador
Edificio Torre Citibank en Intercontinental Plaza, 3
Avenida, 13-78, Zona 10, Nivel 2, Oficina 203,
Guatemala
Calle 113, 7 - 21 Piso 11, Bogota, Torre A. Oficina,
Colombia
Avenida Das Nações Unidas, 4777 - 14, andar- parte-
Jardim Universidade - São Paulo- SP- CEP, 05477-000
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
Edificio Plaza Azul, Piso 2 do Nivel, Local No. 26, Colonia
Lomas del Guijarro Sur, Avenida Paris, Calle Viena,
Tegucigalpa, Honduras
Av. Renato Leduc 321, Col. Toriello Guerra,
14050 Mexico D.F.
Edificio Invercasa, 5to Piso, Suite 505, Via Fontana, frente
al colegio La Salle, Managua, Nicaragua
Edificio Credicorp Bank, Piso 3, Oficina 301, Cuidad de
Panama, Panama
Calle Martir Olaya, 129 of 1901, Miraflores, Lima, Peru
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
Av. Francisco de Miranda, Edificio Parque Cristal, Torre
Este, Mezz 2, Local 28, Los Palos Grandes, Caracas 1060,
Venezuela
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
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
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
100% –
100% ordinary Muitas iela 1A, Riga, LV-1010, Latvia
100% ordinary
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% –
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Abou Hamad, Merheb, Nohra & Chedid Law Firm, Chbaro
Street, 22nd Achrafieh Warde Building, 1st Floor, Beirut,
P.O.BOX 165126, Lebanon
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Telecomlaan 9, 1831 Diegem, Belgium
100% ordinary
81 Newgate Street, London, EC1A 7AJ, United Kingdom
BT Limited Hungarian Branch Officeb Communications related services, systems
100% –
BT Limited Taiwan Branchb
BT Limited, Beijing Officeb
integration and products provider
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
100% –
100% –
First Floor, Culross Court North, 16 Culross Road,
Bryanston 2021, 2021, South Africa
Budafoki U. 91-93, Budapest, 1117, Hungary
Shin Kong Manhattan Building, 14F, No. 8, Sec. 5, Xinyi
Road, Taipei, 11049, Taiwan
No. 3 Dong San Huan Bei Lu, Chao Yang District, Beijing,
100027, China
242
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Annual Report 2017
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BT Group plc
243
Related undertakings continued Company name
BT Limited, organizacni slozkab
BT Luxembourg Investment Holdings
Sarl
BT Malawi Limited
Activity
Communications related services, systems
integration and products provider
Holding company
Group interest in
allotted capitala
100% –
Registered Address and
Country of incorporation
V Celnici 1031/4, 110 00 Prague 1, Czech Republic
100% ordinary
12 rue Eugene Ruppert, L 2453, Luxembourg
BT Managed Services (No.2) Limited Dormant
BT Managed Services Limited
Communications related services, systems
integration and products provider
100% ordinary
100% ordinary
100% ordinary
BDO Tax & Advisory Services (Pvt) Ltd, 6th Floor Unit
House, 12 Victoria Street PO BOX 3038, Blantyre, Malawi
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
BT Manx Investments Limited
BT MDV Limited
BT MEA FZ-LLC
BT Montenegro DOO
BT Moorgate LLC
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, systems
integration and products provider
Communications related services
100% units
BT Moorgate LLC – UK Branchb
BT Moorgate One Limited
BT Moorgate Two Limited
BT Mozambique, Limitada
BT Multimedia (Malaysia) Sdn Bhd
Communications related services
Finance company
Finance company
Communications related services, systems
integration and products provider
In liquidation
100% –
100% ordinary
100% ordinary
100% quotas
100% ordinary
100% ordinary
Equiom (Isle of Man) Limited, Jubilee Buildings, Victoria
Street, Douglas, Isle of Man, IM1 2SH
100% ordinary MD-2001, 65 Stefan cel Mare si Sfant Boulevard, office
806, Chisinau, Moldova, Republic of
Office No G03, Ground Floor, EIB Building No 04, Dubai,
United Arab Emirates
Bulevar revolucije 7, Podgorica, 81000, Montenegro
100% ordinary
100% –
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Av. 25 de Setembro, 1230, 3º, Bloco 5, Caixa Postal
4200, Maputo, 4200, Mozambique
Level 1 to 8, Tower 3,, Avenue 7, Bangsar South, No. 8
Jalan Kerinchi, 59200 Kuala Lumpur, Malaysia
BT Nederland N.V.
BT Nederland N.V.b
BT Netherlands Investments B.V.
Communications related services and
products provider
Communications related services, systems
integration and products provider
Holding company
100% ordinary Minerva & Mercurius building, Herikerbergweg 2,
100% –
1101CM, Amsterdam Zuidoost, Netherlands
Via Tucidide 56, Torre 7, 20134, Milano, Italy
100% ordinary Minerva & Mercurius building, Herikerbergweg 2,
BT Newgate LLC
Communications related services
100% units
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
Communications related services
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
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
Holding company
In liquidation
BT Professional Services (Luxembourg)
S.A.
BT Professional Services Nederland
B.V.
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
100% quotas
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% –
100% ordinary
100% ordinary
100% ordinary
100% –
100% capital
1101CM, Amsterdam Zuidoost, Netherlands
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Edificio Invercasa, 5to Piso, Suite 505, Via Fontana, frente
al colegio La Salle, Managua, Nicaragua
57, Rue des Sorkhos, BP 616, Niamey-Niger
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% ordinary
100% ordinary
100% ordinary Mannerheimvägen 12 B 6, 00100 Helsinki, Finland
100% ordinary
100% ordinary
Box 30005, 104 25, Stockholm, Sweden
2nd Floor, Block C, Lakson Square, Building No. 1,
Sarwar Shaheed Road, Karachi, 74200, Pakistan
Humaita 145, Planeta I Building, 9th Floor, Asuncion,
1245, Paraguay
BDO LLP, 55 Baker Street, London, W1U 7EU
Calle Martir Olaya, 129 of 1901, Miraflores, Lima, Peru
International Business Center, Al. Armii Ludowej,
14,00-638 Warszawa
Rua D. Francisco Manuel de Melo 21-1, 1070-085
Lisboa, Portugal
Unterster Zwerchweg 61, 60599 Frankfurt am Main,
Germany
Telecomlaan 9, 1831 Diegem, Belgium
602, Tower B, RMZ Infinity, Municipal No. 3, Old Madras
Road, Benninganahalli, Bengaluru, Karnataka, 560016,
India
12 rue Eugene Ruppert, L 2453, Luxembourg
100% ordinary Minerva & Mercurius building, Herikerbergweg 2,
1101CM, Amsterdam Zuidoost, Netherlands
242
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243
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Activity
Property/holding company
Company name
BT Property Holdings (Aberdeen)
Limited
BT Property Holdings (Oxford) Limited Property/holding company
BT Property Limited
BT ROC Kft
BT Services S.A.S.
BT Seventy-Four Limited
BT Seventy-Three
BT Siam Limited
BT Singapore Pte. Ltd.
BT Sixty-Four Limited
BT Sle Euro Limited
BT Sle USD Limited
BT Slovakia s.r.o.
BT Sociedad De Responsabilidad
Limitada
BT Solutions Limitedb
BT Solutions Limitedb
BT Solutions Limitedb
BT Solutions Limitedb
BT Solutions Limitedb
BT Solutions Limitedb
BT Solutions Limited
BT Solutions Limitedb
BT Solutions Limited
(Bahrain Branch)b
BT Solutions Limited – Kuwait
Branchb
BT Solutions Limited – Morocco
Branchb
BT Solutions Limited – Tanzania
Branchb
BT Solutions Limited Branch Office
in Skopjeb
BT Solutions Limited Eesti Filiaalb
Dormant
Communications related services, systems
integration and products provider
Technology consulting and engineering
services
In liquidation
Investment/holding company
Communications related services, systems
integration and products provider
Communications related services and
products provider
Finance company
Finance company
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
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 Solutions Limited Liability
Company
BT Solutions Limited Podruznica
Hrvatskab
BT Solutions Limited Sucursal Boliviab Communications related services, systems
BT Solutions Limited Sucursal
Uruguayb
BT Solutions Limited Útibú á Íslandib
BT Solutions Limited-Greek Branchb
BT Solutions Norway AS
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
Group interest in
allotted capitala
100% ordinary
Registered Address and
Country of incorporation
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% ordinary
100% ordinary
100% business
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Budafoki út 91-13, 1117 Budapest, Hungary
100% ordinary
Tour Ariane, 5 place de la Pyramide, La Defense Cedex,
92088 PARIS, France
BDO LLP, 55 Baker Street, London, W1U 7EU
81 Newgate Street, London, EC1A 7AJ, United Kingdom
69% preference Athenee Tower, 23rd Floor, (CEO Suite, Suite 38 & 40),
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
63 Wireless Road, Lumpini, Pathumwan, Bangkok,
10330, Thailand
8 Changi Business Park Ave (South Tower), #08-51 UE
Bizhub East, Singapore, 486018, Singapore
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Laurinská 18, 811 01 Bratislava, Slovakia
100% –
100% –
100% –
100% –
100% –
100% –
100% –
100% ordinary
100%
100% –
100% –
100% –
100% –
100% –
100% –
Colonia Lomas Del Guijarro sur, edificio Plaza azul,
2do. Nivel, local #26, Tegucigalpa, Honduras
236 Strovolos Avenue, Strovolos 2048, Nicosia, Cyprus
Av. Amazonas N21-252 y Carrión, Edificio Londres,
4° Piso, Quito, Ecuador
Tower Gate Place, Tal-Qroqq Street, Msida MSD 1703,
Malta
PO Box 2184, 61 Bismarck Street, Windhoek, Namibia
9 Warner Street, Port of Spain, 0000, Trinidad and
Tobago
c/o BDO East Africa, Plot 22 Mbuya Road, Bugolobi,
Kampala,, P.O. BOX 9113, Uganda
81 Newgate Street, London, EC1A 7AJ, United Kingdom
C/O BDO Zambia Limited Services, Unit B, Counting House
Square, Thabo Mbeki Road, Lusaka, Zambia
Suite #650, 6th floor, Building No. 247, Road 1704,
Diplomatic Area 317, Bahrain
Block 2-A, 9th Floor, Ahmad Al Jaber Street, Sharq,
Kuwait
193, Avenue HASSAN II, Casablanca, MAROC s/c Domicilia
services, Morocco
BDO East Africa, 1st Floor-Wing B, Infotech Place, Mwai
Kibaki Road, Dar es Salaam, Tanzania
Str. Dame Gruev no.8, 5th floor, Building “Dom na voenite
invalidi”, SKOPJE 1000, Macedonia
A.H. Tammsaare tee 47, Tallinn, 11316, Estonia
100% –
26 Pravdy Street, Moscow, 127137, Russia
100% –
Savska 64, 10 000 Zagreb, Croatia
100% –
100% –
100% –
Avenida Arce esquina Rosendo Gutierrez, Edifico
Multicentre Torre B, Piso 12, La Paz, Bolivia
Rincón 487 Piso 11, Montevideo, ZIP CODE 11.000,
Uruguay
Co. Deloitte, Smáratorg 3, 201, Kopavogur, Iceland
100% –
75 Patision Street, Athens, 10434, Greece
100% ordinary Munkedamsveien 45, c/o BDO AS, 0121 Oslo, Norway
244
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245
Related undertakings continued Group interest in
allotted capitala
100% ordinary
100% ordinary
Registered Address and
Country of incorporation
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Richtistrasse 5, 8304 Wallisellen, Switzerland
100% ordinary Menara BT, Level 8, Tower 3, Avenue 7, Bangsar South,
No.8, Jalan Kerinchi, 59200, Kuala Lumpur, Malaysia
100% registered Building 16, 6th Floor, Room 602-B, No. 269 Wuyi
Company name
BT South Tyneside Limited
BT Switzerland AG
BT Systems (Malaysia) Sdn Bhd
BT Technology (Dalian) Company
Limited.
BT Telconsult Limited
BT Telecom Egypt LLC
BT Telecom India Private Limited
Activity
Employment company
Communications related services 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
Dormant
integration and products provider
Communications related services, systems
integration and products provider
100% ordinary
100% stakes
74% ordinary
100% ordinary
100% common
100% ordinary
BT Telecommunications Kenya
Limited
BT Telekom Hizmetleri Anonim Şirketi Communications related services, systems
BT Tunisia S.A.R.L
BT UAE Limited
Communications related services, systems
integration and products provider
100% ordinary
BT UAE Limited – Abu Dhabi Branchb Communications related services, systems
100% –
integration and products provider
BT UAE Limited – Dubai Branch (1)b
Communications related services, systems
integration and products provider
100% –
BT UAE Limited – Dubai Branch (2)b
Communications related services, systems
integration and products provider
100% –
BT Ukraine Limited Liability Company Communications related services, systems
100% stakes
BT US Investments Limited
BT US Investments Limited
– UK branchb
BT U.S. Government Services L.L.C.
integration and products provider
Investment/holding company
100% ordinary
Investment company
100% –
Dormant
100% units
BT United States L.L.C.
Holding company
100% units
BTexact Technologies Limited
BTexact Venturing Limited
BTGS Mexico S.A. de C.V.
Finance company
Investment/holding company
Communications related services, systems
integration and products provider
100% ordinary
100% ordinary
2%
98%
fixed
variable
Road, Hi-tech Park, Dalian, 116023, China
BDO LLP, 55 Baker Street, London, W1U 7EU
1 Wadi El Nile St., Mohandessin, Giza, Cairo, Egypt
11th Floor, Eros Corporate Tower, Opp. International Trade
Tower, Nehru Place, New Delhi, 110019, India
P.O. BOX 10032-00100, Nairobi, Kenya
Barbaros Mahallesi, Yavuz Selim Caddesi No: 17/1
Ataşehir, İstanbul, Turkey
BT chez BDO Tunisie, Immeuble, ENNOUR BUILDING
3ème étage, Centre Urbain Nord 1082, Mahrajène Tunis,
Tunisia
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Office No. (F6) International Business Center, Building No.
(27W10), Three Sails Tower, Cornish, Abu Dhabi, United
Arab Emirates
Office no.206 BLOCK B, Diamond Business Center 1,
Al Barsha South Third, Dubai, P.O.BOX 25205, United
Arab Emirates
Office no.206 BLOCK B, Diamond Business Center 1,
Al Barsha South Third, Dubai, P.O.BOX 25205, United
Arab Emirates
Office 615; 26 Lesi Ukrayinky Boulevard, Kyiv, 01133,
Ukraine
Ogier House, The Esplanade, Parish, St Helier,
Jersey, JE4 9WG, Jersey
81 Newgate Street, London, EC1A 7AJ, United Kingdom
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
100% owned by BT America Holdings Inc.
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Blvd. Manuel Avila Camacho #1-6, Col. Lomas de
Chapultepec, Deleg. Miguel Hidalgo, Mexico D.F., 11009,
Mexico
BTGS USVI Limited
Dormant
100% ordinary Waterfront Center - Suite A, St. Thomas 00803,
BTIH Teleconsult Drustvo sa
organicenom odgovornoscu za
posredovanje i zastupanje d.o.o.
Sarajevo
Canal Capital Investment Limited
Cegetel Holdings I B.V.e
Cegetel Holdings I Sarl
Cegetel Holdings II B.V.e
Cegetel Holdings II Sarl
Comms Factory Limited
Communications Global Network
Services Limited
Communications Global Network
Services Limited – UK Branchb
Architectural and engineering activities
and technical consulting
100% –
US Virgin Islands
ul. Despiceva broj 3/II, Sarajevo, Sarajevo-Stari Grad,
71000, Bosnia and Herzegovina
Investment company
100% ordinary 2 Grand Canal Plaza, Upper Grand Canal Street, Dublin 4,
Holding company
Holding company
Holding company
Holding company
In liquidation
Communications related services and
products provider
Communications related services and
products provider
100% ordinary
100% –
100% ordinary
100% –
100% ordinary
100% ordinary
100% –
Republic of Ireland
12 rue Eugene Ruppert, L 2453, Luxembourg
12 rue Eugene Ruppert, L 2453, Luxembourg
12 rue Eugene Ruppert, L 2453, Luxembourg
12 rue Eugene Ruppert, L 2453, Luxembourg
BDO LLP, 55 Baker Street, London, W1U 7EU
Century House, 16 Par-la-Ville Road, Hamilton, HM08,
Bermuda
81 Newgate Street, London, EC1A 7AJ, United Kingdom
244
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245
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Group interest in
allotted capitala
100% ordinary
Registered Address and
Country of incorporation
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% -
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Company name
Communications Networking
Services (UK)
Communicator (IOM) Limited - UK
Branchb
Communicator Insurance Company
Limited
Communicator Limited
Activity
Communications related services and
products provider
Insurance
Investment company
Investment company
Comsat de Guatemala S.A.
Dormant
99%
1%
ordinary
preference
100% ordinary
100% common
dabs.com plc
Technology equipment retailer
100% ordinary
Deleteway Limited
Dublin London Network Limited
EE (Group) Limited
In liquidation
Communications related services, systems
integration and products provider
Dormant
100% ordinary
55% ordinary
100% ordinary
EE Communications (South Africa)
Proprietary Limited
EE Finance plc
Dormant
100% ordinary
Finance company
100% ordinary
EE Limited
Telecommunications
100% ordinary
EE Pension Trustee Limited
Pension trustee company
100% ordinary
EE Services Limited
Dormant
ERPTech S.p.A.
ESAT Telecommunications (UK)
Limited
Everything Everywhere Limited
Communications related services, systems
integration and products provider
Dormant
Dormant
Extraclick Limited
Frontline Solutions Pte Ltd
Investment/holding company
In liquidation
Green House Group Pte Ltd
In liquidation
100% ordinary
99% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
Third Floor, St Georges Court, Upper Church Street,
Douglas, IM1 1EE, Isle of Man
Third Floor, St Georges Court, Upper Church Street,
Douglas, IM1 1EE, Isle of Man
6a avenida, 7-39 de la zona 10 Edificio las Brisas,
3er nivel, ciudad de Guatemala, Guatemala
Alpha & Beta House, Enterprise Park, Horwich, Bolton,
Lancs, BL6 6PE
1 More London Place, London, SE1 2AF
2 Grand Canal Plaza, Upper Grand Canal Street, Dublin 4,
Republic of Ireland
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
24-18th Street, Menlo Park, Pretoria, 0081, South Africa
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Via Charles Robert Darwin, no 85, 20019,
Settimo Milanese, Italy
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
600 North Bridge Road, #23-01 Parkview Square,
188778, Singapore
8 Changi Business Park Ave (South Tower), #08-51 UE
Bizhub East, Singapore, 486018, Singapore
Green House Solution Sdn Bhd
In liquidation
100% ordinary Menara BT, Level 8, Tower 3, Avenue 7, Bangsar South,
groupBT Limited
Holland House (Northern) Limited
iASPire.Net Pte Ltd
Communications related services, systems
integration and products provider
Property/holding company
Dormant
100% ordinary
100% ordinary
95% ordinary
IINS, Inc.
Communications related services
100% common
Ilford Trustees (Jersey) Limited
Infocom Telecom LLC
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
Investment company
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
Dormant
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
100% ordinary
100% charter
100% common
100% ordinary
100% –
100% –
100% ordinary
66% ordinary
100% ordinary
Infonet Primalliance Holding Co. Ltd. Holding company
100% ordinary
No.8, Jalan Kerinchi, 59200, Kuala Lumpur, Malaysia
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Alexander Bain House, 15 York Street, Glasgow, G2 8LA
8 Changi Business Park Ave (South Tower), #08-51 UE
Bizhub East, Singapore, 486018, Singapore
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
26 New Street, St Helier, JE2 3RA, Jersey
Miusskaya Square 7, 125811, Moscow, Russia
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
38th floor, Dorset House, Taikoo Place, 979 King’s Road,
Island East, Hong Kong
Room 4C, 7/F, Tower W3, Oriental Plaza, 1 East Chang An
Avenue, Dong Cheng District, Beijing, P. R. China
Room B, 28/F, Cross Region Plaza, 899 Ling Ling Road,
Xu Hui District, Shanghai, P. R. China
Via Tucidide 56, Torre 7, 20134, Milano, Italy
Room 4B, 7/F, Tower W3, Oriental Plaza, 1 East Chang An
Avenue, Dong Cheng District, Beijing, P. R. China
38 Floor Dorset House, Taikoo Place, 979 King's Road,
Quarry Bay, Hong Kong
Room 635-3, No. 2 BLDG, 351 Guo Shou Jing Road,
Zhang Jiang High Technology Park, Shanghai, P. R. China
246
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247
Related undertakings continued Company name
Infonet Services (Hong Kong) Limited Communications related services, systems
Activity
Infonet Services Corporation
integration and products provider
Communications related services
Group interest in
allotted capitala
100% ordinary
100% common
Infonet USA Corporation
Communications related services
100% common
IT Holdings, Inc
Dormant
100% ordinary
Holding company
100% ordinary
Mainline Communications Group
Limited
Mainline Digital Communications
Limited
Mainline Limited
Distribution of mobile telephones and
services
Dormant
Mobilise Telecoms Limited
Dormant
M-Viron Limited
Dormant
Newgate Communication (Sudan)
Co. Ltd
Newgate Leasing Limited
Newgate Street Secretaries Limited
Numberrapid Limited
Numberrapid Limitedb
Nuova Societa di Telecomunicazioni
SpA
Openreach Limited
Opimus S.A. de C.V.
Orange FURBS Trustees Limited
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
Dormant
Communications related services, systems
integration and products provider
Pension trustee company
Orange Home UK Limited
Dormant
Orange Personal Communications
Services Limited
Orange Services India Private Limited Provision of call centre services
Pelipod Ltd
Holding company
Supplier of delivery pods for supply
chain solution
Broadband service provider
Plusnet plc
Postgate Holding Company
Priestgate Limited
In liquidation
Holding company
PSPI-Subic, Inc
Dormant
Registered Address and
Country of incorporation
38 Floor Dorset House, Taikoo Place, 979 King's Road,
Quarry Bay, Hong Kong
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
12th Floor, Multinational Bancorporation Centre, 6805
Ayala Ave., Makati City, Philippines
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Alskheikh Mustafa Building, Parlman Street, Khartoum,
Sudan
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% –
3 Baines Avenue, Box 334, Harare, Zimbabwe
99% ordinary
Via Tucidide 56, Torre 7, 20134, Milano, Italy
100% ordinary
100% common
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
51% ordinary
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Av. Renato Leduc 321, Col. Toriello Guerra, 14050
Mexico D.F.
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
Trident Place, Mosquito Way, Hatfield, Hertfordshire,
AL10 9BW, United Kingdom
A-47, Hauz Khas, New Delhi, Delhi-DL, 110016, India
81 Newgate Street, London, EC1A 7AJ, United Kingdom
The Balance, 2 Pinfold Street, Sheffield, S1 2GU, United
Kingdom
BDO LLP, 55 Baker Street, London, W1U 7EU
Third Floor, St Georges Court, Upper Church Street,
Douglas, IM1 1EE, Isle of Man
c/o Sun Microsystems Phil Inc., 8767 Paseo de Roxas,
Makati City, Philippines
PT BT Communications Indonesia
PT BT Indonesia
PT Sun Microsystems Indonesia
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
Dormant
100% ordinary World Trade Centre 5, 13th Floor, Jl. Jend. Sudirman Kav.
29-31, Jakarta, Jakarta, 12920, Indonesia
100% ordinary World Trade Center 5, 13th Floor, Jl.Jend Sudirman, Kav.
29-31, Jakarta, Jakarta, 12920, Indonesia
60% ordinary World Trade Centre 5, 13th Floor, Jl. Jend. Sudirman Kav.
Radianz Americas Inc.
Communications related services
100% common
Radianz Italia S.r.l.
Radianz Limited
Radianz Spain S.L.
RDZ Netherlands BV
Sama Empreedimentos e Participações
Limitada
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
Dormant
29-31, Jakarta, Jakarta, 12920, Indonesia
c/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, DE 19808, United States
Via Correggio 5, 20097, San Donato Milanese, Milan,
Italy
81 Newgate Street, London, EC1A 7AJ, United Kingdom
C/ Isabel Colbrand 6-8, 28050, Madrid, Spain
100% ordinary
100% ordinary
100% ordinary
100% ordinary Minerva & Mercurius building, Herikerbergweg 2,
100% common
1101CM, Amsterdam Zuidoost, Netherlands
Rua Arnaldo Quintela - 96, 1 Andar - Botafogo, CEP
22.280-070, Rio de Janeiro, Brazil
246
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247
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Company name
Servicios de Telecomunicaciones BT
Global Networks Chile Limitada
SEV Automotive and Plant Limited
Skeegle App Limited
Skeegle Holdings Limited
Skeegle Operations Limited
Southgate Developments Limited
Stemmer GmbH
Sun Microsystems Philippines, Inc
Activity
Communications related services, systems
integration and products provider
Maintenance and repair of motor
vehicles
In liquidation
In liquidation
In liquidation
Investment/holding company
Communications related services, systems
integration and products provider
Dormant
Sun Vietnam Co., Ltd.
Sun Vietnam Pte. Ltd.
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
Dormant
Dormant
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
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
51% common
60% ordinary
60% ordinary
99% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
100% ordinary
Registered Address and
Country of incorporation
Avenida Américo Vespucio Sur 951, Piso 1 y 2, Las
Condes, Santiago de Chile, Chile, 7550371, Chile
Future Technology Centre, Barmston Court, Nissan Way,
Sunderland, Tyne and Wear, SR5 3NY, United Kingdom
BDO LLP, 55 Baker Street, London, W1U 7EU
BDO LLP, 55 Baker Street, London, W1U 7EU
BDO LLP, 55 Baker Street, London, W1U 7EU
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Peter Henlein Straße 2, 82140 Olching, Germany
18th Floor, Philamlife Tower, 8767 Paseo de Roxas,
Makati City, Philippines
7th Floor, ESTAR Building, 147-149 Vo Van Tan Street,
Ward 6, District 3, HCM City, Viet Nam
8 Changi Business Park Ave (South Tower), #08-51 UE
Bizhub East, Singapore, 486018, Singapore
Espace Jet Business Class, 16/18 Lot Attoufik Sidi
Maarouf, Casablanca, 20190, Morocco
BDO LLP, 55 Baker Street, London, W1U 7EU
81 Newgate Street, London, EC1A 7AJ, United Kingdom
BDO LLP, 55 Baker Street, London, W1U 7EU
200 King Street W, Suite 1904, Toronto ON M5H 3TA,
Canada
81 Newgate Street, London, EC1A 7AJ, United Kingdom
100% ordinary
100% ordinary
81 Newgate Street, London, EC1A 7AJ, United Kingdom
Aludariu str 2-33, LT-01113 Vilnius, Lithuania
100% ordinary
2 Grand Canal Plaza, Upper Grand Canal Street, Dublin 4,
Republic of 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
UK
31 March
Mobile Broadband Network Limited
Joint venture between EE and
Hutchison 3G UK Limited to
manage network
50% ordinary
UK 31 December
Rugby Radio Station (General Partner)
Limited
Property investment
50%
ordinary
UK 31 December
Rugby Radio Station (Nominee)
Limited
Property company
50% ordinary
UK 31 December
Rugby Radio Station LP
Property company
50% –
UK 31 December
81 Newgate Street,
London, EC1A 7AJ,
United Kingdom
6 Anglo Office
Park, 67 White Lion
Road, Amersham,
Buckinghamshire, HP7
9FB, United Kingdom
St Helen’s
1 Undershaft,
London, EC3P 3DQ,
United Kingdom
St Helen’s
1 Undershaft,
London, EC3P 3DQ,
United Kingdom
1 Poultry,
London, EC2R 8EJ,
United Kingdom
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249
Related undertakings continued
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.
Activity
Group interest in
allotted capitala
Country of incorporation
Associates
Company name
Held via other group companies
British Telecom Al-Saudia Limited
Communications related services, systems
integration and products provider
49% other
BT Global Services (North Gulf) LLC
BT Siam Communications Co. Ltd.
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
Collectively Limited
In liquidation
Digital Mobile Spectrum Limited
Ecquaria Limited
Mitigation of interference to digital terrestrial
television
Communications related services, systems
integration and products provider
ePLDTSunphilcox JV, Inc
Dormant
I2 S.r.l
Infonet Primalliance Shanghai Co. Ltd.
Communications related services, systems
integration and products provider
Communications related services, systems
integration and products provider
49% ordinary
49% class B
20% –
25% ordinary
50% ordinary
20% ordinary
23% –
28% ordinary
Infonet Primalliance Shenzhen Co. Ltd.
Communications related services, systems
integration and products provider
35% ordinary
Internet Matters Limited
Not for profit venture
25% –
Mahindra – BT Investment Company
(Mauritius) Limited
Midland Communications Distribution Limited Distribution and retailing of mobile telephones,
associated equipment and airtime connections
Investment/holding company
43% ordinary
35% ordinary
QXN S.c.p.A.
Real Time Content, Inc.
Communications related services and products
provider
Provision of Cloud based video services
25% ordinary
21% common
SunPhilcox JV, Inc
Dormant
Youview TV Limited
Not for profit venture – Development of
software to provide TV platform services
20% ordinary
14% voting
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.
e Cegetel Holdings I B.V. and Gegetel Holdings II B.V. were incorporated in the Netherlands rather than the country of their registered address.
New Acaria Commercial Complex,
Al-Siteen Street, Malaz, Riyadh,
Saudi Arabia
1413, 14th Floor, Al Fardan Office
Tower, Doha, 31316, Qatar
Athenee Tower, 23rd Floor, (CEO
Suite, Suite 38 & 40), 63 Wireless
Road, Lumpini, Pathumwan, Bangkok,
10330, Thailand
Kings Orchard, 1 Queen Street,
Bristol, BS2 0HQ, United Kingdom
83 Baker Street, London, W1U 6AG,
United Kingdom
c/o Offshore Incorporations Limited,
P.O. Box 957, Road Town, Tortola,
Virgin Islands, British
32F Philam Life Tower, 8767 Paseo de
Roxas, Makati City, Philippines
Via XII Ottobre 2N, 16121, Genova,
Liguria, Italy
Room 601, No. 2 BLDG, 750 West
Zhong Shan Rd., Shanghai, 200051,
P R China
Room 1206, Tower A, United Plaza,
5022 Bin He Avenue, Fu Tian District,
Shenzhen, P. R. China
Ambassador House 2nd Floor,
St Michaels Street, London, W2 1QS,
United Kingdom
c/o IFS, IFS Court, TwentyEight,
Cybercity, Ebene, Mauritius
Unit 1, Colwick Quays Business Park,
Colwick, Nottingham, Nottinghamshire,
NG4 2JY, United Kingdom
Piazzale Luigi Sturzo, 23, 00144,
Roma, Italy
Corporation Trust Center, 1209 Orange
Street, City of Wilmington,
County of New Castle 19801,
United States of America
32F Philam Life Tower, 8767 Paseo de
Roxas, Makati City, Philippines
10 Lower Thames Street, Third Floor,
London, EC3R 6YT, United Kingdom
248
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Annual Report 2017
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249
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 250
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
PB
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.
Additional information
Alternative performance measures
Selected financial data
Financial and operational statistics
Information for shareholders
Cross reference to Form 20-F
Glossary of terms
252
255
257
260
276
280
PB
BT Group plc
Annual Report 2017
Annual Report 2017
BT Group plc
251
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION 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.
Certain comparatives have been revised, see note 1 to the consolidated financial statements.
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 adjusted for the acquisition of EE, and in underlying
operating costs excluding transit adjusted for the acquisition of EE, as well as in EBITDA, adjusted EBITDA and underlying EBITDA adjusted
for the acquisition of EE; 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 underlying operating costs excluding transit adjusted for the acquisition of EE
Underlying revenue and underlying operating costs excluding transit adjusted for the acquisition of EE 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 exclude transit from the trends as transit traffic is low-margin
and is affected by reductions in mobile termination rates. Given the significance of the EE acquisition to the group, in 2016/17 we are
calculating underlying revenue excluding transit adjusted for the acquisition of EE and underlying operating costs excluding transit adjusted for
the acquisition of EE, as though EE had been part of the group from 1 April 2015. This is different from how we usually adjust for acquisitions.
A reconciliation from the increase in reported revenue and in reported operating costs, the most directly comparable IFRS measures, to the
movement in underlying revenue and increase in underlying operating costs excluding transit adjusted for the acquisition of EE, are set out below.
a
2016
%
Year ended 31 March
2017
%
Increase in reported revenue
Specific items
Increase in adjusted revenue
Adjusted for the acquisition of EEb
Increase in adjusted revenue adjusted for the acquisition of EE
Transit revenue
Acquisitions and disposals
Foreign exchange movements
(Decrease) increase in underlying revenue excluding transit adjusted for the acquisition of EE
Year ended 31 March
Increase in reported operating costs
Depreciation and amortisation
Increase in reported operating costsc
Specific items
Increase in adjusted operating costsc
Adjusted for the acquisition of EEb
Increase in adjusted operating costs adjusted for the acquisition of EEc
Transit costs
Acquisitions and disposals
Foreign exchange movements
Increase in underlying operating costsc excluding transit adjusted for the acquisition of EE
a
b
c
2015/16 calculation excludes specific items, foreign exchange movements and the effect of acquisitions and disposals.
Includes EE’s historical financial information as though it had been part of the group from 1 April 2015.
Before depreciation and amortisation.
252
BT Group plc
Annual Report 2017
26.6
1.0
27.6
(25.9)
1.7
0.1
0.1
(2.1)
(0.2)
2017
%
35.7
0.5
36.2
(3.9)
32.3
(28.7)
3.6
0.2
0.1
(2.7)
1.2
5.8
–
5.8
n/a
5.8
0.8
(5.6)
0.9
1.9
a
2016
%
5.7
0.4
6.1
0.5
6.6
n/a
6.6
1.0
(6.4)
1.4
2.6
Annual Report 2017
BT Group plc
253
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, adjusted EBITDA and underlying EBITDA adjusted for the acquisition of EE. 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, adjusted EBITDA and underlying EBITDA adjusted for the acquisition of EE 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.
Trends in underlying EBITDA adjusted for the acquisition of EE is a measure which seeks 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.
Given the significance of the EE acquisition to the group in 2016/17 we are calculating underlying EBITDA adjusted for the acquisition of
EE, as though EE had been part of the group from 1 April 2015. This is different from how we usually adjust for acquisitions.
A reconciliation from group operating profit, the most directly comparable IFRS measure, to group EBITDA and adjusted group EBITDA and
a reconciliation of the trends in EBITDA adjusted for the acquisition of EE is provided 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
EBITDA
Specific itemsa
Adjusted EBITDA
Year ended 31 March
Increase in EBITDA
Specific items
Increase in adjusted EBITDA
Adjusted for the acquisition of EEc
(Decrease) increase in adjusted EBITDA adjusted for the acquisition of EE
Acquisitions and disposals
Foreign exchange movements
(Decrease) increase in underlying EBITDA adjusted for the acquisition of EE
2017
£m
2016
£m
2015
£m
3,167
3,572
6,739
906
7,645
3,613
2,631
6,244
215
6,459
2017
%
7.9
10.5
18.4
(20.7)
(2.3)
–
(0.6)
(2.9)
3,402
2,538
5,940
253
6,193
b
2016
%
5.1
(0.8)
4.3
n/a
4.3
(4.2)
0.0
0.1
a Excludes amortisation specifics of £62m (2015/16: £nil, 2014/15: £nil). Specific items are set out in note 8 to the consolidated financial statements.
b 2015/16 calculation excludes specific items, foreign exchange movements and the effect of acquisitions and disposals.
c Includes EE’s historical financial information as though it had been part of the group from 1 April 2015.
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
19.2
9.7
28.9
2017
£m
1,908
961
2,869
Pence
per share
28.5
3.3
31.8
2016
£m
2,466
278
2,744
Pence
per share
25.5
5.1
30.6
2015
£m
2,057
406
2,463
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.
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253
THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Alternative performance measures continued
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 and 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.
A reconciliation from net cash inflow from operating activities, the most directly comparable IFRS measure, to free cash flow 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
Net (purchases) sales of non-current asset investments and dividends received from associates and joint ventures
Included in cash flows from financing activities
Interest paid
Free cash flow
Net cash outflow from specific items
Cash tax benefit of pension deficit payments
Normalised free cash flow
2017
£m
2016
£m
2015
£m
6,174
274
(3,119)
7
(20)
(629)
2,687
205
(110)
2,782
5,151
880
(2,431)
10
17
(558)
3,069
232
(203)
3,098
4,788
876
(2,310)
10
8
(590)
2,782
154
(106)
2,830
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. A reconciliation from loans and other borrowings,
cash and cash equivalents, and current asset investments, the most directly comparable IFRS measures to net debt, is set out below.
At 31 March
Loans and other borrowingsa
Cash and cash equivalents
Current investments
Adjustments:
To retranslate currency denominated balances at swapped rates where hedgedb
To remove fair value adjustments and accrued interest applied to reflect the effective interest methodc
Net debt
a
Includes overdrafts of £17m at 31 March 2017 (31 March 2016: £537m, 31 March 2015: £441m).
b
The translation difference between spot rate and hedged rate of loans and borrowings denominated in foreign currency.
c
Includes remaining fair value adjustments made on certain loans and other borrowings and accrued interest at the balance sheet date.
2017
£m
2016
£m
2015
£m
12,713
(528)
(1,520)
14,761
(996)
(2,918)
10,176
(848)
(3,523)
10,665
10,847
5,805
(1,419)
(314)
(652)
(357)
(357)
(335)
8,932
9,838
5,113
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PB
Selected 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 (loss) profit 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 sharec
Dividends per share, US centsc,d
2017
£m
a
2016
£m
a
2015
£m
b
2014
£m
b
2013
£m
24,082
(20)
18,879
133
17,840
128
18,287
–
18,339
(236)
24,062
19,012
17,968
18,287
18,103
(19,947)
(948)
(15,051)
(348)
(14,185)
(381)
(14,866)
(276)
(15,039)
(116)
(20,895)
(15,399)
(14,566)
(15,142)
(15,155)
4,135
(968)
3,167
(594)
(210)
(804)
(9)
–
3,532
(1,178)
2,354
(663)
217
(446)
3,828
(215)
3,613
(483)
(229)
(712)
6
–
3,351
(444)
2,907
(607)
166
(441)
3,655
(253)
3,402
(560)
(299)
(859)
(1)
25
3,094
(527)
2,567
(631)
121
(510)
3,421
(276)
3,145
(591)
(235)
(826)
(3)
(4)
2,827
(515)
2,312
(613)
319
(294)
3,300
(352)
2,948
(653)
(119)
(772)
9
130
2,656
(341)
2,315
(597)
230
(367)
2,869
(961)
2,744
(278)
2,463
(406)
2,214
(196)
2,059
(111)
1,908
2,466
2,057
2,018
1,948
28.9p
(9.7)p
19.2p
9,938
9,994
19.1p
15.4p
19.3c
31.8p
(3.3)p
28.5p
8,619
8,714
28.2p
14.0p
20.1c
30.6p
(5.1)p
25.5p
8,056
8,191
25.1p
12.4p
18.4c
28.2p
(2.5)p
25.7p
7,857
8,231
24.5p
10.9p
18.2c
26.3p
(1.5)p
24.8p
7,832
8,203
23.7p
9.5p
14.4c
a Revised, see note 1.
b As previously reported.
c Dividends per share represents the dividend paid and proposed in respect of the relevant financial year. Under IFRS, interim dividends are recognised as a deduction from shareholders’ equity when they are
paid, final dividends when they are approved.
d Based on actual dividends paid and/or year end exchange rate on proposed dividends.
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Selected financial data continued
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
Total equity (deficit)
a Revised, see note 1.
b As previously reported.
2017
£m
a
2016
£m
a
2015
£m
b
2014
£m
b
2013
£m
15,029
16,498
3,970
35,497
(4,050)
31,447
(10,081)
(9,088)
(3,943)
15,450
15,971
2,997
34,418
(3,103)
31,315
(11,025)
(6,382)
(3,796)
3,170
13,498
3,040
19,708
(356)
19,352
(7,862)
(7,583)
(3,226)
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)
8,335
10,112
681
(592)
(262)
499
1,051
(96)
6,647
884
(650)
499
1,051
(115)
8,422
685
(430)
419
1,051
(165)
998
502
(2,124)
408
62
(829)
998
449
(1,680)
408
62
(832)
998
792
(1,690)
8,335
10,112
681
(592)
(262)
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Financial and operational statistics
Financial statistics
Year ended 31 March
(Decrease) increase in underlying revenue excluding transitd,e
Adjusted EBITDAd,e
Cash flowd
– Free cash flow
– Normalised free cash flow
Net debt at 31 Marchd
Operating costs excluding depreciation and amortisatione
Expenditure on research and development
Research and development operating expense
Capitalised software development costs
Total expenditure on research and development
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
2017
£m
(0.2)%
7,645
2,687
2,782
8,932
a
2016
£m
b
2015
£m
c
2014
£m
c
2013
£m
1.9%
6,459
3,069
3,098
9,838
(0.4)%
6,193
2,782
2,830
5,113
0.5%
6,116
2,171
2,450
7,028
(3.1)%
6,143
2,292
2,300
7,797
16,437
12,420
11,647
12,171
12,196
61
457
518
73
399
472
87
421
508
170
365
535
279
265
544
42
31
31
44
42
1,592
126
917
119
22
2,818
(13)
2,805
621
3,426
28
3,454
(309)
3,145
–
3,145
1,531
41
652
48
19
2,322
(3)
2,319
412
2,731
(109)
2,622
(184)
2,438
–
2,438
1,463
33
455
85
75
2,142
6
2,148
561
2,709
(392)
2,317
93
2,410
–
2,410
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
a Revised, see note 1.
b Other than the decrease in underlying revenue excluding transit adjusted for the acquisition of EE 2014/15 has been revised.
c As previously reported.
d Defined on pages 252 to 254.
e Before specific items.
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Financial and operational statistics continued
Financial ratios
Year ended 31 March
Return on capital employed – %c
Adjustedd – %
Interest cover – timese
Adjustedd – times
Net debt to adjusted EBITDAd – times
Capital expenditure as a percentage of revenued – %
2017
11.2
14.6
3.9
7.0
1.2
14.3
2016a
2015a
2014b
2013b
12.7
13.5
5.1
7.9
1.5
13.9
23.3
24.9
4.0
6.5
0.8
13.0
21.1
22.9
3.8
5.8
1.1
12.8
20.6
22.1
3.8
5.1
1.3
13.3
a Revised, see note 1.
b As previously reported.
c 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.
d Before specific items.
e The number of times net finance expense is covered by operating profit.
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Operational statisticsa
All values in thousands unless otherwise stated.
Year ended 31 March
Consumer
Average revenue per user (ARPU)b (£)
Business and Public Sector
Order intake (£m)
Global Services
Order intake (£m)
Wholesale and Ventures
Order intake (£m)
Ethernet circuits
Openreach
Physical lines
Internal
External
Fully unbundled
Total physical lines
BT Group
TV customers
Broadband lines
Total retail
Wholesale and Ventures (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
Mobile churn (%)
Total
Postpaid
Mobile ARPU (£)
Postpaid
Prepaid
Total
2017
2016
2015
2014
2013
39.9
37.1
34.6
32.6
30.4
3,369
3,163
3,781
2,098
2,202
4,604
5,124
5,000
6,963
6,348
1,956
43.8
1,421
38.5
1,887
31.7
1,910
–
2,031
–
12,567
3,541
9,047
12,915
3,563
8,921
12,274
4,509
8,586
12,700
4,580
7,846
13,217
5,125
6,702
25,245
25,398
25,370
25,126
25,044
1,747
1,561
1,142
1,002
810
9,276
886
10,162
9,041
906
9,947
7,713
1,831
9,544
7,281
1,872
9,302
6,704
2,066
8,859
20,324
19,894
19,088
18,455
17,629
55%
46%
65%
45%
51%
40%
69%
39%
51%
38%
10,313
2,937
10,411
3,228
9,633
3,481
9,908
3,784
10,207
4,165
13,250
13,639
13,114
13,692
14,372
30,036
30,445
2.1
1.1
26.3
4.4
19.8
n/a
n/a
26.0
4.0
18.3
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
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 Consumer revenue per-month, 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 the 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 Global Services, Business and Public Sector, Consumer, EE and Wholesale and Ventures.
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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
recovery plan, operating charge, regular cash contributions and
interest expense for our defined benefit pension schemes; 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 Ofcom’s Wholesale Local Access
Market Review; 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; improvements to the control
environment; 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 whether as a result of the
uncertainties arising from the UK’s exit from the EU or otherwise;
future regulatory and legal actions, decisions, outcomes of appeal
and conditions or requirements in BT’s operating areas, including the
outcome of Ofcom’s strategic review of digital communications in
the UK, as well as competition from others; the outcome of Ofcom’s
Wholesale Local Access Market Review; responses to Openreach
consultations and the results of any future spectrum auctions;
selection by BT and its lines of business 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 anticipated
savings from our restructuring programmes not being delivered;
the aims of the group-wide restructuring programme not being
achieved; the anticipated benefits and synergies of the EE integration
not being delivered; the improvements to the control environment
proposed following the investigations into BT’s Italian business not
being implemented successfully or effectively; 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 44 to 55. 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.
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261
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
2013
2014
2015
2016a
2017a
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
Financial year ended 31 March 2017a
1 April – 30 June 2016
1 July – 30 September 2016
1 October – 31 December 2016
1 January – 31 March 2017
Monthsa
November 2016
December 2016
January 2017
February 2017
March 2017
April 2017
8 May 2017
Pence per ordinary share
US$ per ADS
High
pence
Low
pence
High
US$
Low
US$
281.00
418.10
470.55
499.80
454.90
470.00
479.15
499.80
496.00
454.90
414.35
389.20
396.85
373.40
371.40
396.85
332.90
342.45
316.00
306.60
200.70
265.70
356.20
404.00
302.10
438.80
404.00
417.20
432.95
375.85
375.30
346.70
302.10
350.30
346.70
302.10
304.70
317.00
304.75
–
42.76
69.75
70.18
37.49
33.46
36.92
37.35
37.49
35.87
33.46
27.66
24.89
24.57
23.52
23.35
24.57
20.82
20.88
20.25
20.14
31.02
40.70
57.99
31.18
19.29
32.82
31.30
31.91
31.18
25.21
24.93
22.05
19.29
22.05
22.34
19.33
19.29
19.88
19.42
–
a The ADS prices stated for 2015/16 and 2016/17 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
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.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
Information for shareholders continued
Analysis of shareholdings at 31 March 2017
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
Ordinary shares of 5p each
Number of
holdings
Percentage
of total
%
Number of
shares held
millions
Percentage
of total
%
310,908
208,657
151,917
113,725
4,309
621
310
204
39.31
26.40
19.22
14.39
0.55
0.08
0.04
0.03
65
116
170
349
80
229
734
8,224
0.66
1.16
1.71
3.50
0.81
2.30
7.37
82.50
790,651
100.00
9,967
100.00
a 14.3m 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, 55.7m shares were held in trust on behalf of 42,854 participants who were beneficially entitled to the shares. 381.3m shares were held in the
corporate nominee BT Group EasyShare on behalf of 92,115 beneficial owners.
c 154.1m shares were represented by ADSs. An analysis by size of holding is not available for these.
d 7.6m shares were held as treasury shares.
e 7.45% of the shares were in 781,899 individual holdings, of which 50,855 were joint holdings, and 92.55% of the shares were in 8,752 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 8 May 2017, there were 9,968,127,681 ordinary shares outstanding, including 7,635,015 shares held as treasury shares. At the same
date, approximately 30.8m ADSs (equivalent to 153.9m ordinary shares, or approximately 1.54% of the total number of ordinary shares
outstanding on that date) were outstanding and were held by 1,477 record holders of ADRs.
At 31 March 2017, there were 3,465 shareholders with a US address on the register of shareholders who in total hold 0.02% of the
ordinary shares of the company.
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Dividends
A final dividend in respect of the year ended 31 March 2016 was paid on 5 September 2016 to shareholders on the register on 12 August
2016, and an interim dividend in respect of the year ended 31 March 2017 was paid on 6 February 2017 to shareholders on the register
on 30 December 2016. The final proposed dividend in respect of the year ended 31 March 2017, if approved by shareholders, will be paid
on 4 September 2017 to shareholders on the register on 11 August 2017.
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 272. 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
2013
2014
2015
2016
2017
Interim
pence
3.00
3.40
3.90
4.40
4.85
Per ordinary share
Total
pence
Final
pence
6.50
7.50
8.50
9.60
10.55
9.50
10.90
12.40
14.00
15.40
Interim
£
0.300
0.340
0.390
0.220a
0.2425
Final
£
0.650
0.750
0.850
0.480a
0.5275
Per ADS
Total
£
0.950
1.090
1.240
0.700a
0.770
Interim
US$
0.451
0.534
0.573
0.296a
0.281
Final
US$
0.994
1.187
1.285
0.623
–b
Per ADS
Total
US$
1.445
1.721
1.858
0.919
–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 11 August 2017 are entitled to receive the final dividend which will be paid to ADS holders on 12 September 2017, subject to approval at the AGM. The US
Dollar amount of the final dividend of 52.75 pence per ADS to be paid to holders of ADSs will be based on the exchange rate in effect on 4 September 2017, 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 275), 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 2016
May
June
July
August
September
October
November
December
January 2017
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
39,710,091
nil
1,130,000
6,140,405
nil
nil
nil
nil
nil
nil
nil
46,980,496
n/a
442
n/a
413
408
n/a
n/a
n/a
n/a
n/a
n/a
n/a
437
nil
39,710,091
nil
1,130,000
6,140,405
nil
nil
nil
nil
nil
nil
nil
811,964,400
772,254,309
772,254,309
994,870,000
988,729,595
988,729,595
988,729,595
988,729,595
988,729,595
988,729,595
988,729,595
988,729,595
46,980,496
988,729,595
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 34m own shares were purchased during 2016/17. Of these, 34m shares were purchased for a total consideration of £150m
(under the authority given at the 2015 AGM), and 12.9m shares were purchased by the BT Group Employee Share Ownership Trust for a
consideration of £55m. Please see note 21 to the consolidated financial statements for further details.
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Information for shareholders continued
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
2015/16 final
2016/17 interim
Date paid
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
5 September 2016
6 February 2017
Price per share
pence
216.39
223.15
265.01
339.38
385.76
387.00
436.92
428.17
469.41
394.44
309.41
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 2016/17 was negative 25.1%, compared with the
market which was positive 23.3% and the sector which was negative 3.1%. Over the last five financial years BT’s TSR was positive 65.1%,
compared with the market’s TSR of positive 53.0% and the sector’s TSR of positive 54.1%.
BT’s TSR performance vs the FTSE100 and the Sector
over the last 8 years
31 March 2009=100
850
750
650
550
450
350
250
150
100
Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16
Mar 17
BT
FTSE100
Sector Index €
Source: Datastream.
NB: Sector index is shown in Euro terms.
The performance in Sterling is 17% worse than the TSR performance in the graph shown above.
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Results announcements
Expected announcements of results:
Results for the 2017/18 financial year
1st quarter
2nd quarter and half year
3rd quarter and nine months
4th quarter and full year
Annual Report 2017 published
a Dates may be subject to change.
Datea
28 July 2017
November 2017
February 2018
May 2018
May 2018
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
2017
1.25
1.31
1.47
1.21
April
2017
1.29
1.23
2016
1.44
1.50
1.59
1.39
March
2017
1.25
1.21
2015
1.49
1.61
1.72
1.47
2014
1.67
1.60
1.68
1.48
2013
1.52
1.58
1.63
1.49
February
2017
January
2017
Month
December
2016
1.26
1.24
1.26
1.21
1.27
1.22
On 8 May 2017, the latest practicable date for this Annual Report, the Noon Buying Rate was US$1.294 to £1.00.
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Information for shareholders continued
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 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)
(ii)
with the sanction of a special resolution passed at a separate
meeting of the holders of the shares of that class; or
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.
(c) Changes in capital
The company may by ordinary resolution:
(i)
(ii)
divide all or any of its share capital into shares with a smaller
nominal value; and
consolidate and divide all or part of its share capital into shares
of a larger nominal value.
The company may also:
(i)
(ii)
buy back its own shares; and
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
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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 to 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 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)
(iii)
(iv)
(v)
(vi)
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;
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;
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;
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;
relating to the funding of expenditure by any director or
(ix)
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)
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Subject to the relevant legislation, the shareholders can, by passing
an ordinary resolution, ratify any particular contract carried out in
breach of those provisions.
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.
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.
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
At every annual general meeting, all directors must automatically
retire. A retiring director is eligible for re-election.
Board: the Directors of the Company from time to time
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
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.
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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
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.
The warranties and indemnities given by the Sellers are subject to
customary financial and other limitations.
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 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.
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.
Relationship Agreement
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)
(ii)
(iii)
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;
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
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”).
The warranties and indemnity given by BT are subject to customary
financial and other limitations.
Deutsche Telekom AG undertakes to procure the compliance of its
group members with the Independence Provisions.
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.
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)
(ii)
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;
act in concert with any person with respect to the holding,
voting or disposition of any shares or other securities of BT;
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(iii)
(iv)
solicit or participate in any solicitation of Shareholders to vote in
a particular manner at any meeting of Shareholders; or
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 circumstances:
(i)
(ii)
(iii)
(iv)
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;
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;
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
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)
(ii)
(iii)
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;
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
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).
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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 Board
meetings of BT are likely to consider or refer to any matter in respect
of which the Conflicted Matters Committee believes that either:
(ii)
(iii)
(i)
(ii)
BT and the Deutsche Telekom Group are competitors; or
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)
(ii)
(iii)
(iv)
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;
act in concert with any person in respect of the holding, voting
or disposition of any shares or other securities of BT;
solicit or participate in any solicitation of Shareholders to vote in
a particular manner at any meeting of the Shareholders; or
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;
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
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:
(i)
(ii)
(iii)
(iv)
(v)
any Disposal to the Deutsche Telekom Group;
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;
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;
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.
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.
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 Deutsche Telekom AG and Deutsche
Telekom, the maximum amount of Ordinary Shares BT can acquire
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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 (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.
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 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.
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.
Following recent changes in UK tax law (effective from 6 April
2016), UK tax credits no longer attach to any dividends paid on the
ordinary shares or ADSs, irrespective of the domicile or residence of
the shareholder. No question therefore arises as to the entitlement
of any US Holder to any UK tax credit.
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.
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Taxation of capital gains
Unless a US Holder of ordinary shares or ADSs is 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
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 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 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 (a PFIC) for US federal income tax purposes
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 2017. 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-corporate
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.
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In addition, during our integration of the EE business, we discovered
a roaming agreement between EE and Syriatel Mobile Telecom, an
entity designated under UK/EU sanctions. Following an internal
investigation, we ceased providing services under the agreement
and made a voluntary disclosure to HM Treasury. We are also
investigating whether there are additional implications under
other sanctions regimes. EE is now fully subject to BT’s sanctions
compliance policies and procedures.
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.
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.
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).
Further note on certain activities
In addition, under Section 219 of the Iran Threat Reduction and
Syria Human Rights Act of 2012, which added Section 13 (r) to
the Securities Exchange Act of 1934, we are required to disclose
whether BT or any of its affiliates knowingly engaged in certain
activities, transactions or dealings relating to Iran or certain
designated individuals or entities. Disclosure is required even when
the activities were conducted outside the US by non-US entities and
even when they were conducted in compliance with applicable law.
During 2016/17, certain of the group’s non-US subsidiaries or
other non-US entities conducted limited activities in, or with
persons from, certain countries identified by the US Department
of State as State Sponsors of Terrorism or otherwise subject to US
sanctions. These activities, which generally relate to the provision
of communications services to embassies and diplomatic missions
of US-allied governments, other Communication Providers, news
organisations, multinational corporations and other customers that
require global communications connectivity, are insignificant to the
group’s financial condition and results of operations.
BT has a contract in place with Telecommunication Infrastructure
Company (TIC), to make and receive voice calls from Iran to the UK.
BT entered into a Framework Agreement with Rafsanjan Industrial
Complex (RIC) for business consultancy services in May 2010 and
provided an initial consultancy engagement under phase 1 of
the agreement. In February 2011, phase 2 was agreed with RIC
however BT stopped work in December 2011 due to the geopolitical
situation. RIC made an advance payment to BT of €384,120 to
carry out the phase 2 work. We continue to explore whether the
amount can be refunded.
BT’s subsidiary, EE (the acquisition of which was completed on
29 January 2016), has in place roaming partner agreements with
Mobile Company of Iran (MCI), and Taliya Company (also known as
Rafsanjan Industrial Complex). These bilateral agreements allow the
transmission of mobile calls. There has been no traffic with Taliya in
2016/17. The amounts received by EE under these contracts were
less than £405,000. In addition, EE also exchanges SMS traffic
with MCI, Mobile Telecommunications Company of Esfahan and
Telecommunication Kish Company. The amounts received by EE
under these contracts were less than £6,500.
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PB
THE STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
ADDITIONAL INFORMATION
Documents 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.
Shareholder Helpline
Tel: Freefone 0808 100 4141
Fax: 01903 833371
Textphone: Freefone 0800 169 6907
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
Publication date
May
May
May
May
Expected quarterly results releases
July, October, January and May
Current Cost Financial Statements
The Way We Work, a statement of
business practice
July
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.
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.
From outside the UK:
Tel: +44 121 415 7178
Fax: +44 1903 833371
Textphone: +44 121 415 7028
https://help.shareview.co.uk
The Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
www.equiniti.com
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
General enquiries
BT Group plc
BT Centre
81 Newgate Street
London EC1A 7AJ
United Kingdom
Tel: 020 7356 5000
Tel: +44 1793 596 931 (from outside the UK)
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
Annual Report 2017
BT Group plc
275
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 2017, 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
3
3A
Key information
Selected financial data
4
4A
Information on the company
History and development of the company
4B
Business overview
4C
Organisational structure
4D
Property, plants and equipment
Where information can be found in this Annual Report
Section
Selected financial data
Information for shareholders
Exchange rates
Lines of business
Information for shareholders
Background
Group performance
Capital expenditure
General information
Capital management and funding policy
Review of the yeara
How we’re organised
How we’re doing
What we do
Our networks and physical assets
Research and development
Brand and reputation
Stakeholders
Protecting the environment
Our performance as a sustainable and responsible business
Lines of business
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
Information for shareholders
Further note on certain activities
Operating Committee
Our business model
Lines of business
Related undertakings
Our networks and physical assets
Properties
Protecting the environment
Our performance as a sustainable and responsible business
Consolidated financial statements
Notes to the consolidated financial statements
Property, plant and equipment
Financial and operational statistics
Financial statistics
Page
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56
261
97
150
3
8
17
24
30
32
34
34
41
43
56
182
259
260
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22
56
238
30
31
41
43
198
257
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Required item in Form 20-F
Item
5
Operating and financial review and prospects
Operating results
5A
5B
Liquidity and capital resources
5C
Research and development, patents and licences
5D
Trend information
5E
5F
6
6A
6B
Off-balance sheet arrangements
Tabular disclosure of contractual obligations
Directors, senior management and employees
Directors and senior management
Compensation
6C
Board practices
6D
Employees
6E
Share ownership
Where information can be found in this Annual Report
Section
Lines of business
Group performanceb c
Our relationship with HM Government
Regulation
Protecting the environment
Our performance as a sustainable and responsible business
Alternative performance measures
Information for shareholders
Cautionary statement regarding forward-looking statements
Group performanceb c
Information for shareholders
Cautionary statement regarding forward-looking statements
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 performanceb c
Selected financial data
Information for shareholders
Cautionary statement regarding forward-looking statements
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
Focus on Remuneration
Annual Remuneration Report
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
Focus on Remuneration
Remuneration Principles
Annual Remuneration Report
Remuneration Policy
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
Focus on Remuneration
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38
38
41
43
252
260
91
260
218
222
229
32
257
91
255
260
150
102
106
108
122
123
125
204
215
106
108
122
123
124
125
139
26
94
187
122
123
277
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Cross reference to Form 20-F continued
Required item in Form 20-F
Item
7
7A
Major shareholders and related party transactions
Major shareholders
7B
Related party transactions
8
8A
Financial information
Consolidated statements and other financial information
8B
9
9A
Significant changes
The offer and listing
Offer and listing details
9C
Markets
10
10B
Additional information
Memorandum and articles of association
10C
Material contracts
10D
Exchange controls
10E
Taxation
10H
Documents on display
11
Quantitative and qualitative disclosures about
market risk
Where information can be found in this Annual Report
Section
Annual Remuneration Report
Remuneration Policy
Consolidated financial statements
Notes to the consolidated financial statements
Share-based payments
Shareholders and Annual General Meeting
Relations with shareholders
Substantial shareholdings
Information for shareholders
Analysis of shareholdings at 31 March 2017
Directors’ information
Interest of management in certain transactions
Consolidated financial statements
Notes to the consolidated financial statements
Related party transactions
See Item 18 below
General information
Legal proceedings
Group performance
Dividendsc
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
Information for shareholders
Stock exchange listings
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)
Information for shareholders
Documents on display
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
Page
125
139
215
152
262
147
229
150
96
229
263
266
146
261
261
266
268
274
272
275
181
222
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Required item in Form 20-F
Item
15
Controls and procedures
Where information can be found in this Annual Report
Section
General information
16A
Audit committee financial expert
16B
Code of ethics
16C
Principal accountants’ fees and services
16E
16G
Purchases of equity securities by the issuer and
affiliated purchasers
Corporate Governance
18
Financial statements
US Regulation
UK Internal control and risk management
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
General information
US Regulation
New York Stock Exchange
Report of the independent auditors – Consolidated financial statements
United States opinion
Financial statements
Page
148
149
164
148
148
188
112
263
148
164
153
a Excluding the information under the heading “Outlook” on page 7.
b Excluding the paragraph beginning “For 2017/18” on page 91, the information under the sub-heading “Outlook for 2017/18” on page 92 and the paragraph beginning “Our outlook for normalised
free cash flow...” on page 93.
c Excluding the last sentence ending in “... in our Outlook on page 92.” under the sub-heading “Dividends” on page 96.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION
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.
5G: the coming fifth generation wireless broadband
technology which will provide better speeds and coverage
than the current 4G.
ADSL: asymmetric digital subscriber line – a digital
technology that allows the use of a standard telephone line
to provide high-speed data communications.
Dark fibre: an ‘unlit’ fibre-only connection provided with
no associated electronics.
DP: distribution point.
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.
EAD: Ethernet access direct – a point-to-point access
product in the Openreach Ethernet portfolio offering
high bandwidth connectivity, linking end-user sites,
communications provider networks and BT exchanges.
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.
ARPU: average revenue per user.
ESN: Emergency Services Network.
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.
CI: continuous improvement – a complementary
‘bottom-up’ approach, empowering our people to make
small but significant changes to improve customer service
and employee engagement while reducing the cost of
failure.
Cloud of Clouds: Global Services’ portfolio strategy which
brings together its six core product families and a network
of partners to support the delivery of global network and IT
infrastructure services.
CP: communications provider – a provider of
communications services – telephony, broadband, video on
demand and other services.
Flexible Co-mingling: allows CPs to place their equipment
in our exchanges.
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.
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.
IoT: internet of things – the interconnection via the
internet of computing devices embedded in everyday
objects, enabling them to send and receive data.
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.
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Ladder pricing: Ladder pricing links the amounts that BT
charges mobile operators for mobile calls to 0800, 0845
and 0870 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.
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.
MBNL: Mobile Broadband Network Limited is a joint
venture arrangement between EE Limited and Hutchison
3G UK Limited with each company owning a 50% share.
MiiS: mobile infill infrastructure solution – lets CPs install
their radio equipment in special cabinets linked to antennas
on telephone poles and use their spectrum to improve
mobile coverage.
MPF: metallic path facility – a circuit comprising a pair of
twisted metal wires between an end-user’s premises and a
main distribution frame.
MPLS: multi-protocol label switching – supports the rapid
transmission of data across network routers, enabling
modern networks to achieve high quality of service.
MSL: minimum service level – set by Ofcom in relation to
the quality of service that Openreach offers.
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.
NFV: network function virtualisation.
Ofcom: the independent regulator and competition
authority in the UK communications industries, with
responsibilities across television, radio, telecommunications
and wireless communications services.
PCP: primary connection point.
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 we have the ability to connect customers to one of
our networks.
PPC: partial private circuit – a generic term used to
describe a category of private circuits that terminate at a
point of connection between two operators’ networks.
RFT: Right First Time – the internal measure of whether we
are keeping our promises to our customers and meeting or
exceeding their expectations.
SDN: software defined networking – one of the new
generation of networking technologies that are giving us a
new way to build and manage corporate networks that are
fit for the digital age.
SEP: superfast extension programme.
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 analogue,
T1-based Public Switched Telephone Network connections
with termination instead provided over a company’s public
or private internet connection through a SIP provider.
SMPF: shared metallic path facility – access to the
non-voiceband frequencies of the metallic path facility.
SON: self-organising network.
SVoD: subscription video on demand.
TDM: time-division multiplexing.
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.
UHD: ultra high definition.
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THE STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSADDITIONAL INFORMATION Glossary of terms continued
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.
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.
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Notes
Notes
Notes
Notes
Notes
Notes
In 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 2016/17 is to the financial
year ended 31 March 2017 and a reference to a year expressed
as 2017 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 2017. References to ‘last year’ and ‘prior year’
are to the financial year ended 31 March 2016.
BT Group plc
Registered office: 81 Newgate Street, London EC1A 7AJ
Registered in England and Wales No. 4190816
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