FINANCING

The cash inflow from operations of £5,245 million in the 2007 financial year compares with £5,777 million in the 2006 financial year and £5,906 million in the 2005 financial year. The reduction of £532 million in the 2007 financial year, compared to the 2006 financial year, is mainly due to the pension deficiency payment of £520 million in the 2007 financial year (2006: £54 million, 2005: £nil). The reduction in the 2006 financial year when compared to the 2005 financial year was primarily as a result of lower working capital inflows of £120 million compared with £253 million in the 2005 financial year. Net tax paid in the 2007 financial year was £35 million compared with £390 million in the 2006 financial year and £332 million in the 2005 financial year. The reduction in net tax payments in the 2007 financial year when compared to the 2006 financial year mainly reflects the initial net cash receipt of £376 million in relation to the settlement with HM Revenue and Customs discussed in the specific items section of this Financial review. The increase in tax payments in the 2006 financial year when compared with the 2005 financial year was primarily as a result of normalisation of tax payments following low tax payments in the 2005 financial year.
     Net cash outflow from investing activities of £3,035 million in the 2007 financial year compared with a net cash inflow of £365 million in the 2006 financial year and net cash outflow of £1,740 million in the 2005 financial year. The 2006 financial year includes a net cash inflow of £3,220 million on the sale of investments, which was used to partly fund the repayment of maturing debt in the 2006 financial year, compared to a net cash inflow of £258 million from the sale of investments in the 2007 financial year. Net cash outflow for the purchase of property, plant and equipment and computer software was £3,209 million in the 2007 financial year, compared to £2,874 million in the 2006 financial year and £2,945 million in the 2005 financial year. The increase in the 2007 financial year reflects the preparations for 21CN and the systems developments required by the Undertakings agreed with Ofcom. The net cash outflow for acquisitions in the 2007 financial year totalled £237 million and mainly related to the acquisition of INS, PlusNet, dabs.com and Counterpane. In the 2006 financial year, the net cash outflow for acquisitions was £167 million and mainly related to the acquisitions of Radianz and Atlanet. In the 2005 financial year, the net cash outflow for acquisitions of £418 million mainly related to the acquisitions of Infonet and Albacom. Interest received was £147 million in the 2007 financial year, compared to £185 million in the 2006 financial year and £374 million in the 2005 financial year. The interest receipts in the 2007 financial year include an initial cash settlement of £74 million from HM Revenue and Customs discussed in the specific items section of this Financial review. Excluding this receipt, interest received was £112 million lower than the 2006 financial year reflecting the lower level of investments held by the group. The 2005 financial year included receipts of £153 million on restructuring the group’s swap portfolio.
     Net cash outflow from financing activities of £2,898 million in the 2007 financial year compares with £5,278 million in the 2006 financial year and £3,529 million in the 2005 financial year. In the 2007 financial year, the full and part maturity of notes and leases resulted in a cash outflow of £1,085 million mainly offset by the net issue of commercial paper of £309 million. Included in the 2006 financial year net cash outflow is a repayment of £4,432 million for maturing debt. In addition, the group raised new sterling floating rate borrowing of £1,000 million and issued commercial paper raising net proceeds of £464 million. Equity dividends paid in the 2007 financial year were £1,057 million, compared with £907 million and £784 million in the 2006 and 2005 financial years, respectively. Interest paid in the 2007 financial year was £797 million compared to £1,086 million and £1,260 million in the 2006 and 2005 years, respectively. The reduction in the 2007 financial year mainly reflects the impact of debt maturities noted above. The reduction between the 2005 and 2006 financial years reflects payments of £139 million made in the 2005 financial year associated with restructuring the group’s swap portfolio.
     During the 2007 financial year the share buyback programme continued with the group repurchasing 148 million shares for consideration of £401 million and issued 67 million shares for a consideration of £123 million. During the 2006 and 2005 financial years the group repurchased 166 million and 101 million shares for a consideration of £360 million and £195 million, respectively.
     At 31 March 2007, net debt was £7,914 million, compared with £7,534 million at 31 March 2006 and £7,893 million at 31 March 2005. Net debt consists of loans and other borrowings (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 analysis 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.
     This definition of net debt measures balances at the expected value of future cash flows due to arise on maturity of financial instruments and removes the balance sheet adjustments made from the re-measurement of hedged risks under fair value hedges and the use of the amortised cost method as required by IAS 39. In addition the gross balances are adjusted to take account of netting arrangements.
     Net debt is a non GAAP measure since 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 which is reconciled to net debt in note 10 to the consolidated financial statements. In 2001, BT’s net debt reached £27.9 billion and as part of the group’s transformation strategy the group went through a major restructuring to reduce the level of net debt and improve the group’s financial strength. Therefore management believe it is both useful and necessary to continue to disclose net debt as it is a key measure against which the group’s performance against its strategy is measured. Management believe it is a measure of net indebtedness that provides an indicator of our overall balance sheet strength and also facilitates an evaluation of the group’s cash position and indebtedness in a single performance measure. There are material limitations in the use of non GAAP measures and 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. The group’s definition of net debt may not be comparable to similarly titled measures used by other companies.