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 THE STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS ADDITIONAL INFORMATION The strategic report 2 Contents Review of the year 3 How we’re organised 8 An introduction from our Chairman 10 A message from our Chief Executive 12 This is the BT Annual Report for the year ended Operating Committee 14 31 March 2017. It complies with UK regulations Our strategy Our strategy in a nutshell 16 and comprises part of the Annual Report and How we’re doing Form 20-F for the US Securities and Exchange – Delivering great customer experience 17 – Investing for growth 18 Commission to meet US regulations. – Transforming our costs 19 Key performance indicators 20 This is the third year that we’ve applied an Our business model Integrated Reporting (IR) approach to how Our business model 22 we structure and present our Annual Report. What we do 24 Resources, relationships and sustainability IR is an initiative led by the International Integrated Reporting – Financial strength 26 Council (IIRC). Its principles and aims are consistent with UK – Our people 26 regulatory developments in financial and corporate reporting. – Our networks and physical assets 30 We’ve reflected guiding principles and content elements from the – Properties 31 IIRC’s IR Framework in preparing our Annual Report. This is most – Research and development 32 obvious in the representation of our business model. This year, – Brand and reputation 34 we’ve focused on the resources and relationships that set us apart – Stakeholders 34 and the outcomes we generate for our stakeholders. Icons provide – Protecting the environment 41 a mapping to the IIRC’s ‘capitals’. – Our performance as a sustainable and responsible business 43 Our risks Our approach to risk management 44 Our principal risks 45 Our viability statement 55 Our lines of business Consumer 56 EE 62 Business and Public Sector 66 Throughout the Global Services 70 report look out Wholesale and Ventures 75 for these. Technology, Service and Operations 81 Openreach 83 – Openreach chairman’s introduction Reference to other pages within the report Group performance Group Finance Director’s introduction 91 Reference to further Group performance 92 reading online Governance 103 Critical accounting estimates and key Financial statements 153 judgements Additional information 251 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. Annual Report 2017 BT Group plc 1 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 Gavin Patterson & Company Secretary Chief Executive 11 May 2017 2 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 Review of the year continued Our investigation into our Adjustments relating to the investigation of our Italian business amount to Italian business £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: £268m – detailed balance sheet reviews in seven selected country operations in prior years’ adjustments 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 £260m across the group. specific item charge PG6 to read more Market environment Headwinds in the UK public sector and Low interest rate environment international corporate markets. 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 4 BT Group plc Annual Report 2017 Annual Report 2017 BT Group plc 5 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% BT Sport BT Sport won exclusive rights to UEFA Champions League and UEFA Europa League until the end of of retail broadband customers now on fibre 2020/21 season. 500,000 around the world, creating the premises now built to Global Services with ultrafast broadband strategic review opportunity to reposition Global Services as a more focused digital We have undertaken a strategic review business. We will prioritise innovation of Global Services, with the objectives of cloud-based platforms that deliver of improving its market and financial our products and services, with 30m performance, its risk profile, and the BT’s global network at the core, to long-term value that it delivers to BT. support the digital transformation mobile customers using of our customers. As we implement our network Global Services is most differentiated with large, multinational customers, this strategy, we will ensure that we who demand high-quality, secure optimise the value of our global and communications. Its product portfolio our local network assets. is industry-leading across a range of 18.6m areas, including networking, security, To enable this strategic repositioning, cloud collaboration and contact we are restructuring our Global mobile customers centres. Services organisation to a simpler using 4G operating model. This will involve Technology trends mean that we a two-year restructuring of our are now less dependent on owning operations, the costs of which will 80% physical local network access assets be treated as a specific item. UK’s land mass now covered by 4G 4 BT Group plc Annual Report 2017 Annual Report 2017 BT Group plc 5 Review of the year continued Our investigation into our Italian business What we found BT Group chairman, conducted an investigation of the systems and In the summer of 2016 we received a whistle-blower report of controls relating to our Italian business. We also conducted a broader inappropriate behaviours in our Italian business. We instigated an review of financial processes, systems and controls across the group. investigation, which included an independent review by KPMG We are acting on both the recommendations of KPMG and our own LLP, with support and oversight from our Legal, Governance & observations and have taken steps to improve our controls within Compliance function and Freshfields Bruckhaus Deringer, reporting Italy. We have also taken steps to enhance the wider controls that directly to both the chair of the Audit & Risk Committee and BT monitor our overseas operations in our shared service centres, Group chairman, and our own comprehensive balance sheet review, Global Services and at a group level. which revealed improper accounting practices and a complex set of improper sales, purchase, factoring and leasing transactions in our Beyond Italy, we have completed detailed balance sheet reviews in Italian business.