Half-year Report

British Telecommunications plc

Results for the half year to 30 September 2020

November 2020

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 the London stock exchange.

BT is the UK's leading telecommunications and network provider and a leading provider of global communications services and solutions, serving customers in 180 countries. Its principal activities in the UK include the provision of fixed voice, mobile, broadband and TV (including Sport) and a range of products and services over converged fixed and mobile networks to consumer, business and public sector customers. For its global customers, BT provides managed services, security and network and IT infrastructure services to support their operations all over the world. BT consists of four customer-facing units: Consumer, Enterprise, Global and its wholly-owned subsidiary, Openreach, which provides access network services to over 650 communications provider customers who sell phone, broadband and Ethernet services to homes and businesses across the UK.

The directors at 30 September 2020 were Simon Lowth, Neil Harris, Ulrica Fearn, Edward Heaton and Keighly Droy-Whelan, all of whom served as directors throughout the period.

Customer-facing unit results for the half year to 30 September 2020

1 See Glossary below

2 On 1 April 2020, Supply Chain and Pelipod, which serve several parts of BT, were transferred from Enterprise to the central procurement team and as a result are now reported in Group 'Other' financial results. The prior year comparative for the Enterprise and Other CFU results has been restated to reflect this. Refer to the announcement on 29 June 2020 for further information

Glossary of alternative performance measures

We assess the performance of the group using a variety of alternative performance measures. Reconciliations from the most directly comparable IFRS measures are in Additional Information on page 24.

British Telecommunications plc

Group results for the half year to 30 September 2020

Income statement

Reported revenue was £10,590m, down 8%, due primarily to the impact of Covid-19 including reduced BT Sport revenue and a reduction in business activity in our enterprise units. The decline in revenue was also driven by ongoing legacy product declines in our enterprise businesses and a later than normal iPhone product launch, but was partially offset by higher rental bases of fibre enabled products and Ethernet in Openreach.

Reported operating costs were £9,134m, down 6%, mainly driven by lower product costs and commissions, sports rights rebates, savings from our modernisation programme and other cost initiatives including Covid-19 mitigating actions such as short-term reductions in discretionary spend. This was partly offset by continued investment in customer experience and higher operating costs in Openreach. Adjusted1 EBITDA of £3,723m was down 5%, or £202m.

Reported profit before tax of £1,161m was down 20%, or £290m, primarily reflecting the decline in adjusted EBITDA, higher depreciation and amortisation, and higher non-specific finance expense.

Specific items (Note 6 to the condensed consolidated financial statements)

Specific items resulted in a net charge after tax of £94m (H1 2019/20: £88m). The main components are restructuring costs of £155m (H1 2019/20: £144m), property rationalisation costs of £8m (H1 2019/20: gains of £111m reflecting the gain on sale of BT Centre), regulatory charge of £18m (H1 2019/20: release of £55m), and interest expense on pensions of £9m (H1 2019/20: £72m); offset by a net divestment-related items credit of £66m including profit on disposal of our Spanish operations (H1 2019/20: loss of £67m) and a tax credit on specific items of £30m (H1 2019/20: £24m).

Tax

The effective tax rate was 19.4% on reported profit and 19.8% on adjusted1 profit, based on our current estimate of the full year effective tax rate.

Capital expenditure

Capital expenditure was £1,969m (H1 2019/20: £1,882m). Network investment was £1,098m, up 9%2. This was driven by higher fixed network and mobile network spend, reflecting continued investment in FTTP deployment and the mobile network; offset by a decrease in core network spend. Other capital expenditure components were down 1%2 with £455m spent on customer-driven investments, £364m on systems and IT, and £52m spent on non-network infrastructure.

Cash flow

Net cash inflow from operating activities was up £540m to £2,711m, mainly driven by reduced pension deficit payments compared to last year offset by the reduced operating profit.

Balance sheet

At 30 September 2020 the group held cash and current investment balances of £6.6bn. The current portion of loans and other borrowings of £2.7bn include term debt of £1.4bn repayable during 2020/21. Our £2.1bn facility, which matures in March 2025, remains undrawn at 30 September 2020.

Pensions (Note 7 to the condensed consolidated financial statements)

The IAS 19 pension position at 30 September 2020 was a deficit of £4.0bn net of tax (£4.9bn gross of tax), compared with £1.0bn net of tax (£1.1bn gross of tax) at 31 March 2020. The increase in the gross deficit of £3.8bn since 31 March 2020 mainly reflects a fall in the real discount rate, partially offset by higher than expected asset returns, deficit contributions over the period, and a change of methodology used in the discount rate model.

At 30 September 2020, the discount rate model has been updated to use a wider universe of corporate bonds to derive the yield curve. A key difference is the inclusion of certain special purpose vehicle (SPV) corporate bonds that remain consistent with the requirements of IAS 19. The revised model is a standard approach developed by our external actuary. The impact of this change is a £0.9bn reduction in the BT Pension Scheme (BTPS) IAS 19 liabilities.

In August 2020 a consultation on reforming RPI closed. As no new information has been released and no change in market behaviour has been observed, there is no change proposed to our judgement in setting inflation assumptions. The result of the consultation is expected by the end of the calendar year.

1 See Glossary on page 1

2 Capital expenditure by spend type reported in Q2 2019/20 has been re-presented between categories to reflect an improved mapping process

In October 2020 a consultation was launched regarding future public sector pension increases, which may have a knock-on impact on the BTPS (the consultation will provide further clarity to information provided in our Q3 2019/20 results on this subject). Various options are proposed in the consultation which are likely to lead to extra pension liability (estimated to be a maximum increase of low hundreds of millions GBP). The extent of the impact will be known when the results of the consultation are released.

The BTPS funding valuation as at 30 June 2020 is currently in progress and we are considering a number of options for funding the deficit. These options include considering whether there are alternative approaches to only making cash payments, including arrangements that would give the BTPS a prior claim over certain BT assets. We are aiming to complete discussions in the first half of calendar year 2021.

Operating review

Consumer

Revenue declined in the half year, predominately due to the continued impact of Covid-19 with sport, including pubs & clubs, and roaming revenue significantly down, and the loss of retail store sales in Q1. A declining base of voice only customers and a later iPhone product launch has also impacted revenues.

EBITDA for the half year declined driven by lower revenues, continued investment in the fairness commitments made to Ofcom and increased bad debt. This has been partially offset by sports rights rebates and tight management of costs, including reduced headcount. No further material sports rights rebates are expected in the second half of the year.

Capital expenditure was up 11%, due to higher network and equipment investment.

Covid-19 will continue to affect Consumer with further impacts from lower sport revenue from pubs & clubs, more price-conscious customers, reduced roaming activity and increased costs from major handset launches. Q2 broadband and mobile churn both landed at 1.1%, each improving 0.1ppt year on year, linked to our focus on pricing, market competitiveness, fairness and also aided by lower market activity.

Our 5G ready customer base has increased to over 1m and 5G is now live in 112 UK towns and cities, more than any other operator, leaving the business well positioned for any new 5G device launches including the recent iPhone 12. During Q2 EE launched the exclusive 'Full Works Plan for iPhone' where customers receive inclusive access to Apple Music, Apple TV+ and Apple Arcade, in one mobile plan.

In Q2 our FTTP customer base grew by 86k to 598k, our largest quarterly increase to date. Nearly 40% of BT broadband customers are on our converged BT Halo product. Online live streams (web and app-based) for BT Sport were at their highest ever level in August 2020 during a busy month for BT Sport driven by the UEFA Champions League Finals.

 1 Adjusted (being before specific items). See glossary on page 1

2 Adjusted (being before specific items, share of post tax profits/losses of associates and joint ventures and net non-interest related finance expense). See glossary on page 1

Enterprise

Revenue decreased mainly due to reduced business activity across Enterprise as a result of Covid-19, as well as ongoing declines in our legacy products. Excluding the divestments of BT Fleet Solutions and Tikit in the prior year our revenue for the half year was down 7%.

Total fixed revenue was down 7% due to declines in legacy calls and lines, partially offset by growth in new products. Retail mobile revenue was down 13%, reflecting ongoing intense mobile competition and the impact of Covid-19, which affected both domestic and international call volumes, and led to a lower level of sales and upgrades. This was partially offset by an increase in Wholesale mobile revenue of 16%.

We expect to see further impacts of Covid-19 from business insolvencies, particularly among our SME customers, although the size of the impact will depend on the level and length of Government support. This also affects Wholesale which indirectly serves SMEs.

Operating costs were lower mainly due to the declines in revenue as well as cost transformation. We continue to focus our efforts on reducing our cost base through supplier and product rationalisation. We have over 500 individual cost reduction initiatives, and during the quarter introduced a number of measures to further tighten our third party costs.

EBITDA was down 13%. Excluding the divestments of BT Fleet Solutions and Tikit in the prior year our EBITDA for the half year was down 12%.

Capital expenditure was flat.

Retail order intake increased 3% to £3.2bn and Wholesale order intake decreased 1% to £1.1bn on a 12-month rolling basis. This includes a five year extension to our MVNO agreement with utilities service provider Utility Warehouse.

We continue to support small businesses across the UK through BT's Small Business Support Scheme. We recently announced a partnership with Square to help EE's small business customers securely accept contactless mobile payments and launched a bursary scheme to give UK start-ups six months' free fibre broadband, digital phone line and mobile bundles. The bursary includes Halo for Business and will be made available to 1,000 eligible companies initially.

We have extended our 5G development programme for our enterprise customers and have agreed a new landmark partnership with Belfast Harbour to deploy a 5G Private Network. We have also partnered with Stirling University on its 'Living Laboratory' project which sees BT helping to create a state of the art environmental monitoring system using 5G and complementary tech.

1 Adjusted (being before specific items). See glossary on page 1

2 Adjusted (being before specific items, share of post tax profits/losses of associates and joint ventures and net non-interest related finance expense). See glossary on page 1

3 All prior year comparatives as reported in the Q2 2019/20 results release have been restated for the changes detailed on footnote 2 on page 1

Global 

Covid-19 negatively impacted revenue in the half year but did not materially impact EBITDA as lower non-contracted business and milestone slippage were offset by higher conferencing volumes and cost mitigation. Looking forward, we are seeing a reduction in spending and a more cautious approach from our multinational customers resulting in cancellations and delays to purchasing cycles which will negatively impact revenue and EBITDA in the second half of the year.

Revenue for the half year was down 13% reflecting the impact of Covid-19, divestments, legacy portfolio declines and a £16m negative impact from foreign exchange movements. Revenue excluding divestments and foreign exchange was down 10%.

EBITDA for the half year was down 5% reflecting the impact of divestments, prior year favourable one-offs and a £4m negative impact from foreign exchange movements. EBITDA, excluding divestments, one-offs and foreign exchange was up 6%. The negative impact of Covid-19 on revenue was more than offset by lower operating costs reflecting ongoing transformation and Covid-19 mitigation actions.

Depreciation and amortisation was down 21% due to the impact of divestments and declines in capital investment over the last few years in line with our strategy to become an asset light business. Operating profit was up £37m.

Capital expenditure was down due to lower project spend and the impact of divestments.

Order intake in the quarter was £0.8bn, down 43% due to a number of large renewals in the prior year and the impact of Covid-19. On a rolling 12-month basis it was £4.1bn, up 10% year on year.

On 1 October we completed the sale of selected domestic operations and infrastructure in Latin America. 

1 Adjusted (being before specific items). See glossary on page 1

2 Adjusted (being before specific items, share of post tax profits/losses of associates and joint ventures and net non-interest related finance expense). See glossary on page 1

Openreach

Revenue growth for the half year was driven by higher rental bases in fibre3, up 18% and Ethernet, up 9%. This was partially offset by decline in legacy copper products. The first quarter in particular was impacted by Covid-19 driving lower provision and upgrade activity, partly offset by lower churn.

EBITDA grew 3% year on year with revenue growth partially offset by higher operating costs. The increase in operating costs was primarily driven by investment in people to deliver better service, partially offset by ongoing efficiency programmes and reductions in discretionary spend.

Depreciation and amortisation was broadly flat. Operating profit grew by 7% to £621m.

Capital expenditure was up 6% due to investments in the network, predominantly fibre enabled infrastructure, partially offset by efficiency savings.

Delivering a standout service for Openreach's customers was a challenge in the first half of the year, impacted by Covid-19, bad weather and increased home working. Despite this Openreach delivered record levels of engineering work in support of a nation working from home during the pandemic.

Openreach continues to build FTTP at pace with an average of 40k premises passed per week in the second quarter. To support accelerating build we have concluded one of the biggest tender processes in Openreach's history, with nine engineering partners contracted in the quarter to support our build. These tenders are key to the commitment to build to 20m premises by the mid-to-late 2020s, subject to enablers.

1 Adjusted (being before specific items). See glossary on page 1

2 Adjusted (being before specific items, share of post tax profits/losses of associates and joint ventures and net non-interest related finance expense). See glossary on page 1

3 FTTP, FTTC and Gfast (including Single Order migrations)

Financial statements

Group income statement

For the half year to 30 September 2020

For the half year to 30 September 2019

Group statement of comprehensive income

Group balance sheet

1 Assets and liabilities held for sale at 30 September 2020 relate to our domestic operations in France, and selected domestic operations and infrastructure in 16 countries in Latin America

2 Bank overdrafts of £116m at 30 September 2020 (31 March 2020: £183m) are included within loans and other borrowings

Group statement of changes in equity

For the half year to 30 September 2020

For the half year to 30 September 2019

Group cash flow statement

For the half year to 30 September

1 Consistent with the full year results, interest on lease liabilities is now included within interest paid, and the notional interest charge reclassified from other non-cash charges to movement in trade and other payables. Interest on lease liabilities of £70m was previously presented as a separate line item within cash generated from operations in the Q2 2019/2020 results release.

2 Includes pension deficit payments of £425m for the half year to 30 September 2020 (H1 2019/20: £1,261m)

3 Repayment of borrowings includes the impact of hedging

4 Net of bank overdrafts of £116m at 30 September 2020 (31 March 2020: £183m, 30 September 2019: £78m, 31 March 2019: £72m), and including £43m cash and cash equivalents classified as held for sale (31 March 2020: £43m, 30 September 2019: £nil, 31 March 2019: £nil)

5 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

Notes to the condensed consolidated financial statements

1. 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 2020 and 2019 together with the balance sheet at 31 March 2020. The financial statements for the half year to 30 September 2020 have been reviewed by the auditors and their review opinion is on page 23. 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 2020 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).

The directors are satisfied that the group has adequate resources to continue in operation for a period of at least twelve months from the date of this report. Consequently, the directors consider it appropriate to adopt the going concern basis of accounting in preparing the condensed consolidated financial statements for the half year to 30 September 2020. When reaching this conclusion, the directors took into account:

• The group's overall financial position (including trading during the half year and ability to repay term debt as it matures without recourse to refinancing);

• Exposure to principal risks (including severe but plausible downsides); and

• The ongoing impact of Covid-19 (which has affected trading but has not had a significant impact on the group's ability to generate cash).

At 30 September 2020, the group had cash and cash equivalents of £0.8bn and current asset investments of £5.8bn. The group also had access to committed borrowing facilities of £2.1bn. These facilities were undrawn at period-end and are not subject to renewal until March 2025.

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 2020 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 2020 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

No new or amended accounting standards that became effective during the year have had a significant impact on the group.

New and amended accounting standards that have been issued but are not yet effective

We do not expect any other standards or interpretations that have been issued but are not yet effective to have a significant impact on the group.

2. Restatement of prior period financial statements

On 1 April 2020, Supply Chain and Pelipod, which serve several parts of BT, were transferred from Enterprise to the central procurement team and as a result are now reported in Group 'Other' financial results. The comparative results in the operating results notes have been revised to be presented on a consistent basis. See notes 3 and 4.

3. Operating results - by customer facing unit

1 For the reconciliation of adjusted EBITDA see additional information on page 24

2 See Glossary on page 1

3 2019 results have been restated to reflect the transfer of Supply Chain and Pelipod from Enterprise to Other

4. Operating results - by type of revenue

1 See Glossary on page 1

2 2019 results have been restated to reflect the transfer of Supply Chain and Pelipod from Enterprise to Other

5. Operating costs

6. Specific items

Specific items are used to derive the adjusted results as presented in the accompanying consolidated income statement. The directors believe that presentation of our results in this way is relevant to an understanding of our financial performance, as specific items are identified by virtue of their size, nature or incidence.

This presentation is consistent with the way that financial performance is measured by management and reported to the BT Group plc Board and the Executive Committee and assists in providing a meaningful analysis of our trading results. In determining whether an event or transaction is specific, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence.

Specific items may not be comparable to similarly titled measures used by other companies. Examples of charges or credits meeting the above definition and which have been presented as specific items in the current and/or prior years include acquisitions/disposals of businesses and investments, regulatory settlements, historical insurance or litigation claims, business restructuring programmes, asset impairment charges, property rationalisation programmes, net interest on pensions and the settlement of multiple tax years. In the event that other items meet the criteria, which are applied consistently from year to year, they are also treated as specific items.

Restructuring charges

During the year we incurred charges of £155m (H1 2019/20: £144m), primarily relating to leaver costs associated with our group-wide modernisation programme and other cost initiatives.

Property rationalisation

We have recognised costs of £8m relating to rationalisation of our property portfolio under our Better Workplace Programme (H1 2019/20: net credit of £111m primarily relating to the £115m gain on sale of BT Centre).

Retrospective regulatory matters

We have recognised a regulatory charge of £18m (H1 2019/20: credit of £55m) in relation to regulatory matters. Of this charge, £17m is recognised in revenue and £1m in operating costs.

Divestment related items

We have recognised a net credit in relation to divestment related items of £66m (H1 2019/20: loss on disposal of £67m relating to the divestment of BT Fleet Solutions).

The credit in the current period includes £81m gain on disposal of our Spanish operations which completed in Q1. Net consideration was £152m and disposal costs of £10m were incurred. Total net assets disposed of were £61m, including an allocation of goodwill. This was partially offset by £6m impairment charges in respect of the disposal of selected operations and infrastructure in 16 countries in Latin America which completed on 1 October 2020, and £9m of divestment related costs.

Provisions for claims

In H1 2019/20 we recognised a credit of £5m in relation to release of provisions for claims created through specific items in 2012/13 which have now been fully settled.

Interest expense on retirement benefit obligation

During the year we incurred £9m (H1 2019/20: £72m) of interest costs in relation to our defined benefit pension obligations. This is lower than the prior year reflecting the lower IAS 19 pension deficit at 31 March 2020.

Tax on specific items

A net tax credit of £30m (H1 2019/20: credit of £24m) was recognised in relation to specific items.

7. Pensions

The IAS 19 deficit has increased from £1.1bn at 31 March 2020 to £4.9bn at 30 September 2020. Net of deferred tax, the deficit has increased from £1.0bn to £4.0bn.

At 30 September 2020, the discount rate model has been updated to use a wider universe of corporate bonds to derive the yield curve. A key difference is the inclusion of certain special purpose vehicle (SPV) corporate bonds that remain consistent with the requirements of IAS 19. The revised model is a standard approach developed by our external actuary. The impact of this change is a £0.9bn reduction in the BT Pension Scheme IAS 19 liabilities.

8. Financial instruments and risk management

Fair value of financial assets and liabilities measured at amortised cost

At 30 September 2020, the fair value of listed bonds was £21,142m (31 March 2020: £20,088m) and the carrying value was £18,083m (31 March 2020: £18,044m).

The fair value of the following financial assets and liabilities approximate to their carrying amount:

• Cash and cash equivalents

• Lease liabilities

• Trade and other receivables

• Trade and other payables

• Provisions

• Investments held at amortised cost

• Other short term borrowings

• 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 2020.

The current trade and other payables balance of £5,778m includes £106m (30 September 2019: £nil) of trade payables that have been factored by suppliers in a supply chain financing programme. These programmes are used with a limited number of suppliers with short payment terms to extend them to a more typical payment term.

Fair value estimation

Fair values of financial instruments are analysed by three levels of valuation methodology which are:

1. Level 1 - uses quoted prices in active markets for identical assets or liabilities

2. Level 2 - uses inputs for the asset or liability other than quoted prices, that are observable either directly or indirectly

3. 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 values 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.

No gains or losses have been recognised in the income statement in respect of Level 3 assets held at 30 September 2020. 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 £1,164m (31 March 2020: £1,234m). Programme rights commitments, mainly relating to football broadcast rights for which the licence period has not yet started, were £1,911m (31 March 2020: £2,434m).

10. Contingent liabilities

Legal proceedings

The group is involved in various proceedings, including actual or threatened litigation, and government or regulatory investigations. 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 2020.

In respect of each of the claims below, the nature and progression of such proceedings and investigations can make it difficult to predict the impact they will have on the group. There are many reasons why we cannot make these assessments with certainty, including, among others, that they are in early stages, no damages or remedies have been specified, and/or the often slow pace of litigation.

Italian Business

Milan Public Prosecutor prosecutions: In February 2019 the Milan Public Prosecutor served BT Italia S.P.A. with a notice (which named BT Italia, as well as various individuals) that records the prosecutor's view that there is a basis for proceeding with its case against BT Italia for certain potential offences. BT Italia disputes this and maintains in a defence brief filed in April 2019 that it should not be prosecuted. BT Italia is not presently the subject of any formal charge (nor are any of the individuals named in the prosecutor's notice).

Preliminary Hearings in Milan to determine whether or not BT Italia and the 23 named Defendants should be committed to trial which were adjourned due the Covid-19 pandemic have now recommenced.

US securities class action complaints: In April 2020 the US Federal Court Judge granted our motion to dismiss all claims against BT and the named individual defendants. The plaintiffs have appealed that judgment. The appeal is estimated to take 12 to 18 months.

Brazilian tax claims

The Brazilian state tax authorities have made tax demands on the exchange of goods and services (ICMS) and regulatory assessments (FUST/FUNTTEL) against certain Brazilian subsidiaries. These are indirect taxes imposed on the provision of telecommunications services in Brazil. The state tax and regulatory authorities are seeking to impose ICMS and FUST/FUNTTEL on revenue earned on activities that the company does not consider as being part of the provision of telecommunications services, such as equipment rental and managed services. The judicial process is likely to take many years.

We have disputed the basis on which ICMS and FUST/FUNTTEL are imposed and, in the case of ICMS, have challenged the rate which the tax authorities are seeking to apply.

As of the close of the second quarter we had 31 pending ICMS cases with an updated potential value of £130m, and 62 pending FUST FUNTTEL cases with an updated potential value of £22m.

On 1 October, the sale of BT Latam Inc. and its subsidiaries to CIH Telecommunications Americas LLC was completed. As a result of the sale the entities liable for the majority of all ICMS and FUST/FUNTTEL matters are no longer a part of British Telecommunications plc and it will have no ongoing exposure with respect to those matters.

The retained business will continue to be responsible for 2 ICMS cases with a current estimated potential value of £11m, and 17 FUST FUNTELL cases with a current estimated potential value of £4m. Other than these British Telecommunications plc retains no material direct exposures.

Phones 4U

Since 2015 the administrators of Phones 4U Limited have made allegations that EE and other mobile network operators colluded to procure Phones 4U's insolvency. Legal proceedings for an unquantified amount were issued in December 2018 by the administrators and in April 2019 we submitted our defence to this claim. We continue to dispute these allegations vigorously.

Regulatory matters

In respect of regulatory risks, the group provides for anticipated costs where an outflow of resources is considered probable and a reasonable estimate can be made of the likely outcome. Estimates are used in assessing the likely value of the regulatory risk. The ultimate liability may vary from the amounts provided and will be dependent upon the eventual outcome of any settlement.

Northern Ireland Public Sector Shared Network contract

On 4 April 2019 Ofcom opened an investigation into whether the award of the Public Sector Shared Network contract for Northern Ireland to BT complied with relevant significant market power conditions. We are cooperating with Ofcom's investigation.

Other regulatory matters

In the ordinary course of business, we are periodically notified of regulatory matters and investigations. We hold provisions reflecting management's estimates of regulatory risks across a range of issues, including price and service issues. The precise outcome of each matter depends on whether it becomes an active issue, and the extent to which negotiation or regulatory decisions will result in financial settlement.

11. 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 Ltd) 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 Ltd, between BT Group plc and British Telecommunications plc. This intermediary company held an investment of £18.5bn in British Telecommunications plc which was funded by an intercompany loan facility with British Telecommunications plc.

A dividend of £2,000m (2019: £1,575m) was declared and settled with the parent company in relation to the year ended 31 March 2020 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:

12. Post balance sheet events

On 1 October 2020 the group completed the disposal of selected operations and infrastructure in 16 countries in Latin America. These operations and infrastructure had been classified as held for sale at 31 March 2020 with a charge of £90m recognised as an impairment. Further impairment charges of £6m have been recognised as specific items in the half year to 30 September 2020. The impact of the divestment on the legal proceedings in relation to Brazilian tax claims is discussed in note 10.

On 2 November 2020 we completed the disposal of our domestic operations in France. These operations had been classified as held for sale at 31 March 2020 with a charge of £37m recognised as an impairment. No further impairment charges have been recognised in the half year to 30 September 2020 in relation to this divestment.

13. Principal risks and uncertainties (extracted from the British Telecommunications plc Annual Report 2020)

We have processes for identifying, evaluating and managing our risks. Details of our principal risks and uncertainties can be found on pages 14 to 21 of the Annual Report 2020 and are summarised below. They have the potential to have an adverse impact on our profit, assets, liquidity, capital resources and reputation.

Strategic risks

• Competition - Failure to respond effectively to intensifying competition and technology developments, and develop product propositions in line with changing market dynamics and expectations.

• Political - Risks associated with Brexit, geopolitical trends, and the perceived issues in deployment and connectivity of broadband and mobile coverage.

• Communications industry regulation - Failure to comply with existing regulations or material regulatory change could impact the way we operate and compete in terms of our pricing, the standards we must meet and the services we provide.

Operational risks

• Cyber security - Cyber security risks could arise from colleagues inside BT or from external sources, with any failure to effectively manage these exposures presenting a material threat to data integrity, service availability and our reputation as a leader in cyber security.

• Third party management - A failure in the supplier selection and/or in-life third party management process, as well as external factors that could generate risk in our supply chain such as restrictions in our ability to engage with perceived high risk vendors, Brexit and Covid-19.

• Change management - Failure to realise the benefits of our transformation programme could negatively impact customer experience and our operational efficiency, as well as our ability to make future investments.

• Major contracts - Failure to successfully manage our large, complex and high-value national and multinational customer contracts (including the Emergency Services Network and the Building Digital UK Programme) and deliver the anticipated benefits.

• Customer experience - Failure to transform the customer experience so that it is brand enhancing and drives sustainable profitable revenue growth.

• Service interruption - Any major or repeated failure to maintain the continuity of our end-to-end customer services (e.g. network connectively and performance, and IT systems and service platforms).

• Colleague engagement - A negative reaction to change or poor consultation could adversely impact colleague engagement and subsequent ability to achieve our strategic objectives.

Financial risks

• Pension scheme - Our defined benefit pension schemes, in particular the BT Pension Scheme (BTPS), could become more of a financial burden as a result of future low investment returns, changes in inflation expectations, longer life expectancies, a more prudent approach being taken (e.g. if BT's financial strength is viewed as having worsened) or regulatory changes). A review of our contributions for the BTPS is underway.

• Financing - Exposure to funding and liquidity risks, including those arising from our underling business operations, and also to financial risks such as interest rate, foreign exchange and counterparty risks.

Compliance risks

• Health, safety and wellbeing - Failure to look after the health, safety and wellbeing of our colleagues and/or members of the public, especially in the light of Covid-19 related exposures, with potential breaches of health and safety laws and regulations and disruption to our operations.

• Significant control failure - Failure of our financial controls to prevent and/or detect fraud, financial misstatement or other financial loss.

• Privacy and data protection - Breach of data privacy laws through misuse, or failure to secure and protect, customer and employee data.

• Ethics culture - Failure to promptly recognise and respond to wrongdoing by our colleagues or those working on our behalf, which could include a breach of our internal policies and procedures or applicable laws (e.g. anti-bribery and corruption, trade sanctions and human rights).

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. Since the publication of the 2020 Annual Report, the risks landscape has developed, particularly in relation to Covid-19, Brexit and the Government's review of high risk vendors.

Despite a successful operational response to date, Covid-19 continues to impact our colleagues, operations, suppliers and customers. Our Covid-19 trading risks relate to reduced consumer spending, financial distress and insolvency of our corporate customers, reduced public-sector budgets, reduced mobile roaming and the possibility of further suspension of sport. This is partially offset by reduced customer churn and an increasing use of connectivity products. The future prevalence of the virus and the long-term economic impacts are uncertain. We continue to monitor emerging exposures and our ability to manage them, defining and agreeing actions as required.

Our Brexit SteerCo continues to stress test scenarios related to a disorderly Brexit, assessing our level of preparedness and agreeing any further contingency actions where required. This includes ensuring appropriate stock piling is in place and implementing preventative and contingency controls to deal with potential supply chain, customs, data, mobile roaming, people and regulatory related risks.

In July 2020, the UK Government announced a revised set of proposals to remove Huawei equipment from 5G communication networks in the UK by the end of 2027. Compliance with this requirement creates additional network development and resilience risks that need to be carefully managed. There is a risk that further restrictions resulting from the Government's review of high risk vendors (including Huawei) could exacerbate the risks and lead to additional costs. We will continue to work with relevant authorities as they consult on the future procurement strategy for fixed and mobile networks.

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:

a. 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

b. 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

Simon Lowth

Director

9 November 2020

INDEPENDENT REVIEW REPORT TO BRITISH TELECOMMUNICATIONS 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 2020 which comprises Consolidated Income Statement, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated Cash Flow Statement and the 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 2020 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.

As disclosed in note 1, 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.

John Luke

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square, London, E14 5GL

9 November 2020

Additional Information

Notes

1) 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 BT Group plc 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 profit, reported profit before tax and reported net finance expense are the equivalent unadjusted or statutory measures. Reconciliations of reported to adjusted revenue, operating costs, operating profit and profit before tax are set out in the Group income statement.

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 for the period to EBITDA and adjusted EBITDA is provided below.

1 See Glossary on page 1

Reconciliation of year on year trends in adjusted earnings before interest, tax, depreciation and amortisation

Adjusted 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. Adjusted EBITDA is defined as EBITDA before specific items, share of post tax profits/losses of associates and joint ventures and net non-interest related finance expense.

A reconciliation of the trends in EBITDA to adjusted EBITDA is provided below.

1 See Glossary on page 1

Forward-looking statements - caution advised

This results release contains certain forward-looking statements which are made in reliance on the safe harbour provisions of the US Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements include, without limitation, those concerning: the potential impact of Covid-19 on our people, operations, suppliers and customers; current and future years' outlook; revenue and revenue trends; EBITDA and profitability; free cash flow; capital expenditure and costs; return on capital employed; return on investment; shareholder returns including dividends and share buyback; net debt; credit ratings; our group-wide transformation and restructuring programme, cost transformation plans and restructuring costs; investment in and roll out of our fibre network and its reach, innovations, increased speeds and speed availability; our broadband-based service and strategy; investment in and rollout of 5G; the investment in converged network; improvements to the customer experience and customer perceptions; our investment in TV, enhancing our TV service and BT Sport; the recovery plan, operating charge, regular cash contributions and interest expense for our defined benefit pension schemes; effective tax rate; growth opportunities in networked IT services, the pay-TV services market, broadband, artificial intelligence and mobility and future voice; growth of, and opportunities available in, the communications industry and BT's positioning to take advantage of those opportunities; expectations regarding competition, market shares, prices and growth; expectations regarding the convergence of technologies; plans for the launch of new products and services; retail and marketing initiatives; network performance and quality; the impact of regulatory initiatives, decisions and outcomes on operations; BT's possible or assumed future results of operations and/or those of its associates and joint ventures; investment plans; adequacy of capital; financing plans and refinancing requirements; demand for and access to broadband and the promotion of broadband by third-party service providers; improvements to the control environment; and those statements preceded by, followed by, or that include the words 'aims', 'believes', 'expects', 'anticipates', 'intends', 'will', 'should', 'plans', 'strategy', 'future', 'likely', 'seeks', 'projects', 'estimates' or similar expressions.

Although BT believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause differences between actual results and those implied by the forward-looking statements include, but are not limited to: the duration and severity of Covid-19 impacts on our people, operations, suppliers and customers; failure to respond effectively to intensifying competition and technology developments; failure to address the lingering perception of slow pace and connectivity in broadband and mobile coverage, which continues to be raised at a UK parliamentary level; undermining of our strategy and investor confidence caused by an adversarial political environment; challenges presented by Covid-19 around network resilience, support for staff and customers, data sharing and cyber security defence; unfavourable regulatory changes; attacks on our infrastructure and assets by people inside BT or by external sources like hacktivists, criminals, terrorists or nation states; a failure in the supplier selection process or in the ongoing management of a third-party supplier in our supply chain, including failures arising as a result of Covid-19; risks relating to our BT transformation plan; failure to successfully manage our large, complex and high-value national and multinational customer contracts (including the Emergency Services Network and the Building Digital UK (BDUK) programme) and deliver the anticipated benefits; changes to our customers' needs, budgets or strategies that adversely affect our ability to meet contractual commitments or realise expected revenues, profitability or cash generation; customer experiences that are not brand enhancing nor drive sustainable profitable revenue growth; pandemics, natural perils, network and system faults, malicious acts, supply chain failure, software changes or infrastructure outages that could cause disruptions or otherwise damage the continuity of end to end customer services including network connectivity, network performance, IT systems and service platforms; insufficient engagement from our people; adverse developments in respect of our defined benefit pension schemes; risks related to funding and liquidity, interest rates, foreign exchange, counterparties and tax; failures in the protection of the health, safety and wellbeing of our employees or members of the public or breaches of health and safety law and regulations; financial controls that may not prevent or detect fraud, financial misstatement or other financial loss; security breaches relating to our customers' and employees' data or breaches of data privacy laws; failure to recognise or promptly report wrongdoing by our people or those working for us or on our behalf (including a failure to comply with our internal policies and procedures or the laws to which we are subject); and the potential impacts of climate change on our business.

BT undertakes no obligation to update any forward-looking statements whether written or oral that may be made from time to time, whether as a result of new information, future events or otherwise.