This is the BT Annual Report for the year ended 31 March 2015. It complies with UK regulations and comprises part of the Annual Report and Form 20-F for the US Securities and Exchange Commission to meet US regulations.

This is our first integrated Annual Report. We want to communicate our story in a more compelling way. We see Integrated Reporting (IR) as the best way to do that. So this year, for the first time, we are reflecting this approach in how we structure and present our Annual Report.

Integrated Reporting is an initiative led by the International Integrated Reporting Council (IIRC). While IR is market-led, its principles and aims are consistent with UK regulatory developments in financial and corporate reporting.

In December 2013, the IIRC issued the IR Framework to establish guiding principles and content elements for integrated reports. We have taken these principles and elements into account in preparing our Annual Report. This is most obvious in the revised representation of our business model and the new section describing our main stakeholders. We no longer report simple ‘outputs’, we consider ‘outcomes’ or the impact that we have as a business. And we use a set of six icons throughout this Annual Report to provide linkage to the business model.

But this is just the start. We recognise that our move toward ‘full’ IR will continue to evolve. Find out more: www.theiirc.org

Please see the cautionary statement regarding forward-looking statements on page 209.

The Purpose and strategy, Delivering our strategy, Our lines of business and Group performance sections on pages 19 to 92 form the Strategic Report. The Governance section on pages 93 to 136 forms the Report of the Directors.

Chairman’s introduction

“We are continuing to make significant investments, for the long-term benefit of both BT and the UK.”

We have performed well this year, with our investments delivering for the business in challenging market conditions. We have announced a number of further major investments to support the long-term value of our business.

Investing for growth

Our most significant investment has been in superfast broadband. In 2008, when the UK was in the middle of a recession, the Board approved bold plans to take fibre broadband to 40% of the country. We then increased this target to two-thirds of the UK, a goal we hit a year ago. Today our network covers more than three-quarters of the UK. This includes premises in rural and hard-to-reach areas that we have been able to get to with the help of public funding following competitive tenders as part of the Government’s Broadband Delivery UK programme.

Our fibre broadband investment has been a major achievement. It has been one of the fastest rollouts in the world. We have come in on budget and ahead of schedule. And demand for it is strong. The number of premises connected rose over 50% this year.

We have been able to make this investment by exercising strong financial discipline. Our cash flow is almost four times higher than it was when we started building our fibre network as we have significantly transformed our cost base, giving us the oxygen to invest for growth. Being part of a larger group gave Openreach the confidence in future demand to make this long-term investment. Thanks to Openreach, fibre broadband availability is ahead of all the major European countries. And broadband pricing in the UK is amongst the lowest with more than 500 providers selling services in a highly competitive market.

We will continue to work with government to help take fibre coverage to 95% of the UK. But we are not stopping there. We announced this year another major investment to make ultrafast speeds of up to 500Mbps available to most of the UK within a decade, with 1Gbps available to those who want even faster speeds. This will be another significant investment for BT, ensuring that the UK remains at the forefront of digital communications with a vibrant internet economy.

This year we successfully launched BT Mobile into the consumer market and re-launched our business mobile propositions. We also announced the proposed acquisition of EE, the leading mobile operator in the UK. This will be a transformational deal for BT, accelerating our mobility strategy. We will combine the UK’s most advanced 4G network with the UK’s most extensive superfast broadband network, allowing us to provide a full range of innovative communications services.

We have secured some great content for our BT Sport channels. We extended and improved our FA Premier League and Aviva Premiership Rugby broadcast rights. And we will start to show our exclusive UEFA Champions League and UEFA Europa League content from this summer.

We will make sure BT Sport remains great value and widely available to UK households.

We have invested further in our customer service. We recruited 2,500 new engineers and more than 500 new people into our contact centres. And we are seeing the benefits of our investment. We have increased the speed of service delivery and repaired faults faster. But we didn’t meet our customer perception targets, and in a competitive market we need to do more. This remains an absolute priority for BT and one where we are committed to invest and improve further.

Building our global presence

A significant proportion of our revenue is generated outside the UK, mainly from large multinational businesses. BT Global Services has again consolidated its position as a global leader for managed networked IT services. To best serve our customers it is critical that we have fair access to networks across the world. Other operators can use our networks in the UK on favourable terms. Yet in the US and some European countries incumbents are allowed a distinct advantage in their home markets.

We have therefore continued to work with governments around the world, and are encouraged by progress over the last year. In Europe, completing the Digital Single Market is a key policy priority of the new European Commission. And in the US, the Federal Communications Commission is making progress on its review of the wholesale access market. We have continued to engage too on the EU-US transatlantic trade talks seeking further improvements in transatlantic economic integration and in regulatory coherence.

Rewarding our people

As well as our networks and assets, we are also investing in our people to make sure they have the skills and support they need to best serve our customers. Our performance in the year reflects their expertise, hard work and commitment. I am delighted that in August 2014, over 22,000 people in our 2009 savings-related share option plan were able to buy shares at 61p, representing an average gain of around £41,000 each. Our people also give back in other ways. Twenty-six per cent of them volunteered 53,000 days of their time to help more than 3,700 charities and community groups across the globe.

Strengthening the Board

I am delighted to welcome Isabel Hudson who joined the Board on 1 November 2014. Isabel is Chair of the National House Building Council and was previously a non-executive director of The Pensions Regulator. Her insight and experience in the regulatory, pensions and financial industries will be a strong asset for BT and the Board. As I mentioned last year, Iain Conn joined the Board on 1 June 2014. Iain is chief executive of Centrica and brings a wealth of experience, making a strong contribution to the Board discussions this year. We announced in April that Warren East will be stepping down from the Board on 31 May 2015 in light of his appointment as chief executive of Rolls-Royce. Warren has made an immense contribution during his time at BT and I congratulate him on this important appointment.

Generating value for shareholders

As a result of our progress this year, the Board is proposing a final dividend of 8.5p, up 13%. This gives a full year dividend of 12.4p, up 14%. We expect to grow our dividend per share by 10%-15% next year and to pay a progressive dividend beyond that.

Our goal is to deliver sustainable, profitable revenue growth supported by the investments we are making. Together with our cost transformation activities this will provide a powerful platform for long-term cash flow growth, and therefore value creation for our shareholders.

Sir Michael Rake

Chairman

6 May 2015

Our goal and strategy

Our goal is to deliver sustainable, profitable revenue growth.

The three pillars of our strategy will help us achieve this goal: delivering superior customer service; transforming our costs; and investing for growth. The better our customer service, the more we will sell and the less time and money we need to spend putting things right. And the better we manage our costs, the better value for money we can offer our customers and the more we can invest in giving customers what they need, today and tomorrow.

We are investing in five strategic growth areas: fibre; TV and content; mobility and future voice services; UK business markets; and supporting leading global companies. By investing in these areas, we aim to broaden and deepen our relationships with consumers, businesses and public sector clients, increasing our relevance to them as markets and technologies evolve.

Previously, we had to depend on cost transformation to grow our cash flow. In the years ahead, revenue growth, together with continued transformation of our costs, will provide a powerful platform for long-term and sustainable cash flow growth. This will create value for our shareholders, as well as for our other stakeholders.

Our business model

Our business model creates value for shareholders, by delivering for customers, society and our people.

Our people, technology, networks and financial strength are key to our business. We invest to build and maintain communications networks in the UK and overseas. We develop products and services that run over those networks – these are our key outputs; and then we sell them on a subscription basis to consumers, businesses and the public sector.

By selling services we are able to make a return on our network investments. But the outcomes of our business are more than just financial. What we do matters. We make connections, create new possibilities and deliver value to individuals, families, businesses, governments, communities, and society in general. And we contribute directly to the health of the UK by providing jobs and paying tax.

We make sure we stay in tune with market and competitive trends, so that we make the right investments and create products and services that customers want to buy. Being able to anticipate and respond to changes in our environment makes for a flexible and sustainable business model. We see more and more demand for our services because they play such an integral role in modern life. So we are confident that we will be able to deliver value today and in the future.

Key performance indicators

We measure our progress using four key performance indicators (KPIs).

Our key measure of the group’s revenue trend, underlying revenue excluding transit, was down 0.4%, in line with our outlook of broadly flat. BT Consumer revenue was up 7%, helped by strong growth in our fibre broadband and TV customer bases. This was offset by declines in our other lines of business, in part due to regulatory pricing pressures.

We grew adjusted earnings per share by 12%. Normalised free cash flow of £2,830m was up 16% and ahead of our outlook for the year of above £2.6bn. Our continued focus on cost transformation, capital expenditure efficiencies and debt reduction helped us achieve these.

Finally, we have improved our customer service, although we want to achieve more. ‘Right First Time’ (RFT) is our key measure of customer service and is up 4.7% compared with a 1.5% increase last year. All lines of business contributed to this improvement. We delivered significantly better repair performance and shorter lead times for providing UK lines and broadband. BT Global Services made large gains in delivering more of its products within target times. Looking ahead, we need to improve our provision of Ethernet services and recover more quickly when we do fail to meet our promises.

Our performance for the year

This year, we delivered on our core business in globally challenging markets, achieving or beating the outlook we set at the start of the year. BT Consumer launched great value mobile propositions and we have set out our plans to deliver ultrafast broadband with G.fast to most of the UK. For our business customers, we launched a number of innovative solutions, including BT Assure Threat Defence in BT Global Services and cloud-based voice services in BT Business and BT Wholesale.

We have made further progress in transforming our costs. Despite continuing to insource jobs, net labour costs were down 8% as we increased productivity while reallocating our labour resource to be more efficient. We reorganised our business and streamlined our processes. Underlying operating costs excluding transit were down 2%, contributing to EBITDA growing 3%.

Our strong financial discipline has helped us fund investments in our five strategic growth areas. We announced the proposed acquisition of EE for £12.5bn, secured exclusive rights to FA Premier League football matches for a further three years and extended our Aviva Premiership Rugby rights. As well as growing our EBITDA and free cash flow we have reduced our net debt and made further significant contributions to the BT Pension Scheme. Our proposed full year dividend to shareholders is 12.4p, up 14%.

How our lines of business performed

BT Global Services

We have consolidated our position as a global market leader for managed networked IT services. We help around 6,500 large corporate and public sector customers, in more than 170 countries worldwide, to embrace the digital age, innovate and work more efficiently.

We deliver value to our customers by combining our products and services with industry-specific solutions and consulting expertise. We operate globally and deliver locally, to help our customers make connections and create new possibilities.

We put our customers at the heart of our decision-making and have made progress in improving customer service. By increasing the speed of delivery of our main products, we improved our Right First Time measure by 8.6%. We have enhanced our global capabilities by extending the reach and features of our services. And we launched new solutions including security, cloud-based and unified communications services.

We grew underlying revenue excluding transit in the high-growth regions and Continental Europe. But lower public sector revenue resulted in overall revenue declining. We focused on transforming our cost base, for instance, simplifying our organisational structure in Switzerland and Eastern Europe and improving the process for ceasing access circuits which we no longer need. This meant we grew EBITDA, despite the decline in revenue.

Our operating cash inflow of £349m was lower than we achieved last year, when we had benefited from some early customer receipts. But our EBITDA less capital expenditure measure has continued to grow. We achieved an order intake of £6.5bn, down 7% reflecting large re-signs last year.

BT Business

BT Business provides communications and IT services in the UK and Republic of Ireland. We serve around 900,000 customers.

We are focused on serving small and medium-sized enterprises (SMEs) in three main markets: fixed-voice and data; mobility; and IT services. We have a market share of around 30% in fixed-voice and data but just 1% in mobility and 6% in IT services. We expect these markets to increasingly converge over the next few years as technology and customer needs change. And as they do, we see an opportunity to grow our share of the mobility and IT services markets.

To help achieve this, we launched a number of new products in the year including BT One Phone, BT Cloud Voice and BT Cloud Phone. We relaunched BT Business Mobile, adding 4G access and unlimited wi-fi for all new and re-signing customers. Our proposed acquisition of EE will let us accelerate the sale of converged fixed-mobile services to our existing business customers as well as offer new services.

We have invested in improving our customer service. We provided 35,000 hours of training to improve the skills of our service teams. We have moved more customers onto our new UK Business Solution system, which makes it easier to serve customers with multiple products. And we have improved our online ‘self-service’ capabilities. These all contributed to our Right First Time measure improving 5.1%.

Underlying revenue excluding transit was down 1% due to lower line and call volumes. But we have increased EBITDA for the third year running through our cost transformation activities, including a 10% reduction in our total labour resource, the merger of two of our IT services units and by renegotiating supplier contracts. Our order intake was broadly level for the year at £2.1bn.

BT Consumer

We are the largest provider of consumer fixed-voice and broadband services in the UK. We are focused on top and bottom-line growth through selling broadband, TV, exclusive sports channels and mobile services to our customers.

We grew our share of the DSL and fibre broadband market for the sixth year in a row and we have added the most broadband customers of any operator for six quarters running. Customers continue to want faster broadband. 39% of our retail broadband customers are now on fibre. We also sell services through our Plusnet brand. Plusnet has won numerous awards for customer service and value, and helps us address more price-conscious customers.

As well as driving take-up of broadband, we have invested in our TV service. We launched TV Everywhere, which means customers can watch TV channels on multiple devices, and introduced Netflix and a range of new packages. And we are very pleased with the games that we won in the auction for the 2016/17 to 2018/19 FA Premier League broadcast rights. We will be showing 42 Premier League matches each season. That is four more than we currently show, including a live Saturday evening game almost every Premier League weekend.

We re-entered the consumer mobile market this year. All our mobile plans come with 4G, unlimited texts, unlimited access to BT Wi-fi hotspots in the UK and to the BT Sport app, at no extra cost. Our planned acquisition of EE will mean we can provide a full range of innovative communications services to both EE and BT customers.

We hired hundreds of new contact centre staff. We were able to resolve 20% more customer issues in a single call. Our Right First Time measure improved 1.9%. Our revenue grew 7% this year, reflecting the growth in our broadband and BT Sport customer bases. EBITDA was up 24%.

BT Wholesale

BT Wholesale provides services in Great Britain to more than 1,400 communications providers (CPs). We help them achieve their goals by offering them innovative, reliable and cost-effective products and services that complement their own capabilities. This means that we can share in their success.

The market for wholesale services is shrinking as some CPs are building more of their own network infrastructure. It is also highly competitive. But the market for next-generation services, including Ethernet, is expanding.

We have sought to stand out from the competition by providing new services and a better customer experience. We have extended our Hosted Communications Services portfolio and expanded our Ethernet network. And we launched Business Zone – a self-service portal through which CPs can manage their orders and any faults.

We improved our billing and repair processes, so we can answer calls and queries more quickly. We moved our service colleagues into fewer service centres, with a view to increasing the level of expertise available to each caller. Overall, we increased customer satisfaction significantly. And our Right First Time performance was up 4.4%. But our service performance on Ethernet was mixed and it took us longer to provide Wholesale Ethernet than we would have liked.

Underlying revenue excluding transit fell 7%. This reflected a large contract termination, regulatory price changes following Ofcom’s 2013 Narrowband Market Review and a generally tougher trading environment.

We reduced our selling and general administration costs by 20%. But this was not enough to offset the decline in revenue and EBITDA fell 9%.

Our order intake was £1.9bn, the same as last year.

Openreach

Openreach provides the vital infrastructure that is the foundation of the UK’s vibrant internet economy.

We are responsible for providing services over the local loop or local access network, sometimes referred to as ‘the last mile’. This consists of the copper and fibre connections between our exchanges and homes and businesses.

We have now passed more than 22m premises with our superfast fibre broadband network. That is more than three-quarters of the UK. We achieved 1.5m fibre broadband net connections in the year. This means that around 4.2m homes and businesses in the UK are now connected – 19% of those passed.

In January 2015 we set out our ultrafast broadband vision for the UK. Using G.fast technology, we expect to offer initial speeds of a few hundred megabits per second to millions of homes and businesses by 2020. As further industry standards are secured, we expect speeds to increase to up to 500Mbps to most of the UK within a decade.

The number of physical lines increased by 215,000 in the year. The number of copper and fibre broadband users on our network rose by 851,000.

We achieved the minimum service levels set by Ofcom, exceeding all 60 measures, though our ambition and plans are to further improve customer service. To help us do this, we hired more than 2,500 new engineers. Our Right First Time measure was up 3.5%, exceeding our target.

Revenue declined 1%, with regulatory price reductions offsetting the impact of fibre revenue growth. Our operating costs were 2% lower which meant EBITDA was flat. Cost efficiencies offset increased volumes, pay increases and the additional engineering resource we recruited to support our provision and repair performance.

BT Technology, Service & Operations (BT TSO)

BT TSO is our internal service unit. It is responsible for delivering and operating our networks, platforms and IT systems.

BT TSO works closely with each of our customer-facing lines of business. We create new products for them and make sure that our existing services evolve to meet the changing needs of their customers.

This year we upgraded our core IP network to handle record volumes of data traffic in the UK. Our IT reliability has improved for the fourth consecutive year and the operational reliability of our core voice and broadband network platforms has hit a five-year high.

We are also responsible for managing the group’s energy consumption and for putting strategies in place to cut the group’s carbon footprint. We have reduced energy usage for six consecutive years^a.

BT TSO manages most of our research and development and is also responsible for our worldwide patent portfolio of over 4,500 patents and applications.

BT has a long history of innovation and has pioneered many of the technologies that our business was built upon. In 1926 we held the world’s first two-way, trans-Atlantic conversation by radio telephone from our wireless station near Rugby. And in 1943, Tommy Flowers, working in the telecommunications division of the General Post Office (as we were at the time), developed the world’s first programmable electronic computer, Colossus. In 1968, we installed the world’s first digital telephone exchange. And we laid the world’s first, purpose-designed optical fibre submarine cable in Loch Fyne, Scotland in 1980.

Chief Executive’s introduction

“It’s been a ground-breaking year for BT. We’ve announced some major investments and launched a number of innovative new services.”

At BT our purpose is to use the power of communications to make a better world. We’re proud our technologies have changed what’s possible and allow people to do new things, and that we play a meaningful role in society through the products and services we deliver every day. Our achievements are rooted in innovation. That was true when we were formed in 1846. And it’s more true than ever today, after 30 years as a listed company. That is why we are celebrating this theme in this, our first integrated Annual Report.

It’s been a ground-breaking year for BT. We’ve made some key decisions and announced some major investments. We’ve delivered on the outlook we set at the start of the year and have delivered strong growth in cash flow and profits.

This year we reached an agreement to buy EE, the leading UK mobile operator. It will be a transformational deal for BT. We will combine the best fixed network with the best mobile network, offering our customers new, innovative and seamless services. And we will invest in our networks and customer service to provide them with a great experience, wherever they are. We expect to generate substantial synergies – both in terms of cost savings and additional revenue – and are confident that the combination will generate significant shareholder value.

We’re delighted that the acquisition has now been approved by our shareholders. While we await regulatory clearance, we have pushed ahead with our own mobility plans, launching our BT Mobile consumer service, in addition to our successful business mobile propositions.

We also announced plans to transform the UK’s fibre broadband landscape from superfast to ultrafast. Using G.fast technology, we will be able to offer speeds of up to 500Mbps to most of the UK within a decade. It is thanks to our research labs that we have developed innovative new ways to use this technology and we will start customer trials this summer. We will also be offering a 1Gbps service to those who want even faster speeds. This will be another large and multi-year investment by Openreach that will require the right investment and regulatory environment. It will be the right thing for both BT and the UK, providing even faster speeds in an already competitive market.

Our BT Sport TV channels continue to prove popular with customers and we’re pleased to have secured FA Premier League football rights for a further three years, and an extension with Aviva Premiership Rugby for a further four years. With exclusive live football from the UEFA Champions League and UEFA Europa League, we’ll be showing even more top sporting action from this summer. BT TV now offers access to Netflix, the world’s largest internet TV network. We became the UK’s first TV platform to offer buy-to-keep films and TV shows on multiple devices, and we’ve added functionality such as TV Everywhere so you can get BT TV in a second room or watch on the go with the BT TV mobile app.

For our business customers, we launched a number of innovative services such as BT Assure Threat Defence, BT One Phone and BT Cloud Voice. We are helping companies to better identify and react to sophisticated cyber security threats. Our cloud-based services give our customers even more functionality and flexibility. And we enhanced a number of our core products and services like our audio conferencing service in partnership with Dolby, which enables outstanding sound clarity.

While we expect to face continuing declines in the revenue we earn from the UK public sector due to lower levels of expenditure, we won new public sector contracts in the year and our investments overseas continued to deliver, with good growth in Asia and the Middle East as we support leading global companies.

We have continued to improve the service we provide to our customers. We recruited 2,500 new engineers and more than 500 new employees into our contact centres around the UK. Each of our lines of business made improvements. We increased the speed of service delivery, repaired faults faster and fixed more customer issues first time.

But we recognise we’re not yet where we want to be and this will be a key priority for us in the years ahead. These days, life and work is built around connectivity. Through us, millions of individuals connect to friends and family, and have a wealth of information and entertainment at their fingertips. We help companies to work smarter and compete in global markets. And we enable essential public services to be delivered. Customer expectations are rising and we recognise how important it is to improve the service we provide.

By improving our service and providing the products our customers need, we can broaden and deepen relationships and deliver our goal of sustainable profitable revenue growth for the business.

We made great progress over the last year. Our results, and the investments we are making, position us well for the future and we have increased our free cash flow outlook for the coming year.

We have a strong platform to build on and a team I know will deliver. We are looking forward to the year ahead.

Gavin Patterson

Chief Executive

6 May 2015

Our purpose

BT’s purpose is to use the power of communications to make a better world.

We are here to meet the needs of our customers, delivering the experience, products and services that matter to them. Millions of individuals connect through us to their friends and family, and have huge amounts of information and entertainment at their fingertips. The smallest companies right through to multinational corporations use our services every day to conduct their business and compete in the global marketplace. Many public services rely on our technologies, and in the UK the telecoms industry operates across our networks. Our success as a business depends on delivering value to all our customers, enabling them to fulfil their needs and aspirations.

The connectivity we provide every day plays an essential role in modern society and economies. Our core business represents a significant part of the social infrastructure in the places where we operate.

It is because we recognise how important connectivity is today that we also work to extend the value we can add to communities where we operate and to society at large by finding new ways that our products and services can bring social and economic benefits. We are committed to using our technologies to respond to the climate change challenge. And we enable our people to contribute their skills and energies to make a positive impact in areas of social need.

It is by creating value for our customers and society that we will satisfy the needs of our shareholders – and deliver sustainable profitable revenue growth.

Our goal

Our goal is to deliver sustainable profitable revenue growth.

Previously, we had to depend on cost transformation to grow our cash flows. In the years ahead, revenue growth, combined with continued transformation of our costs, will provide a powerful platform for long-term and sustainable cash flow growth.

We will reinvest some of the cash we generate back into the business, to enable us to grow over the long term. A  virtuous circle. And we will also use it to reward our shareholders and other stakeholders.

Our strategy

Our strategy is founded on broadening and deepening our customer relationships.

To deliver sustainable profitable revenue growth, we need stronger relationships with our customers. That means making sure we stay relevant to them as markets, lifestyles and technologies change.

The three pillars of our strategy help us do that: delivering superior customer service; transforming our costs; and investing for growth. The better our customer service, the more we will sell and the less time and money we need to spend putting things right. And the better we manage our costs, the better value for money we can offer our customers and the more we can invest in giving customers what they need, today and tomorrow. And these principles in turn drive our business model (see page 28).

Deliver superior customer service

Every day we touch the lives of millions, providing services that help people get the most out of their working and personal lives. We recognise how important it is to improve service as the impact when things go wrong is greater than ever before. Getting the customer experience right will not only benefit our customers, it will make our business more cost effective too. Customer service and cost transformation go hand-in-hand.

To make sure we are equipped to meet the changing and growing demands of consumers and businesses, a group-wide transformation, to put the ‘Customer First’, is underway. You can find out more on page 31.

Right First Time (RFT) is our key measure of customer service and tracks how often we keep the promises we make to our customers. Our overall improvement of 4.7% (2013/14: 1.5%) reflects positive contributions from each of our customer-facing lines of business. We achieved significantly better repair performance and delivery times for providing UK lines and broadband. Within BT Global Services, we made large improvements to our speed of delivery. But we still want to do better. You can find more details in the line of business section on operating performance.

Customer service is one of the factors used in determining the annual bonus of executives. It is made up of the RFT metric and a new customer perception measure (see page 113).

In last year’s Annual Report we outlined a number of specific areas that we would focus on this year, including investment in our network, improving our online capability and changing some of the key processes relating to installations and when customers move house.

We have made some good progress in these and other areas, including:

But we still want to do better. Looking ahead, we are focusing on five key areas:

Transform our costs

We run large and complex cost transformation programmes which are led by a team of internal consultants. They are BT people. This makes sense because they know our business better than anyone.

Their approach is based on a methodology honed over ten years and underpinned by forensic data analysis, strong governance and the support of senior management to make change happen quickly and sustainably.

This year, our underlying operating costs excluding transit were down 2%, reflecting an 8% reduction in net labour costs and lower payments to other telecommunications operators. These were partly offset by increased programme rights charges reflecting a full year of BT Sport. We reduced our operating costs by around £600m this year. Over the last six years we have reduced our operating costs and capital expenditure by around £5.5bn.

Our largest cost transformation activities are driven ‘top-down’. They might be end-to-end programmes spanning multiple lines of business or complex changes contained within a single line of business. Continuous Improvement (CI) provides a complementary ‘bottom-up’ approach. CI makes small but important changes to how we do things every day and has the added benefit of improving employee engagement.

To strengthen cost transformation (CT) and its application throughout the business we have an in-house CT Academy. The CT Academy is responsible for the continued development of our change professionals. This year alone it has trained and coached more than 1,800 people. BT is the only UK organisation currently licensed by the British Quality Foundation to certify qualifications to the most advanced levels in Lean, Six Sigma and Change Management methodologies on such a scale.

Programmes this year included:

Looking ahead, we are focused on a number of areas including:

We benchmark what it costs us to do business against other large telecommunications companies. We keep making progress but we can still see more that we can do. We also look beyond the world of communications to see what lessons we can learn from other industries. We are confident that there are plenty of opportunities to reduce costs further.

You can read about cost transformation within our lines of business from page 53. And the group’s performance on operating costs is described on page 82.

Invest for growth

We are investing in five strategic areas. These are the things we believe will deliver sustainable profitable revenue growth – which will deliver value for our shareholders:

Our culture

To deliver strong performance we have to be healthy. A healthy organisation is made by the structures and processes that help people do their jobs effectively; and the attitudes and actions of all individuals.

We have defined our values to guide how we want to work. We have identified the changes we need to make: putting the customer first in everything we do, simplifying how we work and developing a leadership style which helps to drive change and gives people the confidence to take responsibility. We believe people want to work with a company that recognises what they have to offer, supports their ability to grow and is a positive force in wider society. By making all of this happen we will create an environment that brings the best out of our people.

Becoming a healthy organisation will enable us to deliver our strategy. It is about ensuring we can be resilient and agile in a changing world and, at the same time, make BT an exciting place where our people can all be proud to work.

The key management committee, which meets weekly and is chaired by the Chief Executive. Brief details of its members are set out on these pages.

The Operating Committee has collective responsibility for running our business end to end and delivering our strategy. It monitors the group’s financial, operational and customer service performance and has cross-business oversight of the lines of business. It also reviews the group’s key risks and considers the potential threats to and opportunities for the business.

The Operating Committee:

It can approve, up to certain limits which are set by the Board, capital expenditure, disposals of fixed assets, investments and divestments. It has delegated some of these approvals to sub-committees, such as the Design Council, and to senior executives. The Company Secretary attends all meetings.

Alison Wilcox will join the business in July 2015 as Group HR Director and an Operating Committee member, following the departure of Clare Chapman in March 2015.

Chief Executive

Appointed as Chief Executive in September 2013 and on the Board since June 2008.

Gavin was previously CEO, BT Retail and from 2004 to 2008 was Managing Director, BT Consumer, BT Retail. Before joining BT, Gavin was managing director of the consumer division of Telewest (now Virgin Media). Prior to that, he spent nine years at Procter & Gamble, rising to become European marketing director.

Group Finance Director

Appointed to the Board as Group Finance Director in December 2008.

Tony was formerly CFO, BT Retail, and Managing Director, BT Enterprises and, from 1997 to 2004, he was CFO and then Chief Operating Officer of BT Global Solutions. He qualified as a Chartered Management Accountant.

CEO, BT Global Services

Appointed CEO, BT Global Services in October 2012.

Luis was formerly president of the European, Middle East, Africa and Latin America operations of BT Global Services serving some of our biggest global customers. Luis also led BT Global Services Telecom Markets unit, managing business with carriers and operators outside the UK.

Before joining BT, Luis worked at Ericsson, IBM and Group Santander. Luis has a telecommunications engineering degree.

CEO, BT Consumer

Appointed CEO, BT Consumer in September 2013.

John was formerly Managing Director, BT Consumer, BT Retail and prior to that Chief Operating Officer in BT Consumer. John was appointed chairman of the Plusnet Board in 2008 and has overseen its development as a key part of BT’s strategy.

Prior to joining BT, John held roles as marketing and commercial director at Telewest (now Virgin Media) and brand manager at Procter & Gamble. John graduated in modern history from Oxford University.

^a Directors of BT Group plc. You will find their full biographies on pages 96 and 97.

CEO, BT Technology, Service & Operations and Group CIO

Appointed CEO, BT Technology, Service & Operations when it was formed in January 2013.

Clive was formerly CEO, BT Innovate & Design and prior to that President, BT Global Services Portfolio & Service Design where his focus was to increase profitability and increase customer satisfaction for BT Global Services.

Clive was also formerly Managing Director, BT Global Platforms in India and has also held positions as CIO BT Wholesale and Director CRM for BT Retail. Clive has an Electronic Engineering Degree.

CEO, BT Wholesale

Appointed CEO, BT Wholesale in September 2011.

Nigel was formerly Managing Director, BT Business, BT Retail and prior to that Managing Director, Customer Service, BT Retail.

Nigel was also Managing Director, BT Enterprises comprising six standalone businesses leveraging the BT brand and CEO BT Conferencing turning it into one of the top audio and video conferencing businesses globally.

Nigel has also held roles in BT as Director of Retail Product Management and General Manager of BT Consumer Products Division.

CEO, BT Business

Appointed CEO, BT Business in September 2013.

Graham was formerly Managing Director, BT Business, BT Retail responsible for the small and medium-sized enterprises unit within BT Retail and prior to that CEO of BT Ireland.

Before joining BT, Graham held a number of senior management positions including managing director of NTL in the Republic of Ireland. Graham holds an Accountancy and Finance degree and qualified as a Chartered Management Accountant.

Group HR Director (from July 2015)

Alison will join BT in July 2015 as Group HR Director.

Alison was formerly Regional HR Director for Vodafone Europe and prior to that Regional HR Director for Vodafone’s Africa, Middle East and Asia Pacific footprint. Alison joined Vodafone in 2006 as Group Director of Leadership following a career in consulting.

Our business model

Our business creates value for shareholders, by delivering for customers, society and our people.

We invest to build and maintain communications networks in the UK and overseas; we develop products and services that run over those networks; and then we sell them on a subscription basis to consumers, businesses and the public sector. By selling services, we are able to make a return on our network investments and create value for our stakeholders. This means we can reinvest in the business to keep creating value over the short, medium and long term. A virtuous circle.

The way we describe our business model is evolving. This year, for the first time, we include elements of the IIRC’s Integrated Reporting (IR) Framework. In the Framework, the resources used and the relationships affected by an organisation are collectively referred to as ‘the capitals’. The IIRC defines the capitals as: financial, manufactured, intellectual, human, social, and natural. We have adopted a similar approach by using a common set of icons for the inputs, outputs and outcomes of our business model, although we describe them in terms that are most meaningful to our business.

Inputs

Our business model starts with the things that set us apart from our competitors. We have a strong combination of people, technology, networks and other physical assets. Our research and development activities support innovative new ways of doing things and advancements in our technology. And we have the financial strength to invest in these areas to stay ahead of the competition.

Then there are the relationships we have with our stakeholders, such as our customers, and the natural resources we consume as part of doing business.

Find out more about the key inputs to our business via the page references in the business model graphic.

Outputs

The main output of our business is our portfolio of products and services. We make money by selling these in the UK and around the world through our customer-facing lines of business.

We sell through a range of channels including online, contact centres and desk or field-based account managers. Our revenue is mostly subscription or contract-based. People, households and SMEs pay for standalone or bundled services monthly, quarterly or annually (typically on 12 to 24 month contracts). Large corporate and public sector customers usually buy managed networked IT services on contracts spanning several years. Our wholesale customer contracts range from one month in length for regulated products, to five years or more for major managed services deals.

Improving the skills and expertise of our people, both through on-the-job experience and our investment in their training and development, is another output of our business. We also generate intellectual property like patents. Finally, the waste and emissions produced by our operations are considered to be outputs (more details of what we are doing to minimise these can be found on page 40).

Outcomes

The financial outcome of what we do hinges on the performance of our lines of business. Together they contribute to the overall performance and key performance indicators (KPIs) of the group.

But there is more to what we do than just financial value. What we do matters. We help millions of people communicate, be entertained, do business and generally live their lives. We help our customers reduce their carbon footprint, for example by providing conferencing facilities which mean they do not have to travel as much. And we contribute directly to communities and the health of the UK by providing jobs, working with suppliers and paying tax.

All of which contribute to the strength of our brand – a key asset for us as it can influence whether a potential customer buys from us or one of our competitors.

How we create value

Delivering a superior customer service, transforming our costs and investing for growth in our five strategic areas are central to both our strategy and business model. They are key business activities. Better customer service means that we spend less time and money putting things right. These cost savings, combined with savings from working more efficiently and the cash that we generate from sales, mean we can invest in the future of our business.

Our ability to deliver our strategy is as much about how we do things, as what we do. That is why being a healthy organisation (see page 31) and living our corporate values (below) are so important to us. Our values reflect how we work together in BT to create a healthy, high-performing business. And that is why our people are key to the success of our business.

Our sustainable business model

Communications markets are very competitive, particularly in the UK. There are both opportunities and risks. We make sure we stay in tune with market and competitive trends through teams dedicated to ‘insight’. And we undertake an annual materiality review to understand the societal and environmental issues that are important to our stakeholders.

Our Enterprise Risk Management framework (see page 41) helps us identify and mitigate the challenges and risks we face. And we use governance committees to make sure we make the right investments and deliver products and services that customers want to buy. We see more and more demand for our products and services because they play such an integral role in modern life.

Being able to anticipate and respond to changes in our environment makes for a flexible and sustainable business model. And by continuing to reinvest in the business, we are confident that we will be able to deliver value both today and in the future.

 Financial strength

We have the financial strength to make bold decisions and to invest in the things that set us apart.

Our goal is to deliver sustainable profitable revenue growth. Together with further transformation of our costs, we aim to grow our EBITDA and cash flow over the long term.

We have a prudent financial policy that governs how we use the cash we generate.

We want to continue to invest in the future of our business and in particular in our five strategic growth areas (see page 24).

At the same time as investing in these areas, we intend to reduce our net debt over the medium term and are targeting a BBB+/Baa1 credit rating. We have a strong balance sheet today, but we want to make it stronger.

We will also continue to support the pension fund and to do so in a responsible way. And we will pay progressive dividends to our shareholders.

We aim to balance the interests of all stakeholders.

We have summarised our financial policy below:

We believe that this approach provides us with the financial flexibility to make long-term investments in the best interests of the company; and also in the best interests of communities where we operate.

It is this approach that means we can invest over £3bn to help take fibre broadband to 90% of the UK. And our financial strength means we can go even further. We will work with government to help take fibre broadband to 95% of the country. And with the right investment and regulatory environment, we will invest in ultrafast broadband to deliver up to 500Mbps to most of the UK within a decade with 1Gbps available to those who want even faster speeds.

Our financial strength has also underpinned the investments we have made in BT Sport both this year and last, and which we will continue to make in the years ahead. And it meant that in February 2015 we could announce the proposed acquisition of EE, the leading mobile network operator in the UK.

It also means we can support the business in other ways. For example, by making sure we continue to innovate and stay at the forefront of a rapidly-changing industry. And by investing in the training, development and support we give to our people, as we describe below.

 Our people

Every day our people touch the lives of millions, providing services that help our customers get the most out of their work and personal lives. We invest in our people so they can succeed and contribute effectively to our business.

Believing in what we do

A clear purpose guides everyone’s contribution in BT. By bringing together the best networks, technology and products and services for our customers, we use the power of communications to make a better world.

Living up to our values in everything we do will help build the kind of business our people are proud to be part of. Our values are:

A global workforce

At 31 March 2015 we had 88,500 full-time equivalent (FTE) employees in 60 countries, with 70,900 of them based in the UK. We are one of the largest employers in the UK, supporting its economy by providing jobs and income.

This year we recruited over 9,900 people. Of these, more than 5,300 work in the UK, including over 500 who are on our renowned apprenticeship scheme.

Across our global business we continue to simplify the way we work, for example, by transforming our HR and finance systems and services. This makes things easier for our people, so we can serve our customers better.

As our business evolves to meet the needs of our customers, we adapt our organisation, redeploying people through the BT transition centre. This helps us avoid redundancies. Last year in the UK, 2,100 people were redeployed, meaning that we retained experienced people with the skills we need for the future.

A customer-facing workforce

This year we recruited 2,500 new engineers and more than 500 new service colleagues to work in our customer management and contact centres. We created 1,100 jobs in the UK that were previously performed by agencies in the UK and overseas.

Our Customer First programme supports our business strategy by making sure our people have the support, skills and confidence to give our customers a great experience. Examples include:

 We are making use of internal social media tools to encourage colleagues to share best practice, ask each other questions and celebrate the progress we are making.

Investing for growth

Learning matters at BT. We want our people to build their skills and careers and our Academy helps them do this.

The Academy is BT’s new approach to learning. It is not a physical place or building, it is home to a combination of materials, events, programmes and knowledge-sharing activities which help our people learn in different ways. The Academy is organised across four ‘faculties’: Leadership, Technical, Customer and Business. Each faculty supports a number of communities we call ‘professions’ which have similar learning and career journeys.

 We have made accessing a profession easy by investing in an innovative social collaboration platform – helping people to develop their skills and careers together.

Around 9,600 leaders – from senior executives to junior managers – have learnt new ways to lead, coach and support their teams. And a global programme is giving 5,600 frontline people the skills, tools and techniques to continuously improve the way we serve customers.

We intend to recruit around 1,000 graduates and apprentices in 2015/16. And we are also offering up to 1,000 vocational and work experience placements to 18-24 year olds as part of the UK employer-led initiative, ‘Movement to Work’. This is backed by the Prince’s Trust and the Government.

A healthy organisation – employee engagement and involvement

We are becoming a healthier organisation. Our plans to improve organisational health have included the creation of the Academy, the implementation of ‘Continuous Improvement’ initiatives throughout the business and an award-winning leadership development programme.

Each quarter about 35,000 people provide feedback on working for BT through our employee engagement survey. Our surveys help us develop a focused people strategy and support action planning at a local level. We have maintained engagement levels at 3.82 (out of a maximum of 5, with a telecoms benchmark of 3.90), the highest level since we started the survey in 2008.

We keep our people informed about company results, major business decisions and other things that affect them using a variety of digital channels. Leaders regularly connect with their teams through roundtable meetings, town hall debates, site visits, webcasts and blogs.

We consult with our people or their representatives on a regular basis, taking their views into account on decisions that affect them. In the UK we recognise two main trade unions. The Communication Workers Union represents people in engineering, administration and clerical positions. Prospect represents managerial and professional people.

Diversity at work

At BT we believe that we unlock the power of our people when we value their diversity. This is a priority for us because a diverse workforce fosters greater innovation, helps us better understand and serve our customers and empowers our people to deliver their best.

Business in the Community benchmarks consistently rank us in the top ten private-sector organisations for women and people from Black and Minority Ethnic (BME) backgrounds. And as a ‘Two Ticks’^a employer, we are committed to attracting, developing and retaining people with disabilities. Applicants with disabilities or long-term health conditions – and who meet the minimum criteria for a vacancy – are automatically put through to the first stage of the recruitment process.

We were again named this year as one of The Times Top 50 Employers for Women. But we have the ambition to move further and faster. We are determined to drive up the number of women in our workforce. 19,655 women currently work for us – many on flexible contracts, giving us a full-time equivalent of 18,457 female employees. This corresponds to 10,358 FTE (25%) of our management population and 8,099 (17%) of our team members.

At Board level, our policy is to aim to have at least 25% female representation. We were below this for part of the year, but with three out of 11 Board members, we now have 27% female representation. We are working to attract more women into BT and our sector. And we are reviewing our working practices and development opportunities to make sure that an increasing number of women can enjoy successful careers with us.

Staying safe and well

Our people tell us wellbeing has improved by 2% across the company. We have made good progress on reducing accidents while working. The Lost Time Injury rate came down by 23% to 1.5 incidents per million working hours. However, the changing age profile of the business presents some challenges for us as mature and experienced workers are replaced by younger people who sometimes have a different attitude to risk. We have targeted our training to address this.

Sickness absence rates have increased by 6% to 2.2%. There are differences between the lines of business with a steady reduction in most of them but a sustained increase in Openreach. Here, mental ill health and musculoskeletal disorders in older workers are the main causes. The increase in sickness absence is mainly because people are having to take more time off. Extended absences (over one month) now make up two-thirds of all lost time.

Our focus is on early intervention to improve attendance. And our support services help around 93% of people return to their role on full duties.

Volunteering

It is a source of great pride to BT and our people that so many colleagues volunteer. This year, more than 22,700 (26%) of our colleagues (up 62% from last year) spent 53,000 days supporting more than 3,700 charities and community groups around the world. Our people can use up to three working days a year to support causes that matter to them. This means they can have a real impact in the communities where they live and work. Our ambition is that by 2020, two-thirds of BT people will be volunteering time to support good causes.

More than 5,300 (2013/14: 2,200) people took part in volunteering specifically as part of a team. Specialist BT teams helped charities with particular issues which needed our expert input and knowledge. Other BT teams used their energy and enthusiasm to make a practical difference in local areas.

Charities supported in this way include Place2be, a UK children’s mental health charity which we helped with their communications strategy, and Leicester Outdoor Pursuits Centre where we helped build equipment to enable wheelchair users to access an abseil tower. In Spain, BT’s human resources team helped young people facing severe financial issues prepare for work. And in Hungary, 50 BT volunteers improved the living conditions in a young people’s refuge in Budapest.

In India, more than 80 BT volunteers, working with our local partner Katha, continued to support the Katha Information Technology and E-commerce School (KITES), a charity which provides ICT training for children in one of Delhi’s largest slums. Over 19,000 children have already completed ICT courses. KITES also supplies more general schooling for children and teaches business skills to women. Mridul Srivastava from BT Global Services won this year’s Chairman’s Award for his contribution to society and the lead he has taken in encouraging volunteering at KITES.

Pay and benefits

We compare salaries with other companies in our markets to make sure our packages are competitive. In the UK, pay for the vast majority of our engineering and support people is determined by collective bargaining, with fair terms and conditions for all. Managers’ pay and bonuses are linked to business performance and their personal contribution.

Our executives are offered long-term incentives to align their reward with the creation of shareholder value. The amount ultimately received depends on BT’s performance over a three-year period. In accordance with our regulatory obligations, incentives for senior leaders in Openreach are tied to its business performance rather than that of the wider group.

We also provide a range of pension and retirement plans for employees globally, either through dedicated company plans or by contributing to state retirement arrangements where applicable. You can find details of the BT Pension Scheme and other retirement plans on page 89.

Sharing in success

Around 60% of our people take part in one or more of BT’s savings-related share option plans (saveshare), which operate in over 25 countries. In August 2014, over 22,000 people in our 2009 saveshare plan were able to buy shares at 61p, representing an average gain of around £41,000 each. Around 7,000 of these people, who participated at the maximum allowed, were able to buy shares worth just under £90,000 (based on the share price on 31 July 2014). We believe this was one of the largest ever payouts by a UK plc for an all-employee saveshare plan.

 Our networks and physical assets

Our networks, service platforms and IT systems are the foundations of the products our customers rely on around the world.

Network platforms

Our global reach

Our global network provides service to more than 170 countries and is supported by in-country networks and infrastructure. Most of our network assets are in the UK and Europe. We continue to selectively expand the reach of our network to support multinational companies in other regions.

The scale and reach of our global multi-protocol label switching (MPLS) network is a key competitive differentiator. This single IP-based network lets our customer-facing lines of business launch and sell products and services quickly and cost-effectively, without needing to invest in dedicated infrastructure for each product.

To serve our multinational customers we offer our virtual private network (VPN) services. To provide these, we use our MPLS network and a combination of owned and leased fibre connections to interconnect our points of presence (PoPs) around the world. For the final connection into the customers’ premises, we either use our own existing circuits, or rent connections from telecoms operators in that country. We also have an extensive satellite network which provides customers with connectivity around the world, including to remote and hard-to-reach locations.

Our global IP Exchange platform (GIPX) continues to do well. Around 400 service providers are connected to it globally and this year we launched a new node serving the Middle East.

In-country networks

We have extensive networks in the UK, as well as in Germany, Italy, the Netherlands, the Republic of Ireland and Spain.

Our UK fixed-line network is one of our most valuable assets and our investment in fibre broadband is key to delivering modern, superfast services to our customers. To meet the demand from businesses, we are continuing to expand the availability of Ethernet. And when our customers are away from their home or office, they can use one of more than 5m BT Wi-fi hotspots.

 Developments this year

This year we have:

Service platforms

We run a number of service platforms that combine our network and IT resources to underpin many of the key products we offer. These include:

IT systems

Our internal IT systems enable us to manage our processes, handle customer information and deliver our products and services. They are critical to serving our customers and running our business.

For example, our customer management systems hold our customer and billing information. They include the technology that is used when customers call a contact centre, and behind our online customer portals.

 We are making our systems simpler. And we are continuing to innovate. Last year we launched a system to analyse our own ‘Big Data’. We have seen the benefits of it this year. It has provided greater insight into potential line faults which has reduced the number of unnecessary engineer visits.

We currently have around 25 petabytes of data storage infrastructure spread across several sites. (If this storage was full of MP3-encoded songs, they would take about 50,000 years to play.) We expect the amount of data that we store to grow. Despite this, we are working on reducing the number of data centres we run, removing older server technology and using fewer IT applications. We are able to do this while increasing our storage capacity by using ‘virtualisation’. This increases our data centre utilisation by running many ‘virtual machines’ on each server.

 We are incorporating many innovations into our data centres to improve performance and power efficiency, as well as reduce cost. Developments such as adaptive power management and hot/cold aisle isolation help us to reduce power usage. These and other programmes will help us cut our IT energy use over the coming years.

Properties

We occupy around 6,350 properties in the UK and around 1,730 in the rest of the world. Most of our UK properties are owned by and leased from Telereal Trillium, part of the William Pears group, after we entered into a sale and leaseback arrangement with them in 2001.

Our freehold sites include our main strategic buildings: BT Centre; the BT Tower; and our R&D facility, Adastral Park in Suffolk.

Of our UK properties, 95% are operational, housing telecoms and broadband equipment. The rest are offices, customer contact centres, engineering depots, data centres and our BT Sport TV studio.

In the UK we continue to drive our programme of disposing of office and operational buildings we no longer need while consolidating office space in the remaining properties. This year we completed the closure of Keybridge House, a former international telephone and telex exchange in London. We sold this surplus building to Mount Anvil for £93m in February 2015 realising a profit of £67m. In addition, we have recognised a £45m charge in specific items for onerous leases as a property rationalisation cost (see page 83).

Outside the UK, 91% of our buildings are operational, housing our hosting and telecoms equipment. The remaining 9% are offices. This year we opened new offices in Gurgaon, Bangalore and Kolkata, as part of our strategy to invest in high-growth regions and support leading global companies. We also closed 25 offices around the world that we no longer need and delivered a net reduction of 14 operational sites, which helped our cost transformation.

 Research and development

BT has a long history of innovation, starting from our roots as The Electric Telegraph Company (the world’s oldest telecommunications company) in 1846.

For example, in 1926 we held the world’s first two-way, trans-Atlantic conversation by radio telephone from our wireless station near Rugby. And in 1943, Tommy Flowers, working in the telecommunications division of the General Post Office, developed the world’s first programmable electronic computer, Colossus. In 1968, we installed the world’s first digital telephone exchange. And we laid the world’s first purpose-designed optical fibre submarine cable in Loch Fyne, Scotland in 1980.

In the 30 years since our privatisation in December 1984, we pioneered many of the technologies that our business now relies on. For example, we were at the forefront of defining the global IP and broadband standards which mean our networks are capable of supporting the advanced video, business and internet services we have today. We were the first company to commercially launch single-mode fibre optics – the technology that underpins today’s high-speed networks. And we pioneered a technology that uses compressed air to blow fibre optic cables through conduits, which speeds up network installation.

Innovation, supported by our global research and development (R&D), enables us to offer the new services that customers want, and to find ways of doing things more efficiently and at lower cost. This year we invested £502m (2013/14: £530m) in research and development. We are one of the largest investors in R&D of any company in the UK, and globally in the telecoms sector^a.

Since privatisation we have had over 13,000 patents granted and in 2014/15 we filed patent applications for 93 inventions (2013/14: 89). We routinely seek patent protection in different countries and at 31 March 2015 we had a worldwide portfolio of more than 4,500 patents and applications.

We bring together expertise and resources (both our own and third-party) at our six global development centres. Adastral Park, our technology headquarters, is home to over 65 high-tech companies. It is a world-leading innovation campus, employing around 3,700 people. This year we have continued to grow our development centres in Kuala Lumpur and Bangalore. These give us local technical expertise and spread our development more evenly around the world.

We are keen to work with people outside BT, from small start-up companies to some of the best universities around the world. We have extensive, long-standing, joint-research programmes with Cambridge University (UK), Massachusetts Institute of Technology (US), Tsinghua University (China), Khalifa University (UAE) and over 30 other universities globally. We continue to support a programme of co-innovation with start-ups in London’s Tech City. And our teams work with customers and other companies in the US, Asia, Europe and the

Middle East. They help us track the very latest global developments in new technologies, business propositions and market trends.

Our people help us innovate and improve our service to customers. This year our award-winning internal New Ideas Scheme had more than 2,000 submissions. As a result, we have identified more than £30m of benefit through new revenues and lower costs, and it is helping us provide a better service to our customers.

We run innovation showcases for our major customers, where they can discuss applications and solutions with our experts. And we get to hear first-hand what they need.

Under the brand of ‘Ingenious’ we are sharing BT’s innovation story with thought leaders, governments and the media. You can read more about Ingenious on page 35.

 Examples of our activities this year include:

 Brand and reputation

Innovation is an important part of our history and an essential ingredient for our future. It is also key to our brand – one of our most important assets and a vital source of competitive advantage. We believe that well-managed brands drive business performance because they stand out in crowded markets.

Partnerships continue to be an important part of the way we build our reputation and show our support for good causes.

Ingenious

In 2014, we ran a programme of events under the theme of ‘Ingenious’. This included events at high profile locations such as the BT Tower and Adastral Park. We launched the UK’s first National Inventors’ Day in December. The event was designed to celebrate the UK’s rich heritage of invention and inspire the next generation of creative thinkers. It was also a showcase of BT’s long history of innovation.

We also became the lead principal sponsor of the new Information Age gallery at the Science Museum in London. The gallery explores how the modern connected world was created through different technology networks such as radio and television broadcasting, the web and mobile communications.

 Stakeholders and relationships

Other than our people, our main stakeholders are: our customers; communities; shareholders; lenders; our pension schemes; suppliers; government; and regulatory authorities.

Our customers

We sell fixed-voice, broadband, mobile and TV products and services to consumers in the UK. For small and medium-sized enterprises, as well as larger businesses in the UK, we offer fixed-voice, broadband, mobility, networking and IT services. In both the UK and globally we offer managed networked IT services to multinational corporations, domestic businesses and public sector organisations.

Some of our customers are also our competitors. This is because we sell wholesale products and services to other communications providers in the UK and overseas.

You can read about our customers and the services we provide them in our lines of business section from page 53.

Communities and society as a whole

The investments we make will play a big part in benefitting society and the environment, proving that it is possible to do good and create business value at the same time.

Last year, we talked about our 2020 ambitions in three focus areas of creating a connected society, supporting charities and communities and delivering environmental benefits. This year we have introduced two additional areas – developing a culture of tech literacy and inclusive growth.

Our 2020 ambitions are now:

Creating a connected society

Digital inclusion is a key part of bringing our purpose to life. We are helping people on low incomes, with disabilities or who are elderly, to get online. An example of this is BT Basic, a product created specifically for a low income group. This low-cost product, combined with our digital skills programme (Get IT Together), helps those individuals to make the most of being online.

We share the increasing public concern about protecting children online. Through The Right Click: Internet Safety Matters, our partnership with UNICEF UK, we are delivering 600 online safety workshops across the UK, with BT volunteers providing parents and children with practical advice to keep them safe online. We have also invested in tools and resources to educate children and their families about staying safe while online.

BT Parental Controls is our free, network-based filter that lets families control internet access. In 2014/15 we contacted all our BT Broadband customers to raise awareness of this service.

Developing a culture of tech literacy

Increasingly every aspect of modern life is underpinned by technology. But even though young people grow up surrounded by technology, many of them do not understand the basic concepts of how it works. This could leave them unable to fully participate in society. We want to help build a culture of tech literacy for the nation. We want to inspire young people to move from simply being technology consumers to embracing the role technology can play in their lives, being confident with computational thinking, and aware of the way technology and data underpins our social infrastructure.

For more information on how we deliver both societal and business benefits, please refer to page 90, where we have outlined our progress.

Supporting charities and communities

Our charity partners help millions of people in the UK and worldwide. Our communications technology can help them raise money quickly and function more efficiently, so they can focus on what they do best.

MyDonate is our commission-free online giving platform which underpins our fundraising and community support. We have supported various fundraising activities this year including Cancer UK’s Stand Up 2 Cancer telethon, Children in Need and Red Nose Day. We have also supported Disasters Emergency Committee appeals for Syria, the Philippines, Gaza and the Ebola Crisis – all using our MyDonate fundraising platform. In total, all these activities raised £30m this year.

We do not just support large scale telethons, but also smaller charities and individual fundraisers too – with over £21m being raised using MyDonate. We are investing in new technologies and extending the reach of MyDonate, as it is key to helping us deliver our £1bn 2020 goal.

The Supporters Club is our collaboration with our long-standing charity partner, Comic Relief. It aims to build a better world by bringing people together through sport. We provide grants to support charities and community sport foundations, to use sport as a vehicle for change in young people’s lives. BT Sport customers can make monthly donations of £1, £3 or £5 through their bill.

Increasing our customers’ sense of connection with The Supporters Club, and increasing donations, was a key priority in the year. To encourage more people to get involved, we included short films as part of our coverage of live sporting events which showed The Supporters Club is making a difference. Customer donations have raised £1.8m this year, with over 26 projects currently being funded, both in the UK and around the world.

 Delivering environmental benefits

We serve some of the biggest companies in the world, so helping them reduce carbon emissions can have a global impact. Many of them are sustainability leaders themselves. And more and more of our customers want to know how our products can contribute to their own sustainability commitments.

We lead by example as we are reducing our own environmental impact and minimising waste, and are working with our suppliers to help them do the same. We have an integrated approach to cost reduction and carbon abatement – many of our solutions directly reduce our customers’ carbon emissions, save money and use fewer resources. For example, our conferencing facilities reduce the need for travel.

Our shareholders

We have around 900,000 separate shareholders. Over 20% of them have held shares since BT was privatised 30 years ago. As well as the Annual Report and Annual General Meeting, we keep our shareholders up to date with how we are doing through regular mailings. These often include offers on our products and services that are only available to shareholders. Our website includes press releases, newsletters, presentations and webcasts that can also keep our shareholders informed.

The majority of our shares are held by institutional investors. We have an extensive investor relations programme aimed at keeping existing shareholders informed and attracting new ones. This programme includes:

In 2014/15, we held 369 meetings or events with institutional investors. This compares with 421 in 2013/14 and 259 in 2012/13.

We were voted the best company for investor relations in England in the Extel Survey 2014. Across Europe, we were voted the second best in the telecommunications sector.

Our lenders

Our relationships with our lenders, mainly banking institutions and bond holders, play an important role in our treasury and funding strategy. These relationships are vital for funding the business and meeting our liquidity requirements (see page 85).

Our pension schemes

We operate defined benefit and defined contribution pension schemes. The largest is the BT Pension Scheme (BTPS) which has 306,500 members. You can read more about it on page 89.

Our suppliers

Our suppliers from across the world play a vital role in helping us to provide our products and services and deliver our strategy. We spent £9.4bn with our suppliers this year (2013/14: £9.8bn). The top 100 represent around 61% of our annual spend.

The mix of our suppliers continues to evolve as we move into new markets, such as televised sport and mobility.

Our approach to procurement

We have around 320 people in 26 countries working with suppliers to deliver our procurement strategy.

We want to get the most from our suppliers – especially from their diversity, skills and innovation.

As part of our cost transformation programmes, we have concentrated on making the most of our relationships with our largest suppliers to get even better value.

This year we introduced our Purchase Order intercept programme. This involves reviewing all purchase orders to make sure that we are optimising our spend across BT. The new Central Business Services centre (see page 23) is supporting our procurement division and is growing in numbers to support this programme.

We are continuing to review our supply base and have deactivated around 3,300 suppliers from our procurement systems in the last 12 months. Our supply base now includes new categories of suppliers to support our new markets.

During the year we launched the Procurement Profession, part of the Academy (see page 31). This is helping to improve the skills of our people. Our ambition is to have all of our buyers accredited and licensed. And for a few of our expert practitioners to be recognised externally as fellows of the Chartered Institute of Procurement and Supply (CIPS). Currently we have two practitioners who are fellows of CIPS.

Choosing our suppliers

It is important to us that we know who we are doing business with and who is acting on our behalf. So we:

You can find out more at www.selling2bt.bt.com

Labour standards in our supply chain

We want our suppliers’ employees to experience working conditions that meet the standards we have developed. We send our suppliers an ethical standards questionnaire. Based on their responses, we follow up with any suppliers identified as high or medium risk. This year we met 96% of our target to achieve 100% follow-up within three months.

We also visit supplier sites to make sure they meet our standards. This year we visited 47 sites (2013/14: 54 sites) around the world.

To comply with the Dodd-Frank Act and our Securities and Exchange Commission (SEC) obligations, we asked certain suppliers whether their products contain certain minerals which may have been sourced from conflict areas such as the Democratic Republic of the Congo. In June 2014 we filed the required report covering 2013 with the SEC which described our due diligence and reflected the responses we received. We will file the report for 2014 in June 2015.

Paying our suppliers

This year the average number of days between invoice date and supplier payment was 60 days (2013/14: 62 days).

Suppliers can choose to use the BT Supplier Finance scheme. It offers contracted suppliers the chance to be paid early which reduces their financing costs. We introduced it in September 2013 and it is now one of the largest supplier finance schemes in the UK, supporting over £1.2bn of spend annually.

You can find out more about the BT Supplier Finance scheme at www.selling2bt.bt.com/Payment/SupplierFinance/

It is particularly attractive for SMEs (who make up around 50% of our supply base) and it supports UK Government initiatives to encourage small business growth. We also follow the Better Payment Practice Code set up by the Government in partnership with business organisations across the UK.

You can find out more about the Better Payment Practice Code at www.payontime.co.uk

Human rights

As a provider of communications services across the world, we could impact the human rights of our employees, workers in our supply chain, customers and communities in a number of different ways.

Our statement of business practice, ‘The Way We Work’, sets out our commitment to respecting human rights. It gives employees, suppliers and anyone working on behalf of BT guidance on how we expect them to behave.

We believe the areas that could be most affected by our business are the human rights to privacy and freedom of expression. Our policies on privacy, security, anti-corruption and bribery, diversity, inclusion, health, safety, wellbeing, conflict minerals and sourcing with human dignity help mitigate risks in these and other relevant areas.

In last year’s Annual Report we said we would carry out a Board-level review of our human rights policy and further develop our compliance framework. We have now completed this review. We assessed our operations in the UK against stakeholder expectations on how businesses should respect human rights. We have taken advice from both a leading law firm and a global, non-profit human rights consultancy.

The review showed that we have strong processes to manage human rights impacts arising with our employees, such as highly developed diversity and wellbeing measures. We also have a clear approach to freedom of expression, based on our belief that our customers should have the choice, whenever possible, to access the services and content they want. The review did identify opportunities to strengthen our human rights policy and governance, and to be more transparent about our operations and interactions with government.

Our Operating Committee and Board considered the recommendations and have approved an implementation programme to further enhance our approach to human rights. This programme will begin later in 2015. We have established a human rights steering group to achieve this. It is sponsored by the Operating Committee and will have broad representation across our key functions and lines of business. More information can be found at www.bt.com/deliveringourpurpose

Our relationship with HM Government

We are the largest supplier of networked IT services to the UK public sector. We work with more than 1,300 organisations across central, local and devolved government, healthcare, police and defence to provide some of the UK’s most vital services. For example, we run N3, the National Health Service’s secure national network. We provide telecommunications services to the Ministry of Defence. And we have recently started working with the Welsh Government to operate the Wales-wide public sector broadband network and with Devon and Cornwall Police to provide their IT services.

We can be required by law to do certain things and provide certain services to Government. For example, under the Communications Act, we (and others) can be required to provide or restore services during disasters. The Civil Contingencies Act 2004 also says that the Government can impose obligations on us (and others) at times of emergency or in connection with civil contingency planning. The Secretary of State can also require us to take certain actions in the  interests of national security and international relations.

Regulation

In our markets in the UK and around the world, communications and TV services are regulated by governmental and non-governmental bodies. This is to make sure that CPs and broadcasters abide by common standards and rules, and that nobody is disadvantaged by those providers with strong positions in their markets. Below we explain the regulatory framework and some of the recent and upcoming decisions taken by regulators and how they affect us.

European Union (EU) regulation

In EU countries, electronic communications networks and services are governed by directives and regulations set by the European Commission (EC). These create a Europe-wide framework covering services such as fixed and mobile voice, broadband, cable and satellite TV.

The directives include rules covering access and interconnection, universal service obligations and a requirement for national regulators to review markets for significant market power (SMP) every three years. Companies with SMP typically have a market share of 40% or more and are able to do things such as increase prices without losing business to competitors (as would happen in a fully competitive market).

The directives also cover how regulators set price controls which can have a major impact on the companies subject to them. The rules require national regulators to consult with the EC on any price control decisions before they are finalised to make sure they are consistent with European regulations.

The EC announced its strategy for the Digital Single Market on 6 May 2015 which included a plan to review the EU Telecommunications Framework. As part of this review, the EC aims to assess how to encourage investment in infrastructure and how to make current telecoms and media rules fit for new challenges and new providers. The EC will also consider a European approach to spectrum management.

UK regulation

The telecoms and broadcasting industries are regulated primarily by Ofcom (the UK’s independent regulator) within the framework set by the various European directives, the Communications Act and other UK and EU regulations and recommendations. The telecoms sector is subject to an extensive ex-ante regulatory framework set out under the European Common Regulatory Framework whereas broadcasting and pay-TV is only subject to a mixture of separate, specific regulation and general competition law.

The Communications Act and Ofcom

The Communications Act gives Ofcom legal powers and sets out how electronic communication and broadcasting services should be regulated in the UK. It includes the conditions set by the European directives.

Ofcom’s main duties are:

Under the powers of the Communications Act, Ofcom sets conditions that CPs must comply with. Some conditions, known as General Conditions, apply to all CPs. These mainly deal with protecting consumers’ general access and interconnection, planning for emergencies, providing information to Ofcom and allocating and transferring phone numbers. Other conditions apply to certain companies that are universal service providers or that Ofcom has decided have SMP in a particular market.

We are the designated universal service provider for the UK (except for the Hull area where it is KCOM Group) and so we have certain obligations. The main one is to make sure that basic fixed-line services are available at an affordable price to all consumers in the UK. We are also obliged to provide public payphones.

We have SMP in a number of markets including Business Connectivity (eg Ethernet, backhaul), Fixed Access (eg LLU, GEA, WLR) and Wholesale Narrowband (eg Call Origination). Ofcom’s market reviews are therefore very important for us. Following a market review, if Ofcom decides that a CP has SMP, it can put controls in place, typically on the prices which the CP can charge. Ofcom will generally try to set charges that are reasonably based on costs and an appropriate return on the capital invested.

Anyone can appeal against Ofcom’s decisions through a number of routes, including to the Competition Appeal Tribunal (CAT) or to the High Court.

In March 2015, Ofcom announced a major review of the digital communications market. The Strategic Review of Digital Communications will examine competition, investment, innovation and the availability of products in the fixed-line, broadband and mobile markets. It will focus on three areas in particular:

The first phase of the review will examine current and future market factors that may affect digital communications services, and current regulatory approaches. To inform this work, Ofcom intends to engage with a wide range of stakeholders – including industry, consumer groups, the UK Government and devolved administrations – through meetings and workshops. This phase of the review is expected to conclude with a discussion document in summer 2015.

BT’s Undertakings

In response to Ofcom’s 2005 Strategic Review of Telecommunications, we gave some legally-binding undertakings under the Enterprise Act 2002. These Undertakings (which included the creation of Openreach) began in September 2005. They aim to give clarity and certainty to the UK telecoms industry about the way we provide ‘upstream’ regulated products. This in turn supports effective and fair competition in related ‘downstream’ markets.

Overseas regulation

The degree of regulation in international markets varies widely. This can hinder our ability to compete. We are pressing incumbent operators around the world, and their national regulatory authorities, for fairer cost-related wholesale access to their networks.

We are in discussions with both the EC and US regulatory authorities over what we believe to be premature deregulation of parts of the US telecoms market. This has made it more difficult for non-US CPs to enter and compete in the US, while European telecoms markets remain open to competition from US operators.

Natural resources

As well as trying to minimise our use of precious natural resources, we are also maintaining our focus on reducing our waste.

We try to reduce the amount of materials we use in our operations, and to reuse them rather than dispose of them. Many of our waste materials can be turned into resources and redirected back into the supply chain.

We use a number of specialist contractors to recycle materials that we cannot reuse. These include cables, network equipment, wood and other mixed recycling such as paper and cardboard. For hazardous waste materials such as batteries, fluorescent light tubes and oil, we use specialist contractors who make sure the waste is recycled and managed according to legislation. We have around 2,000 sites which each produce more than 500kg of hazardous waste a year. They are registered with the appropriate UK environmental authority.

Water usage

Most of the water we use is used in washrooms and catering facilities at our offices. We also use water to cool equipment at our offices and telephone exchanges. This year we began a programme to install water meters at sites that together account for half of our total water use in the UK. The new meters provide half-hourly water measurements, giving us a more accurate understanding of how we use water and helping us spot leaks more quickly. This will help us identify where we can save water and we estimate this alone will help us cut our water use by 2% in 2015/16.

Energy use and carbon footprint

BT TSO is responsible for managing the group’s energy consumption and for putting strategies in place to cut our carbon footprint.

We have signed long-term Power Purchase Agreements with wind and solar farms. These will provide 16% of our electricity needs in Great Britain from next year. One contract connects a large solar farm to our R&D facility at Adastral Park. We believe this is the largest arrangement of its kind in the UK and will provide up to 75% of the electricity needed by the Park on sunny days.

In Great Britain we spent around £306m on energy and fuel this year (2013/14: £296m), the increase from last year reflects higher energy prices. We estimate our energy savings programme delivered a 3.2% reduction in consumption and is expected to generate over £36m in annualised cost savings. This is the sixth consecutive year that we have achieved a reduction and takes the total savings calculated on this basis to £168m.

^a We have restated our worldwide energy consumption and GHG emission figures for previous years following improvements to our data. Previous estimates of energy usage have been updated with measured figures.

To track our carbon emissions, we report two C0₂ equivalent (C0₂e) intensity measures:

We report all of the greenhouse gas (GHG) emission sources required under UK regulations. We have used the GHG Protocol Corporate Accounting and Reporting Standard with UK Government GHG Conversion Factors for Company Reporting 2014 and International Energy Agency Conversion Factors. The chart below reports our GHG emissions and defines scopes 1, 2 and 3. We reduced our total worldwide net CO₂e emissions by 1.4% this year.

Our risks

Like all businesses, we are affected by a number of risks and uncertainties. These may be impacted by internal and external factors, some of which we cannot control. Many of our risks are similar to those felt by comparable companies in terms of scale and operation.

Principal risks and uncertainties

In this section we explain some of the principal risks and uncertainties affecting us. These risks have the potential to impact our business, brand, people, assets, revenue, profits, liquidity or capital resources. The principal risks we described last year have evolved, and so too has our response to them.

Our Enterprise Risk Management framework provides reasonable (but cannot give absolute) assurance that significant risks are identified and addressed. There may be some risks which are unknown to us at present. And there may be some that we consider less significant now but become more important later.

External factors can present both risks and opportunities, to our business and to others. We focus our efforts on predicting and mitigating the risks, while at the same time seeking to capitalise on opportunities that may emerge.

We recognise the particular uncertainty that political and geo-political risks present, both in the UK (for example the Scottish independence referendum in 2014) and globally. We now monitor these through a separate sub-committee of our Group Risk Panel.

In the principal risks section below, we talk about what we are doing to stop our main risks materialising, or to limit their impact. Our principal risks and uncertainties should be considered along with the risk management process, the forward-looking statements in this document and the cautionary statement regarding forward-looking statements, which you can read on page 209.

How we manage risk

We need to manage risk so we can meet our objectives, build shareholder value and promote our stakeholders’ interests. We have a group-wide risk management process, and we show its four stages below.

Changes over the year

In 2013/14 we improved the way we manage risk through enhancing our risk management training, formalising the linkage between our investments and our principal risks and proactively assessing emerging risks. This year we made further improvements including:

Project and programme risk management

We developed an enhanced risk management policy, process and toolkit to provide guidance to colleagues managing risk in projects and programmes. This was supported by additional training for our project management community.

Risk appetite

Risk appetite (the nature and extent of the risks we are prepared to take) has been reviewed by both the Board and the Operating Committee this year. We have also progressed this work in our lines of business, for example using risk appetite to help determine the relative criticality of different IT systems.

Risk culture

Aligning with our organisational health programme, we have identified opportunities to build into the behaviours being embedded into our business, a culture that positively supports active and open risk management.

Risk case-studies

Raising standards in major contracts

We describe the risks associated with our major contracts on page 42.

High-quality management of large contracts, including the thorough handling of risks, benefits us and our customers. Improved contract management, including increased focus on risks, will generate improved contract performance, in addition to improved customer experience.

How we managed the risk

One example of how we improved our contract management capability this year was the launch of the ‘Gold Standard’ programme. This programme aims to standardise high-quality benchmarks – for example, around revenue assurance, cost assurance and resource allocation – that are repeatable so that all major contracts apply best practice principles including those associated with handling of risks. All major contracts will be assessed against strict ‘gold standard’ criteria and those contract teams below the benchmark will be developed/coached for improvement in order to attain the standard.

Outcome and lessons learned

There is a correlation between ‘gold standard’ and high-performing contracts, so as the ‘gold standard’ base increases, we should experience a reduction in risk exposure and an improvement in the numbers of customers extending their contract term.

Other benefits have included a more focused contract management community who have seen that shared learning helps them manage their contracts.

Reduction in physical security incidents

For a company the size of BT, protecting our physical assets around the globe is a huge task. We have in the region of 8,000 sites globally, ranging from small rural UK telephone exchanges keeping communities supplied with vital communications through to major Latin American data centres serving multinational companies. All areas of the physical estate are important for us to deliver services to our customers: from poles, holes and cables in the ground to high-end routers, switches and firewalls. The protection of our network assets relies on us being able to deter, delay, detect and respond to any criminal activity, in addition to our service restoration capabilities.

How we managed the risk

Having an up-to-date inventory of where our assets are is key to being able to prioritise investments in order to protect them. We are able to use our network topology, alarming and inventory systems, coupled with threat-monitoring information from law enforcement partnerships to mitigate our risks. In 2014/15 our investment and proactive initiatives led to a 30% overall reduction in reported incidents. The investment included a mix of new tools, improved risk assessment techniques, building security controls and mobile security guard patrols.

Innovation plays a key role – for example our network security armoury includes the ‘Rabit’ (Rapid Assessment of Incidents within BT) alarm monitoring system, developed to give proactive notification of a cable cut by identifying loss of broadband service.

Outcome and lessons learned

While we see a downward trend in the number of incidents, we continue to develop and look for innovative security solutions to protect our physical estate. Continuous improvement of our security strategy is deemed vital to support customer service and business growth opportunities.

EE acquisition: risks

Our proposed acquisition of EE creates additional risks for BT beyond those captured in our principal risks and uncertainties. In the section below we highlight those risks relating to the acquisition, and new risks that would be relevant to the enlarged group. We described these risks in the shareholder circular in relation to our proposed acquisition of EE and repeat them below.

Risks related to the acquisition

In the period through to completion of the acquisition there are risks relating to the deal itself, as well as business risks during this transitional phase.

Approval of the acquisition

Completion of the acquisition is conditional upon satisfaction or, where capable of being waived, waiver of various conditions. In the event that these conditions are not satisfied or, where they can be waived, waived by the ‘long stop date’ (or a later date which we agree with the sellers), the Share Purchase Agreement will automatically terminate. There can be no assurance that the conditions will be fulfilled or waived, or that the acquisition will be completed.

The acquisition is subject to merger control approval from the Competition and Markets Authority (CMA) in the UK. Approval from the CMA may take longer than expected to obtain, may not be granted, or may be granted subject to conditions or remedies, including BT’s or EE’s divestment of assets or businesses and/or restrictions on the conduct of the enlarged group. Any of these could delay or jeopardise completion, impose sustained additional costs for the enlarged group and/or materially reduce the anticipated benefits (including synergy benefits) of the acquisition, or result in a material adverse effect on the enlarged group’s business, financial condition and results of operations.

EE’s performance prior to completion of the acquisition

The anticipated benefits and synergies of the acquisition have been developed based on assumptions regarding (among other things), EE’s financial and operational performance, including in the period before completion when EE’s performance is outside our control. During this time, EE’s performance – and that of BT – could be negatively impacted by one or more of the following:

If any of these happen, the value of EE may be less than the consideration paid by BT and, accordingly, the net assets of the enlarged group could be reduced. This could have a material adverse effect on the enlarged group’s financial position.

Realising synergies following integration

BT is targeting significant synergies from the acquisition. The financial planning for the enlarged group is based partly on realising these synergies, which include expected operating cost savings and capital expenditure savings of £360m per year, to be realised in the fourth full year following completion. Combining the respective businesses is also expected to give rise to further benefits. These include (among other things), fixed-mobile convergence, the ability to serve customers through a single, seamless platform supported by a single IP network, and being able to offer BT products to EE customers and EE products to BT customers.

The success of the enlarged group will depend, in part, on the effectiveness of the integration process and the ability to realise the anticipated benefits and synergies from combining the businesses.

Some of the potential challenges in combining the businesses may not be known until after completion. If these challenges cannot be overcome, for example because of unforeseen difficulties in implementing fixed-mobile convergence or a lack of customer demand for the offerings, the anticipated benefits of the acquisition will not be fully achieved.

Realisation of synergies will depend partly on the rapid and efficient management and co-ordination of the activities of the enlarged group’s businesses. We may experience difficulties in integrating EE with our existing businesses and may not realise, or it might take longer than expected to realise, certain or all of the perceived benefits of the acquisition. There is also a risk that synergy benefits and growth opportunities from the acquisition may fail to materialise, or may be materially lower than have been estimated. In addition, the costs of generating these synergies, which are expected to be around £600m, may exceed expectations.

Failure to deliver the anticipated synergies and business opportunities could have a material adverse effect on the enlarged group’s businesses, financial conditions and results of operations, including its ability to support its pension deficit.

Increased cost of debt

The enlarged group may face increased costs when it seeks to refinance or repay its debt as a result of its increased level of debt following the acquisition.

The acquisition will be funded in part by a £3.6bn debt bridge facility, which may be extended for an additional 12 months following its one year maturity.

The costs and other terms on which the enlarged group is able to refinance the debt bridge facility and other longer-term indebtedness will depend partly on market conditions; unfavourable economic conditions could impact the cost and terms on which the enlarged group is able to access capital markets to refinance its indebtedness which may increase its cost of capital.

Risks to the enlarged business

Although a number of the risks EE faces are similar in nature to those potentially impacting BT today, there are also a number of distinct risks that the enlarged group will face that we do not currently perceive to be significant threats to BT.

This section outlines some of those new risks and uncertainties, but it is not exhaustive. These risks have the potential to impact the enlarged group’s business, brand, people, assets, revenue, profits, liquidity or capital resources.

Our Enterprise Risk Management framework will continue to operate in the enlarged group and provides reasonable (but cannot give absolute) assurance that significant risks are identified and addressed. There may be some risks which are unknown to us at present. And there may be some that we consider less significant now but become more important later.

Handset and network development

The enlarged group’s operations will depend partly on the successful deployment of continuously evolving telecommunications technologies.

Delays in the development of handsets and network compatibility and components may hinder the deployment of new technologies for the enlarged group.

EE uses technologies from a number of vendors and incurs significant capital expenditure deploying these technologies. There can be no assurance that common standards and specifications will be achieved, that there will be interoperability across BT’s, EE’s and other networks, that technologies will be developed according to anticipated schedules, that they will perform according to expectations or that they will achieve commercial acceptance. The introduction of software and other network components may also be delayed. The failure of vendor performance or technology performance to meet our expectations or the failure of a technology to achieve commercial acceptance could result in additional capital expenditure by, or a reduction in profitability of, the enlarged group.

Technological change and market acceptance

The enlarged group may not succeed in making customers sufficiently aware of existing and future services or in creating customer acceptance of these services at the prices we would want to charge. Also, the enlarged group may not identify trends correctly, or may not be able to bring new services to market as quickly or price-competitively as its competitors.

These risks exist in the mobile telecommunications area (such as mobile data services or other advanced technologies which are supported by advanced smartphone products). They also exist in the non-mobile telecommunications areas (such as mobile payment services based on contactless technology) where there is a risk that differences in the regulatory treatment of different operators based on their choice of technology could put the enlarged group at a competitive disadvantage.

Further, as a result of rapid technological progress and the trend towards technological convergence, new and established information and telecommunications technologies or products may not only fail to complement one another but in some cases, may even become a substitute for one another. An example of this is the risk that ‘over-the-top’ services (being those which are provided by a third party to the end user device) develop substitutes for BT’s and EE’s own products and services. Another example is VoIP, a technology that is already established in the business customer market and which has now reached the consumer market. The introduction of mobile handsets with VoIP functionality may adversely affect the enlarged group’s pricing structures and market share in its mobile voice telephony business. If we do not appropriately anticipate the demand for new technologies, and adapt our strategies, service offering and cost structures accordingly, the enlarged group may be unable to compete effectively, which may have an adverse effect on our business and operations.

Supplier failure

EE has a number of suppliers identified as critical. EE is also party to a complex and critical network-sharing arrangement with Hutchison Whampoa Limited. The failure of this joint operation to fully support the enlarged group’s interests and goals, or any material disruption to the operation of EE’s network sharing arrangement, could cause significant harm to the enlarged group’s business.

As demand for smartphone and tablet products increases around the world, there could be shortages in the volume of devices produced as a result of insufficient manufacturing capacity, lack of availability of internal components such as processors or major supply chain disruptions. This may result in delays in the supply chain which in turn may have an adverse effect on the enlarged group’s business and operations.

Spectrum pricing and regulation

Regulators, including Ofcom, set annual licence fees for spectrum bands used by EE for voice calls, 3G and 4G services and EE is a party to an ongoing consultation with Ofcom in relation to this. Any significant increases in spectrum pricing applicable to the enlarged group could have a material adverse effect on its business and results of operations.

Ofcom may, after consultation, vary conditions in relation to spectrum licences. EE will monitor any developments from regulators relating to the allocation of mobile spectrum in the UK.

The scope and form of the regulation of wholesale services is reviewed every three years and can include controls on the level of prices charged for regulated inputs.

As technology and market dynamics develop and as the mobile business of EE is integrated into BT then a wider range of existing regulations will apply to the enlarged group and a broader range of new and/or modified regulations may be directed at us.

Network and licence investment

EE (as well as BT to a lesser extent), has made substantial investments in the acquisition of licences and EE has invested in its mobile networks, including modernising its 2G network, the upgrade of its 3G network and the continued expansion of its 4G network which was launched in October 2012. EE expects to continue to make significant investments in its mobile networks due to increased usage and the need to offer new services and greater functionality. It may acquire new spectrum licences with licence conditions which may include network coverage obligations or increased licence fees. Accordingly, the rate of the enlarged group’s capital expenditure and costs in future years could increase and exceed those expected or experienced to date.

There can be no assurance that new services will be introduced according to anticipated schedules or that the level of demand for new services will justify the cost of setting up and providing new services (in particular, the cost of new spectrum licences and network infrastructure, eg for 4G services and subsequent evolutions). Failure or a delay in completing networks and launching new services, or increases in the associated costs, could have an adverse effect on the enlarged group’s business and operations and could result in significant write downs of the value of spectrum or other licences or other network-related investments.

If the current economic climate worsens, the enlarged group may decide, or be required, to scale back capital expenditure. A lasting reduction in capital expenditure levels below certain thresholds could affect our ability to invest in our mobile telecommunications network (including additional spectrum), new technology and our other businesses and therefore could have an adverse effect on our future growth and the value of radio spectrum.

Transmission of radio waves

Media reports have suggested that radio frequency emissions from wireless mobile devices and mobile communications sites may cause health issues, including cancer, and may interfere with some electronic medical devices, including hearing aids and pacemakers. Research and studies are ongoing. The World Health Organisation has declared that, on the basis of current scientific knowledge, there are no known adverse effects on health from emissions at levels below internationally recognised health and safety standards. However, the enlarged group cannot provide assurance that research in the future will not establish links between radio frequency emissions and health risks.

Whether or not research or studies conclude that there is a link between radio frequency emissions and health, popular concerns about radio frequency emissions may discourage the use of wireless devices, impairing the enlarged group’s ability to retain customers and attract new customers, and may result in restrictions on the location and operation of mobile communications sites and the usage of the enlarged group’s wireless technology. These concerns could also lead to litigation against the enlarged group. Any restrictions on use or litigation could have an adverse effect on the enlarged group’s business and operations.