TIDM72NS
RNS Number : 3609I
British Telecommunications PLC
23 November 2018
British Telecommunications plc
Results for the half year to 30 September 2018
23 November 2018
About BT
British Telecommunications plc (BT or group) is a wholly-owned
subsidiary of BT Group plc and encompasses virtually all businesses
and assets of the BT Group. BT Group plc is listed on stock
exchanges in London and New York.
BT's purpose is to use the power of communications to make a
better world. It is one of the world's leading providers of
communications services and solutions, serving customers in 180
countries. Its principal activities include the provision of
networked IT services globally; local, national and international
telecommunications services to its customers for use at home, at
work and on the move; broadband, TV and internet products and
services; and converged fixed-mobile products and services. BT
consists of five customer facing units: Consumer, Business and
Public Sector, Wholesale and Ventures, Global Services and
Openreach.
Ulrica Fearn was appointed as a director of BT with effect from
1 June 2018. Patrick Bradley resigned on 31 August 2018. Simon
Lowth, Neil Harris and Glyn Parry served as directors throughout
the period.
Half year to 30 September 2018 2017 2017 Change
2018
(IFRS 15) (IFRS 15 pro (IAS 18)
forma)
=== =========== ============== ==========
GBPm GBPm GBPm %
============================ === =========== ============== ========== =========
Reported measures
Revenue 11,588 11,786 (2)
Profit before tax 1,454 1,174 24
Profit after tax 1,144 881 30
Capital Expenditure 1,833 1,693 8
--------------------------------- ----------- -------------- ---------- ---------
Adjusted measures
Adjusted(1) Revenue 11,624 11,770 11,800 (1)(2)
Change in underlying revenue (0.9)(2)
Adjusted(1) EBITDA 3,676 3,607 3,598 2(2)
================================= =========== ============== ========== =========
Customer facing unit results for the half year to 30 September
2018
Adjusted(1) revenue Adjusted(1) EBITDA
===================================== ==============================
Half year to 2018 2017 Change(2) 2018 2017 Change(2)
30 September (IFRS (IFRS
15 15
1 1
proforma) proforma)
GBPm GBPm % GBPm GBPm %
=========================== ======== ========== ========== ====== ========== ==========
Consumer 5,272 5,127 3 1,221 1,131 8
Business and Public
Sector 2,195 2,275 (4) 708 696 2
Wholesale and Ventures 929 1,007 (8) 325 364 (11)
Global Services 2,332 2,511 (7) 208 154 35
Openreach 2,472 2,509 (1) 1,177 1,250 (6)
Other 2 6 n/m 37 12 n/m
Intra-group items (1,578) (1,665) 5 - - -
=========================== ======== ========== ========== ====== ========== ==========
Total 11,624 11,770 (1) 3,676 3,607 2
=========================== ======== ========== ========== ====== ========== ==========
(1) See Glossary below
(2) Measured against IFRS 15 pro forma comparative period in the
prior year
n/m = not meaningful
Glossary of alternative performance measures
Adjusted Before specific items
EBITDA Earnings before interest, tax, depreciation and amortisation
Adjusted EBITDA EBITDA before specific items, share of post tax profits/losses
of associates and joint ventures and net non-interest
related finance expense
Capital expenditure Additions to property, plant and equipment and software
in the period less proceeds from disposals
Specific items Items that in management's judgement need to be disclosed
separately by virtue of their size, nature or incidence.
Further information is provided in note 6 on page
19
Underlying Excludes specific items, foreign exchange movements
and the effect of acquisitions and disposals. Further
information is provided in note 1 on page 27
We assess the performance of the group using a variety of
alternative performance measures. The rationale for using adjusted
measures is explained in note 1 on page 27. Results on an adjusted
basis are presented before specific items. Reconciliations from the
most directly comparable IFRS measures are in Additional
Information on pages 27 to 28.
British Telecommunications plc
Group results for the half year to 30 September 2018
Revenue and EBITDA
Reported revenue was GBP11,588m, down 2%, and adjusted(1)
revenue was down 1%(2) as growth in our consumer business was more
than offset by regulated price reductions in Openreach and declines
in our enterprise businesses. The main contributor to enterprise
revenue decline was Global Services whose adjusted(1) revenue
declined 7%(2) due to a reduction in IP exchange volumes in line
with our strategy to reduce low margin business and the impact of
foreign exchange.
Adjusted(1) operating costs were down 3% mainly driven by
restructuring related cost savings, partly offset by higher costs
of recruiting and training new engineers to support Openreach's
'Fibre First' programme. Adjusted(1) EBITDA of GBP3,676m was up
2%(2) primarily driven by higher volume and mix in our high-end
smartphones in our consumer business and cost efficiencies from our
cost transformation programmes, partly offset by the decline in
revenue and higher costs of investment in customer experience.
Reported profit before tax was up 24% at GBP1,454m, primarily
driven by higher specific item costs in the prior year.
Specific items (Note 6 to the condensed consolidated financial
statements)
Specific items resulted in a net charge after tax of GBP265m (H1
2017/18: GBP450m). The main components include restructuring costs
of GBP206m (H1 2017/18: GBP130m), costs relating to regulatory
matters of GBP41m (H1 2017/18: GBP27m) and interest expense on
pensions of GBP69m (H1 2017/18: GBP109m). Our prior half year also
included GBP225m relating to the settlement of warranty claims
arising under the 2015 EE acquisition agreement.
Tax
The effective tax rate was 21.3% on reported profit and 20.4% on
profit before specific items, based on our current estimated
effective tax rate for the full year. This is higher than the
standard UK corporation tax rate of 19% principally due to
non-deductible items, including share-based payments.
Cash flow
Net cash inflow from operating activities was down GBP1,831m at
GBP756m mainly driven by GBP2bn contributions to the BT Pension
Scheme.
Balance Sheet
At 30 September 2018 the group held GBP3.9bn of cash and current
investment balances. GBP2.4bn of short term borrowings include term
debt of GBP1.8bn, repayable during 2018/19, and GBP0.6bn collateral
for open mark to market positions and overdrafts. Our GBP2.1bn
facility, which matures in September 2021, remains undrawn at 30
September 2018.
Capital expenditure
Capital expenditure was GBP1,833m (H1 2017/18: GBP1,693m)
including network investment of GBP988m, up 15% due to an increase
in our base-case assumption for customer take-up under the
Broadband Delivery UK (BDUK) programme partly offset by lower
mobile investment as the Emergency Services Network (ESN) passed
the peak deployment phase. Excluding the effect of the change in
our base-case assumption for BDUK capital expenditure was
GBP1,663m. Other capital expenditure components were up 1% with
GBP443m spent on customer driven investments, GBP327m on systems
and IT, and GBP75m spent on non-network infrastructure.
Under the terms of the BDUK programme, we have an obligation to
repay or re-invest grant funding depending on factors including the
level of customer take-up achieved. Following sign up of the
majority of its major and a number of its smaller communications
providers to Openreach's pricing discounts for volume commitments
in the quarter, we have reassessed our base-case assumption for
take-up in BDUK areas. Based on the greater certainty provided by
the volume commitments we have increased the take-up assumption
from 41% to 61% of total premises passed, reflecting a life-time
view of the BDUK programme. The gainshare provision increased by
GBP176m in the half year to GBP712m, primarily driven by the
take-up assumption change.
Pension (Note 7 to the condensed consolidated financial
statements)
The IAS 19 net pension position at 30 September 2018 was a
deficit of GBP4.5bn net of tax (GBP5.3bn gross of tax), compared
with GBP5.7bn net of tax (GBP6.8bn gross of tax) at 31 March 2018.
The reduction in the gross deficit of GBP1.5bn since 31 March 2018
mainly reflects deficit contributions of GBP2bn offset by lower
than expected asset returns and actuarial movements.
The increase in the deficit compared to 30 June 2018 (GBP3.9bn
net of tax; GBP4.6bn gross of tax) mainly reflects a fall in the
real discount rate and lower than expected asset returns.
In October, we appealed a January 2018 High Court judgment which
determined that it is not currently possible to change the index
used for calculating pension increases for BTPS Section C members
from RPI, and are awaiting the outcome.
On 26 October, the High Court handed down a judgment involving
the Lloyds Banking Group's defined benefit pension schemes. The
judgment concluded the schemes should be amended to equalise
pension benefits for men and women in relation to guaranteed
minimum pension benefits. The issues determined by the judgment
arise in relation to many other defined benefit pension schemes. We
are working with the trustees of our pension schemes, and our
actuarial and legal advisers, to understand the extent to which the
judgment crystallises additional liabilities for BT's pension
schemes. We estimate this could be in the hundreds of millions of
pounds, and any adjustment necessary is expected to be recognised
in the second half of 2018/19.
Principal risks and uncertainties
A summary of the Group's principal risks and uncertainties is
provided in note 13.
Operating review
Consumer
Half year to 30 September(1)
2018 2017 Change
(IFRS 15) (2)
GBPm GBPm GBPm %
============================= ============== ================================ =========== ===========
Revenue 5,272 5,127 145 3
Operating costs 4,051 3,996 55 1
============================= ============== ================================ =========== ===========
EBITDA 1,221 1,131 90 8
Depreciation & amortisation 508 485 23 5
============================= ============== ================================ =========== ===========
Operating profit 713 646 67 10
============================= ============== ================================ =========== ===========
Capital expenditure 401 461 (60) (13)
============================= ============== ================================ =========== ===========
Revenue growth for the half year was driven by a higher volume
and mix of high-end smartphones, improved mix of direct
distribution, 'more for more' pricing in broadband and mobile,
growth in the SIM only base across all the brands and all customers
now paying for BT Sport. This was partially offset by solus voice
reductions.
EBITDA grew, driven by the revenue growth and supplier rebates
in the period, partially offset by increased contractual UEFA
sports rights costs.
Capital expenditure was down 13% as ESN passed the peak
deployment phase.
Business and Public Sector
Half year to 30 September(1)
==================================
2018 2017 Change
(IFRS
15) (2)
GBPm GBPm GBPm %
================================ ====== ==== ====== ========= =========== ======= ==========
Revenue 2,195 2,275 (80) (4)
- underlying revenue(3) (4)
Operating costs 1,487 1,579 (92) (6)
================================ ================== ========= =========== ======= ==========
EBITDA 708 696 12 2
Depreciation & amortisation 179 185 (6) (3)
================================ ================== ========= =========== ======= ==========
Operating profit 529 511 18 4
================================ ================== ========= =========== ======= ==========
Capital expenditure 136 152 (16) (11)
================================ ================== ========= =========== ======= ==========
Revenue decreased for the half year mainly due to the ongoing
decline in fixed voice where revenues declined 9%, broadly in line
with an 11% decline in our traditional lines base. This was
partially offset by growth in IP, Mobile and Networking. Mobile
grew 2% as the effects of Roam Like at Home dropped away and steady
growth in the base.
Operating costs reduced, helped by labour cost efficiencies from
our cost transformation programmes. EBITDA grew, with our lower
cost base offsetting the reduction in revenue, as well as some
one-off cost benefits in the first quarter.
Capital expenditure decreased 11% due to lower network and
integration costs.
Wholesale and Ventures
Half year to 30 September(1)
2018 2017 Change
(IFRS
15) (2)
GBPm GBPm GBPm %
======================================================= ========= ================ ========= ==============
Revenue 929 1,007 (78) (8)
Operating costs 604 643 (39) (6)
======================================================= ========= ================ ========= ==============
EBITDA 325 364 (39) (11)
Depreciation & amortisation 152 154 (2) (1)
======================================================= ========= ================ ========= ==============
Operating profit 173 210 (37) (18)
======================================================= ========= ================ ========= ==============
Capital expenditure 106 106 - -
======================================================= ========= ================ ========= ==============
Revenue was down 8% for the half year. Wholesale revenue was
down 11% driven by lower voice usage and customers migrating to
newer IP technologies, ongoing price competition in the wholesale
broadband market, a decline in the broadband base and the ongoing
migration of customers from Partial Private Circuits (PPCs) to
newer technologies.
Our Ventures businesses performed well with revenue growth of
11%, mainly driven by growth in messaging services and new external
deals in Supply Chain.
Operating costs were down 6% and EBITDA decreased 11% reflecting
the revenue decline, particularly in higher margin legacy
services.
Global Services
Half year to 30 September(1)
2018 2017 Change
(IFRS
15) (2)
GBPm GBPm GBPm %
===================================================== ========== =============== ========== =============
Revenue 2,332 2,511 (179) (7)
- underlying revenue(3) (6)
Operating costs 2,124 2,357 (233) (10)
===================================================== ========== =============== ========== =============
EBITDA 208 154 54 35
Depreciation & amortisation 186 221 (35) (16)
===================================================== ========== =============== ========== =============
Operating profit (loss) 22 (67) 89 133
===================================================== ========== =============== ========== =============
Capital expenditure 99 128 (29) (23)
===================================================== ========== =============== ========== =============
In line with our strategy to de-emphasise low margin business,
revenue for the half year was down 7% including a GBP39m negative
impact from foreign exchange movements.
Operating costs for the half year were down 10% mainly
reflecting the decline in IP Exchange volumes and equipment sales
and lower labour costs in line with our strategy to transform our
operating model. EBITDA for the half year was up GBP54m as lower
revenues were more than offset by the reduction in operating costs
and certain one-offs.
Depreciation and amortisation was down 16% for the half year due
to the timing of certain projects in the prior year. Operating
profit for the half year was GBP22m.
Capital expenditure was down 23% for the half year reflecting
ongoing rationalisation and including deferral of spend into the
second half of the year.
Openreach
Half year to 30 September(1)
2018 2017 Change
(IFRS
15) (2)
GBPm GBPm GBPm %
=============================================== ========= ============== ====== ===========
Revenue 2,472 2,509 (37) (1)
Operating costs 1,295 1,259 36 3
=============================================== ========= ============== ====== ===========
EBITDA 1,177 1,250 (73) (6)
Depreciation & amortisation 679 690 (11) (2)
=============================================== ========= ============== ====== ===========
Operating profit 498 560 (62) (11)
=============================================== ========= ============== ====== ===========
Capital expenditure 1,031 787 244 31
=============================================== ========= ============== ====== ===========
Revenue decline for the half year was driven by around GBP150m
of regulated price reductions on FTTC and Ethernet products, GBP30m
of non-regulated price reductions mainly driven by a number of
major and smaller communications providers that have signed up to
our pricing discounts offer for volume commitments, and a decline
in our physical line base. This was partly offset by underlying
growth of 25% in our FTTC rental base and a 10% increase in our
Ethernet rental base.
Operating costs were 3% higher mainly driven by higher costs
from recruitment and training of new engineers to support our
'Fibre First' programme and help deliver improved customer service,
pay inflation and business rates, partly offset by efficiency
savings. EBITDA was down 6% for the half year.
Capital expenditure was GBP1,031m, up GBP244m or 31%, driven by
higher year on year BDUK net grant funding deferrals and investment
in our FTTP and Gfast network build being partly offset by
efficiency savings.
Financial statements
Group income statement
For the half year to 30 September 2018 (IFRS 15 basis)
Note Before Specific Total
specific items (Reported)
items (note 6)
('Adjusted')
===== ============== ==========
GBPm GBPm GBPm
================================ ===== ============== ========== ============
Revenue 3,4 11,624 (36) 11,588
Operating costs 5 (9,684) (212) (9,896)
================================ ===== ============== ========== ============
Operating profit 1,940 (248) 1,692
Finance expense (317) (69) (386)
Finance income 147 - 147
================================ ===== ============== ========== ============
Net finance expense (170) (69) (239)
Share of post tax profit of
associates and joint ventures 1 - 1
================================ ===== ============== ========== ============
Profit before tax 1,771 (317) 1,454
Tax (362) 52 (310)
================================ ===== ============== ========== ============
Profit for the period 1,409 (265) 1,144
================================ ===== ============== ========== ============
Group income statement
For the half year to 30 September 2017 (IAS 18 basis)
Note Before Specific Total
specific items (Reported)
items (note 6)
('Adjusted')
========== ============== ==========
GBPm GBPm GBPm
================================ ========== ============== ========== ============
Revenue 3,4 11,800 (14) 11,786
Operating costs 5 (9,959) (373) (10,332)
================================ ========== ============== ========== ============
Operating profit 1,841 (387) 1,454
Finance expense (272) (109) (381)
Finance income 101 - 101
================================ ========== ============== ========== ============
Net finance expense (171) (109) (280)
Share of post tax profit of - - -
associates and joint ventures
================================ ========== ============== ========== ============
Profit before tax 1,670 (496) 1,174
Tax (339) 46 (293)
================================ ========== ============== ========== ============
Profit for the period 1,331 (450) 881
================================ ========== ============== ========== ============
Group statement of comprehensive income
For the half year to 30 September
Half year
to 30 September
2018 2017
(IFRS 15) (IAS 18)
GBPm GBPm
=========================================================== ================ =============
Profit for the period 1,144 881
=========================================================== ================ =============
Other comprehensive income (loss)
Items that will not be reclassified to the income
statement:
Remeasurements of the net pension obligation (292) (4)
Tax on pension remeasurements 58 17
Items that have been or may be reclassified subsequently
to the income statement:
Exchange differences on translation of foreign
operations 74 (115)
Fair value movements on available-for-sale assets 5 4
Fair value movements on cash flow hedges:
- net fair value (losses) gains 477 (49)
- recognised in income and expense (293) 78
Movement on cost of hedging reserve (90) -
Tax on components of other comprehensive income
that have been or may be reclassified (30) (9)
=========================================================== ================ =============
Other comprehensive profit (loss) for the period,
net of tax (91) (78)
=========================================================== ================ =============
Total comprehensive income for the period 1,053 803
=========================================================== ================ =============
Group balance sheet
30 September 31 March
(IFRS 15) (IAS 18)
2018 2018
(restated)(1)
=============
GBPm GBPm
======================================= ============= ===============
Non-current assets
Intangible assets 14,618 14,455
Property, plant and equipment 17,234 17,000
Derivative financial instruments 1,467 1,312
Investments 13,569 13,354
Associates and joint ventures 43 38
Trade and other receivables 436 317
Contract assets(2) 239 -
Deferred tax assets 1,003 1,326
======================================= ===============
48,609 47,802
======================================= ===============
Current assets
Programme rights 727 272
Inventories 305 239
Trade and other receivables 3,570 4,029
Contract assets(2) 1,321 -
Assets held for sale 88 -
Current tax receivable 77 77
Derivative financial instruments 311 197
Investments 3,494 3,224
Cash and cash equivalents 421 521
======================================= ============= ===============
10,314 8,559
======================================= ============= ===============
Current liabilities
Loans and other borrowings 4,290 2,298
Derivative financial instruments 53 50
Trade and other payables 5,771 7,190
Contract liabilities(2) 1,343 -
Current tax liabilities 211 83
Provisions 607 603
======================================= ============= ===============
12,275 10,224
======================================= ============= ===============
Total assets less current liabilities 46,648 46,137
======================================= ============= ===============
Non-current liabilities
Loans and other borrowings 15,317 13,038
Derivative financial instruments 706 787
Contract liabilities(2) 121 -
Retirement benefit obligations 5,280 6,847
Other payables 1,563 1,326
Deferred tax liabilities 1,176 1,340
Provisions 486 452
======================================= ===============
24,649 23,790
======================================= ===============
Equity
Share capital 2,172 2,172
Share premium 8,000 8,000
Other reserves 1,384 1,241
Retained earnings 10,443 10,934
======================================= ===============
Total equity 21,999 22,347
======================================= ------------- ===============
46,648 46,137
======================================= ============= ===============
(1) Restatement to reflect the update to our retirement benefit
obligation. See Note 2 to the condensed consolidated financial
statements
(2) Contract assets and contract liabilities arise following the
adoption of IFRS 15 on 1 April 2018. See note 1 to the condensed
consolidated financial statements.
Group statement of changes in equity
For the half year to 30 September 2018 (IFRS 15 basis)
Note Share Share Other Retained Total
Capital Premium Reserves Earnings Equity
===== ========= ========= ========== ==========
GBPm GBPm GBPm GBPm GBPm
==================================== ===== ========= ========= ========== ========== ========
At 31 March 2018 - as published 2,172 8,000 1,241 11,327 22,740
Pension restatement(1) - - - (393) (393)
------------------------------------ ----- --------- --------- ---------- ---------- --------
At 31 March 2018 - restated 2,172 8,000 1,241 10,934 22,347
IFRS opening balance adjustment(2) - - - 1,308 1,308
Tax on IFRS opening balance
adjustment(2) - - - (248) (248)
------------------------------------ ----- --------- --------- ---------- ---------- --------
At 1 April 2018 2,172 8,000 1,241 11,994 23,407
Profit for the period - - - 1,144 1,144
Other comprehensive income
(loss) before tax - - 556 (292) 264
Movements on cost of hedging
reserve - - (90) - (90)
Tax on other comprehensive
(loss) income - - (30) 58 28
Transferred to the income
statement - - (293) - (293)
==================================== ===== ========= ========= ========== ========== ========
Comprehensive income - - 143 910 1,053
Dividends 12 - - - (2,500) (2,500)
Share-based payments - - - 36 36
Unclaimed dividends over
10 years - - - 5 5
Other movements - - - (2) (2)
==================================== ----- --------- --------- ========== ========== ========
At 30 September 2018 2,172 8,000 1,384 10,443 21,999
==================================== ----- --------- --------- ========== ========== ========
(1) See Note 2 to the condensed consolidated financial statements
(2) See Note 1 to the condensed consolidated financial statements
For the half year to 30 September 2017 (IAS 18 basis)
At 1 April 2017 2,172 8,000 1,591 7,163 18,926
===================================== ====== ====== ====== ====== =======
Profit for the period - - - 881 881
Other comprehensive loss before
tax - - (160) (4) (164)
Tax on other comprehensive (loss)
income - - (9) 17 8
Transferred to the income statement - - 78 - 78
===================================== ====== ====== ====== ====== =======
Comprehensive (loss) income - - (91) 894 803
Share-based payments - - - 40 40
Other movements - - - 3 3
===================================== ====== ====== ====== ====== =======
At 30 September 2017 2,172 8,000 1,500 8,100 19,772
===================================== ====== ====== ====== ====== =======
Group cash flow statement
For the half year to 30 September
Half year
to 30 September
2018 2017
(IFRS 15) (IAS 18)
GBPm GBPm
====================================================== ================ =============
Cash flow from operating activities
Profit before tax 1,454 1,174
Share-based payments 36 40
Profit on disposal of subsidiaries and interest
in associates - (1)
Share of post tax losses of associates and joint (1) -
ventures
Net finance expense 239 280
Depreciation and amortisation 1,736 1,757
(Increase) decrease in working capital (489) (431)
Provisions, pensions and other non-cash movements(1) (2,009) (72)
====================================================== ================ =============
Cash inflow from operating activities(2) 966 2,747
Tax paid (210) (181)
====================================================== ================ =============
Net cash inflow from operating activities 756 2,566
====================================================== ================ =============
Cash flow from investing activities
Interest received 8 2
Acquisition of subsidiaries, associates and
joint ventures (6) (20)
Proceeds on disposal of subsidiaries - 2
Purchases of property, plant and equipment and
software (1,739) (1,665)
Proceeds on disposal of property, plant and
equipment 3 11
Outflow non-current amounts to ultimate parent
company(3) (1,052) (1,200)
Purchases of current financial assets (6,721) (5,892)
Proceeds on disposal of current financial assets 6,395 4,853
====================================================== ================ =============
Net cash outflow from investing activities (3,112) (3,909)
====================================================== ================ =============
Cash flow from financing activities
Interest paid (236) (259)
Proceeds from bank loans and bonds 2,896 2,029
Repayment of borrowings(4) (480) (502)
Cash flows from derivatives related to net debt 59 (132)
Net cash outflow from financing activities 2,239 1,136
=============
Net (decrease) increase in cash and cash equivalents (117) (207)
====================================================== ================ =============
Opening cash and cash equivalents 492 509
Net (decrease) increase in cash and cash equivalents (117) (207)
Effect of exchange rate changes 7 (19)
====================================================== ================ =============
Closing cash and cash equivalents(5) 382 283
====================================================== ================ =============
(1) Includes pension deficit payments of GBP2,012m for the half
year to 30 September 2018 (H1 2017/18: GBP10m)
(2) Includes cash flows relating to TV programme rights
(3) In addition, there are non-cash movements in this
intra-group loan arrangement which principally relate to the
settlement of dividends with the parent company and amounts the
ultimate parent company was owed by the parent company which were
settled through their loan accounts with British Telecommunications
plc. For further details see note 12.
(4) Repayment of borrowings includes the impact of hedging and repayment of lease liabilities
(5) Net of bank overdrafts of GBP39m at 30 September 2018 (30
September 2017: GBP62m; 31 March 2018: GBP29m)
Notes to the condensed consolidated financial statements
Basis of preparation and accounting policies
These condensed consolidated financial statements ('the
financial statements') comprise the financial results of British
Telecommunications plc for the half years to 30 September 2018 and
30 September 2017 together with the balance sheet at 31 March 2018.
The financial statements for the half year to 30 September 2018
have been reviewed by the auditors and their review opinion is on
page 26. The financial statements have been prepared in accordance
with the Disclosure Guidance and Transparency Rules sourcebook
(DTR) of the Financial Conduct Authority and with IAS 34 Interim
Financial Reporting as adopted by the European Union. The financial
statements should be read in conjunction with the Annual Report
& Form 20-F 2018 and Annual Report & Form 20-F(A) 2018
('Annual Report 2018') which was prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union. In preparing the group financial statements,
the directors have also elected to comply with IFRS, issued by the
International Accounting Standards Board (IASB).
Having assessed the principal risks, the directors consider it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements.
Except as described below and other than income taxes which are
accrued using the tax rate that is expected to be applicable for
the full financial year, the financial statements have been
prepared in accordance with the accounting policies as set out in
the financial statements for the year to 31 March 2018 and have
been prepared under the historical cost convention as modified by
the revaluation of financial assets and liabilities (including
derivative financial instruments) at fair value.
The comparative figures for the financial year ended 31 March
2018 are not the company's statutory accounts for that financial
year. Those accounts have been reported on by the company's auditor
and delivered to the registrar of companies. The report of the
auditor was unqualified, did not include a reference to any matters
to which the auditor drew attention by way of emphasis without
qualifying their report, and did not contain a statement under
section 498 (2) or (3) of the Companies Act 2006.
New and amended accounting standards effective during the
year
The following standards have been issued and were effective for
BT from 1 April 2018:
IFRS 15 'Revenue from contracts with customers'
Background
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 performance
obligations, on a relative stand-alone selling price basis, based
on a five-step model.
As disclosed in our Annual Report 2018 we have adopted the
standard on a modified retrospective basis and have recognised the
cumulative effect of initially applying the standard as an
adjustment to the opening balance of retained earnings at 1 April
2018. Under this transition method:
- the standard has been applied only to contracts in progress
but not completed at the date of initial application;
- for contracts that were modified before 1 April 2018, we have
reflected the aggregate effect of all of the modifications that
occur before this date at 1 April 2018;
- we have not restated prior year comparatives for the effect of
IFRS 15 but have instead restated our 1 April 2018 opening retained
earnings for the full cumulative impact of adopting this standard;
and
- for the year ended 31 March 2019 we will provide a
reconciliation of our primary financial statements under IFRS 15 to
those in accordance with IAS 18 in our Annual Report & Form
20-F 2019.
Financial impact
In our Annual Report 2018 we estimated that the likely impact on
transition at 1 April 2018 would produce a cumulative increase in
retained earnings of between GBP1.1bn and GBP1.5bn before tax. The
actual increase of GBP1.3bn before tax (GBP1.1bn after tax) has
primarily been recorded as a contract asset and will lead to an
additional one-off cash tax payment of GBP0.2bn equally split
between 2018/19 and 2019/20. The cumulative increase in retained
earnings is mainly due to the acceleration of handset revenues and,
to a lesser extent, deferral of costs (notably third party contract
acquisition costs primarily associated with post pay mobile
contracts).
The financial impact of each business area is as follows:
- Under our previous accounting policy, mobile handset revenue
was recognised based on the amount the customer pays for the
handset when it is delivered to the customer. Generally mobile
handsets are either provided free or for a small upfront charge.
Under IFRS 15, additional revenue is 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 changed 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 has been
recognised as a contract asset. Over time, we expect the contract
asset generated 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 primarily
impacted Consumer, and to a lesser extent this also impacted mobile
handset revenues in Business and Public Sector in respect of the
legacy EE business division. We saw a similar trend in respect of
subsidised equipment although this had a less significant impact
due to the lower relative standalone value for this equipment.
- Previously, sales commissions and other third party
acquisition costs resulting directly from securing contracts with
customers were expensed when incurred. Under IFRS 15 sales
commissions and other third party contract acquisition costs are
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 Consumer in respect of
third-party acquisition costs.
- The above two impacts are partly offset by amended accounting
for connections revenue. Previously, the group recognised
connections revenue upon performance of the connection activity.
Under IFRS 15 connections revenue is deferred and recognised on a
straight-line basis over the associated line/circuit contractual
period. This means that revenue and profits are recognised later.
On transition this led 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 experienced 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.
- The IFRS 15 impact on other areas was not material. This
included certain contract fulfilment costs which are recognised as
an asset and amortised over the period in which benefit is received
and certain expenses are recognised as a deduction from
revenue.
Pro forma
We have prepared and published unaudited pro forma results for
the years ended 31 March 2018 and 31 March 2017 under IFRS 15.
While BT believes the pro forma information contained in this
document to be reliable, BT does not warrant the accuracy,
completeness or validity of the information, figures or
calculations and shall not be liable in any way for loss or damage
arising out of the use of the information, or any errors or
omissions in its content.
IFRS 9 'Financial Instruments'
IFRS 9 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. The standard does not have a
material impact on our results, with the key issues being the
provision of expected lifetime losses on IFRS 15 contract assets,
documentation of policies, hedging strategy and new hedge
documentation.
There are no other new or amended standards or interpretations
adopted during the year that have a significant impact on the
group.
New and amended accounting standards that have been issued but
are not yet effective
IFRS 16 'Leases'
We will report our financial statements under IFRS 16 from the
first quarter of 2019/20. We expect to adopt IFRS 16 on a modified
retrospective basis in our 2019/20 financial statements.
Accordingly we will not restate prior year comparatives for the
effect of IFRS 16 but will instead restate our 1 April 2019 opening
reserves for the full cumulative impact of adopting this
standard.
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. We are 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 (i.e.
classified as operating leases under IAS 17) will be recognised on
balance sheet and valued in accordance with the principles of IFRS
16. 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
- operating lease expenditure will be reclassified and split
between depreciation and finance costs. Therefore EBITDA will
increase. Future depreciation and finance costs are also expected
to increase as a result of increased assets and liabilities
- there is an expected temporary reduction in profit after tax.
This is expected to be driven by an increase in finance costs as a
result of the new leases. These finance costs will have an
accelerated profile which will reduce over the lease term
- there may be a corresponding effect on tax balances in
relation to all of the above impacts.
This standard will require us to make key accounting judgements
in particular around the likelihood of lease renewals. Details of
our existing operating lease commitments at 31 March 2018 are set
out in note 30 of our Annual Report 2018.
2 Restatement of prior period financial statements
IAS 19 accounting valuation of retirement benefit
obligations
On 27 July 2018, we announced that we had been alerted to an
error made by our independent external actuary in the actuary's
calculation of our IAS 19 accounting valuation of retirement
benefit obligations at 31 March 2018. Our independent external
actuary is employed as an expert to calculate the IAS 19 accounting
valuation on behalf of management. The error resulted from the
incorrect application of changes to demographic assumptions.
Management determined that the error was material with respect to
our Group statement of comprehensive income and would require the
Group to restate its previously issued consolidated financial
statements for year ended 31 March 2018.
The accounting error understated the net pension obligation,
after tax, at 31 March 2018 by GBP393m (GBP476m gross of deferred
tax) and overstated total equity in the balance sheet by GBP393m.
The re-measurement gain of the net pension obligation recorded
within the Group statement of comprehensive income for the year
ended 31 March 2018 was overstated by GBP476m and tax expense on
the pension re-measurement was overstated by GBP83m.
The error has no effect on the Group income statement or the
Group cash flow statement or any amounts included in the financial
statements for the years ending 31 March 2017 and 31 March 2016 or
the six months to 30 September 2017. It also has no effect on the
2017 triennial funding valuation of the BT Pension Scheme,
associated cash contributions or on the pension scheme members.
The impact of the retirement benefit obligation restatement and
the IFRS 15 and IFRS 9 opening balance adjustment have been set out
in the reconciliations below:
Group statement of comprehensive income
Year to 31 March 2018 Pensions
As published adjustment Restated
GBPm GBPm GBPm
=============== ============ ===========
Profit for the period 2,184 - 2,184
=============================================== =============== ============ ===========
Other comprehensive income (loss)
Items that will not be reclassified
to the income statement:
Remeasurements of the net pension
obligation 2,160 (476) 1,684
Tax on pension remeasurements (346) 83 (263)
Items that have been or may be reclassified
subsequently to the income statement:
Exchange differences on translation
of foreign operations (188) - (188)
Fair value movements on available-for-sale
assets 11 - 11
Fair value movements on cash flow
hedges:
- net fair value (losses) gains (368) - (368)
- recognised in income and expense 277 - 277
Movement on cost of hedging reserve - - -
Tax on components of other comprehensive
income that have been or may be reclassified 1 - 1
=============================================== =============== ============ ===========
Other comprehensive profit (loss)
for the period, net of tax 1,547 (393) 1,154
=============================================== =============== ============ ===========
Total comprehensive income (loss)
for the period 3,731 (393) 3,338
=============================================== =============== ============ ===========
Group balance sheet
At 31 March Pension At 31 March IFRS(1) At 1 April
2018 adjustment 2018 adjustment 2018
as published restated
GBPm GBPm GBPm GBPm GBPm
============================= ============== ============ ============ ============ ===========
Non-current assets
Intangible assets 14,455 - 14,455 - 14,455
Property, plant and
equipment 17,000 - 17,000 - 17,000
Investments 13,354 - 13,354 - 13,354
Trade and other receivables 317 - 317 114 431
Contract assets - - - 198 198
Deferred tax assets 1,243 83 1,326 - 1,326
Other non-current
assets 1,350 1,350 - 1,350
============================= ============== ============ ============ ============ ===========
47,719 83 47,802 312 48,114
============================= ============== ============ ============ ============ ===========
Current assets
Trade and other receivables 4,029 - 4,029 (337) 3,692
Contract assets - - - 1,417 1,417
Cash and cash equivalents 521 - 521 - 521
Other current assets 4,009 - 4,009 - 4,009
============================= ============== ============ ============ ============ ===========
8,559 - 8,559 1,080 9,639
============================= ============== ============ ============ ============ ===========
Current liabilities
Loans and other borrowings 2,298 - 2,298 - 2,298
Trade and other payables 7,190 - 7,190 (1,409) 5,781
Contract liabilities - - - 1,406 1,406
Current tax liabilities 83 - 83 248 331
Other current liabilities 653 - 653 - 653
============================= ============== ============ ============ ============ ===========
10,224 - 10,224 245 10,469
============================= ============== ============ ============ ============ ===========
Total assets less
current liabilities 46,054 83 46,137 1,147 47,284
============================= ============== ============ ============ ============ ===========
Non-current liabilities
Loans and other borrowings 13,038 - 13,038 - 13,038
Retirement benefit
obligations 6,371 476 6,847 - 6,847
Other non-current
liabilities 3,905 - 3,905 87 3,992
============================= ============== ============ ============ ============ ===========
23,314 476 23,790 87 23,877
============================= ============== ============ ============ ============ ===========
Equity
Share capital 2,172 - 2,172 - 2,172
Share premium 8,000 - 8,000 - 8,000
All other reserves 1,241 - 1,241 - 1,241
Retained earnings 11,327 (393) 10,934 1,060 11,994
============================= ============== ============ ============ ============ ===========
Total equity 22,740 (393) 22,347 1,060 23,407
============================= ============== ============ ============ ============ ===========
46,054 83 46,137 1,147 47,284
============================= ============== ============ ============ ============ ===========
Group statement of changes in equity
Share Share Other Retained Total
Capital Premium Reserves Earnings Equity
========= ========= ========== ==========
GBPm GBPm GBPm GBPm GBPm
=========================================== ========= ========= ========== ========== ========
At 31 March 2018 - as published 2,172 8,000 1,241 11,327 22,740
Pension restatement - - - (393) (393)
=========================================== ========= ========= ========== ========== ========
At 31 March 2018 - restated 2,172 8,000 1,241 10,934 22,347
IFRS opening balance adjustment(1) - - - 1,308 1,308
Tax on IFRS opening balance adjustment(1) - - - (248) (248)
=========================================== ========= ========= ========== ========== ========
At 1 April 2018 2,172 8,000 1,241 11,994 23,407
=========================================== ========= ========= ========== ========== ========
(1) This reflects the opening balance sheet adjustment for both
IFRS 15 and IFRS 9. See note 1 to the condensed consolidated
financial statements
3 Operating results - by customer facing unit
External Internal Group revenue EBITDA(1) Operating
Revenue revenue profit
========= ========= ============== ==========
Half year to 30 September GBPm GBPm GBPm GBPm GBPm
2018
(IFRS 15 basis)
=========================== ========= ========= ============== ========== ==========
Consumer 5,220 52 5,272 1,221 713
Business and Public
Sector(2) 2,140 55 2,195 708 529
Wholesale and Ventures(2) 873 56 929 325 173
Global Services 2,332 - 2,332 208 22
Openreach 1,057 1,415 2,472 1,177 498
Other 2 - 2 37 5
Intra-group items - (1,578) (1,578) - -
=========================== ========= ========= ============== ========== ==========
Total adjusted(3) 11,624 - 11,624 3,676 1,940
=========================== ========= ========= ==========
Specific items (note
6) (36) (248)
=========================== ============== ==========
Total 11,588 1,692
=========================== ============== ==========
Half year to 30 September
2017
(IAS 18 basis)
=========================== ========= ========= ============== ========== ==========
Consumer (restated)(4) 5,083 50 5,133 1,139 654
Business and Public
Sector 2,224 57 2,281 694 509
Wholesale and Ventures 926 71 997 361 207
Global Services 2,506 - 2,506 154 (67)
Openreach 1,054 1,494 2,548 1,238 548
Other 7 - 7 12 (10)
Intra-group items - (1,672) (1,672) - -
=========================== ========= ========= ============== ========== ==========
Total adjusted(3) 11,800 - 11,800 3,598 1,841
=========================== ========= ========= ==========
Specific items (note
6) (14) (387)
=========================== ============== ==========
Total 11,786 1,454
=========================== ============== ==========
(1) For the reconciliation of adjusted EBITDA see additional
information on page 27
(2) From 1 October 2018 Business and Public Sector and Wholesale
and Ventures will be brought together to form Enterprise. See note
11 for further information
(3) See Glossary on page 1
(4) Consumer results restated to reflect the bringing together
of BT Consumer and EE with effect from 1 April 2018
4 Operating result - by type of revenue(1)
Half year to 30 September 2018 2017
GBPm GBPm
=======
ICT and managed networks 2,203 2,256
Fixed access subscription revenue 4,641 4,814
Mobile subscription revenue 2,659 3,086
Equipment and other services 2,121 1,644
Total adjusted(2) 11,624 11,800
Specific items (note 6) (36) (14)
----------------------------------- ------- -------
Total 11,588 11,786
=================================== ======= =======
(1) Prior year comparatives have been re-presented to reflect revised revenue type categories
(2) See Glossary on page 1
5 Operating costs
Half year
to 30 September
2018 2017
(IFRS 15) (IAS 18)
GBPm GBPm
=================================================== =========== ==========
Direct labour costs 2,663 2,688
Indirect labour costs 472 451
Leaver costs 8 30
=================================================== =========== ==========
Total labour costs 3,143 3,169
Capitalised labour (729) (668)
=================================================== =========== ==========
Net labour costs 2,414 2,501
Product costs and sales commissions(1) 2,172 2,153
Payments to telecommunications operators 1,073 1,207
Property and energy costs 661 649
Network operating and IT costs 508 476
Programme rights charges 403 377
Other operating costs(1) 717 839
=================================================== =========== ==========
Operating costs before depreciation, amortisation
and specific items 7,948 8,202
Depreciation and amortisation 1,736 1,757
=================================================== =========== ==========
Total operating costs before specific items 9,684 9,959
Specific items (Note 6) 212 373
Total operating costs 9,896 10,332
==========
(1) Other operating costs have been disaggregated and
re-presented for the half year to 30 September 2018
6 Specific items
The group separately identifies and discloses those items that
in management's judgement need to be disclosed by virtue of their
size, nature or incidence (termed 'specific items'). Specific items
are used to derive the adjusted results as presented in the
accompanying consolidated income statement. Adjusted results are
consistent with the way that financial performance is measured by
management and assists in providing an additional analysis of the
reporting trading results of the group. Specific items may not be
comparable to similarly titled measures used by other companies. In
determining whether an event or transaction is specific, management
considers quantitative as well as qualitative factors. 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,
retrospective regulatory matters, 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.
Half year
to 30 September
2018 2017
GBPm GBPm
========================================= ========= ========
Specific revenue
Retrospective regulatory matters 36 14
Specific revenue 36 14
========================================= ========= ========
Specific operating costs
Restructuring charge 206 130
Retrospective regulatory matters 5 13
Italian business investigation 1 6
EE acquisition warranty claims - 225
Profit on disposal of business - (1)
Specific operating costs 212 373
========================================= ========= ========
Specific operating loss 248 387
Net interest expense on pensions 69 109
Net specific items charge before tax 317 496
Tax credit on specific items before tax (52) (46)
Net specific items charge after tax 265 450
========================================= ========= ========
Restructuring charge
During the first half of the year we incurred charges of GBP206m
(H1 2017/18: GBP130m), primarily relating to leaver costs. These
costs reflect projects within our group-wide cost transformation
programme, including those costs related to the integration of
EE.
Retrospective regulatory matters
We've recognised a net charge of GBP41m (H1 2017/18: GBP27m) in
relation to regulatory matters in the first half of this year. This
reflects the completion of the majority of compensation payments to
other communications providers in relation to Ofcom's March 2017
findings of its investigation into our historical practices on
Deemed Consent by Openreach, and new matters arising. Of this,
GBP36m is recognised in revenue and GBP5m in operating costs.
Italian business investigation
During the first half of the year we have incurred professional
costs relating to the investigation of our Italian business of
GBP1m (H1 2017/18: GBP6m).
Interest expense on retirement benefit obligation
During the first half of the year we incurred GBP69m (H1
2017/18: GBP109m) of interest costs in relation to our defined
benefit pension obligations.
Tax on specific items
A tax credit of GBP52m (H1 2017/18: GBP46m) was recognised in
relation to specific items.
EE acquisition warranty claims
In the prior year we reached settlements with Deutsche Telekom
and Orange in respect of any warranty claims under the 2015 EE
acquisition agreement, arising from the issues previously announced
regarding our operations in Italy. This represents a full and final
settlement of these issues and results in a specific item charge of
GBP225m.
7 Pensions
30 September 31 March 2018
2018
(restated)
======================
GBPbn GBPbn
============================= ====================== ======================
IAS 19 liabilities - BTPS (55.6) (56.2)
Assets - BTPS 50.8 49.9
Other schemes (0.5) (0.5)
============================= ====================== ======================
Total IAS 19 deficit, gross
of tax (5.3) (6.8)
============================= ====================== ======================
Total IAS 19 deficit, net
of tax (4.5) (5.7)
============================= ====================== ======================
Discount rate (nominal) 2.85% 2.65%
Discount rate (real) (0.39)% (0.44)%
RPI inflation 3.25% 3.10%
CPI inflation 1.0% below RPI 1.0% below RPI
until 31 March until 31 March
2023 and 1.1% 2023 and 1.1%
below RPI thereafter below RPI thereafter
8 Financial instruments and risk management
Fair value of financial assets and liabilities measured at
amortised cost
At 30 September 2018, the fair value of listed bonds and other
long-term borrowings was GBP17,507m (31 March 2018: GBP14,878m) and
the carrying value was GBP16,212m (31 March 2018: GBP13,491m) and
fair value of finance leases was GBP245m (31 March 2018: GBP253m)
and carrying value was GBP218m (31 March 2018: GBP223m)
The fair value of the following financial assets and liabilities
approximate to their carrying amount:
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Provisions
Investments held at amortised cost
Other short term borrowings
Investments classified as loans and receivable
Contract assets
Contract liabilities
The group's activities expose it to a variety of financial
risks: market risk (including interest rate risk and foreign
exchange risk); credit risk; and liquidity risk. There have been no
changes to the risk management policies which cover these risks
since 31 March 2018.
Fair value estimation
IFRS9 introduces three new categories of financial assets, fair
value through profit and loss, fair value through other
comprehensive income and amortised cost. At 31 March 2018 assets
held at fair value included GBP2,575m of investments in liquidity
funds, held as available for sale. These investments are held with
the objective of collecting contractual cashflows. Under IFRS 9
they have therefore been classified as amortised cost. All other
assets which were previously held as available for sale are now
held as fair value through other comprehensive income.
These instruments are further analysed by three levels of
valuation methodology which 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 methods.
The fair value of the group's outstanding derivative financial
assets and liabilities were estimated using discounted cash flow
models and market rates of interest and foreign exchange at the
balance sheet date.
Total held
Level Level 2 Level 3 at fair value
1
======== ========== ==========
30 September 2018 GBPm GBPm GBPm GBPm
=========================== ======== ========== ========== ===============
Investments
Fair value through other
comprehensive income 38 - 15 53
Fair value through profit
and loss 6 - - 6
Derivative assets
Designated in a hedge - 1,521 - 1,521
Fair value through profit
and loss - 257 - 257
=========================== ======== ========== ========== ===============
Total assets 44 1,778 15 1,837
=========================== ======== ========== ========== ===============
Derivative liabilities
Designated in a hedge - 564 - 564
Fair value through profit
and loss - 195 - 195
===========================
Total liabilities - 759 - 759
=========================== ===============
Total held
Level Level 2 Level 3 at fair value
1
======== ========== ==========
31 March 2018 GBPm GBPm GBPm GBPm
=========================== ======== ========== ========== ===============
Investments
Available for sale 32 2,575 14 2,621
Fair value through profit
and loss 7 - - 7
Derivative assets
Designated in a hedge - 1,248 - 1,248
Fair value through profit
and loss - 261 - 261
=========================== ======== ========== ========== ===============
Total assets 39 4,084 14 4,137
=========================== ======== ========== ========== ===============
Derivative liabilities
Designated in a hedge - 628 - 628
Fair value through profit
and loss - 209 - 209
Total liabilities - 837 - 837
===============
No gains or losses have been recognised in the income statement
in respect of Level 3 assets held at 30 September 2018. There were
no changes to the valuation methods or transfers between levels 1,
2 and 3 during the half year.
9 Financial commitments
Capital expenditure for property, plant and equipment and
software contracted for at the balance sheet date but not yet
incurred was GBP1,293m (30 September 2017: GBP875m; 31 March 2018:
GBP993m). Programme rights commitments, mainly relating to football
broadcast rights for which the licence period has not yet started,
were GBP2,866m (30 September 2017: GBP1,955m; 31 March 2018:
GBP2,823m).
Contingent liabilities
Save for the updates provided below, there have been no material
updates relating to the Legal Proceedings and Regulatory matters as
disclosed in the Annual Report 2018.
Italian business - US securities class action complaints
On 1 August 2018 our motion to dismiss the first amended
complaint filed in the District of New Jersey in November 2017 was
granted, without prejudice to the filing of a second amended
complaint which was filed on 1 October 2018. On 29 October 2018 we
filed our motion to dismiss this second amended complaint.
Post balance sheet events
Changes in our segments
From 1 October 2018, our existing Business and Public Sector and
Wholesale and Ventures divisions will be brought together into a
combined division, Enterprise, to accelerate transformation,
simplify our operating model and strengthen accountabilities. These
businesses operated and were reported separately throughout the
first half of the 2018/19 financial year and therefore have been
presented as separate operating segments throughout these accounts.
In the first half of the year there were GBP10m of internal revenue
and costs between Business and Public Sector and Wholesale and
Ventures.
Following our commitment to Ofcom in 2017 BT Group has completed
the transfer of 31,000 employees to Openreach Limited from 1
October 2018, marking the final step in the creation of a more
independent, legally separate business within the BT Group. As part
of this, BT Northern Ireland Networks was renamed Openreach
Northern Ireland and will be reported as part of Openreach
(previously Business and Public Sector (Enterprise)).
There is no impact on total group results, balance sheet or cash
flows.
BT's pension schemes
On 26 October, the High Court handed down a judgment involving
the Lloyds Banking Group's defined benefit pension schemes. The
judgment concluded the schemes should be amended to equalise
pension benefits for men and women in relation to guaranteed
minimum pension benefits. The issues determined by the judgment
arise in relation to many other defined benefit pension schemes. We
are working with the trustees of our pension schemes, and our
actuarial and legal advisers, to understand the extent to which the
judgment crystallises additional liabilities for BT's pension
schemes. We estimate this could be in the hundreds of millions of
pounds, and any adjustment necessary is expected to be recognised
in the second half of 2018/19.
Related party transactions
British Telecommunications plc and certain of its subsidiaries
act as a funder and deposit taker for cash related transactions for
both its parent (BT Group Investments Limited) and ultimate parent
company (BT Group plc). The loan arrangements described below with
these companies reflect this. Cash transactions normally arise
where the parent and ultimate parent company are required to meet
their external payment obligations or receive amounts from third
parties. These principally relate to the payment of dividends, the
buyback of shares and the exercise of share options. Transactions
between the ultimate parent company, the parent company and the
group are settled on both a cash and non-cash basis through these
loan accounts depending on the nature of the transaction.
In 2001/02 the group demerged its former mobile phone business
and as a result BT Group plc became the listed ultimate parent
company of the group. The demerger steps resulted in the formation
of an intermediary holding company, BT Group Investments Limited,
between BT Group plc and British Telecommunications plc. This
intermediary company held an investment of GBP18.5bn in British
Telecommunications plc which was funded by an intercompany loan
facility with British Telecommunications plc.
A dividend of GBP2,500m (2017: GBPnil) was declared and settled
with the parent company in relation to the year ended 31 March 2018
during the first half.
A summary of the balances with the parent and ultimate parent
companies and the finance income or expense arising in respect of
these balances is shown below:
Asset (liability) Finance income (expense)
------------------------ -----------------------------
30 September 31 March 30 September 30 September
2018 2018 2018 2017
GBPm GBPm GBPm GBPm
------------------------------- ------------- --------- -------------- -------------
Amounts owed by (to) parent
company
Loan facility - non-current
asset investments 10,486 10,318 105 84
Loan facility - current asset
investments 105 168 n/a n/a
Trade and other payables (73) (50) n/a n/a
------------------------------- ------------- --------- -------------- -------------
Amounts owed by (to) ultimate
parent company
Non-current asset investments 3,024 2,983 30 13
Non-current liabilities (1,061) (1,044) (22) (9)
Trade and other receivables 16 15 n/a n/a
Current asset investments 30 34 n/a n/a
Current liabilities (1,477) (18) n/a n/a
------------------------------- ------------- --------- -------------- -------------
Principal risks and uncertainties
We have processes for identifying, evaluating and managing our
risks. Details of our principal risks and uncertainties can be
found on pages 34 to 47 of the Annual Report 2018 and are
summarised below. All of them have the potential to have an adverse
impact on our business, revenue, profits, assets, liquidity and
capital resources.
The risks associated with operating under a wide range of local
and international laws, trade sanctions and import and export
controls; coupled with the risk of inappropriate and unethical
behaviour by our people or associates
The risks arising from operating as a major data controller and
processor of customer information around the world
The risks arising from our operational activities, and in
particular the work of our engineers, that are subject to health
and safety regulation and enforcement by national authorities. This
also extends to the risks associated with the transmission of radio
waves from mobile telephones, transmitters and associated equipment
- although according to the World Health Organisation there are no
known adverse effects on health from emissions at levels below
internationally recognised health and safety standards
The risks arising from operating in markets which are
characterised by: high levels of change; strong and new
competition; declining prices and in some markets declining
revenue; technology substitution; market and product convergence;
customer churn; and regulatory intervention to promote competition
and reduce wholesale prices
The risks associated with some of our activities being subject
to significant price and other regulatory controls
The risks associated with a significant funding obligation in
relation to our defined benefit pension schemes, and in particular
the BT Pension Scheme
The risks associated with political and geopolitical trends and
incidents, including the uncertainty caused by the UK voting to
leave the European Union
The financial risks common to other major international
businesses, including market, credit, liquidity and tax risks
The risks that could impact the security of our data or the
resilience of our operations and services
The risks associated with complex and high value national and
multinational customer contracts
The risk there could be a failure of any of our critical
third-party suppliers to meet their obligations
The risks associated with not being able to secure sufficient
employee engagement to support delivery of our strategic aims
There have been no significant changes to the principal risks
and uncertainties in the half year to 30 September 2018. These
principal risks and uncertainties continue to have the potential to
impact our results or financial position during the remaining six
months of the financial year.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU;
-- the interim management report includes a fair review of the
information required by:
DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
DTR 4.2.8R of the Disclosure Guidance and Transparency Rules ,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
By order of the Board
Ulrica Fearn
Director
21 November 2018
INDEPENT REVIEW REPORT TO BT GROUP PLC
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 September 2018 which comprises the condensed
consolidated income statement, statement of comprehensive income,
balance sheet, statement of changes in equity, cash flow statement
and related explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
September 2018 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU and the Disclosure Guidance and Transparency Rules ("the
DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
The annual financial statements of the group are prepared in
accordance with International Financial Reporting Standards as
adopted by the EU. The directors are responsible for preparing the
condensed set of financial statements included in the half-yearly
financial report in accordance with IAS 34 as adopted by the
EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Antony Cates
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
21 November 2018
Additional Information
Notes
Our commentary focuses on the trading results on an adjusted
basis, which is a non-GAAP measure, being 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 those that in management's
judgement need to be disclosed by virtue of their size, nature or
incidence. This is consistent with the way that financial
performance is measured by management and reported to the Board and
the Executive 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. Reported revenue, reported
operating costs, reported operating profit, reported profit before
tax, reported net finance expense and reported EPS are the
equivalent unadjusted or statutory measures. Reconciliations of
reported to adjusted revenue, operating costs, operating profit,
profit before tax and EPS are set out in the Group income
statement. Reconciliations of underlying revenue, net debt and free
cash flow from the nearest measures prepared in accordance with
IFRS are provided in this Additional Information.
2) Trends in underlying revenue are non-GAAP measures which seek
to reflect the underlying performance of the group that will
contribute to long-term sustainable growth. As such this excludes
the impact of acquisitions or disposals, foreign exchange movements
and specific items.
Reconciliation of earnings before interest, tax, depreciation
and amortisation
Earnings before interest, tax, depreciation and amortisation
(EBITDA) is not a measure defined under IFRS, but is a key
indicator used by management to assess operational performance. We
consider EBITDA and adjusted EBITDA to be useful measures of our
operating performance because they approximate the underlying
operating cash flow by eliminating depreciation and amortisation.
EBITDA and adjusted EBITDA are not direct measures of our
liquidity, which is shown by our cash flow statement, and need to
be considered in the context of our financial commitments. A
reconciliation of reported profit before tax to adjusted EBITDA is
provided below.
Half year to
30 September
2018 2017
(IFRS 15) (IAS 18)
GBPm GBPm
================================================== =========== ==========
Reported profit for the period 1,144 881
Tax 310 293
================================================== =========== ==========
Reported profit before tax 1,454 1,174
Net interest related finance expense 163 157
Depreciation and amortisation 1,736 1,757
================================================== =========== ==========
EBITDA 3,353 3,088
EBITDA specific items 248 387
Net other finance expense 76 123
Share of post tax losses (profits) of associates (1) -
and joint ventures
================================================== =========== ==========
Adjusted(1) EBITDA 3,676 3,598
================================================== =========== ==========
(1) See Glossary on page 1
Reconciliation of year on year trends in underlying revenue
Year on year trends in underlying revenue seeks to reflect the
underlying performance that will contribute to long-term profitable
growth. A reconciliation from the trend in reported revenue, the
most directly comparable IFRS measure, to the trend in underlying
revenue, is set out below.
Half year
to
30 September
2018
%
==================================================== ==============
Decrease in reported revenue (IAS 18) (1.7)
Specific items (IAS 18) 0.2
IFRS 15 adjustment 0.3
==================================================== ==============
Decrease in adjusted(1) revenue (IFRS 15 proforma) (1.2)
Foreign exchange movements 0.3
==================================================== ==============
Decrease in underlying(1) revenue (0.9)
==================================================== ==============
(1) See Glossary on page 1
Reconciliation of year on year trends in adjusted earnings
before interest, tax, depreciation and amortisation
Earnings before interest, tax, depreciation and amortisation
(EBITDA) is not a measure defined under IFRS, but is a key
indicator used by management to assess operational performance. A
reconciliation of the trends in EBITDA is provided below.
Half year to
30 September
2018
%
========================================== ==============
Increase (decrease) in EBITDA (IAS 18) 6.8
Specific items (IAS 18) (4.6)
IFRS 15 adjustment (0.3)
========================================== ==============
Decrease in adjusted(1) EBITDA (IFRS 15) 1.9
========================================== ==============
(1) See Glossary on page 1
Forward-looking statements - caution advised
Certain statements in this results release are forward-looking
and are made in reliance on the safe harbour provisions of the US
Private Securities Litigation Reform Act of 1995. These statements
include, without limitation, those concerning: our assumptions for
the take-up in BDUK areas and our investment in our FTTP and Gfast
network build.
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, in particular
those relating to BT's pension scheme liabilities, as well as
competition from others; consultations and market reviews;
selection by BT and its customer facing units of the appropriate
trading and marketing models for its products and services;
fluctuations in foreign currency exchange rates and interest rates;
technological innovations, including the cost of developing new
products, networks and solutions and the need to increase
expenditures for improving the quality of service; prolonged
adverse weather conditions resulting in a material increase in
overtime, staff or other costs, or impact on customer service;
developments in the convergence of technologies; external threats
to cyber security, data or resilience; political and geo-political
risks; the anticipated benefits and advantages of new technologies,
products and services not being realised, including the proposed
investment in our FTTP broadband network; the timing of entry and
profitability of BT in certain markets; significant changes in
market shares for BT and its principal products and services; the
underlying assumptions and estimates made in respect of major
customer contracts proving unreliable; additional funding
obligationto the BT pension schemes; the anticipated benefits,
synergies and cost savings 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, effectively or timeously across the
Group; inappropriate or unethical behaviour by our people or
associates; and general financial market conditions affecting BT's
performance and ability to raise finance. BT undertakes no
obligation to update any forward-looking statements whether as a
result of new information, future events or otherwise.
Enquiries
Press office:
Tom Engel Tel: 020 7356 5369
Investor relations:
Mark Lidiard Tel: 020 7356 4909
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR FXLFLVFFZFBZ
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