CEO statement
Dear Reader,
This annual report covers the period from 1 July 2017 to 30 June 2018, and was completed and
signed off by the Board and our auditors on 25 July 2018. At this time, both Twenty First
Century Fox (“21CF”) and Comcast had made firm offers for the company and the offer process
was ongoing.
Following an auction process
led by the Takeover Panel, on 22 September 2018 the
Independent Directors recommended Comcast’s superior offer of £17.28 per Sky share to
shareholders. This valued Sky at £29.7 billion and demonstrated the strength of our business
and its position across Europe. Subsequently, on 9 October 2018 Comcast announced they had
acquired over 75% of the voting rights of Sky and their offer had therefore become wholly
unconditional, meaning our business had become part of a global and world-class
entertainment organisation. We expect Sky shares to cease trading on the London Stock
Exchange on 7 November 2018.
It was nearly 30 years ago that Rupert Murdoch took a risk to launch our company and
revolutionise the way people watch TV. The support of 21CF over that time, including James’
Chairmanship of our business, has enabled Sky to grow in to one of Europe’s leading direct-to-
consumer media and entertainment companies. I would personally like to thank Rupert, James
and 21CF for their consistent support as shareholders, board members and friends.
I’d additionally like to thank those Board members - Chase Carey, Tracy Clarke, Martin Gilbert,
Adine Grate, John Nallen, Matthieu Pigasse, Andy Sukawaty and Katrin Wehr-Seiter – who
have or will shortly join James in stepping down from the Board. They have all made a
significant contribution to the success of Sky and have continually looked after the interests
of all shareholders.
This is the beginning of the next exciting chapter for Sky and I look forward to bringing
our business together with Comcast for the benefit of customers, colleagues and the
communities in which we operate. As part of a broader organisation our momentum will only
increase and our aim is to make the next 30 years equally as successful as the last. I’m very
proud by what we’ve achieved at Sky and I’m equally excited about the opportunities that still
lie ahead.
Yours faithfully
Jeremy Darroch
31 October 2018
Sky plc, Grant Way, Isleworth, Middlesex TW7 5QD
Call 0333 100 0333 Fax 0333 100 0444 Visit sky.com
Registered in England No. 2247735 VAT registered No. 440 6274 67
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Annual Report 2018
Bringing better content
and innovation to all of
our customers, better
connecting them to
more of what they love.
At Sky we believe in providing our customers with the
very best TV experience. That means offering them the
best entertainment from major live sporting events,
gripping drama, great US and Sky original programmes,
and blockbuster movies across a range of brilliant
platforms and services. We also continually improve
our product set across TV, home communications,
and mobile, attracting more customers to Sky.
We know that everyone deserves exceptional
service and we strive to improve what we do every day
for our customers. At the same time we believe in being
a fair and responsible business, doing the right thing for
our people, communities, customers and shareholders.
Contents
Strategic report
Our journey
Chairman’s statement
Group Chief Executive’s statement
Our approach
Our performance
The Bigger Picture
Operational review
– UK and Ireland
– Germany and Austria
– Italy
Financial review
Principal risks and uncertainties
Regulatory matters
Governance
Board of Directors
Corporate governance report
Directors’ remuneration report
Directors’ report and statutory
disclosures
Financial statements
Statement of Directors’
responsibilities
Independent Auditor’s report
Consolidated financial statements
Notes to the consolidated
financial statements
Group financial record
Non-GAAP measures
Shareholder information
Shareholder information
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133
135
140
To find out more about Sky go to
skygroup.sky/corporate
To find out about our products and
services go to sky.com
For more about our wider contribution go to
skygroup.sky/corporate/bigger-picture
Annual Report 2018
1
Sky Q
Now launched across
all our main territories
Patrick Melrose
Nominated for five
Emmy® Awards
Digital service
My Sky app downloaded
11 million times
Our journey
Since our launch in 1989 we’ve grown from being the UK’s first satellite TV service to Europe’s
leading direct-to-consumer media and entertainment company, serving 23 million customers
with multiple products across seven markets. Here are some of our highlights:
Revolutionising the
way people watch TV
Putting customers
in control
Sky Sports starts broadcasting
Sky+ introduced, letting
customers record, pause
and instantly rewind live TV
1989
1991
1998
2001
Launched as the UK’s first satellite
TV service with four channels
including Sky News, Europe’s
first 24 hour news channel
launched, allowing
customers to watch over 140 live
TV channels
Establishing our
presence across Europe
Acquisition of Sky Italia
and Sky Deutschland
2014
Broadened
our content
strategy
Streaming service
brought to market
2012
Pay-per-view movie
service Sky Store
is introduced
launches
Building the next generation of products
Sky Q – Europe’s best home
entertainment service –
brought to market in the UK
NOW TV rolls
out in Italy
2015
2016
Sky Kids app created to
give a bespoke and safe
destination for kids content
NOW TV adds unlimited NOW
Broadband, the UK’s first
contract-free broadband service
Fortitude becomes our
first original programme
to launch across the Group
2
Sky plc
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Sky Mobile TV, our
first streaming service,
launched
Broadening our product portfolio
to more customers
Sky+ HD launched with
10 channels in high definition
2005
2006
Launch of
Sky Talk
Developing our
streaming services
Sky Go launched, letting
customers watch live and on
demand TV on mobile devices
Expanded into home
communications with
Sky Broadband
2007
Reached our ambitious
10 million customer target
2009
2011
2010
Creation of
becoming the home of HBO
Introduction of the
Sky+ app, letting
customers record shows
whilst out of the home
NOW TV rolls
out in Italy
Germany’s streaming
service introduced
The start of Sky VR,
a dedicated virtual
reality app
Our services expanded
into Spain and Switzerland
Sky launched
over DTT in Italy
app to be added to Sky Q,
starting in the UK and Ireland
Serving a bigger market with our best products
2016
2017
2018
Sky+ Pro launches with
Ultra-HD in Germany
Launch of Sky Mobile
– the UK’s most flexible
mobile phone service
Sky Q starts rolling
out across Europe
joins the Sky Q
platform
Sky over Fibre
becomes available
in Italy
Annual Report 2018
3
As we continue to generate strong returns, we are able to
make an ever-growing contribution to the countries and
communities in which we operate. This year we collected and
paid £1.8 billion in total taxes. In total, we generate around
£4.8 billion in tax revenues, and proudly employ over 31,000
people while supporting a further 216,800 jobs throughout
Europe (Oxford Economics 2017).
Our Sky Ocean Rescue campaign, which launched over a year
ago, has contributed to making the matter of ocean health and
plastic pollution an issue of national importance. Sky’s efforts
in raising awareness and taking action have been recognised by
world leaders and policy makers and we are using our skills and
experience to attract high-profile partners to this important
cause. Additionally, in March we launched Sky Ocean Ventures,
our impact investment vehicle, to accelerate breakthrough
and scalable ideas to help solve the ocean plastic crisis and
encourage responsible consumption.
I’m proud to announce that we have exceeded our target of
reducing our carbon emissions intensity by 50% two years early
and, together with our pledge to remove all single-use plastics
from our operations by 2020, we are proving our commitment
to building a better and more sustainable business.
As you know, Sky remains in an extended offer period, having
received firm offers from 21st Century Fox and Comcast to
acquire the business. Sky’s Independent Directors led by our
Deputy Chairman, Martin Gilbert, have conduct over the offer
process. Sky shareholders, who will have the final say, continue
to be kept fully informed.
Finally, I would like to take this opportunity to thank all my
colleagues for delivering another strong performance and
remaining focused throughout the year. The talent of our
people means we continue to find more ways to improve the
customer offer and drive the growth of this great business.
James Murdoch, Chairman
Chairman’s statement
James Murdoch
Chairman
At a time of significant change in our industry, Sky has
continued to strengthen its position as Europe’s leading
direct-to-consumer media and entertainment business.
We have more ways than ever before to reach customers
and let them access their favourite content in whichever
way they choose. At the same time, we’re using our
European footprint to make a significant positive
impact in the communities in which we operate.
We have once again delivered on our strategy to give customers
the best and broadest range of content, market-leading product
innovation and excellent front-line customer service, while at
the same time constantly improving our operational capability
and efficiency.
Additionally, we have continued to open up new opportunities
for growth by capitalising on the strength of the Sky brand,
developing new services and entering additional geographic
markets. This year, we’ve taken Sky Q, Europe’s best home and
entertainment service, into our main territories, have made
the Sky service available without a satellite dish for the first
time and have launched pay-as-you-go streaming services in
both Spain and Switzerland.
The success of our approach is demonstrated in the strength
of our financial performance, with strong revenue and profit
growth delivered again this year. Our 23 million households
are now taking over 63 million products from us and we reach
over 120 million people across Europe.
4
Sky plc Group Chief Executive’s statement
This strong financial performance has been delivered against the
backdrop of a challenging consumer environment, demonstrating
the continual improvement in our broad set of products and
services, and our focus on providing value for money to all our
customers. We now have a customer base of over 23 million
households across Europe who are taking over 63 million Sky
products. This year alone, we sold a further 3.1 million products,
with particularly strong take-up of Sky Q multiscreen, Ultra HD
and Sky Mobile.
Importantly, this year has been about establishing and opening
up new opportunities for growth. In the UK, we’ve agreed a
cross-supply deal with BT and renewed our Premier League
rights, meaning customers will have the best choice of sport
through one Sky TV subscription. In Italy, we have transformed
the business into a major multi-product, multi-platform company.
We reached landmark agreements with Mediaset and Open Fiber
that will allow us to expand our product reach to more customers,
plus launch a triple-play offering as well as developing our Sky over
IP service. In Germany and Austria, we significantly upgraded all of
our products and services, and launched Sky Q to transform the
viewing experience. Additionally, we agreed European partnerships
with Spotify and Netflix, which will further enhance the whole home
entertainment experience on the Sky Q platform and provide our
customers with even greater value from their subscription.
More of the very best content available
All of this has been achieved at the same time as delivering for
customers today. We offer our customers the best and broadest
range of content and ensure we have something for every home
and everyone in that home. We know our customers want
exclusive, high-quality local storytelling that is differentiated
from free-to-air and OTT offerings, which is why we have
significantly increased our investment in Sky original productions
in each of our markets. Over the course of calendar year 2018
we’re showing an average of one Sky original a week, including
at least 10 big dramas. Alongside ramping up the quantity,
we’re focused on step changing the quality and scale of what
we produce. We’re attracting the very best writers, directors
and acting talent in each of our markets, including global stars
such as Benedict Cumberbatch, who starred in the critically
acclaimed Patrick Melrose, which has now been nominated for
five Emmy® Awards; Lars Eidinger, our award-winning Babylon
Berlin actor; Alessandro Cattelan, our X Factor host and one
of Italy’s most talented showmen; and writer of Britannia,
Jez Butterworth. This in turn is allowing us to increase the
international distribution of our programmes, recoup a
significant percentage of our costs and thereby enable
further investment in the overall customer experience.
Alongside our great entertainment portfolio, our customers also
benefit from a sports offering that is second to none. This year,
we’ve built on important partnerships and secured rights that
will enable us to reach even more sports fans.
Jeremy Darroch
Group Chief Executive
The global media and entertainment industry is changing
at pace. Consumers’ viewing behaviours are evolving
and the rate of innovation and technological change
is accelerating. Competition continues to intensify,
especially for direct relationships with consumers, and
with this the quality and quantity of what’s on screen
is increasing. In a world of almost unlimited choice,
consumers are becoming more discerning, seeking out
better curation and quality from brands they trust, while
spending more time than ever watching video content.
As the original direct-to-consumer media and entertainment
business, Sky is uniquely well positioned to succeed in today’s
environment. We’ve remained flexible in our approach, building
out our portfolio of products and services in order to bring
better content and innovation to all our customers, connecting
them in ways that most suit their needs. We package together
programmes from the world’s best partners with our very own
home-grown content. We have a strong brand that now has
significant reach across multiple and growing territories.
Our people are highly engaged and committed and our
infrastructure is robust, enabling us to deliver the very
best front-line service to customers.
We’ve delivered an excellent set of results and have
put in place the building blocks for future growth
Our approach is working. Revenue for the period is up 5% to
£13.6 billion, with growth in each of our territories. EBITDA from
our Established businesses is up 11% to £2.5 billion1, and up 9%
when taking into account the investments we’ve made this
year in Sky Mobile and our expansion into Spain.
1 This is an adjusted measure and a reconciliation between statutory and adjusted measures can be found on page 135.
5
Strategic reportAnnual Report 2018 Group Chief Executive’s statement continued
We successfully renewed our Premier League rights in the UK at a
lower overall cost versus our contract today, and in Italy secured
a significant increase in the number of exclusive Serie A games
at a lower price per exclusive game than the previous seasons.
For the first time in Germany and Austria, we will take UEFA
Champions League exclusive to pay TV from next season,
plus air the Austrian Bundesliga.
In news, the quality of original journalism from Sky News was
once again recognised in 2018 with the channel taking home two
RTS Awards, including News Channel of the Year, and a BAFTA for
its coverage of the Rohingya humanitarian crisis. The channel
continued to champion important causes, leading the way
in the gender equality debate with its 100 Women series,
and pushing technological boundaries, becoming the only
broadcaster to show the Royal Wedding in Ultra HD.
In Italy, Sky TG24 has completed the transfer of its operations
to our Milan headquarters and opened a new editorial office
in Rome. The new premises have been equipped with the
latest technology to ensure the highest-quality news output.
Offering customers the best ways to watch
Along with our curation of the best range of content, we have
further developed and improved the customer viewing
experience in each of our territories, making it easier for new
customers to watch on a platform that best works for them
and giving them the flexibility to join at a price point to suit their
needs. We remain agnostic to how customers choose to watch
their favourite programmes, be it via satellite, through our on
demand services, on our NOW TV and Sky Ticket streaming
platforms, or across DTT. In fact, over 70% of our customers
now have the ability to access our content through our hybrid
model of both satellite and streaming delivery.
Our investment in Sky Q is paying off. Sky Q customers are
watching more – on average, an hour more of TV a day –
transacting more, and are more loyal to Sky, demonstrating
the strength of the Sky Q platform as Europe’s leading home
entertainment service. We are therefore committed to getting
Sky Q into more homes to the benefit of both our customers
and our business. Following its launch in Italy in November and
in Germany and Austria in May, Sky Q is now in over 3.6 million
homes across Europe and we’ll continue to push its penetration
in the year ahead.
Sky Q
In order to help us achieve this, we’re going to make the platform
even better. In February, we announced the next stage in Sky Q’s
development with a new and improved user interface along
with enhanced personalisation, allowing customers to find
their favourite programmes more easily. In the year ahead,
we’re rolling out new Kids and Sports modes, plus extending
our voice functionality.
The launch of Sky Q in Germany and Austria was just one part
of our comprehensive upgrade to our service in these markets.
In order to realise the full growth potential in these territories
over the longer term, we used insights and designs from across
the Group to transform the viewing experience for our customers
across each of our existing platforms. Combined with the launch
of a new, simpler pricing structure and a new customer service
centre in Berlin, these significant initiatives will enable us to push
ahead with our next leg of growth in this market.
In Italy, Sky Q is at the heart of our segmentation strategy, which
is focused on building a solution for every household, combining
the best of Group and local initiatives. When taken together
with our streaming platforms, DTT and Sky over IP services,
this expansive product portfolio means we’ve never been
in a better position for long-term growth.
We continue to drive deeper product penetration among all
our customers. Sky Mobile is now in over half a million homes
in the UK and we’ve recently signed a new deal with Telefónica
that will further strengthen this area of our UK business.
In the year ahead, we will increase our penetration of fibre
broadband customers with the launch of a new router,
ensuring our customers are receiving the best experience
no matter which platform they use to access our services.
6
Sky Mobile
Sky plc Our customer service is best in class
We know customers want the best experience whenever they
interact with Sky and giving them excellent customer service
remains at the forefront of everything we do. We have embraced
data and automation to keep making customer interactions
simpler and quicker, driving higher satisfaction scores as well
as delivering further efficiency within our business.
In the UK, we have once again
been recognised by Ofcom for our
superior service and have launched
our VIP loyalty programme,
rewarding customers the longer
they remain with us. We also
continue to make great progress
with our Digital First service
delivery through the new My Sky
app, which has now been enhanced
to include engineer tracking,
putting an end to customers
having to wait in for the engineer
to arrive. In Germany and Austria,
we have similarly launched the
Mein Sky service app as we take
our next steps in digital service
in these markets. We will also be
launching a loyalty programme
there in September, replicating
the success of similar initiatives
in Italy and, more recently, the UK.
Engineer tracking
on the My Sky app
Our growing social impact
Our contribution to the cultural, economic and social life of the
communities in which we live and work has never been greater.
I’m proud we continue to grow as a business that plays its part
in making a difference and bringing about change in the issues
that both we and our customers care about.
Sky has a strong history of taking the lead on environmental
issues that matter to our customers. We are currently the only
FTSE 100 firm committed to eliminating the use of single-use
plastics from our operations, products and supply chain by
2020 and are on track to do so. In the past year, we’ve already
eliminated the use of disposable coffee cups, a simple act saving
12 tonnes of annual plastic waste, or seven million cups. We are
also using our voice and reach to raise awareness of the crisis
in ocean health through our Sky Ocean Rescue campaign, and
are inspiring others to make changes through new partnerships
with the likes of National Geographic and the Premier League.
This year also saw us establish Sky Ocean Ventures, which will
help find solutions to the single-use plastics issue we face by
investing in breakthrough ideas for the future.
Sky Ocean Rescue partnership with Premier League
We also invest in and are passionate about helping high-
potential young people receive the support they need for their
talent to flourish. As well as our Sports Scholars programme,
which has now expanded into Europe, we have two new
scholarship programmes in the UK. The first, in partnership
with National Geographic, gives grants to young innovators
to enhance the impact of their scientific research into ocean
health. The second sponsors female entrepreneurs working
in technology and underpins our commitment to increase
the number of women working in this field.
Sky’s people are our greatest asset
The people who work for Sky across our seven territories are
central to our success. I am very grateful every day for their
hard work, enthusiasm and dedication to making Sky an even
better place to work and to creating even better services for
our customers. The restlessness, creativity and ability to get
things done, which has always been at the heart of Sky, has
never been more apparent and it’s through our people that
our ethos ‘believe in better’ remains strong.
Perfectly placed to succeed
We exit the year in a strong position. In our vibrant and
dynamic markets, we have the right strategy, infrastructure,
people and culture in place to continue delivering for customers
and shareholders. This will be achieved while meeting our
responsibilities as a large business and using our expanding
reach across Europe in the interests of all our stakeholders.
As direct-to-consumer relationships become more important
than ever before, Sky is a business that is well positioned
to succeed.
Jeremy Darroch, Group Chief Executive
7
Strategic reportAnnual Report 2018 Our approach
Our marketplace
The markets in which we
operate are constantly
changing and evolving.
Consumers are demanding
more of the very best content
on their terms, be it live on
the main television set in the
home, or on demand when
on the move. Daily viewing
to television remains high,
with consumers continually
wanting to be entertained
on a big screen.
When looking at our business
and the markets we are in
today, we see a significant
growth opportunity ahead.
We have 23 million customers
to whom we can offer more
products. In addition, around
78 million households have
yet to take pay TV in all our
markets, giving us substantial
headroom to address with our
multi-platform and streaming
TV services. We continue to
look at other opportunities
to grow and may add new
products and services to
our portfolio, for example
launching a triple-play
service in Italy in 2019.
Opportunities in adjacent markets represent significant
further areas of growth.
Customers are increasingly consuming content in digital
formats, with the transactional home video market
valued at around £2.7 billion across our core markets.
We are able to exploit this opportunity through
our own transactional video service, Sky Store.
In addition, our advertising sales house, Sky Media,
operates in an advertising market worth £14 billion
across the Group.
With strong global demand for high-quality content,
Sky Vision, our production and distribution arm,
goes from strength to strength, now generating
over £200 million in revenues.
We are now firmly establishing our presence in
the UK mobile market which is worth £16 billion.
Our strategy
Our strategy is to grow our
revenues and profits while
creating sustainable value
for shareholders by providing
the best and broadest range
of content, market-leading
innovation and world-class
customer service; moving
into new markets, opening
up new customer segments
and expanding our range
of products and services.
At the heart of our strategy are the steps we
have taken to build our position as Europe’s
leading entertainment and communications
business. This year we have launched new
and unique streaming services in Spain and
Switzerland, expanding our international
footprint. In Spain, customers can access the
best of Spanish pay TV along with Sky originals
and a wealth of on demand content, all on a
flexible, pay-as-you-go basis. In Switzerland,
Sky Sport largely mirrors the sports offering
we provide customers in Germany, whilst Sky
Show focuses on brilliant entertainment, both
live and on demand. Although very early days
for all of these services, we have strong plans
in place to accelerate their growth from here.
Across all our markets we ensure Sky is the
home of more of the best content from around
the world, with sustained innovation across
multiple platforms, delivered by a trusted
brand that offers world-class customer service.
This customer proposition enables us to pursue
the significant opportunities for growth in
the attractive markets where we operate.
Our strategy is enabling us to deliver sustained,
broadly based revenue growth which, together
with our focus on operating efficiency, creates
a consistently stronger, more profitable
business and long-term shareholder value.
8
Sky plc Our business model
We are focused on delivering the very best content, innovation and service for our customers.
Market-leading innovation
We combine our investment in
technologies with a deep understanding
of our customers to offer a great viewing
experience whenever, wherever and
however our customers want to watch.
Our customer focus
We are a customer-centric organisation,
focused on meeting the needs of all our
customers in every market. We are able to
meet their needs through the strength of
our trusted brand, ensuring that we offer
a market-leading TV experience and our
commitment to superior customer service.
Selling more to customers
We focus on broadening out our range of
products and services to offer more to
existing customers in ways that most suit
their needs. We have now expanded into
the mobile market in the UK and will
launch a triple-play service in Italy.
Scaling adjacent businesses
We create and pursue opportunities in
adjacent sectors such as advertising,
transactional services and international
programme sales to create and grow
additional revenue streams.
Our strengths
Great content
We invest to deliver the best and broadest
range of content across the portfolio of
channels and services we provide to
customers, offering something for
everyone in the household. We partner
with content owners to secure the very
best content from around the world,
and produce an increasing number
of our own original productions.
Growth opportunities
Growing pay TV and product penetration
Across our core markets there is a
significant opportunity for growth, with
78 million households yet to take pay TV.
We have further developed our
segmented customer offers to ensure
we are well placed to persuade more
customers to join and stay with Sky.
How we create value
Growing pay TV and product penetration
Driving efficiency
We invest over the long term because we want to build a
business that is durable. This means ensuring that we create
the conditions for sustainable success whilst also delivering
results in the short term.
We underpin everything we do with a rigorous focus on
operating efficiency. By ensuring that we have an efficient
and agile operating model, we consistently drive down costs,
allowing us to invest more where customers see greatest value.
Seeing the Bigger Picture
Investing in people
We are committed to acting responsibly in all that we do.
That’s because we know that to build a successful business
over the long term, how we do business is as important as
what we do. We also focus on making a positive impact on
society. We call this seeing the Bigger Picture.
We invest in our people because we recognise that their talent
and commitment are critical to our success. We aim to foster
a culture which encourages our people to fulfil their potential
and strive for continual improvement in all that they do,
enabling us all to achieve great things together.
9
Strategic reportAnnual Report 2018 Our performance
Financial key performance indicators
Adjusted revenue1
£13,585m
+5%
13,585
12,997
12,445
Programming and operating costs1
5,556
4,564
2016
6,179
4,305
2017
6,431
4,432
2018
2016
2017
2018
Programming costs
Operating costs
Description
Adjusted revenue includes revenue from
Direct-to-Consumer, Advertising and
Content businesses. 2017 revenue excludes
the sale of Rio Olympics rights in Italy.
2016 revenue excludes the 53 week.
Analysis
Adjusted revenue is a key measure of
how the Group is delivering on its strategy
to grow the business. In 2018, revenue
grew by 5% on a constant currency basis,
including strong growth in both content
and advertising.
Description
Programming costs relate to the
acquisition, commissioning and production
of programming content. Operating costs
are made up of marketing, costs to serve
our customers and general administration.2
Adjusted operating profit1
£1,574m
+7%
1,569
1,574
1,473
Adjusted EBITDA1
£2,349m
+9%
Analysis
Programming costs increased by £172
million as we continue to invest on screen
for customers, including the £153 million
increase in the new Bundesliga football
deal, a strong schedule of Sky Originals
and an improved entertainment schedule.
Operating costs increased by only 2%,
reflecting the strong progress we made
driving efficiencies through the business.
2,349
2,226
2,151
2016
2017
2018
2016
2017
2018
Description
Adjusted operating profit is a measure of
the profit generated by the business from
its revenues and excludes items that may
distort comparability from year to year.2
Analysis
Adjusted operating profit is a key measure
of the underlying business performance.
In 2018 adjusted operating profit was
up 7%, as a result of our strong revenue
growth and excellent progress in
operating efficiency.
Description
Adjusted EBITDA is a measure of the profit
generated by the business, excluding
depreciation and amortisation costs.
For the purposes of understanding the
underlying performance of the Group,
the measure also excludes items that
may distort comparability.2
Analysis
Adjusted EBITDA is a key measure of
profitability. In 2018 adjusted EBITDA
increased by 9% on the previous year, as a
result of our strong revenue growth and
excellent progress in operating efficiency.
Adjusted EPS1
67.3p
+5.9p
67.3
63.1
61.4
Total shareholder return
3-year
10-year
324%
52%
32%
99%
2016
2017
2018
FTSE 100
Sky
FTSE 100
Sky
Description
Adjusted basic EPS is the profit after tax
for the year, excluding adjusting items and
related tax effects, divided by the weighted
average number of ordinary shares.
Analysis
Adjusted basic EPS provides a measure of
shareholder return that is comparable over
time. Adjusted basic EPS was up 10% year
on year due to the increase in adjusted
operating profit, greater contribution
from joint ventures and associates,
lower interest costs and lower tax.
Description
Total shareholder return (‘TSR’) represents
the change in value of a share held for a
12-month period to 30 June, assuming
that dividends are reinvested to purchase
additional shares at the close price
applicable on the ex-dividend date.
Analysis
TSR represents a comparable measure of
shareholder return over time. Sky shares
outperformed the FTSE 100 index over both
a medium (3-year) and long-term (10-year)
period illustrating the strong shareholder
returns that Sky generates.
1
2
This is an adjusted measure and a reconciliation between statutory and adjusted measures can be found on
page 135.
Unless otherwise stated, all growth rates and comparative amounts are presented on an adjusted like-for-like
basis and on a constant currency basis using current period exchange rates, excluding the resale of Rio Olympic
rights in Italy in FY17 and the 53rd week in 2016. The financial results of Italy and Germany are translated into
sterling at a constant currency rate of €1.13: £1.
10
Sky plc
Operational key performance indicators
Retail customers
23.0m
Description
A customer is defined as a subscriber
to one of our TV packages or stand-alone
home communications services.
Analysis
We added 510,000 new customers in the
year with good growth in every market.
Connected homes
12.7m
Description
A connected home is one that has
connected their Sky box to the internet and
therefore has access to Sky’s on demand
services such as Catch Up TV and Box Sets.
Analysis
We added 0.7 million connected homes
during the year and we now have over
12 million homes connected, which is
58% of all TV customers.
+0.5m
2017 22.5m
2016 21.8m
+0.7m
2017 12.0m
2016 10.9m
+2.3m
2017 1.3m
2016 0.1m
+3.1m
2017 59.7m
2016 57.1m
Sky Q households
3.6m
Description
Number of households with a Sky Q
service across UK, Germany and Italy.
Analysis
We put Sky Q into 2.3 million customer
homes having rolled it out to Italy and
Germany this year.
Total products
62.8m
Description
Total products is defined as the total of all
paid-for subscription products taken by
our customers across the Sky Group. In the
UK and Ireland, this includes TV, HD, UHD,
Multiscreen, Sky Go Extra, Broadband,
Telephony, Mobile and Line Rental. In Italy,
this includes TV, Multivision and paying HD.
In Germany and Austria, this includes TV,
Second Smartcard, Premium HD and
Mobile TV.
Analysis
We have almost 63 million products
across the Group having sold an additional
3.1 million products in the year. The strong
growth is a result of existing products as
well as a growing contribution from new
products, such as Sky Q and Sky Mobile.
The Bigger Picture
People aware of Sky Ocean Rescue
33.5m
Description
People aware of Sky Ocean Rescue are
defined as those aware of Sky Ocean
Rescue and/or Sky trying to reduce the
use of single-use plastics across the UK,
Germany and Italy.
This is based on a bi-annual survey of
approximately 24,000 respondents who
are nationally representative, conducted
across the three territories.
Analysis
This is the first year that we have reported
on Awareness of Sky Ocean Rescue and
Sky trying to reduce the use of single-use
plastics across the Group countries
(UK, Germany and Italy). The figure of
number of people aware will support Sky
to understand better how to inspire others
to take action. Awareness across the
three territories is 10.9m in the UK,
8.4m in Germany and 12.5m in Italy.
Carbon intensity
8.4tCO2e/£m
Description
Carbon intensity, defined as tonnes of
CO2 equivalent (tCO2e) emissions relative
to revenue, is one of the key indicators
we use to measure our environmental
performance. Our total gross tCO2e
emissions include all our Scope 1 and
Scope 2 location-based greenhouse gas
emissions across all of our territories;
these total 114,084tCO2e for 2017/18
compared to 112,742tCO2e for 2016/17.
Analysis
Our carbon intensity has decreased
in 2017/18 as a result of our continued
investment in energy efficiency and
renewable energy. We continue to
report across all territories and in our
online Bigger Picture impact report
we have compared our Group emissions
performance against a science-based
benchmark.
Our full set of independently assured key
performance indicators used to measure our
sustainability performance can be found at
skygroup.sky/corporate/bigger-picture
11
Strategic reportAnnual Report 2018 The Bigger Picture
We’re at the heart of the lives of millions of people, which is why we use our voice to drive change on the
issues that matter to our customers and the world we live in. We aim to be an inspirational business and
use our strengths to inspire young people to be their best.
55%
reduction in CO2e intensity
in the UK and Ireland, exceeding
2020 target
80%
increase in the number of
scholarships launched this year
175 tonnes
of single-use plastic to be saved from
our operations and products across
the Group by the end of December 2018
Being an inspirational business
We aim to be the most environmentally
friendly media company in the world
We’re proud to have exceeded our 2020
target to halve CO2 emissions, relative to
revenue, a whole two years early. We’ve
achieved this through investing in energy
efficiency and renewables. We have now
set out our path to dramatically reduce
the greenhouse gas emissions in Sky’s
value chain – from the manufacture of our
products to their use in customer homes.
This means we play our part in a world
where warming is limited to well below
2° celsius, closer to 1.5°, by 2050.
We’ve also continued to develop our
renewable energy approach with suppliers.
Collaboration with our long-standing
partners resulted in the installation of
large scale solar energy infrastructure
on two further key manufacturing sites.
See our GHG emission tables on:
page 63
We aim to be the most accessible
provider of services
We’re working to make the whole Sky
experience accessible to all customers,
including those with disabilities.
We’re customer-led in our offering of
subtitling and audio described content,
prioritising the best content and great
audio describers across 24 TV channels.
In the UK, we audio describe just under
30% of this content, going beyond the
Ofcom requirement of 10%. Over 80%
of our Sky On Demand content is now
available with subtitles and we continue
to work with third-party broadcasters
to provide access services on demand.
Going forward, we are working to
increase awareness of audio description
and availability of audio description
on demand.
We aim to set and adhere to the highest
standards in our ways of working
We’ve continued our assessment of
suppliers and our policy approach to
human rights is set out on our website
alongside our progress outlined in Sky’s
Modern Slavery Statement 2018. This year
we’ve had a particular focus on identifying
any human rights risks and putting in
place mitigations across TV and Sports
production. Following the identification of
modern slavery risks in the UK recycling
industry, Sky has taken a lead role on
developing an industry response focusing
on electronics waste recycling.
See our Modern Slavery Statement at:
skygroup.sky/corporate/home
We have maintained a strong focus
on privacy, with the successful launch
of our GDPR readiness programme.
Inclusion
Inspiring young people
to be their best
It’s our people that make Sky Europe’s
leading entertainment company. That’s why
we work hard to be an inclusive employer,
so everyone at Sky can be themselves and
deliver their best work. This year we’ve
increased our efforts to improve female
and Black, Asian and Minority Ethnic (BAME)
representation. We’ve launched our Women
in Home Service and development
programmes to better prepare mid-level
women for leadership. We’ve launched Digify,
providing training and paid placements to
digital creatives from BAME backgrounds,
and continue to support the MamaYouth
Project. Joining existing LGBT+, Parents
and Women@Sky employee networks,
we launched new networks focusing on
multiculture, mental and physical ability as
well as wellbeing. We’re also using our voice
to inspire other organisations to create a
fairer, more inclusive society.
12
“Knowing that Sky see
the potential in me
has inspired me to
keep on striving to
achieve my goals.”
Kike Oniwinde
Taking high potential young people and
creating the conditions for them to thrive
Five years ago we launched our
scholarship journey with Sky Sports
Scholars. This year we have grown our
scholars programme, launching Sky
Women in Tech, and Sky Ocean Rescue
across our European markets. These
provide a unique combination of financial
support, personal development, learning,
mentoring and practical experience of
the world beyond their area of expertise.
Inspiring others to take action
We aim to use the full power and scale of
Sky to inspire others, including our people,
to take action.
We are taking big issues that matter to
our customers, like ocean health, and
connecting with other organisations
and millions of people. In January we
celebrated one year of Sky Ocean Rescue,
by encouraging everyone to join us to
#PassOnPlastic and make simple everyday
changes to cut down on single-use plastic.
Since then over one million people have
shown their support.
Our research has indicated that, as the
leading corporate voice in the space of
ocean plastics, we have an important role
to play in maintaining momentum. We’ll do
this through our commitments across the
business and impactful partnerships with
the experts.
Sky plc Sky Ocean Rescue
Shining a spotlight on the issues that affect ocean health and inspiring people
to make simple everyday changes that collectively make a huge difference.
Transforming our own business
• Work with our business
• Be single-use plastic
partners and supply
free in our products
chain to do the same
and operations
by 2020
• Lead the way for
other businesses
33.5m
people aware of Sky Ocean Rescue
in our core markets
Using our voice to inspire action
• Call for governments to
• Inspire our customers
adopt policy changes
through our content,
to make simple
everyday changes
• Encourage millions to join
us with key partnerships
including Volvo Ocean Race,
Premier League and WWF
All new products launched have
single-use plastic free packaging
Making our oceans resilient with WWF
• We’re working with people
who live, work and play on
our coastlines to make
sure they’re making ocean
friendly choices
• We’re finding innovative
ways to protect marine
animals and sharing what
we learn with governments
and businesses
• We’re creating ways to
secure protection for our
oceans for the long term
220+
MPs and MEPs
signed up to
#PassOnPlastic
3
Sky Ocean Rescue
Scholars announced with
National Geographic
Sky Ocean Ventures
• Launched in March 2018, investing
in startups to accelerate ideas to
solve the ocean plastic crisis
• Partnerships with National
Geographic Innovation Challenge
and Imperial College launched
Sky Ocean Rescue & WWF working
together to protect marine areas
across Europe
Devon and Outer Hebrides
marine protected areas
Harbour porpoise special
areas of conservation
German North Sea marine
protected area & Wadden
Sea National Parks
The Pelagos Sanctuary
Mediterranean
cetacean migration
corridor
£25m
Sky Ocean Ventures
investment fund was
launched with anchor
funding by Sky plc
First investments
announced in
summer 2018
Skipping Rocks Lab
Choose H2O
Annual Report 2018
13
Strategic report Operational and
financial review
Operational and
financial review
Patrick Melrose
UK and Ireland
We have delivered an excellent operational and financial
performance in the UK and Ireland at the same time as
scaling growth in our new initiatives. More customers
than ever are choosing Sky to connect them to more
of what they love across TV, broadband, talk and mobile.
We’ve brought world-class original content to millions
of homes, reset the standard for today’s viewing
experience with our innovative products and continued
our focus on delivering the best customer service.
Over the last 12 months, we generated £8.9 billion in revenue,
up 4%, with UK EBITDA growth of 9% to £1,888 million1.
Our investment in new products and services grew our
customer base by 270,000 to 13 million. At the same time,
our total paid-for products grew by 2.7 million to 44.7 million,
while churn fell 120 basis points year on year to 10.3%.
Sky Q leads the way
Across the UK and Ireland, we are building a bigger, better
and more diversified business and central to our plans is the
extension of our product leadership and penetration. Over the
past 12 months, Sky Q has consolidated its position as Europe’s
best home entertainment system. Thousands of homes across
the UK and Ireland are choosing the service, resulting in an
average of 6,000 new Sky Q customers every day – making
it our fastest-selling product. This year, we took another big
leap forward in the evolution of Sky Q by rolling out the next
wave of major enhancements and new functionality. Greater
personalisation based on viewing habits, the expansion of voice
search and the introduction of voice control means viewers
can now discover more relevant content, more easily. A new
wide-screen user interface allows users to simply navigate the
breadth of programmes available, while the amount of Ultra HD
programming on Sky Q has doubled over the past 12 months.
The result of all this is more engaged customers who enjoy more
video on demand, make more purchases through Sky Store, are
bigger advocates of Sky and are therefore less likely to switch
to a different provider.
Creating the whole home entertainment experience
We want to connect customers to more of what they love and
in November we joined forces with Devialet – one of the world’s
most innovative audio businesses – to create Sky Soundbox,
meeting customer needs for a greater sound experience. This
all-in-one system significantly enhances Sky Q through ground-
breaking acoustic technology. With the introduction of Spotify
on the platform earlier this year, we are able to give customers
a simple, high-quality home music solution with access to
over 35 million songs. Together, these partnerships are a
demonstration of how we’ll continue to consolidate
Sky Q’s leadership.
1 This is an adjusted measure and a reconciliation between statutory and adjusted
measures can be found on page 135.
16
Sky Soundbox
NOW TV available across more platforms
We continue to extend our product penetration among different
customer segments by broadening the ways customers can
access Sky content, providing brilliant services that suit every
household and every person in that household. By focusing on
giving customers great value for money no matter how they
choose to access their favourite programmes, we have a variety
of ways to grow our customer base.
NOW TV, our contract-free streaming service, attracts customers
who want a low-cost, flexible way of accessing Sky content. The
launch of the NOW TV Smart Stick – the UK’s cheapest streaming
stick – has made it even easier for customers to access content
on any TV screen and comes with voice search functionality,
a first for the NOW TV platform. When coupled with standalone
NOW Broadband, which launched in January, we have given
customers ultimate flexibility with no contract, easy switching
and a reliable, unlimited service.
We’ll extend NOW TV’s availability across multiple platforms and
devices through our new agreement with BT, which will see our
full NOW TV service, including Sky Atlantic, become available on
BT TV’s set-top boxes next year. This means that Sky’s portfolio
of TV entertainment brands will be available to all UK consumers
through every major pay TV service, reaching new customers
and expanding the appeal of our channels to advertisers.
Scaling communications
Using the appeal of the Sky brand, we have extended our
product penetration by expanding our services. Sky Mobile
shook up the mobile industry when it launched last year and
the strength of the service has continued to be acknowledged
through both customer response and industry recognition.
Our customer-centric proposition along with the availability
of Apple and Samsung tablets, has resulted in over half a million
customers now taking the service with more than 95,000
new Sky Mobile customers added in the final quarter alone.
The service has also been ranked a top provider by Which?
and won best MVNO at two major UK mobile industry awards.
At the same time our broadband business goes from strength
to strength, with a growing subscriber base and fibre penetration
now standing at 38%. We’ve also launched Sky Talk Shield, giving
customers more control over the calls they wish to receive at no
additional cost.
The best and broadest choice of content
This year we have continued to build on our outstanding track
record of delivering the content customers want to watch. We’ve
stepped up our investment in high-quality, original drama, which
Sky plc
sports rights deals secured this year include extensions and
enhanced rights to the English Football League, the England
and Wales Cricket Board and the Ladies European Tour.
Creating the best customer service
Our focus on providing the best customer service in the industry
is integral to all our plans. We continue to invest in new ways to
interact with our customers so issues are resolved first time
and it remains a simple and smooth process to contact Sky.
This year, investment in our digital service has introduced
artificial intelligence, enabling us to quickly connect our
customers to the most suitable person to resolve their query.
In addition, we’ve implemented a service concierge bot to the
My Sky app, giving customers an immediate response when using
this digital platform. Over 50% of basic customer transactions
are now being completed digitally, with the My Sky app being
used by 2 million customers every month.
Our superior service was once again recognised by Ofcom as a
result of receiving the lowest number of complaints across TV,
broadband and telephone for the ninth consecutive quarter.
Rewarding customer loyalty with Sky VIP
Sky VIP
At the same time as improving service for all customers, we
launched Sky VIP, the first tenure-based loyalty programme in
the TV and broadband sector, meaning the longer customers
have been with Sky, the better the rewards become. 1.9 million
customers have signed up to the scheme and we are already
seeing a positive impact on customer retention. We expect
membership and awareness of Sky VIP to grow over the next
12 months as we market the proposition formally to customers
for the first time.
Acting on important issues
Over the past 12 months, we’ve been taking more action through
our Sky Ocean Rescue campaign, firmly putting the challenge of
single-use plastic on the agenda of governments, businesses
and consumers. Our actions have started at home, where we
have committed to removing single-use plastics from our own
business, operations and supply chains by 2020. We are on
track to meet those targets, with 70 tonnes of single-use plastic
removed from our business to date, 25% of our total usage.
For example, along with disposable coffee cups, we’ve removed
all single-use plastic water bottles, plastic straws and plastic
cutlery from our offices. Our new products, the NOW TV Smart
Stick and the Sky Soundbox, both launched without any single-
use plastic packaging, and Sky Mobile SIMs will shortly be sent
to customers in cardboard packaging, instead of plastic. While
not always the easiest or cheapest decisions to make, we hope
our actions will inspire others to adopt similar principles within
their own organisations.
17
Save Me
has driven viewing up over 50% year on year. Britannia, starring
David Morrissey, delivered Sky’s second-biggest show launch so
far, attracting 1.9 million views in the first week alone. Meanwhile,
Save Me, starring Lennie James, became our most rapidly
consumed box-set release, with more than one million customers
watching all six episodes in the first two weeks. Patrick Melrose,
starring Benedict Cumberbatch, launched with much critical
acclaim, receiving the highest number of five-star reviews
for a Sky original production to date, and receiving five
Emmy® Award nominations.
We have also strengthened the Sky One brand by moving into
more original British comedy, entertainment and drama with
shows like Bulletproof, Carmageddon and In the Long Run.
We also announced the rebrand of Sky Living to become Sky
Witness, continuing to bring viewers the best of the US and
procedural dramas, while driving greater customer awareness
and viewer attribution to the channel.
Bulletproof
The strengthening of Sports, where we launched 10 new sports
channels, has given customers more choice at no extra cost.
With channels dedicated to our biggest sports, customers
are now able to enjoy Sky Sports for as little as 60 pence a
day, giving them exceptional value for money. As a result, total
consumption per subscriber across our sports channels was
up 5% year on year. At the same time, we secured a number of
significant rights deals over the last 12 months on behalf of our
customers. We successfully negotiated more Premier League
matches than ever before, including every first-pick weekend
match, plus Saturday evening fixtures for the first time, at a
notable discount to our current agreement. Other significant
Strategic reportAnnual Report 2018
Germany and Austria
We’ve made significant progress transforming our
business in Germany and Austria over the past 12
months. We have rebalanced our trading strategy,
brought industry-leading products to market while
at the same time comprehensively upgrading all our
existing services and securing long-term content rights.
The substantial improvements we have made to our products
and operations have transformed the customer experience
and now provide a solid foundation to kick start our next
stage of growth in what is Europe’s largest TV market.
Over the last 12 months, we generated £2 billion in revenue, up
6%, with EBITDA of £119 million1, only £28 million lower year on
year, despite the £153 million step up in costs of the German
Bundesliga contract. New products and services grew our
customer base by 200,000 to 5.2 million, and our total paid-for
products grew to 8.9 million, up 113,000 year on year. Churn was
15.0%, as we lost some lower value customers, and we expect
it to improve as the set of comprehensive initiatives we’ve
launched this year begin to take effect.
Sky Q as the new viewing standard
The best entertainment offer starts with the best viewing
experience. In May, we set a new standard for TV viewing in
Germany and Austria, with the launch of our next-generation TV
platform, Sky Q. The launch has revolutionised the TV experience
for our customers and follows the successful roll-out of Sky+ Pro
in autumn 2016. Sky Q now allows customers to watch on multiple
screens simultaneously, and gives viewers a more intuitive user
interface. Almost one million Sky+ Pro customers automatically
received the Sky Q user interface and functionality via a software
update throughout May and June. In addition, the Sky Q box is
now offered to new customers as standard, accelerating the
platform’s growth and enabling us to further drive product
penetration. As in other territories, Sky Q is set to transform our
business in Germany and Austria by building deeper engagement
with our customers, increasing viewing and greater loyalty, in turn
delivering higher satisfaction scores.
Transforming the viewing experience
As well as launching Sky Q, we significantly upgraded all of Sky’s
product experiences in Germany and Austria with a renewed
focus on value for money, ensuring we have a world-class service
for every household no matter how they wish to access Sky.
Our comprehensive upgrades started in February with the Sky
Kids app, including the implementation of an updated user
interface and new interactive features including online games.
This was coupled with improved security features to make
sure parents and children can enjoy watching, in the knowledge
that only suitable content is accessible. At the same time,
we upgraded our Sky Go service, adding over 70 channels, an
improved search functionality and a new intuitive design guided
by genre, the same as that used in the UK and meaning it is now
even easier for customers to find the content they love on the go.
We delivered a major upgrade for our Sky+ customers in March,
including a content-rich new user interface that highlights key
shows and offers a more personalised viewing experience. This
followed the launch of Sky Store which offers customers greater
choice and flexibility over their movie watching. Finally, in June,
Sky Ticket customers benefited from a new ‘continue watching’
feature and a personalised home screen design, making it even
easier to binge watch the shows they love on this flexible
streaming platform.
We’ve taken a big leap forward in our Ultra HD (UHD) offering.
For the first time in Germany, Sky secured the exclusive UHD
broadcasting rights to 25 matches at the 2018 FIFA World Cup.
The deal means that Sky was the only German broadcaster to
show the top match of the day live in UHD. We also agreed a
partnership with Vodafone and Unitymedia which means Sky’s
live sports and cinema content can be watched in razor-sharp
UHD at scale across Germany.
Taken together, all these upgrades mean we have significantly
increased the value customers are getting from Sky and our
services have become more attractive to new customers
taking a Sky subscription for the first time.
Strong year on screen
Sky Kids
18
Das Boot
1 This is an adjusted measure and a reconciliation between statutory and adjusted
measures can be found on page 135.
Sky plc Investing in customer service and loyalty
Alongside our significantly enhanced customer proposition,
we are step changing our customer service, focusing on
strengthening our in-house capabilities while taking the
next steps in digital-first delivery.
In January, we opened a new service centre
in Berlin that will create hundreds of new
jobs over the years ahead, becoming a
centre of excellence for customer retention.
We’ve also launched the Mein Sky app
enabling customers to easily manage their
subscription and quickly resolve issues
using video tutorials and helpful hints and
tips. The app has already been downloaded 750,000 times.
In May, along with the launch of Sky Q, we introduced simplified
pricing and packaging structures, giving customers clear,
simple and consistent price points for our premium sports
and cinema channels.
Finally, following our success in Italy and the UK, we will launch
a tenure-based customer loyalty scheme in Germany in the
autumn of 2018. The new scheme will take learnings from other
territories, rewarding customers throughout their time with
Sky, with the aim of improving customer retention and increasing
brand loyalty.
Acting on important issues
We’re committed to removing single-use plastics from across
the Group and have already removed 58% of single-use
plastic across catering and cleaning in Germany and Austria.
We’re taking our approach and embedding it within content
production, with more sustainable and single-use plastic
free alternatives used across a number of series including
MasterChef, X-Factor and Acht Tage. In addition, Sky Ocean
Ventures was launched at the Royal Jungle Conference in
Munich in May, bringing together thousands of entrepreneurs
and start-ups to inspire them in how we can help solve the
oceans plastic crisis together.
By focusing on sustainability and carefully considering product
recycling in the design of Sky+Pro, we’ve been able to refurbish
and return over 90% of all set-top boxes to market over the past
12 months. In addition, following a review of Sky’s investments in
environmental efficiencies, Sky Deutschland has been awarded
the ÖKOPROFIT environmental certification, further cementing
our position as an environmental leader within our industry.
19
MasterChef
In order to deliver the best entertainment experience, we have
also focused on accelerating the broadening of our content
line-up. Our original content has performed very well with viewing
of our dramas up three fold year on year. This has been led by
the success of Babylon Berlin, our first German-language Sky
original production, which was watched by over half a million
viewers per episode and won eight TV awards. Viewers also
enjoyed the second series of MasterChef, with audiences three
times higher compared to the first season. The success is set to
be repeated next year with Das Boot, Acht Tage, Der Pass and
the HBO-Sky co-production Chernobyl coming to Sky customers
across Germany. In August, we are also launching X Factor on
Sky 1 following its success in Italy.
Expanding the reach of Sky Sport
While increasing the breadth and range of entertainment
programming, we have remained a clear leader in sports. This
year we have secured an important set of rights for the future
including the main German football cup competition, DFB-Pokal,
for a further three years, ensuring only Sky customers will be able
to watch all 63 matches each season until 2022. We also made
a milestone agreement for the worldwide rights to the Austrian
Bundesliga, ensuring exclusive coverage in Austria for the first
time across a three-year deal beginning with the 2018/19 season.
These rights join those we have for UEFA Champions League next
season, providing pay TV exclusive coverage to this tournament,
for the first time in Germany and Austria.
At the same time the quality of our sports coverage has become
even better with the opening of Sky Sport HQ, a new state of the
art production centre just outside Munich, close to our German
headquarters. Sky Sport HQ boasts four studios split over 1,700
square metres and has brought together all Sky Sport content
across broadcast and online into a single location.
Strategic reportAnnual Report 2018 Italy
This has been a ground-breaking year for our Italian
business. Customers in Italy now have more choice than
ever before over how they watch content, with Sky now
available across satellite, OTT, DTT and fibre. Bringing
together this industry-leading connectivity with an
ever-greater breadth and depth of world-class content
means the business will continue to attract more
customers to Sky.
Over the last 12 months, like-for-like revenue increased 6%
to £2.6 billion, with EBITDA growth of 29% to £342 million1.
Launching our offer across new platforms while continuing
to invest in our existing products and services grew our
customer base by 40,000 to 4.8 million, and took our total
paid-for products to 9.2 million, up 263,000 year on year.
Churn remained stable at 10.1%.
Becoming a major multi-platform, multi-product company
breakthrough has the potential to significantly increase
Sky’s footprint both in Italy and across Europe by widening
the potential pool of subscribers and attracting new
customers who either can’t have or don’t want a satellite dish.
Boosting Italian connectivity with Open Fiber
The roll-out of Sky over fibre will be further accelerated by our
innovative partnership with Open Fiber, Italy’s leading builder
of FTTH (fiber-to-the-home) technology. The deal, which will be
operational from summer 2019, gives Sky access to Open Fiber’s
FTTH network, which is set to reach the 271 main urban areas
of the country by 2022. Additionally, the agreement will enable
us to increase our product penetration among customers
through the launch of a new triple-play offer next year.
Renewing NOW TV
Another way we’re servicing our Italian customers is through
our pay-as-you-go streaming service, NOW TV, which we continue
to make even better. This year, we launched the NOW TV Smart
Stick to the Italian market, refreshed the brand, and delivered
a new user interface along with new features that will allow
customers to download and play on the go.
Our partnerships will further widen our potential customer pool
for NOW TV too. Through a new deal with Fastweb, we’re now
able to offer NOW TV customers access to a broadband package
when purchasing our streaming product. Similarly, Fastweb
customers can now purchase NOW TV Entertainment passes
through one provider.
Sky Q
Sky in Italy has now become a truly multi-platform business,
giving customers new and innovative ways to access our
service. Through product launches – including Sky Q – and
new agreements we’ve made this year, we’ve never been
better positioned for long-term growth in this market.
In March, we agreed a landmark deal with Mediaset that has
already allowed us to launch a new Sky pay TV service on digital
terrestrial television (DTT), utilising transmissions capacity
offered by Mediaset Group. The new Sky on DTT service enables
customers to sign up for Sky in a simple and convenient way
through their TV, without the need for installation of a satellite
dish or fibre connection. The service features 15 channels
dedicated to entertainment, films and sport and will enable
us to reach customers in segments we haven’t done so before.
Launching Sky over fibre
Our multi-platform approach has extended to delivery over fibre.
In order to give customers even more choice and flexibility, at the
same time as ensuring a great TV experience, we launched Sky
over fibre at the beginning of June – our first major territory
to benefit from the new technology that delivers our Sky TV
service without the need for a satellite dish. This technological
20
NOW TV Smart Stick
Upgrading Sky Go
As well as expanding the number of platforms the Sky service
is on, we’ve continued to enhance and expand our number of
products, driving more value into customers’ subscriptions.
This year we revamped Sky Go with a new-look user interface
that makes it easier for viewers to find and watch their favourite
programmes, as well as enabling on demand content to be
watched on smartphones. The upgrade also includes the
capability for subtitles, with a new Sky Go desktop app for
Windows and iOS to be launched over the next year.
The biggest and best shows
As with our other markets, our market-leading suite of products
sits alongside the very best choice of TV content. Our focus is on
giving customers the best range and quality of content possible
through both our own productions or acquired programmes.
As part of our deal with Mediaset, we’ve made nine film and TV
series channels available to Sky’s existing satellite customers,
1 This is an adjusted measure and a reconciliation between statutory and adjusted
measures can be found on page 135.
Sky plc the exclusive home to seven games out of 10 on each match
day – more than twice as many exclusive matches versus today
– and will feature 16 of the 20 biggest matches each season.
Under the terms of the new deal, Sky will pay around a third less
for each exclusive match versus the current agreement. Our new
deal with Mediaset will also enable us to broadcast the matches
over DTT for the first time, reaching more football fans than
ever before.
The Serie A rights will add to the already extensive sports offer
available on Sky, including majority exclusive UEFA Champions
League, Formula 1, Europa League and Moto GP coverage.
Sky Sport and Calcio viewership continues to perform well, with
Serie A Championship up 6% over the last year, due to a more
competitive tournament, and Formula 1 grew 23% year on year
due the victories of the Ferrari team.
Serie A
Customer service
Our customer service experience in Italy continues to improve
with our focus on enhancing digital channels working well. 60%
of customer service requests are now self-served, up 5% year
on year. Over 2 million customers are also enrolled in our loyalty
scheme following its relaunch in April, making it simpler for
customers to engage with the programme and offering more
Sky-based rewards.
Acting on important issues
Our Sky Ocean Rescue campaign has also been rolled out in Italy.
In April, we removed all single-use plastic water bottles from our
sites, supplying staff with reusable bottles, meaning we’ve now
saved 8 tonnes of plastics from our Italian operations. We also
continued our commitment to removing single-use plastic from
our operations by launching the NOW TV Smart Stick in Italy
without any single-use plastic packaging, and replaced all NOW
TV pre-paid plastic cards with cardboard.
The campaign reached new audiences in Italy through a
collaboration with X Factor that saw the stage set made of
single-use plastic. We also used our partnerships within sport
to inspire fans and spectators at the San Marino Grand Prix
to take action to safeguard ocean health, while we worked
with the Misano GP to reduce single-use plastic on site.
21
X Factor
delivering even greater value. This deal will further enrich Sky’s
wide-ranging library of on demand content, bringing viewers
the best of both local and global programming.
Our own original productions have focused on giving audiences
shows with strong local cultural relevance and made with
international execution standards. We’re also working with
industry leading talent including Alessandro Cattelan, the host
of X Factor and one of Italy’s most talented showmen, as well as
the critically acclaimed actor Salvatore Esposito, a lead in our
Sky original production Gomorrah. This approach is working,
with viewing of Sky original dramas up 15% year on year. Within
this, viewing of X Factor Italia was up again this year, including
an 8% rise for the series finale. The third series of our hit show
Gomorrah also performed very strongly, ranking number one
at the box office when we released the first two episodes in
cinemas prior to its premiere on Sky Atlantic. Il Miracolo also
received acclaim from customers and critics, with viewing higher
than international US programmes and on a par with the last
series of Game of Thrones.
Gomorrah
The home of sports in Italy
In sports, we’ve also secured an important set of rights this year
that position us well to give more value to existing customers,
and attract new customers to take our service.
We have acquired exclusive rights to broadcast 266 live games
per season for the 2018 – 2021 seasons of Serie A, Italy’s top
domestic league. The new deal means Sky Sports in Italy will be
Strategic reportAnnual Report 2018 Financial review
Andrew Griffith
Group Chief Operating Officer and Chief Financial Officer
We’ve delivered another set of strong results with
like-for-like revenues up 5%, Established EBITDA
up 11% and EPS up 10%.
Group financial performance
Unless otherwise stated, all numbers are presented on an adjusted basis
for the year ended 30 June 2018. For comparative amounts in the prior year
down to operating profit, numbers are translated at a constant currency
rate of €1.13:£1 being the average exchange rate prevailing in the year to
30 June 2018, while content revenue and programming costs also exclude
the one-off sale of the Rio Olympic rights in Italy in the prior year.
Adjusted results exclude items which may distort comparability in order to
provide a measure of underlying performance. Such items arise from events
or transactions that fall within the ordinary activities of the Group but
which management believes should be separately identified to help explain
underlying performance. Further details of the adjusting items impacting
the Group can be found in note 8 to the consolidated financial statements.
A reconciliation of the Group’s statutory and adjusted consolidated income
statement can be found in the Non-GAAP measures section of the
consolidated financial statements on page 135.
Revenue
Group revenues increased by £588 million, or 5%, to £13,585 million (with
growth of £669 million or 5% on a statutory basis, at actual exchange rates).
We delivered growth in each territory, with the UK and Ireland up 4%
(+£331 million), Germany and Austria up 6% (+£107 million) and Italy up
6% (+£150 million). We also delivered revenue growth in each category.
Direct-to-consumer revenue, our largest revenue category, grew by 3% or
£396 million to £11,830 million, driven by a number of factors. These include:
the increased size of our customer base; greater product penetration,
as we grow into Sky Fibre, Sky Q and Sky Mobile; a higher number of pay-
as-you-go buys; the full-year benefit from our home communications
price rise in the UK in March 2017; and a price rise in Italy in October 2017.
Content revenue strongly increased by 15% (+£110 million) to £838 million
as we monetised our growing investment in original programming. Similarly
advertising revenue grew 10% (+£82 million) to £917 million with each
territory outperforming its market.
22
An analysis of revenue by category for each territory for the current and
prior year is provided in note 2 to the consolidated financial statements.
Costs
We made excellent progress in operating efficiency, with operating costs as
a percentage of revenue improving by 70 basis points, and as a result total
costs of £12,011 million increased by 4% (£12,551 million or an increase of
5% on a statutory basis, at actual exchange rates).
We continued to invest on screen for customers, with programming costs
up 4% (+£225 million). This includes a £153 million step up in Bundesliga
costs in Germany and greater investment in original drama. This was partly
offset by a change to our sports rights amortisation in the UK, following
the repackaging of our sport channel proposition, to an approach similar
to that of Italy and Germany. As a result we are allocating 97.5% of the
Premier League costs from the 2017/18 season to this fiscal year, with 2.5%
or £35 million deferred into the 2019 fiscal year.
Direct network costs increased by 21% as we scaled growth in Sky Mobile to
over half a million customers, and increased fibre penetration to 38% of the
total broadband customer base.
Sales, general and administrative costs were up only 2% (+£79 million) and
down 70 basis points as a percentage of revenue to just 33%. We absorbed
our increased investment in brand to support Sky original dramas and the
launch of Sky Q in Italy and Germany, as well as higher depreciation as a
result of investment in the roll-out of Sky Q set-top boxes, Group integration
and our UK campus. This performance reflects the strong progress we have
made driving operating efficiency through the business as well as the
benefit of capitalising rather than fully expensing Sky Q costs.
An analysis of costs by category for each territory for the current and
prior year is provided in note 2 to the consolidated financial statements.
Profit and earnings
As a result of our strong revenue growth and excellent progress in
operating efficiency, Established business EBITDA was up 11% to £2,456
million (2017: £2,208 million). EBITDA was up 9% after including the net costs
of our investments in Sky Mobile and our streaming TV service in Spain.
Adjusting for depreciation and amortisation of £775 million, operating
profit was up 7% to £1,574 million (2017: £1,473 million), or up 7% to
£1,034 million on a statutory basis at actual exchange rates.
Tax was £1 million lower at £214 million, at an effective rate of 15.5%
(2017: 17.0%) mainly reflecting the reduction in the UK rate and the
recognition of tax allowances in Italy.
Profit after tax was £1,168 million (2017: £1,048 million), resulting in earnings
per share of 67.3 pence, up 10% (2017: 61.4 pence) or 47.5p, up 17% on a
statutory basis at actual exchange rates. The total weighted average
number of ordinary shares was 1,716 million (2017: 1,710 million shares).
Statutory revenue, profit and adjusting items
Statutory revenue for the year of £13,585 million was up 5% from the
prior year (2017: £12,916 million), which included the one-off sale of
the Rio Olympic rights in Italy.
Statutory operating profit for the year of £1,034 million (2017: £964 million)
increased by 7%, reflecting 5% growth in statutory revenue, progress in
operating efficiency and the movement in foreign currency exchange rates.
Statutory operating profit is after the deduction of net operating expenses
of £540 million (2017: £504 million) comprising three elements: (i) the
ongoing amortisation of acquired intangible assets and acquisition-related
costs, (ii) one off costs associated with the offers for the Company and (iii)
adjusting items including the costs of corporate efficiency and restructuring
Sky plc £m
Year to
30 June 2018
Year to
30 June 2017
Adjusted results
Revenue
EBITDA
Operating profit
EPS – adjusted (pence)
Statutory results
Revenue
Operating profit
EPS – statutory (pence)
Constant
currency
12,997
2,151
1,473
61.4p
Actual
exchange
rates
12,916
964
40.6p
13,585
2,349
1,574
67.3p
13,585
1,034
47.5p
programmes and the costs of integrating Sky Italia and Sky Deutschland,
which were partly offset by income received with respect to regulatory
receipts and proceeds from settlements.
A reconciliation of the Group’s statutory and adjusted consolidated income
statement can be found in the Non-GAAP measures section of the
consolidated financial statements on page 135.
Cash flow and net debt
Free cash flow of £552 million was £277 million lower than the prior year,
reflecting the investment in deploying Sky Q to customers in each of our
markets (c£180 million), as well as a peak year for the payment of upfront
deposits on key sports rights including Premier League, Serie A and English
Cricket Board (c£230 million).
Net debt as at 30 June 2018 was £6.5 billion (30 June 2017: £6.2 billion).
On a pro-forma basis reflecting Sky Bet sale proceeds actually received
on 10 July, net debt would have been £6.0 billion, representing a net
debt to EBITDA ratio of 2.6 times.
During the year the Group repaid its October 2017 and February 2018
bonds (£787 million) from existing cash resources. The Group continues
to maintain a strong financial position and has ample headroom to its
financial covenants, including excellent liquidity with cash of £1.6 billion as
at 30 June 2018 and access to Revolving Credit Facilities totalling £1 billion.
Balance sheet
During the year, total assets decreased by £436 million to £18,002 million
at 30 June 2018.
Non-current assets increased by £160 million to £13,264 million, primarily
due to an increase of £180 million in intangible assets and property, plant
and equipment due to continued capital investment; an increase in
deferred tax assets of £123 million; and an increase in programming
distribution rights of £46 million. These movements were offset by a
decrease in non-current derivative financial assets of £168 million.
Current assets decreased by £596 million to £4,378 million at 30 June 2018,
principally due to a £878 million decrease in cash and cash equivalents
and short-term deposits, as a result of repaying two bonds this year from
existing cash resources, and a £154 million decrease in derivative financial
assets. These movements were offset by a £254 million increase in trade
and other receivables and a £192 million increase in inventories.
Total liabilities decreased by £609 million to £13,982 million at 30 June 2018.
Current liabilities decreased by £229 million to £5,321 million, primarily due
to a £527 million decrease in current borrowings following the repayment
of two bonds in the year offset by the reclassification of non-current
borrowing in line with bond maturities. This was offset by a £283 million
increase in trade and other payables as a result of an increase in
programming right payables and the timing of the year end close.
Non-current liabilities decreased by £380 million to £8,661 million
principally due to £453 million decrease in the Group’s non-current
borrowings following the movement to current borrowings in the year,
offset by a £54 million increase in trade and other payables.
Distributions to shareholders
The Company has remained in an offer period throughout the year.
On 9 February 2018, shareholders received a 10 pence special dividend as
the 21st Century Fox offer had not become effective by 31 December 2017.
Following this, on 23 April 2018, shareholders received an interim dividend
of 13.06 pence per share, representing an increase of 4% on the interim
dividend paid in 2016 and making a total of 23.06 pence per share.
On 25 April 2018, Comcast announced a firm pre-conditional cash offer for
Sky at an offer price of £12.50 per Sky share. Following the year end, on 11
July 2018, 21st Century Fox announced a recommended cash offer for the
shares in the Company which it (or its affiliates) did not already own at an
offer price of £14.00 per Sky share. Subsequently and also on 11 July 2018,
Comcast announced an increased cash offer of £14.75 per Sky share which
the Independent Committee of the Board recommended shareholders
to accept.
The increased Comcast offer and increased 21CF offer both include an
amount in lieu of a final dividend in respect of the financial year ended
30 June 2018, with Comcast and 21CF each reserving the right to reduce their
respective offer prices by some or all of the amount of any dividend (which
is announced, declared, paid or becomes payable to Sky shareholders).
As a result, the Board is not proposing a final dividend at this stage.
As at
1 July 2017
Cash flows
Non cash movements
As at
30 June 2018
Current borrowings
Non–current borrowings
Borrowing–related derivative financial instruments
Gross debt
Cash and cash equivalents
Short–term deposits
Net debt
Foreign
exchange
movements
Fair value
changes and
other
Transfers
£m
974
8,207
(470)
8,711
(2,200)
(300)
6,211
£m
(937)
–
147
(790)
586
300
96
£m
450
(450)
–
–
–
–
–
£m
(47)
(18)
107
42
(8)
–
34
£m
7
15
106
128
–
–
128
£m
447
7,754
(110)
8,091
(1,622)
–
6,469
23
Strategic reportAnnual Report 2018 Principal risks and uncertainties
The Board has overall responsibility for determining the nature and extent
of the principal risks it is willing to take to achieve its strategic objectives, as
well as establishing and maintaining the Group’s systems of internal control
and risk management and reviewing the effectiveness of those systems.
Additional information on the Group’s internal control and risk management
processes is set out in the Corporate Governance Report and in the Audit
Committee Report.
For more on the Corporate Governance Report see:
pages 32-45
The Group has a formal risk management framework embedded within the
business to support the identification and effective management of risk
across the Group. The divisions within the Group are each responsible
for managing and reporting risk in accordance with the Group’s risk
management policy and standards that have been approved by the
Audit Committee.
The risks are then consolidated into a Group risk register which provides
an overview of the Group risk profile.
The Board, through the Audit Committee, conducts a robust assessment of
the Group’s principal risks, including those that would threaten its business
model, future performance, solvency or liquidity, and their mitigation.
The Group risk register is reported to the Audit Committee typically twice
a year.
Detailed controls and any relevant action plans are monitored by the Group
Risk team on an ongoing basis.
There is an ongoing monitoring process which is operated by the Group Risk
team and supported by senior management across the Group, to identify
and report to the Audit Committee on significant changes or new risks.
The outcome of the UK referendum on EU membership continues to cause
uncertainty in both the political and economic environments in which we
operate. Although the large majority of our revenue is from subscriptions,
we are not immune from the impact of any economic uncertainty. We do,
however, believe that our business model means that we are comparatively
well placed to manage the consequences of the result and of its effect on
the economic environment. Our operations are conducted mainly on a
territorial basis and our business involves limited movement of goods and
services between the UK and the rest of the EU and, to the extent that
it does, we can adapt our business processes as necessary. Like all
companies, we will need to monitor and manage the practical implications
as they occur. Where appropriate we have also outlined in the table below
the impact of the result on our principal risks and uncertainties.
This section describes the current principal risks and uncertainties facing
the Group. In addition to summarising the material risks and uncertainties,
the table below gives examples of how we mitigate those risks.
Description of risk
Market and competition:
Mitigation
The Group operates in a highly competitive environment and faces
competition from a broad range of organisations. Technological developments
also have the ability to create new forms of quickly evolving competition.
The Group continues to make significant investments in innovation.
The Group’s product development strategic aim is to be at the forefront
of progressive technology.
The Group regularly reviews its pricing and packaging structures to ensure
that its product proposition is appropriately placed within the market.
The Group works closely with its marketing partners to ensure that the value
of its offering is understood and communicated effectively to its customers.
The Group makes significant investment in the origination of content as well
as in acquisition from across the world.
The Group also works to develop and maintain the brand value associated
with its individual channels.
The Group manages these risks through active engagement in the regulatory
processes that affect the Group’s business.
The Group actively seeks to identify and meet its regulatory obligations
and to respond to emerging requirements. This includes, for example:
• Broadcasting – compliance controls and processes are in place in the Group’s
content services. Interaction with the relevant regulatory authorities is
co-ordinated between the relevant local Compliance, Regulatory and Legal
departments;
• Technical services – with respect to the provision of certain technical
services in the UK and Germany, processes are in place to monitor third-
party broadcaster access to the relevant broadcast platforms and to ensure
that this is provided on fair, reasonable and non-discriminatory terms;
A failure to develop the Group’s product proposition in line with changing
market dynamics and expectations could erode the Group’s competitive
position.
Great content is central to Sky’s product proposition and increased
competition could impact the Group’s ability to acquire content that our
customers want on commercially attractive terms.
Economic conditions have been challenging in recent years across the
territories in which the Group operates and the outcome of the UK
referendum has caused further economic uncertainty. A significant economic
decline in any of those territories could impact the Group’s ability to continue
to attract and retain customers in that territory.
Regulatory breach and change:
The Group’s ability to operate or compete effectively could be adversely
affected by the outcome of investigations or by the introduction of new laws,
policies or regulations, changes in the interpretation or application of existing
laws, policies and regulations, or failure to obtain required regulatory
approvals or licences. Please see page 28 of the ‘Regulatory matters’ section
for further details.
The Group is subject to regulation primarily under Austrian, German, Irish,
Italian, UK and European Union legislation.
The regimes which apply to the Group’s business include, but are not limited to:
• Broadcasting – as a provider of audio visual media services, the Group is
subject to Austrian, German, Italian and UK licensing regimes under the
applicable broadcasting and communications legislation. These obligations
include requirements to comply with relevant codes and directions issued
by the relevant regulatory authorities, including for example, in the UK,
Ofcom’s Broadcasting Code, Code on the Scheduling of Television
Advertising and Cross-Promotion Code;
• Technical services – as a provider of certain technical services in the UK
and Germany, Sky UK and Sky Deutschland are subject to regulation in
their respective countries; and
24
Sky plc Description of risk
Mitigation
• Telecommunications – Sky UK is subject to the General Conditions of
• Telecommunications – compliance controls and processes are in place
Entitlement adopted under the Communications Act 2003 (UK) and the
Conditions for the provision of Electronic Communications Networks and
Services under the Communications Regulation Act 2002 (Ireland), which
impose detailed requirements on providers of communications networks
and services.
The Group is also subject to generally applicable legislation including, but not
limited to, competition (antitrust), anti-bribery, consumer protection, data
protection and taxation.
The Group is currently, and may be in the future, subject to proceedings, and/
or investigation and enquiries from regulatory and antitrust authorities.
The telecommunications and media regulatory framework applying to the
Group in the UK and the EU may be subject to greater uncertainty in the event
that the UK leaves the EU. Potential changes to the regulatory framework
could include divergence in the long term between the UK and EU regulation
of telecommunications and media, and changes to certain mutual recognition
arrangements for media and broadcasting. Sky does not currently foresee
any changes as a result of a UK exit that would have a material impact on
its business.
Please see page 28 of the ‘Regulatory matters’ section for further details.
Customer service:
A significant part of the Group’s business is based on a subscription model
and its future success relies on building long-term relationships with its
customers. A failure to meet its customers’ expectations with regard to
service could negatively impact the Group’s brand and competitive position.
in the UK and Ireland, overseen by the Customer Compliance Committee,
to monitor compliance and performance against the General Conditions
of Entitlement and the Conditions for the Provision of Electronic
Communications Networks and Services.
The Group maintains appropriate oversight and reporting, supported by
training, to provide assurance that it is compliant with regulatory requirements.
The Group will monitor carefully future developments that arise out of the
result of the UK referendum and will engage in any relevant regulatory
processes.
The Group strives consistently to exceed its customers’ expectations, to put
its customers first, to understand what they want and to be responsive to
what they say.
The Group makes significant investments in order to deliver continuous
development and improvement to its customer service capabilities, including
investment in its contact centres across the UK and Ireland, insourcing
of service centres in Germany and implementing ongoing training and
development plans.
The Group tracks its customer service performance, benchmarks its customer
service experience and strives to be best in class.
Technology and business interruption:
The products and services that the Group provides to its customers are
reliant on complex technical infrastructure.
A failure in the operation of the Group’s key systems or infrastructure, such
as the broadcast platform, customer management systems, OTT platforms or
the telecommunications and mobile networks on which the Group relies, could
cause a failure of service to our customers and negatively impact our brand.
The Group makes significant investment in technology infrastructure to
ensure that it continues to support the growth of the business and has a
robust selection and monitoring process of third-party providers. The Group
is committed to achieve best in class business continuity standards and
makes significant investments in the resilience and robustness of its
business infrastructure.
Suppliers:
The Group relies on a number of third parties and outsourced suppliers
operating across the globe to support its business.
A significant failure of a supplier or a discontinuation of supply could
adversely affect the Group’s ability to deliver operationally.
The Group also organises regular scenario-based group-wide business
continuity exercises to ensure ongoing readiness of key staff, systems
and sites.
The Group continues to invest in its supply chain infrastructure to support
its business plan commitments. A robust supplier selection process is in
place with appropriate ongoing management and monitoring of key partners
and suppliers.
The Group performs regular audits of key suppliers and of their installations
and, wherever possible, has dual supply capability.
25
Strategic reportAnnual Report 2018 Principal risks and uncertainties continued
Description of risk
Financial:
Mitigation
The effective management of its financial exposures is central to preserving
the Group’s profitability.
The Group is exposed to financial market risks and may be impacted
negatively by fluctuations in foreign exchange and interest rates, which
create volatility in the Group’s results to the extent that they are not
effectively hedged.
Any increase in the financial leverage of the Group may limit the Group’s
financial flexibility.
The Group may also be affected adversely by liquidity and counterparty risks.
Security:
The Group must protect its customer and corporate data and the safety of its
people and infrastructure as well as needing to have in place fraud prevention
and detection measures.
The Group is responsible to third-party intellectual property owners for
the security of the content that it distributes on various platforms
(Sky’s own and third-party platforms).
A significant breach of security could impact the Group’s ability to operate
and deliver against its business objectives.
26
The Group’s finance teams are embedded within the business to provide
support to management and to ensure accurate financial reporting and
tracking of our business performance. Reporting on financial performance
is provided on a monthly basis to senior management and the Board.
The Group continually invests in the improvement of its systems and processes
in order to ensure sound financial management and reporting. The Group has a
formal Treasury Policy which is reviewed and approved by the Audit Committee
on an annual basis. In addition, the Group COO and CFO monitors the Treasury
Policy on an ongoing basis to ensure its continuing appropriateness. The
Treasury Policy covers all areas of treasury risk including foreign exchange,
interest rate, counterparty and liquidity.
The Group manages treasury risk by minimising risk to capital and uses
appropriate hedging instruments and strategies to provide protection
against adverse foreign exchange and interest rate movements.
Trading transactional currency risk is hedged up to five years in advance.
Interest rate risk protection is in place using interest rate swaps and an
appropriate currency mix of debt is maintained using cross-currency swaps.
Cash investment is made in line with the Treasury Policy which sets limits
on deposits based on counterparty credit ratings. No more than 10% of
the Group’s cash deposits are held with a single bank counterparty, with the
exception of overnight deposits which are invested in a spread of AAAf-rated
liquidity funds.
The Group maintains headroom within our banking covenants to allow for
unforeseen adverse impacts on our leverage ratio as a result of either
economic decline or extreme currency movements.
The Group maintains strong liquidity as part of its core strategy, with
high cash balances and access to £1.5 billion under fully undrawn
revolving credit facilities.
The Group manages its tax risk by ensuring that risks are identified and
understood at an early stage and that effective compliance and reporting
processes are in place.
The Group continues to maintain an open and proactive relationship with
all relevant tax authorities, including HM Revenue & Customs. The Group
aims to deal with taxation issues, wherever possible, as they arise in order
to avoid unnecessary disputes.
The Group ensures security-by-design, built in from the ground up, in its
products, services and operation, making significant investment in leading
technology, systems and infrastructure. Security protection and assurance
is integrated into business processes, from research and development,
to supply chain, sales and marketing, delivery, corporate operations and
technical services.
The Group works closely with law enforcement agencies and policy makers in
order to protect its assets. and is compliant with applicable laws, regulations,
standards of relevant countries and regions, third-party contractual obligations,
and by reference to industry best practices.
As part of security protection and assurance, the Group takes measures
including physical and logical access controls to data and property, technologies
to protect data, services and infrastructure, third-party security assessments
and the monitoring of key partners to manage security risks.
The Group ensures that its employees, partners and suppliers comply with
security policies and requirements, and receive appropriate training so that
security, in particular cyber security, is deeply rooted throughout the Sky Group.
The Group takes a proactive approach to threat management and readiness
in order to minimise risk and has a dedicated cyber security team which
includes security analysts, threat intelligence specialists and senior security
engineers. They engage in intelligence monitoring and detection to hunt for
security threats.
The Group actively recruits industry leading security professionals with industry
recognised certifications and professional training.
Sky plc Description of risk
Projects:
Mitigation
The Group invests in, and delivers, significant capital expenditure projects
in order to continually drive the business forward.
The failure to deliver key projects effectively and efficiently could result
in significantly increased project costs and impede our ability to execute
our strategic plans.
Intellectual property protection:
The Group, in common with other service providers, relies on intellectual
property and other proprietary rights, including in respect of programming
content, which may not be adequately protected under current laws or which
may be subject to unauthorised use.
A common project management methodology is used to enable the Group
to manage, monitor and control its major capital expenditure projects and
strategic programmes. This includes detailed reporting and regular reviews by
senior management as well as cross-functional executive steering groups for
major projects.
Third-party partners will, where appropriate, be engaged to provide support
and expertise in our large strategic programmes, complex initiatives and for
emerging technologies.
We maintain an ongoing programme to support appropriate protections of our
intellectual property and other rights. This involves both unilateral action and
close co-operation with rights licensors and other bodies. This includes, for
example, the use of automated online monitoring tools, the implementation of
on-screen imprinting of content and steps in support of the Premier League’s
action to require UK ISPs to block illegal streams of live PL matches together
with an active programme to protect our intellectual property rights, including
registering patents for our products where applicable.
People:
People at Sky are critical to the Group’s ability to meet the needs of its
customers and achieve its goals as a business. Failure to attract or retain
suitable employees across the business could limit the Group’s ability to
deliver its business plan commitments.
Making Sky a great place to work is central to the Group’s strategy. The Group
champions diversity and develops talent through a number of activities,
including the Graduate programme, Development Studio, an apprenticeship
scheme and a leadership programme.
The Group invests in the working environment to make Sky an even more
appealing place to work. The Group has well established channels and
procedures to recruit and retain its employees, and to ensure that an adequate
number of suitable employees work within its customer service teams and
across all its operations.
Further details on our people are set out in the Employees section of the
Directors’ report on page 61.
Viability statement
Going concern
In accordance with provision C.2.2 of the UK Corporate Governance Code
2016, the Directors have assessed the viability of the Group over the three
years to 30 June 2021. The assessment has taken account of the current
position of the Group and the potential impact of the principal risks
detailed on pages 24 to 27 of the Annual Report.
The Directors believe that an assessment period of three years is
appropriate based on management’s reasonable expectations of the
position and performance of the Company over this period, taking account
of its strategic plans. The Directors’ assessment included a review of the
financial impact of the most severe principal risks that could threaten the
viability of the Company. The financial impact was tested taking account
of currency downside risk and the likely effectiveness of the potential
mitigations that management reasonably believes would be available to the
Company over this period, enabling the net financial effect to be calculated.
The Audit Committee reviewed and discussed the process undertaken
by management.
Based on the results of the assessment, the Directors confirm that they
have a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the three-year period
to 30 June 2021.
In assessing the prospects of the Company, the Directors noted that such
assessment is subject to a degree of uncertainty that can be expected to
increase looking out over time and, accordingly, that future outcomes
cannot be guaranteed or predicted with certainty.
The Group’s business activities, together with the factors likely to affect its
future development, performance and position, are set out in the Strategic
report on pages 2 to 29. The financial position of the Group, its cash flows
and liquidity position are described in the Financial review on pages 22 to
23. In addition, notes 1 to 31 to the consolidated financial statements
include details of the Group’s treasury activities, long-term funding
arrangements, financial instruments and hedging activities and exposure
to financial risk.
As set out above, the Group has sufficient financial resources which,
together with internally generated cash flows, will continue to provide
sufficient sources of liquidity to fund its current operations, including its
contractual and commercial commitments as set out in note 26 on page 121,
its approved capital expenditure and any proposed dividends, and the
Group is well placed to manage its business risks successfully, despite the
current economic outlook.
After making enquiries, the Directors have formed the judgement, at the
time of approving the consolidated financial statements, that there is a
reasonable expectation that the Group has adequate resources to
continue in operational existence for the foreseeable future. For this
reason, the Directors continue to adopt the going concern basis in
preparing the consolidated financial statements.
27
Strategic reportAnnual Report 2018 Regulatory matters
Below is an overview of the ongoing investigations and
reviews of regulatory and competition matters involving
the Group.
annulment of the decision. On 23 December 2016, the Italian Administrative
Court (TAR Lazio), upheld Sky Italia’s appeal and annulled the ICA decision
in its entirety. On 23 March 2017 the ICA filed an appeal against the TAR
decision before the Consiglio di Stato. The date of the hearing before the
Consiglio di Stato has not been fixed yet.
European Commission investigation
21st Century Fox’s offer for Sky
On 13 January 2014, the European Commission (the ‘EC’) opened a formal
antitrust investigation into cross-border provision of pay TV services in the
European Union. The investigation was opened into certain provisions
relating to territorial protection in licence agreements between major
US film studios (Twentieth Century Fox, Warner Bros., Sony Pictures, NBC
Universal, Paramount and Disney) and key European pay TV broadcasters
(Sky UK, Canal Plus, Sky ltalia, Sky Deutschland and DTS, operating under
the Canal Plus brand in Spain). On 23 July 2015, the EC adopted a Statement
of Objections, setting out its preliminary finding that there has been an
infringement of EU Competition law involving Sky UK and on 12 January 2018
the EC sent a Letter of Facts setting out additional supporting evidence in
relation to that preliminary finding. Sky UK and the Studios have responded
to the EC’s case, both in written responses (in particular October 2015 and
March 2018) and at an oral hearing (January 2016). In addition, Paramount
has proposed commitments which the EC accepted in July 2016. The EC has
not yet reached its final views and the Group is not yet able to determine
the outcome of the investigation or its financial impact. However, should
the outcome be adverse to Sky UK, this may have a significant effect on
the financial position or profitability of the Group.
Ofcom investigation into Sky’s compliance with rules
about cancellation and termination arrangements
On 6 August 2015, Ofcom opened an investigation on whether there are
reasonable grounds for believing that Sky has failed to comply with its
obligations under the Ofcom General Conditions of Entitlement which
require communication providers to ensure that their conditions or
procedures for contract termination do not act as a disincentive for
end-users changing their communication providers. On 7 August 2017,
Ofcom closed the investigation deciding to take no further enforcement
action, following consideration of Sky’s representations.
Competition law investigation into 2014 Serie A auction
On 19 April 2016, the Italian Competition Authority (the ‘ICA’) made its final
decision in relation to the award of Serie A TV Broadcasting Rights for the
2015-18 seasons. According to the ICA, Lega Nazionale Professionisti Serie
A, its advisor Infront Italy S.r.l., and TV broadcasters Sky Italia, Reti Televisive
Italiane S.p.A. and its subsidiary Mediaset Premium S.p.A. entered into
an anticompetitive agreement in breach of Art. 101 of the Treaty on the
Functioning of the European Union to change the award of TV broadcasting
rights for the 2015-18 seasons Serie A matches. With respect to Sky Italia,
the ICA concluded that it had played a marginal and defensive role in the
infringement in order to obtain the award of at least one of the two
packages that should have been assigned to Sky Italia based on the
tendered offers. Moreover, Sky Italia extensively co-operated with the
ICA during the proceedings. Accordingly, the ICA imposed a fine equal to
€4 million on Sky. On 18 June 2016, Sky Italia filed an appeal seeking the
When announced, the 21st Century Fox Offer (see further details on page
34) was subject to the satisfaction or waiver of certain pre-conditions,
principally being regulatory clearances.
On 16 March 2017, the Secretary of State for Digital, Culture, Media and
Sport (the ‘Secretary of State’ and ‘DCMS’ respectively) intervened on
media plurality and broadcasting standards grounds. On 14 September
2017, following reports from Ofcom and the Competition and Markets
Authority (the ‘CMA’), the Secretary of State referred the 21st Century Fox
Offer for an in-depth Phase II review on both grounds.
On 1 May 2018, the CMA provided its final report to the Secretary of State,
concluding that the transaction may be expected to operate against the
public interest on media plurality grounds, but that divestment of Sky News
to Disney (or another suitable purchaser), as proposed by Fox, would be an
effective and proportionate remedy to address this concern. The CMA
concluded that the transaction may not be expected to operate against
the public interest on broadcasting standards grounds.
On 5 June 2018, the Secretary of State made a statement to Parliament
explaining that he agreed with the CMA’s findings on public interest
grounds and with its finding that undertakings to divest Sky News to
Disney or to an alternative suitable buyer could potentially remedy the
public interest concerns identified, subject to further discussion with DCMS
officials in order to reach agreement on an acceptable form of the remedy.
On 19 June 2018, following the successful conclusion of discussions with
DCMS officials, the Secretary of State published updated undertakings
offered by 21st Century Fox along with new undertakings offered by Disney
for the divestment of Sky News to Disney.
On 12 July 2018, following a period of public consultation; the Secretary of
State published final versions of the undertakings offered by 21st Century
Fox and Disney and confirmed his acceptance that they address the
concerns raised by the CMA with respect to media plurality. 21st Century
Fox has now satisfied or waived all regulatory pre-conditions to the 21st
Century Fox Offer.
Comcast’s offer for Sky
When announced, the Comcast Offer (see further details on page 34) was
subject to the satisfaction or waiver of certain pre-conditions, principally
being UK and EU regulatory clearances.
On 5 June 2018, the Secretary of State confirmed that the Comcast Offer
does not raise public interest concerns, and he would not intervene on
public interest grounds. On 15 June 2018, the European Commission
unconditionally cleared the Comcast Offer. The Comcast Offer is
conditional on the receipt of various other regulatory clearances,
the main outstanding one being Irish media merger clearance.
28
Sky plc Ofcom’s fit and proper decision
On 29 June 2017, under its duty under the Broadcasting Acts to be satisfied
that broadcast licensees are fit and proper on an ongoing basis, Ofcom
published its decision that Sky would remain a fit and proper holder of UK
broadcast licences following the completion of the 21st Century Fox Offer.
On 29 September 2017, the Avaaz Foundation issued judicial review
proceedings of Ofcom’s fit and proper decision, and on 22 January 2018,
was granted permission by the High Court to bring its claim. On 19 and
20 June 2018, the main hearing took place and judgment is now awaited.
Forward-looking statements
This document contains certain forward-looking statements with respect
to our financial condition, results of operations and business, and our
strategy, plans and objectives.
These statements include, without limitation, those that express forecast,
expectations and projections, such as forecasts, expectations and
projections with respect to new products and services, the potential for
growth of free-to-air and pay television, fixed-line telephony, broadband
and bandwidth requirements, advertising growth, DTH, DTT and OTT
customer growth, On Demand, NOW TV, Sky Go, Sky Go Extra, Sky+HD,
Sky Q, Sky Store, Sky Online, IPTV, Sky Mobile, Sky Ticket, Multiscreen and
other services, churn, revenue, profitability and margin growth, cash flow
generation, programming costs, subscriber management and supply chain
costs, administration costs and other costs, marketing expenditure,
capital expenditure programmes and proposals for returning capital
to shareholders.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, these statements (and all
other forward-looking statements contained in this document) are not
guarantees of future performance and are subject to risks, uncertainties
and other factors, some of which are beyond our control, are difficult to
predict and could cause actual results to differ materially from those
expressed or implied or forecast in the forward-looking statements.
These factors include, but are not limited to, those risks that are highlighted
in this document in the section entitled ‘Principal risks and uncertainties’,
and information on the significant risks and uncertainties associated with
our business is described therein.
No part of this document constitutes, or shall be taken to constitute,
an invitation or inducement to invest in the Company or any other entity
and must not be relied upon in any way in connection with any investment
decision. All forward-looking statements in this document are based on
information known to us on the date hereof. Except as required by law,
we undertake no obligation publicly to update or revise any forward-
looking statements, whether as a result of new information, future
events or otherwise.
29
Strategic reportAnnual Report 2018 Governance
Governance
Portrait Artist of the Year, Series 4
Board of Directors
Key:
Audit Committee
Bigger Picture Committee
Remuneration Committee
Corporate Governance
and Nominations Committee
A
BP
R
GN
Committee Chairman
Membership
James Murdoch (45)
Chairman
BP GN
Jeremy Darroch (56)
Group Chief Executive Officer
Andrew Griffith (47)
Group Chief Operating Officer
and Chief Financial Officer
Appointed: James became Chairman in April
2016, having joined the Board in February
2003. James previously served as Chief
Executive Officer from 2003 to 2007 and
as Chairman from 2007 to 2012.
Skills and experience: James brings
significant media sector knowledge and
experience through his role at 21st Century
Fox. He was Chairman and Chief Executive
Officer of Star Group Limited from 2000
to 2003 and held Non-Executive Director
roles at GlaxoSmithKline plc from 2009
to 2012 and Sotheby’s from 2010 to 2012.
External Appointments: James was
appointed as Chief Executive Officer at 21st
Century Fox in June 2015. He also serves as
a member of the Board of News Corporation
and is a Non-Executive Director of Tesla, Inc.,
Yankee Global Enterprises, Vice Media, and
a member of the Board of Trustees of the
Ghetto Film School.
Appointed: Jeremy joined Sky as Chief
Financial Officer and Executive Director
in 2004 and was appointed to his current
role in December 2007.
Skills and experience: Jeremy has extensive
experience in the retailing and fast-moving
consumer goods sectors. Prior to joining Sky,
Jeremy was Group Finance Director of DSG
International plc, formerly Dixons Group plc.
He also spent 12 years at Procter & Gamble
in a variety of roles in the UK and Europe.
Jeremy is a former Non-Executive Director
and Chairman of the Audit Committee of
Marks and Spencer Group plc from 2006
to 2013.
Appointed: Andrew was appointed as a
member of the Board and as Chief Financial
Officer in 2008 and became Group Chief
Operating Officer in 2016. His current role
includes responsibility for Group Strategy,
Corporate & Business Development,
Group Product, Digital and Supply Chain.
Skills and experience: Andrew joined the
Company in 1999 from Rothschild, the
investment banking organisation, where
he provided financial and strategic advice
to corporate clients in the technology, media
and telecommunications sector. He held a
number of senior finance roles prior to his
appointment to the Board.
External Appointments: In February 2014,
Jeremy was appointed Non-Executive
Director of Burberry Group plc, and serves
as Chairman of the Audit Committee,
a member of the Nomination Committee
and Senior Independent Director. He is
Chairman of Business in the Community
and a Business Member of the National
Centre for Universities and Business.
External Appointments: In March 2014,
Andrew was appointed Senior Independent
Non-Executive Director of Just Eat plc and
from April 2017 to April 2018 served as Interim
Chairman. He also Chairs the Audit Committee
and is a member of the Nomination
Committee. In addition he is a Trustee
of Riverside Studios in West London,
a registered charity.
Chase Carey (64)
Non-Executive Director
Tracy Clarke (51)
Independent Non-Executive
Director
R
BP
Martin Gilbert (63)
Independent Deputy Chairman
A GN
Appointed: January 2013
Appointed: June 2012
Appointed: November 2011
Skills and experience: Chase has extensive
knowledge and experience of the international
media and pay TV sectors. He is a former
President and Chief Executive Officer of
DirecTV, where he led the operations and
strategic direction of the DirecTV Group.
Prior to joining DirecTV, Chase was Co-Chief
Operating Officer of News Corporation
(subsequently renamed 21st Century Fox)
and Chairman and Chief Executive Officer
of the Fox Television Group.
External Appointments: Chase is Chairman
and Chief Executive of the Formula 1 Group
and Vice Chairman of 21st Century Fox, Inc.
He was President, Chief Operating Officer
and Deputy Chairman of 21st Century Fox
from 2009 to 2015 and Executive Vice
Chairman from July 2015 to July 2016.
Skills and experience: Tracy brings a wide
range of operational experience having
spent the early part of her career in corporate
banking. She went on to take leadership of
corporate affairs, brand and marketing, media
relations, human resources, and latterly, global
compliance, all with Standard Chartered Bank.
She served as a Non-Executive Director of
Standard Chartered First Bank in Korea from
2005 to 2007 and Non-Executive Director of
Eaga plc from 2007 to 2011, where she chaired
the Remuneration Committee.
External Appointments: Tracy is a member
of the Management Team and a Director
of Standard Chartered. In October 2015 she
was appointed Regional Chief Executive
Americas and Europe and in March 2018
assumed the additional role of CEO, Private
Banking. Tracy is a Board member for England
Netball; a co-opted member on the CBBC
Board; a member of the Institute of Financial
Services; and Fellow of the Chartered Institute
of Personnel and Development.
Skills and experience: Martin has been
involved in the investment management
industry since 1982 and has extensive
investment, finance and executive
leadership experience through his role
as co-founder and Chief Executive Officer
of Aberdeen Asset Management PLC (now
Standard Life Aberdeen plc). He has served
as Chairman of FirstGroup plc, Chaucer PLC
and was Non-Executive Director of Dynmark
International Limited, a mobile messaging
and data applications services provider.
External Appointments: In addition to
his role as Co-Chief Executive Officer of
Standard Life Aberdeen PLC, Martin is
Chairman of the Prudential Regulatory
Authority (PRA) Practitioner Panel. Martin
also serves as a Non-Executive Director
of Glencore plc, from which he has taken
a temporary leave of absence which is
expected to end in October 2018, and
as Senior Governor of the University
of Aberdeen.
32
Sky plc Adine Grate (57)
Independent Non-Executive
Director
A
R
John Nallen (61)
Non-Executive Director
Appointed: July 2013
Appointed: November 2015
Skills and experience: John is a highly
experienced executive with strong media
and finance industry expertise. He previously
served as Senior Executive Vice President
and Deputy Chief Financial Officer of 21st
Century Fox from 2001 to 2013. John joined
News Corporation in 1995 after working at
Arthur Andersen for the previous 16 years.
External Appointments: John is Senior
Executive Vice President and Chief Financial
Officer for 21st Century Fox, a role which
he assumed on 1 July 2013.
Skills and experience: Adine brings a
wealth of executive, finance and investment
management and TMT experience having
operated at the top tiers of Nordic-based
international business for the past two
decades. She was formerly Executive Vice
President and Executive Board Member
of Investor AB, owner of a number of
Nordic-based international companies,
and Chairperson of the NASDAQ OMX
Swedish Listing Committee.
External Appointments: Adine is Vice
Chairperson of AP7, a Swedish pension and
savings assets management company. She is
Director of CKHH Three (Scandinavia), a mobile
telecommunications and broadband operator;
Sampo OY, a leading financial services and
insurance institution; and Swedavia AB,
an airport operator.
Matthieu Pigasse (50)
Independent Non-Executive
Director
Appointed: November 2011
A
GN
Skills and experience: Matthieu brings
significant knowledge of the European
media sector and finance expertise to the
Board. He is CEO of Lazard, France and Vice
Chairman of Lazard (Europe). He is also the
Global Head of Mergers and Acquisitions
and the Global Head for Sovereign Advisory
of Lazard. He has also served in the French
Ministry of Economy and Finance.
External Appointments: In addition
to his role at Lazard, Matthieu has a
number of personal interests in media
and publishing, notably Le Monde and
the Huffington Post (France). He is a
Board member of Group Lucien Barrière
SAS, an operator of luxury hotels and
restaurants, and Derichebourg, a recycling
and maintenance services business.
Andy Sukawaty (63)
Senior Independent Director
GN R
Katrin Wehr-Seiter (48)
Independent Non-Executive Director
Appointed: June 2013
Skills and experience: With over 30 years
of telecommunications media technology
experience Andy brings strong industry
knowledge to the Board. He has led companies
in the mobile phone, Cable TV and satellite
industries in the US and Europe and serves
as Chairman of Inmarsat plc, a global mobile
satellite communications provider.
External Appointments: In addition
to his role as Chairman of Inmarsat plc,
Andy has previously held a number
of senior management positions in the
telecommunications industry including
Chairman of Ziggo N.V., a Dutch cable TV
and communications company. He has also
served as Chief Executive Officer of Sprint PCS
(NYSE) and NTL Ltd and held the roles of
Chairman of Xyratex (Nasdaq) and Telenet,
and Deputy Chairman of 02 plc.
Appointed: October 2016
Skills and experience: Katrin is an
experienced investment management and
finance professional having worked in the
private equity industry for more than 17
years. She brings significant knowledge
of the European media, communications
and technology sector. Prior to joining BIP
Investment Partners in 2012, she served as
a Principal of global investment firm Permira
and Senior Advisor to international private
equity firms and corporations, having
started her career at Siemens. Katrin was also
an independent director of Sky Deutschland
AG from 2010 to 2015, prior to Sky taking full
ownership of the company.
External Appointments: Katrin is Managing
Director of BIP Investment Partners SA and
Managing Director/Partner of BIP Capital
Partners SA. She is a director of SES SA and
serves on the audit and risk committee.
Katrin is also a director of several non-listed
corporations including Mercateo AG.
33
GovernanceAnnual Report 2018 Corporate governance report
Chairman’s overview
On behalf of the Board it gives me great pleasure to introduce this year’s
corporate governance report. I would like to take this opportunity to
provide you with some direct insight into the Board’s view of Corporate
Governance.
As a Board, we are the stewards of the Company. It is our responsibility
to ensure that the Company’s strategy is aligned to the interests of
our investors and takes account of the interests of all the Company’s
stakeholders. As individuals, we believe that effective corporate
governance is based on honesty, integrity and transparency and can
only be fully realised within an environment of open, robust and effective
debate. This is the Board culture we foster at Sky and it is my personal
responsibility as Chairman to ensure that we continue to live this culture
and promote it within our business.
In December 2016, 21st Century Fox – where I am Chief Executive Officer
– approached the Deputy Chairman of Sky with an initial proposal
to acquire the shares in the Company that it does not already
own. Following this approach, specific governance arrangements
were put in place to protect the interests of all shareholders. These
governance arrangements have continued to operate in relation to the
offer by Comcast, and are described further in this report.
The Board has established arrangements to evaluate whether the
information in the Annual Report is fair, balanced and understandable.
Further details of these arrangements can be found on page 42.
As a result the Board considers the Annual Report, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company’s position and
performance, business model and strategy.
During the year we have continued our work in promoting greater and
more effective engagement with our shareholders. The Executive
Directors meet our investors and analysts and discuss a wide range
of topics. As described on page 39, Martin Gilbert and Andy Sukawaty
have engaged with shareholders on issues in relation to the 21st Century
Fox Offer and Comcast Offer and Tracy Clarke, Chair of the Remuneration
Committee, has also engaged on remuneration issues. We will continue to
engage with our shareholders over the course of the coming financial year.
James Murdoch
Chairman
34
Compliance with the UK Corporate Governance Code
The UK Corporate Governance Code (‘Code’) provides the standard for
corporate governance in the UK. The Financial Conduct Authority requires
listed companies to disclose whether they have complied with the
provisions of the Code throughout the financial year. The Code currently
applicable to the Company is the 2016 edition and we are reporting our
compliance with that edition.
The Board considers that the Company has complied with the provisions
and applied the main principles of the Code for the whole of the year ended
30 June 2018. This section of the Annual Report along with the Directors’
remuneration report on pages 46 to 60 and the Directors’ report and other
statutory disclosures on pages 61 to 67 provide details of how the Company
has applied the main principles of corporate governance, in particular those
laid down in the Code. The Code can be accessed at www.frc.org.uk
Offers for Sky
Independent Committee
Following the approach by 21st Century Fox on 7 December 2016 with an
initial proposal to acquire the fully diluted share capital of the Company
that it does not already own, the Board appointed a committee comprising
the Independent Non-Executive Directors and Executive Directors
(the ‘Independent Committee’), all of whom the Board considers to be
free from conflicts of interest with regard to the offer. The Independent
Committee is chaired by Martin Gilbert and has the authority to exercise
all powers of the Board in relation to both the 21st Century Fox Offer and
the Comcast Offer (together, the “Offers”). The Independent Committee,
whose members constitute a majority of the Board, are exercising their
rights and powers to manage the governance of the Board during this
period in the best interests of all shareholders. This includes taking such
steps as they consider appropriate to regulate the attendance of Directors
connected with 21st Century Fox at meetings of the Board and information
they receive relating to the Company that is deemed relevant to the
21st Century Fox Offer or Comcast Offer. This ensures that all matters
relevant to the Offers (including matters relating to the future prospects
or strategy of the Company) are dealt with by the Independent Committee.
These arrangements will continue for the duration of the Offers or until
the successful completion of any transaction (the ‘Offer Period’). The
Independent Committee met on 15 occasions between 1 July 2017 and
30 June 2018.
Developments in relation to the Offers
On 15 December 2016, 21st Century Fox announced that it had reached
agreement with the Independent Committee on the terms of a
recommended pre-conditional cash offer of £10.75 per share for the
fully diluted share capital of the Company which it did not already own
(the ‘Original 21st Century Fox Offer’).
On 27 February 2018, Comcast Corporation announced a possible offer
for the Company, and on 25 April 2018 announced a firm pre-conditional
cash offer for the Company at an offer price of £12.50 per share for the
entire issued and to be issued share capital of the Company (the ‘Original
Comcast Offer’). As a result of the Original Comcast Offer, the Independent
Committee withdrew its recommendation of the Original 21st Century Fox
Offer. On 15 June 2018, the final regulatory pre-condition to the Original
Comcast Offer was satisfied.
On 11 July 2018, 21st Century Fox and the Independent Committee
announced that they had reached agreement on an increased pre-
conditional cash offer for the fully diluted share capital of the Company
which 21st Century Fox does not already own of £14.00 per share, which
included an amount in lieu of a final dividend in respect of the financial year
ended 30 June 2018 (the ‘21st Century Fox Offer’). The Independent
Committee recommended the 21st Century Fox Offer given it represented
a substantial increase in value relative to the Original Comcast Offer
and the Original 21st Century Fox Offer.
Sky plc Subsequently and also on 11 July 2018, Comcast Corporation and the
Independent Committee announced an increased cash offer of £14.75 per
share which included an amount in lieu of a final dividend in respect of the
financial year ended 30 June 2018 (the ‘Comcast Offer’). The Comcast Offer
represents a significant increase in value relative to the Original Comcast
Offer and the 21st Century Fox Offer and, as such, the Independent
Committee withdrew its recommendation for the 21st Century Fox Offer
and recommended the Comcast Offer.
On 12 July 2018 21st Century Fox announced that all regulatory pre-
conditions to the 21st Century Fox Offer had been satisfied or waived.
On 13 July 2018, the offer document for the Comcast Offer was published and
posted to Sky shareholders (and other persons with information rights).
Chain principle
On 12 April 2018, further to the proposed acquisition of 21st Century Fox by
Disney, the Takeover Panel Executive ruled that Disney must make a “chain
principle” mandatory cash offer for Sky at £10.75 per Sky share following the
closing of the Disney acquisition of 21st Century Fox if, at that time, 21st
Century Fox had not acquired 100% of Sky shares or Comcast Corporation
or another third party had not acquired a majority of the Sky shares.
On 13 July 2018 and subsequent to the increased offer by Disney for
21st Century Fox, the Takeover Panel Executive announced that the price
payable pursuant to any required chain principle bid would be £14.00 in
cash. The Hearings Committee of the Panel will be hearing an appeal of
that determination on 27 July 2018.
Leadership
Role of the Board
The Board has collective responsibility for the management, direction and
performance of the Company and provides leadership within a framework
of prudent and effective controls which enables risk to be appropriately
assessed and managed. The Board sets the strategic direction, ensuring
that the necessary resources are in place for the Company to meet its
objectives and deliver sustainable performance.
The Board takes a long-term outlook and sees itself as responsible to
a wide range of stakeholders, whilst pursuing its objectives in a manner
consistent with its statutory duties, for the benefit of the Company’s
members as a whole.
The Directors of the Board are selected on the criteria of proven skill
and ability in their particular field of endeavour and a diversity of outlook
and experience which directly benefits the operation of the Board as the
custodian of the business. A full biography of each Director is provided
on pages 32 and 33.
Roles and responsibilities
The roles of the Chairman and Group Chief Executive Officer are separate
and have been so since the Company’s shares were admitted to listing
in 1994. The roles and expectations of each Director are clearly defined
and recorded within their letters of appointment or service contracts.
The roles and responsibilities of the Board members are explained below.
Board and Committee framework
Board
Audit
Committee
Remuneration
Committee
Bigger Picture
Committee
Corporate
Governance
& Nominations
Committee
The Group Chief Executive Officer (‘Group CEO’)
Jeremy Darroch is responsible and accountable to the Board for the
management and operation of the Company, advancing long-term
shareholder value, supported by the management team. He is also
involved in the management of the social and environmental
responsibilities of the Company.
Deputy Chairman
Martin Gilbert deputises for the Chairman as appropriate, provides a
sounding board to Non-Executive Directors and is an additional point
of contact for shareholders. The Deputy Chairman in particular plays a
key role in situations where the Chairman has a conflict of interest, such
as the current 21st Century Fox Offer and Comcast Offer. During the Offer
Period he is acting as Chairman of the Independent Committee and has
held a series of meetings with the Company’s largest shareholders.
Senior Independent Non-Executive Director
Andy Sukawaty is responsible for providing support to the Chairman and
provides an independent point of contact for shareholders, particularly
if they have concerns which have not been resolved through the normal
channels or for which such contact is inappropriate. He also plays a key
role in ensuring the Board has a balanced understanding of the issues
and concerns of major shareholders.
Non-Executive Directors
Chase Carey, Tracy Clarke, Martin Gilbert, Adine Grate, James Murdoch,
John Nallen, Matthieu Pigasse, Andy Sukawaty and Katrin Wehr-Seiter,
collectively, are responsible for constructively challenging the Executive
Directors and overseeing the delivery of the Company’s strategy within
the risk and control framework.
Company Secretary
Chris Taylor is responsible for the following in respect of effective Board
operation:
The Chairman
James Murdoch is responsible for leadership of the Board, ensuring its
effectiveness on all aspects of its role and setting its agenda. The Chairman
is responsible for creating an environment for open, robust and effective
debate. This includes ensuring, via the Company Secretary, that the
Directors receive accurate, timely and clear information. The significant
commitments of the Chairman are detailed in his biography on page 32.
• To ensure good information flows within the Board and its Committees,
between senior management and Non-Executive Directors;
• To facilitate Director induction and assist with professional development;
• To advise the Board through the Chairman of all corporate governance
obligations and developments in best practice; and
• To be responsible for communicating with shareholders as appropriate.
All Directors have access to the advice and services of the Company
Secretary who advises on corporate governance matters, Board procedures
and other relevant rules and regulations. In addition, Directors have the
right to seek independent professional advice at the Company’s expense.
35
GovernanceAnnual Report 2018 Corporate governance report continued
Environment supportive of challenge
The effective operation of the Board is dependent on the inherent
checks and balances within the various Board roles. As highly qualified
and successful individuals in their respective fields of endeavour, all
Non-Executive Directors influence, debate and contribute to decisions
relating to the strategy of the Company, its performance and its impact
on stakeholders. The Non-Executive Directors are evaluated and judged
on the quality and content of their contributions to Board debate and
are expected to offer alternative viewpoints and challenge perceptions
and decisions as appropriate.
Board agenda
In addition to its reserved and standing matters, during the year
the Board also considered and received a number of updates and
presentations, giving Directors a further opportunity to explore
and analyse topics such as:
• The Group’s operations and five-year plans;
• The general market and economic outlook;
• The competitive landscape, opportunities and market trends;
• Growth of existing business activities; and
• Existing and new products, services and technological developments.
The Remuneration Committee is responsible for setting the remuneration
policy for the Board and ensures that no Director is involved in decisions
affecting their own remuneration. The Directors’ remuneration report
can be found on pages 46 to 60.
The Corporate Governance & Nominations Committee is responsible
for oversight of the structure, size, composition and succession planning
of the Board and its Committees and overall compliance with corporate
governance standards. The report of the Corporate Governance
& Nominations Committee can be found on page 44.
The Bigger Picture Committee has responsibility for oversight of the
social, environmental and ethical impacts of the Company’s activities.
The report of the Bigger Picture Committee can be found on page 45.
The Executive Committee is responsible for approving routine business
such as the approval of share option exercises and specific business
delegated by the Board.
The minutes of Committee meetings are made available to all Board
Directors on a timely basis. At each Board meeting the Chairman of each
Committee provides the Board with a brief update of the work currently
being carried out by the Committee they chair. Other sub-committees
and steering groups provide additional resource and support to the
Board Committees or are formed for specific tasks.
The members of the Independent Committee have taken steps to ensure
that 21st Century Fox affiliated Directors do not receive information relating
to the Company that is deemed relevant to the Offers during the Offer
Period. As described on page 34, the Independent Committee has the
authority to exercise all powers of the Board in relation to the Offers.
A Committee of senior management generally meets on a weekly basis
to allow prompt discussion of relevant business issues. The Committee
comprises the Group CEO, Group Chief Operating Officer and Chief
Financial Officer (‘Group COO & CFO’) and other senior executives
from within the Group.
To maintain an appropriate level of control over the day-to-day affairs
of the Company, the Board has identified certain matters that only
it can approve. These matters are contained within the Company’s
‘Schedule of Matters Reserved to the Board’ which can be found at
www.skygroup.sky/corporate
Board delegation
The Board has delegated specific responsibilities to Board committees,
notably the Audit, Remuneration, Corporate Governance & Nominations,
Bigger Picture and Executive Committees. Each Committee’s terms
of reference can be found on the Company’s corporate website
www.skygroup.sky/corporate
The Audit Committee has responsibility for oversight of corporate
reporting, risk management and the Company’s relationship with its
auditor. The Audit Committee conducts a robust assessment of the Group’s
principal risks and their mitigation on behalf of the Board and reviews the
effectiveness of internal controls. Significant risks to the business are
kept under review and appropriate material controls are sanctioned and
employed as appropriate. The Company’s principal risks and examples
of how we mitigate those risks are detailed on pages 24 to 27. The Audit
Committee also oversees the review of whether the Annual Report is fair,
balanced and understandable. For further details, the Audit Committee
Report can be found on pages 40 to 43.
36
Sky plc Board and Committee attendance
Attendance at Board and Committee meetings during the year is set out in the table below. The table shows the number of meetings each Director was
eligible to attend.
Number of meetings held in year
Executive Directors
Jeremy Darroch, Group CEO
Andrew Griffith, Group COO & CFO
Non-Executive Directors
Chase Carey1
Tracy Clarke1
Martin Gilbert
Adine Grate
James Murdoch
John Nallen
Matthieu Pigasse1
Andy Sukawaty
Katrin Wehr-Seiter
1
Board
5
Audit
6
Remuneration
6
Corporate
Governance &
Nominations
1
Bigger Picture
1
5/5
5/5
3/5
4/5
5/5
5/5
5/5
5/5
4/5
5/5
5/5
6/6
6/6
5/6
6/6
6/6
6/6
1/1
1/1
1/1
1/1
1/1
1/1
Directors are encouraged to attend Board and Committee meetings but in certain circumstances meetings are called at short notice and due to prior business commitments and time
differences Directors may be unable to attend. In these circumstances Directors receive relevant papers and are updated on developments by either the Chairman or Group CEO.
Effectiveness
Board composition and independence
The Board currently comprises 11 Directors, made up of two Executive
Directors and nine Non-Executive Directors. A majority of six of the Board
of Directors are determined to be independent by the Board in accordance
with provision B.1.2 of the Code. Further details are set out in the
biographies of each of the Directors which are set out on pages 32 and 33.
Chase Carey, James Murdoch and John Nallen represent the Company’s
largest shareholder, 21st Century Fox, and as such are not considered to
be independent within the meaning of the Code. Each of these Directors
has extensive media and pay TV experience and makes a significant
contribution to Board discussion.
The Independent Non-Executive Directors bring a wide range of experience
and expertise to the Group’s affairs and carry significant weight in
the Board’s decisions. The Independent Non-Executive Directors are
encouraged to challenge management and to help develop proposals
on strategy. Time is regularly put aside at Board meetings to discuss
the strategic direction of the Company.
Prior to appointment, and on an annual basis, each Board member receives
and completes a questionnaire to determine factors that may affect
independence according to best practice statements contained within
the Code. The responses to the questionnaire assist the Board in
ascertaining whether a Director is independent in character and judgement
and whether there are relationships or circumstances which are likely
to affect, or could appear to affect, the Director’s judgement.
Board composition
Chairman (1)
Executive Directors (2)
Independent Non-Executive Directors (6)
Other Non-Executive Directors (2)
Appointments to the Board, diversity and succession planning
The Corporate Governance & Nominations Committee keeps the Board’s
balance of skills, knowledge, experience and the length of service of
individuals under constant review. In respect of succession planning and
supplementing the skill set of the Board, there is an established procedure
for the appointment of new Directors. In brief, the Committee identifies
the set of skills and experience required and, with the assistance of
external search agencies, selects individuals to take Board positions
on review of their individual merits, regardless of gender, race, religion,
age or disability. Further information on the work of the Committee
during the year can be found on page 44.
37
GovernanceAnnual Report 2018 Corporate governance report continued
Copies of the Executive Directors’ service contracts and letters of
appointment of the Non-Executive Directors may be inspected at
the registered office of the Company during normal business hours
on any weekday (except public holidays) and at the place of the Annual
General Meeting (‘AGM’) for 15 minutes prior to the meeting until the
conclusion of the AGM.
The Board currently comprises eight men and three women (27% female
representation on the Board). As required by company legislation, a table
on page 62 illustrates gender diversity across the Group as well as at
Board level.
Length of time served on the Board
0-5 years 4
5+ years 7
Industry/Background experience
Industry related
International
Finance/investment
Technology/Innovation
Regulatory
Executive
7
9
8
5
5
9
Note: This covers the experience of the Non-Executive Directors who may fall into one or
more of the above categories.
Directors’ reappointment
In accordance with Code provision B.7.1., all continuing Executive and
Non-Executive Directors will retire and are expected to offer themselves
for reappointment at the Company’s 2018 AGM.
External directorships
Any external appointments for the Executive Directors are considered by
the Corporate Governance & Nominations Committee. Executive Directors
are not allowed to take on the Chairmanship of a FTSE 100 company,
but are allowed to take up one external Non-Executive FTSE 100
appointment and retain any payments in respect of such appointments.
Jeremy Darroch was appointed as an Independent Non-Executive
Director of Burberry Group plc on 5 February 2014. Jeremy serves
as Senior Independent Director, Chairman of the Audit Committee,
and a member of the Nomination Committee.
Andrew Griffith was appointed as Senior Independent Non-Executive
Director of Just Eat plc on 12 March 2014 and from April 2017 to April 2018
served as Interim Chairman. He also Chairs the Audit Committee and
is a member of the Remuneration and Nomination Committees.
Details of pay in respect of these appointments can be found in the
Directors’ remuneration report on page 51.
Time commitment
All Non-Executive Directors are advised of the likely time commitments
required on induction and are expected to devote sufficient time
for the effective discharge of their functions. The Company provides
Non-Executive Directors with appropriate support and facilities for
consideration of the Company’s strategy and performance and a
dialogue with the Chairman is strongly encouraged so that any issues
regarding conflicting commitments and time pressures can be
addressed appropriately.
Induction and training
All new Directors receive an induction tailored to their individual
requirements. The induction process involves meeting with all of the
Company’s Executive Directors and Senior Executives. This facilitates
their understanding of the Group and the key drivers of the business
performance. During the year, Directors have received presentations
from a number of areas of the business including Customer Group,
Content, Business Development, Technology and Strategic Planning
Group. The Chairman meets with the Directors throughout the year
to review their developmental needs.
An example of a tailored induction programme is detailed below:
Stage 1
Stage 2
Stage 3
Stage 4
Meetings with
Senior Executives,
Sky News and
Sky Studio visits
Customer
contact
centre visit
Product
demonstrations
Accompanying
a Sky engineer
on customer
visits
In addition to this, various presentations from prior Board meetings will
be made available to the Director in order to improve their understanding
of the Group and the competitive and regulatory landscape in which it
operates. Consideration is given to Committee appointments and, where
relevant, tailored training may be required.
Board evaluation
In line with the Code, an external Board evaluation was carried out by
Alice Perkins of JCA Group in 2016, and an internal Board evaluation was
carried out in 2017 facilitated by Andy Sukawaty, the Senior Independent
Director. The findings of the evaluation were considered by the Corporate
Governance & Nominations Committee and reported to the Board. The
overall conclusion was that individual Board members are satisfied that
the Board and its Committees work well and operate effectively, in an
environment where there is constructive challenge from the Non-Executive
Directors. The Directors were satisfied with the current mix of skills and
experience and the size of the Board. The Directors noted that appropriate
rigour was applied to related party transactions and the 21st Century Fox
Offer was a solid example of the Company’s governance procedures
working well in practice. The allocation of Board and Committee discussion
topics has been reviewed and some topics currently discussed in detail
at committee level will be brought to the whole Board from time to time.
The quality of information presented to the Board was considered to be
of a high standard and distributed on a timely basis. The performance of
each Director is evaluated as part of the evaluation process, based on
self-analysis and input from the other Directors. It is the Board’s intention
to continue to review its performance and that of its Committees and
individual Directors on an annual basis. The next Board evaluation, which
will be externally facilitated, will be undertaken during the next financial
year should the offer process fall away.
38
Sky plc Shareholder engagement
The Company is committed to maintaining and improving dialogue with
shareholders in order to ensure that the objectives of both the Group
and the shareholders are understood. A programme of meetings with
institutional shareholders, fund managers and analysts takes place each
year and the Group CEO and Group COO & CFO have attended meetings
with investors, as appropriate. The Company also makes presentations
to analysts and investors around the time of the half-year and full-year
results announcements; conference calls are held with analysts and
investors following the release of the first quarter and third quarter trading
statements; and presentations are made during the year to many existing
or potential shareholders at investor conferences. The Company holds
meetings with its major shareholders to discuss corporate governance
and remuneration matters from time to time.
During the year Tracy Clarke, Chairman of the Remuneration Committee,
engaged with certain major shareholders to solicit their views on the
Remuneration Policy in advance of any new Remuneration Policy being put
to shareholders. In light of the ongoing 21st Century Fox Offer and Comcast
Offer, the Remuneration Committee has decided not to put a new Policy to
shareholders at the 2018 AGM. Further details are included in the Chairman
of the Remuneration Committee’s letter, which can be found on page 46.
Since the 21st Century Fox Offer and Comcast Offer, Martin Gilbert and
Andy Sukawaty have held a series of meetings with major shareholders to
discuss the background to, and reasons for, the Independent Committee’s
recommendations of each of the Offers.
The AGM
The Board views the AGM as an opportunity to communicate with private
investors and sets aside time at the meeting for shareholders to ask
questions. At the AGM, the Chairman provides a brief summary of the
Company’s activities for the previous year. All resolutions at the 2017
AGM were voted by way of a poll. This follows best practice and allows
the Company to count all votes rather than just those of shareholders
attending the meeting. As recommended by the Code, all resolutions were
voted separately and the final voting results, which included all votes cast
for, against and those withheld, together with all proxies lodged prior
to the meeting, were released to the London Stock Exchange as soon as
practicable after the meeting. The announcement was also made available
on the Company’s corporate website. As in previous years, the proxy form
and the announcement of the voting results made it clear that a ‘vote
withheld’ is not a vote in law and will not be counted in the calculation
of the proportion of the votes for or against the resolution.
Information provided to the Directors
The Company Secretary is responsible for ensuring good information flows
within the Board and its Committees and between senior management
and Non-Executive Directors. For each Board and Committee meeting,
Directors are provided with a tailored Board pack at least one week prior
to the meeting. To improve the delivery and security of Board papers, the
Company has adopted an electronic system allowing the Board to easily
access information, irrespective of geographic location. Directors regularly
receive additional information from the Company between Board meetings,
including a daily press summary and a monthly Group performance update.
Where a Director was unable to attend a meeting, they were provided
with all the papers and information relating to that meeting and were
able to discuss issues arising directly with the Chairman and Group CEO.
Conflicts of interest
Under UK company law, all Directors must seek authorisation before
taking up any position with another company that conflicts, or may
possibly conflict, with the Company’s interests. The Company’s Articles
of Association contain provisions to allow the Directors to authorise
situations of potential conflicts of interest so that a Director is not
in breach of his duty under company law.
All existing external appointments for each Director have been authorised
by the Board and each authorisation is set out in a Conflicts Register.
Directors are required to notify the Board of potential conflicts so that they
can be considered and, if appropriate, authorised by the Board. In addition,
the Corporate Governance & Nominations Committee conducts an annual
review of Directors’ conflicts and reports its findings to the Board.
The Corporate Governance & Nominations Committee reviewed the
Board’s conflicts during the financial year and concluded that conflicts
had been appropriately authorised and that the process for authorisation
is operating effectively. The Corporate Governance & Nominations
Committee and the Board will continue to monitor and review potential
conflicts of interest on a regular basis.
Directors’ and Officers’ insurance and indemnity
The Company recognises that all Directors are equally and collectively
accountable under the law for the proper stewardship of the Company’s
affairs. The Company maintains a Directors’ and Officers’ liability insurance
policy. Qualifying third-party indemnity provisions are in place for the
Directors in respect of liabilities incurred as a result of their office, to
the extent permitted by law. The indemnities applied throughout the
financial year ended 30 June 2018 and through to the date of this report.
Relations with shareholders
Shareholder communications
Presentations and webcasts on the development of the business
are available to all shareholders on the Company’s corporate website.
The Company also uses email alerts and actively promotes downloading
of all reports enhancing speed and equality of shareholder communication.
The Company has taken full advantage of the provisions within the
Companies Act 2006 allowing the website to be used as the primary means
of communication with shareholders where they have not requested hard
copy documentation. The shareholder information section on page 140
contains further details on electronic shareholder communications together
with more general information of interest to shareholders which is also
included on the Company’s corporate website www.skygroup.sky/corporate
39
GovernanceAnnual Report 2018 Corporate governance report continued
Report of the Audit Committee
Chairman’s overview
During the year the Audit Committee has continued to fulfil its key
oversight role on behalf of the Board and has remained focused on this
role despite the ongoing Offers. The Committee’s principal activities have
focused on the financial performance of the Company, internal audit,
external audit, risk management, compliance and governance.
The Committee has also monitored the Company’s approach to risk
management and the independence and effectiveness of the external
auditors, and received a number of presentations from management
relating to data governance, including preparations for GDPR, security,
internal audit, treasury, taxation, Brexit, customer service and health
and safety, as well as regular presentations on business performance.
We have considered the processes underpinning the production and
approval of this year’s Annual Report to enable the Board to confirm that
the Annual Report taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Company’s position and performance, business model and strategy.
A description of how we approached this can be found in this report.
The Committee assessed the viability of the Group over a three-year period,
applying downside sensitivity to our business as usual plans which takes
account of the principal risks identified. Further information on how
the Committee approached this is detailed in this report.
There were six meetings during the year and after each Committee meeting
I provided an oral update to the Board on the key issues discussed during
our meetings. I have also met separately with the external audit partner
and key management on a number of occasions during the year.
Attendance at Committee meetings
John Nallen has a standing invitation to attend meetings. However,
his attendance at these meetings is as an observer and in a non-voting
capacity. The Group COO & CFO, other business and finance executives
and representatives from the external auditor, Deloitte LLP, and the internal
audit department attend meetings at the request of the Committee.
The Company Secretary acts as Secretary to the Committee.
Audit Committee agenda
The focus for the Committee this year has included the following items:
• Review and recommendation to the Board of the interim and full-year
financial statements, including whether the Annual Report is fair,
balanced and understandable
• Review and approval of the first and third quarter trading statements
• Quarterly updates from the Group COO & CFO on business performance
across the Group
• Audit plans and findings of external and internal audits
• The review and recommendation to the Board of the 2017/18
interim dividend
• Liquidity, going concern and viability statement review
• Annual reporting due diligence procedures and corporate governance
updates
• Assessment of the effectiveness of the external audit process and
scope of audit
• Auditor independence and the policy on the provision of non-audit
services by the external auditor
• Quarterly review of non-audit services and fees
• Quarterly reports from the treasury function on the funding, liquidity,
going concern and operational capabilities of the Group and compliance
with treasury policies
• Quarterly updates on planned internal audit work and on the status
of Senior Accounting Officer (‘SAO’) certification work to ensure
SAO compliance
• Quarterly reports of all transactions with a related party during
the period
You can find additional information on how we have carried out our role
and responsibilities within the remainder of this report.
• Quarterly reports on Security matters, including anti-piracy activities,
whistleblowing and anti-bribery and corruption matters
Adine Grate
Committee Chairman
Committee composition
Adine Grate (Chairman)
Martin Gilbert
Matthieu Pigasse
The Committee members have considerable financial and business
experience and the Board has determined that the membership
as a whole has sufficient recent and relevant sector and financial
experience to discharge its responsibilities and that at least
one member has competence in accounting or auditing in line
with the Code. The Committee comprises three Independent
Non-Executive Directors, in compliance with the Code and DTR 7.
• Review of transactions (with the exception of the 21st Century Fox Offer)
which fall within the Listing Rule 11.1.5R definition of a Related Party
Transaction and all transactions with a related party in excess of
£10 million and, where required, recommendation to the Board
• Review and oversight of the Group risk register, risk methodology and risk
management systems and processes
• Updates on the Group’s data protection programme, including
preparations for and implementation of the General Data Protection
Regulations (‘GDPR’)
• Deep dive update on the Customer Service Group function
• Review of Sky Mobile handset financing arrangements
• Monitoring and reviewing the effectiveness of the Group’s internal audit
function and controls
• Taxation, health and safety and Brexit matters.
The Committee’s terms of reference are available on the Company’s
corporate website.
40
Sky plc Critical accounting policies and judgements
When considering the annual financial statements, the Committee
reviewed the significant accounting issues and the Group’s critical
accounting policies as set out on pages 88 to 90 with particular
focus on the following:
Retail subscription revenue:
The majority of the Group’s revenues derive from retail subscription
packages, including hardware and installation services, supplied to
customers. The Group applies judgement in determining the accounting
allocation of payments received from customers to different elements of
the bundled package, taking into consideration the timing and relative
value attributed to each element. During the year, the Committee received
a quarterly performance report from the Group COO & CFO that included a
review of revenues recognised in the period and also considered the future
impact of the new accounting standard for revenue (IFRS 15) on the Group’s
reporting and accounting policies.
The Committee considered management’s policy and considered the views
of the external auditor and is satisfied that the policies have been applied
consistently and appropriately.
General entertainment programming inventory:
The Committee reviewed the policy for the recognition of content costs and
challenged management on the appropriateness of the policy, and took
into account the views of the external auditor that the policy is appropriate
and has been applied consistently. The method for recognising general
entertainment programming expense requires estimation and judgement
to ensure that the expense profile is consistent with the expected value of
the content to the Group.
The Committee is satisfied that the policies have been applied consistently,
are appropriate and are aligned to industry practice.
Capitalisation of intangible assets and property, plant and equipment:
The Committee considered the Group’s policies and sought assurances
from management that the Group’s project accounting controls and
controls over the capitalisation of intangible assets are operating as
intended and that spend capitalised as property, plant and equipment
and intangible assets meets the relevant accounting requirements.
The Committee also considered the report from the external auditor.
The Committee is satisfied that the Group has followed appropriate
accounting standards regarding the capitalisation of intangible assets
and project expenditure.
Handset financing
The Committee considered the Group’s accounting judgements relating
to a securitisation facility the Group entered into during the year,
which involves the selling of certain handset receivables at a discount.
The Committee considered management’s analysis that the Group does
not control the securitisation vehicle, based on the vehicle operating within
a set of principles that demonstrate it is not under the Group’s control,
and hence is not consolidated into the Group’s financial statements.
It considered management’s analysis that the Group has transferred
substantially all of the risks and rewards of the receivables sold, and as
such they have been derecognised from the Group’s balance sheet.
The Committee also considered the views of the external auditor.
The Committee is satisfied that the Group’s accounting judgements
are appropriate, and are also disclosed appropriately.
Goodwill impairment assessment
The Committee considered the Group’s annual goodwill impairment testing,
which involves comparing the recoverable amounts of the cash generating
units to which the goodwill is associated with their carrying value.
Calculation of recoverable amount involves estimation by management of
future performance and cash flows of those businesses. During the year,
the Committee reviewed the Group’s budgets and medium-term plans on
which those estimates were based and received monthly financial
performance updates, which included the results of each of the Group’s
operating segments. The Committee also considered the report from
the external auditor.
The Committee is satisfied that management’s conclusions that the
Group’s goodwill balances are not impaired is appropriate and that
the related judgements have been disclosed appropriately.
Internal control and risk management
The Board is responsible for establishing and maintaining the Group’s
systems of internal control and risk management and for reviewing their
effectiveness. These systems are designed to manage and, where possible,
eliminate the risk of failure to achieve business objectives and to provide
reasonable, but not absolute, assurance against material misstatement or
loss. There is an ongoing process for identifying, evaluating and managing
the significant risks faced by the Group in accordance with the revised
guidance on internal control issued by the Financial Reporting Council in
September 2014. During the period under review, the Committee discussed
a number of areas where actions had been identified to further improve
the control environment, however no material failings or weaknesses
were identified.
The Committee, on behalf of the Board, considers the effectiveness of the
operation of the Group’s systems of internal control and risk management
during the year and this review has been carried out for the year ended
30 June 2018 and up to the date on which the financial statements were
approved. This review includes all material controls and relates to the
Company and its subsidiaries and does not extend to joint ventures.
The Committee meets on at least a quarterly basis with the Group’s
Director: Audit, Risk Management and Compliance and the external auditor.
The harmonisation of internal controls across the Group has been an area
of focus for the Audit Committee chair who has received regular updates
through the year via quarterly meetings with the Director: Audit & Risk
Management and regular meetings with the external audit partner.
There is a comprehensive budgeting and forecasting process, and the
annual budget, which is regularly reviewed and updated, is approved
by the Board. Performance is monitored against budget through weekly
and monthly reporting cycles. During the financial year under review
monthly reports on performance were provided to the Board, and
the Group reports to shareholders each quarter.
In respect of Group financial reporting, the Group Finance team is
responsible for preparing the Group financial statements and there
are well established controls over the financial reporting process. These
are also documented in line with the requirements of the SAO legislation
and the controls are reviewed and signed off to confirm their continuous
operation by the control owners twice a year and are independently
tested by the internal audit team. The results of the SAO testing
are reported to the Committee on a quarterly basis.
Changes in internal controls
No change in the Group’s internal control over financial reporting has
occurred during the year ended 30 June 2018 that has materially affected,
or is reasonably likely to materially affect, the Group’s internal control
over financial reporting.
41
GovernanceAnnual Report 2018 Disclosure control and procedures
The Company maintains disclosure controls, procedures and systems that
are designed to ensure that information required to be disclosed as part
of the Company’s UK listing obligations is accumulated and communicated
to management, including the Group CEO and Group COO & CFO, as
appropriate, to allow timely decisions regarding required disclosures.
Auditor independence
During the year ended 30 June 2018, the Committee reviewed audit
independence and the scope of non-audit services and independence
safeguards with Deloitte LLP (‘Deloitte’), the Group’s external auditor.
As part of the review, the Audit Committee has received and reviewed
confirmation in writing that, in Deloitte’s professional judgement, Deloitte
is independent within the meaning of all UK regulatory and professional
requirements and the objectivity of the audit engagement partner and
audit staff is not impaired.
The Committee was satisfied throughout the year that the objectivity
and independence of Deloitte was not in any way impaired by either the
nature of the non-audit related services undertaken during the year, the
level of non-audit fees charged, or any other facts or circumstances.
Prior to the Group’s acquisitions of Sky Italia and Sky Deutschland,
Deloitte member firms in Italy and Germany had substantial consulting
engagements with those businesses. A transition plan was approved by
the Committee and fully implemented in order to restructure and cease
any independence-impairing aspects of those engagements in accordance
with relevant auditor independence rules.
During the current year, the Group has continued to substantially reduce
the level of Deloitte’s non-audit work. Deloitte has been involved in certain
strategic customer and operating systems projects since their inception
and has specialist knowledge which it would be time consuming and costly
to build up with another advisor. The Committee therefore approved a
certain level of permitted consulting advisory services with respect to
these strategic projects for the current year, and has approved the
continuation of this work at a further reduced level in the year ending
30 June 2019. Non-audit fees declined very significantly over this four-year
period, from a peak of £15.8 million in 2014/15 (pro-forma basis spend of
£19.5 million) to a level below that of the audit fee in the current year
(excluding any non-audit fees incurred as a consequence of the Offers),
and will continue to reduce the level of non-audit fees.
The Committee is satisfied that all of Deloitte’s non-audit work continues
to be of a permitted nature, meaning that Deloitte is independent within
the meaning of UK regulatory and professional requirements, and that
appropriate safeguards are in place to assure Deloitte’s continued
independence. In this regard, the Committee also closely monitors the
developing regulatory regime relating to the use of auditors for non-audit
work and is satisfied that the Company has complied and continues to
comply with the regulations in force.
Audit and non-audit services provided during the year were approved
by the Committee. An analysis of auditor remuneration is disclosed in
note 5 to the consolidated financial statements.
Corporate governance report continued
Risk management
There are risk registers which identify the risks faced by the Group
and these are consolidated into a Group Risk Register. The risk register
framework is based on methodology to identify the risk based on impact
and likelihood. The risk is assessed, quantified and measured which enables
discussions on risk appetite. The registers detail the controls that
manage the risks and, where necessary, the action plans to mitigate
the risk exposure.
The business develops the action plans and the internal audit team
monitors their implementation. The internal audit team provides objective
assurance as to the effectiveness of the Group’s systems of internal
control and risk management to the Group’s operating management.
The Committee reviews the Group Risk Register typically twice a year and
carries out a robust assessment of the principal risks and uncertainties
facing the Group and has done so during the year. The Group’s principal
risks and uncertainties are detailed on pages 24 to 27. There is an
ongoing monitoring process, which is operated by the Group Risk team
and supported by senior management across the Group, to identify
and report to the Audit Committee on significant changes or new risks.
Effectiveness of internal audit process
The Committee also reviews the effectiveness of the internal audit function
on an annual basis which includes consideration of their understanding
of the business, scope of the audit coverage, resource levels and resolution
of recommendations. This review has been carried out for the year
ended 30 June 2018 and the Committee determined that internal
audit operated effectively.
Committee evaluation
An evaluation of the Committee’s performance is conducted as part of
the Board evaluation process. Further details are described on page 38.
Fair, balanced and understandable assessment
The Financial Reporting Committee (‘FRC’), an internal committee, has
responsibility for the production of the annual report and the associated
review process. Guidance and comprehensive due diligence procedures
were issued to reviewers by the FRC to help them assess whether the
document was fair, balanced and understandable and complied with the
requirements of the Code. The FRC maintained oversight of the review
process and submitted certification to the Committee to enable it to
be in a position to recommend to the Board that the required statement
could be made.
The Committee also reviewed the disclosures regarding the Company’s
alternative performance measures (APMs) having regard, in particular,
to the Guidelines on Alternative Performance Measures issued by
the European Securities and Markets Authority in October 2015.
Viability statement
The Directors are required to confirm whether they have a reasonable
expectation that the Company and the Group will be able to continue to
operate and meet their liabilities as they fall due over a longer-term period.
The disclosure must set out the basis for Directors’ conclusions and explain
why the period chosen is appropriate.
The Committee sought management’s input to its assessment of the
viability of the Company and the Group. The assessment, which was based
on the Group’s operating, capital and funding plans, also included
consideration of the principal risks which could impact the performance
of the Group and its liquidity and capital projections over the period.
The Committee was satisfied that the viability statement could be
provided and agreed that three years was a suitable period of review.
The Viability Statement is detailed on page 27.
42
Sky plc Audit firm and partner rotation
The external auditor is required to rotate the audit partner responsible
for the engagement every five years. The prior audit partner rotated
off the engagement following the conclusion of the 2014/15 audit and
his successor was in place for 2015/16. In turn, the current audit partner
(Paul Franek) will be required to rotate after the 2019/20 audit.
The regulatory regime relating to mandatory audit tendering has
significantly changed in the UK and Europe. The Committee is closely
monitoring these developments and taking into account that Deloitte
has been the external auditor of the Company since June 2002, it expects
to conduct an audit tender in advance of June 2020, which itself is in
advance of 2023 by which the transitional rules in UK and EU regulation
would require the Company to have performed a tender. The Committee
has reviewed the timing of a future tender and feels that it is not currently
in shareholders’ interests, but it will continue to keep the appropriate
timing of a future tender under review.
The Company and the Group confirms its compliance with the provisions
of The Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014 for the year to 30 June 2018.
Audit and non-audit services
The Group has a policy on the provision by the external auditor of audit
and non-audit services, which categorises such services between:
• Those services which the auditor is not permitted to provide;
• Those services which are acceptable for the auditor to provide and
the provision of which has been pre-approved by the Committee; and
• Those services for which the specific approval of the Committee
is required before the auditor is permitted to provide the service, which
includes those over £250,000.
The policy defines the types of services falling under each category
and sets out the criteria which need to be met and the internal approval
mechanisms required to be completed prior to any engagement.
The policy is reviewed at least every three years and an analysis
of all services provided by the external auditor is reviewed by the
Committee on a quarterly basis.
During the year, the following examples of non-audit work were deemed
to be pre-approved in accordance with the policy:
• Assurance of Gender Pay Gap reporting
• Regulatory audit of the Sky pension plan
As previously stated the Committee was satisfied throughout the year that
the objectivity and independence of Deloitte was not in any way impaired
by the nature of the non-audit related services undertaken during the year.
Effectiveness of external audit process
During the year, the effectiveness of the audit process and management’s
role within that process was assessed by the Committee, Group Finance
team and other key internal stakeholders in the form of a questionnaire.
The areas under review were:
• Quality, resources and scope of planning of the audit
• Objectivity, independence and transparency of the audit
• Identification of key accounting judgements, significant audit
and accounting issues
• Level of technical knowledge and professional scepticism
• Understanding Sky as a business, its values and culture and challenges
it faces
• The quality of planning and supervision of the Group audit
• Quality of reporting and communications to the Audit Committee
The responses to the assessment were discussed by the Committee
and it was confirmed that Deloitte are performing as expected. Deloitte
continue to demonstrate strengths in the majority of these areas.
There were no significant findings from the assessment and the review
confirmed that Deloitte continue to carry out an effective and robust
external audit, including the supervision of the Group audit. The Committee
also continues to be satisfied with the quality of challenge and scepticism
of the external auditor.
The Committee therefore recommended to the Board that shareholder
approval be sought to reappoint Deloitte as the external auditor for the
2018/19 financial year.
43
GovernanceAnnual Report 2018 Corporate governance report continued
Corporate Governance & Nominations Committee
Chairman’s overview
Activities during the year
Board changes
The Committee keeps the Board’s balance of skills, knowledge and
experience and the length of service of individuals under constant review.
In respect of succession planning and supplementing the skill set of the
Board, there is an established procedure for the appointment of new
Directors. The Committee will identify the set of skills and experience
required and, with the assistance of external search agencies, select
individuals to take Board positions on review of their individual merits,
regardless of gender, race, religion, age or disability.
Due to the ongoing Offers, the Board has remained stable during the year.
There remain 11 Directors on the Board, of which six Directors are deemed
by the Board to be independent.
Committee composition
During the year, the Committee reviewed the composition of the Board
Committees and agreed that during the Offer Period the membership
of the Committees would remain unchanged.
Independence
During the year, all Non-Executive Directors were asked to complete
questionnaires to enable the Committee to determine their independence.
The Committee reviewed the questionnaires and recommended to the
Board that there be no changes to the independent status of the current
Independent Non-Executive Directors. The Non-Executive Directors who
are considered by the Board to be independent are clearly identified in
their respective biographies on pages 32 and 33.
As noted on page 37, James Murdoch, Chase Carey and John Nallen are not
considered to be independent within the meaning of the Code. However,
following the evaluation the Committee considers that each of these
Directors continue to make a significant contribution to Board and
Committee discussions.
Board diversity
The Committee pursues a policy of diversity of skills, experience, nationality
and gender in its approach to Board appointments. Since 2011, three female
Directors have been appointed and the Board currently comprises eight
men and three women (27% female representation on the Board).
Directors’ conflicts
The Committee reviewed the Board’s conflicts during the year and
concluded that Directors’ conflicts had been appropriately authorised
and that the process for authorisation was operating effectively.
The Committee and the Board will continue to monitor and review potential
conflicts of interest and take action to mitigate them as necessary.
During the ongoing Offers it is important to ensure the stability of the
Board and I am pleased to report that there have been no Board changes
during the year. The Committee continues to keep the composition of
the Board under review.
The Independent Committee has functioned well and has ensured that
the appropriate governance structure is in place to protect independent
shareholders. These arrangements will continue for the duration of
the Offer Period.
The Board as a whole welcomes the opportunity to adapt to innovation
and change and is actively progressing initiatives such as addressing
gender balance, sourcing the right skills to complement
our talented management team and creating robust succession plans
to safeguard the Company’s future performance.
There was one Committee meeting held during the year after which I
reported to the Board on the key issues discussed during the meeting.
The Committee continues to comprise a majority of Independent
Non-Executive Directors in compliance with the Code.
Andy Sukawaty
Committee Chairman
Committee composition
Andy Sukawaty (Chairman)
Martin Gilbert
James Murdoch
Matthieu Pigasse
Attendance at Committee meetings
The Group CEO and General Counsel attend the meetings from time
to time and the Company Secretary acts as Secretary to the Committee.
Corporate Governance & Nominations Committee agenda
Focus for the Committee this year has centred on the following items:
• Board and Committee composition
• Review of Non-Executive Director independence
• Review of Directors’ conflicts of interest
• Review of the Corporate Governance Report
The Committee’s terms of reference are available on the Company’s
corporate website.
44
Sky plc Bigger Picture Committee
Chairman’s overview
I am pleased to report that there has been continued significant
progress across the Bigger Picture this year. We celebrated the success
of Sky Academy Studios which has welcomed over 100,000 young people
through the doors, opening up the behind the scenes world of television
and inspiring interest in some important issues. There was also the
announcement of the Company’s commitments across Sky Ocean Rescue,
set out further in this report, and the significant progress made towards
these. Our commitment to sustainability has been reflected by our
inclusion in a number of leading investor indices, including: the Dow Jones
Sustainability Index, in which we maintained our silver award, and CDP’s
Supply Chain Leadership board. The Committee believes that the focus
and scale of the Bigger Picture continues to make a significant contribution
to the Company’s ability to build a better business for the long term.
A refreshed strategy during this financial year is making an even greater
impact for customers, the environment and for the Company and is
an important way in which Sky is achieving its purpose and values.
There was one Committee meeting during the year and after that meeting
I reported to the Board on the key issues discussed. Outside of this
meeting the Committee were kept updated on the progress of Bigger
Picture activities.
Progress against the Bigger Picture strategy is detailed at
www.skygroup.sky/corporate/bigger-picture
James Murdoch
Committee Chairman
Composition of the Committee
James Murdoch (Chairman)
Tracy Clarke
Attendance at Committee meetings
The Group CEO, Group COO & CFO, the Group Corporate Affairs Director,
other senior executives and the Bigger Picture team attend meetings
at the request of the Chairman. The Deputy Company Secretary acts
as Secretary to the Committee.
Bigger Picture Committee agenda
Focus for the year has centred on the following items:
• Progress on responsible business performance
• Progress on initiatives to inspire young people and inspire others
to take action
• The launch of the evolved Bigger Picture strategy.
The Committee’s terms of reference are available on the Company’s
corporate website.
Activities during the year
The Committee was updated on a number of developments in relation
to the Bigger Picture during the year, as set out below.
The Committee noted the progress being made on expanding and
implementing the Group responsible business strategy in Germany,
Austria and Italy and also reviewed progress on responsible sourcing
and human rights, including the launch of the Company’s second
Modern Slavery Statement.
The Committee supports the Company’s focus on inclusion and the
ambition to build an inclusive culture for everyone. To achieve this the
Company has been focused on increasing the representation of BAME
(Black, Asian, and minority ethnic) employees and achieving gender parity,
including setting ambitious targets such as increasing the representation
of women in senior leadership to 50% by 2020. A range of initiatives have
been developed, for example ‘Get into Tech’ and Women in Home Service,
which support women to develop skills in traditionally under-represented
areas. The Company has been recognised externally for these programmes
with inclusion in the Times Top 50 Employers of Women and being awarded
the Business in the Community Gender Equality Game Changer Award.
The Committee also reviewed the Company’s first Gender Pay Gap report,
published in March 2018.
The Committee is proud of the Company’s continued success in supporting
young people, with the launch of the Sky Ocean Rescue scholars and Sky
Women in Technology scholars during the year. These scholarships offer
young people a unique combination of financial support, personal
development, learning, mentoring and practical experience of the world
beyond their existing areas of expertise. Sky Academy Studios in London,
Livingston and Milan saw 26,679 young people create news reports this
year, now reaching over 100,000 young people since its 2013 launch.
This year, 4% of employees volunteered with Sky Academy Studios or
took part in a beach clean for Sky Ocean Rescue. Progress continues to
be made in Italy to support young people through Ultima Ora, supporting
media literacy through the Sky Academy Studios programme in Milan.
The Company’s long standing charity partner MAMA Youth continues
to offer training and career opportunities in broadcast and production
for young people from diverse and challenging backgrounds from our
West London Campus, with over 90% of alumni going on to secure
work placements.
Sky made four significant commitments through Sky Ocean Rescue during
the year:
• to transform the Company’s own business operations and products to
become single-use plastic free;
• to use the Company’s voice to inspire others to take action;
• to protect the health of our oceans through working in partnership
with WWF; and
• to inspire innovations that can help tackle plastic waste blighting the
world’s oceans.
The Committee discussed the Company’s progress on these commitments,
including the significant reduction in plastic use across the business and
the objective that all new products launched from 2018 are to be single-use
plastic free. The launch of Sky Ocean Ventures, the £25 million impact
innovation fund, and the reach that Sky Ocean Rescue had achieved, with
millions of people having become aware of the issue of ocean plastic
through campaigns such as #PassOnPlastic, were also discussed.
The Committee has participated in the evolution of the Bigger Picture
strategy and supports its aim to be an inspirational business, inspiring
young people, and others to take action on the issues that matter to
everyone. As part of a review of the Bigger Picture reporting, the Committee
continued to note the positive economic, social and environmental
contribution of Sky and looks forward to the further development of
opportunities they will bring. For more information about Sky’s approach
and progress during the year, go to skygroup.sky/corporate/bigger-picture.
45
GovernanceAnnual Report 2018 Directors’ remuneration report
Annual statement from the Chairman 2018
Dear Shareholder
On behalf of the Board I am pleased to present our Directors’ Remuneration
Report for the year ended 30 June 2018.
In my last statement I said that should the Offer process fall away we would
present a new remuneration policy for approval at the 2018 AGM, and
during the year the Committee sought the views of our shareholders on
some potential key structural changes to our policy.
However, given that the Offer process has yet to reach a conclusion and
taking into account shareholder feedback, the Committee has decided that
it would not be appropriate to present a new policy for approval unless the
Offer process is unsuccessful. In this event a new remuneration policy will
be presented for approval at the 2019 AGM.
In the meantime, the Committee does intend to implement some changes
immediately for the 2018/19 performance year that we believe will be
welcomed by our shareholders.
Context and business performance
2018 has been a strong year of delivery against our key drivers of
performance, despite a general squeeze on household disposable income
in every market in which we operate and little growth in the wider TV
advertising market across Europe:
• Revenue grew by 4.1% to £13.6 billion1
• Operating profit increased by 7% to £1,614 million1 and operating cash
flow was £1,137 million1
• Our Established business EBITDA grew by 11% to £2.5 billion, and by 9%
to £2.3 billion including our Investment business
• EPS grew by 11% to 69.2p
• We added over 510,000 new customers, taking the total customer base
above 23 million for the first time
• Our customers bought 3.1 million new paid-for products, taking the total
product base to almost 63 million
The business has also continued to build for the future:
• Secured a significant set of exclusive sports rights in each of our major
territories, including Serie A, UEFA, Premier League, German and Austrian
Bundesliga, and Formula 1
• Agreed new partnerships including Netflix, BT Sport, Mediaset Premium,
and Spotify
1 This is an adjusted measure, performance is measured on an adjusted basis using
methodology agreed by the Remuneration Committee, which may differ from the
adjusted measures presented elsewhere in this report. Revenue growth is presented
on a constant currency basis only.
46
• Sky Q now installed in 3.6 million homes across our major territories,
enabling roll-out of new innovations including increased personalisation,
expanded voice search functionality and a doubling in UHD content.
Customers in Italy are now able to access a broader range of services
with the launch of Sky over DTT and fibre, and in Germany and Austria
we have comprehensively upgraded all services for our customers,
kick-starting our next phase of growth there
• We’ve expanded into new markets with launches in Spain and Switzerland
Over the past ten years to 30 June 2018, cumulative Total Shareholder
Return (TSR) growth was 324% compared to 99% for the FTSE 100. Over
the past three years revenue has increased by 15%, Established business
EBITDA by 19%, and earnings per share by 20%.
Pay for performance outcomes
Our current remuneration policy focuses senior management on driving the
performance of our business. The consistency with which we have adhered
to the principles we have set for remuneration has served our shareholders
well, particularly during this time when it has been critical for the senior
management team to focus on the key priorities.
Pay outcomes continue to be linked directly to the achievement of the
stretching performance targets which are the key drivers of our
performance.
Taking account of this strong performance overall the Committee agreed
the following pay outcomes:
Salaries
• Base salaries for the Group CEO and Group COO & CFO were increased
by 3.0% on 1 July 2018 in line with the general increase range for our
employees, with increases of 3.5% for exceptional performance and 10%+
for promotions and market adjustments.
Annual bonus
• A combination of very strong outperformance against our stretch target
for operating profit, and good revenue growth and operating cash flow
performance against stretch targets, resulted in overall achievement
of 90% of maximum for the Group CEO and the Group COO & CFO
Co-Investment Plan (CIP)
• Matching shares under the 2015 Co-Investment Plan vested at 1.4 times
out of a maximum opportunity of 1.5 times, or 93%, with average annual
EPS growth over the three-year period of the Plan at 7.3%, which is just
short of the maximum.
Long Term Investment Plan (LTIP)
• There is no LTIP vesting due in 2018. Subject to the outcome of the Offer
process, the next LTIP vesting will be in July 2019 for the performance
period 2016 to 2019.
Remuneration policy review
The Committee was pleased to receive 94% support from shareholders for
the policy at the 2017 AGM. Its strong link between pay and performance
and focus on our key strategic priorities provides good alignment between
Executive Director and shareholder interests.
Having listened to the feedback from shareholders over the past 12 months,
the Committee intends to make a number of changes which will simplify
the policy and further strengthen alignment with shareholder interests.
The following changes will apply for the 2018/19 performance year:
• Mandatory deferral of 50% of the earned annual bonus for 2018/19
into shares for two years
•
Disclosure of performance targets immediately following the end of
the performance period, commencing with the 2018/19 annual bonus
Sky plc We intend to present key structural changes for approval at the 2019 AGM
for approval should the Offers from 21st Century Fox or Comcast fail to
complete or otherwise fall away in sufficient time, to be implemented for
the 2019/20 performance period onwards;
•
Removal of the Co-Investment Plan, incorporating its value into a single
Long Term Incentive Plan. The Committee therefore intends that LTIP and
CIP awards normally due to be granted in July 2019 would be deferred
until after the 2019 AGM, at which point awards under the new combined
Plan would be granted
•
Move from bi-annual vesting to annual vesting for the LTIP
•
A holding period of two years following the end of the performance
period for the LTIP
Until then the existing policy will apply, providing continuity and stability
for the Executive Directors and the senior management team.
Share awards vesting
There is no LTIP vesting due this year; the 2016 and 2017 LTIP awards are
due to vest in 2019.
Should the ongoing Offer process complete prior to normal vesting dates
for outstanding CIP and LTIP awards, the Committee will determine the
vesting conditions on the completion date taking into account the
circumstances at that time including discussions with the offerors
and the interests of the business, employees and shareholders.
Future share awards
Awards will be granted as normal in July and August 2018 under the current
LTIP and Co-Investment plans, subject to the timing of the Offer process.
The performance conditions for the LTIP award are unchanged with the
exception of relative TSR performance which the Committee concluded in
the light of the ongoing Offer process is no longer a fair measure of the
Company’s performance due to the effective distorting impact of the share
price. The LTIP award will therefore vest based solely on the operational
metrics of revenue growth, operating cash flow and EPS growth, which the
Committee believes are no more difficult nor easier to achieve than the
TSR conditions were intended to be in the absence of the Offer process.
These awards will vest either at the end of their normal performance period,
or, as above, the Committee will determine the vesting conditions on the
completion date taking into account the circumstances at that time.
Execution of the existing remuneration policy
The Committee has implemented the existing remuneration policy
throughout the year without change.
Activity in the coming year
The Committee will continue to monitor developments on corporate
governance including proposed changes to the Corporate Governance Code
and implementation of the CEO Pay Ratio. Activity for the coming year will
be shaped by the outcome of the Offer process for 21st Century Fox and
Comcast. Should the Offers not complete the Committee is committed
to implementing the changes to policy set out above in time for the 2019
performance year and the 2019 AGM.
Tracy Clarke
Committee Chairman
47
GovernanceAnnual Report 2018 Directors’ remuneration report
Our performance at a glance
We maintain lower levels of fixed pay relative to the market, believing that a high ratio of variable to fixed
pay provides a strong link between pay and performance and delivers strong returns for our shareholders.
We believe this structure has worked well during the prolonged period of uncertainty caused by the 21st Century
Fox Offer and the Comcast Offer, encouraging our executives to focus on the delivery of the business plan
Strong alignment with
shareholders is critical
TSR against major indices
Sky
FTSE 100
Over the last nine financial years, Sky has outperformed the
FTSE 100 by 60%. In light of the 21st Century Fox Offer no
dividends were paid in the 2017 financial year and no final
dividend has been proposed for 2018 at this stage, due to the
Offers from 21st Century Fox and Comcast both including an
amount in lieu of a final dividend. Using interim dividends as
a proxy, dividends increased by 74% over this period.
Shareholding guidelines exceeded by
CEO and COO & CFO
£394
% of base salary
£247
1,019%
Share
ownership
Shareholding
guidelines
Sky’s dividend
Final
Special
Interim
17.60p
7.50p
19.40p
7.88p
23.28p
8.74p
25.40p
9.20p
30.00p
11.00p
32.00p
12.00p
32.80p
12.30p
33.50p
12.55p
2009
2010
2011
2012
2013
2014
2015
2016
10.00p
13.06p
0.00p
2017
2018
430%
200%
300%
CEO
COO & CFO
Performance overall against our
key measures has been strong
We are firm advocates of ‘pay for performance’ and these measures have been carefully chosen
to align executive and shareholder interests.
Measures
Performance
2018 Annual
bonus
Revenue growth
+4.1%1
Underperformance vs stretch target
Operating profit
£1,614m1
Outperformance vs stretch target
Operating cash flow
£1,137m1
Slight underperformance vs stretch target
Annual bonus achievement 90%
of maximum
2015–18 Co-Investment
Plan
EPS growth
7.3%p.a.
Between threshold and maximum
93% vesting of CIP award
1 This is an adjusted measure, performance is measured on an adjusted basis using methodology agreed by the Remuneration Committee, which may differ from the adjusted measures presented elsewhere in
this report. Revenue growth is presented on a constant currency basis only.
Our policy is to pay lower fixed
pay with high variable pay
We believe that this system offers the fairest outcome for both our executives and our shareholders and focuses
our executives on the business outcomes. The average fixed/variable ratio over two years was 12%/88% for the
Group CEO and 14%/86% for the Group COO & CFO. There was no LTIP vesting in 2018, so total remuneration is
lower this year than in 2017.
GROUP CEO
2018
2017
26%
1.2
8%
1.2
41%
1.9
12%
1.9
33%
1.8
8%
1.4
Fixed 25% / Variable 75%
£5.0m
72%
11.6
Fixed 8% / Variable 94%
£16.1m
£0.0m
£2.0m
£4.0m
£6.0m
£8.0m
£10.0m
£12.0m
£14.0m
£16.0m
£18.0m
£20.0m
GROUP COO & CFO
2018
31% 36%
33% Fixed 31% / Variable 69%
0.8
0.9
0.8 £2.5m
2017
9%
0.8
10%
7% 74%
0.9
0.6 6.8
Fixed 9% / Variable 91%
£9.1m
£0.0m
£2.0m
£4.0m
£6.0m
£8.0m
£10.0m
£12.0m
£14.0m
£16.0m
£18.0m
£20.0m
The charts show the single figure remuneration for 2017 and 2018. See page 55 for further details.
Fixed pay
Annual bonus
CIP
LTIP
* Average annual
remuneration
over two years =
£10.5m
Fixed pay
Annual bonus
CIP
LTIP
* Average annual
remuneration
over two years =
£5.8m
48
Sky plc
Directors’ remuneration report
Our remuneration policy
This section provides a summary of the Directors’ remuneration policy that was approved by shareholders at the 2017 AGM. The full policy is
available on our website at skygroup.sky/corporate/articles/annual-report-2017. Ordinarily the policy would be in effect for three years until 2020,
but the Remuneration Committee has committed that should the 21st Century Fox Offer and the Comcast Offer fall away a new policy will be
introduced for approval by shareholders at the 2019 AGM.
Executive Directors
Element and link to performance
Summary of current policy
Changes in the year ahead and beyond
Base salary attracts and retains
Executive Directors taking
account of personal contribution
and size of the role.
Reviewed annually, and takes into account factors such as market pay levels
for the role, individual and business performance, experience, size and scope
of the role and relativity compared to other roles in the business.
There is no maximum base salary but any increases will be in line with our
policy and practice for all employees.
Group CEO: £1,097,610
(3.0% increase)
Group COO & CFO: £691,057
(3.0% increase)
Both effective 1 July 2018
Pension and benefits are
provided as part of a competitive
total remuneration package.
Employer contributions to the pension scheme or an equivalent cash
supplement (or a combination thereof) are capped at around 16% of
base salary.
Executive Directors are entitled to a range of benefits including, but not
limited to, private medical insurance, life assurance, company car allowance
and relocation allowances.
Benefits provided to Executive Directors are broadly in line with those
offered to all employees.
Annual bonus drives and rewards
the delivery of stretching annual
performance goals aligned with
the Company’s overall business
strategy.
Maximum opportunity is 200% of base salary. Performance is assessed
against a combination of operational and financial objectives which are
determined by the Remuneration Committee at the start of the year, along
with the weighting of each measure. The maximum weighting for any one
measure is 40%.
The Committee believes the concept of threshold, target and maximum
compromises our focus on delivery and drive for growth so we set one clear
and ambitious stretch target for each performance measure every year.
The Committee exercises its judgement on the level of bonus payable for
outcomes short of maximum and in exceptional circumstances will use its
judgement to adjust bonus outcomes up or down to ensure alignment
of pay with performance and with shareholder interests, within the
policy maximum.
Awards are subject to clawback for a period of two years after payment
in cases of gross misconduct and misstatement of results.
Executive Directors may voluntarily invest up to half of their earned annual
bonus in the Company’s shares.
These investment shares are matched on a gross basis by up to 1.5 shares
for every 1 share invested based typically on a financial measure such as EPS
performance over a three-year period. There is no vesting of the matching
award if performance is below threshold.
The maximum annual award is 150% of base salary.
Matching share awards are subject to clawback for a period of two years
after vesting in cases of gross misconduct and misstatement of results.
Co-Investment Plan (CIP)
encourages personal investment
and shareholder alignment;
rewards long-term focus and
performance achievement.
Effective 1 July 2018 Dependents’
Death in Service Pension has been
removed and replaced with an
additional 4x life cover. This change
applies to all eligible employees
across the business.
The Committee intends that
subject to the outcome of the
Offer process, from the 2018/19
performance year there will be
mandatory deferral of 50% of
the earned bonus into Sky
shares for two years.
No change for 2018.
The Committee intends that
subject to the outcome of the
Offer process from the 2019/20
financial year CIP will be removed
and its value incorporated into
the LTIP.
49
GovernanceAnnual Report 2018 Directors’ remuneration report – Our remuneration policy continued
Element and link to performance
Summary of current policy
Long Term Incentive Plan (LTIP)
rewards longer-term value
creation and aligns Executive
Directors’ interests with
those of shareholders.
A fixed number of shares are granted annually, to delink the award from
increasing automatically with salary adjustments.
Awards are made in Year 1 and in Year 2 with vesting of both awards at the
end of Year 3, based on stretching performance over the three-year period.
This means that vesting of awards occurs every other year, with zero vesting
in between.
Awards are reviewed annually. A typical annual award to the Group CEO
is 600,000 shares, with a maximum award level of 900,000 granted in
exceptional circumstances.
100% of the shares vest when the performance criteria are met in full.
26% of the award vests if threshold performance is met.
Performance measures are typically a mix of operational measures and
relative TSR. Previous operational measures include EPS, operating cash flow
and revenue growth. The weighting may vary but is typically 70% operational
measures and 30% relative TSR.
Unvested awards lapse immediately in instances of gross misconduct,
and all awards are subject to clawback for a period of two years after
vesting in cases of gross misconduct and misstatement of results.
The Committee may also use its discretion to withhold or vary downwards
unvested awards typically in the event of the material misstatement of the
results or actions resulting in material reputational damage to the business.
Changes in the year ahead and beyond
Subject to the outcome of the
Offer process, the Committee
intends that from the 2019/20
financial performance year the
LTIP and CIP will be combined into
one new Plan, with annual vesting
and a two-year holding period
post-vesting.
The new Plan will be put to
shareholders at the 2019 AGM for
approval. Awards under the current
LTIP are normally made in July of
each year. There will be no award
in 2019 until after the approval
of the new Plan at the 2019 AGM.
Remuneration of the Chairman and Non-Executive Directors
The table below summarises the main elements of remuneration for Non-Executive Directors:
Element and link to performance
Summary of current policy
Changes in the year ahead
Fees reflect individual
responsibilities and membership
of Board Committees. Attract
Non-Executive Directors with the
skills and experience required to
oversee the implementation of
strategy.
Reviewed annually, with the Chairman’s fees determined by the Corporate
Governance & Nominations Committee. Fees are as follows:
Chairman (all inclusive) –
£422,300 (3.0% increase)
Chairman (all inclusive) – £410,000
Deputy Chairman – £30,000
Board member (base fee) – £66,215
Additional fees for additional responsibilities:
Senior Independent Director – £40,000
Chairman of Committee – £25,000
Member of Committee – £10,000
Board member (base fee) –
£68,200 (3.0% increase).
Effective 1 July 2018
Non-Executive Directors can elect to receive a portion of their fees in
the Company’s shares, which are purchased on a monthly basis. Directors
who are deemed to be affiliated with 21st Century Fox are not permitted
to take part in this facility.
Benefits may be provided for
business purposes.
Benefits for business purposes may be provided, such as the provision
of a car to travel to/from meetings.
No change.
Non-Executive Directors are eligible to receive a Sky subscription package,
but are not eligible to join Sky’s pension plan.
50
Sky plc Shareholding guidelines and share ownership
The Committee recognises the importance of aligning Executive Directors’
and shareholders’ interests through executives building up a significant
shareholding in the Company. The shareholding requirements are 3x base
salary for the Group CEO and 2x base salary for the Group COO & CFO, and
both Executive Directors comply with these guidelines. Executive Directors
are required to build up their shareholding to the required levels within five
years. There are no shareholding guidelines for Independent Non-Executive
Directors but they are able to participate in a monthly share purchase plan.
See page 58 for further details on Directors’ interests.
How the Remuneration Committee exercises discretion
The Committee retains discretion relating to annual bonus, LTIP and CIP
in line with their rules and according to the remuneration policy.
These include but are not limited to:
• Timing of a grant of an award/payment
• Size of an award/bonus payment up to the maximums indicated in
the policy table
• Determination of vesting and the application of malus for the LTIP,
and clawback for the annual bonus, Co-Investment Plan and LTIP
• Dealing with a change of control
• Determination of treatment of leavers based on the rules of the plan
and the leaver policy
• Annual review of performance measures and weighting and targets
of the plan from year to year
Any use of discretion within the policy framework will be explained in the
Annual Remuneration Implementation Report. There may be exceptional
circumstances under which the Committee may use discretion or
judgement in the interests of the business and shareholders. These
exceptional circumstances may be the subject of discussion with the
Company’s major shareholders.
External appointments
External appointments for Executive Directors are considered by the
Company’s Corporate Governance & Nominations Committee to ensure
they would not cause a conflict of interest and are then approved by the
Board. It is the Company’s policy that remuneration earned from such
appointments may be retained by the individual.
Jeremy Darroch became a Non-Executive Director of Burberry Group plc
in February 2014, and serves as Senior Independent Director, Chair of the
Audit Committee and a member of the Nomination Committee. For the
period 1 July 2017 to 30 June 2018, Jeremy earned £137,000 in this role.
Andrew Griffith became a Non-Executive Director of Just Eat plc in March
2014, and serves as Senior Independent Director, Chairman of the Audit
Committee and as a member of the Remuneration and Nomination
Committees. For the period 1 July 2017 to 30 June 2018, Andrew earned
£88,750 in this role.
Additional policy information
Shareholder alignment
The Committee seeks shareholders’ views during the year, at the AGM,
through shareholder meetings and through correspondence. We engaged
with our major shareholders throughout 2018 to solicit their views on
our remuneration policy review, gaining useful comment and insight,
which helped inform the proposals outlined in the Chairman’s statement
on page 46. The Committee intends to implement the proposals in
2019 and they will be put to shareholders at the 2019 AGM should the
21st Century Fox Offer and the Comcast Offer fall away.
We will continue to engage with our major shareholders and welcome
feedback at any time. Should we propose to make any major changes
to the remuneration structure we will seek the views of our major
shareholders in advance.
Pay scenario analysis (updated for 2018)
The charts below provide an estimate of the awards that could be received
by our Executive Directors under the remuneration policy effective from the
2017 AGM showing:
• Minimum: base salary as at 1 July 2018 plus pension and benefits as per
the table on page 55 (fixed pay)
• Maximum: fixed pay plus maximum awards for annual bonus (200%
of base salary for the Group CEO and 150% for the Group COO & CFO)
• Co-Investment Plan (maximum deferral of 50% of the annual bonus into
investment shares and full vesting of 1.5x matching shares) and Long
Term Incentive Plan (600,000 shares for the Group CEO and 350,000
shares for the Group COO & CFO)
The Committee sets one clear and ambitious stretch target for each
performance measure. If stretch targets are met then 100% of maximum for
the bonus is paid and the shares awarded under the LTIP and CIP will vest in
full. There is no additional payment for achievement over the stretch goals.
Awards under the LTIP are made annually but vesting occurs only every two
years. The impact of this vesting cycle on actual realised pay is shown in the
nine-year single figure remuneration table for the Group CEO on page 56.
Jeremy Darroch, Group CEO
Minimum
100% £1.3m
Long Term Incentive Plan
Co-Investment Plan
Annual bonus
Fixed pay
Maximum
10%
16%
12%
62%
£13.4m
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
£m
Andrew Griffith, Group COO & CFO
Minimum
100%
£0.8m
Maximum
11%
14% 11%
65%
£7.5m
Long Term Incentive Plan
Co-Investment Plan
Annual bonus
Fixed pay
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
£m
Scenarios are modelled assuming a share price of £13.53 which is the
average share price over the period 1 April to 30 June 2018 with no
allowance for share price appreciation.
51
GovernanceAnnual Report 2018 Directors’ remuneration report
Annual remuneration implementation report
The Committee believes that early disclosure of specific targets would offer
a material insight and competitive advantage for our competitors and
therefore would be to the detriment of our shareholders.
Our commitment remains to make retrospective disclosure when the
targets are no longer commercially sensitive; after due consideration the
Committee has typically made retrospective disclosure two years after the
end of the performance period. The Committee has carefully considered
the views of shareholders and has decided, subject to the outcome of
the 21st Century Fox Offer and Comcast Offer process, to publish targets
immediately following the end of the performance period commencing
with the 2018/19 annual bonus.
Vesting of shares under the Co-Investment Plan (CIP) 2015–2018
Under the terms of the CIP offered on 28 August 2015 for the performance
period 1 July 2015 to 30 June 2018, Executive Directors voluntarily deferred
50% of their earned 2015 bonus into investment shares which were then
matched by the Company up to 1.5 times the gross equivalent of their
investment.
The table below shows the performance conditions for vesting of the
matching shares:
EPS growth performance
(annual average growth
over three-year term)
Less than RPI +3%
RPI +3%
RPI +4%
RPI +5%
More than RPI +5%
Match awarded
(number of matching shares
awarded per investment share*)
0.0
1.0
1.25
1.5
1.5
Straight-line interpolation between points
* ie. on equivalent gross basis
The average adjusted basic EPS growth rate was 7.3% per year over the
three-year period. RPI over the same period was 2.8% per year and the
Committee agreed that the matching shares under the 2015 CIP will vest
at 1.4 times on 28 August 2018, which is 93% of the maximum.
1 This is an adjusted measure, performance is measured on an adjusted basis using
methodology agreed by the Remuneration Committee, which may differ from the
adjusted measures presented elsewhere in this report. Revenue growth is presented
on a constant currency basis only.
This section sets out how our remuneration policy was implemented during
the year ended 30 June 2018 and how it will be implemented for the coming
year. It also sets out the link between Company performance and Executive
Directors’ remuneration, the context in which our policy operates, details
on our Executive Directors’ shareholdings and the general governance
of Directors’ remuneration. In the event that the 21st Century Fox Offer or
Comcast Offer are withdrawn or lapse the Remuneration Committee will
submit a new policy for shareholder approval at the 2019 AGM.
What are our variable pay outcomes for this year?
This has been a strong year of delivery against our key drivers of
performance despite a general squeeze on household disposable income
in every market in which we operate and little growth in the wider TV
advertising market across Europe. Senior management has remained
focussed on the business despite the uncertainty over the prolonged
Offer process for Sky.
Annual bonus for 2018 performance
The annual bonus drives the achievement of annual financial and
operational business goals. The plan for 2018 for Executive Directors and
senior executives was based on three equally weighted measures which
were identified by the Committee as being key indicators of performance,
driving growth for our business and returns to our shareholders:
• Revenue growth1
• Operating profit1
• Operating cash flow1
The Committee sets one clear stretch target for each performance measure
each year, providing a clear focus on growth and taking into account the
business plan and consensus analyst forecasts. Stretch targets must be
delivered to achieve the business plan and for the Executive Directors to
receive the maximum bonus. There are no payments above maximum for
performance above these stretch targets.
We believe that applying an alternative approach of threshold, target
and maximum performance would compromise the drive for growth.
Performance is measured on an ‘adjusted’ basis, as reported externally,
in order to capture underlying performance.
The table below sets out the Committee’s assessment of performance
versus the three measures for the last performance period. The Committee
will apply its judgement to assess the level of bonus if a stretch target is
not met, taking into account personal performance, the performance of
the other measures, the underlying performance of the business, and
other factors which the Committee considers to be material to the
results achieved. Payments are earned in direct correlation to
performance achieved.
Annual bonus metrics
Performance
measure
Weighting Performance Achievement against
performance measures
Revenue growth1
33%
+4.1%
Operating profit1
33%
£1,614m
Operating cash flow1 33%
£1,137m
Underperformance
vs stretch target
Outperformance
vs stretch target
Slight underperformance
vs stretch target
In total the business achieved 90% of its operational stretch targets, with
very strong outperformance against the operating profit stretch target a
nd good revenue growth and operating cash flow performance against
stretching targets. The Committee therefore decided to pay the Executive
Directors 90% of maximum, equivalent to 180% of base salary for the Group
CEO and 135% for the Group COO & CFO.
52
Sky plc Executive Long Term Incentive Plan 2016–2019
There was no LTIP vesting in 2018. Subject to the outcome of the ongoing 21st Century Fox Offer and Comcast Offer, the next vesting of awards made
under the terms of the LTIP will occur on 29 July 2019 for the three-year performance period 1 July 2016 to 30 June 2019, for awards made in 2016 and 2017.
Should the ongoing 21st Century Fox Offer and Comcast Offer process complete prior to normal vesting dates for outstanding CIP and LTIP awards,
the Committee will determine the vesting conditions on the completion date taking into account the circumstances at that time including discussions
with the offerors and the interests of the business, employees and shareholders.
What share-based incentive awards did we make in the year?
No. of shares
awarded
Grant date
Face value on
date of grant
Performance period
Vesting date
Minimum %
of shares that
can vest
Maximum %
of shares that
can vest
Long Term Incentive Plan
Jeremy Darroch
Andrew Griffith
Co-Investment Plan
Jeremy Darroch
Andrew Griffith
600,000
350,000
27.07.17
27.07.17
£5,808,0001
£3,338,0001
01.07.16 – 30.06.19
01.07.16 – 30.06.19
29.07.19
29.07.19
151,706
71,635
01.09.17
01.09.17
£1,450,3092
£684,8312
01.07.17 – 30.06.20
01.07.17 – 30.06.20
01.09.20
01.09.20
0%
0%
0%
0%
100%
100%
100%
100%
1 Market price at date of LTIP award was £9.68 on 27 July 2017.
2 Market price at date of CIP matching award was £9.56 on 1 September 2017.
Performance conditions for the Long Term Incentive Plan
Awards made in July 2017 were ‘Year 2’ nil-cost awards. That is, they relate to the three-year performance period beginning on 1 July 2016 and ending
on 30 June 2019. Vesting is subject to the following performance conditions:
1. Operational targets – 70% of the award
There are three equally weighted operational performance measures, each of which is a key indicator of Sky’s continued success:
• EPS growth
• Operating cash flow
• Revenue growth
Performance is measured on an ‘adjusted’ basis, as reported externally, in order to capture underlying performance.
The Committee will make retrospective disclosure of the targets for operating cash flow and revenue growth when they are deemed to be no longer
commercially sensitive. This has typically been two years after the end of the performance period though the Committee has decided that subject
to outcome of the ongoing Offer process, performance targets will be disclosed immediately following the end of the relevant performance period,
commencing with the 2019 performance year.
• For EPS, two points are awarded for growth of RPI +3% per year, with the maximum ten points awarded for RPI +5% per year or more.
• For operating cash flow and revenue growth, one point is awarded for 75% achievement of ‘target’ on a sliding scale up to ten points for 105% or more.
• One point equates to 10% of the award vesting, with maximum vesting for 21 points or more, vesting on a straight-line basis between these points.
There is no additional award for achievement above 21 points.
• If the minimum range is met each year for all measures, 26% of the shares vest.
• The Committee sets a high threshold vesting level in line with our policy of rewarding success not failure. Maximum vesting is not achievable
if performance is below threshold for any one measure.
• To earn the minimum of one point on any one of these measures requires the achievement of 75% of target. Missing two targets would represent
a significant and disproportionate reduction in total compensation.
53
GovernanceAnnual Report 2018 Directors’ remuneration report – Annual remuneration implementation report continued
Annual performance measures are shown in further detail in the table below:
Average EPS growth
Operating cash flow
Revenue growth
Performance achieved
RPI +5% p.a.
RPI +4.5% p.a.
RPI +4% p.a.
RPI +3.5% p.a.
RPI +3% p.a.
Less than RPI +3% p.a.
Points awarded
10
8
6
4
2
0
Performance achieved
(% of target)
105% or more
100%
95%
90%
85%
75%
Less than 75%
Points awarded
10
8
6
4
2
1
0
Performance achieved
(% of target)
105% or more
100%
95%
90%
85%
75%
Less than 75%
Points awarded
10
8
6
4
2
1
0
The top end of the EPS growth range was set for awards in 2016 and 2017 at RPI +5% p.a. This is equivalent to absolute growth in earnings of 26% over
three years if RPI is 3% a year. This level of growth in earnings was set at a level which exceeded consensus research analysts’ estimates.
2. Relative TSR performance – 30% of the award
The Company’s TSR performance is measured relative to the TSR of the constituents of the FTSE 100. If the Company’s TSR performance is below median,
the TSR element of the award lapses in full. For median performance, one-third of the shares subject to the TSR condition may vest, with all of the shares
vesting for upper quartile performance. Vesting is on a straight line basis between these points as shown below.
TSR vesting schedule
Payout
(% of grant)
30
10
i
n
a
d
e
M
e
l
i
t
r
a
u
Q
r
e
p
p
U
Below
Median
50
55
60
65
70
75
80
Final TSR rank (%)
TSR
Performance
Payout
Below Median
50%
55%
60%
65%
70%
75%
100%
0%
10%
14%
18%
22%
26%
30%
30%
TSR calculations are conducted independently by Willis Towers Watson, advisors to the Committee.
Performance conditions for the Co-Investment Plan
CIP awards made in 2017 are subject to the performance conditions set out in the table below.
EPS growth performance
(annual average growth
over three-year term)
Less than RPI +3%
RPI +3%
RPI +4%
RPI +5%
More than RPI +5%
Match awarded
(number of matching shares
awarded per investment share*)
0.0
1.0
1.25
1.5
1.5
Straight-line interpolation between points
* ie. on equivalent gross basis
54
Sky plc
What did we pay our Executive Directors during the year?
The table below sets out total remuneration received by the Executive Directors for the financial year ended 30 June 2018 and the prior year ended
30 June 2017. The vesting pattern of awards under the LTIP is biennial; shares vest every other year over a three-year performance period. This means
that every other year no payment is due as there is no vesting of awards. The following year, assuming performance conditions are met, there will be
a payment which covers the equivalent of two years’ vesting. There was no LTIP vesting in 2018, so the single figure for 2018 is significantly lower than
for 2017, which was a vesting year.
Single figure for Executive Directors’ total remuneration (audited)
Salary1
2017
2018
1,039,650 1,065,641
Taxable
benefits2
Pension3
Bonus4
Fixed pay
and bonus5
Long Term
Incentive Plan6
Co-Investment Plan7
Total
2017
2018
2018
22,122 21,637 156,930 160,851
2017
2017
2018
1,933,749 1,918,154
2017
2017
2018
3,152,451 3,166,283 11,604,000
2018
n/a
2017
2018
1,355,837 1,790,120
2017
2018
16,112,289 4,956,403
654,565 670,929
24,805 24,128
98,801
101,270
913,118
905,754 1,691,290 1,702,082 6,769,000
n/a
637,384 845,293
9,097,674 2,547,375
£
Jeremy
Darroch
Andrew
Griffith
1 Executive Directors’ salaries were increased on 1 July 2017 by 2.5% for the Group CEO and Group COO & CFO. The all-employee pay budget was 2.5%, with increases of 5% for
outstanding performance and 10%+ for promotions. Employees earning less than £31,000 received an uplift on the standard increase of a further 0.5% to 1.5% based on performance.
2 Taxable benefits include company car or car allowance, healthcare, provision of tax advice and other expenses incurred in the ordinary course of business which are deemed to
be taxable benefits on the individual.
3 Pension comprises a cash allowance in lieu of company contributions.
4 Bonus shows the full amount earned shortly after the year end in which the performance measures applied, including amounts deferred through the CIP. The payout for the 2017
bonus was 186% of base salary for the Group CEO and 140% for the Group COO & CFO. The figures for 2018 are 180% for the Group CEO and 135% for the Group COO & CFO, which
is 90% of maximum. The Executive Directors deferred 50% of their bonus into shares through the CIP in 2017 and it is anticipated they will do so for 2018, subject to the outcome
of the Offer process for Sky.
5 Fixed pay and bonus is the total of salary, taxable benefits, pension and bonus for 2017 and 2018.
6 Long Term Incentive Plan shows the market value of the awards that vested immediately following the end of the relevant performance period. The figure for 2017 is the value for LTIP
shares which vested on 25 July 2017 with a share price of £9.67. Previously the value of these shares was estimated using the average share price over the period 1 April to 30 June 2017
of £9.83. No LTIP shares vested for the performance period ended 30 June 2018.
7 Co-Investment Plan shows the market value of the matching shares that vested on 1 September 2017 with a share price at that time of £9.56. Previously the value of these shares was
estimated using the average share price over the period 1 April to 30 June 2017 of £9.83. No Co-Investment Plan shares have been exercised for the performance period 1 July 2014 to
30 June 2017. It also shows the estimated value of matching shares that are due to vest on 1 September 2018, for the performance period 1 July 2016 to 30 June 2018, using the
average share price over the period 1 April to 30 June 2018 of £13.53.
Percentage change in Group CEO’s remuneration 1 July 2017 to 30 June 2018
The table below shows the percentage change in Group CEO remuneration from 1 July 2017 to 30 June 2018 compared to the average change for
all employees.
Base salary1
Taxable benefits
Annual bonus
1 Up to 5% for outstanding performance and 10%+ for promotions. Employees earning less than £31,000 received an additional uplift of 0.5% to 1.5% based on performance.
All employees % change
2.5%, with 5% for outstanding performance
0%
0.3%
Group CEO % change
2.5%
-2.2%
-0.8%
Relative importance of pay spend
The table below shows total employee costs and dividend payments to shareholders for 2017 and 2018.
Total employee costs1
Dividend payments2
1 Group total including Germany and Italy.
2 The 2018 dividend payments figure excludes a special dividend of 10 pence per share, totalling £172 million. This was paid in February 2018 in accordance with the terms of the
2017
(£m)
1,729
358
2018
(£m)
1,610
224
21st Century Fox Offer which included a provision that such a payment would be made in the event that the 21st Century Fox Offer had not become effective by 31 December 2017.
55
GovernanceAnnual Report 2018 Directors’ remuneration report – Annual remuneration implementation report continued
How is the pay of our Group CEO linked to Sky’s performance?
TSR performance
The graph below shows the Company’s TSR for the nine years to 30 June 2018, measured as the value of a £100 holding in ordinary shares at the start of
the period. The performance is shown relative to the FTSE 100, which represents the broad market index against which the Company’s shares are traded.
TSR is a measure of the returns that a company has provided for its shareholders, reflecting share price movements and assuming reinvestment
of dividends. Data is averaged over three months at the end of each financial year.
TSR against major indices
Sky
FTSE 100
t
n
e
m
t
s
e
v
n
i
0
0
1
£
l
a
c
i
t
e
h
t
o
p
y
h
a
f
o
e
u
a
V
l
£400
£350
£300
£250
£200
£150
£100
£50
£0
£394
£247
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Group CEO’s remuneration
The table below provides a summary of the total remuneration for the Group CEO over the past nine years including bonus payout, LTIP and CIP vesting
levels. The table highlights the unique structure of our remuneration policy, in which vesting of LTIP shares occurs every two years rather than the
customary 12-month cycle. As our LTIP awards are made as a fixed number, the realised value is purely reflective of delivery against performance
measures and any share price growth over this period, keeping it aligned to shareholders’ interests.
It should be noted that total remuneration for 2013 includes vesting of the one-off additional LTIP award of 300,000 shares made in 2011 at the time of
the then possible News Corporation bid. The average annual total remuneration paid to the Group CEO over this nine-year period, excluding this one-off
award, is £9,036,154.
Single figure of total remuneration
Annual bonus payout against maximum
opportunity %
LTIP vesting rates against maximum
opportunity %
CIP vesting rates against maximum
opportunity %
2010
2,678,744
100
2011
11,133,554
100
2012
4,550,0371
100
2013
2015
17,026,9822 4,879,590 17,873,503
100
2014
97.5
100
2016
4,619,283
100
2017
2018
16,112,2893 4,956,4034
90
93
n/a
n/a
83
n/a
n/a
100
100
100
n/a
100
93
100
n/a
100
100
87
n/a
93
1
2
3
4
Includes first year of vesting of CIP introduced in 2010.
Includes vesting of the one-off additional LTIP award of 300,000 shares made in 2011 at the time of the then possible News Corporation bid.
Includes valuation of LTIP shares that vested on 25 July 2017 with a share price of £9.67 and CIP matching shares which vested on 1 September 2017 at £9.56, both previously reported
using the average share price over the period 1 April to 30 June 2017 of £9.83.
Includes valuation of CIP matching shares which are due to vest on 28 August 2018 using the average share price over the period 1 April to 30 June 2018 of £13.53.
56
Sky plc
Disclosure of performance targets for 2016
The Committee discussed at length its approach to disclosure of performance targets. Its position that early disclosure of targets would be commercially
detrimental because of the highly competitive nature of the market in which it operates still holds but it considers that performance targets for the
2016 annual bonus are no longer commercially sensitive. There was no LTIP vesting in 2016 and the 2013 CIP award that vested in 2016 did so based
on EPS performance disclosed on page 55 of the 2016 Annual Report.
Annual bonus
In setting the bonus targets the Committee gave careful consideration to the business plan and to the research analyst consensus forecasts at the time.
The targets and performance (measured on an ‘adjusted’ basis) for the 2016 annual bonus are shown in the table below.
Performance metric
Group paid-for products growth
Group operating profit
Group operating cash flow
2015/16
Performance
+3.27m
£1,558m
£1,291m
Performance vs
Target
109%
102%
111%
Target
+3.0m
£1,525m
£1,160m
On the basis of average performance versus target of 107%, the Committee determined that the bonus was paid at 100% of maximum for the Group CEO
and for the Group COO & CFO.
How do we intend to implement the remuneration policy next year?
Shareholders approved the renewal of the existing remuneration policy at the 2017 AGM. Following further consultation with shareholders this year
the Committee determined that changes to the policy would be put to shareholders for approval at the 2019 AGM should the 21st Century Fox Offer
and Comcast Offer fall away. Until then the Committee intends to implement the current policy as summarised on pages 49 to 51 for the year ending
30 June 2019 or until such time as a 21st Century Fox Offer or Comcast Offer completes during this period.
Base salary
Increases for our employees effective 1 July 2018 ranged from 2.5% to 3.5% based on performance, with additional adjustments of 10%+ for promotions
and market adjustments. After careful consideration, the Committee decided to make base salary adjustments of 3.0% each for the Group CEO and
Group COO & CFO, effective 1 July 2018, which is in line with the performance matrix parameters for our employees. Employees were not consulted
over the Committee’s decision but the Committee was briefed on the employee pay budget and policy for pay awards.
Taxable benefits and pension
Effective from 1 July 2018 the Dependents Death in Service Benefit which provided a surviving spouse or dependent with a pension of 1/3rd of the
employee’s base salary for life has been replaced with additional life cover of 4x base salary life cover. This change applies to all employees, including
the Executive Directors, as part of a strategic review of our benefits package for UK employees.
Annual bonus and Co-Investment Plan
The performance measures for the annual bonus remain unchanged for the coming year, namely revenue growth, operating profit and operating cash flow.
The Committee believes that these measures provide clear line of sight to the key imperatives for the business.
We expect that both of the Executive Directors will participate in the CIP for this year, based on their earned 2017/18 annual bonus. The performance
conditions for the vesting of shares are as per the details set out on page 54.
The Committee has decided that with effect from the 2018/19 performance year the earned annual bonus will be subject to a mandatory deferral
of 50% into Sky shares.
Long Term Incentive Plan award
The Committee agreed that Jeremy Darroch would be granted an award of 600,000 shares and Andrew Griffith would be granted an award of 350,000
shares on 27 July 2018. This is the Year 1 award of the 2018–2021 Plan. These awards will normally vest on 27 July 2021 subject to the performance
measures being achieved.
The performance conditions for this award are the same as for the 2017 award, as set out on pages 53 and 54, with the exception of relative TSR
performance which the Committee concluded in the light of the ongoing Offer process is no longer a fair measure of the Company’s performance
due to the effective distorting impact of the share price. Awards will therefore vest based solely on operational metrics, which the Committee
believes are no more difficult nor easier to achieve than the TSR conditions were intended to be in the absence of the Offer process.
57
GovernanceAnnual Report 2018 Directors’ remuneration report – Annual remuneration implementation report continued
Directors’ share interests
As at the end of the financial year, the Group CEO had beneficial ownership of 743,101 shares equivalent to 10.1x base salary and the Group COO & CFO had
beneficial ownership of 197,580 shares, equivalent to 4.3x base salary, using the year end closing share price of £14.61. Both Executive Directors currently
exceed the shareholding guidelines for Executive Directors as described on page 51.
Interests in Sky plc shares (audited)
As at
30 June 2017
Change during
the year
As at
30 June 2018
Executive Directors:
Jeremy Darroch1
Andrew Griffith1
Non-Executive Directors:
Chase Carey2
Tracy Clarke
Martin Gilbert
Adine Grate
James Murdoch2
John Nallen2
Matthieu Pigasse
Andy Sukawaty
Katrin Wehr-Seiter
1
2 Non-Executive Directors affiliated to 21st Century Fox are not permitted to participate in the monthly share purchase plan.
3 There have been no changes in the period from 30 June 2018 to 25 July 2018. Any changes between 25 July 2018 and a date not more than one month before the AGM will be included
Interests in shares include shares purchased under the Co-Investment Plan on 1 September 2017 at a price of £9.56.
–
4,246
7,806
29,394
–
–
7,865
4,641
–
–
5,060
9,137
29,394
–
–
9,147
5,730
–
–
814
1,331
–
–
–
1,282
1,089
–
689,871
172,445
743,101
197,580
53,230
25,135
in the Notice of Meeting at the relevant time.
Outstanding share awards: Jeremy Darroch (audited)
Date of award
LTIP1,2,6
25.07.14
29.07.15
29.07.16
27.07.17
CIP Matching3,4,5,6
01.09.14
28.08.15
31.08.16
01.09.17
Sharesave
30.09.14
At 30 June
2017
Vested
during year
Exercised
during year
Lapsed
during year
At 30 June
2018
Share price
at date of
award
Option
price
Market
price on
exercise
Date from
which
exercisable Expiry date
600,000
600,000
600,000
–
600,000
600,000
–
–
600,000
600,000
–
–
163,644
141,758
176,110
–
141,824
–
–
–
2,139
–
–
–
–
–
–
–
–
–
–
–
–
600,000
600,000
21,820
–
–
–
141,824
141,758
176,110
151,706
£8.74
£11.32
£9.20
£9.68
£8.82
£10.42
£8.64
£9.56
nil
nil
nil
nil
nil
nil
nil
nil
£9.67
£9.67
n/a
n/a
n/a
n/a
n/a
n/a
25.07.17
25.07.17
29.07.19
29.07.19
01.09.17
28.08.18
31.08.19
01.09.20
25.07.22
25.07.22
29.07.24
29.07.24
01.09.22
28.08.23
31.08.24
01.09.25
–
2,139
£8.82
£7.08
n/a
01.02.20
31.07.20
Outstanding share awards: Andrew Griffith (audited)
Share price
at date of
award
Option
price
Market
price on
exercise
Date from
which
At 30 June
2017
Vested
during year
Exercised
during year
Lapsed
during year
At 30 June
2018
exercisable Expiry date
350,000
350,000
350,000
–
350,000
350,000
–
–
350,000
350,000
–
–
Date of award
LTIP1,2,6
25.07.14
29.07.15
29.07.16
27.07.17
CIP Matching3,4,5,6
01.09.14
28.08.15
31.08.16
01.09.17
Sharesave
30.09.14
01.12.17
1 Performance conditions relating to LTIP awards made in 2014 and 2015 are disclosed in the 2015 Annual Report.
2 The 2014 and 2015 LTIP awards were exercised and shares subsequently sold on 28 July 2017. The aggregate value received by the Executive Directors on exercise of their 2014 and
–
–
350,000
350,000
01.09.17
28.08.18
31.08.19
01.09.20
25.07.17
25.07.17
29.07.19
29.07.19
66,672
66,938
83,159
71,635
76,930
66,938
83,159
–
66,672
–
–
–
10,258
–
–
–
£8.82
£10.42
£8.64
£9.56
£8.74
£11.32
£9.20
£9.68
£9.67
£9.67
n/a
n/a
01.02.18
01.02.21
n/a
n/a
n/a
n/a
£8.82
£9.30
£7.08
£7.52
nil
nil
nil
nil
nil
nil
nil
nil
1,271
1,196
1,271
–
1,271
–
n/a
n/a
–
–
–
–
–
–
–
–
–
–
–
–
25.07.22
25.07.22
29.07.24
29.07.24
01.09.22
28.08.23
31.08.24
01.09.25
31.07.18
31.07.21
2015 LTIP Awards before tax was £18,373,000.
3 The 2014 CIP Matching awards vested on 1 September 2017 on a 1.3x matching basis.
4 Dividends are payable on shares purchased through the CIP. During the year the Executive Directors received £215,768 (2017: £52,105).
5 Performance conditions relating to CIP Matching Awards can be found on page 54.
6 Following the vesting of awards, participants continuing to be employed by the Company have five years to exercise the award.
58
Sky plc What did we pay our Chairman and Non-Executive Directors during the year? (audited)
The following table sets out the single figure for total remuneration for the Chairman and Non-Executive Directors for the financial year ended
30 June 2018 and the prior year ended 30 June 2017.
Chase Carey
Tracy Clarke
Martin Gilbert
Adine Grate
James Murdoch
John Nallen
Matthieu Pigasse
Andy Sukawaty
Katrin Wehr-Seiter2
1 Basic fees were increased by 2.5% from 1 July 2017. Changes to responsibilities and associated fees are set out in full in the 2016/17 Remuneration Report.
2 Katrin Wehr-Seiter had taxable travel expenses of £9,881 during the year, which have been ‘grossed up’ for tax and included in the total fees.
2018 Total
fees1
66,215
111,215
116,215
111,215
410,000
66,215
86,215
141,215
76,096
2017 Total
fees
64,600
109,600
114,600
109,600
400,000
64,600
84,600
140,074
56,375
Fees for the Chairman and Non-Executive Directors are detailed in the table below:
Chairman (all inclusive fee)1
Deputy Chairman
Board member1
Additional responsibilities:
Senior Independent Director
Chairman of Committee
Member of Committee
1 Fees for the Chairman and Non-Executive Directors were increased by 3.0% effective 1 July 2018.
From 1 July
2018
£
422,300
30,000
68,200
40,000
25,000
10,000
From 1 July
2017
£
410,000
30,000
66,215
40,000
25,000
10,000
Payments to past Directors and loss of office
There were no payments made to past Directors and no payments made for loss of office during the financial year.
Shareholder voting outcomes
The Company engages with major shareholders and institutional investor groups every year to seek their views on remuneration, and the Remuneration
Committee ensures that their views are considered carefully prior to making its decisions. At the AGM held on 12 October 2017, 70.99% of shareholders
voted in favour of the Directors’ Report on Remuneration and 93.76% voted in favour of the remuneration policy.
The Company had engaged with its major shareholders prior to the 2017 AGM on a new policy and explained that given the ongoing 21st Century Fox
Offer the prudent approach at the time was to propose a substantially unchanged policy which would enable senior management to continue to focus
on the business priorities. This rationale was accepted at the time, as evidenced by the voting outcome.
Since the last AGM the Company has continued to engage with our major shareholders on a new policy should the 21st Century Fox Offer and Comcast
Offer process fall away. The proposals have been positively received. The Committee considered feedback on the 2017 Remuneration Report and the
views of shareholders on the early vesting conditions for LTIP and CIP in the event of a successful 21st Century Fox Offer as set out in the Co-operation
Agreement of 15 December 2016. The Committee’s view was that the conditions proposed were proportionate and measured given the particular
circumstances at the time. Since then the process has continued and the Committee will consider the most appropriate approach at the time should
the 21st Century Fox Offer or Comcast Offer complete, having regard to the interests of the Company, its employees and shareholders.
Resolution
2017 Approval of the Remuneration Report
2017 Approval of the Remuneration Policy
Votes for
833,056,357
1,099,069,186
% for
70.99
93.76
Votes against
340,399,243
73,113,237
% against
29.01
6.24
Total votes cast
1,173,455,600
1,172,182,423
Votes withheld
9,649,701
9,639,886
59
GovernanceAnnual Report 2018 Directors’ remuneration report – Annual remuneration implementation report continued
Membership of the Committee
During the year ended 30 June 2018 the Committee chaired by Tracy Clarke met six times. Tracy Clarke, Adine Grate and Andy Sukawaty are members
of the Committee. Attendance during the year is shown on page 37.
Role of the Committee
The role of the Committee is to oversee the remuneration policy so that the Company is able to recruit, retain and motivate its Executives and reward
their individual contributions in a fair and responsible manner. The Committee reviews the design and structure of employee incentives and is responsible
for approving the key terms of employment for the Executive Directors or any senior executive who reports directly to the Group CEO. The full terms of
reference for the Committee are available on the Company’s corporate website. The terms of reference were reviewed during the year as part of the
normal corporate review process and no material changes were made.
Committee activities during the year
The table below shows a summary of the topics discussed by the Committee, with a key focus throughout the year being on the implications of the Offer
process on remuneration programmes and the remuneration policy review .
December 2017
Review of initial
proposals for
remuneration policy
March 2018
Update on the
remuneration policy
review and shareholder
consultation
April 2018
Update on the
remuneration policy
review and shareholder
consultation
Update on the reporting
season
July 2017
Performance outcomes
for bonus, LTIP and CIP
October 2017
Update on the reporting
season
Update on shareholder
feedback and proxy
voting service guidance
Review of timetable
for remuneration policy
review and shareholder
consultation
Review and approve
performance targets for
the 2017/18 annual bonus
and LTIP
Review and approve
remuneration for
Executive Directors and
Senior Management
Review and approve
Directors’ Remuneration
Report
June 2018
Performance update – bonus,
LTIP and CIP
Update on the 21st Century
Fox and Comcast Offers and
implications for treatment of
share awards
Update on the remuneration
policy review and decisions
Update on executive and all
employee salary
remuneration proposals
Review of the first draft of
the Chairman’s statement
Advisors to the Committee
Willis Towers Watson were formally appointed by the Remuneration Committee to act as its independent advisors in July 2013, following a tender process.
The Committee reviewed the performance of the advisors in October 2016 and subsequently, following the announcement of the 21st Century Fox Offer,
decided to maintain Willis Towers Watson as advisors until the outcome of the Offer process is known. The Committee is satisfied that the advice it
receives on Executive Directors’ remuneration is independent and objective, and that the advisors do not have connections with Sky that may impair
their independence. Terms of reference are monitored throughout the appointment. Willis Towers Watson subscribes to the Remuneration Consultants
Group’s Code of Conduct in relation to executive remuneration. The Code clarifies the scope and conduct of the role of remuneration consultants when
advising UK listed companies. The fees paid to Willis Towers Watson for their services in relation to Directors’ pay totalled £148,000. Willis Towers Watson
also provided Sky with advice during the year on pension within its reward strategy, the operation of its pension and related benefit provisions, and
provided support on a project to introduce a banding structure across the UK organisation.
The Group CEO and the Group Director for People provide information and advice and attend meetings as required. The Committee is also supported by
the Company Secretary, Finance and Human Resources functions. No individuals are involved in the decision in relation to their own remuneration.
The Remuneration Report was approved by the Board of Directors on 25 July 2018 and signed on its behalf by:
Tracy Clarke
Chairman of Remuneration Committee
60
Sky plc Directors’ report and statutory disclosures
Introduction
In accordance with the Companies Act 2006, the Corporate governance
report on pages 32 to 45 and information contained in the Strategic
Report on pages 2 to 29 forms part of this Directors’ report and are
incorporated by reference.
The Directors present their report together with the audited consolidated
and parent company financial statements for the year ended 30 June 2018.
Shares
Dividends
An interim dividend of 13.06 pence per ordinary share was paid to
shareholders on 23 April 2018. In addition, a special dividend of 10 pence per
ordinary share was paid on 9 February 2018, as the 21st Century Fox Offer
had not become effective on or before 31 December 2017, making a total
of 23.06 pence paid to date during 2018 (2017: nil; 2016: 33.55 pence).
The Comcast Offer and the 21st Century Fox Offer both include an amount
in lieu of a final dividend in respect of the financial year ended 30 June
2018, with Comcast and 21st Century Fox each reserving the right to
reduce their respective offer prices by some or all of the amount of any
dividend (which is announced, declared, paid or becomes payable to Sky
shareholders). As a result, the Board is not intending to propose a final
dividend at this stage.
Share capital
The Company’s issued ordinary share capital at 30 June 2018 comprised
one class of ordinary shares. All of the issued ordinary shares are fully
paid and rank equally in all respects. Further details of the Company’s
share capital and share issues under the period under review are
disclosed in note 23 to the consolidated financial statements.
Interests in voting rights
Information provided to the Company pursuant to the UK Listing
Authority’s Disclosure and Transparency Rules (‘DTRs’) is published on
a Regulatory Information Service and on the Company’s website. As at
30 June 2018, the Company had been notified under DTR5 of the following
significant holdings of voting rights in its shares.
A shareholder entitled to attend and vote at a general meeting may
appoint one or more proxies to attend and vote instead of them.
If a member appoints more than one proxy they must specify the
number of shares which each proxy is entitled to exercise rights over.
A proxy need not be a shareholder of the Company. Holders of the
Company’s ordinary shares do not have cumulative voting rights. A voting
agreement dated 21 September 2005 was entered into between the
Company, BSkyB Holdco Inc, 21st Century Fox (‘21CF’ or ‘21st Century Fox’)
and 21st Century Fox UK Nominees Limited which became unconditional
on 4 November 2005 and capped 21st Century Fox UK Nominees Limited’s
voting rights at any general meeting at 37.19%. The provisions of the
voting agreement ceased to apply (in accordance with the terms of the
voting agreement) on 13 July 2018, being the date on which the Comcast
Offer was made to shareholders.
Members of the Independent Committee who own shares in the Company
have irrevocably undertaken to exercise all rights attached to their
own beneficial holdings of 999,149 shares (representing, in aggregate,
approximately 0.058 per cent. of the share capital of the Company in issue
at close of business on 25 July 2018) in favour of the 21st Century Fox Offer.
The members of the Independent Committee have also undertaken
not to exercise, or permit the exercise of, the voting rights attaching
to such beneficial holdings of shares in the Company in any manner
which would frustrate the 21st Century Fox Offer.
Restrictions on transfer of securities
There are no specific restrictions on the transfer of securities in the
Company, which is governed by the Articles of Association and prevailing
legislation, nor is the Company aware of any agreements between holders
of securities that may result in restrictions on the transfer of securities
or that may result in restrictions on voting rights, save as set out above.
Variation of rights
Subject to the Companies Act 2006, rights attached to any class of shares
may be varied with the consent in writing of the holders of three-quarters
in nominal value of the issued shares of the class or with the sanction of a
special resolution passed at a separate general meeting of the shareholders.
Identity of person or group
21st Century Fox UK Nominees Limited1
UBS AG London Branch
1 Direct holding
Amount
owned
672,783,139
120,647,455
Percent
of class
notified
39.14
7.02
Relationship Agreement
Changes to the Listing Rules came into effect in November 2014 which
require a premium listed company which has one or more controlling
shareholders to have in place an agreement which is intended to ensure
that any controlling shareholder complies with the independence provisions
in the Listing Rules.
G
o
v
e
r
n
a
n
c
e
Between 30 June 2018 and 25 July 2018, the Company was notified that
UBS AG London Branch’s holding had changed to 118,241,436 shares
representing 6.88% of total voting rights, and that Société Générale SA
held 87,279,452 shares representing 5.08% of total voting rights. There
were no other changes notified between 30 June 2018 and 25 July 2018.
The Employee Share Ownership Plan (‘ESOP’) was established to satisfy
awards made to participants of the Company’s employee share plans.
The trustees of the ESOP have waived the right to dividends payable
in respect of the shares held by it, except to the extent of 0.0001% of
the dividend payable on each share. At 30 June 2018, the ESOP had
an interest in 978,328 of the Company’s ordinary shares. The Trustees,
who are independent of the Company, have full discretion on how
they vote the ordinary shares held by the ESOP.
Voting rights
The Company’s Articles of Association provide that subject to any rights
or restrictions attached to any shares, on a show of hands every member
present in person or by proxy shall have one vote and on a poll every
member shall have one vote for every share of which they are a holder.
On a poll, votes may be given either personally or by proxy or (in the case
of a corporate member) by a duly authorised representative.
21st Century Fox and certain of its wholly-owned subsidiaries, directly or
indirectly, exercise or control 39.14% of the voting rights of the Company
and are therefore deemed to be controlling shareholders for the purposes
of the Listing Rules. Accordingly, the Company entered into a relationship
agreement with 21st Century Fox on 13 November 2014 (the ‘Relationship
Agreement’) containing the undertakings required by the Listing Rules.
In accordance with the Listing Rules, the Board confirms that, throughout
the period under review:
(i)
(ii)
the Company has complied with the independence provisions in the
Relationship Agreement;
so far as the Company is aware, 21st Century Fox and its associates
have complied with the independence provisions in the Relationship
Agreement; and
(iii)
so far as the Company is aware, 21st Century Fox has procured
compliance by its relevant subsidiaries and their associates with
the independence provisions in the Relationship Agreement.
Annual Report 2018
61
Directors’ report and statutory disclosures continued
In the event that the Company’s shares cease to be listed on the premium
segment of the Official List, or in the event that 21st Century Fox ceases to
be a controlling shareholder of the Company for the purposes of the Listing
Rules, the Relationship Agreement will terminate with immediate effect.
Directors’ powers in relation to the Company
issuing and buying back its own shares
At the 2017 AGM, the Directors were given authority to allot shares up to a
maximum nominal amount of £573,005,742 representing two-thirds of the
Company’s then issued ordinary share capital. Of this amount, a nominal
amount of £286,502,871 (representing one-third of the Company’s then
issued ordinary share capital) could only be allotted pursuant to a rights
issue (the Allotment Authority). The Directors were additionally empowered
to allot equity securities in the Company for cash, pursuant to the
Allotment Authority, on a non-pre-emptive basis (a) in connection with
a rights issue or open offer, (b) (otherwise than in connection with a
rights issue or open offer) up to a maximum nominal value of £42,975,430
representing 5% of the Company’s then issued share capital, and (c)
(otherwise than in connection with a rights issue or open offer) up to
a maximum nominal value of £42,975,430 representing a further 5% of
the Company’s then issued share capital for the purposes of financing
a transaction (or refinancing within six months of the transaction) which
the Directors determine to be an acquisition or other capital investment
contemplated by the Pre-emption Group’s Statement of Principles
(‘Principles’). In line with the Principles, the authority under (b) and (c)
was sought in separate resolutions. The Company did not seek
authority to buy back its own shares at the 2017 AGM.
Articles of Association
The Company’s Articles of Association may only be amended by special
resolution at a general meeting of shareholders.
Annual General Meeting
The venue and timing of the Company’s 2018 AGM will be detailed in the
notice convening the AGM at the relevant time.
Board of Directors
Board of Directors and their interests
The Directors who served during the year were: Jeremy Darroch, Andrew
Griffith, Chase Carey, Tracy Clarke, Matthieu Pigasse, Martin Gilbert, Adine
Grate, James Murdoch, John Nallen, Andy Sukawaty and Katrin Wehr-Seiter.
The biographical details of the Directors of the Company can be found on
pages 32 and 33.
The Directors’ interests in the ordinary shares and options of the Company
are disclosed within the Directors’ remuneration report on pages 46 to 60.
Appointment and retirement of Directors
The Directors may from time to time appoint one or more Directors.
Any such Director shall hold office only until the next AGM and shall
then be eligible for reappointment by the Company’s shareholders.
It is the current intention that at the Company’s 2018 AGM all continuing
Executive and Non-Executive Directors will retire and offer themselves
for reappointment in compliance with the Code.
Alternate Directors
A Director may appoint any other Director or any other person to act as
his Alternate. An Alternate Director shall be entitled to receive notice of
and attend meetings of the Directors and committees of Directors of
which his appointer is a member and not able to attend. The Alternate
Director shall be entitled to vote at such meetings and generally
perform all the functions of his appointer as a Director in his absence.
On the resignation of the appointer for any reason the Alternate Director
shall cease to be an Alternate Director. The appointer may also remove
their Alternate Director by notice to the Company Secretary signed by
the appointer revoking the appointment. An Alternate Director shall
not be entitled to fees for their service as an Alternate Director.
Chase Carey, James Murdoch and John Nallen have appointed each
of the others to act as their Alternate Director.
Employees
Equal Opportunities
At Sky we believe in equal opportunities and that everyone should have
full and fair consideration for all vacancies, promotions, training and
development. We work with employees who have disabilities to remove
barriers from the working environment to allow them to maximise their
potential.
Diversity and Inclusion
At Sky we aim to be an inclusive employer with a workforce that reflects the
communities in which we operate. For more on our approach to diversity
and inclusion please see page 12. The table below sets out the gender
diversity numbers across the Group.
Employee Engagement
At Sky we listen to our people and encourage everyone to be involved.
We know great ideas come from all corners of our business and it is part
of our ‘believe in better’ spirit to harness those ideas for the benefit of our
customers and our people. Twice a year we gather feedback from people
across all of our territories using an online engagement survey. Overall
response rates remain very high (83% in the UK & ROI, 73% in Italy, 78% in
Germany) and this year we have seen an increase in overall engagement in
the UK & ROI, have maintained high levels of engagement in Italy and have
seen a small reduction in Germany & Austria despite a year of change and
transformation.
Board of Directors1
Senior managers3
UK & ROI
Italy4
Germany & Austria5
All employees3
UK & ROI
Italy4
Germany & Austria5
Male
8
241
119
27
95
19,128
15,142
2,014
1,972
2017/182
Female
73%
73%
68%
75%
81%
62%
65%
51%
60%
3
88
56
9
23
11,481
8,276
1,910
1,295
27%
27%
32%
25%
19%
38%
35%
49%
40%
Male
8
189
89
29
71
19,751
15,461
2,415
1,875
2016/172
Female
73%
75%
71%
81%
80%
63%
65%
52%
58%
3
62
37
7
18
11,745
8,175
2,234
1,336
27%
25%
29%
19%
20%
37%
35%
48%
42%
1
2
3
4
5
As defined in the Companies Act 2006.
Data is independently assured by Deloitte LLP and can be viewed online at www.skygroup.sky/corporate/bigger-picture
Based on headcount. Defined for the purposes of this report as those included in the Leadership Bonus Group which includes members of Sky’s executive group. For more information and methodology changes
please see the Basis of Reporting on www.skygroup.sky/corporate/bigger-picture
The number of female employees in Italy decreased in the current year as a result of a change in methodology to exclude agency workers from the calculation as they are not paid by Sky.
The number of female employees in Germany & Austria decreased in the current year due to a change in methodology to exclude employees on parental leave as they are no longer paid by Sky.
62
Sky plc Employee Involvement & Communication
At Sky we communicate daily with our employees, publishing timely and
relevant content about matters affecting our business and our people via the
company intranet, today@sky. We also communicate regular business updates
through a variety of communication channels, with a full business round-up
shared with everyone at Sky at each set of quarterly financial results.
The Sky Forum in the UK & ROI is a group of 96 elected employee
representatives empowered to make Sky even better for colleagues and
customers. Members meet with the CEO and other senior leaders twice a
year to represent their constituents in discussions about the business and
the matters that impact them. As well as participating in working groups on
behalf of their constituents they also attend three meetings with their
relevant local leadership teams to discuss in more detail the issues and
initiatives most relevant to them. The Sky Forum helps leaders better
understand the needs of their people and allow Forum members and
their constituents to better understand the business.
Approximately 12,200 employees choose to participate in our Sharesave
Scheme, providing them with an opportunity to save on a monthly basis to
buy Sky shares at a 20% discount at the end of a 3 or 5 year savings period.
This means a large proportion of our employees share in the success of our
business and will benefit from the significant growth our share price has
seen over the past 18 months.
Sky UK and Ireland: Progress against target to halve our carbon emissions relative to revenue1
As outlined on page 12, we are committed to reducing the environmental impact of our business. This year, we have exceeded our 2020 target to halve
UK carbon emissions relative to revenue. Our progress against these targets is outlined below. Please see the Bigger Picture Impact Report for more
information which is available at www.skygroup.sky
Our carbon emissions performance is a result of our continued investment in the UK, Italy and Germany and Austria to improve efficiencies across the
business. We have taken measures such as engaging employees, maintaining and improving energy efficiencies, reducing product waste and investing
in renewable energy including district heating.
Gross absolute emissions (tCO2e)
Scope 1
Scope 2 (location-based)
Carbon intensity (tCO2e/£m)
Reduction in gross absolute CO2e
emissions relative to revenue (%)
Target
50
2008/09
(Baseline)
105,839
20,322
85,517
20.7
0
2010/11
107,294
23,098
84,196
16.3
21
2011/12
94,616
20,939
73,677
13.9
33
2012/13
92,968
20,429
72,539
12.8
38
2013/14
94,420
20,633
73,787
12.4
40
2014/15
101,039
24,406
76,633
12.9
37
2015/16
97,584
24,333
73,251
11.7
44
2016/17
83,940
24,496
59,444
9.8
53
2017/18
83,352
24,270
59,083
9.3
55
Sky Group-wide carbon emissions and carbon intensity 2017/181,3
The disclosures required by law and additional information relating to the Group’s greenhouse gas emissions are included in the table below.
For full details of calculations and performance, please see our Bigger Picture Impact Report.
Gross absolute carbon emissions (tCO2e)
Scope 1
Fuel combustion (gas, diesel generators, fuel oil, vehicles)
Diesel
Fuel Oil
Gas
Vehicle Fuel
Operation of facilities (refrigerants)
Refrigerants
Scope 2 (location-based)
Purchased district heating gross (location-based)
Purchased electricity (location-based)
Scope 2 (market-based)
Purchased district heating (market-based)
Purchased electricity (market-based)
Total (Scope 1 and 2) (location-based) CO2e (tCO2e)
Total (Scope 1 and 2) (market-based) CO2e (tCO2e)
Sky Group
UK &
Ireland
Germany &
Austria
Italy
29,961
24,270
2,522
3,169
174
40
5,012
23,430
1,305
84,123
713
83,410
43,101
713
42,388
114,084
73,062
126
n/a
4,674
19,290
180
59,083
0
59,083
13,247
0
13,247
83,352
37,516
4
40
0
2,334
144
4,419
234
4,185
2,142
234
1,908
44
n/a
338
1,806
981
20,621
479
20,142
27,713
479
27,234
6,940
4,663
23,791
30,882
Joint Ventures contribution to total Scope 1 and 2 (location-based) CO2e (tCO2e)4
649
649
n/a
n/a
Carbon Intensity
Revenue (£m)
Carbon Intensity (tCO2e/£m revenue)
Independently assured by Deloitte LLP.
1
2 2016/17 has been restated to reflect the most up-to-date data set.
3 We measure our CO2e emissions according to the Greenhouse Gas Protocol, the global standard for reporting greenhouse gas emissions. Our total gross CO2e emissions include all
Scope 1 and Scope 2 location-based emissions; and our market-based emissions are those remaining after emissions from contractual instruments have been applied. Our energy
providers retain, on our behalf, the Guarantees of Origin (GOs) and Renewable Energy Guarantee of Origin (REGOs). In addition, we offset our total gross emissions, including Scope 1,
Scope 2 and selected Scope 3 emissions, through the purchase of renewable energy investments and Voluntary Carbon Standard offsets.
13,585
8.40
2,023
3.43
8,931
9.33
2,631
9.04
4 Joint ventures include an enterprise or business where Sky is the majority shareholder (>50%).
63
GovernanceAnnual Report 2018 Directors’ report and statutory disclosures continued
Other disclosures
Contracts of Significance
The following agreements are contracts of significance in accordance with
Listing Rule 9.8.4(10).
On 25 July 2014, the Company (and certain of its subsidiaries) entered into
various agreements with 21st Century Fox (and certain of its subsidiaries)
to effect the acquisition of Sky Italia Srl for £2.06 billion with the
consideration being partially settled by the disposal of the Company’s
21% stake in National Geographic Channel International to certain of
21st Century Fox’s subsidiaries at a value of US$650 million. The sale
and purchase agreements for the acquisition and disposal contained
customary warranties, covenants and indemnities, including certain
indemnities relating to tax and other matters.
Also on 25 July 2014, as part of the acquisition of Sky Deutschland, the
Company (and certain of its subsidiaries) entered into various agreements
with 21st Century Fox (and certain of its subsidiaries) to effect the
acquisition of 21st Century Fox’s entire shareholding (approximately
57.4%) in Sky Deutschland AG, a German stock corporation listed on
the Frankfurt Stock Exchange, for £2.9 billion (the ‘Sky Deutschland
Acquisition’). The sale and purchase agreement contained customary
warranties as to title and ownership.
Significant agreements
The following significant agreements which were in force at 30 June 2018
take effect, alter or terminate on a change of control of the Company
following a takeover bid.
Premier League
In 2015, Sky UK Limited (a Group subsidiary) entered into an agreement
(the ‘2015 PL Licence’) with The Football Association Premier League
Limited (the ‘PL’), pursuant to which the Group was awarded five of the
seven available Live Packages in respect of the three seasons 2016/17 –
2018/19, together consisting of 126 live matches per season. The PL will not
award Live Packages containing in aggregate more than 126 live matches
per season to a single licensee (either on its own or as part of a consortium
or through one or more related parties) (the ‘2015 PL Single Buyer Rule’).
Pursuant to the 2015 PL Licence, the PL can suspend and/or terminate all
of the rights which are included in, or exercisable as part of, two (2) Live
Packages containing in the aggregate up to 42 live matches per season in
the event that a change of control of the Company occurs at any time prior
to the expiry of the 2015 PL Licence which, if it had occurred prior to the
award of the Live Packages to the Group, would have resulted in a breach
of the 2015 PL Single Buyer Rule.
In 2018, Sky UK Limited (a Group subsidiary) entered into an agreement
(the ‘2018 PL Licence’) with the PL, pursuant to which the Group was
awarded four of the seven available Live Packages in respect of the three
seasons 2019/20 – 2021/22, together consisting of 128 live matches per
season. The PL will not award Live Packages containing in aggregate more
than 148 live matches per season to a single licensee (either on its own or as
part of a consortium or through one or more related parties) (the ‘2018 PL
Single Buyer Rule’). Pursuant to the 2018 PL Licence, the PL can suspend
and/or terminate all of the rights which are included in, or exercisable as
part of, two (2) Live Packages containing in the aggregate up to 52 live
matches per season in the event that a change of control of the Company
occurs at any time prior to the expiry of the 2018 PL Licence which, if it had
occurred prior to the award of the Live Packages to the Group, would have
resulted in a breach of the 2018 PL Single Buyer Rule. In addition, in the
event that a change of control of the Company occurs at any time prior to
the expiry of the 2018 PL Licence, as a result of which either S&P or Moody’s
downgrade the Company’s credit rating below investment grade, the PL can
require the Group to nominate a replacement guarantor that has either:
(i) a credit rating with S&P or Moody’s which is at least investment grade
64
or (ii) a credit rating with an alternative credit rating agency which is at least
investment grade. If the Group fails to nominate a replacement guarantor
or fails to nominate a replacement guarantor with sufficient credit rating,
the PL can require the Group to provide alternative financial security in
place of the guarantor. Upon receipt of such request, the Group may elect
at its discretion to provide either (i) a bank guarantee or (ii) accelerated
payments under the 2018 PL Licence.
DFL Contract/Bundesliga Rights
In June 2016, Sky Deutschland Fernsehen GmbH & Co.KG entered into
an agreement (the ‘Bundesliga Agreement 17/21’) with DFL in relation to
the predominantly exclusive rights to broadcast 572 out of 617 games of
the Bundesliga and 2nd Bundesliga (including relegation and Supercup
matches). The lack of 45 matches was a result of the newly implemented
‘No single buyer rule’ by the German Federal Cartel Office. The licence
period will begin with the season 2017/18 and will end 2020/21. The
Bundesliga Agreement 17/21 may be terminated on a change of control.
Serie A
On 13 June 2018, further to an invitation to offer (the ‘ISO’), Sky Italia Srl
entered into an agreement (the ‘Serie A Licence’) with Lega Nazionale
Professionisti Serie A (the ‘Lega’), pursuant to which Sky Italia Srl was
awarded two of three available packages of live audio-visual rights for the
Italian Serie A football championship for the seasons 2018/19 – 2020/21
(the three packages are together the ‘Live Packages’). These two packages
consist of 266 (out of 380) cross platform live matches per season.
Pursuant to the relevant provision of the Melandri Decree and ISO, Lega
cannot award all of the Live Packages to a single licensee (either on its own
or through one or more of its related parties) (the ‘Serie A Single Buyer
Rule’). As a consequence Lega could suspend and/or terminate one or more
of the rights which are included in the packages assigned to Sky Italia Srl, in
the event that a change of control occurs at any time prior to the expiry of
the Serie A Licence which, if it had occurred prior to the award of the Live
Packages, would have resulted in a breach of the Serie A Single Buyer Rule.
UEFA
On 12 June 2017, each of the two companies (i) Sky Deutschland Fernsehen
GmbH & Co. KG (on an exclusive basis for the territory of Germany and
on a non-exclusive basis in Liechtenstein and Luxembourg) and (ii) Sky
Österreich Fernsehen GmbH (for the territory of Austria) entered into
a separate media rights agreement with the Union des Associations
Européennes de Football (‘UEFA’) in relation to certain media rights to
broadcast matches of the UEFA Champions League for the seasons
2018/19 – 2020/21 across all distribution means (the ‘German/Austrian CL
Agreements 18/21’). The German/Austrian CL Agreements 18/21 may be
terminated by UEFA on a change of control if at any point during the term
of the relevant German/Austrian CL Agreement (i) 21st Century Fox Inc.
(together with any of its affiliated companies); and /or (ii) any other entities
in which 21st Century Fox Inc. holds directly or indirectly more than 30%
of the total shares in the relevant company, should cease to be the single
largest direct or indirect shareholder of Sky Deutschland Fernsehen
GmbH & Co. KG or Sky Österreich Fernsehen GmbH (as applicable) and
such change of control adversely affects the ability of Sky Deutschland
Fernsehen GmbH & Co. KG or Sky Österreich Fernsehen GmbH
(as applicable) to perform its obligations under the relevant agreement.
On 16 June 2017, Sky Italia Srl entered into two agreements with UEFA
in relation to all the media rights to broadcast matches respectively
of the UEFA Champions League and the UEFA Europa League for the
seasons 2018/19 – 2020/21 across all distribution means (the ‘Italia UEFA
Agreements’). The Italia UEFA Agreements may be terminated on a change
of control if such change of control adversely affects the ability of Sky Italia
Srl to perform its obligations under the agreements.
Sky plc 21st Century Fox voting agreement
On 21 September 2005, the Company, BSkyB Holdco Inc., 21st Century Fox
UK Nominees Limited and 21st Century Fox entered into a voting
agreement, pursuant to which 21st Century Fox UK Nominees Limited’s
voting rights at any general meeting are capped at 37.19% (the ‘Voting
Agreement’). The provisions of the Voting Agreement ceased to apply
on 13 July 2018, being the date on which the Comcast Offer was made to
shareholders.
Revolving Credit Facility
The Group has a £1,000,000,000 syndicated multicurrency revolving credit
facility (‘RCF’) with a maturity date of 30 November 2021. In the event of
a change of control of the Company, as a result of which both S&P and
Moody’s downgrade the Company’s credit rating below investment grade
within 90 days, the lenders can require any amounts outstanding under
the RCF to be repaid (other than in the event that 21st Century Fox or any
subsidiary or holding company thereof (or a subsidiary of such holding
company) acquires such control).
GMTN Programme bond issue
On 3 April 2007, certain Group entities established a euro medium-term
note programme which provides the Group with a standardised
documentation platform to allow for senior debt issuance in the Eurobond
markets. On 7 February 2014, the programme was updated and expanded
to become a global medium-term note programme (the ‘GMTN
Programme’). The GMTN Programme was last updated in October 2016.
The maximum potential issuance under the GMTN Programme is £5 billion.
On 14 May 2007, the Company issued bonds under the GMTN Programme
(then known as an EMTN programme) consisting of £300 million
guaranteed notes paying 6.000% interest and maturing on 14 May 2027
(the ‘2007 Notes’). On 17 November 2015, the Company issued €500 million
guaranteed notes under the GMTN Programme paying 2.250% interest
and maturing on 17 November 2025 (the ‘2015 Notes’ and, together with
the 2007 Notes, the ‘GMTN Notes’). Pursuant to the final terms of the
GMTN Notes, the Company will be required to make an offer to redeem or
purchase the GMTN Notes at the relevant redemption amount plus interest
up to the date of redemption or purchase if there is a change of control
of the Company or the announcement of a potential change of control (i)
which, if the GMTN Notes carry an investment grade credit rating, results
in a downgrade to a non-investment grade rating or a withdrawal of that
rating; or (ii) which, if the GMTN Notes carry a non-investment grade rating,
results in a downgrade by one or more notches or a withdrawal of that
non-investment grade rating; or (iii) where, if the GMTN Notes do not
carry a credit rating, the Company does not seek such a rating or is
unable to achieve such a rating, provided that in each case the decision to
downgrade, withdraw or not to award a credit rating occurs within a certain
period of time after the change of control and the relevant rating agency
cites that such decision(s) resulted from the change of control or the
announcement of the potential change of control.
EMTN Programme bond issue
On 5 September 2014, certain Group entities also established a £10 billion
EMTN programme (the ‘EMTN Programme’), which provides the Group with
a standardised documentation platform to allow for senior debt issuance
in the Eurobond markets. In September 2014, the Company issued (i) €1,500
million 1.500% guaranteed notes due 2021, and (ii) €1,000 million 2.500%
guaranteed notes due 2026; in November 2014, the Company issued (i)
€850 million 1.875% guaranteed notes due 2023, (ii) £450 million 2.875%
guaranteed notes due 2020, (iii) £300 million 4.000% guaranteed notes
due 2029, and (iv) €400 million 2.750% guaranteed notes due 2029; and in
April 2015, the Company issued €600 million floating rate guaranteed notes
due 2020 (together, the ‘Notes’). Pursuant to the conditions of the Notes,
the Company will be required to make an offer to redeem or purchase the
Notes at the relevant redemption amount plus interest up to the date of
redemption or purchase if there is a change of control of the Company or
the announcement of a potential change of control (i) which, if the Notes
carry an investment grade credit rating, results in a downgrade to a
non-investment grade rating or a withdrawal of that rating; or (ii) which,
if the Notes carry a non-investment grade rating, results in a downgrade by
one or more notches or a withdrawal of that non-investment grade rating;
or (iii) which, if the Notes do not carry a credit rating, the Company does
not seek such a rating or is unable to achieve such a rating, provided that
in each case the decision to downgrade, withdraw or not to award a credit
rating occurs within a certain period of time after the change of control
and the relevant rating agency cites that such decision(s) resulted from the
change of control or the announcement of the potential change of control.
October 2005, November 2008, November 2012 and September 2014
bond issues
In October 2005, certain Group entities entered into an indenture in
respect of US$350 million 6.500% senior unsecured notes due 2035 (the
‘2005 Indenture’). In November 2008, certain Group entities entered into
an indenture in respect of US$600 million 9.500% senior unsecured notes
due 2018 (as amended and supplemented from time to time, the ‘November
2008 Indenture’). In November 2012, the parties to the November 2008
Indenture entered into a supplemental indenture in respect of a further
issuance of US$800 million 3.125% senior unsecured notes due 2022. The
November 2008 Indenture was further amended and supplemented in
September 2014, with the parties thereto entering into a supplemental
indenture in respect of a further issuance of US$750 million 2.625% senior
unsecured notes due 2019 and US$1,250 million 3.750% senior unsecured
notes due 2024. Pursuant to the November 2008 Indenture, the Company
will be required to make an offer to redeem or purchase its securities at
a price equal to 101% of their principal amount plus accrued and unpaid
interest up to the date of redemption or repurchase, if there is a change
of control or the announcement of a potential change of control of the
Company (i) which, if the securities carry an investment grade credit rating,
results in a downgrade to a non-investment grade rating or a withdrawal
of that rating; or (ii) which, if the securities carry a non-investment grade
rating, results in a downgrade by one or more notches or a withdrawal of
that non-investment grade rating; or (iii) where, if the securities do not
carry a credit rating, the Company does not seek such a rating or is unable
to achieve an investment grade rating, provided that in each case the
decision to downgrade, withdraw or not to award a credit rating occurs
within a certain period of time after the change of control and the relevant
rating agency cites that such decision(s) resulted from the change of
control or the announcement of a potential change of control.
65
GovernanceAnnual Report 2018 Directors’ report and statutory disclosures continued
UK broadcasting licences
Sky UK Limited is party to a number of Ofcom broadcasting licences for
the broadcast of Sky’s wholly-owned channels. The Broadcasting Act 1990
(as amended by the Broadcasting Act 1996 and the Communications Act)
lays down a number of restrictions on those parties permitted to hold
Ofcom broadcasting licences. Among those restricted from holding Ofcom
broadcasting licences or from controlling a licensed company are (a) local
authorities, (b) political bodies, (c) religious bodies, (d) any company
controlled by any of the previous categories or by their officers or
associates, (e) advertising agencies or any company controlled by such
an agency or in which it holds more than a 5% interest. Licensees have an
ongoing obligation to comply with these ownership restrictions. Failure by
a licensee to do so (either by the licensee becoming a ‘disqualified person’
or any change affecting the nature, characteristics or control of the
licensee which would have precluded the original grant of the licence)
may constitute a breach of the licence and, if not rectified, could result
in revocation of the licence.
Ofcom also has a duty under the Broadcasting Acts to be satisfied that
any person holding a broadcasting licence is fit and proper to hold those
licences and may revoke those licences if it ceases to be so satisfied.
German broadcasting licences
Sky Deutschland Fernsehen GmbH & Co. KG is party to a number of
broadcasting licences issued by the State Media Authorities BLM
(Bayerische Landeszentrale für Neue Medien) and MaHSH (Medienanstalt
Hamburg Schleswig-Holstein) for its linear Sky Channels. The Interstate
Treaty on Broadcasting, (as amended on 25 May 2018) sets out a number
of requirements for the licensees of broadcasting licences and providers
of non-linear telemedia services. Licensees have an ongoing obligation
to comply with these requirements. Failure by a licensee to do so may
constitute a breach of the licence and, if not rectified, could result in fines
or in the revocation of the licence. The State Media Authorities also have
a duty under the Broadcasting Acts to be satisfied that any person holding
a broadcasting licence is fit and proper to hold those licences and may
revoke those licences if it ceases to be so satisfied. Any change in the
ownership structure, including but not limited to an interest change
exceeding the threshold of 5% in the shareholder structure of the
licensee, has to be notified to and approved by the authorities.
Italian broadcasting licences
In accordance with the Italian regulatory system, the transfer of control
of a company such as Sky Italia which is classified as an audio-visual media
service provider is subject to an authorisation by the Italian Regulatory
Authority which is aimed at verifying the honourability of the directors and
nationality. Public administrations, public entities, state-owned companies,
banks and financial institutions are prohibited from being given such
authorisation in relation to audio-visual media service providers.
Co-operation Agreement
The Company and 21st Century Fox entered into a co-operation agreement
on 15 December 2016 (the ‘Co-operation Agreement’) in relation to the
Original 21st Century Fox Offer. The Co-operation Agreement was
terminated by the Company on 25 April 2018 after the Independent
Committee withdrew its recommendation of the Original 21st Century Fox
Offer in light of Comcast’s announcement of its firm intention to make
a £12.50 per share pre-conditional cash offer for the Company.
Following such termination, certain provisions of the Co-operation
Agreement ceased to apply, including the obligation on 21st Century Fox
to pay a break fee of £200 million. The Co-operation Agreement ensured,
however, that certain obligations continued after such termination.
These included the obligation on the Company to provide information
and assistance to 21st Century Fox for the purposes of obtaining
all regulatory clearances.
Furthermore, 21st Century Fox continues to be bound by the standstill
provisions in the Co-operation Agreement (as amended) which prevent
21st Century Fox acquiring any interest in Sky shares or taking any other
action which would trigger a requirement on 21st Century Fox to make a
mandatory offer under Rule 9 of the City Code on Takeovers and Mergers.
A further surviving provision of the Co-operation Agreement provided that,
in the event 21st Century Fox switches to pursue its offer for Sky by way of
a contractual offer, the acceptance condition for such an offer must be no
less than the percentage of Sky Shares to which the offer relates which is
equal to a majority of the Sky Shares held by Unaffiliated Sky Shareholders.
However, as set out in the 21st Century Fox Offer announcement, in the
context of the premium offered pursuant to the 21st Century Fox Offer,
the Sky Independent Committee agreed that 21st Century Fox (in its sole
discretion) may reduce the minimum acceptance condition of such a
contractual offer from a majority of the Sky Shares held by Unaffiliated
Sky Shareholders to a simple majority of all Sky Shares (including those
held by 21st Century Fox and its affiliates).
A copy of the Co-operation Agreement is available on the Company’s
microsite relating to the 21st Century Fox Offer at www.skygroup.sky/
corporate/investors/offers-for-sky/21st-century-fox-offer
Post-Offer Undertakings
As announced on 9 May 2018, Sky has given legally binding post-offer
undertakings in relation to the Comcast Offer that have been agreed
with the Panel on Takeovers and Mergers. These post-offer undertakings
are conditional upon the Comcast Offer becoming or being declared
wholly unconditional in all respects. A copy of the announcement of the
post-offer undertakings is available on the Company’s microsite relating
to the Comcast Offer at www.skygroup.sky/corporate/investors/
offers-for-sky/comcast-offer
66
Sky plc Disclosure of information to auditors
In accordance with the provisions of section 418 of the Companies Act
2006, each of the persons who are Directors of the Company at the date
of approval of this report confirms that:
• so far as the Director is aware, there is no relevant audit information
(as defined in the Companies Act 2006) of which the Company’s auditor
is unaware; and
• the Director has taken all the steps that he/she ought to have taken as a
Director to make himself/herself aware of any relevant audit information
(as defined) and to establish that the Company’s auditor is aware of that
information.
Auditors
Deloitte LLP, the auditors of the Company, have expressed their willingness
to continue in office. A resolution to reappoint them as the Company’s
auditors and to authorise the Directors to determine their remuneration
will be proposed at the forthcoming AGM.
The Strategic Report (comprising pages 2 to 29) and Directors’ report
(comprising pages 32 to 45 and 61 to 67) were approved by the Board
and signed on its behalf by the Company Secretary.
By order of the Board
Chris Taylor
Company Secretary
25 July 2018
Disclosures required under Listing Rule 9.8.4R
For the purposes of LR 9.8.4C, the information required to be disclosed
by Listing Rule 9.8.4R can be located as set out below:
Information required
(1) Amount of interest capitalised and tax relief
(2) Publication of unaudited financial information
(4) Details of long-term incentive schemes
(5) Waiver of emoluments by a director
(6) Waiver of future emoluments by a director
(7) Non pre-emptive issues of equity for cash
(8) Item (7) in relation to major subsidiary undertakings
(9) Parent participation in a placing by a listed subsidiary
(10) Contracts of significance
(11) Provision of services by a controlling shareholder
(12) Shareholder waivers of dividends
(13) Shareholder waivers of future dividends
(14) Agreements with controlling shareholders
Page
93 (Note 3)
n/a
46 to 60
n/a
n/a
n/a
n/a
n/a
64
n/a
61
61
61
Financial instruments
Details of the Group’s use of financial instruments, together with
information on our financial risk management objectives and policies,
hedging policies and our exposure to financial risks can be found in
notes 21 and 22 to the consolidated financial statements.
Political contributions
Political contributions of the Group during 2018 amounted to nil (2017: nil).
Branches
The Group, through various subsidiaries, has established branches
in Belgium, Germany, Ireland, Portugal and Switzerland, in which the
business operates.
Going concern
The Company’s going concern statement is detailed on page 27 of the
Strategic Report.
Important events
An update on the 21st Century Fox Offer and Comcast Offer is provided
on page 34.
The Company completed the sale of its 20% stake in Sky Bet to The Stars
Group Inc. on 10 July 2018. At the closing of the transaction, the Company
received £426 million in cash and 7.6 million shares in The Stars Group.
This, together with the original sale of the Company’s majority stake in
2015, has crystalised a total value of c£1.4 billion for Sky shareholders.
67
GovernanceAnnual Report 2018 Financial
statements
Financial
statements
Women’s Cricket World Cup 2017
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Directors’ responsibility statement
The Directors confirm that to the best of their knowledge:
1. The financial statements, prepared in accordance with IFRSs as adopted
by the European Union, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the undertakings
included in the consolidation taken as a whole;
2. The Strategic Report includes a fair review of the development and
performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties that they
face; and
3. The Annual Report and financial statements, taken as a whole, are fair,
balanced and understandable and provide the information necessary
for shareholders to assess the Company’s position, performance,
business model and strategy.
By order of the Board
Jeremy Darroch
Group Chief Executive Officer
25 July 2018
Andrew Griffith
Group Chief Operating Officer
and Chief Financial Officer
25 July 2018
Company law requires the Directors to prepare financial statements for
each financial year. Under that law, the Directors are required to prepare
the Group financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and
Article 4 of the IAS Regulation and have also chosen to prepare the parent
Company financial statements under IFRSs as adopted by the EU. Under
Company law, the Directors must not approve the accounts unless they
are satisfied that they give a true and fair view of the state of affairs of
the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, International Accounting
Standard 1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue as a going
concern.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply
with the Companies Act 2006. They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from legislation
in other jurisdictions.
70
Sky plc
Independent Auditor’s report
Independent auditor’s report
to the members of Sky plc
Report on the audit of the financial statements
Opinion
In our opinion:
Materiality
Scoping
• the financial statements of Sky plc give a true and fair view of the state
of the Group’s and of the Parent Company’s affairs as at 30 June 2018
and of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union and IFRSs as issued by the International
Accounting Standards Board (IASB);
Significant changes
in our approach
• the Parent Company financial statements have been properly prepared
in accordance with IFRSs as adopted by the European Union and as
applied in accordance with the provisions of the Companies Act 2006;
and
• the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements of Sky plc (the ‘Parent Company’)
and its subsidiaries (the ‘Group’) which comprise:
• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated and Parent Company balance sheets;
• the consolidated and Parent Company statements of changes in equity;
• the consolidated and Parent Company cash flow statements; and
• the related notes 1 to 31.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European Union
and as issued by the IASB, and, as regards the Parent Company financial
statements, as applied in accordance with the provisions of the Companies
Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the auditor’s responsibilities
for the audit of the financial statements section of our report.
We are independent of the Group and the Parent Company in accordance
with the ethical requirements that are relevant to our audit of the financial
statements in the UK, including the Financial Reporting Council’s (the FRC)
Ethical Standard as applied to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance with these
requirements. We confirm that the non-audit services prohibited by
the FRC’s Ethical Standard were not provided to the Group or the
Parent Company.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the
current year were:
• Revenue recognition for bundled items in retail
subscription revenue;
• recognition of entertainment programming
expense in the UK & Ireland;
• valuation of goodwill for the Germany & Austria
cash generating unit;
• financing of mobile handset receivables in the UK;
and
• capital project accounting in the UK & Ireland.
The materiality that we used in the current year was
£65 million which was determined on the basis of
profit before tax after removing for certain one-off
items (“normalised profit before tax”).
Our audit scope is consistent with the prior year and
includes the Group’s UK & Ireland, Germany & Austria,
and Italy operations. The Spain and Switzerland
businesses are included within the UK & Ireland and
Germany & Austria operations respectively.
We have added financing of mobile handset
receivables and valuation of goodwill for the
Germany & Austria cash generating unit as key audit
matters this year. There were no other significant
changes in our approach for the year ended 30 June
2018 compared with the prior year.
Conclusions relating to principal risks, going concern
and viability statement
Going concern
We have reviewed the Directors’ statement in note 1 to the financial
statements about whether they considered it appropriate to adopt the
going concern basis of accounting in preparing them and their identification
of any material uncertainties to the Group’s and company’s ability to
continue to do so over a period of at least twelve months from the date
of approval of the financial statements.
We are required to state whether we have anything material to add or draw
attention to in relation to that statement required by Listing Rule 9.8.6R(3)
and report if the statement is materially inconsistent with our knowledge
obtained in the audit.
We confirm that we have nothing material to report, add or draw attention
to in respect of these matters.
Principal risks and viability statement
Based solely on reading the Directors’ statements and considering whether
they were consistent with the knowledge we obtained in the course of the
audit, including the knowledge obtained in the evaluation of the Directors’
assessment of the Group’s and the Company’s ability to continue as a going
concern, we are required to state whether we have anything material to add
or draw attention to in relation to:
• the disclosures on pages 24 to 27 that describe the principal risks and
explain how they are being managed or mitigated;
• the Directors’ confirmation on page 24 that they have carried out a
robust assessment of the principal risks facing the Group, including
those that would threaten its business model, future performance,
solvency or liquidity; or
• the Directors’ explanation on page 27 as to how they have assessed the
prospects of the Group, over what period they have done so and why
they consider that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the Group will be able
to continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
We are also required to report whether the Directors’ statement relating to
the prospects of the Group required by Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge obtained in the audit.
71
Annual Report 2018Financial statements Independent Auditor’s report continued
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included
those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
The financing of mobile handset receivables, as described on page 90, is a new and complex area of accounting for the Group. The valuation of goodwill
for Germany & Austria requires significant judgement on the part of management on key assumptions, which are described in note 10. As a result, we
allocated additional effort and resources to these areas and have included them as key audit matters this year.
Key Audit Matter
Revenue recognition for bundled items in retail subscription revenue
The Group sells subscription packages to customers which include
multiple elements and may include discounts and offers, for
example TV subscription, hardware and telephony services sold
for a single package price. The Group earned direct-to-consumer
revenue of £11,830 million in 2018 (2017: £11,312 million), which
includes subscription revenue.
The allocation of retail subscription revenue to each element of a
bundled transaction is complex and requires judgement over the
timing and relative value attributed to each element, as described in
the Audit Committee Report on page 41 and in the Group’s critical
accounting policies on page 88.
There is a risk that inappropriate allocations of value could lead to
non-compliance with accounting standards and incorrect timing
of revenue recognition under the Group’s accounting policies.
We have pinpointed a risk of fraud in revenue to manual
adjustments made to the system-based revenue profile for bundled
items in retail subscription revenue.
How the scope of our audit responded to the key audit matter
In order to address the completeness of revenue adjustments that are made
by management to align the timing of revenue recognition to the Group’s
accounting policies, our audit procedures included:
• evaluating the Group’s revenue recognition policy and management’s
current year accounting assessment for bundled transactions; and
• assessing the different product bundles and offers in the year to pinpoint
the risk of incorrect timing of revenue recognition.
In order to address the accuracy and completeness of revenue recognition
and any timing adjustments, our audit procedures included:
• confirming the implementation of the Group’s policy in each territory
by performing walkthroughs and tests of controls to confirm our
understanding of the process by which revenue is calculated by the
relevant billing systems;
• assessing whether the timing of revenue recognition should be adjusted
based on the relative fair value of elements delivered at different points
during the contract, when compared to the revenue calculated by the
relevant billing system;
• for bundles assessed as being at higher risk of requiring revenue
recognition timing adjustments, inspecting the accounting treatment
of the bundle with greater scrutiny by vouching the fair value of different
elements to appropriate evidence; and
• where revenue recognition timing adjustments were identified as being
required, validating the valuation and accuracy of these adjustments to
align revenue recognition to the Group’s accounting policy.
In response to the potential for fraud in the manual adjustments made
to the system-based billing profile, our audit procedures included:
• calculating an independent expectation of retail subscription revenue;
• understanding the nature of adjustments and resulting journals that are
made to the system-based profile; and
• vouching to appropriate evidence the rationale for a sample of these
journals, validating their valuation and accuracy.
Key observations
Based on our work, we are satisfied that revenue recognition for bundled items in retail subscription revenue, including consideration of manual
adjustments, has been recognised appropriately and is in accordance with the Group’s revenue recognition policy.
72
Sky plc Key Audit Matter
Recognition of general entertainment programming expense in the
UK & Ireland
Determining the timing and amount of the general entertainment
programming expense recognised in the period requires judgement
in selecting the appropriate recognition profiles. The profiles should
achieve the objective of recognising the programming inventory
expense in line with the way that the benefit of the inventory is
consumed by the Group, as set out in the Audit Committee Report
on page 41 and in the Group’s critical accounting policies on page 89.
General entertainment programming expense involves more
judgement than other types of programming due to the number
of quantitative and qualitative factors involved in the selection
and application of an appropriate expense profile, for example:
• time period and frequency with which the programme is expected
to be utilised on the Group’s linear and non-linear (on demand)
services;
• expectations of the number of viewers a programme is likely
to achieve for each broadcast on the Group’s linear channels;
• potential benefits associated with utilising programming;
• the relative values associated with linear and on demand rights;
and
• evolving viewing habits and broadcast methods over time.
There is a risk that the recognition profiles selected by management
for entertainment programming, and therefore the expense
recognised, do not reflect the way that the Group consumes the
benefit of the inventory.
How the scope of our audit responded to the key audit matter
The UK & Ireland business spends the greatest amount of the three major
territories on general entertainment programming, and is the most developed
market in respect of changing viewing trends and broadcast methods.
As a result, we allocate additional effort and resource in this area on the
UK & Ireland component of the Group.
In order to address the accuracy and completeness of general entertainment
programming expense, our audit procedures included:
• critically assessing management’s review of amortisation profiles by
searching for contradictory and corroborative evidence, including through
the use of computer-assisted analytical tools to measure changes in
viewing and scheduling trends against cost recognition;
• comparing the expense profiles determined by management with those
that would be indicated by viewing trends (used as a proxy for value from
broadcast) in addition to other qualitative factors such as brand and/or
channel value;
• assessing the appropriateness of the fair value apportioned to linear and
non-linear (on demand) viewing rights in content contracts, including
through analysis of viewing data; and
• benchmarking management’s general entertainment amortisation policy
against industry practice in the UK.
Key observations
Based on our work, we are satisfied that the accounting for entertainment programming expense in the UK & Ireland is appropriate and in line with
the Group’s accounting policies.
Key Audit Matter
Valuation of goodwill for the Germany & Austria cash generating unit
The Group has goodwill of £4,972 million (2017: £4,930 million) across
its three cash generating units (‘CGUs’), of which £3,213 million (2017:
£3,192 million) relates to Germany & Austria.
Determining the recoverable amount of each CGU, which is
calculated on the basis of value in use as described in note 10,
requires judgement by management over the expected future
performance and cash flows of the relevant CGU.
In particular, for Germany & Austria, significant judgement is
required by management on variables such as the size and
opportunity of the subscription business in the territory, medium
and long term growth rates, assumptions on the levels of
programming spend, the Group’s ability to reduce operational
costs over time, and the most appropriate discount rate.
How the scope of our audit responded to the key audit matter
We pinpointed our work to the German element of the business as this is
the most significant part of the Germany & Austria CGU and involved the
most judgement by management.
Our audit procedures performed included:
• evaluating management’s identification of CGUs to ensure that Germany &
Austria is the appropriate level on which to assess the valuation of goodwill;
•
involving our valuation specialists to evaluate the appropriateness of the
discount rate, medium and long term growth rates and valuation
methodology applied in management’s model
• evaluating revenue growth and cost assumptions against historical trends
and detailed business plans, and third-party estimates of future
performance;
•
inspecting independently obtained research to search for contradictory
and corroborative evidence of the market opportunity in the German
market
• performing independent sensitivities including increases in levels of
programming spend and delays to growth in cash flows;
• evaluating management’s forecasting ability against actual results;
• considering the value of the business in light of the offers for the Company;
and
• reviewing the adequacy of the related disclosures in note 10 to the financial
statements.
Key observations
Based on our work, we are satisfied with management’s conclusion that the goodwill allocated to the Germany & Austria cash generated unit does
not need to be impaired. We are satisfied with the enhanced disclosures management has made in note 10.
73
Annual Report 2018Financial statements Independent Auditor’s report continued
Key Audit Matter
Financing of mobile handset receivables in the UK
The financing of handset receivables is a new activity for the
business in the UK. As described in note 20, the Group sold £142
million of handset receivables into a securitisation entity (‘the
Entity’), with associated financing costs of £11 million. In addition,
it received less than £1 million in interest on its junior debt and
received less than £1 million in fees for its role as servicing agent
for the Entity’s receivables. At the year end, the Group’s investment
in the junior debt issued by the Entity was £19 million.
The Group has concluded that it does not control the Entity and
therefore that it should not be consolidated and that the handset
receivables can be de-recognised from the balance sheet.
The assessment of both control of the Entity and the assessment
of de-recognition of the receivables is complex and requires
judgement, as described in the Group’s critical accounting policies
on page 90:
• the arrangement may operate in such a way that the
securitisation Entity is controlled by the Group and should
therefore be consolidated; and
• substantially all the risks and rewards of ownership may not have
been transferred from the Group to the Entity and receivables
may therefore have been inappropriately de-recognised from
the Group’s balance sheet.
How the scope of our audit responded to the key audit matter
In order to address the control of the Entity, our audit procedures included:
• evaluating management’s assessment of control of the Entity, through
enquiring with the third parties in the arrangement and inspecting evidence
of interaction with the Group;
•
inspecting third-party evidence, both corroborative and contradictory,
including correspondence between the Group and third parties involved
in the arrangement; and
• evaluating the completeness and compliance of disclosures in the financial
statements against the relevant reporting standards.
In order to address the de-recognition of the handset receivables, our audit
procedures included:
• critically assessing and challenging management’s assessment for the
de-recognition of the receivables against the requirements and criteria
of IAS 39; and
•
involving financial instrument specialists to validate the appropriateness of
the methodology and assumptions used in the de-recognition assessment.
Key observations
Based on our work, we are satisfied that the Entity should not be consolidated in Group’s financial statements and that the handset receivables
have been appropriately de-recognised.
Key Audit Matter
Capital project accounting in the UK & Ireland
During the year, the Group had additions to intangible assets of
£570 million (2017: £553 million) and to property, plant and
equipment of £703 million (2017: £666 million), as shown in notes 11
and 12.
The assessment and timing of whether assets meet the
capitalisation criteria set out in IAS 38 Intangible Assets and IAS 16
Property, Plant and Equipment requires judgement, as set out in the
Audit Committee Report on page 41 and in the Group’s critical
accounting policies on page 89. In addition, determining whether
there is any indication of impairment of the carrying value of assets
being developed or replaced also requires judgement in assessing
performance against the investment business case.
As a result, there is a risk that expenditure is inappropriately
capitalised based on relevant accounting guidance, and that
obsolete assets or assets not yet in use are not recoverable
at their carrying value.
How the scope of our audit responded to the key audit matter
The UK & Ireland incurs the most complex and greatest amount of capital
expenditure across the Group. In addition, it incurs expenditure on behalf
of all territories; for example the development of the Sky Q box. As a result,
we allocated additional effort for our procedures on this territory.
In order to address the classification and valuation of capitalised assets,
our audit procedures included:
• testing the design and operating effectiveness of management’s controls
in respect of the capitalisation of assets and the identification of potential
indicators of impairment;
• for a sample of capital expenditure projects:
– critically assessing management’s considerations of whether the project
meets IAS 16 or IAS 38 capitalisation criteria;
– meeting with project managers outside of the finance function to
understand the project scope and status, evaluate the project against
capitalisation criteria, and to search for indicators of impairment;
– developing a detailed understanding of the project business case and
tracing to expenditure authorisations; and
– vouching a sample of project costs to appropriate evidence.
Key observations
Based on our work, we are satisfied that the accounting for capital projects is appropriate and in line with the Group’s accounting policies.
74
Sky plc Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably
knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of
our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Materiality
Basis for determining
materiality
Rationale for the
benchmark applied
Group financial statements
£65 million (2017: £65 million)
Parent Company financial statements
£62 million (2017: £60 million)
This represents 8% of normalised profit before tax (2017: 8%).
As Sky plc is a public interest entity with listed equity we
determined normalised profit before tax to be the most
appropriate benchmark. This is defined as statutory profit
before tax of £864 million after removing for the effects of
one-off items in the year such as: the distribution received
from associate, profit on disposal of available-for-sale
investment, regulatory-related receipts and proceeds of
settlements, and costs incurred in respect of the offers
for Sky. Further detail of the amounts in respect of these
is included in note 8.
The Parent Company’s materiality is determined as 3%
(2017: 3%) of its net asset position at the year end, capped
at the highest component materiality of £62 million.
The Parent Company is not a trading entity, and primarily
contains investments in Group companies and borrowings.
As a result, the benchmark considered most relevant to
the users of the Parent Company’s financial statements
is net assets.
Normalised PBT
£781 million
Normalised PBT
Group materiality
Group materiality
£65 million
Component
materiality
range £62 million
to £39 million
Audit Committee
reporting threshold
£3.25 million
We agreed with the Audit Committee that we would report to the Audit
Committee all audit differences in excess of £3.25 million (2017: £3.25
million), as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds. We also report to the
Audit Committee on disclosure matters that we identified when
assessing the overall presentation of the financial statements.
An overview of the scope of our audit
Our audit scope is consistent with the prior year and includes the Group’s
UK & Ireland, Germany & Austria, and Italy operations all of which were
subject to a full scope audit for the year ended 30 June 2018. The Spain and
Switzerland businesses are included within the UK and German operations
respectively. As a result all of the Group’s assets, revenue and adjusted
profit before tax are subject to an audit either scoped by our component
audit teams to their respective component materiality or by the Group
audit team. The Group audit team directed, supervised and reviewed the
work of the component auditors for Germany & Austria and for Italy, which
involved issuing detailed instructions, holding regular discussions with
component audit teams, making multiple visits to each location throughout
the year, performing detailed file reviews and attending local audit
meetings with management.
Audit work performed for the Group’s UK & Ireland operations was
performed by the Group and UK audit team. The Group audit partner
visited all components, attending key meetings with both component
auditors and local management. The Group audit team performed work
on the consolidation.
Audit work in UK & Ireland, Germany & Austria and Italy was performed at
levels of materiality which were lower than Group materiality and ranged
from £39m to £62m, depending on the component’s contribution to the
Group’s profit before tax.
Other information
The Directors are responsible for the other information. The other
information comprises the information included in the Annual Report
other than the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility
is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our
knowledge obtained in the audit or otherwise appears to be materially
misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement
of the other information. If, based on the work we have performed,
we conclude that there is a material misstatement of this other
information, we are required to report that fact.
In this context, matters that we are specifically required to report to you
as uncorrected material misstatements of the other information include
where we conclude that:
• Fair, balanced and understandable – the statement given by the
Directors that they consider the Annual Report and financial statements
taken as a whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s position
and performance, business model and strategy, is materially inconsistent
with our knowledge obtained in the audit; or
• Audit Committee reporting – the section describing the work of the Audit
Committee does not appropriately address matters communicated by
us to the Audit Committee; or
• Directors’ statement of compliance with the UK Corporate Governance
Code – the parts of the Directors’ statement required under the Listing
Rules relating to the Company’s compliance with the UK Corporate
Governance Code containing provisions specified for review by the
auditor in accordance with Listing Rule 9.8.10R(2) do not properly
disclose a departure from a relevant provision of the UK Corporate
Governance Code.
We have nothing to report in respect of these matters.
75
Annual Report 2018Financial statements Independent Auditor’s report continued
Responsibilities of Directors
As explained more fully in the statement of Directors’ responsibilities, the
Directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such
internal control as the Directors determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for
assessing the Group’s and the Parent Company’s ability to continue as a
going concern, disclosing as applicable, matters related to going concern
and using the going concern basis of accounting unless the Directors
either intend to liquidate the Group or the Parent Company or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs (UK) will always
detect a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part
of our auditor’s report.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ remuneration report to be audited
has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic Report and the Directors’ Report
for the financial year for which the financial statements are prepared
is consistent with the financial statements; and
• the Strategic Report and the Directors’ Report have been prepared in
accordance with applicable legal requirements
In the light of the knowledge and understanding of the Group and the
Parent Company and their environment obtained in the course of the audit,
we have not identified any material misstatements in the Strategic Report
or the Directors’ Report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
• we have not received all the information and explanations we require
for our audit; or
• adequate accounting records have not been kept by the Parent Company,
or returns adequate for our audit have not been received from branches
not visited by us; or
• the Parent Company financial statements are not in agreement with the
accounting records and returns.
We have nothing to report in respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our
opinion certain disclosures of Directors’ remuneration have not been
made or the part of the Directors’ remuneration report to be audited
is not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were appointed
by the Directors on 26 July 2002 to audit the financial statements for the
year ending 30 June 2002 and subsequent financial periods. The period
of total uninterrupted engagement including previous renewals and
reappointments of the firm is 17 years, covering the years ending 30 June
2002 to 30 June 2018.
Consistency of the audit report with the additional report to the Audit
Committee
Our audit opinion is consistent with the additional report to the Audit
Committee we are required to provide in accordance with ISAs (UK).
Use of our report
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law, we
do not accept or assume responsibility to anyone other than the Company
and the Company’s members as a body, for our audit work, for this report,
or for the opinions we have formed.
Paul Franek FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London
25 July 2018
76
Sky plc Consolidated financial statements
Consolidated income statement
for the year ended 30 June 2018
Revenue
Operating expense
Operating profit
Share of results of joint ventures and associates
Investment income
Finance costs
Profit on disposal of available-for-sale investment
Profit before tax
Taxation
Profit for the year
Profit (loss) for the year attributable to:
Equity shareholders of the parent company
Non-controlling interests
Earnings per share from profit for the year (in pence)
Basic
Diluted
Consolidated statement of comprehensive income
for the year ended 30 June 2018
Profit for the year
Other comprehensive income
Amounts recognised directly in equity that may subsequently be recycled to the income statement
Gain on revaluation of available-for-sale investments (see note 4)
(Loss) gain on cash flow hedges (see note 21)
Tax on cash flow hedges (see note 15)
Loss on net investment hedges (see note 21)
Exchange differences on translation of foreign operations (see note 22)
Actuarial movements on employee benefit obligations (see note 19)
Amounts reclassified and reported in the income statement
Loss (gain) on cash flow hedges (see note 21)
Tax on cash flow hedges (see note 15)
Transfer to income statement on disposal of available-for-sale investment (see note 4)
Amounts recognised and reported in non-financial assets (basis adjustment)
Gain on cash flow hedges (see note 21)
Tax on cash flow hedges (see note 15)
Other comprehensive loss for the year (net of tax)
Total comprehensive income for the year
Total comprehensive income (loss) for the year attributable to:
Equity shareholders of the parent company
Non-controlling interests
The accompanying notes are an integral part of this consolidated income statement.
Notes
2
2
13
3
3
4
5
7
8
8
2018
£m
13,585
(12,551)
1,034
56
11
(286)
49
864
(49)
815
815
–
815
47.5p
47.2p
2018
£m
815
49
(139)
25
(42)
–
–
(107)
64
(11)
(49)
4
(71)
11
(60)
(163)
652
652
–
652
2017
£m
12,916
(11,952)
964
21
22
(204)
–
803
(112)
691
695
(4)
691
40.6p
40.0p
2017
£m
691
–
31
(2)
(335)
396
1
91
(85)
17
–
(68)
(165)
33
(132)
(109)
582
586
(4)
582
77
Annual Report 2018Financial statements
Notes
2018
£m
2017
£m
10
11
12
13
14
15
16
17
21
16
17
21
21
21
20
18
19
21
20
18
19
21
15
23
24
24
24
4,972
4,531
2,548
42
117
425
109
45
475
13,264
1,305
1,729
2
–
1,622
80
4,738
18,002
447
4,586
139
127
22
5,321
7,754
141
81
428
257
8,661
13,982
860
2,704
452
4,016
4
18,002
4,930
4,626
2,273
116
110
302
63
41
643
13,104
1,113
1,475
12
300
2,200
234
5,334
18,438
974
4,303
146
107
20
5,550
8,207
87
83
384
280
9,041
14,591
860
2,704
274
3,838
9
18,438
Consolidated financial statements continued
Consolidated balance sheet
as at 30 June 2018
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Investments in joint ventures and associates
Available-for-sale investments
Deferred tax assets
Programme distribution rights
Trade and other receivables
Derivative financial assets
Current assets
Inventories
Trade and other receivables
Current tax assets
Short-term deposits
Cash and cash equivalents
Derivative financial assets
Total assets
Current liabilities
Borrowings
Trade and other payables
Current tax liabilities
Provisions
Derivative financial liabilities
Non-current liabilities
Borrowings
Trade and other payables
Provisions
Derivative financial liabilities
Deferred tax liabilities
Total liabilities
Share capital
Share premium
Reserves
Total equity attributable to equity shareholders of the parent company
Total equity attributable to non-controlling interests
Total liabilities and equity
The accompanying notes are an integral part of this consolidated balance sheet.
These consolidated financial statements of Sky plc, registered number 02247735, have been approved and authorised
for issue by the Board of Directors on 25 July 2018 and were signed on its behalf by:
Jeremy Darroch
Group Chief Executive Officer
Andrew Griffith
Group Chief Operating Officer and Chief Financial Officer
78
Sky plc
Consolidated cash flow statement
for the year ended 30 June 2018
Cash flows from operating activities
Cash generated from operations
Interest received
Taxation paid
Net cash from operating activities
Cash flows from investing activities
Dividends received from joint ventures and associates
Funding to joint ventures and associates
Repayment of loan from associate
Loan to joint venture
Purchase of joint ventures and associates
Proceeds on disposal of joint ventures and associates
Purchase of property, plant and equipment
Proceeds on disposal of property, plant and equipment
Purchase of intangible assets
Purchase of subsidiaries (net of cash and cash equivalents purchased)
Purchase of available-for-sale investments
Proceeds on disposal of available-for-sale investments
Decrease (increase) in short-term deposits
Net cash used in investing activities
Cash flows from financing activities
Repayment of borrowings
Repayment of obligations under finance leases
Proceeds from disposal of shares in Employee Share Ownership Plan (‘ESOP’)
Purchase of own shares for ESOP
Payments to satisfy exercise of employee share awards
Interest paid
Capital contribution from non-controlling interests
Dividends paid to shareholders of the parent
Dividends paid to holders of non-controlling interests
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate movements
Cash and cash equivalents at the end of the year
The accompanying notes are an integral part of this consolidated cash flow statement.
Notes
25
2018
£m
2017
£m
1,910
7
(151)
1,766
131
(8)
–
–
–
–
(662)
–
(523)
(11)
(18)
69
300
(722)
(787)
(3)
14
(200)
(5)
(248)
–
(396)
(5)
(1,630)
(586)
2,200
8
1,622
2,254
15
(163)
2,106
20
(9)
83
(14)
(2)
4
(628)
1
(546)
(26)
(34)
2
(300)
(1,449)
(7)
(16)
15
–
–
(238)
7
(358)
(4)
(601)
56
2,137
7
2,200
79
Annual Report 2018Financial statements
Consolidated financial statements continued
Consolidated statement of changes in equity
for the year ended 30 June 2018
At 1 July 2016
Profit (loss) for the year
Net investment hedges
Exchange differences on translation of foreign
operations
Recognition and transfer of cash flow hedges:
- In equity
- In income statement
- In non-financial assets (basis adjustment)
Tax on items taken directly to equity
Actuarial movements on employee benefit obligations
Total comprehensive income (loss) for the year
Share-based payment
Non-controlling interests arising on purchase of
subsidiaries
Tax on items taken directly to equity
Dividends
At 30 June 2017
Profit for the year
Net investment hedges
Recognition and transfer of cash flow hedges:
- In equity
- In income statement
- In non-financial assets (basis adjustment)
Tax on items taken directly to equity
Revaluation of available-for-sale investments
Transfer to income statement on disposal of available-
for-sale investment
Total comprehensive income for the year
Share-based payment
Tax on items taken directly to equity
Dividends
At 30 June 2018
Attributable to equity shareholders of the parent company
Share
capital
£m
860
–
–
Share
premium
£m
2,704
–
–
ESOP
reserve
£m
(125)
–
–
Hedging
reserve
£m
257
–
–
Other
reserves
£m
302
–
(335)
Retained
(deficit)
earnings
£m
(551)
695
–
Total
share-
holders’
equity
£m
3,447
695
(335)
Non-
controlling
interests
£m
(6)
(4)
–
–
–
–
–
–
–
–
–
–
–
–
860
–
–
–
–
–
–
–
–
–
–
–
–
860
–
–
–
–
–
–
–
–
–
–
–
2,704
–
–
–
–
–
–
–
–
–
–
–
–
2,704
–
–
–
–
–
–
–
47
–
–
–
(78)
–
–
–
–
–
–
–
–
–
69
–
–
(9)
–
396
–
396
31
(85)
(165)
48
–
(171)
–
–
–
–
86
–
–
(139)
64
(71)
25
–
–
(121)
–
–
–
(35)
–
–
–
–
1
62
–
–
–
–
364
–
(42)
–
–
–
–
49
(49)
(42)
–
–
–
322
–
–
–
–
–
695
109
–
7
(358)
(98)
815
–
–
–
–
–
–
–
815
(166)
19
(396)
174
31
(85)
(165)
48
1
586
156
–
7
(358)
3,838
815
(42)
(139)
64
(71)
25
49
(49)
652
(97)
19
(396)
4,016
–
–
–
–
–
–
(4)
–
23
–
(4)
9
–
–
–
–
–
–
–
–
–
–
–
(5)
4
Total
equity
£m
3,441
691
(335)
396
31
(85)
(165)
48
1
582
156
23
7
(362)
3,847
815
(42)
(139)
64
(71)
25
49
(49)
652
(97)
19
(401)
4,020
For a description of the nature and purpose of each equity reserve, see note 24.
The accompanying notes are an integral part of this consolidated statement of changes in equity.
80
Sky plc Notes to the consolidated financial statements
1. Accounting policies
Sky plc (the ‘Company’) is a public limited company incorporated in
the United Kingdom (‘UK’) and registered in England and Wales.
The consolidated financial statements include the Company and its
subsidiaries (together, the ‘Group’) and its interests in associates and
jointly controlled entities.
a) Statement of compliance
The consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (‘IFRS’) as adopted by
the European Union (‘EU’), the Companies Act 2006 and Article 4 of the
International Accounting Standard (‘IAS’) Regulations. In addition, the
Group also complied with IFRS as issued by the International Accounting
Standards Board (‘IASB’).
b) Basis of preparation
The consolidated financial statements have been prepared on a going
concern basis (as set out in the Directors’ Report) and on an historical cost
basis, except for the remeasurement to fair value of certain financial assets
and liabilities as described in the accounting policies below. The Group has
adopted the new accounting pronouncements which became effective
this year, none of which had a significant impact on the Group’s results or
financial position.
The Group maintains a 52 or 53 week fiscal year ending on the Sunday
nearest to 30 June in each year. In fiscal year 2018, this date was 1 July 2018,
this being a 52 week year (fiscal year 2017: 2 July 2017, 52 week year).
For convenience purposes, the Group continues to date its consolidated
financial statements as at 30 June and to refer to the accounting period
as a ‘year’ for reporting purposes.
The Group has classified assets and liabilities as current when they are
expected to be realised in, or intended for sale or consumption in, the
normal operating cycle of the Group.
Adjusted measures, which are a type of alternative performance measure,
disclosed in the consolidated financial statements exclude items that
may distort comparability in order to provide a measure of underlying
performance. Such items arise from events or transactions that fall within
the ordinary activities of the Group but which management believes should
be separately identified to help explain underlying performance. Adjusted
measures are not defined terms under IFRS and may not be comparable
to similar measures used elsewhere. Further details regarding the Group’s
alternative performance measures are disclosed in the unaudited
supplemental information to the Group’s financial statements on page 135.
c) Basis of consolidation
i. Subsidiaries
Subsidiaries are entities controlled by the Company. Control is achieved
where the Company has existing rights that give it the current ability to
direct the relevant activities that affect the Company’s returns and
exposure or rights to variable returns from the entity. Subsidiaries are
included in the consolidated financial statements of the Company from
the date control of the subsidiary commences until the date that control
ceases. Intragroup balances, and any unrealised gains and losses or income
and expenses arising from intragroup transactions, are eliminated in
preparing the consolidated financial statements.
ii. Associates and joint ventures
Associates are entities where the Group has significant influence, but not
control or joint control, over the relevant activities of the entity. Joint
ventures are joint arrangements whereby the parties that have joint control
of the arrangement have rights to the net assets of the arrangement.
These consolidated financial statements include the Group’s share of the
total profit or loss and other comprehensive income of associates and joint
ventures using the equity method, from the date that significant influence
or joint control commences to the date that it ceases, based on present
ownership interests and excluding the possible exercise of potential voting
rights, less any impairment losses (see accounting policy i). When the
Group’s interest in an associate or joint venture has been reduced to nil
because the Group’s share of losses exceeds its interest in the associate or
joint venture, the Group only provides for additional losses to the extent
that it has incurred legal or constructive obligations to fund such losses,
or where the Group has made payments on behalf of the associate or
joint venture. Where the disposal of an investment in an associate or joint
venture is considered to be highly probable, the investment ceases to be
equity accounted and, instead, is classified as held for sale and stated at
the lower of carrying amount and fair value less costs to sell.
iii. Non-controlling interests
Non-controlling interests in the net assets of consolidated subsidiaries
are identified separately from the Group’s equity. Non-controlling interests
consist of the amount of those interests at the date of the acquisition and
the non-controlling shareholders’ share of changes in equity since the date
of the acquisition. The interest of the non-controlling shareholders in the
acquiree may initially be measured either at fair value or at the non-
controlling shareholders’ proportion of the net fair value of the identifiable
assets acquired and liabilities and contingent liabilities assumed. The
choice of measurement basis is made on an acquisition-by-acquisition
basis. In transactions with non-controlling parties that do not result
in a change in control, the difference between the fair value of the
consideration paid or received and the amount by which the
non-controlling interest is adjusted, is recognised in equity.
d) Goodwill
Business combinations that have occurred since 1 July 2004, the date of
transition to IFRS (the ‘Transition Date’), are accounted for by applying the
acquisition method of accounting. Following this method, goodwill is initially
recognised on consolidation, representing the difference between the fair
value cost of the business combination and the fair value of the identifiable
assets, liabilities and contingent assets and liabilities assumed.
Deferred consideration or contingent consideration (often referred to as
earnout agreements) which are not linked to the future employment of
previous shareholders in the post-completion period are recognised as
part of the fair value of the consideration for the purchase of the business.
Movements in the fair value of the consideration outside of the first
year anniversary of the business purchase are recognised in the income
statement. Consideration for the purchase of equity capital pertaining
to non-controlling interests is presented in the financing activities of
the cash flow statement.
For those business combinations that occurred prior to the Transition Date,
goodwill has been included at the amounts recognised under the Group’s
UK Generally Accepted Accounting Principles (‘UK GAAP’) accounting
policies on the Transition Date. On disposal of a subsidiary, associate
or joint venture, the attributable amount of goodwill is included in the
determination of profit or loss on disposal, except for goodwill written
off to reserves under UK GAAP prior to the Transition Date, which is not
reinstated and is not included in determining any subsequent gain or
loss on disposal.
Goodwill is stated at cost less any impairment losses and is tested, at least
annually, for impairment, based on the recoverable amounts of the cash
generating unit to which the goodwill has been allocated. Any impairment
identified is recognised immediately in the income statement and is not
subsequently reversed. The carrying amount of goodwill in respect of
associates and joint ventures is included in the carrying amount of
the investment in the associate or joint venture. Goodwill is tested
for impairment in line with accounting policy i below.
e) Intangible assets and property, plant and equipment (‘PPE’)
i. Intangible assets
Research expenditure is recognised in operating expense in the income
statement as the expenditure is incurred. Development expenditure
(relating to the application of research knowledge to plan or design new
or substantially improved products for sale or use within the business) is
recognised as an intangible asset from the point that the Group has the
intention and ability to generate probable future economic benefits from
the development expenditure, that the development is technically feasible
and that the subsequent expenditure can be measured reliably. Any other
development expenditure is recognised in operating expense as incurred.
Annual Report 2018
81
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
Notes to the consolidated financial statements continued
1. Accounting policies (continued)
Other intangible assets which are acquired by the Group separately or
through a business combination are initially stated at cost or fair value,
respectively, less accumulated amortisation and impairment losses.
Borrowing costs directly attributable to the acquisition, construction or
production of qualifying assets, which are assets that necessarily take a
substantial period of time to get ready for their intended use or sale, are
added to the cost of those assets until such time as the assets are
substantially ready for their intended use or sale.
The amortisation of an intangible asset begins when the asset is available
for use, and is charged to the income statement through operating expense
over the asset’s useful economic life in order to match the expected
pattern of consumption of future economic benefits embodied in
the asset.
Principal useful economic lives used for this purpose are:
• Trademarks
• Internally generated
intangible assets
5 to 25 years straight-line over
licence period, as applicable
3 to 5 years straight-line
• Software development (external)
3 to 7 years straight-line
and software licences
•
Acquired customer contracts and related customer relationships
– Relating to the acquired customer 15 years straight-line basis
base in Germany and Austria
– Relating to the acquired customer 15 years straight-line basis
base in Italy
– Relating to acquired customer
3 to 12 years straight-line
bases in UK and Ireland
– Relating to other customer
relationships in UK and Ireland
8 to 25 years straight-line
• Other intangible assets
1 to 5 years straight-line
For acquired customer contracts and related customer relationships, the
assets are amortised on either a reducing balance basis or on a straight-
line basis depending on which more accurately reflects the pattern of
how future economic benefits will be consumed, as determined by the
estimated customer retention profile.
If the asset’s useful economic life is judged to be indefinite or the asset is
not yet available for use, no amortisation is charged and an impairment
test is carried out at least annually. Other intangible assets are tested
for impairment in line with accounting policy i below.
ii. Property, plant and equipment
Owned PPE is stated at cost, net of accumulated depreciation and any
impairment losses (see accounting policy i). When an item of PPE comprises
major components having different useful economic lives, the components
are accounted for as separate items of PPE.
The costs of assets comprise the following, where applicable:
• Purchase price, including import duty and non-refundable purchase
taxes, after probable trade discounts and rebates
• Directly attributable costs of bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
intended by management, including relevant delivery and logistics costs
Assets held under finance leases, which confer rights and obligations
similar to those attached to owned assets, are treated as PPE
(see accounting policy n).
The cost of PPE, less estimated residual value, is depreciated in operating
expense on a straight-line basis over its estimated useful life. Land and
assets that are not yet available for use are not depreciated. Principal
useful economic lives used for this purpose are:
• Freehold buildings
25 to 40 years
• Equipment, furniture and fixtures
3 to 20 years
• Set-top boxes and routers
5 to 7 years
• Assets under finance leases and
leasehold improvements
Lesser of lease term and the
useful economic life
To the extent that the financing for a qualifying asset is part of the Group’s
general borrowings, the interest cost to be capitalised is calculated based
upon the weighted average cost of borrowing to the Group (excluding the
interest on any borrowings specific to any qualifying assets). This is then
applied to the expenditures on the asset. All other borrowing costs are
recognised in profit or loss in the period to which they relate.
f) Derivative financial instruments and hedging activities
The Group uses derivative financial instruments to hedge its exposure to
fluctuations in interest and foreign exchange rates. Derivatives are held at
fair value from the date on which a derivative contract is entered into. Fair
value is defined as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
at the measurement date under IFRS 13 ‘Fair Value Measurement’.
The Group calculates a separate credit valuation adjustment (‘CVA’) or
debit valuation adjustment (‘DVA’) for each derivative based upon the
net position for each counterparty relationship.
The Group calculates the CVA where it has a net asset position using a
quoted credit default swap curve for the counterparty and calculates the
DVA where it has a net liability position using an industry proxy credit
default swap curve for the Group. The fair value of derivative financial
instruments is calculated by discounting future cash flows with reference
to the benchmark Libor curve, adjusted by the relevant credit default
swap curve.
Certain derivatives held by the Group which relate to highly probable
forecast transactions (‘hedged items’), which meet qualifying criteria under
IAS 39 ‘Financial Instruments: Recognition and Measurement’ (‘IAS 39’), are
designated as cash flow hedges. Other derivatives which hedge changes
in fair value of fixed rate financial instruments and meet the requirements
of IAS 39 are designated as fair value hedges. Certain borrowings and
derivatives have been designated as net investment hedges of the Group’s
foreign operations for movements in the spot foreign exchange rate, see
section r for further details. Certain other derivatives held by the Group
do not meet the qualifying criteria for recognition for accounting purposes
as hedges, despite this being their economic function. Changes in the
fair values of these derivatives are recognised immediately in the income
statement. The Group does not hold or issue derivatives for speculative
purposes.
i. Derivatives that qualify for cash flow hedge accounting
Changes in the fair values of derivatives that are designated as cash flow
hedges (‘cash flow hedging instruments’) are initially recognised in the
hedging reserve. In circumstances in which the derivative used is a currency
option, only changes in the intrinsic value of the option are designated
under the cash flow hedging relationship, with all other movements being
recorded immediately in the income statement.
Amounts accumulated in the hedging reserve are subsequently recognised
in the income statement when the related hedged item is recognised in the
income statement or in the initial cost or other carrying amount of the
non-financial asset or liability on the balance sheet, again being recognised
in the income statement in the periods in which the related hedged items
are recognised in the income statement. At inception, the effectiveness
of the Group’s cash flow hedges is assessed through a comparison of the
principal terms of the hedging instrument and the underlying hedged item.
The ongoing effectiveness of the Group’s cash flow hedges is assessed
using the dollar-offset approach, with the expected cash flows of hedging
instruments being compared to the expected cash flows of the hedged
items. This assessment is used to demonstrate that each hedge
relationship is expected to be highly effective on inception, has been highly
effective in the period and is expected to continue to be highly effective in
future periods. The measurement of hedge ineffectiveness for the Group’s
hedging instruments is calculated using the hypothetical derivative
method, with the fair values of the hedging instruments being compared
to those of the hypothetical derivative that would result in the designated
cash flow hedge achieving perfect hedge effectiveness.
82
Sky plc
The excess of the cumulative change in the fair value of the actual hedging
instrument compared to that of the hypothetical derivative is deemed to
be hedge ineffectiveness, which is recognised in the income statement.
The Group uses a range of 80% to 125% for hedge effectiveness, in
accordance with IAS 39, and any relationship which has effectiveness
outside this range is deemed to be ineffective and hedge accounting
is suspended.
When a cash flow hedging instrument expires, is terminated or is exercised,
or if a hedge no longer meets the qualifying criteria for hedge accounting,
any cumulative gain or loss existing in the hedging reserve at that time
remains in the hedging reserve and is recognised in the initial cost or other
carrying amount of the non-financial asset or liability on the balance sheet
provided that the underlying transaction is still expected to occur. When
a forecast transaction is no longer expected to occur, the cumulative gain
or loss that was reported in the hedging reserve is immediately recognised
in the income statement and all future changes in the fair value of the
cash flow hedging instruments are immediately recognised in the income
statement.
ii. Derivatives that qualify for fair value hedge accounting
The Group has designated certain derivatives as fair value hedges as
defined under IAS 39. Any changes in the fair value of the derivatives are
recognised immediately in the income statement. The carrying values of the
underlying hedged items are adjusted for the change in the fair value of the
hedged risks, with the gains or losses recognised immediately in the income
statement, offsetting the fair value movement on the derivative.
Prospective effectiveness is assessed quarterly, through a comparison of
the principal terms of the hedging instrument and the underlying hedged
item, including the likelihood of default by the derivative counterparty.
The retrospective effectiveness of the Group’s fair value hedges is
calculated quarterly using the cumulative dollar-offset approach, with
movements in the fair value of the hedged item being compared to
movements in the fair value of the hedging instrument. The Group uses a
range of 80% to 125% for hedge effectiveness and any relationship which
has effectiveness outside this range is deemed to be ineffective and hedge
accounting is suspended.
iii. Embedded derivatives
Derivatives embedded in other financial instruments or other host
contracts are treated as separate derivatives when their risks and
characteristics are not closely related to those of the host contracts and
the host contracts are not carried at fair value, with unrealised gains or
losses reported in the income statement. Embedded derivatives are carried
on the balance sheet at fair value from the inception of the host contract.
Changes in fair value are recognised within the income statement during
the period in which they arise.
g) Inventories
i. Acquired and commissioned television programme rights for broadcast
Programme inventories for broadcast are stated at the lower of cost and
net realisable value (‘NRV’), including, where applicable, estimated
subscriber escalation payments, and net of the accumulated expense
charged to the income statement to date. Such programming rights are
included as inventories when the legally enforceable licence period
commences and all of the following conditions have been met: (a) the
cost of each programme is known or reasonably determinable; (b) the
programme material has been accepted by the Group in accordance with
the conditions of the rights; and (c) the programme is available for its
first showing.
Prior to being included in inventories, the programming rights are classified
as television programme rights not yet available for transmission and not
recorded as inventories on the Group’s balance sheet and are instead
disclosed as contractual commitments (see note 26). Payments made
in advance of the legal right to broadcast the programmes are treated
as prepayments in trade and other receivables.
The cost of television programme inventories is recognised in the operating
expense line of the income statement, over the period the Group utilises
and consumes the programming rights, applying linear-broadcast and
time-based methods of amortisation depending on the type of programme
right, taking into account the circumstances primarily as described below.
These circumstances may change or evolve over time and, as such, the
Group regularly reviews and updates the method used to recognise
programming expense.
• Sports – the majority or all of the cost is recognised in the income
statement on the first broadcast or, where the rights are for multiple
seasons or competitions, such rights are recognised principally on a
straight-line basis across the seasons or competitions. Where the rights
are packaged, sold and/or significantly consumed over the off-season,
the Group allocates an appropriate portion of the total rights value to
the off-season period, and that cost is recognised on a straight-line
basis over the off-season period.
• News – the cost is recognised in the income statement as incurred.
• Movies – the cost is recognised in the income statement on a straight-
line basis over the period for which the broadcast rights are licensed.
• General entertainment – the cost relating to acquired, commissioned
and produced programming rights for broadcast on the Group’s linear
channels is recognised in the income statement on either an accelerated
or straight-line basis. The amortisation profile is principally based on the
expected value of each planned broadcast on the Group’s linear channels
and the time period over which the economic value of the content is
expected to be consumed and utilised. Relicensed content is amortised
on a straight-line basis over the time period the rights are expected to be
utilised. The cost attributable or apportioned to non-linear (on demand)
rights is amortised on a straight-line basis over the period for which
those rights are licensed or over the time period the rights are expected
to be utilised.
The Group regularly reviews its programming rights for impairment. Where
programme broadcast rights are surplus to the Group’s requirements,
and no gain is anticipated through a disposal of the rights, or where the
programming will not be broadcast for any other reason, a write-down
to the income statement is made. Any reversals of inventory write-downs
are recognised as reductions in operating expense.
ii. Programme distribution rights
Programme distribution rights are valued at the lower of cost and NRV,
net of the accumulated expense charged to the income statement to date.
The cost of the programme distribution rights is recognised in operating
expense in line with the profile of expected revenue generation.
iii. Set-top boxes, routers and related equipment
Set-top boxes, routers and related equipment held for sale to customers
are valued at the lower of cost and NRV, the latter of which reflects the
value that the business expects to realise from the set-top boxes and
related equipment in the hands of the customer, and are recognised
through the operating expense line of the income statement. The cost of
inventory is expensed on enablement, which is the process of activating the
viewing card during installation, so as to enable a viewer to view encrypted
broadcast services, and effectively represents the completion of the
installation process for new customers. The amount recognised in the
income statement is determined on a weighted average cost basis, in
accordance with IAS 2 ‘Inventories’.
iv. Raw materials, consumables and goods held for resale and third-party
equipment and vouchers used in marketing
Raw materials, consumables and goods held for resale are valued at the
lower of cost and NRV. The cost of raw materials, consumables and goods
held for resale is recognised through the operating expense line of the
income statement on a first-in-first-out basis.
Third-party equipment used for marketing purposes, such as televisions,
tablets and consoles, and vouchers providing money off third-party goods
and prepaid credit cards are recognised at purchase cost in inventory,
and subsequently in operating expense on delivery to the customer.
83
Annual Report 2018Financial statements Notes to the consolidated financial statements continued
1. Accounting policies (continued)
h) Financial assets and liabilities
Directly attributable transaction costs are included in the initial
measurement of financial assets and liabilities only with respect to those
assets and liabilities that are not subsequently measured at fair value
through profit and loss. At each balance sheet date, the Group assesses
whether there is any objective evidence that any financial asset is impaired.
Financial assets and liabilities are recognised on the Group’s balance sheet
when the Group becomes a party to the contractual provisions of the
financial asset or liability. Financial assets are derecognised from the
balance sheet when the Group’s contractual rights to the cash flows
expire or the Group transfers substantially all the risks and rewards of
the financial asset. Financial liabilities are derecognised from the Group’s
balance sheet when the obligation specified in the contract is discharged,
cancelled or expires.
i. Available-for-sale investments
Equity investments intended to be held for an indefinite period are
classified as available-for-sale investments. They are carried at fair
value, where this can be reliably measured, with movements in fair value
recognised directly in the available-for-sale reserve. Where the fair
value cannot be reliably measured, the investment is carried at cost.
Any impairment losses in equity investments classified as available-for-sale
investments are recognised in the income statement and are not reversible
through the income statement unless or until the investment is disposed
of, and are determined with reference to the closing market share price at
the date the impairment is observed. Any subsequent increase in the fair
value of the available-for-sale investment above the impaired value will be
recognised within the available-for-sale reserve.
Available-for-sale investments are included within non-current assets
unless the carrying value is expected to be recovered principally through
sale within the next 12 months, in which case they are included within
current assets. On disposal, the difference between the carrying amount
and the sum of the consideration received and any cumulative gain or loss
that had previously been recognised directly in reserves is recognised in
the income statement.
ii. Trade and other receivables
Trade and other receivables are non-derivative financial assets with fixed
or determinable payments and, where no stated interest rate is applicable,
are measured at the original invoice amount, if the effect of discounting is
immaterial. Where discounting is material, trade and other receivables are
measured at amortised cost using the effective interest method.
An allowance account is maintained to reduce the carrying value of trade
and other receivables for impairment losses identified from objective
evidence, with movements in the allowance account, either from increased
impairment losses or reversals of impairment losses, being recognised in
the income statement.
iii. Cash and cash equivalents
Cash and cash equivalents include cash in hand, bank accounts, deposits
receivable on demand and deposits with maturity dates of three months
or less from the date of inception. Bank overdrafts that are repayable on
demand and which form an integral part of the Group’s cash management
are also included as a component of cash and cash equivalents.
iv. Short-term deposits
This includes short-term deposits which have maturity dates of more than
three months from inception. These deposits are initially recognised at fair
value, and then carried at amortised cost through the income statement
less any allowance for impairment losses.
v. Trade and other payables
Trade and other payables are non-derivative financial liabilities and are
measured at amortised cost using the effective interest method. Trade
and other payables with no stated interest rate are measured at the
original invoice amount if the effect of discounting is immaterial.
84
vi. Borrowings
Borrowings are recorded as the proceeds received, net of direct issue costs.
Finance charges, including any premium payable on settlement or
redemption and direct issue costs, are accounted for on an accruals basis
in the income statement using the effective interest method and are added
to the carrying amount of the underlying instrument to which they relate,
to the extent that they are not settled in the period in which they arise.
i) Impairment
At each balance sheet date, in accordance with IAS 36 ‘Impairment of
Assets’, the Group reviews the carrying amounts of all its assets excluding
inventories (see accounting policy g), assets classified as held-for-sale,
financial assets (see accounting policy h) and deferred taxation (see
accounting policy o) to determine whether there is any indication that
any of those assets have suffered an impairment loss.
An impairment is recognised in the income statement whenever the
carrying amount of an asset or its cash generating unit exceeds its
recoverable amount. An impairment of an investment in a joint venture or
associate is recognised within the share of profit from joint ventures and
associates. The recoverable amount is the greater of net selling price,
defined as the fair value less costs to sell, and value in use. In assessing
value in use, the estimated future cash flows are discounted to their
present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and risks specific to the asset.
Where it is not possible to estimate the recoverable amount of an individual
asset, the Group estimates the recoverable amount of the cash generating
unit to which the asset belongs. Impairment losses recognised in respect
of cash generating units are allocated first to reduce the carrying amount
of any goodwill allocated to those units, and then to reduce the carrying
amount of other assets in the unit on a pro rata basis.
An impairment loss for an individual asset or cash generating unit will be
reversed if there has been a change in estimates used to determine the
recoverable amount since the last impairment loss was recognised and is
only reversed to the extent that the asset’s carrying amount does not
exceed the carrying amount that would have been determined, net of
depreciation or amortisation, if no impairment loss had been recognised.
Impairment of goodwill is not reversed.
j) Provisions
Provisions are recognised when the Group has a probable, present legal or
constructive obligation to make a transfer of economic benefits as a result
of past events where a reliable estimate is available. The amounts
recognised represent the Group’s best estimate of the transfer of benefits
that will be required to settle the obligation as of the balance sheet date.
Provisions are discounted if the effect of the time value of money is
material using a pre-tax market rate adjusted for risks specific to the
liability.
k) ESOP reserve
Where the Group’s ESOP purchases the Company’s own equity shares, the
cost of those shares, including any attributable transaction costs, is
presented within the ESOP reserve as a deduction in shareholders’ equity
in the consolidated financial statements.
l) Revenue recognition
Revenue, which excludes value added tax and transactions between Group
companies, represents the gross inflow of economic benefit from the
Group’s operating activities, and is measured at the fair value of the
consideration received or receivable. The Group’s main sources of revenue
are recognised as follows:
• Direct-to-consumer revenue includes subscription and transactional
revenue from residential and commercial customers. Subscription
revenue includes revenue from residential and commercial subscribers
to TV, Mobile and home communication products, including over-the-top
(‘OTT’) subscriptions, and income from set-top box, Mobile handset
and tablet sales, installation, service calls and warranties. Revenue
is recognised, net of any discount given, as the goods or services are
provided. Transactional revenue includes the purchase of physical
Sky plc content, OTT passes, pay per view and buy to keep content. Transactional
revenue is recognised, net of any discount given, when the relevant goods
or service are provided.
• Content revenue includes revenue from the sale of channels and
programmes across other platforms and internationally. Channel sales
revenue is recognised as the services are provided on a wholesale basis
to cable and other retailers and is based on the number of subscribers
taking the Sky channels, as reported to the Group by the cable and other
retailers, and the applicable rate card or contract. Programme sales
revenue is earned from the production of programming and the
distribution of programming rights. Production revenue is recognised on
a stage of completion basis, where the stage of completion is determined
by comparing the proportion of costs incurred to date to the total
estimated cost of the transaction. Distribution revenue is recognised
when the contract is signed and the final content has been delivered
for customer exploitation.
• Advertising sales revenue is recognised when the advertising is
broadcast. Revenue generated from airtime sales, where Sky acts as an
agent on behalf of third parties, is recognised on a net commission basis.
A bundle exists where a customer enters into contracts for goods and
services at or around the same time, where the transaction can only be
understood commercially with reference to the bundle of goods and
services as a whole, and where there is price inter-dependency between
the products in a bundle. Where a customer purchases further products
or services subsequent to the original sale, these are judged to represent
contract modifications and are accounted for separately to the
original bundle.
When the Group sells a set-top box, installation or service and a
subscription in one bundled transaction, the total consideration from the
arrangement is allocated to each element based on their relative fair values.
The fair value of each individual element is determined using vendor
specific or third-party evidence. The amount of revenue the Group
recognises for the delivered elements is limited to (cannot exceed) the cash
received or consideration receivable. Discounts are allocated to products
on a pro-rata basis according to relative fair values, except where there is
observable evidence that the discount relates to one or more, but not all,
products within the bundle.
m) Employee benefits
Wages, salaries, social security contributions, bonuses payable and
non-monetary benefits for current employees are recognised in the income
statement as the employees’ services are rendered.
Where the Group provides pensions to eligible employees through defined
contribution schemes, the amount charged to the income statement in the
year represents the cost of contributions payable by the Group to the
schemes in exchange for employee services rendered in that year. The
assets of the schemes are held independently of the Group. Liabilities in
relation to employee obligations which are economically similar to defined
benefit pension schemes are accounted for as such under IAS 19.
Termination benefits are recognised as a liability at the earlier of when
the Group can no longer withdraw the offer of the termination benefit
and when the Group recognises any related restructuring costs, such
termination being before the normal retirement date or as the result
of an offer to encourage voluntary redundancy.
The Group issues equity-settled share-based payments to certain
employees which are measured at fair value and recognised as an expense
in the income statement, with a corresponding increase in equity. The fair
values of these payments are measured at the dates of grant using
option-pricing models, taking into account the terms and conditions upon
which the awards are granted. The fair value is recognised over the period
during which employees become unconditionally entitled to the awards,
subject to the Group’s estimate of the number of awards which will be
forfeited, either due to employees leaving the Group prior to vesting or
due to non-market-based performance conditions not being met. Where
an award has market-based performance conditions, the fair value of the
award is adjusted for the probability of achieving these via the option
pricing model. The total amount recognised in the income statement as
an expense is adjusted to reflect the actual number of awards that vest,
except where forfeiture is due to the failure to meet market-based
performance measures. In the event of a cancellation, whether by the
Group or by a participating employee, the compensation expense that
would have been recognised over the remainder of the vesting period
is recognised immediately in the income statement.
Deferred or contingent payments (often referred to as earnout
agreements), arising in business combinations, which are linked to the
future employment of previous shareholders in the post-completion period,
are recognised as employee remuneration costs in operating expense,
whereby the expected fair value of subsequent payments is accrued in
accordance with IAS 19. Employee remuneration is presented in operating
activities in the cash flow statement.
n) Leases
Leases are classified as finance leases whenever the terms of the lease
transfer substantially all the risks and rewards incidental to ownership of
the asset to the lessee. All other leases are classified as operating leases.
Sub-lease income from operating leases is recognised on a straight-line
basis over the term of the lease.
When the Group is a lessee
Assets held under finance leases are recognised as assets of the Group at
their fair value on the date of acquisition, or if lower, at the present value of
the minimum lease payments. The corresponding liability to the lessor is
included in the balance sheet as a finance lease obligation. Lease payments
are apportioned between finance charges and reductions to the lease
obligations so as to achieve a constant rate of interest on the remaining
balance of the liability.
The lease expense arising from operating leases is charged to the income
statement on a straight-line basis over the term of the lease. Benefits
received and receivable as incentives to enter into operating leases are
recorded on a straight-line basis over the lease term.
When the Group is a lessor
Assets which are provided under operating lease arrangements are
recognised as assets within property, plant and equipment. The assets
remain in the economic ownership of the Group for the duration of the
lease, and are depreciated over their useful economic lives.
o) Taxation, including deferred taxation
The Group’s liability for current tax is based on taxable profit for the year,
and is calculated using tax rates that have been enacted or substantively
enacted at the balance sheet date.
Deferred tax assets and liabilities are recognised using the balance
sheet liability method, providing for temporary differences between the
carrying amounts of assets and liabilities in the balance sheet and the
corresponding tax bases used in the computation of taxable profit. Taxable
temporary differences arising from goodwill and, except in a business
combination, the initial recognition of assets or liabilities that affect neither
accounting profit nor taxable profit are not provided for. Deferred tax
liabilities are recognised for taxable temporary differences arising on
investments in subsidiaries and associates, and interests in joint ventures,
except where the Group is able to control the reversal of the temporary
difference and it is probable that the temporary difference will not reverse
in the foreseeable future. The amount of deferred tax provided is based on
the expected manner of realisation or settlement of the carrying amount
of assets and liabilities, using tax rates that have been enacted or
substantively enacted at the balance sheet date.
The carrying amount of deferred tax assets is reviewed at each balance
sheet date and adjusted to reflect an amount that is probable to be
realised based on the weight of all available evidence. Deferred tax is
calculated at the rates that are expected to apply in the period when the
liability is settled or the asset is realised. Deferred tax assets and liabilities
are not discounted. Deferred tax is charged or credited in the income
statement, except where it relates to items charged or credited directly
to equity, in which case the deferred tax is also included within equity.
85
Annual Report 2018Financial statements Notes to the consolidated financial statements continued
1. Accounting policies (continued)
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority
and the Group intends to settle its current tax assets and liabilities on a
net basis.
p) Distributions to equity shareholders
Dividends are recognised in the retained earnings reserve in the year in
which they are declared.
The cost of repurchasing the Group’s own equity shares for cancellation
(‘share buy-backs’) is recorded in retained earnings. In addition, the nominal
cost of shares repurchased is deducted from share capital and a matching
credit is recorded in the capital redemption reserve.
q) Earnings per share
Basic earnings or loss per share represents the profit or loss for the year
attributable to equity shareholders of the parent company, divided by the
weighted average number of ordinary shares in issue during the year
excluding the weighted average number of ordinary shares purchased by
and held in the Group’s ESOP during the year to satisfy employee share
awards.
Diluted earnings or loss per share represents the profit or loss for the year
attributable to equity shareholders of the parent company, divided by
the weighted average number of ordinary shares used to calculate basic
earnings, plus the weighted average number of dilutive shares resulting
from share options where the inclusion of these would not be antidilutive.
r) Foreign currency translation
Trading activities denominated in foreign currencies are recorded in the
functional currency of the entity at applicable monthly exchange rates.
Monetary assets, liabilities and commitments denominated in foreign
currencies at the balance sheet date are recorded at the rates of exchange
at that date. Non-monetary assets and liabilities denominated in foreign
currencies are translated to the functional currency of the entity at the
exchange rate prevailing at the date of the initial transaction. Gains and
losses from the retranslation of monetary assets and liabilities are included
net in profit for the year.
The Group’s presentational currency is pounds sterling. Assets and
liabilities of the Group’s foreign operations are translated at exchange rates
prevailing on the balance sheet date. Income and expense items are
translated at the applicable monthly average exchange rates. Any exchange
differences arising are classified as equity within the foreign currency
translation reserve. Goodwill and fair value adjustments arising on the
acquisition of a foreign operation are treated as assets and liabilities of the
foreign operation and translated accordingly. Gains and losses accumulated
in the foreign currency translation reserve are included in the income
statement when the foreign operation is disposed of.
Gains and losses on those instruments designated as hedges of the net
investments in foreign operations are recognised in equity to the extent
that the hedging relationship is effective; these amounts are recognised in
the statement of comprehensive income. Gains and losses relating to
hedge ineffectiveness are recognised immediately in the income statement
for the period.
s) Reportable segments
IFRS 8 ‘Operating Segments’ requires the segment information presented
in the financial statements to be that which is used internally by the chief
operating decision maker to evaluate the performance of the business and
decide how to allocate resources. The Group has identified the Board
of Directors as its chief operating decision maker and the segment
information presented in the financial statements is consistent with
the internal reporting reviewed by the Board.
t) Accounting Standards, interpretations and amendments to existing
standards that are not yet effective
The Group has not yet adopted certain new standards, amendments and
interpretations to existing standards, which have been published but are
only effective for accounting periods beginning on or after 1 July 2018.
These new pronouncements are listed below. The Directors are currently
evaluating the impact of the adoption of these standards, amendments
and interpretations in future periods.
• Amendments to IFRS 2 ‘Share-based Payments’ (effective 1 January 2018)
• IFRIC 22 ‘Foreign Currency Transactions and Advanced Consideration’
(effective 1 January 2018)
• Amendments to IFRS 4 ‘Insurance contracts’ (effective 1 January 2018)
• Amendments to IAS 40 ‘Investment Properties’ (effective 1 January 2018)
• IFRS 17 ‘Insurance Contracts’ (effective 1 January 2021)*
• IFRIC 23 ‘Uncertainty over Income Tax Treatments’ (effective 1 January
2019)*
• Amendments to IAS 28 ‘Investments in Associates and Joint Ventures’
– Long term interests (effective 1 January 2019)*
• Annual Improvements to IFRS Standards 2015-2017 (effective 1 January
2019)*
• Amendments to IAS 19 ‘Employee Benefits’ – Plan amendment,
Curtailment or Settlement (effective 1 January 2019)*
• Amendments to References to the Conceptual Framework in IFRS
Standards (effective 1 January 2020)*
• Prepayment Features with Negative Compensation – Amendments to
IFRS 9 (effective 1 January 2019)*
• IFRS 15 ‘Revenue from Contracts with Customers’ is effective on the
Group from 1 July 2018 onwards.
IFRS 15 provides a single, principles-based five-step model to be applied
to all contracts with customers:
• Identify the contract with the customer
• Identify the performance obligations in the contract, introducing the
new concept of ‘distinct’
• Determine the transaction price
• Allocate the transaction price to the performance obligations in the
contracts, on a relative stand-alone selling price basis.
• Recognise revenue when (or as) the entity satisfies its performance
obligations
IFRS 15 also introduces new guidance on, amongst other areas, combining
contracts, discounts, variable consideration, contract modifications and
requires that certain costs incurred in obtaining and fulfilling customer
contracts be deferred on the balance sheet and amortised over the period
an entity expects to benefit from the customer relationship.
When IFRS 15 is adopted, it can be applied either on a fully retrospective
basis, requiring the restatement of the comparative periods presented in
the financial statements, or with the cumulative impact of IFRS 15 applied
as an adjustment to equity on the date of adoption; when the latter
approach is applied, it is necessary to disclose the impact of IFRS 15
on each line item in the financial statements in the reporting period.
The Group has determined that it will adopt IFRS 15 on a modified
retrospective basis. The Group has also determined that the results of its
segments will exclude IFRS 15, on the basis that the Group will continue to
be managed internally using the Group’s current ‘cash-led’ accounting
policies, for both revenue and cost. In line with the modified retrospective
adoption approach, the Group will also present its consolidated group
result under both IFRS 15 and its existing accounting policies.
In the current year, management has concluded a detailed accounting
scoping analysis across each of the Group’s operating segments and across
the products and services within the Group’s revenue streams, the results
of which are summarised below. Management has also determined and
developed implementation approaches for each revenue stream based on
the potential materiality, complexity and volatility of impacts, utilising a
mixture of system led and manually derived estimates, as appropriate
given the specific nature of IFRS 15 adjustments identified.
86
Sky plc Overall, IFRS 15 is expected to result in the recognition of a material new
contract asset and a material new asset pertaining to the costs of
obtaining customer contracts. Material year-on-year changes to revenue,
operating profit and profit before tax are not anticipated. However,
significant and potentially volatile changes in these statutory measures
are foreseeable, depending on the specific volume, value and mix of trading
activity in a given period.
• The Group will apply IFRS 9’s new provisioning model to newly recognised
contract assets, such that an allowance account will be set-up against
the contract asset at inception, to represent the effect of anticipated
customer churn within the minimum contract period. The recognition
of the new allowance account is expected to decrease the net contract
receivable recognised at any point in time, with the corresponding
impact being incurred in operating expense.
At the time of finalising and approving the Group financial statements in
July 2018, the Group remains in the process of calculating, reviewing and
validating the IFRS 15 transition impacts in order to derive the consolidated
Group balance sheet under IFRS 15, as at 30 June 2018. Where practicable,
further direction on expected impacts (pre-tax) is provided below.
Direct-to-consumer revenue – Subscription
• The Group’s revenue recognition for bundled subscription products
will no longer be limited to the consideration receivable for a delivered
element. As a result, the Group will bring forward revenue for distinct
products and services delivered at the start of a subscription contract,
where the price charged for those performance obligations is lower
than the stand-alone selling price. This will correspondingly reduce
subsequent subscription revenue across the remainder of the customer
contract, but will not change revenue recognised in total or the amount
or timing of associated cash flows. Specifically:
– Revenue will be brought forward and a contract asset recognised for
the installation of Sky TV and Fibre Broadband services, resulting in
higher initial revenue and lower subsequent subscription revenues
than our current accounting policy
– Revenue will be brought forward and a contract asset recognised on
delivery of equipment which is owned by the customer, such as certain
set-top boxes or broadband routers, resulting in higher initial revenue
and lower subsequent subscription revenues than our current
accounting policy
– Revenue will now be allocated to third party equipment and vouchers
included within customer bundles for marketing and customer
acquisition purposes. As a result, revenue will be brought forward
resulting in a contract asset being recognised, compared to our
current treatment of recognising a cost upfront on delivery of the
marketing offer
• Where product or service discounts reduce the total consideration for
a customer’s bundle, these will be allocated to all distinct performance
obligations in the bundle. The impact of discounts will be spread over
the minimum contract period. Currently, discounts reduce revenue
over the offer period, rather than over the minimum contract period.
• Discounts will also be allocated to all distinct performance obligations
in the customer bundle on a pro-rata basis. This will reduce the revenue
recognised upfront or brought forward, for upfront delivery.
• Certain upfront fees relating to separately identifiable deliverables, but
which are concluded not to pertain to distinct performance obligations
under IFRS 15 requirements, will result in revenue being deferred
compared to our current accounting treatments.
• Certain propositions are concluded to be within the scope of the new
‘repurchase agreement’ and ‘right of return’ guidance in IFRS 15. As a
result, Sky anticipates deferring a portion of upfront revenues and also a
portion of upfront cost, to represent its best estimate of the expected
value of the assets it anticipates repurchasing from customers,
compared to its current accounting treatment of recognising total
revenue and cost on delivery to the customer.
• The accounting for contract modifications not made at stand-alone sales
price will differ compared to current accounting treatments of
recognising all contract modifications as separate contracts on a
prospective basis. This is anticipated to accelerate the amortisation of
a given contract asset through revenue, potentially resulting in contract
liabilities at certain points of the customer’s minimum subscription
period. The overall effect of this is anticipated to reduce the quantum
of contract asset recognised on balance sheet, at any point in time.
Across the Group, the cumulative net contract asset recognised as at
30 June 2018 on transition, resulting from the accounting changes to
subscription revenues discussed above, is expected to be in the order
of £20-£70 million.
• Cohorts of costs to obtain customer contracts have been identified
that will require capitalisation under IFRS 15, pertaining to certain sales
commissions and incentives payable to Sky employees and third-party
agencies, as well as certain online display costs.
• The costs will be amortised over the period the Group expects to benefit
from the new customer relationship, compared to being expensed as
incurred currently. Depending on the facts and circumstances of each
territory, accelerated or straight-line methods of amortisation are
anticipated, with a resulting amortisation period of 5 years.
Across the Group, the cumulative cost to obtain customer contracts
recognised as at 30 June 2018 on transition, is expected to be in the order
of £350 million.
Transactional
• No significant impacts in the recognition of transactional revenues
related costs have been identified, compared to current accounting
treatments
Advertising
• No significant changes in the recognition of advertising revenues have
been identified, which are anticipated to be recognised as the advertising
campaigns or impressions are delivered over time, in line with current
treatments
• No significant changes to existing principal versus agent judgements
have been identified, compared to current accounting treatments.
• No significant impacts in cost recognition have been identified,
compared to current accounting treatments
Content – Channel
• No significant changes in the recognition of channel (wholesale) revenues
or in cost recognition have been identified, compared to current
accounting treatments
• It is anticipated that channel revenue will be recognised over time as the
service is delivered
Content – Programming
• Distribution: It is anticipated that revenue will be recognised on the
control of the final programming being transferred to the customer,
rather than on risks and rewards being transferred, as currently.
As a result, it is anticipated that distribution revenues will be recognised
on licence period commencement, deferring revenues compared to
our current accounting treatment. On transition, the balance sheet
impact is expected in the range of £nil to 5 million
• Production: It is anticipated that revenue will be recognised on control
of the final programming being transferred to the customer at a point
in time, as opposed to being recognised on a stage of completion basis
over time, as currently, deferring revenue and cost compared to current
accounting treatments. On transition, the balance sheet impact is
expected in the range of £5-15 million
87
Annual Report 2018Financial statements Notes to the consolidated financial statements continued
1. Accounting policies (continued)
• IFRS 9 ‘Financial Instruments’ replaces IAS 39 ‘Financial instruments:
Recognition and Measurement’ and is effective on the Group from
1 July 2018 onwards.
The areas which impact the Group relate to the recognition of impairment
provisions for customer receivables and other financial assets and the
accounting for available-for-sale investments. IFRS 9 also contains new
rules relating to hedge accounting, although the adoption of these is not
mandatory and the Group will continue to apply IAS 39 hedge accounting
policies.
With respect to impairment provisions, IFRS 9 introduces a model based on
expected credit loss. This requires a provision to be made for impairment
from the initial point at which the receivable is recognised, compared to IAS
39 which requires a provision to be made only when a loss event occurs. The
IFRS 9 credit loss model is not expected to have a material impact on either
the Group’s balance sheet position or income statement result.
IFRS 9 requires certain of the Group’s trade receivables to be measured at
fair value, as opposed to amortised cost. The balance sheet impact of this
is expected to be less than £2 million.
IFRS 9 requires all available-for-sale investments to be held on the balance
sheet at fair value, with associated movements incurred in either the
income statement or in equity reserves, as an accounting policy choice.
The balance sheet impact on transition is expected to be less than £15 million.
IFRS 9 requires that amounts recognised in non-financial assets (basis
adjustment) are removed directly from reserves, rather than being released
through other comprehensive income as is currently allowed under IAS 39.
• IFRS 16 ‘Leases’ (effective 1 January 2019)* and is effective on the Group
from 1 July 2019 onwards.
When IFRS 16 is adopted, it can be applied either on a fully retrospective
basis, requiring the restatement of the comparative periods presented in
the financial statements, or with the cumulative retrospective impact of
IFRS 16 applied as an adjustment to equity on the date of adoption; when
the latter approach is applied it is necessary to disclose the impact of IFRS
16 on each line item in the financial statements in the reporting period.
Depending on the adoption method that is utilised, certain practical
expedients may be applied on adoption. The Group has not yet determined
which method it will adopt.
IFRS 16 replaces IAS 17 ‘Leases’ and will primarily change lease accounting
for lessees; lessor accounting under IFRS 16 is expected to be similar to
lease accounting under IAS 17. Lessee accounting under IFRS 16 will be
similar in many respects to existing IAS 17 accounting for finance leases,
but is expected to be substantively different to existing accounting for
operating leases.
Where a contract meets IFRS 16’s definition of a lease, lease agreements
will give rise to the recognition of a non-current asset representing the right
to use the leased item, and a loan obligation for future lease payables.
Lease costs will be recognised in the form of depreciation of the right to use
asset and interest on the lease liability, which may impact the phasing of
operating profit and profit before tax, compared to existing cost profiles
and presentation in the income statement, and will also impact the
classification of associated cash flows.
The detailed assessment of the impact on the Group is ongoing, with the
current focus being on assessing of the completeness of lease contracts.
The adoption is expected to have a material impact on the presentation
of the Group’s assets and liabilities, mainly relating to significant property
leases. Due to the quantity of contracts under review, management has
not completed the impact assessment of the new accounting standard,
and therefore a quantification of the impact on the Group’s results cannot
currently be reliably estimated.
* not yet endorsed for use in the EU
u) Critical accounting policies and judgements and key sources
of estimation uncertainty
Certain accounting policies are considered to be critical to the Group. An
accounting policy is considered to be critical if, in the Directors’ judgement,
its selection or application materially affects the Group’s financial position
or results. The application of the Group’s accounting policies also requires
the use of estimates and assumptions that affect the Group’s financial
position or results.
Below is a summary of areas in which estimation is applied primarily
in the context of applying critical accounting policies and judgements.
Critical accounting policies and judgements
i. Revenue (see note 2)
Selecting the appropriate timing for, and amount of, revenue to be
recognised requires judgement. This may involve estimating the fair value
of consideration before it is received. Judgement is required in determining
which products constitute a bundle, and how revenue is allocated to
products within the bundle. When the Group sells a set-top box, installation
service and TV, home communications and/or mobile subscriptions in one
bundled transaction, the total consideration from the arrangement is
allocated to each element based on its relative fair value. The fair value of
each individual element is determined using vendor-specific or third-party
evidence. The amount of revenue the Group recognises for the delivered
elements is limited to the cash received or consideration receivable, which
is not contingent on the delivery of additional goods or services.
Discounts are allocated to products on a pro-rata basis according to
relative fair values, except where there is observable evidence that the
discount relates to one or more, but not all, products within the bundle,
so as to faithfully represent the commercial substance of the transaction.
Mobile handset and tablet revenues are recognised upfront on delivery to
the customer. The Sky Mobile proposition includes an option whereby the
customer can sell their handset to Sky at a preset market price. This
requires the application of judgement in assessing whether or not the
customer’s option is on-market, taking into account the expected future
resale value of the equipment. If the option is concluded to be on-market,
the Group recognises handset and tablet revenue on delivery, and any
future purchases of customer handsets or tablets at the time of purchase,
as inventory.
ii. Taxation, including deferred taxation (see notes 7 and 15)
The Group’s total tax charge is the sum of the current and deferred tax
charges. The calculation of the Group’s total tax charge necessarily involves
a degree of estimation and judgement in respect of certain items whose
tax treatment cannot be finally determined until resolution has been
reached with the relevant tax authority or, as appropriate, through a formal
legal process.
Provisions for tax contingencies require management to make judgements
and estimates in relation to tax audit issues and exposures. Amounts
provided are based on management’s interpretation of applicable tax law
and the likelihood of settlement and include any liability for interest and
penalties. Tax benefits are not recognised unless it is probable that the tax
positions will be sustained. Once considered to be probable, management
reviews each material tax benefit to assess whether a provision should be
taken against full recognition of the benefit on the basis of the likely
resolution of the issue through negotiation and/or litigation. The amounts
recognised in the consolidated financial statements in respect of each
matter are derived from the Group’s best estimation and judgement, as
described above. However, the inherent uncertainty regarding the outcome
of these items means the eventual resolution could differ from the
provision and in such event the Group would be required to make an
adjustment in a subsequent period which could have a material impact
on the Group’s profit and loss and/or cash position. There is a reasonable
possibility that an overseas tax matter will be resolved within the next 12
months. A resolution in favour of the Group would result in a reduction
of up to £48 million in the liability recognised as at 30 June 2018.
88
Sky plc The key area of judgement in respect of deferred tax accounting is the
assessment of the expected timing and manner of realisation or settlement
of the carrying amounts of assets and liabilities held at the balance sheet
date. In particular, assessment is required of whether it is probable that
there will be suitable future taxable profits against which any deferred tax
assets can be utilised. Specifically, the Group has a gross deferred tax asset
relating to unused tax losses in Sky Deutschland of £805 million (2017: £727
million), which is recognised net of the deferred tax liabilities principally
arising from the fair value of acquired customer contracts in Sky
Deutschland resulting in a net deferred tax asset for Sky Deutschland
of £401 million (2017: £296 million), as described in note 15.
iii. Intangible assets and property, plant and equipment
(see notes 11 and 12)
The assessment of the useful economic lives and the method of amortising
these assets requires judgement. Depreciation and amortisation are
charged to the income statement based on the useful economic life
selected, which requires an estimation of the period and profile over which
the Group expects to consume the future economic benefits embodied
in the assets. The Group reviews its useful economic lives on at least an
annual basis.
Determining whether the carrying amount of these assets has any
indication of impairment also requires judgement. If an indication of
impairment is identified, further judgement is required to assess whether
the carrying amount can be supported by, for example, the net present
value of future cash flows forecast to be derived from the asset. This
forecast involves cash flow projections and selecting the appropriate
discount rate, where applicable.
Assessing whether assets meet the required criteria for initial capitalisation
requires judgement. This requires a determination of whether the assets
will result in future benefits to the Group. In particular, internally generated
intangible assets must be assessed during the development phase to
identify whether the Group has the ability and intention to complete
the development successfully.
Determining the costs of assets to be capitalised requires judgement.
Specifically, judgement and estimation is required in determining the
amount of duties and non-refundable taxes, probable trade discounts and
rebates, and directly attributable costs to bring the asset to the location
and condition necessary for it to be capable of operating in the manner
intended by management (including relevant delivery and logistics costs
to the customer’s premises) to be allocated to the asset.
iv. Programming inventory for broadcast (see note 16)
The key areas of accounting for programming inventory for broadcast that
require judgement are the assessment of the appropriate profile over
which to amortise general entertainment programming, and the proportion
of sports rights cost which should be allocated to an off-season period.
General entertainment programming
The general entertainment programming assessment requires the Group
to form an expectation of:
• the number of times a programme will be broadcast on the Group’s linear
channels, and the time period over which the programme is expected to
be utilised;
• the relative value associated with each broadcast; and
• the relative value associated with linear channel and non-linear
programme rights. Linear channel rights refer to the rights to broadcast
a programme on the Group’s linear broadcast channels and non-linear
rights refer to the rights to make a programme available on the Group’s
on demand services.
In order to perform this assessment, the Group considers the following
factors:
• The frequency with which, and the time period over which, the
programme is expected to be utilised on the Group’s linear channels and
non-linear services. This is usually based on a combination of the actual
period specified in the contract for the programme rights, an initial
expectation of when airings will be scheduled and the alternative
programming available to the Group within this period. Linear rights
are consumed as and when the programmes are broadcast; non-linear
rights are consumed over the period the programme is made available.
• Expectations as to the number of viewers a programme is likely to
achieve for each individual broadcast on the Group’s linear channels over
the contractual broadcast period. The number of viewers per broadcast
directly influences advertising revenue for channels, although this
consideration is partly influenced by the Group’s assessment of the
potential impact of the publicly available information on its competitors’
scheduling intentions against planned broadcasts.
• The potential benefits associated with utilising programming. Certain
high-profile or high-quality programming titles have additional value to
the Group, as they attract new TV customers and encourage retention
of existing TV customers, which directly influences subscription revenues.
As such, these programmes are able to retain more value throughout
their licence period than would be indicated when considering the
expected customer viewing and consumption numbers alone.
• The relative value associated with linear channel and non-linear rights is
assessed based on the manner in which the Group expects to utilise the
programming rights and the relative value perceived by customers for
the Group’s channels and services. Those relative values may also differ
based on the type and genre of programme. Such values are reviewed
by the Group against current and expected future trends in customer
viewing behaviour for the Group’s programming and channels. The value
apportioned to non-linear rights (in addition to any separately acquired
non-linear rights) is amortised on a straight-line basis over the period of
the broadcast rights, as the Group considers this to be the profile most
closely aligned to its consumption of those rights. A broadcast-based
amortisation model is not relevant or appropriate for this type of right
as the Group makes the programmes available for a period of time
rather than for a specified number of broadcasts.
Sports rights – off-season allocation
The majority or all of sports right cost is recognised in the income
statement on first broadcast or, where the rights are for multiple seasons
or competitions, principally on a straight-line basis across the seasons or
competitions. Where the rights are packaged, sold and/or significantly
consumed over the off-season, the Group also allocates an appropriate
portion of the total rights value to the off-season period, and that cost
is recognised on a straight-line basis over the off-season period.
Judgement is therefore required in determining how the Group utilises and
consumes sports rights during the off-season. In forming this judgement,
it considers the hours expected to be scheduled in the off-season, viewing
expected to be achieved in the off-season, subscriber profiles over the
off-season, as well as other qualitative considerations.
During the current year, the Group’s pay TV business in the UK and Ireland
repackaged its sport channel proposition, resulting in new sport-specific
channels being retailed to the customer, which are consumed throughout
the year. As a result, a portion of total rights value has been allocated to
the off-season period, and will be recognised on a straight-line basis over
the off-season period. This change in accounting estimate has resulted
in a reduction in programming expense of £35 million in the year.
89
Annual Report 2018Financial statements Key sources of estimation uncertainty
Areas for which there are major sources of estimation uncertainty at the
reporting period end (as defined by IAS 1), that have a significant risk of
causing a material adjustment to be made to the carrying value amounts
of assets and liabilities within the next financial year, are discussed below.
By contrast, areas where estimation is applied primarily in the context of
applying critical accounting policies and judgements, have been discussed
in the preceding section above.
vi. Recoverability of deferred tax assets
The recognition of deferred tax assets is contingent on the Group’s
estimation of the future taxable income, particularly that of Sky
Deutschland. This estimation is supported by the Group’s latest available
medium term plan, which was considered by the Company’s Board of
Directors, and extrapolated beyond the forecast period as disclosed in
note 15. Given the nature of Sky Deutschland’s subscription-based
business model, management has sufficient confidence in its ability to
execute and realise these plans. A consistent set of forecasts is used as
the basis for assessing the carrying value of deferred tax assets with that
used in the Group’s annual impairment review of goodwill associated
with Sky Deutschland, as described in note 1 and note 10.
As such, the carrying value of deferred tax assets is sensitive to the
method, assumptions and estimates underlying the calculations. We
consider the sensitivity of the outcome to plausible changes in key inputs,
as part of our assessments. Uncertainty around key sources of estimation
will be resolved through the passage of time, as future performance
materialises and latest forecasts are considered.
Notes to the consolidated financial statements continued
1. Accounting policies (continued)
v. Mobile handset financing (see note 20)
During the year, the Group entered into a securitisation facility with a third
party for the sale of mobile handset receivables. The Group does not have
control over the securitisation entity, and has transferred substantially all
the risks and rewards of the receivables.
As a result, the receivables have been derecognised and the securitisation
entity is not consolidated within the Group’s financial statements, such
that the transfer of handset receivables is treated as a sale.
The Group applies judgement in its assessment of the derecognition of
handset trade receivables on a cohort-by-cohort basis, taking into account
its best estimate of expected credit losses and expected volatility of credit
losses. In doing so, it considers historical credit losses and volatility incurred
with respect to other Sky products and services, as well as external
benchmarks. As a result of the discount applied and the securitisation
entity’s investment structure, c90-95% of expected losses and variability
in losses is expected to be transferred.
The Group also applies judgement in its assessment of whether it controls
the securitisation entity, to determine whether it should be consolidated
within the Group financial statements. In doing so, it considers whether
the Group has power over the entity, exposure or rights to variable returns
from its involvement with the entity, and the ability to use its power over
the entity to affect the level of those returns, as set out in the
requirements of IFRS 10.
The Group’s power over the securitisation entity has been considered with
respect to decisions relating to the transfer of receivables, the servicing of
those receivables and risk management of the entity. The Group’s exposure
or rights to variable returns from the securitisation entity has been
considered with respect to the level of fees earned and the nature of any
investment which the Group holds in the entity. The Group’s ability to use
its power to affect the level of those returns has been considered taking
into account the degree to which the Group benefits from any upside
performance and its residual exposure to downside performance.
As a result of this evaluation, it was determined that the Group does
not have control over the securitisation entity.
Further information on the handset financing structure, including
disclosures required under IFRS 12 regarding non-consolidated
securitisation entities, and also under IFRS 7 regarding the derecognition of
financial assets where the Group has continuing involvement, can be found
in note 20.
90
Sky plc 2. Operating segments
The Group has three reportable segments that are defined by geographic area to reflect how the Group’s operations are monitored and managed.
The reportable segments presented reflect the Group’s management and reporting structure as viewed by the Board of Directors, which is considered
to be the Group’s chief operating decision maker.
Reportable segment
UK and Ireland
Germany and Austria
Italy
Description
The activities and operations of the pay TV, home communications, mobile and adjacent businesses in the UK and Ireland
The activities and operations of the pay TV and adjacent businesses in Germany and Austria
The activities and operations of the pay TV and adjacent businesses in Italy
Segmental income statement for the year ended 30 June 2018
Direct-to-consumer
Content
Advertising
Revenue
Inter-segment revenue
Revenue from external customers
Programming
Direct network costs
Sales, general and administration
Operating expense
EBITDA
Depreciation and amortisation
Operating profit (loss)
Share of results of joint ventures and associates
Investment income
Finance costs
Profit on disposal of available-for-sale investment
Profit before tax
UK &
Ireland
£m
7,611
788
540
8,939
Germany &
Austria
£m
1,896
31
96
2,023
(8)
8,931
(3,698)
(1,148)
(2,696)
(7,542)
1,888
(499)
–
2,023
(1,243)
–
(784)
(2,027)
119
(123)
Italy
£m
2,323
27
281
2,631
–
2,631
(1,490)
–
(952)
(2,442)
342
(153)
1,389
(4)
189
Adjusting
Items and
Eliminations
£m
–
(8)
–
(8)
Statutory
Group Total
£m
11,830
838
917
13,585
8
–
(57)
9
(492)
(540)
(241)
(299)
(540)
–
13,585
(6,488)
(1,139)
(4,924)
(12,551)
2,108
(1,074)
1,034
56
11
(286)
49
864
91
Annual Report 2018Financial statements Notes to the consolidated financial statements continued
2. Operating segments (continued)
Segmental income statement for the year ended 30 June 2017
Direct-to-consumer
Content
Advertising
Revenue
Inter-segment revenue
Revenue from external customers
Programming
Direct network costs
Sales, general and administration
Operating expense
EBITDA
Depreciation and amortisation
Operating profit
Share of results of joint ventures and associates
Investment income
Finance costs
Profit before tax
UK &
Ireland
£m
7,398
698
508
8,604
(4)
8,600
(3,649)
(964)
(2,703)
(7,316)
1,739
(451)
1,288
Germany &
Austria
£m
1,760
22
76
1,858
–
1,858
(1,039)
–
(778)
(1,817)
143
(102)
41
Italy
£m
2,154
62
242
2,458
–
2,458
(1,495)
–
(824)
(2,319)
257
(118)
139
Adjusting
Items and
Eliminations
£m
–
(4)
–
(4)
Statutory
Group Total
£m
11,312
778
826
12,916
4
–
(17)
–
(483)
(500)
(203)
(301)
–
12,916
(6,200)
(964)
(4,788)
(11,952)
1,936
(972)
(504)
964
21
22
(204)
803
Results for each segment are presented on an adjusted basis. A reconciliation of statutory to adjusted profit is shown in note 8 which also includes a description of the adjusting items.
Transactions between segments are recorded based on estimated market prices.
To provide a more relevant presentation, management has chosen to reanalyse the revenue categories from those previously reported. Revenues previously included in Subscription, Transactional,
and Other have been aggregated into Direct-to-consumer revenue. Revenue previously labelled Programme and Channel sales is now labelled Content. To provide a more relevant presentation,
management has chosen to reanalyse the segmental allocation of certain costs in the prior year, to be consistent with their presentation in the current year, resulting in the transfer of Sales,
general and administration expense of £1 million from Germany & Austria and £3 million from Italy into the UK & Ireland segment.
During the year, the Group’s pay TV business in the UK and Ireland repackaged its sport channel proposition, resulting in new sport-specific channels being retailed to the customer, which are
consumed throughout the year. As a result, in accordance with the Group’s accounting policy for the cost of sports rights, a portion of the total rights value has been allocated to the off-season
period, and will be recognised on a straight-line basis over the off-season period. This change in accounting estimate has resulted in a reduction in programming expense of £35 million in the year.
Revenue of £8,325 million (2017: £8,050 million) arises from goods and services provided to the UK and revenue of £5,260 million (2017: £4,866 million) arises from services provided to other
countries. Non-current assets located in the UK were £11,661 million (2017: £10,915 million) and non-current assets located outside the UK were £499 million (2017: £977 million).
Included within operating expenses for the year ended 30 June 2018 are:
• Costs of £194 million (2017: £140 million) relating to corporate restructuring and efficiency programmes. These costs have been recognised as follows:
– £24 million (2017: £20 million) within Programming
– £170 million (2017: £120 million) within Sales, general and administration (‘SG&A’)
• Costs of £66 million (2017: £50 million) relating to the integration of Sky Deutschland and Sky Italia in the enlarged Group. These costs have been recognised as follows:
– £2 million (2017: £1 million) within Programming
– £64 million (2017: £49 million) within SG&A
• Costs of £23 million (2017: £56 million) relating to advisory fees and share-based payments incurred as a result of offers for the Company recognised within SG&A.
•
Income of £21 million (2017: nil) relating to regulatory related receipts and proceeds of settlements. This income has been recognised as follows:
– £9 million within Direct Network Costs
– £12 million within SG&A
• Costs of £278 million (2017: £258 million) relating to the amortisation of acquired intangible assets and related acquisition costs. These costs have been recognised as follows:
– £31 million (2017: nil) within Programming
– £247 million (2017: £258 million) within SG&A
92
Sky plc 3. Investment income and finance costs
Investment income
Interest on cash, cash equivalents and short-term deposits
Interest on other loans and receivables
Dividends receivable from available-for-sale investments
Finance costs
– Interest payable and similar charges
Facility related costs
Guaranteed Notes (see note 20)
Finance lease interest
Mobile handset financing costs
– Other finance income (expense)
Remeasurement of borrowings and borrowings-related derivative financial instruments (not qualifying for hedge accounting)
Remeasurement of other derivative financial instruments (not qualifying for hedge accounting)
Loss arising on derivatives in a designated fair value hedge accounting relationship
Gain arising on adjustment for hedged item in a designated fair value hedge accounting relationship
2018
£m
3
5
3
11
2018
£m
(2)
(215)
(6)
(11)
(234)
(57)
5
(14)
14
(52)
(286)
2017
£m
6
16
–
22
2017
£m
(5)
(233)
(7)
–
(245)
22
18
(47)
48
41
(204)
Borrowing costs included in the cost of qualifying assets during the year arose on the general borrowing pool and are calculated by applying
a capitalisation rate of 2.5% (2017: 2.7%) to expenditure on such assets. The amount capitalised in the current year amounted to £8 million
(2017: £10 million). Tax relief in the current year on capitalised interest totals £1 million (2017: £1 million).
4. Profit on disposal of available-for-sale investment
On 27 March 2018, the Group completed its disposal of its investment in Roku Inc. consisting of 2,571,740 shares for aggregate consideration
of £58 million. A profit of £49 million was realised on disposal, being the excess of the consideration above the initial cost of the shares (£9 million).
5. Profit before taxation
Profit before taxation is stated after charging:
Cost of inventories recognised as an expense
Depreciation, impairment and losses (profits) on disposals of property, plant and equipment
Amortisation, impairment and losses (profits) on disposals of intangible assets
Rentals on operating leases and similar arrangements
Foreign exchange
Foreign exchange gains recognised in the income statement during the year amounted to £1 million (2017: gains of £23 million).
2018
£m
5,217
430
644
101
2017
£m
4,847
366
606
99
93
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
5. Profit before taxation (continued)
Audit fees
An analysis of auditor’s remuneration is as follows:
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor for the audit of the Company’s subsidiaries
Total audit fees
Audit-related services
Taxation services
Other assurance services
Other advisory services
Total non-audit fees
2018
£m
3.5
0.5
4.0
0.7
0.1
0.2
3.2
4.2
2017
£m
3.1
0.5
3.6
0.8
0.2
0.5
2.7
4.2
Other assurance services principally relate to assurance procedures performed on Group billing systems and The Bigger Picture assurance.
Deloitte Germany and Deloitte Italy provided technology consulting and advisory services to Sky Deutschland and Sky Italia during the year. As described
in the Report of the Audit Committee, these services were reviewed regularly throughout the year in order to ensure the continued independence of
Deloitte LLP as auditors of the Group. The total fees for these services were £3.2 million (2017: £2.7 million). Total non-audit fees excluding non-audit fees
incurred as a consequence of Offers for the Company were £3.8 million (2017: £3.4 million).
6. Employee benefits and key management compensation
a) Group employee benefits
Wages and salaries
Social security costs
Costs of employee share option schemes1
Contributions to the Group’s pension schemes2
2018
£m
1,306
184
94
48
1,632
2017
£m
1,331
202
147
49
1,729
1 £94 million relates to equity-settled share-based payments (2017: £147 million).
2 The Group operates defined contribution pension schemes. The pension charge for the year represents the cost of contributions payable by the Group to the schemes during the
year. The amount payable to the schemes by the Group at 30 June 2018 was £7 million (2017: £9 million).
The average monthly number of full-time equivalent persons (including temporary employees) employed by the Group during the year was as follows:
Channels and services
Customer service, sales and marketing
Transmission and technology
Management and administration
2018
Number
5,684
16,242
4,497
2,504
28,927
2017
Number
4,750
16,774
4,962
2,646
29,132
There are approximately 1,476 (2017: 1,009) temporary staff included within the average number of full-time equivalent persons employed by the Group.
b) Key management compensation (see note 28d)
Short-term employee benefits
Share-based payments
2018
£m
6
9
15
2017
£m
6
11
17
Post-employment benefits were less than £1 million (2017: less than £1 million). The amounts disclosed for key management compensation are included
within the disclosures in note 6(a).
94
Sky plc
7. Taxation
a) Taxation recognised in the income statement
Current tax expense
Current year – UK
Adjustment in respect of prior years – UK
Current year – overseas
Adjustment in respect of prior years – overseas
Total current tax charge
Deferred tax expense
Origination and reversal of temporary differences – UK
Adjustment in respect of prior years – UK
Origination and reversal of temporary differences – overseas
Adjustment in respect of prior years – overseas
Total deferred tax credit
Taxation
b) Taxation recognised directly in equity
Current tax credit relating to share-based payments
Deferred tax credit relating to share-based payments
Deferred tax credit relating to cash flow hedges
2018
£m
142
(4)
21
(2)
157
22
(5)
(59)
(66)
(108)
49
2018
£m
(6)
(13)
(25)
(44)
2017
£m
183
(34)
16
(16)
149
(17)
11
(31)
–
(37)
112
2017
£m
(1)
(6)
(48)
(55)
c) Reconciliation of effective tax rate
The tax expense for the year is lower (2017: lower) than the expense that would have been charged using the statutory rate of corporation tax in the
UK (19.0%) (2017: blended rate 19.75%) applied to profit before tax. The differences are explained below:
Profit before tax:
Profit before tax multiplied by rate of corporation tax in the UK of 19.0% (2017: blended rate 19.75%)
Effects of:
Different statutory tax rates of overseas jurisdictions
Disposal of Group investments
Net effect of other non-taxable/non-deductible items
Effect of tax rate changes
Adjustments in respect of prior years
Taxation
8. Earnings per share
The weighted average number of shares for the year was:
Ordinary shares
ESOP trust ordinary shares
Basic shares
Dilutive ordinary shares from share options
Diluted shares
2018
£m
864
164
(17)
(10)
(15)
4
(77)
49
2017
£m
803
159
(15)
–
7
–
(39)
112
2018
Millions of
shares
1,719
(3)
1,716
11
1,727
2017
Millions of
shares
1,719
(9)
1,710
29
1,739
There are no share options (2017: 89,756) which could potentially dilute earnings per share in the future but which have been excluded from the
calculation of diluted earnings per share as they are anti-dilutive in the year.
95
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
8. Earnings per share (continued)
Basic and diluted earnings per share are calculated by dividing the profit for the year attributable to equity shareholders of the parent company by
the weighted average number of shares for the year. In order to provide a measure of underlying performance, management has chosen to present
an adjusted profit for the year which excludes items that may distort comparability. Such items arise from events or transactions that fall within
the ordinary activities of the Group but which management believes should be separately identified to help explain underlying performance.
The adjusted results are also those used by management to monitor performance and run the business.
Profit for the year
Loss attributable to non-controlling interests
Profit attributable to equity shareholders of the parent company
Reconciliation from profit attributable to equity shareholders of the parent company to adjusted profit for the
year attributable to equity shareholders of the parent company
Profit for the year attributable to equity shareholders of the parent company
Costs relating to corporate restructuring and efficiency programmes
Costs relating to the integration of Sky Deutschland and Sky Italia in the enlarged Group
Regulatory-related receipts and proceeds of settlements
Costs relating to advisory fees and share-based payments incurred as a result of offers for the Company
Amortisation of acquired intangible assets and related acquisition costs
Distribution received from associate
Profit on disposal of joint venture (see note 13)
Profit on disposal of available-for-sale investment (see note 4)
Remeasurement of all derivative financial instruments not qualifying for hedge accounting and hedge ineffectiveness
Tax adjusting items and the tax effect of above items
Adjusted profit for the year attributable to equity shareholders of the parent company
Earnings per share from profit for the year
Basic
Diluted
Adjusted earnings per share from adjusted profit for the year
Basic
Diluted
9. Dividends
Dividends declared and paid during the year
2016 Final dividend paid: 20.95p per ordinary share
2018 Special dividend paid: 10.00p per ordinary share
2018 Interim dividend paid: 13.06p per ordinary share
2018
£m
815
–
815
2018
£m
815
194
66
(24)
23
276
(33)
–
(49)
52
(165)
1,155
2018
pence
47.5p
47.2p
2017
£m
691
4
695
2017
£m
695
140
50
(8)
56
269
–
(8)
–
(41)
(103)
1,050
2017
pence
40.6p
40.0p
67.3p
66.9p
61.4p
60.4p
2018
£m
–
172
224
396
2017
£m
358
–
–
358
As the 21st Century Fox Offer had not become effective at 31 December 2017, and in accordance with the terms of the offer, a special dividend was paid
on 9 February 2018.
Dividends are paid between Group companies out of profits available for distribution subject to, inter alia, the provisions of the companies’ articles
of association and the Companies Act 2006. The ESOP has waived its rights to dividends.
10. Goodwill
Carrying value
At 1 July 2016
Foreign exchange movements
Other
At 30 June 2017
Foreign exchange movements
Other
At 30 June 2018
96
£m
4,713
188
29
4,930
16
26
4,972
Sky plc
Goodwill has principally arisen from the Group’s purchases of Sky Deutschland, Sky Italia, British Interactive Broadcasting (‘BiB’), Easynet’s UK broadband
network assets and residential activities, 365 Media’s content activities, Amstrad, Living TV, The Cloud and the O2 consumer broadband and fixed-line
telephony business.
Goodwill, allocated by cash generating unit, is analysed as follows:
UK and Ireland1
Germany and Austria2
Italy3
2018
£m
936
3,213
823
4,972
2017
£m
932
3,192
806
4,930
Impairment reviews were performed on these goodwill balances at 30 June 2018, which did not indicate impairment.
Recoverable amounts for each of the cash generating units (‘CGUs’) were calculated on the basis of value in use, using cash flows calculated for the next
four years as forecast by management. In order to extrapolate cash flow projections beyond this period:
•
A growth rate of 2% for subsequent years was applied to the UK and Ireland CGU;
• An initial growth rate of 20% for the four years beyond our plan period, declining to 2% for subsequent years, was applied to the Germany and Austria
CGU; and
•
An initial growth rate of 20% for the four years beyond our plan period, declining to 2% for subsequent years, was applied to the planned Italian
broadband triple-play service and a growth rate of 2% for subsequent years for the remainder of the Italy CGU.
In the prior year, a growth rate of 2% was applied to all units. The growth rates selected were based on an extrapolation of trends included within
management forecasts and on historical growth rates observed by the Group for similar products and/or in similar markets. The approach with respect to
growth rates has been updated in the current year to reflect our business plans and expected medium-term penetration of the market in the Germany
and Austria CGU and expected medium-term growth following the launch of the Italian broadband triple-play service in the Italy CGU.
The cash flows of the UK and Ireland CGU were discounted using a pre-tax discount rate of 8% (2017: 10%), the cash flows of the Germany and Austria
CGU were discounted using a pre-tax discount rate of 8% (2017: 8%) and the cash flows of the Italy CGU were discounted using a pre-tax discount rate
of 9% (2017: 10%).
In determining the applicable discount rate, management applied judgement in respect of several factors, which included, inter alia: assessing the risk
attached to future cash flows and making reference to the capital asset pricing model (the ‘CAPM’). Management gave consideration to the selection of
appropriate inputs to the CAPM, which included the risk free rate, the equity risk premium and a measure of systematic risk. Management also considered
capital structure and an appropriate cost of debt in arriving at the discount rate.
The key assumptions used to calculate the value in use for each unit include the discount rate, the growth rate used to extrapolate cash flow projections
and forecast cash flows. The metrics on which the forecast cash flows of each unit were derived include the number of gross customer additions, the rate
of churn, the average revenue per customer, levels of programming spend, acquisition costs per customer and anticipated changes in the product mix and
marketing mix of the business activities. The values assigned to each of these were determined based on the extrapolation of historical trends within the
Group, and external information on expected future trends in the entertainment and communications industry in each territory.
Sensitivity analysis
Changing of the key assumptions selected by management, in particular the discount rate, forecast cash flows and the growth rate used to extrapolate
cash flow projections, could significantly affect the Group’s impairment evaluation and hence reported assets and profits or losses.
Other than as disclosed below, management believes that no reasonably possible change in any of these key assumptions would cause the carrying value
of any CGU to exceed its recoverable amount.
The following changes to key assumptions used in the impairment review would, in isolation, lead to the recoverable amount being equal to the carrying
value as at 30 June 2018. For the Germany and Austria CGU, (i) the discount rate would need to increase from 8% to 10%; (ii) the cash flows would need
to decrease by 26% in each year; or (iii) the initial growth rate used to extrapolate those cash flow projections would need to decline from 20% to 10%.
For the Italy CGU, (i) the discount rate would need to increase from 9% to 12%; or (ii) the cash flows would need to decrease by 26% in each year.
1. UK and Ireland
The UK and Ireland unit includes goodwill arising from the purchase of BiB, Easynet’s UK broadband network assets and residential activities, 365 Media’s
content activities, Amstrad, Living TV, The Cloud and the O2 consumer broadband and fixed-line telephony business. The UK and Ireland unit includes
intangibles with indefinite lives of £31 million (2017: £31 million).
2. Germany and Austria
The Germany and Austria unit includes goodwill arising from the purchase of Sky Deutschland.
3. Italy
The Italy unit includes goodwill arising from the purchase of Sky Italia. The Italy unit includes intangibles with indefinite lives of £580 million
(2017: £573 million).
97
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
11. Intangible assets
Internally
generated
intangible
assets
£m
Software
development
(external)
and software
licences
£m
Customer
contracts
and related
customer
relationships
£m
Other
intangible
assets
£m
Trademarks
£m
Internally
generated
intangible
assets
not yet
available
for use
£m
Acquired
intangible
assets
not yet
available
for use
£m
Cost
At 1 July 2016
Additions from business combinations
Additions
Disposals
Transfers
Foreign exchange movements
At 30 June 2017
Additions from business combinations
Additions
Disposals
Transfers
Foreign exchange movements
At 30 June 2018
Amortisation
At 1 July 2016
Amortisation
Disposals
Impairments
Foreign exchange movements
At 30 June 2017
Amortisation
Disposals
Impairments
Foreign exchange movements
At 30 June 2018
Carrying amounts
At 1 July 2016
At 30 June 2017
At 30 June 2018
546
–
–
–
–
27
573
–
–
–
–
7
580
5
1
–
–
–
6
–
–
–
–
6
541
567
574
750
–
135
(50)
112
–
947
–
107
(26)
108
–
1,136
385
137
(50)
3
–
475
166
(26)
4
–
619
365
472
517
666
–
105
(21)
92
12
854
–
106
(13)
113
1
1,061
405
123
(21)
6
4
517
145
(13)
9
2
660
261
337
401
3,451
22
–
–
–
181
3,654
3
–
–
–
17
3,674
653
251
–
–
20
924
236
–
–
47
1,207
2,798
2,730
2,467
510
5
72
(2)
1
6
592
–
53
(7)
1
–
639
405
76
(2)
1
–
480
71
(7)
–
–
544
105
112
95
148
–
98
(8)
(117)
–
121
–
200
(6)
(108)
–
207
–
–
(8)
8
–
–
–
(6)
6
–
–
148
121
207
228
–
143
–
(88)
4
287
–
104
(7)
(114)
–
270
–
–
–
–
–
–
–
–
–
–
–
228
287
270
Total
£m
6,299
27
553
(81)
–
230
7,028
3
570
(59)
–
25
7,567
1,853
588
(81)
18
24
2,402
618
(52)
19
49
3,036
4,446
4,626
4,531
The estimated future amortisation charge on intangible assets with finite lives for each of the next five years is set out below. It is likely that future
amortisation will vary from the figures below as the estimate does not include the impact of any future investments, disposals or capital expenditure.
Year ending 30 June
Estimated amortisation charge
2019
£m
594
2020
£m
489
2021
£m
417
2022
£m
342
2023
£m
293
Within intangible assets there are certain assets with indefinite useful lives. The carrying value of these assets is £611 million (2017: £604 million).
The Group’s internally generated intangible assets relate principally to software development associated with our customer management systems
and set-top boxes. The Group’s other intangible assets mainly include copyright licences and connection fees.
As part of the acquisition of Sky Italia the Group acquired the rights to use trademarks in certain territories. The rights to use trademarks in certain
territories are considered to have indefinite lives because the Group has the intention and ability to consume these rights over an indefinite period.
An impairment review of the assets is performed annually as part of the Group’s impairment reviews of its CGUs (see note 10).
Included within customer contracts and related customer relationships are intangible assets with a net book value of £1,439 million (2017: £1,555 million)
and a remaining useful life of 12 years (2017: 13 years) relating to the acquired customer base in Germany and Austria and intangible assets with a net book
value of £953 million (2017: £1,030 million) and a remaining useful life of 12 years (2017: 13 years) relating to the acquired customer base in Italy.
98
Sky plc 12. Property, plant and equipment
Cost
At 1 July 2016
Additions
Disposals
Transfers
Foreign exchange movements
At 30 June 2017
Additions
Disposals
Transfers
Foreign exchange movements
At 30 June 2018
Depreciation
At 1 July 2016
Depreciation
Impairments
Disposals
Foreign exchange movements
At 30 June 2017
Depreciation
Impairments
Disposals
Foreign exchange movements
At 30 June 2018
Carrying amounts
At 1 July 2016
At 30 June 2017
At 30 June 2018
Freehold
land and
buildings2
£m
Leasehold
improvements
£m
Equipment,
furniture
and
fixtures
£m
Owned
set-top boxes
£m
Assets
not yet
available
for use
£m
414
32
(4)
210
1
653
4
(2)
31
–
686
73
12
3
(4)
–
84
14
–
(2)
–
96
341
569
590
104
13
(24)
5
1
99
17
(17)
5
–
104
60
10
–
(24)
1
47
9
–
(17)
–
39
44
52
65
1,775
112
(66)
143
6
1,970
66
(35)
118
1
2,120
1,084
200
–
(65)
2
1,221
172
6
(34)
–
1,365
691
749
755
616
6
(98)
387
23
934
48
(278)
465
4
1,173
216
125
2
(84)
12
271
201
8
(259)
3
224
400
663
949
481
503
–
(745)
1
240
568
–
(619)
–
189
–
–
–
–
–
–
–
–
–
–
–
481
240
189
Total1
£m
3,390
666
(192)
–
32
3,896
703
(332)
–
5
4,272
1,433
347
5
(177)
15
1,623
396
14
(312)
3
1,724
1,957
2,273
2,548
1 The amounts shown include assets held under finance leases with a net book value of £15 million (2017: £8 million). The cost of these assets was £41 million (2017: £30 million)
and the accumulated depreciation was £26 million (2017: £22 million). Depreciation charged during the year on such assets was £4 million (2017: £5 million).
2 Depreciation was not charged on £88 million of land (2017: £88 million).
13. Investments in joint ventures and associates
A list of the Group’s investments in joint ventures and associates, including the name, country of incorporation and proportion of ownership interest
is given in note 30 to the consolidated financial statements.
The movement in joint ventures and associates during the year was as follows:
Share of net assets:
At 1 July
Movement in net assets
– Funding
– Dividends received
– Share of profits
– Acquisition of associates and joint ventures
– Disposal of joint ventures and associates
At 30 June
2018
£m
2017
£m
116
8
(131)
56
–
(7)
42
123
9
(20)
21
2
(19)
116
The aggregate carrying amount of the investments in joint ventures and associates that are not individually material for the Group is £42 million as
at 30 June 2018 (2017: £41 million). The Group’s share of any capital commitments and contingent liabilities of associates and joint ventures is shown
within the totals in note 26.
99
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
13. Investments in joint ventures and associates (continued)
a) Investments in associates
Representing 100% of the Group’s investment in Sky Bet:
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Shareholders’ deficit
Group’s share of shareholders’ deficit
Consolidation and other adjustments
Investment in associates
Revenue
Loss after tax
2018
£m
–
–
–
–
–
–
–
–
–
–
During the year, the Group received a cash distribution of £113 million from Sky Bet, following Sky Bet’s recapitalisation. The distribution was applied
to reduce the carrying value of the Group’s investment in Sky Bet to nil, with the excess of £33 million being recognised as income. On 21 April 2018,
the Group reached an agreement to dispose of its investment in Sky Bet to The Stars Group Inc., following which the investment was reclassified as
a held for sale asset, with a carrying value of nil. The sale of this investment was completed on 10 July 2018 (for further details see note 29).
b) Investments in joint ventures
Representing the Group’s share of each joint venture:
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Shareholders’ deficit
Revenue
Expense
Taxation
Share of profit from joint ventures
2018
£m
9
80
(30)
(144)
(85)
89
(72)
(3)
14
2017
£m
818
140
(127)
(884)
(53)
(11)
86
75
513
(6)
2017
£m
11
86
(36)
(126)
(65)
114
(95)
(5)
14
14. Available-for-sale investments
At 30 June 2018 the Group held £117 million (2017: £110 million) of unlisted investments. These investments consist of minority equity stakes in a number
of technology and start-up companies.
During 2018, the Group purchased investments in iflix Limited (£8 million) and Fubo TV (£4 million). Other principal investments include Dataxu Inc. During
the year, the Group sold its investment in Roku Inc. for an aggregate consideration of £58 million, realising a profit on disposal of £49 million (for further
details see note 4).
100
Sky plc
15. Deferred tax
i) Recognised deferred tax assets (liabilities)
At 1 July 2016
(Charge) credit to income
Credit to equity
Acquisition of subsidiaries
Effect of change in tax rate
– Income
– Equity
Foreign exchange movements
At 30 June 2017
Credit (charge) to income
Credit to equity
Effect of change in tax rate
– Income
– Equity
Foreign exchange movements
At 30 June 2018
Accelerated
tax
depreciation
£m
(35)
(14)
–
–
Intangibles on
business
combinations
£m
(761)
46
–
(4)
Tax losses
£m
696
4
–
1
Short-term
temporary
differences
£m
79
(20)
–
1
Share-based
payments
temporary
differences
£m
28
21
6
–
Financial
instruments
temporary
differences
£m
(70)
–
47
–
5
–
(1)
(45)
10
–
1
–
–
(34)
(1)
–
(40)
(760)
31
–
(3)
–
(5)
(737)
(1)
–
40
740
62
–
–
–
5
807
(2)
–
(1)
57
23
–
–
–
–
80
(1)
–
(1)
53
(22)
14
(1)
(1)
–
43
–
1
(1)
(23)
8
28
(1)
(3)
–
9
Total
£m
(63)
37
53
(2)
–
1
(4)
22
112
42
(4)
(4)
–
168
Deferred tax assets have been recognised at 30 June 2018 and 30 June 2017 on the basis that, from management’s current forecast of the Group’s
entities, it is probable that there will be suitable taxable profits against which these assets can be utilised. The carrying value of deferred tax assets
in excess of deferred tax liabilities principally arising on the acquisition of Sky Deutschland was £401 million as at 30 June 2018 (2017: £296 million).
The majority of the deferred tax asset relates to tax losses in the German and Austrian businesses, which can be carried forward indefinitely.
The Directors have concluded that it is probable that there will be sufficient future taxable profits against which the German and Austrian losses can be
utilised, taking into account the Group’s latest available medium term plan, which was considered by the Company’s Board of Directors, and extrapolated
beyond the forecast period as disclosed in note 10. The forecast shows that the Group will continue to benefit from the utilisation of the tax losses
beyond the initial forecasting period.
For further details regarding this judgement, please refer to the Group’s ‘critical accounting policies and the use of judgement and estimates’ section,
contained in note 1.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the periods in which they reverse. The rates enacted
or substantively enacted for the relevant periods of reversal are: 19.0% from 1 April 2017 and 17.0% from 1 April 2020 in the UK; 27.9% in Italy; and 27.4%
in Germany.
Certain deferred tax assets and liabilities have been offset jurisdiction by jurisdiction.
Deferred tax assets
Deferred tax liabilities
ii) Unrecognised deferred tax assets
Tax losses arising from trading (gross 2018: £1,641 million, 2017: £1,630 million)
Tax losses arising from capital disposals and provisions against investments (gross 2018: £1,330 million, 2017: £1,383 million)
2018
£m
425
(257)
168
2018
£m
259
226
485
2017
£m
302
(280)
22
2017
£m
258
235
493
Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profits will be available against
which the Group can utilise the losses.
At 30 June 2018, a deferred tax asset of £1 million (2017: £1 million) principally arising from UK trading losses in the Group has not been recognised.
These losses can only be offset against taxable profits generated in the entities concerned. There is currently insufficient evidence to support the
recognition of a deferred tax asset relating to these losses. The UK trading losses can be carried forward indefinitely.
At 30 June 2018, a deferred tax asset of £258 million (2017: £257 million) has not been recognised in respect of overseas trading losses on the basis that
it is not probable that these temporary differences will be utilised. These losses include £257 million (2017: £256 million) with respect to the Group’s
former investment in KirchPayTV and £1 million (2017: £1 million) with respect to other subsidiaries. The KirchPayTV losses can be carried forward
indefinitely.
At 30 June 2018, a deferred tax asset of £223 million (2017: £232 million) has not been recognised in respect of UK capital losses related to the Group’s
former investment in KirchPayTV, on the basis that utilisation of these temporary differences is not probable. At 30 June 2018, the Group also has UK
capital losses with a tax value estimated to be £3 million (2017: £3 million) including impairment of a football club and other investments, which have not
been recognised as a deferred tax asset, on the basis that it is not probable that they will be utilised. The capital losses can be carried forward indefinitely.
101
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
16. Inventories
Television programme rights
Set-top boxes and related equipment
Other inventories
Current inventory
Non-current programme distribution rights
Total inventory
2018
£m
1,250
48
7
1,305
109
1,414
2017
£m
1,058
36
19
1,113
63
1,176
At 30 June 2018, 74% (2017: 75%) of the television programme rights and 100% (2017: 100%) of set-top boxes and related equipment and other inventories
are expected to be recognised in the income statement within 12 months.
Inventories with a carrying value of £13 million (2017: £3 million) were written-down in the year.
17. Trade and other receivables
Gross trade receivables
Less: provision for impairment of receivables
Net trade receivables
Amounts receivable from joint ventures and associates
Amounts receivable from other related parties
Prepayments
Accrued income
VAT
Other receivables
Current trade and other receivables
Prepayments
Amounts receivable from joint ventures and associates
Other receivables
Non-current trade and other receivables
Total trade and other receivables
Included within current trade and other receivables is nil (2017: nil) which is due in more than one year.
The ageing of the Group’s net trade receivables which are past due but not impaired is as follows:
Up to 30 days past due date
30 to 60 days past due date
60 to 120 days past due date
120+ days past due date
2018
£m
588
(188)
400
11
13
678
553
2
72
1,729
11
15
19
45
1,774
2018
£m
59
18
19
3
99
2017
£m
533
(120)
413
14
24
498
429
2
95
1,475
16
15
10
41
1,516
2017
£m
57
10
8
5
80
The Directors consider that the carrying amount of trade and other receivables approximates their fair values. The Group is exposed to credit risk on
its trade and other receivables, however the Group does not have any significant concentrations of credit risk, with exposure spread over a large number
of counterparties and customers. Trade receivables principally comprise amounts outstanding from subscribers, advertisers and other customers.
Provisions for doubtful debts
Balance at beginning of year
Amounts utilised
Provided during the year
Balance at end of year
102
2018
£m
120
(29)
97
188
2017
£m
96
(36)
60
120
Sky plc
18. Trade and other payables
Trade payables
Amounts owed to joint ventures and associates
Amounts owed to other related parties
VAT
Accruals
Deferred income
Other payables
Current trade and other payables
Trade payables
Amounts owed to other related parties
Deferred income
Other payables
Non-current trade and other payables
Total trade and other payables
2018
£m
1,907
23
175
169
1,526
530
256
4,586
50
3
54
34
141
4,727
2017
£m
1,612
9
193
168
1,607
480
234
4,303
44
–
3
40
87
4,390
The Directors consider that the carrying amount of trade and other payables approximates their fair values. Trade payables principally comprise amounts
outstanding for programming purchases and ongoing costs.
19. Provisions
Current liabilities
Restructuring
provision1
Customer-related
provisions2
Other provisions3
Non-current liabilities
Other provisions
Employee benefit
obligations4
At
1 July
2016
£m
Reclassified
during the
year
£m
Provided
(released)
during the
year
£m
Utilised
during
the year
£m
Foreign
exchange
movement
£m
At
30 June
2017
£m
Reclassified
during the
year
£m
Provided/
(released)
during the
year
£m
Utilised
during
the year
£m
Foreign
exchange
movement
£m
At
30 June
2018
£m
29
65
87
181
61
33
94
–
–
4
4
(4)
–
(4)
3
–
17
20
22
(1)
21
(19)
(27)
(54)
(100)
(32)
(1)
(33)
–
–
2
2
2
3
5
13
38
56
107
49
34
83
–
–
2
2
(2)
–
(2)
12
–
45
57
36
(1)
35
(4)
(21)
(14)
(39)
(35)
(2)
(37)
–
–
–
–
2
–
2
21
17
89
127
50
31
81
1 These provisions relate to costs incurred as part of corporate restructuring and efficiency programmes.
2 These provisions include costs of a programme to replace aged customer equipment.
3 Included in current other provisions are amounts provided for legal disputes, warranty liabilities and onerous contracts for property leases and maintenance. The timing of the cash
flows for onerous leases is dependent on the terms of the leases, but is expected to continue up to June 2019.
In 2015, the Group acquired employee benefit obligations as part of its acquisitions of Sky Deutschland and Sky Italia. These obligations are described further below.
4
Employee benefit obligations
Sky Deutschland defined benefit obligations
Sky Italia employee benefit obligations
At
1 July
2016
£m
14
19
33
Pension
payments
£m
–
(1)
(1)
Actuarial
gains
£m
(1)
–
(1)
Foreign
exchange
movement
£m
1
2
3
At
30 June
2017
£m
14
20
34
Pension
payments
£m
–
(3)
(3)
Actuarial
gains
£m
–
–
–
Foreign
exchange
movement
£m
–
–
–
At
30 June
2018
£m
14
17
31
103
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
19. Provisions (continued)
a) Sky Deutschland
Sky Deutschland operates unfunded final salary defined benefit pension plans that are not covered by plan assets. These plans were closed to future
accrual. The total defined benefit obligation at 30 June 2018 was £14 million (2017: £14 million). The amount of the pension entitlement depends on
the salary of the respective employee at the time of retirement. Employee benefit obligations will be funded out of current and future earnings.
The present value of the obligations was measured using the projected unit credit method applying the following principal assumptions:
• Actuarial projections (including assumptions about cost-of-living increases, salary increases, etc.) were made to value the future benefits expected
to be paid by the post-employment plan in the event of mortality (both during and after employment), disability and early retirement. Seniority and
rates of employee turnover as well as salary and benefit levels at the measurement date were also taken into account in projecting future benefits;
• The average present value at the measurement date has been calculated on the basis of the assumed annual discount rate and the probability
of services being rendered;
• The following specific assumptions have been used:
– Annual discount rate of 1.91% (2017: 1.95%);
– Annual growth rate of 2.00% (2017: 2.00%);
– Annual salary growth rate of 2.50% (2017: 2.50%); and
– Annual fluctuation rate in employees of 7.00% (2017: 7.00%).
Since there are no plan assets as defined by IAS 19 (revised 2011) and all actuarial gains and losses are recognised when incurred, the present value of the
defined benefit obligation of the pension obligations and the obligations similar to pensions is equivalent to the provision recognised on the balance sheet.
Reasonably possible changes to these assumptions would not have a material impact on the provision.
The weighted average maturity of the defined benefit obligation is 19 years (2017: 21 years) as of the balance sheet date.
Expected pension payments in the year to 30 June 2019 are less than £1 million (2017: less than £1 million).
b) Sky Italia
Sky Italia’s employee benefit obligations relate to a provision for employee retirement, determined using actuarial techniques (as discussed further below)
and regulated by Article 2120 of the Italian Civil Code. These plans were closed to future accrual. The total employee benefit obligation at 30 June 2018
was £17 million (2017: £20 million). The benefit is paid upon retirement as a lump sum, the amount of which corresponds to the total of the provisions
accrued during the employees’ service period based on payroll costs as revalued until retirement. Employee benefit obligations will be funded out of
current and future earnings.
The present value of the obligations was measured using the projected unit credit method applying the following principal assumptions:
• Actuarial projections (including assumptions about cost-of-living increases, salary increases, etc.) were made to value the future benefits expected
to be paid by the post-employment plan in the event of mortality (both during and after employment), disability and early retirement. Seniority and
rates of employee turnover as well as salary and benefit levels at the measurement date were also taken into account in projecting future benefits;
• The average present value at the measurement date has been calculated on the basis of the assumed annual discount rate and the probability of
services being rendered;
• The following specific assumptions have been used:
– Annual discount rate of 0.00% (2017: 0.01%);
– Annual inflation rate of 1.90% (2017: 1.20%);
– Annual revaluation rate of 2.93% (2017: 2.40%);
– Annual fluctuation rate in employees of 5.04% (2017: 3.74%); and
– Annual mortality rate of 0.21% (2017: 0.43%).
Since there are no plan assets as defined by IAS 19 (revised 2011) and all actuarial gains and losses are recognised when incurred, the present value of the
defined benefit obligation of the pension obligations and the obligations similar to pensions is equivalent to the provision recognised on the balance sheet.
Reasonably possible changes to these assumptions would not have a material impact on the provision.
The weighted average maturity of the defined benefit obligation is 15 years (2017: 15 years) as of the balance sheet date.
Expected pension payments in the year to 30 June 2019 are £2 million (2017: £2 million).
104
Sky plc 20. Borrowings
Current borrowings
Obligations under finance leases(ii)
£400 million of 5.750% Guaranteed Notes repayable in October 2017(i)
US$750 million of 6.100% Guaranteed Notes repayable in February 2018(i)
US$582.8 million of 9.500% Guaranteed Notes repayable in November 2018(i)
Non-current borrowings
US$582.8 million of 9.500% Guaranteed Notes repayable in November 2018(i)
US$750 million of 2.625% Guaranteed Notes repayable in September 2019(i)
€600 million of Guaranteed Floating Rate Notes repayable in April 2020(i)
£450 million of 2.875% Guaranteed Notes repayable in November 2020(i)
€1,500 million of 1.500% Guaranteed Notes repayable in September 2021(i)
US$800 million of 3.125% Guaranteed Notes repayable in November 2022(i)
€850 million of 1.875% Guaranteed Notes repayable in November 2023(i)
US$1,250 million of 3.750% Guaranteed Notes repayable in September 2024(i)
€500 million of 2.250% Guaranteed Notes repayable in November 2025(i)
€1,000 million of 2.500% Guaranteed Notes repayable in September 2026(i)
£300 million of 6.000% Guaranteed Notes repayable in May 2027(i)
£300 million of 4.000% Guaranteed Notes repayable in November 2029(i)
€400 million of 2.750% Guaranteed Notes repayable in November 2029(i)
US$350 million of 6.500% Guaranteed Notes repayable in October 2035(i)
Obligations under finance leases(ii)
2018
£m
9
–
–
438
447
–
561
530
453
1,322
603
749
942
440
880
297
298
351
261
67
7,754
2017
£m
3
398
573
–
974
436
575
526
458
1,312
613
744
958
437
873
297
297
348
266
67
8,207
(i) Guaranteed Notes
At 30 June 2018, the Group had in issue the following Guaranteed fixed and floating rate notes, which were issued by the Company:
US$582.8 million of 9.500% Guaranteed Notes repayable in November 2018
£450 million of 2.875% Guaranteed Notes repayable in November 2020
€500 million of 2.250% Guaranteed Notes repayable in November 2025
US$750 million of 2.625% Guaranteed Notes repayable in September 2019
€600 million of Guaranteed Floating Rate Notes repayable in April 2020
€1,500 million of 1.500% Guaranteed Notes repayable in September 2021
US$800 million of 3.125% Guaranteed Notes repayable in November 2022
€850 million of 1.875% Guaranteed Notes repayable in November 2023
US$1,250 million of 3.750% Guaranteed Notes repayable in September 2024
€1,000 million of 2.500% Guaranteed Notes repayable in September 2026
£300 million of 6.000% Guaranteed Notes repayable in May 2027
£300 million of 4.000% Guaranteed Notes repayable in November 2029
€400 million of 2.750% Guaranteed Notes repayable in November 2029
Hedged
Value*
£m
389
450
356
1,195
Hedged
Value*
€m
581
600
1,500
689
850
969
1,000
411
399
400
7,399
Interest Rate Hedging
Hedged Interest Rates
Fixed
£m
260
–
356
616
Floating
£m
129
450
–
579
Fixed
7.091%
–
3.721%
Floating
6m LIBOR +5.542%
3m LIBOR +1.230%
–
Interest Rate Hedging
Hedged Interest Rates
Fixed
€m
–
–
1,500
689
850
969
1,000
411
399
400
6,218
Floating
€m
581
600
–
–
–
–
–
–
–
–
1,181
Fixed
–
–
1.500%
2.118%
1.875%
2.187%
2.500%
5.006%
3.122%
2.750%
Floating
3m EURIBOR +0.656%
3m EURIBOR +0.750%
–
–
–
–
–
–
–
–
105
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
20. Borrowings (continued)
At 30 June 2018, the Group had in issue the following Guaranteed Notes, which were issued by Sky Group Finance plc:
US$350 million of 6.500% Guaranteed Notes repayable in October 2035
Interest Rate Hedging
Hedged Interest Rates
Hedged
Value*
£m
200
200
Fixed
£m
200
200
Floating
£m
–
–
Fixed
5.864%
Floating
–
At 30 June 2017, the Group had in issue the following Guaranteed fixed and floating rate notes, which were issued by the Company:
US$750 million of 6.100% Guaranteed Notes repayable in February 2018
US$582.8 million of 9.500% Guaranteed Notes repayable in November 2018
£450 million of 2.875% Guaranteed Notes repayable in November 2020
€500 million of 2.250% Guaranteed Notes repayable in November 2025
US$750 million of 2.625% Guaranteed Notes repayable in September 2019
€600 million of Guaranteed Floating Rate Notes repayable in April 2020
€1,500 million of 1.500% Guaranteed Notes repayable in September 2021
US$800 million of 3.125% Guaranteed Notes repayable in November 2022
€850 million of 1.875% Guaranteed Notes repayable in November 2023
US$1,250 million of 3.750% Guaranteed Notes repayable in September 2024
€1,000 million of 2.500% Guaranteed Notes repayable in September 2026
£300 million of 6.000% Guaranteed Notes repayable in May 2027
£300 million of 4.000% Guaranteed Notes repayable in November 2029
€400 million of 2.750% Guaranteed Notes repayable in November 2029
Hedged
Value*
£m
387
389
450
356
1,582
Hedged
Value*
€m
581
600
1,500
689
850
969
1,000
411
399
400
7,399
Interest Rate Hedging
Hedged Interest Rates
Fixed
£m
290
260
–
356
906
Floating
£m
97
129
450
–
676
Fixed
6.829%
7.091%
–
3.721%
Floating
6m LIBOR +1.892%
6m LIBOR +5.542%
3m LIBOR +1.230%
–
Interest Rate Hedging
Hedged Interest Rates
Fixed
€m
–
–
1,500
689
850
969
1,000
411
399
400
6,218
Floating
€m
581
600
–
–
–
–
–
–
–
–
1,181
Fixed
–
–
1.500%
2.118%
1.875%
2.187%
2.500%
5.006%
3.122%
2.750%
Floating
3m EURIBOR +0.656%
3m EURIBOR +0.750%
–
–
–
–
–
–
–
–
At 30 June 2017, the Group had in issue the following Guaranteed Notes, which were issued by Sky Group Finance plc:
£400 million of 5.750% Guaranteed Notes repayable in October 2017
US$350 million of 6.500% Guaranteed Notes repayable in October 2035
* Hedged value is the final redemption value including any hedging
Interest Rate Hedging
Hedged Interest Rates
Hedged
Value*
£m
400
200
600
Fixed
£m
350
200
550
Floating
£m
50
–
50
Fixed
5.750%
5.864%
Floating
6m LIBOR –0.229%
–
The Group has a Global Medium-Term Note Programme (the ‘Programme’), which provides the Group with a standardised documentation platform for
senior debt issuance of up to £5 billion in the major global bond markets. The €500 million of 2.250% Guaranteed Notes maturing in November 2025
and the £300 million of 6.000% Guaranteed Notes maturing in May 2027 have been issued under this Programme.
106
Sky plc
(ii) Finance leases
The minimum lease payments under finance leases fall due as follows:
Within one year
Between one and five years
After five years
Present value of finance lease liabilities
Within one year
Between one and five years
After five years
Future finance charges on finance lease liabilities
Within one year
Between one and five years
After five years
Minimum lease payments of finance lease liabilities
The main obligations under finance leases are in relation to:
2018
£m
9
39
28
76
1
15
33
49
10
54
61
125
2017
£m
3
14
53
70
5
23
62
90
8
37
115
160
(a) finance arrangements in connection with the broadband network infrastructure. During the year, repayments of £8 million (2017: £8 million) were
made against the lease. A proportion of these payments have been allocated against the capital outstanding. The lease bears interest at a rate
of 11.1% and expires in November 2039.
(b) finance arrangements in connection with the contact centre in Dunfermline. During the year, repayments of £2 million (2017: £2 million) were made
against the lease. A proportion of these payments have been allocated against the capital amount outstanding. The lease bears interest at a rate
of 8.5% and expires in September 2020.
(c) finance arrangements in connection with IT equipment. During the year repayments of nil (2017: nil) were made against the lease. The lease bears
interest at a rate of between 1.45% and 1.78% and expires in September 2021.
(iii) Revolving credit facility
The Group has a £1 billion RCF with a maturity date of 30 November 2021, syndicated across 15 counterparty banks, each with a minimum credit rating
of ‘Baa2’ or equivalent from Standard & Poor’s. At 30 June 2018, the RCF was undrawn (2017: undrawn).
The Group is subject to two financial covenants under the RCF, a maximum leverage ratio and a minimum interest cover ratio, which are tested at the end
of each six-monthly period. The key financial covenants are the ratio of Net Debt to EBITDA (as defined in the loan agreements) and EBITDA to Net Interest
Payable (as defined in the loan agreements). Net Debt to EBITDA must be no more than 4.00:1 and EBITDA to Net Interest Payable must be at least 3.50:1.
The Group was in compliance with these covenants for all periods presented.
(iv) Guarantees
The following guarantees are in place relating to the Group’s borrowings: (a) Sky UK Limited, Sky Subscribers Services Limited, Sky Group Finance plc,
Sky Telecommunications Services Limited and Sky CP Limited have given joint and several guarantees in relation to the Company’s £1 billion RCF and the
outstanding Guaranteed Fixed and Floating Rate Notes issued by the Company; and (b) the Company, Sky UK Limited, Sky Subscribers Services Limited,
Sky Telecommunications Services Limited and Sky CP Limited have given joint and several guarantees in relation to the outstanding Guaranteed Notes
issued by Sky Group Finance plc.
(v) Mobile handset financing
During the year, the Group entered into a securitisation facility with a third party for the sale of mobile handset receivables. The Group does not have
control over the securitisation entity, and has transferred substantially all the risks and rewards of the receivables. As a result, the receivables have been
derecognised and the securitisation entity is not consolidated within the Group’s financial statements, such that the transfer of handset receivables
is treated as a sale. Sales of mobile handset receivables resulted in proceeds of £86 million being recognised in cash flows from operating activities
and associated costs of £11 million being recognised in financing costs in the year.
The securitisation entity was set up for the purpose of financing the purchase of mobile handset receivables from the Group. It is funded through the
issue of two tranches of debt and a quasi-equity cash investment from the entity’s control party. The debt comprises a senior tranche that is issued
to a bank and the other, a junior tranche, which is issued to the Group.
The senior debt is funded by the bank’s conduit, which in turn secures its funding in the commercial paper market. The Group receives a fixed rate
of interest on its junior tranche, which is subordinated below the senior tranche but above the control party’s investment and the entity’s reserves.
107
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
20. Borrowings (continued)
The carrying value of the Group’s investment in junior debt issued by the securitisation entity was £19 million, which is included within trade and other
receivables. The carrying value represents the maximum exposure to losses in the unconsolidated entity, in the event that the receivables performed
materially worse than anticipated. The Group acts as servicing agent to the securitisation entity and impairment risk associated with this investment
is mitigated to the extent that performance in the collection of the receivables is in line with expectations. No impairment losses on the junior
debt were recognised by the Group during the year. The Group has no future obligation to repurchase the receivables sold to the entity, or provide
other financial support and/or liquidity to the entity.
In the current year, the Group sold £142 million of receivables to the securitisation entity, received less than £1 million in interest on its junior debt
and received less than £1 million in fees for acting as the servicing agent for the securitisation entity’s receivables.
(vi) Net debt
Current borrowings
Non-current borrowings
Borrowings-related derivative financial instruments
Gross debt
Cash and cash equivalents
Short-term deposits
Net debt
As at 30
June 2017
£m
974
8,207
(470)
8,711
(2,200)
(300)
6,211
Cash
Movements
£m
(937)
–
147
(790)
586
300
96
Non-cash movements
Foreign
Exchange
Movement
£m
(47)
(18)
107
42
(8)
–
34
Fair Value
Changes &
other
£m
7
15
106
128
–
–
128
Transfers
£m
450
(450)
–
–
–
–
–
As at 30
June 2018
£m
447
7,754
(110)
8,091
(1,622)
–
6,469
21. Derivatives and other financial instruments
Set out below are the derivative financial instruments entered into by the Group to manage its interest rate and foreign exchange risks.
Fair value hedges
Interest rate swaps
Cross-currency swaps
Cash flow hedges
Cross-currency swaps
Forward foreign exchange contracts
Net investment hedges
Cross-currency swaps
Derivatives not in a formal hedge relationship
Cross-currency swaps
Forward foreign exchange contracts
Interest rate swaps
Embedded derivative
Total
2018
2017
Asset
Liability
Asset
Liability
Fair Value
£m
Notional
£m
Fair Value
£m
Notional
£m
Fair Value
£m
Notional
£m
Fair Value
£m
Notional
£m
14
102
327
44
–
63
2
3
–
555
450
466
1,798
1,634
–
–
–
(42)
–
–
–
1,639
–
(398)
2,344
425
356
441
–
5,570
–
(5)
(1)
(4)
(450)
–
718
260
49
5,010
28
120
544
48
–
119
2
16
–
877
645
466
2,088
2,335
–
–
–
(36)
–
–
–
1,340
–
(353)
2,343
522
417
449
–
6,922
–
(4)
(4)
(7)
(404)
–
532
260
67
4,542
The maturity of the derivative financial instruments is as follows:
In one year or less
Between one and two years
Between two and five years
In more than five years
Total
2018
2017
Asset
£m
78
114
91
272
555
Liability
£m
(20)
(64)
(135)
(231)
(450)
Asset
£m
232
93
147
405
877
Liability
£m
(19)
(16)
(63)
(306)
(404)
The fair value of the Group’s debt-related derivative portfolio at 30 June 2018 was a £110 million net asset (2017: net asset of £470 million) with notional
principal amounts totalling £6,184 million (2017: £6,773 million). This comprised: net assets of £327 million designated as cash flow hedges (2017: net
assets of £544 million), net assets of £116 million designated as fair value hedges (2017: net assets of £148 million), net liabilities of £398 million
designated as net investment hedges (2017: net liabilities of £353 million) and net assets of £65 million not designated in a formal hedge relationship
(2017: net assets of £131 million).
108
Sky plc
Hedge accounting classification and impact
The Group designated certain interest rate swaps as fair value hedges of interest rate risk and cross-currency swaps as fair value hedges of interest
rate risk and foreign exchange risk, representing 15% (2017: 16%) of the total debt related derivative portfolio. Movements in the fair value of the
hedged items are taken to the income statement and are offset by movements in the fair value of the hedging instruments, to the extent that
hedge accounting is achieved.
The Group designated certain fixed rate cross-currency swaps as cash flow hedges, representing 29% (2017: 31%) of the total debt related derivative
portfolio. As such, the effective portion of the gain or loss on these contracts is reported as a separate component of the hedging reserve, and is then
reclassified to the income statement in the same periods that the forecast transactions affect the income statement. Cash flows on the swaps occur
semi-annually up to and inclusive of the relevant bond maturity disclosed in note 20. During the current year, losses of £64 million were removed from the
hedging reserve and debited to finance costs in the income statement principally to offset the currency translation movements in the underlying hedged
debt (2017: gains of £76 million).
The Group designated certain cross-currency swaps as net investment hedges, representing 38% (2017: 35%) of the total debt related derivative portfolio.
Exchange differences arising from the translation of the net investment in foreign operations are recognised directly in equity. Gains and losses on those
hedging instruments (which include bonds and cross-currency swaps) designated as hedges of the net investments in foreign operations are recognised
in equity to the extent that the hedging relationship is effective; these amounts are as stated in the statement of comprehensive income. Gains and
losses relating to hedge ineffectiveness are recognised immediately in the income statement for the period. Gains and losses accumulated in the foreign
currency translation reserve are included in the income statement when the foreign operation is disposed of.
The Group designates certain forward foreign exchange contracts as cash flow hedges of forecast foreign currency sales and purchases. Gains or losses
are released from the hedging reserve and included in the income statement when the related hedged items are recognised in the income statement or in
the initial cost or other carrying amount of the non-financial asset or liability on the balance sheet, again being recognised in the income statement in the
same periods as the related hedged items. If forecast transactions are no longer expected to occur, any amounts included in the hedging reserve related
to that forecast transaction would be recognised directly in the income statement. During the current year, losses of £60 million were removed from the
hedging reserve and debited to finance charges principally to offset the currency translation movements in the underlying hedged debt (2017: gains of
£8 million). Gains of £27 million were removed from the hedging reserve and credited to inventories in the balance sheet (2017: gains of £105 million)
and gains of £47 million were removed from the hedging reserve and credited to property, plant and equipment in the balance sheet (2017: gains of
£63 million). Losses of £3 million were removed from the hedging reserve and debited against intangibles in the balance sheet (2017: losses of £3 million).
Losses of £4 million were removed from the hedging reserve and debited against revenue in the income statement (2017: gains of less than £1 million).
Hedge effectiveness testing is performed quarterly using the dollar-offset approach. The actual movement in the hedging items is compared with the
movement in the valuation of the hypothetically perfect hedge of the underlying risk at inception, and any ineffectiveness is recognised directly in the
income statement. For fair value hedges, ineffectiveness of less than £1 million was recognised in the income statement during the current year (2017:
£1 million). For cash flow hedges, ineffectiveness of less than £1 million was recognised in the income statement during the current year (2017: less than
£1 million). For net investment hedges, ineffectiveness of nil was recognised in the income statement during the current year (2017: nil).
A hedge relationship is deemed to be effective if the ratio of changes in valuation of the underlying hedged item and the hedging instrument is within the
range of 80% to 125%. Any relationship which has a ratio outside this range is deemed to be ineffective, at which point hedge accounting is suspended.
During the year ended 30 June 2018, there was one instance in which the hedge relationship was not highly effective (2017: one instance).
109
Annual Report 2018Financial statements Notes to the consolidated financial statements continued
21. Derivatives and other financial instruments (continued)
Financial instruments
(a) Carrying value and fair value
The accounting classification of each class of the Group’s financial assets and financial liabilities, together with their fair values, is as follows:
At 30 June 2018
Quoted bond debt
Derivative financial instruments
Trade and other payables
Provisions
Obligations under finance leases
and other borrowings
Available-for-sale investments
Trade and other receivables
Short-term deposits
Cash and cash equivalents
At 30 June 2017
Quoted bond debt
Derivative financial instruments
Trade and other payables
Provisions
Obligations under finance leases
and other borrowings
Available-for-sale investments
Trade and other receivables
Short-term deposits
Cash and cash equivalents
Held to
maturity
investments
£m
Available-
for-sale
£m
Derivatives
deemed held
for trading
£m
Derivatives in
hedging
relationships
£m
Loans and
receivables
£m
Other
liabilities
£m
Total
carrying
value
£m
Total fair
value
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
300
–
–
–
–
–
–
117
–
–
–
–
–
–
–
–
110
–
–
–
–
58
–
–
–
–
–
–
–
–
122
–
–
–
–
–
–
–
–
47
–
–
–
–
–
–
–
351
–
–
–
–
–
–
–
–
–
–
–
–
–
1,031
–
1,622
–
–
–
–
–
–
1,325
–
2,200
(8,125)
–
(3,887)
(143)
(76)
–
–
–
–
(9,111)
–
(3,637)
(160)
(70)
–
–
–
–
(8,125)
105
(3,887)
(143)
(76)
117
1,031
–
1,622
(9,111)
473
(3,637)
(160)
(70)
110
1,325
300
2,200
(8,584)
105
(3,887)
(143)
(76)
117
1,031
–
1,622
(9,701)
473
(3,637)
(160)
(70)
110
1,325
300
2,200
The fair values of financial assets and financial liabilities are determined as follows:
• The fair value of financial assets and financial liabilities (which includes our quoted bond debt), with standard terms and conditions and which are
traded on active liquid markets is determined with reference to quoted market prices based on level 1 of the fair value hierarchy. The fair value of other
financial assets and financial liabilities (excluding derivative instruments) is determined in accordance with generally accepted pricing models based
on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments;
• Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching
maturities of the contracts;
• Interest rate and cross-currency swaps are measured at the present value of future cash flows estimated and discounted based on the applicable
yield curves derived from quoted interest rates; and
• The fair value of obligations under finance leases and other borrowings is estimated by discounting the future cash flows to net present value.
The fair value of short-term deposits and cash and cash equivalents is equivalent to carrying value due to the short-term nature of these instruments.
The differences between carrying values and fair values reflect unrealised gains or losses inherent in the financial instruments, based on valuations as
at 30 June 2018 and 30 June 2017. The volatile nature of the markets means that values at any subsequent date could be significantly different from the
values reported above.
Cash and cash equivalents classified as held to maturity investments comprise money market deposits which have maturity dates of less than three
months from inception. Money market deposits, enhanced return investments and tri-party repurchase agreements which have maturity greater than
three months from inception are classified as short-term deposits.
Cash and cash equivalents classified as loans and receivables mainly comprise investments in AAAm rated money market funds which can be withdrawn
without notice.
110
Sky plc
(b) Fair value hierarchy
The following table categorises the Group’s financial instruments which are held at fair value into one of three levels to reflect the degree to which
observable inputs are used in determining their fair values:
At 30 June 2018
Financial assets
Available-for-sale financial instruments
Other investments
Financial assets at fair value through profit or loss
Interest rate swaps
Cross-currency swaps
Forward foreign exchange contracts
Total
Financial liabilities
Financial liabilities at fair value through profit or loss
Interest rate swaps
Cross-currency swaps
Forward foreign exchange contracts
Embedded derivative
Total
At 30 June 2017
Financial assets
Available-for-sale financial instruments
Other investments
Financial assets at fair value through profit or loss
Interest rate swaps
Cross-currency swaps
Forward foreign exchange contracts
Total
Financial liabilities
Financial liabilities at fair value through profit or loss
Interest rate swaps
Cross-currency swaps
Forward foreign exchange contracts
Embedded derivative
Total
Fair value
£m
Level 1
£m
Level 2
£m
Level 3
£m
117
17
492
46
672
(1)
(398)
(47)
(4)
(450)
110
44
783
50
987
(4)
(353)
(40)
(7)
(404)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
17
492
46
555
(1)
(398)
(47)
(4)
(450)
–
44
783
50
877
(4)
(353)
(40)
(7)
(404)
117
–
–
–
117
–
–
–
–
–
110
–
–
–
110
–
–
–
–
–
Level 1
Fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities, including shares in listed entities.
Level 2
Fair values measured using inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly.
Derivative financial instrument fair values are present values determined from future cash flows discounted at rates derived from market source data.
Level 3
Fair values measured using inputs for the asset or liability that are not based on observable market data. All of the Group’s unlisted available-for-sale
financial assets are held at fair value and are categorised as Level 3 in the fair value hierarchy.
111
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
22. Financial risk management
Group Treasury activity
The Group’s Treasury function is responsible for raising finance for the Group’s operations, together with associated liquidity management and
management of foreign exchange, interest rate and credit risks. Treasury operations are conducted within a framework of policies and guidelines
authorised and reviewed annually by both the Audit Committee and the Board, which receive regular updates of Treasury activity. Derivative instruments
are transacted for risk management purposes only. It is the Group’s policy that all hedging is to cover known risks and no speculative trading is
undertaken. Regular and frequent reporting to management is required for all transactions and exposures, and the internal control environment is
subject to periodic review by the Group’s internal audit team.
The Group’s principal market risks are exposures to changes in interest rates and foreign exchange rates, which arise both from the Group’s sources of
finance and its operations. Following evaluation of those market risks, the Group selectively enters into derivative financial instruments to manage these
exposures. The principal instruments currently used are interest rate swaps to hedge interest rate risks, and cross-currency swaps and forward foreign
exchange contracts to hedge transactional and translational currency exposures.
Interest rate risk
The Group has financial exposures to UK, Euro and US interest rates, arising primarily from the Group’s long-term bonds and other borrowings.
The Group’s hedging policy requires that between 50% and 85% of borrowings are held at fixed rates. This is achieved by issuing fixed rate bonds
or floating rate notes and then using interest rate swaps to adjust the balance between fixed and floating rate debt. The Group’s bank debt is at
floating rates, and, if drawn, would mean that the mix of fixed and floating rate debt would fluctuate and would therefore be managed to ensure
compliance with the Group’s hedging policy. At 30 June 2018, 80% of borrowings were held at fixed rates after hedging (2017: 80%).
The Group uses derivatives to convert all of its US dollar-denominated debt and associated interest rate obligations to pounds sterling or euros
(see section on foreign exchange risk for further detail). At 30 June 2018, the Group had no net US dollar denominated interest rate exposure on its
borrowings (2017: none).
The Group designates certain interest rate swaps as hedges of interest rate risk and certain cross-currency swaps as fair value hedges of both interest
rate risk and currency risk. Movements in the fair value of the hedged exposure are taken to the income statement and are offset by movements in
the fair value of the hedging instruments, which are also taken to the income statement. Any hedge ineffectiveness is recognised directly in the income
statement. In the year ended 30 June 2018, this amounted to less than £1 million (2017: £1 million).
At 30 June 2018 and 30 June 2017, the Group’s annual finance costs would increase or decrease by less than £1 million for a one-notch downgrade
or upgrade in credit rating assuming the RCF remains undrawn.
Interest rate sensitivity
The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative financial
instruments at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the
balance sheet date is outstanding for the whole year.
For each one hundred basis point rise or fall in interest rates, and if all other variables were held constant at 30 June 2018:
• The Group’s profit for the year ended 30 June 2018 would increase or decrease by £30 million (2017: profit for the year would increase or decrease
by £39 million).
• Other equity reserves would decrease or increase by £15 million (2017: decrease or increase by £26 million), arising from movements in cash flow hedges.
A one hundred basis point rise or fall in interest rates represents a large but realistic movement which can easily be multiplied to give sensitivities
at different interest rates.
The sensitivity analyses provided are hypothetical only and should be used with caution as the impacts provided are not necessarily indicative of the
actual impacts that would be experienced because the Group’s actual exposure to market rates changes as the Group’s portfolio of debt, cash and
foreign currency contracts changes. In addition, the effect of a change in a particular market variable on fair values or cash flows is calculated without
considering interrelationships between the various market rates or mitigating actions that would be taken by the Group. The changes in valuations are
estimates of the impact of changes in market variables and are not a prediction of future events or anticipated gains or losses.
Foreign exchange risk
A combination of cross-currency and interest rate swap arrangements is used to convert the Group’s debt and associated interest rate obligations
to pounds sterling or euros, at fixed exchange rates. At 30 June 2018, the split of the Group’s aggregate borrowings into their core currencies was US
dollar 34%, euros 52% and pounds sterling 14% (2017: US dollar 38%, euros 46% and pounds sterling 16%). At 30 June 2018, 18% of the Group’s long-term
borrowings, after the impact of derivatives, are denominated in pounds sterling and 82% in euros (2017: 25% in pounds sterling and 75% in euros).
The Group is exposed to currency translation on the consolidation of its foreign operations. It uses certain borrowings and derivative instruments
to hedge its net investments in these subsidiaries.
The majority of the Group’s revenues and operating expenses are denominated in pounds sterling. In the current year, approximately 36% of operating
expenses (£4,559 million) were denominated in euros (2017: approximately 35% (£4,167 million)) and approximately 9% of operating expenses (£1,070
million) were denominated in US dollars (2017: approximately 9% (£1,056 million)). In the current year, approximately 38% of revenues (£5,124 million) were
denominated in euros (2017: 37% (£4,832 million)).
Following the acquisitions of Sky Deutschland and Sky Italia, the Group Treasury function hedges the foreign currency exposure of its foreign subsidiaries
into its functional currency. In all territories the US dollar expense relates mainly to the Group’s programming contracts with US suppliers, together
with US dollar-denominated set-top box costs. In the UK the euro revenues primarily relate to subscribers located in Ireland. The UK’s exposure to
euro-denominated revenue is offset to a certain extent by euro-denominated costs, related mainly to certain transponder costs and euro financing
costs on its borrowings; the net position being a euro surplus (2017: surplus).
112
Sky plc The Group hedges currency exposures on US dollar denominated highly probable cash flows by using forward foreign exchange contracts purchased
up to five years ahead of the cash flow and currently does not hedge transactional euro exposures arising in the UK.
It is the Group’s policy that all US dollar foreign currency exposures are substantially hedged in advance of the year in which they occur.
At 30 June 2018, the Group had purchased forward foreign exchange contracts representing:
• Approximately 88% of US dollar-denominated costs falling due within one year (2017: 87%), and on a declining basis across five-year planning horizon
are hedged via:
– Outstanding commitments to purchase, in aggregate, US$2,661 million (2017: US$2,714 million) at an average rate of US$1.36 to £1.00
(2017: US$1.34 to £1.00).
– Outstanding commitments to purchase, in aggregate, US$1.706 million (2017: US$1,669 million) at an average rate of US$1.22 to €1.00
(2017: US$1.17 to €1.00).
• In respect of the UK legacy euro hedging programme and to hedge current balance sheet exposures:
– Outstanding commitments to sell, in aggregate, €726 million (2017: €760 million) at an average rate of €1.14 to £1.00 (2017: €1.15 to £1.00).
– Outstanding commitments to purchase, in aggregate, €335 million (2017: €444 million) at an average rate of €1.13 to £1.00 (2017: €1.15 to £1.00).
• In respect of the Group’s European subsidiaries to hedge their material non-functional currency exposures:
– Outstanding commitment to purchase, in aggregate, £65 million (2017: £73 million) at an average rate of £0.87 to €1.00 (2017: £0.84 to €1.00).
No forward foreign exchange contracts fall due beyond five years (2017: nil).
The Group designates the following as cash flow hedges for hedge accounting purposes:
• Forward foreign exchange contracts
• Cross-currency swaps where interest on both legs is at a fixed interest rate.
As such, the effective portion of the gain or loss on these contracts is reported as a component of the hedging reserve, outside the income statement,
and is then reclassified to the income statement in the same periods that the forecast transactions affect the income statement. Ineffectiveness of less
than £1 million was recognised in the income statement during the year (2017: less than £1 million).
A combination of US dollar denominated interest rate and US dollar/pound sterling cross-currency swaps is used to convert fixed dollar denominated
debt to floating sterling denominated debt. The interest rate swaps are designated as fair value hedges. The associated cross-currency swaps are not
designated as hedging instruments for hedge accounting purposes and, as such, movements in their value are recorded directly in the income statement.
Foreign exchange sensitivity
The following analysis details the Group’s sensitivity to movements in pounds sterling and euros against those currencies in which it has significant
transactions. The sensitivity analysis includes foreign currency denominated assets and liabilities at the balance sheet date and outstanding foreign
currency denominated financial instruments and adjusts their translation at the period end for a 25% change in foreign currency rates.
A 25% strengthening in pounds sterling against the US dollar would have the effect of decreasing profit by £11 million (2017: decreasing profit by
£18 million), none of which relates to non-cash movements in the valuation of derivatives (2017: losses of £5 million). The same strengthening would
have an adverse impact on other equity of £366 million (2017: adverse impact of £436 million).
A 25% weakening in pounds sterling against the US dollar would have the effect of increasing profit by £19 million (2017: increasing profit by £30 million),
none of which relates to non-cash movements in the valuation of derivatives (2017: gains of £9 million). The same weakening would have a beneficial
impact on other equity of £611 million (2017: beneficial impact of £727 million).
A 25% strengthening in pounds sterling against the euro would have the effect of increasing profit by £63 million (2017: increasing profit by £75 million) of
which gains of £73 million relate to non-cash movements in the valuation of derivatives (2017: gains of £80 million). The same strengthening would have a
beneficial impact on other equity of £17 million (2017: beneficial impact of £45 million).
A 25% weakening in pounds sterling against the euro would have the effect of decreasing profit by £108 million (2017: decreasing profit by £123 million)
of which losses of £122 million relate to non-cash movements in the valuation of derivatives (2017: losses of £133 million). The same weakening would
have an adverse impact on other equity of £29 million (2017: adverse impact of £76 million).
A 25% strengthening in the euro against the US dollar would have the effect of increasing profit by €6 million (2017: increasing profit by €8 million),
none of which relates to non-cash movements in the valuation of derivatives. The same strengthening would have an adverse impact on other equity
of €272 million (2017: €272 million).
A 25% weakening in the euro against the US dollar would have the effect of decreasing profit by €10 million (2017: decreasing profit by €13 million),
none of which relates to non-cash movements in the valuation of derivatives. The same weakening would have a beneficial impact on other
equity of €453 million (2017: €453 million).
The sensitivity analyses provided are hypothetical only and should be used with caution as the impacts provided are not necessarily indicative of the
actual impacts that would be experienced because the Group’s actual exposure to market rates is constantly changing as the Group’s portfolio of debt,
cash and foreign currency contracts changes. In addition, the effect of a change in a particular market variable on fair values or cash flows is calculated
without considering interrelationships between the various market rates or mitigating actions that would be taken by the Group. The changes in
valuations are estimates of the impact of changes in market variables and are not a prediction of future events or anticipated gains or losses.
113
Annual Report 2018Financial statements Notes to the consolidated financial statements continued
22. Financial risk management (continued)
Hedge accounting
The interest rate and foreign exchange rate risk sections above outline the Group’s policies regarding use of derivative products. Further detail on
valuations and the impact of hedge accounting during the year are provided in note 21.
Credit risk
The Group is exposed to counterparty default risk arising in respect of invested cash and cash equivalents and short-term deposits, and the positive
fair value of derivative financial assets held.
This risk is deemed to be low. Counterparty risk forms a central part of the Group’s Treasury policy, which is monitored and reported on regularly.
The Group manages credit risk by diversifying its exposures across a wide number of counterparties, such that the maximum exposure to any individual
counterparty was 6% of the total asset value of instruments at the end of the year. Treasury policies ensure that all derivative transactions are only
effected with strong relationship banks and, at the date of signing, each existing derivative counterparty carried a minimum credit rating of ‘Baa2’ or
equivalent from Standard & Poor’s. To mitigate remaining risks, counterparty credit and sovereign ratings are closely monitored, and no more than 10%
of cash deposits are held with a single bank counterparty (with the exception of overnight deposits which are invested in a spread of AAAf rated liquidity
funds).
The amount recognised in the income statement in respect of credit risk for derivatives deemed held for trading is less than £1 million (2017: £2 million).
Credit risk in our residential customer base is mitigated by billing and collecting in advance for digital television subscriptions for the majority of
our residential customer base. The Group’s maximum exposure to credit risk on trade receivables is the carrying amounts as disclosed in note 17.
Liquidity risk
Our principal source of liquidity is cash generated from operations, combined with access to a £1 billion RCF, which expires in November 2021.
At 30 June 2018, this facility was undrawn (30 June 2017: undrawn).
To ensure continuity of funding, the Group’s policy is to ensure that available funding matures over a period of years. At 30 June 2018, 46% (2017: 54%)
of the Group’s total available funding (including available undrawn amounts on our RCF) was due to mature in more than five years.
Full details of the Group’s borrowings and undrawn facilities are shown in note 20, other than trade and other payables, shown in note 18, and provisions,
shown in note 19.
The following table analyses the Group’s non-derivative financial liabilities, net settled derivative financial instruments and gross settled financial
instruments into relevant maturity groupings, based on the remaining period at the balance sheet date to the contractual maturity date. The amounts
disclosed in the table are the contractual undiscounted cash flows and may therefore not reconcile to the amounts disclosed on the balance sheet
for borrowings, derivative financial instruments, provisions and trade and other payables.
At 30 June 2018
Non-derivative financial liabilities
Bonds – USD
Bonds – EUR
Bonds – GBP
Obligations under finance leases and other borrowings
Trade and other payables
Provisions
Net settled derivatives
Financial assets
Gross settled derivatives
Outflow
Inflow
Less than
12 months
£m
Between
one and
two years
£m
Between
two and
five years
£m
More than
five years
£m
549
78
43
10
3,853
88
647
609
43
26
21
20
811
1,534
553
28
10
21
1,481
2,632
756
61
13
16
(7)
(5)
(9)
–
2,962
(3,074)
2,033
(2,151)
2,370
(2,497)
3,294
(3,522)
114
Sky plc
At 30 June 2017
Non-derivative financial liabilities
Bonds – USD
Bonds – EUR
Bonds – GBP
Obligations under finance leases and other borrowings
Trade and other payables
Provisions
Net settled derivatives
Financial assets
Gross settled derivatives
Outflow
Inflow
Less than
12 months
£m
Between
one and
two years
£m
Between
two and
five years
£m
More than
five years
£m
744
78
466
8
3,475
102
558
78
43
14
132
38
804
2,073
566
23
20
5
2,186
2,671
786
115
19
15
(24)
(11)
(16)
–
2,988
(3,257)
1,565
(1,697)
2,432
(2,639)
4,515
(4,868)
Capital risk management
The Group’s objectives when managing capital are to endeavour to ensure that the Group has the ability to access capital markets when necessary and
to optimise liquidity and operating flexibility through the arrangement of new debt, while seeking to minimise the cost of capital. The Group monitors
its liquidity requirements regularly and is satisfied that it has access to sufficient liquidity and operating flexibility to meet its capital requirements.
The Group manages its short and long-term capital structure by seeking to maintain leverage ratios consistent with a long-term investment grade credit
rating (BBB- or better from Standard & Poor’s and Baa3 or better from Moody’s). The Group’s current ratings are BBB (Standard & Poor’s) and Baa2
(Moody’s) with developing outlook, following the offers from 21st Century Fox and Comcast. The leverage ratio assessed by Standard and Poor’s is Net
Debt: EBITDA and the leverage ratio assessed by Moody’s is Gross Debt: EBITDA. Net Debt is defined as total borrowings, including the cash flows arising
under operating leases and transponder commitments, less cash and cash equivalents, excluding derivatives. Gross Debt does not reduce total
borrowings by the inclusion of cash and cash equivalents.
The Group is also required to maintain a Net Debt: EBITDA ratio below 4.00:1 and an EBITDA to Net Interest Payable ratio at above 3.50:1 under the terms
of its RCF. The RCF definition of Net Debt does not require the inclusion of future operating lease or transponder cash flows.
At 30 June 2018, the Net Debt: EBITDA ratio as defined by the terms of the RCF was 2.7:1 (2017: 2.7:1), and the EBITDA to Net Interest Payable ratio was
10.8:1 (2017: 10.1:1).
23. Share capital
Allotted, called-up and fully paid shares of 50p 1,719,017,230 (2017: 1,719,017,230)
The Company has one class of ordinary shares which carry equal voting rights and no contractual right to receive payment.
2018
£m
860
2017
£m
860
Share option and contingent share award schemes
The Company operates various equity-settled share option schemes (the ‘Schemes’) for certain employees.
The number of newly issued shares which may be allocated under the Schemes on any day shall not, when aggregated with the number of newly issued
shares which have been allocated in the previous 10 years under the Schemes and any other employee share scheme adopted by the Company, exceed
such number as represents 5% of the ordinary share capital of the Company in issue immediately prior to that day. In determining this limit no account
shall be taken of any newly issued shares where the right to acquire the newly issued shares was released, lapsed, cancelled or otherwise became
incapable of exercise. Options and awards which will be satisfied by ESOP shares do not fall within these headroom limits.
115
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
23. Share capital (continued)
The share awards outstanding can be summarised as follows:
Sharesave Scheme options(i)
Management LTIP awards(ii)
LTIP awards(iii)
Management Co-Investment LTIP awards(iv)
Co–Investment LTIP awards(v)
2018
Number of
ordinary
shares
10,682,312
17,020,119
7,053,300
2,533,942
2,472,327
39,762,000
2017
Number of
ordinary
shares
10,067,153
26,796,977
10,231,050
2,401,177
2,113,684
51,610,041
(i) Sharesave Scheme options
All Sharesave Scheme options outstanding at 30 June 2018 and 30 June 2017 have no performance criteria attached, other than the requirement that
the employee remains in employment with the Group. Options granted under the Sharesave Scheme must be exercised within six months of the relevant
award vesting date.
The Sharesave Scheme is open to all employees across the Group. Options are normally exercisable after either three or five years from the date of grant.
The price at which options are offered is not less than 80% of the middle-market price on the dealing day immediately preceding the date of invitation.
It is the policy of the Group to make an invitation to employees to participate in the scheme following the announcement of the end of year results.
(ii) Management LTIP awards
All Management LTIP awards outstanding at 30 June 2018 and 30 June 2017 vest only if performance conditions are met. Awards granted under the
Management LTIP must be exercised within five years of the relevant award vesting date.
The Company grants awards to selected employees under the Management LTIP. Awards under this scheme mirror the LTIP, with the same performance
conditions. Awards exercised under the Management LTIP can only be satisfied by the issue of market-purchased shares.
(iii) LTIP awards
All LTIP awards outstanding at 30 June 2018 and 30 June 2017 vest only if performance conditions are met. Awards granted under the LTIP must be
exercised within five years of the relevant award vesting date.
The Company operates the LTIP for Executive Directors and Senior Executives. Awards under the scheme are granted in the form of a nil-priced option.
The awards vest in full or in part dependent on the satisfaction of specified performance targets. For awards granted from July 2012 onwards, 30% of the
award vested dependent on TSR performance over a three-year performance period, relative to the constituents of the FTSE 100 at the time of grant,
and the remaining 70% vested dependent on performance against operational targets.
For awards that vested in 2017, the TSR performance condition was removed and replaced with operational performance targets.
This was treated as a modification to the relevant awards. The fair value of the modified equity settled share options at the time of modification was
calculated using methodologies that are consistent with the calculation of the fair value of equity-settled share options granted during the year as
explained in the section titled ‘Information for awards granted during the year’.
(iv) Management Co-Investment LTIP awards
All Management Co-Investment LTIP awards outstanding at 30 June 2018 and 30 June 2017 vest only if performance conditions are met. Awards granted
under the Management Co-Investment LTIP must be exercised within five years of the relevant award vesting date.
The Company grants awards to selected employees under the Management Co-Investment LTIP. Awards under this scheme mirror the Co-Investment LTIP,
with the same performance conditions.
(v) Co-Investment LTIP awards
All Co-Investment LTIP awards outstanding at 30 June 2018 and 30 June 2017 vest only if performance conditions are met. Awards granted under the
Co-Investment LTIP must be exercised within five years of the relevant award vesting date.
The Company operates the Co-Investment LTIP award for Executive Directors and Senior Executives. Employees who participate in the plan are granted
a conditional award of shares based on the amount they have invested in the Company’s shares. The investment will be matched up to a maximum of
1.5 shares for every share invested, subject to a three-year EPS performance condition.
For the purposes of the disclosure below, the Management LTIP, LTIP, Management Co-Investment LTIP and Co-Investment LTIP awards (‘Senior
Management Schemes’) have been aggregated.
116
Sky plc
The movement in share awards outstanding is summarised in the following table:
Outstanding at 1 July 2016
Granted during the year
Exercised during the year
Forfeited during the year
Expired during the year
Outstanding at 30 June 2017
Granted during the year
Exercised during the year
Forfeited during the year
Expired during the year
Outstanding at 30 June 2018
Sharesave Scheme
Senior Management
Schemes
Weighted
average
exercise
price
£
7.20
6.88
6.22
7.58
5.80
7.19
7.52
6.96
7.30
6.77
7.35
Number
9,212,906
5,504,516
(2,454,177)
(2,180,817)
(15,275)
10,067,153
4,196,356
(1,980,098)
(1,583,430)
(17,669)
10,682,312
Weighted
average
exercise
price
Number
£
39,053,503
0.00
19,657,918
0.00
(4,062,555)
0.00
(3,023,550)
0.00
(15,275)
–
0.00
51,610,041
0.00
17,610,743
0.00 (26,801,347)
(2,639,768)
0.00
(17,669)
–
0.00 39,762,000
Number
29,840,597
14,153,402
(1,608,378)
(842,733)
–
41,542,888
13,414,387
(24,821,249)
(1,056,338)
–
29,079,688
Total
Weighted
average
exercise
price
£
1.70
1.93
3.75
5.47
5.80
1.40
1.79
0.51
4.38
6.77
1.97
The weighted average market price of the Group’s shares at the date of exercise for share options exercised during the year was £9.89 (2017: £9.46).
For those exercised under the Sharesave Scheme it was £10.80 (2017: £9.93), and for those exercised under the Senior Management Schemes it was
£9.82 (2017: £8.76).
The middle-market closing price of the Company’s shares at 29 June 2018 was £14.62 (30 June 2017: £9.94).
The following table summarises information about share awards outstanding at 30 June 2018:
Range of exercise prices
£0.00 – £1.00
£6.00 – £7.00
£7.00 – £8.00
£8.00 – £9.00
Sharesave Scheme
Senior Management
Schemes
Weighted
average
remaining
contractual
life
Years
–
2.3
3.4
1.4
2.6
Number
–
4,528,036
4,250,893
1,903,383
10,682,312
Weighted
average
remaining
contractual
life
Years
6.0
–
–
–
Number
29,079,688
4,528,036
4,250,893
1,903,383
6.0 39,762,000
Number
29,079,688
–
–
–
29,079,688
Total
Weighted
average
remaining
contractual
life
Years
6.0
2.3
3.4
1.4
5.1
The following table summarises information about share awards outstanding at 30 June 2017:
Range of exercise prices
£0.00 – £1.00
£5.00 – £6.00
£6.00 – £7.00
£7.00 – £8.00
£8.00 – £9.00
Sharesave Scheme
Senior Management
Schemes
Weighted
average
remaining
contractual
life
Years
–
0.1
3.2
1.5
2.4
2.6
Number
–
43,754
5,588,271
2,171,995
2,263,133
10,067,153
Weighted
average
remaining
contractual
life
Years
5.7
–
–
–
–
5.7
Number
41,542,888
–
–
–
–
41,542,888
Total
Weighted
average
remaining
contractual
life
Years
5.7
0.1
3.2
1.5
2.4
5.1
Number
41,542,888
43,754
5,588,271
2,171,995
2,263,133
51,610,041
The range of exercise prices of the awards outstanding at 30 June 2018 was between nil and £8.17 (2017: nil and £8.17). For those outstanding under the
Sharesave Scheme it was between £6.08 and £8.17 (2017: £5.08 and £8.17) and for all awards outstanding under the Senior Management Schemes the
exercise price was nil (2017: nil).
117
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
23. Share capital (continued)
The following table summarises additional information about the awards exercisable at 30 June 2018 and 30 June 2017:
Sharesave Scheme
Senior Management Schemes
2018
Average
remaining
contractual
life of
exercisable
options
0.1
3.8
3.7
Options
exercisable
at 30 June
49,465
1,236,343
1,285,808
Weighted
average
exercise
price
£
6.89
0.00
0.27
Options
exercisable
at 30 June
117,600
474,940
592,540
2017
Average
remaining
contractual
life of
exercisable
options
0.1
2.9
2.4
Weighted
average
exercise
price
£
6.17
0.00
1.23
Information for awards granted during the year
The weighted average fair value of equity-settled share options granted during the year, as estimated at the date of grant, was £6.42 (2017: £5.54).
This was calculated using the Black-Scholes share option pricing model except for awards which have market-based performance conditions, where a
Monte-Carlo simulation model was used, and for grants of nil-priced options, which were treated as the award of a free share. The fair value of nil-priced
options granted during the year was measured on the basis of the market-price of the Company’s shares on the date of grant, discounted for expected
dividends which would not be received over the vesting period of the options.
The Monte-Carlo simulation model reflected the historical volatilities of the Company’s share price and those of all other companies to which the
Company’s performance would be compared, over a period equal to the vesting period of the awards.
Expected volatility was determined by calculating the historical volatility of the Company’s share price, over a period equal to the expected life of the
options. Expected life was based on the contractual life of the awards and adjusted, based on management’s best estimate, for the effects of exercise
restrictions and behavioural considerations.
(i) Sharesave Scheme
The weighted average fair value of equity-settled share awards granted during the year under the Sharesave Scheme, as estimated at the date of grant,
was £2.23 (2017: £1.19). This was calculated using the Black-Scholes share option pricing model.
The following weighted average assumptions were used in calculating these fair values:
Share price
Exercise price
Expected volatility
Expected life
Expected dividends
Risk-free interest rate
2018
£9.30
£7.52
23%
3.8 years
1.6%
0.7%
2017
£8.35
£6.88
21%
3.9 years
3.4%
0.2%
(ii) Senior Management Schemes
The weighted average fair value of equity-settled share awards granted during the year under the Senior Management Schemes, as estimated at the
date of grant, was £7.72 (2017: £7.23). The fair value of awards with market-based performance conditions was calculated using a Monte-Carlo simulation
model. Awards granted as nil-priced options were treated as the award of a free share. For all other awards, fair value was calculated using the Black-
Scholes share option pricing model.
The following weighted average assumptions were used in calculating these fair values:
2018
£9.67
£0.00
24%
2.1 years
2.9%
0.1%
2017
£9.12
£0.00
20%
3.0 years
3.3%
0.2%
Share price
Exercise price
Expected volatility
Expected life
Expected dividends
Risk-free interest rate
118
Sky plc
24. Shareholders’ equity
Share capital
Share premium
ESOP reserve
Hedging reserve
Other reserves
Retained earnings
2018
£m
860
2,704
(9)
(35)
322
174
4,016
2017
£m
860
2,704
(78)
86
364
(98)
3,838
The following table provides information about purchases of equity shares by the Company, including purchases by the Group’s ESOP, during the
fiscal year.
July
August
September
October
November
December
January
February
March
April
May
June
Total for the year ended 30 June 2018
Total
number of
shares
purchased1
18,152,151
2,057,607
380,993
–
–
–
–
–
–
–
–
–
20,590,751
Average
price paid
per share
£
9.73
9.72
9.61
–
–
–
–
–
–
–
–
–
9.72
1 All share purchases were open market transactions and are included in the month statement.
Share premium and special reserve
On 10 December 2003, the High Court approved a reduction in the Company’s share premium account of £1,120 million, as approved by the Company’s
shareholders at the AGM held on 14 November 2003. This amount was equal to the Company-only profit and loss account reserve deficit at 30 June 2003.
As part of the application, the Company’s balance sheet at 30 September 2003 was required to be presented. At that date, the deficit on the Company-
only profit and loss account reserve had reduced by £14 million since 30 June 2003, to £1,106 million. As a condition of the reduction, the reduction in
the share premium account of £1,120 million was permitted to be offset against the profit and loss account reserve by the amount of the deficit at
30 September 2003. The excess of £14 million was credited to a special reserve, which is included in other reserves, and, under the terms of the
reduction, will remain undistributable until all the creditors of the Company and its guarantors (as at 10 December 2003) are paid.
ESOP reserve
The cost of the Company’s ordinary shares held by the Group’s ESOP is treated as a deduction in arriving at total shareholders’ equity. The movement
in the ESOP reserve was as follows:
At 1 July 2016
Share options exercised during the year
At 30 June 2017
Share options exercised during the year
Shares purchased by the ESOP during the year
At 30 June 2018
Number of
ordinary
shares
10,926,479
(4,062,555)
6,863,924
(26,476,347)
20,590,751
978,328
Average
price paid
per share
£11.49
£11.56
£11.46
£10.17
£9.72
£9.69
£m
125
(47)
78
(269)
200
9
119
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
24. Shareholders’ equity (continued)
Hedging reserve
Changes in the fair values of derivatives that are designated as cash flow hedges are initially recognised in the hedging reserve, and subsequently
recognised in the income statement when the related hedged items are recognised in the income statement, or in the initial cost or other carrying amount
of the non-financial asset or liability on the balance sheet, again being recognised in the income statement in the same periods as the related hedged
items. In addition, deferred taxation relating to these derivatives is also initially recognised in the hedging reserve prior to transfer to the income
statement.
Other reserves
The Group’s other reserves include a capital redemption reserve, a merger reserve, a foreign currency translation reserve and a special reserve. The capital
redemption reserve was £190 million as at 30 June 2018 (2017: £190 million). The merger reserve was £125 million as at 30 June 2018 (2017: £125 million).
The special reserve was £14 million as at 30 June 2018 (2017: £14 million). The foreign currency translation reserve was £(5) million as at 30 June 2018
(2017: £37 million). Other reserves also includes the accumulated actuarial movement on employee benefit obligations of £(2) million (2017: £(2) million).
Reconciliation of movements in the foreign currency translation reserve
At 1 July
Net investment hedges
Exchange differences on translation of foreign operations
At 30 June
2018
£m
37
(42)
–
(5)
2017
£m
(24)
(335)
396
37
Merger reserve
The merger reserve was created in accordance with the merger relief provisions under section 131 of the Companies Act 1985 (as amended) and section
612 of the Companies Act 2006 relating to the accounting for business combinations involving the issue of shares at a premium. Merger relief provided
relief from the requirement to create a share premium account in a parent company’s balance sheet. In preparing consolidated financial statements,
the amount by which the fair value of the shares issued exceeded their nominal value was recorded within a merger reserve on consolidation, rather
than in a share premium account. This merger reserve was retained upon transition to IFRS, as allowed under UK law.
The merger reserve, which is included in other reserves, was created as a result of the purchase by the Group of interests in two entities. Sports Internet
Group (‘SIG’) was purchased on 12 July 2000, where consideration was paid by the issue of equity shares in the Company. BiB was purchased between
28 June 2001 and 11 November 2002, where consideration was paid by the issue of equity shares in the Company. Following the Group’s disposal of a
controlling stake in Sky Bet, the merger reserve in relation to the purchase of SIG was transferred to retained earnings. At 30 June 2018, the Group’s
merger reserve was £125 million (2017: £125 million).
25. Notes to the consolidated cash flow statement
Reconciliation of profit before tax to cash generated from operations
Profit before tax
Depreciation, impairment and losses (profits) on disposal of property, plant and equipment
Amortisation, impairment and losses (profits) on disposal of intangible assets
Share-based payment expense
Investment income
Finance costs
Share of results of joint ventures and associates
Profit on disposal of available-for-sale investment
Increase in trade and other receivables
Increase in inventories
Increase in trade and other payables
Increase (decrease) in provisions
(Decrease) increase in derivative financial instruments
Cash generated from operations
2018
£m
864
430
644
94
(11)
286
(56)
(49)
2,202
(267)
(198)
282
21
(130)
1,910
2017
£m
803
366
606
147
(22)
204
(21)
–
2,083
(103)
(176)
278
(89)
261
2,254
120
Sky plc
26. Contracted commitments, contingencies and guarantees
a) Future minimum expenditure contracted for but not recognised in the financial statements
Television programme rights
Set-top boxes and related equipment
Third-party payments1
Transponder capacity 2
Property, plant and equipment
Intangible assets3
Smartcards3
Other
Less than 1
year
£m
4,873
262
317
203
13
29
43
653
6,393
Between
1 and 5
years
£m
12,311
2
492
555
11
49
72
598
14,090
After 5
years
£m
674
–
–
204
4
2
–
134
1,018
Total at
30 June
2018
£m
17,858
264
809
962
28
80
115
1,385
21,501
Total at
30 June
2017
£m
14,688
411
893
926
41
101
206
1,139
18,405
Foreign currency commitments are translated to pounds sterling at the rate prevailing on the balance sheet date.
1 The third-party payment commitments are in respect of distribution agreements for the television channels owned and broadcast by third parties, retailed by the Group to
residential and commercial subscribers (‘Sky Distributed Channels’).
2 Transponder capacity commitments are in respect of capacity that the Group uses for digital transmissions to both retail subscribers and cable operators.
3 Commitments in relation to the provision of smartcards. Smartcards under development are included within intangible assets. The amounts included above are the expected ongoing
smartcard costs based on forecast customer levels.
b) Contingencies and guarantees
Certain subsidiaries of the Company have agreed to provide additional funding to several of their investments in limited and unlimited companies and
partnerships, in accordance with funding agreements. Payment of this additional funding would be required if requested by the investees in accordance
with the funding agreements. The maximum potential amount of future payments which may be required to be made by the subsidiaries of the Company
to their investments, in both limited and unlimited companies and partnerships under the undertakings and additional funding agreements, is £17 million
(2017: £30 million).
The Group has guarantees in place relating to the Group’s borrowings, see note 20.
27. Operating lease commitments
The minimum lease rentals to be paid under non-cancellable operating leases at 30 June are as follows:
Within one year
Between one and five years
After five years
2018
£m
62
191
204
457
2017
£m
61
168
206
435
The majority of operating leases relate to property. The rents payable under these leases are subject to renegotiation at the various intervals specified in
the leases.
The minimum sub-lease rentals to be received under non-cancellable operating sub-leases at 30 June are as follows:
Within one year
Sub-lease rentals primarily relate to property leases.
2018
£m
–
–
2017
£m
1
1
28. Transactions with related parties and major shareholders
a) Entities with joint control or significant influence
During the year the Group conducted business transactions with companies that form part of the 21st Century Fox, Inc. group, a major shareholder in
the Company.
Transactions with related parties and amounts outstanding in relation to those transactions and with related parties at 30 June are as follows:
Supply of goods or services by the Group
Purchases of goods or services by the Group
Amounts owed to the Group
Amounts owed by the Group
2018
£m
48
(407)
13
(178)
2017
£m
41
(413)
24
(193)
121
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
28. Transactions with related parties and major shareholders (continued)
At 30 June 2018 the Group had expenditure commitments of £568 million in relation to transactions with related parties (2017: £359 million) which
principally related to minimum television programming rights commitments.
Goods and services supplied
During the year, the Group supplied programming, airtime, transmission and marketing services to 21st Century Fox, Inc. companies.
Purchases of goods and services and certain other relationships
During the year, the Group purchased programming and technical and marketing services from 21st Century Fox, Inc. companies.
There is an agreement between 21st Century Fox, Inc. and the Group, pursuant to which it was agreed that, for so long as 21st Century Fox, Inc. directly or
indirectly holds an interest of 30% or more in the Group, 21st Century Fox, Inc. will not engage in the business of satellite broadcasting in the UK or Ireland.
The sale and purchase agreements for the acquisitions of Sky Italia Srl and Sky Deutschland AG contained certain commitments from 21st Century Fox, Inc.
not to retail certain services to consumers in certain territories until 1 January 2017. The sale and purchase agreement for the National Geographic channel
contained undertakings from the Company not to compete with the business of the National Geographic Channel International until 1 January 2017.
On 15 December 2016, the Company entered into a co-operation agreement with 21st Century Fox pursuant to which the parties agreed to provide each
other with information and assistance for the purposes of obtaining all merger control and regulatory clearances and authorisations in relation to the
21st Century Fox Offer and the preparation of the document to be sent to the Company’s shareholders in relation to the Original 21st Century Fox Offer.
The co-operation agreement was terminated by the Company on 25 April 2018 after the Independent Committee withdrew its recommendation of the
Original 21st Century Fox Offer. Notwithstanding such termination, certain obligations under the co-operation agreement continue in effect.
b) Joint ventures and associates
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this
note. Transactions between the Group and its joint ventures and associates are disclosed below. Transactions between the Company and its subsidiaries,
joint ventures and associates are disclosed in the Company’s separate financial statements.
Supply of services by the Group
Purchases of goods or services by the Group
Amounts owed by joint ventures and associates to the Group
Amounts owed to joint ventures and associates by the Group
2018
£m
47
(49)
26
(23)
2017
£m
47
(52)
29
(9)
Services supplied are primarily the provision of transponder capacity, marketing, advertising sales and support services. Purchases represent fees payable
for channel carriage.
Amounts owed by joint ventures and associates include £17 million (2017: £16 million) relating to loan funding. These loans bear interest at rates of
between 1.50% and 2.00% (2017: between 1.50% and 2.00%). The maximum amount of loan funding outstanding in total from joint ventures and
associates during the year was £17 million (2017: £100 million). In the prior year Sky Bet repaid £83 million pursuant to an outstanding loan balance.
The Group took out a number of forward exchange contracts with counterparty banks during the prior year on behalf of the joint venture AETN UK.
On the same dates as these forward contracts were entered into, the Group entered into equal and opposite contracts with AETN UK in respect
of these forward contracts.
Consequently, the Group was not exposed to any of the net gains or losses on these forward contracts. The face value of forward exchange contracts
with AETN UK that had not matured as at 30 June 2018 was £9 million (2017: £13 million).
During the year, less than US$1 million (2017: US$19 million) was received from the joint venture upon maturity of forward exchange contracts, and
US$4 million (2017: US$37 million) was paid to the joint venture upon maturity of forward exchange contracts.
During the year, £3 million (2017: £26 million) was received from the joint venture upon maturity of forward exchange contracts, and £1 million
(2017: £21 million) was paid to the joint venture upon maturity of forward exchange contracts.
During the year, €1 million (2017: €8 million) was received from the joint venture upon maturity of forward exchange contracts and nil (2017: nil)
was paid to the joint venture upon maturity of forward exchange contracts.
At 30 June 2018 the Group had minimum expenditure commitments of £1 million (2017: £1 million) with its joint ventures and associates.
c) Other transactions with related parties
The Group has engaged in a number of transactions with companies of which some of the Company’s Directors are also directors. These do not meet
the definition of related-party transactions.
d) Key management
The Group has a related-party relationship with the Directors of the Company. At 30 June 2018, there were 11 (2017: 11) members of key management
all of whom were Directors of the Company. Key management compensation is disclosed in note 6b.
29. Events after the reporting period
On 10 July 2018, the Group completed the sale of its 20% stake in Sky Betting & Gaming to The Stars Group Inc. for a total consideration of £635 million,
comprising £427 million in cash and 7.6 million shares in The Stars Group Inc.
122
Sky plc
30. Group investments
The Group and its subsidiaries are involved in the operation of pay television broadcasting and home communications services, including the provision
of broadband and telephone operations. Certain subsidiary companies provide ancillary functions which support these operations. Joint ventures and
associates are involved in the transmission of specialist channels and the production of television programming.
Unless otherwise indicated, all shareholdings owned directly or indirectly by the Company represent 100% of the issued share capital of the subsidiary
and the share capital is comprised of ordinary shares. All entities primarily operate in their country of incorporation and are listed at their registered
addresses.
Subsidiaries:
Direct holdings of the Company
Incorporated in the UK
Grant Way, Isleworth, Middlesex TW7 5QD
British Sky Broadcasting Group Limited
Picnic Limited
Sky Finance Europe Limited
Sky Group Finance plc
Sky Guarantee Investments Limited1
Sky Operational Finance Limited
Sky Television Limited
Sky UK Limited
Subsidiaries:
Indirect holdings of the Company
Incorporated in the UK
Grant Way, Isleworth, Middlesex TW7 5QD
365 Media Group Limited
Amstrad Limited
Avanti Media Group Limited19
Blast! Films Limited14
British Sky Broadcasting Limited
Ciel Bleu 6 Limited
Cymru International Limited
Diagonal View Limited
Dolphin TV Limited
Ethnic Media Sales EMS Limited
International Channel Pack Distribution Limited
Kidsprog Limited
Love Productions Limited10
MEMSTV Limited
Multicultural & Ethnic Media Sales Limited
Newserge Limited
NOW TV Limited
Parthenon 1 Limited
Parthenon 2 Limited
Parthenon Entertainment Limited
Parthenon Media Group Limited
Rivals Digital Media Limited
S.A.T.V. Publishing Limited
Sky Channel Limited
Sky Comedy Limited
Sky CP Limited
Sky Europe Limited
Sky Global Media Limited
Sky Group Limited
Sky Healthcare Scheme 2 Limited
Sky History Limited
Sky Holdings Limited
Sky Home Communications Limited
Sky In-Home Service Limited
Sky International Limited
Sky International Operations Limited
Sky IP International Limited
Sky IQ Limited
Sky LLU Assets Limited
Sky Mobile Services Limited
Sky New Media Ventures Limited
Sky News Limited
Sky Ocean Ventures (General Partner) Limited
Sky Ocean Ventures Limited Partnership
Sky Ocean Ventures Partner Limited
Sky Publications Limited
Sky Retail Stores Limited
Sky SNA Limited
Sky SNI Limited
Sky SNI Operations Limited
Sky Subscribers Services Limited
Sky Telecommunications Limited
Sky Telecommunications Services Limited
Sky Ventures Limited
The Cloud Networks Limited
Tour Racing Limited8,11
True North Productions Limited12
Una Tickets Limited
Virtuous Systems Limited
36 Cardiff Road, Llandaff, Cardiff CF5 2DR
Avanti Media Limited19
10th Floor, The Met Building, 22 Percy Street, London W1T 2BU
Znak & Co Limited13
Unit 100 Highgate Studios, 53-79 Highgate Road, London NW5 1TL
Blast! Films – Hunger Limited14
Blast! Films – One Day Limited14
Millbank Tower, 21-24 Millbank, London SW1P 4QP
Attheraces Holdings Limited3,15
Attheraces Limited15
Attheraces (UK) Ltd15
Go Racing Ltd8,15
Incorporated in Germany
Oderstraße 59, 14513 Teltow, Potsdam
Sky Deutschland Customer Center GmbH
Eckdrift 109, 19061 Schwerin-Krebsförden
Sky Deutschland Service Center GmbH
Medienallee 26, 85774 Unterföhring, Munich
BSkyB GmbH
Premiere WIN Fernsehen GmbH
SCAS Satellite CA Services GmbH
Sky Deutschland GmbH
Sky Deutschland Fernsehen GmbH & Co. KG2
Sky Deutschland Verwaltungs GmbH
Sky German Holdings GmbH
Sky Hotel Entertainment GmbH
Sky Media GmbH
Incorporated in Italy
Via Monte Penice, 7 – 20138 Milan
Digital Exchange S.r.l2
Nuova Società Televisiva Italiana S.r.l2
Sky Italia S.r.l2
Sky Italian Holdings S.p.A
Sky Italia Network Service S.r.l2
Telepiù S.r.l2
Vision Distribution SpA12
Incorporated in the USA
Corporation Trust Center 1209 Orange Street, Wilmington, New Castle,
Delaware, 19801
BSkyB US Holdings, Inc.8
Znak & Co LLC2,13
123
Annual Report 2018Financial statements
St Albans House, 57-59 Haymarket, London SW1Y 4QX
Odeon and Sky Filmworks Limited8
5 Technology Park, Colindeep Lane, Colindale, NW9 6BX
Sugar Films Limited
Manning House 1st Floor, 22 Carlisle Place, London SW1P 1JA
Thinkbox TV Limited8
50.00%
24.90%
20.00%
Incorporated in other overseas countries
Channel Islands – 1 Waverley Place, Union Street, St Helier, Jersey JE1 1SG
Cyan Blue Topco Limited4
Shareholding
USA – 874 Walker Rd, Suite C, Dover, DE 19904
Talos Films, LLC2,18
UAE – PO Box 77845, Abu Dhabi
Sky News Arabia FZ-LLC
20.06%
25.00%
50.00%
1 This entity is limited by guarantee and so does not have issued share capital.
2 These entities do not have issued share capital and Sky’s investment instead comprises a
membership, partnership or quota interest, according to the legal form of the Company.
3 This entity has also issued recoupment shares.
4 This entity has also issued contingent value shares.
5 These entities have an accounting reference date of 31 March.
6 This entity has an accounting reference date of 31 May.
7 These entities have an accounting reference date of 30 September.
8 These entities have an accounting reference date of 31 December.
9
The Paramount UK Partnership is a joint venture of the Group and is included within the
consolidated accounts in accordance with note 1(c)(ii). Consequently, the Paramount UK
Partnership has taken advantage of the exemption within the Partnerships (Accounts)
Regulations 2008 (regulation 7) from filing annual financial statements.
10 Sky owns 70.40% of the issued share capital of this entity.
11 Sky owns 85.00% of the issued share capital of this entity.
12 Sky owns 60.00% of the issued share capital of this entity.
13 Sky owns 67.50% of the issued share capital of this entity.
14 Sky owns 70.00% of the issued share capital of this entity.
15 Sky owns 50.41% of the issued share capital of this entity.
16 This entity has an accounting reference date of 28 February.
17 This entity has an accounting reference date of 30 November.
18 This entity has an accounting reference date of 31 October.
19 Sky owns 51.00% of the issued share capital of this entity.
The following companies are exempt from the requirements relating to the audit
of individual accounts for the year/period ended 30 June 2018 by virtue of
section 479A of the Companies Act 2006: Kidsprog Limited (02767224),
Parthenon Media Group Limited (06944197), Sky Finance Europe Limited
(09446689), Sky IP International Limited (07245844), Sky Operational Finance
Limited (02906994) and Sky Television Limited (01518707).
Notes to the consolidated financial statements continued
30. Group investments (continued)
1675 S. State Street, Suite B, Dover, DE 19901
Big Sky Music, LLC2,8,12
Callisto Media West, LLC2,8,12
Jupiter Entertainment, LLC2,8,12
Jupiter Entertainment Holdings, LLC2,8,12
Jupiter Entertainment North, LLC2,8,12
4800 Old Kingston Pike, Suite 2200, Knoxville, TN 37919
PhotoOps, LLC2,8,12
1925 Century Park East, 22nd Floor, Los Angeles CA 90067-90071
Baking Show, LLC2,5,10
Love American Journeys, LLC2,5,10
Love Baking, LLC2,5,10
Love Productions USA, Inc2,5,10
Love Sewing, LLC2,5,10
USA Love Development, LLC2,5,10
Incorporated in other overseas countries
Austria – Handelskai 92, 1200 Wien
Sky Österreich Fernsehen GmbH
Sky Österreich Verwaltung GmbH
Belgium – Boulevard Charlemagne 1, 1041 Brussels
Sky Channel SA
Hong Kong – Level 54, Hopewell Centre, 183 Queen’s Road East
Sky Manufacturing Services Limited
Ireland – Fifth Floor, One Burlington Plaza, Burlington Road, Dublin 4
Sky Ireland Limited
Switzerland
Rue du Puits-Godet 10, Neuchâtel
Sky Switzerland SA
Stockerhof, Dreikönigstrasse 31A, CH8002 Zürich
Sky International AG
Joint ventures and associates:
Incorporated in the UK
1 Queen Caroline Street, London, W6 9YN
AETN UK
1st Floor Suite, 181b Kensington High Street, London W8 6SH
Chrysalis Vision Limited16
4 Roger Street, 2nd Floor, London WC1N 2JX
Clearcast Limited8
2nd Floor, 27 Mortimer Street, London W1T 3JF
DTV Services Limited6
Millbank Tower, 21-24 Millbank, London SW1P 4QP
GBI Racing Ltd8
6th Floor, One London Wall, London EC2Y 5EB
Internet Matters Limited1,5
17-19 Hawley Crescent, Camden, London NW1 8TT
Nickelodeon UK Limited7
Paramount UK Partnership2,7,9
3 Park Square East, Leeds, LS1 2NE
Pitch Music Limited5
76 Charlotte Street, London W1T 4QS
Popcorn Digital Limited17
124
Shareholding
50.00%
41.60%
37.50%
20.00%
25.21%
25.00%
40.00%
25.00%
19.99%
42.50%
Sky plc
31. Sky plc company only financial statements
Company balance sheet
as at 30 June 2018
Non-current assets
Investments in subsidiaries
Other receivables
Derivative financial assets
Deferred tax assets
Current assets
Other receivables
Cash and cash equivalents
Derivative financial assets
Total assets
Current liabilities
Borrowings
Other payables
Derivative financial liabilities
Non-current liabilities
Borrowings
Derivative financial liabilities
Total liabilities
Share capital
Share premium
Reserves
Total equity attributable to equity shareholders
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of this balance sheet.
The Company’s profit for the year was £616 million (2017: £386 million).
Notes
2018
£m
2017
£m
C
E
H
D
E
H
F
G
H
F
H
J
J
8,191
4
433
18
8,646
7,272
2
57
7,331
15,977
438
95
1
534
7,426
189
7,615
8,149
860
2,704
4,264
7,828
15,977
9,531
5
599
9
10,144
6,126
1
203
6,330
16,474
573
108
3
684
7,874
183
8,057
8,741
860
2,704
4,169
7,733
16,474
These financial statements of Sky plc, registered number 02247735, have been approved by the Board of Directors on 25 July 2018 and were signed on its
behalf by:
Jeremy Darroch
Group Chief Executive Officer
Andrew Griffith
Group Chief Operating Officer and Chief Financial Officer
125
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
31. Sky plc company only financial statements (continued)
Company cash flow statement
for the year ended 30 June 2018
Cash flows from operating activities
Cash generated from operations
Net cash from operating activities
Cash flows from financing activities
Proceeds from the exercise of share options
Loan to subsidiaries
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
The accompanying notes are an integral part of this cash flow statement.
Company statement of changes in equity
for the year ended 30 June 2018
Notes
K
2018
£m
2017
£m
–
–
14
(13)
1
1
1
2
–
–
15
(14)
1
1
–
1
At 30 June 2016
Profit for the year
Recognition and transfer of cash flow hedges
Tax on items taken directly to other
comprehensive income
Total comprehensive (loss) income for the year
Share-based payment
Dividends
At 30 June 2017
Profit for the year
Recognition and transfer of cash flow hedges
Tax on items taken directly to other
comprehensive income
Total comprehensive (loss) income for the year
Share-based payment
Dividends
At 30 June 2018
Share
capital
£m
860
–
–
Share
premium
£m
2,704
–
–
Special
reserve
£m
14
–
–
Capital
redemption
reserve
£m
190
–
–
Capital
reserve
£m
844
–
–
ESOP
reserve
£m
(125)
–
–
Hedging
reserve
£m
(30)
–
(48)
Retained
earnings
£m
3,144
386
–
Total
Shareholders’
equity
£m
7,601
386
(48)
–
–
–
–
860
–
–
–
–
–
–
860
–
–
–
–
2,704
–
–
–
–
–
–
2,704
–
–
–
–
14
–
–
–
–
–
–
14
–
–
–
–
190
–
–
–
–
–
–
190
–
–
–
–
844
–
–
–
–
–
–
844
–
–
47
–
(78)
–
–
–
–
69
–
(9)
8
(40)
–
–
(70)
–
(22)
4
(18)
–
–
(88)
–
386
97
(358)
3,269
616
–
–
616
(176)
(396)
3,313
8
346
144
(358)
7,733
616
(22)
4
598
(107)
(396)
7,828
For a description of the nature and purpose of each equity reserve, see note J.
The accompanying notes are an integral part of this statement of changes in equity.
A. Accounting policies
Sky plc (the ‘Company’) is a public limited company incorporated in the United Kingdom and registered in England and Wales.
i) Basis of preparation
The Company financial statements have been prepared in accordance with IFRS, consistent with the accounting policies set out in note 1 of the Group’s
consolidated financial statements. In accordance with the exemption allowed by Section 408(3) of the Companies Act 2006, the Company has not
presented its own income statement or statement of comprehensive income.
Under IAS 1, other than those described in the accounting policies, we are not aware of any critical accounting judgements or key sources of estimation
uncertainty.
ii) Investment in subsidiaries
An investment in a subsidiary is recognised at cost less any provision for impairment. As permitted by section 133 of the Companies Act 2006, where the
relief afforded under section 131 of the Companies Act 2006 applies, cost is the aggregate of the nominal value of the relevant number of the Company’s
shares and the fair value of any other consideration given to acquire the share capital of the subsidiary undertakings.
B. Employees
Employee benefits
The Company had no employees (2017: none) during the year.
Key management compensation
Amounts paid to the Directors of the Company are disclosed in the Report on Directors’ remuneration on pages 46 to 60.
126
Sky plc
C. Investments in subsidiaries
Cost
At 1 July 2016
Additions
At 30 June 2017
Disposals
At 30 June 2018
Provision
At 1 July 2016, 30 June 2017 and 30 June 2018
Carrying amounts
At 1 July 2016
At 30 June 2017
At 30 June 2018
See note 28 for a list of the Company’s investments.
D. Deferred tax
Recognised deferred tax assets
At 1 July 2016
Credit to income
Credit to other comprehensive income
At 30 June 2017
Credit to income
Credit to other comprehensive income
At 30 June 2018
£m
10,528
8
10,536
(1,340)
9,196
(1,005)
9,523
9,531
8,191
Financial
instruments
temporary
differences
£m
–
1
8
9
5
4
18
At 30 June 2018 a deferred tax asset of £199 million (2017: £208 million) has not been recognised in respect of gross capital losses of £1,171 million
(2017: £1,223 million) related to the Group’s holding in KirchPayTV, on the basis that utilisation of these temporary differences is not probable.
At 30 June 2018, the Company has also not recognised a deferred tax asset of £1 million (2017: £1 million) relating to gross capital losses and
provisions of £5 million (2017: £5 million) in respect of football club investments, on the basis that it is not probable that they will be utilised.
E. Other receivables
Amounts receivable from subsidiaries
Prepayments and other receivables
Current other receivables
Non-current prepayment
Total other receivables
2018
£m
7,267
5
7,272
4
7,276
2017
£m
6,121
5
6,126
5
6,131
On 17 November 2015, the Company made a loan of £356 million to Sky Operational Finance Limited. This loan bears interest at 3.721% and is repayable
on demand.
On 1 April 2015, the Company made a loan of €600 million to Sky Operational Finance Limited. This loan bears interest at 3 month EURIBOR plus 0.75%
and is repayable on demand.
On 27 November 2014, the Company made a loan of €400 million to Sky Operational Finance Limited. This loan bears interest at 2.750% and is repayable
on demand.
On 24 November 2014, the Company made loans of €850 million and €126 million to Sky Operational Finance Limited. These loans bear interest at a rate
of 1.875% and 2.940% respectively, and are repayable on demand.
On 16 September 2014, the Company made loans of €969 million and €582 million to Sky Operational Finance Limited. These loans bear interest at 2.187%
and EURIBOR plus 0.656% respectively, and are repayable on demand.
On 15 September 2014, the Company made loans of €1,500 million and €1,000 million to Sky Operational Finance Limited. These loans bear interest at
1.500% and 2.500% respectively, and are repayable on demand.
127
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
31. Sky plc company only financial statements (continued)
All other amounts receivable from subsidiaries are non-interest bearing and are also repayable on demand.
The Directors consider that the carrying amount of other receivables approximates their fair values.
The Company’s credit risk is primarily attributable to its other receivables. The majority of its other receivables balance is due from Sky Operational
Finance Limited and Sky UK Limited. The risk of these entities defaulting on amounts owed is considered low due to Sky Operational Finance Limited
being a conduit to pass through intercompany financing and due to Sky UK Limited’s successful operation of pay television broadcasting and home
communications services in the UK and Ireland.
F. Borrowings
Current borrowings
US$582.8 million of 9.500% Guaranteed Notes repayable in November 2018
US$750 million of 6.100% Guaranteed Notes repayable in February 2018
Non-current borrowings
US$582.8 million of 9.500% Guaranteed Notes repayable in November 2018
US$750 million of 2.625% Guaranteed Notes repayable in September 2019
€600 million of Guaranteed Floating Rate Notes repayable in April 2020
£450 million of 2.875% Guaranteed Notes repayable in November 2020
€1,500 million of 1.500% Guaranteed Notes repayable in September 2021
US$800 million of 3.125% Guaranteed Notes repayable in November 2022
€850 million of 1.875% Guaranteed Notes repayable in November 2023
US$1,250 million of 3.750% Guaranteed Notes repayable in September 2024
€500 million of 2.250% Guaranteed Notes repayable in November 2025
€1,000 million of 2.500% Guaranteed Notes repayable in September 2026
£300 million of 6.000% Guaranteed Notes repayable in May 2027
£300 million of 4.000% Guaranteed Notes repayable in November 2029
€400 million of 2.750% Guaranteed Notes repayable in November 2029
At 30 June 2018 the Company had in issue the following Guaranteed Notes:
US$582.8 million of 9.500% Guaranteed Notes repayable in November 2018
£450 million of 2.875% Guaranteed Notes repayable in November 2020
US$800 million of 3.125% Guaranteed Notes repayable in November 2022
€500 million of 2.250% Guaranteed Notes repayable in November 2025
£300 million of 6.000% Guaranteed Notes repayable in May 2027
£300 million of 4.000% Guaranteed Notes repayable in November 2029
US$750 million of 2.625% Guaranteed Notes repayable in September 2019
€600 million of Guaranteed Floating Rate Notes repayable in April 2020
€1,500 million of 1.500% Guaranteed Notes repayable in September 2021
€850 million of 1.875% Guaranteed Notes repayable in November 2023
US$1,250 million of 3.750% Guaranteed Notes repayable in September 2024
€1,000 million of 2.500% Guaranteed Notes repayable in September 2026
£300 million of 4.000% Guaranteed Notes repayable in November 2029
€400 million of 2.750% Guaranteed Notes repayable in November 2029
128
2018
£m
438
–
438
–
561
530
453
1,322
603
749
942
440
880
297
298
351
7,426
2017
£m
–
573
573
436
575
526
458
1,312
613
744
958
437
873
297
297
348
7,874
Hedged
Value
£m
389
450
503
356
300
200
2,198
Hedged
Value
€m
581
600
1,500
850
969
1,000
126
400
6,026
Interest Rate Hedging
Hedged Interest Rates
Fixed
£m
260
–
503
356
300
200
1,619
Floating
£m
129
450
–
–
–
–
579
Fixed
7.091%
–
3.226%
3.721%
6.000%
4.000%
Floating
6m LIBOR +5.542%
3m LIBOR +1.230%
–
–
–
–
Interest Rate Hedging
Hedged Interest Rates
Fixed
€m
–
–
1,500
850
969
1,000
126
400
4,845
Floating
€m
581
600
–
–
–
–
–
–
1,181
Fixed
–
–
1.500%
1.875%
2.187%
2.500%
2.943%
2.750%
Floating
3m EURIBOR +0.656%
3m EURIBOR +0.750%
–
–
–
–
–
–
Sky plc
At 30 June 2017 the Company had in issue the following Guaranteed Notes:
US$750 million of 6.100% Guaranteed Notes repayable in February 2018
US$582.8 million of 9.500% Guaranteed Notes repayable in November 2018
£450 million of 2.875% Guaranteed Notes repayable in November 2020
US$800 million of 3.125% Guaranteed Notes repayable in November 2022
€500 million of 2.250% Guaranteed Notes repayable in November 2025
£300 million of 6.000% Guaranteed Notes repayable in May 2027
£300 million of 4.000% Guaranteed Notes repayable in November 2029
US$750 million of 2.625% Guaranteed Notes repayable in September 2019
€600 million of Guaranteed Floating Rate Notes repayable in April 2020
€1,500 million of 1.500% Guaranteed Notes repayable in September 2021
€850 million of 1.875% Guaranteed Notes repayable in November 2023
US$1,250 million of 3.750% Guaranteed Notes repayable in September 2024
€1,000 million of 2.500% Guaranteed Notes repayable in September 2026
£300 million of 6.000% Guaranteed Notes repayable in May 2027
€400 million of 2.750% Guaranteed Notes repayable in November 2029
G. Other payables
Other payables
Accruals
Hedged
Value
£m
387
389
450
503
356
300
200
2,585
Hedged
Value
€m
581
600
1,500
850
969
1,000
126
400
6,026
Interest Rate Hedging
Hedged Interest Rates
Fixed
£m
290
260
–
503
356
300
200
1,909
Floating
£m
97
129
450
–
–
–
–
676
Fixed
6.829%
7.091%
–
3.226%
3.721%
6.000%
4.000%
Floating
6m LIBOR +1.892%
6m LIBOR +5.542%
3m LIBOR +1.230%
–
–
–
–
Interest Rate Hedging
Hedged Interest Rates
Fixed
€m
–
–
1,500
850
969
1,000
126
400
4,845
Floating
€m
581
600
–
–
–
–
–
–
1,181
Fixed
–
–
1.500%
1.875%
2.187%
2.500%
2.943%
2.750%
Floating
3m EURIBOR +0.656%
3m EURIBOR +0.750%
–
–
–
–
–
–
2018
£m
95
95
2017
£m
108
108
The Directors consider that the carrying amount of other payables approximates their fair values.
H. Derivatives and other financial instruments
Fair values
Set out below is a comparison of the carrying values and the estimated fair values of the Company’s financial assets and financial liabilities at 30 June
2018 and 30 June 2017:
Financial assets and liabilities held or issued to finance the Company’s operations
Quoted bond debt
Derivative financial instruments
Other payables and receivables
2018
Carrying
value
£m
2018
Fair
value
£m
2017
Carrying
value
£m
2017
Fair
value
£m
(7,864)
300
7,172
(8,255)
300
7,172
(8,447)
616
6,013
(8,960)
616
6,013
The fair values of financial assets and financial liabilities are determined as detailed in note 21 and all items held at fair value are classified as Level 2 in the
fair value hierarchy, with the exception of the Company’s quoted bond debt which is determined with reference to quoted market prices based on Level 1
of the fair value hierarchy.
129
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
31. Sky plc company only financial statements (continued)
Set out below are the derivative financial instruments entered into by the Company to manage its interest rate and foreign exchange risk.
Fair value hedges
Interest rate swaps
Cross-currency swaps
Cash flow hedges
Cross-currency swaps
Derivatives not in a formal hedge relationship
Interest rate swaps
Cross-currency swaps
Total
2018
2017
Asset
Liability
Asset
Liability
Fair Value
£m
Notional
£m
Fair Value
£m
Notional
£m
Fair Value
£m
Notional
£m
Fair Value
£m
Notional
£m
14
102
275
3
96
490
450
466
1,634
441
533
3,524
–
–
–
–
–
–
(1)
(189)
(190)
260
1,483
1,743
25
120
469
19
169
802
594
466
1,924
310
629
3,923
–
–
–
–
–
–
(7)
(179)
(186)
499
1,483
1,982
Note 21 provides further details of the Group’s derivative and other financial instruments.
The maturity of the derivative financial instruments is shown below:
In one year or less
Between one and two years
Between two and five years
In more than five years
Total
2018
2017
Asset
£m
57
102
78
253
490
Liability
£m
(1)
(49)
–
(140)
(190)
Asset
£m
203
79
140
380
802
Liability
£m
(3)
(4)
(47)
(132)
(186)
I. Financial risk management
Interest rate and foreign exchange risk management
The Company manages its exposure to interest rates and foreign exchange movements, which arise from the Company’s sources of finance, by selectively
entering into derivative financial instruments to manage its exposure. The Company has also entered into derivative contracts on behalf of its subsidiary
Sky Group Finance plc, and has back-to-back intercompany contracts.
Foreign exchange risk
The following analysis details the Company’s sensitivity to movements in pounds sterling against all currencies in which it has significant transactions.
The sensitivity analysis includes only outstanding foreign currency denominated financial instruments and adjusts their translation at the period end
for a 25% change in foreign currency rates.
A 25% strengthening in pounds sterling against the US dollar would have nil impact on profit (2017: adverse impact of £5 million), relating to non-cash
movements in the valuation of derivatives. The same strengthening would have an adverse impact on other equity of £9 million (2017: adverse impact
of £40 million).
A 25% weakening in pounds sterling against the US dollar would have nil impact on profit (2017: beneficial impact of £9 million), relating to non-cash
movements in the valuation of derivatives. The same weakening would have a beneficial impact on other equity of £15 million
(2017: beneficial impact of £67 million).
A 25% strengthening in pounds sterling against the euro would have a beneficial impact on profit of £25 million (2017: beneficial impact of £27 million),
relating to non-cash movements in the valuation of derivatives. The same strengthening would have an adverse impact on other equity of £11 million
(2017: adverse impact of £12 million).
A 25% weakening in pounds sterling against the euro would have an adverse impact on profit of £41 million (2017: adverse impact of £45 million), relating
to non-cash movements in the valuation of derivatives. The same weakening would have a beneficial impact on other equity of £18 million (2017: beneficial
impact of £19 million).
Interest rate risk
The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and non-derivative financial
instruments at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the balance
sheet date was outstanding for the whole year.
For each one hundred basis point rise or fall in interest rates at 30 June 2018, and if all other variables were held constant, the Company’s profit for the
year ended 30 June 2018 would decrease or increase by £5 million (2017: decrease or increase by £6 million) and other equity reserves would decrease
or increase by £15 million (2017: decrease or increase by £22 million).
A one hundred basis point rise or fall in interest rates represents a large but realistic movement which can easily be multiplied to give sensitivities at
different interest rates.
The sensitivity analyses provided are hypothetical only and should be used with caution as the impacts provided are not necessarily indicative of the
actual impacts that would be experienced because the effect of a change in a particular market variable on fair values or cash flows is calculated without
considering interrelationships between the various market rates or mitigating actions that would be taken by the Company. In addition, the Company’s
actual exposure to market rates changes as the Company’s portfolio of debt changes.
The changes in valuations are estimates of the impact of changes in market variables and are not a prediction of future events or anticipated gains or losses.
130
Sky plc
I. Financial risk management (continued)
Liquidity risk
See note 22 for the Company’s policy on liquidity management.
The following table analyses the Company’s non-derivative financial liabilities, net settled interest rate swaps and gross settled currency swaps
into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date.
The amounts disclosed in the table are the contractual undiscounted cash flows and may therefore not reconcile to the amounts disclosed on
the balance sheet for borrowings, derivative financial instruments and other payables.
At 30 June 2018
Non-derivative financial liabilities
Bonds – USD
Bonds – GBP
Bonds – EUR
Other payables
Net settled derivatives
Financial assets
Gross settled derivatives
Outflow
Inflow
At 30 June 2017
Non-derivative financial liabilities
Bonds – USD
Bonds – GBP
Bonds – EUR
Other payables
Net settled derivatives
Financial assets
Gross settled derivatives
Outflow
Inflow
Less than
12 months
£m
Between
one and
two years
£m
Between
two and
five years
£m
More than
five years
£m
531
43
78
95
630
43
609
–
(7)
(5)
508
(594)
1,080
(1,158)
760
553
1,534
–
(9)
789
(941)
1,000
756
2,632
–
–
2,810
(3,004)
Less than
12 months
£m
Between
one and
two years
£m
Between
two and
five years
£m
More than
five years
£m
726
43
78
108
(21)
537
(774)
541
43
78
–
751
566
2,073
–
1,679
786
2,671
–
(11)
(16)
–
506
(600)
1,273
(1,402)
3,406
(3,760)
At 30 June 2018, the Company had an undrawn £1 billion RCF with a maturity date of 30 November 2021. See note 20 for further information.
131
Annual Report 2018Financial statements
Notes to the consolidated financial statements continued
31. Sky plc company only financial statements (continued)
J. Notes to the Company statement of changes in equity
For details of share capital, share premium, the special reserve, the capital redemption reserve, the ESOP reserve and the hedging reserve, see notes 23
and 24.
For details of dividends, see note 9.
Capital reserve
This reserve arose from the surplus on the transfer of trade and assets to a subsidiary undertaking.
K. Reconciliation of profit before tax to cash generated from operations
Profit before tax
Dividend income
Net finance costs
Increase in other receivables
Cash generated from operations
2018
£m
624
(577)
140
(187)
–
2017
£m
414
(267)
15
(162)
–
L. Contingent liabilities and guarantees
The Company and certain of its subsidiaries have undertaken, in the normal course of business, to provide support to several of the Group’s investments
in both limited and unlimited companies and partnerships, to meet their liabilities as they fall due. Several of these undertakings contain maximum
financial limits. These undertakings have been given for at least one year from the date of the signing of the UK statutory accounts of the related entity.
A payment under these undertakings would be required in the event of an investment being unable to pay its liabilities.
The Company has provided parent company guarantees in respect of the various contracts entered into with the Premier League by Sky UK Limited and
Sky Italia Srl covering the 2017/18 to 2021/22 football seasons. In each case the guarantee covers all payment obligations now or in the future due, owing
or incurred by Sky UK Limited and Sky Italia Srl under the contracts and all liabilities now or in the future arising or incurred under the indemnity given
to the Premier League by Sky UK Limited and Sky Italia Srl under the contracts.
The Company has provided a parent company guarantee to Warburg-HIH Invest Real Estate GmbH in respect of a rental agreement entered into by
Sky Deutschland GmbH. The guarantee covers all payment obligations by Sky Deutschland GmbH under the agreement.
The Company has provided back-to-back guarantees in favour of 21st Century Fox, Inc. in relation to UEFA Europa League and other programming
obligations of Sky Italia Srl.
The Company has provided a parent company guarantee to SGH Stream Sub, Inc. in respect of the obligations of Sky Italian Holdings S.p.A. under the
Sky Italia Srl Sale and Purchase Agreement dated 25 July 2014. The Company has also provided a parent company guarantee to 21st Century Fox Adelaide
Holdings BV in respect of the obligations of Sky German Holdings GmbH under the Sky Deutschland AG Sale and Purchase Agreement dated 25 July 2014.
The Company has provided a parent company guarantee to Apple Distribution International in respect of all the payment obligations of Sky UK Limited
under an iPhone distribution agreement.
The Company has guarantees in place relating to the Group’s borrowings, see note 20, and in relation to audit exemptions, see note 30.
M. Transactions with related parties and major shareholders
Supply of services to subsidiaries
Interest received from funding to subsidiaries
Amounts owed by subsidiaries
2018
£m
241
140
7,267
2017
£m
222
177
6,121
The Company has related-party transactions with its subsidiaries by virtue of its status as parent company of the Group. In particular, it is normal
treasury practice for the Company to lend and borrow cash to and from its subsidiaries as required. Under this policy, Sky UK Limited settled liabilities
of £498 million and €104 million (2017: £112 million and €103 million) on behalf of the Company during the year. Interest is earned on certain loans to
subsidiaries.
The Company recognised £241 million (2017: £222 million) for licensing the Sky brand name to subsidiaries. The Company recognised dividends during
the year from subsidiaries totalling £577 million (2017: £267 million).
The Group’s related-party transactions are disclosed in note 28.
132
Sky plc
Group financial record
Unaudited supplemental information
Consolidated results
Below is selected financial information for the Group under IFRS as at and for each of the five years ended 30 June.
Consolidated income statement
Continuing operations
Revenue1
Operating expense2
Operating profit
Share of results of joint ventures and associates
Investment income
Finance costs
Profit on disposal of available–for–sale investment
Profit on disposal of associate
Profit before tax
Taxation
Profit for the year from continuing operations
Discontinued operations
Profit for the year from discontinued operations
Profit for the year
Profit (loss) for the year attributable to:
Equity shareholders of the parent company
Non–controlling interests
Net (loss) profit recognised directly in equity
Total comprehensive income for the year
Earnings per share from profit for the year (in pence)
Basic
Diluted
Dividends per share (in pence)
Consolidated balance sheet
Non–current assets
Current assets
Total assets
Current liabilities
Non–current liabilities
Net assets
Number of shares in issue (in millions)
Year
ended
30 June
2018
£m
Year
ended
30 June
2017
£m
13,585
(12,551)
1,034
56
11
(286)
49
–
864
(49)
815
–
815
815
–
(163)
652
47.5p
47.2p
23.1p
30 June
2018
£m
13,264
4,738
18,002
(5,321)
(8,661)
4,020
1,719
12,916
(11,952)
964
21
22
(204)
–
–
803
(112)
691
–
691
695
(4)
(109)
582
40.6p
40.0p
–
30 June
2017
£m
13,104
5,334
18,438
(5,550)
(9,041)
3,847
1,719
Year
ended
30 June
2016
£m
11,965
(10,988)
977
2
17
(244)
–
–
752
(89)
663
–
663
666
(3)
378
1,041
39.0p
38.7p
33.5p
30 June
2016
£m
12,708
4,702
17,410
(4,326)
(9,643)
3,441
1,719
Year
ended
30 June
2015
£m
Year
ended
30 June
2014
£m
9,989
(9,017)
972
28
8
(283)
492
299
1,516
(184)
1,332
620
1,952
1,957
(5)
(625)
1,327
115.8p
114.4p
32.8p
7,450
(6,346)
1,104
35
26
(140)
–
–
1,025
(205)
820
45
865
865
–
73
938
55.4p
54.9p
32.0p
30 June
2015
£m
10,799
4,559
15,358
(4,204)
(7,930)
3,224
1,719
30 June
2014
£m
3,876
2,573
6,449
(2,519)
(2,858)
1,072
1,563
Annual Report 2018
133
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
Group financial record – Unaudited supplemental information continued
Statistics
Products
UK and Ireland
Germany and Austria
Italy
Total paid-for subscription products
Customers
UK and Ireland
Germany and Austria
Italy
Retail customers
UK and Ireland
Germany and Austria
Italy
Wholesale customers3
Total customers
Churn
UK and Ireland
Germany and Austria
Italy
30 June
2018
(’000)
30 June
2017
(’000)
30 June
2016
(’000)
30 June
2015
(’000)
30 June
2014
(’000)
44,689
8,887
9,241
62,817
12,996
5,191
4,823
23,010
3,345
160
–
3,505
26,515
10.3%
15.0%
10.1%
41,958
8,774
8,978
59,710
12,726
4,991
4,783
22,500
3,492
129
–
3,621
26,121
11.5%
12.6%
9.1%
40,373
8,042
8,640
57,055
12,446
4,626
4,742
21,814
3,923
144
–
4,067
25,881
11.2%
9.9%
11.1%
38,036
7,133
8,614
53,783
12,001
4,280
4,725
21,006
4,028
146
–
4,174
25,180
9.8%
8.6%
9.6%
34,775
–
–
34,775
11,495
–
–
11,495
4,041
–
–
4,041
15,536
10.9%
–
–
1
2
Included within revenue for the year ended 30 June 2014 is a £15 million credit received following the termination of an escrow agreement with a current wholesale operator.
Included within operating expense for the year ended 30 June 2018 are costs of £194 million relating to corporate restructuring and efficiency programmes, costs of £66 million
relating to the integration of Sky Deutschland and Sky Italia in the enlarged Group, costs of £23 million relating to advisory fees and share-based payments incurred as a result of
offers for the Company, income of £21 million relating to regulatory related receipts and proceeds of settlements and costs of £278 million relating to the amortisation of acquired
intangible assets and related acquisition costs.
Included within operating expense for the year ended 30 June 2017 are costs of £140 million relating to corporate restructuring and efficiency programmes, costs of £50 million
relating to the integration of Sky Deutschland and Sky Italia in the enlarged Group, costs of £56 million relating to advisory fees and share-based payments incurred as a result of the
21st Century Fox Offer and costs of £258 million relating to the amortisation of acquired intangibles.
Included within operating expense for the year ended 30 June 2016 are costs of £4 million in relation to advisory and transaction fees incurred on the purchase of Sky Deutschland
and Sky Italia, costs of £142 million relating to corporate restructuring and efficiency programmes, costs of £84 million relating to the integration of Sky Deutschland and Sky Italia in
the enlarged Group, costs of £343 million relating to the amortisation of acquired intangibles and costs of £8 million relating to the remeasurement of derivative financial instruments
not qualifying for hedge accounting and hedge ineffectiveness.
Included within operating expense for the year ended 30 June 2015 are costs of £50 million in relation to advisory and transaction fees incurred on the purchase of Sky Deutschland
and Sky Italia, costs of £105 million relating to corporate restructuring and efficiency programmes, costs of £10 million relating to the integration of Sky Deutschland and Sky Italia in
the enlarged Group and costs of £231 million relating to the amortisation of acquired intangibles.
Included within operating expense for the year ended 30 June 2014 are costs of £49 million relating to the integration of the O2 consumer broadband and fixed-line telephony
business, costs of £40 million relating to a corporate restructuring and efficiency programme, costs of £2 million as a result of the termination of an escrow agreement with a current
wholesale operator and costs of £23 million relating to the amortisation of acquired intangibles.
3 Wholesale customers are customers who take a package, from one of Sky’s Wholesale Partners, in which they receive at least one paid-for Sky channel.
Factors which materially affect the comparability of the selected financial data
Basis of preparation
Fiscal 2016 includes 53 weeks of trading compared with 52 weeks in all other years.
Discontinued operations
During fiscal 2015, the Group sold a controlling stake in its online betting and gaming business.
Available-for-sale investment
During fiscal 2018, the Group disposed of its investment in Roku Inc. During fiscal 2015, the Group disposed of its remaining investment in ITV.
Business combinations and profit on disposal of associate
During fiscal 2015, the Group completed the acquisitions of Sky Deutschland and Sky Italia. The results of these acquisitions were consolidated from
the date on which control passed to the Group (12 November 2014). As part of the consideration for the purchase of Sky Italia the Group disposed
of its shareholding in the National Geographic channel.
Exchange rates
A significant portion of the Group’s liabilities and expenses associated with the cost of programming acquired from US film licensors together with set-top
box costs are denominated in US dollars. A significant portion of the Group’s revenues and expenses associated with its operations in Germany and
Austria and Italy are denominated in euros. For a discussion of the impact of exchange rate movements on the Group’s financial condition and results
of operations, see note 22 to the consolidated financial statements.
134
Sky plc
Non-GAAP measures
Unaudited supplemental information
Consolidated income statement – reconciliation of statutory and adjusted numbers
Revenue
Direct-to-consumer
Content
Advertising
Operating expense
Programming
Direct network costs
Sales, general and administration
EBITDA
Operating profit
Share of results of joint ventures and associates
Investment income
Finance costs
Profit on disposal of available-for-sale investment
Profit before tax
Taxation
Profit for the year
Profit attributable to non-controlling interests
Profit for the year attributable to equity shareholders of the parent company
Earnings per share (basic)
Notes
Statutory
£m
2018
Adjusting
Items
£m
Adjusted
£m
11,830
838
917
13,585
(6,488)
(1,139)
(4,924)
(12,551)
2,108
1,034
56
11
(286)
49
864
(49)
815
–
815
47.5p
–
–
–
–
57
(9)
492
540
11,830
838
917
13,585
(6,431)
(1,148)
(4,432)
(12,011)
241
2,349
540
(22)
(3)
52
(49)
518
(165)
353
(13)
340
19.8p
1,574
34
8
(234)
–
1,382
(214)
1,168
(13)
1,155
67.3p
A
B
C
D
E
F
G
H
I
Notes: explanation of adjusting items for the year ended 30 June 2018
A Costs of £24 million relating to corporate restructuring and efficiency programmes, costs of £2 million relating to the integration of Sky Deutschland and Sky Italia in the enlarged
Group, and costs of £31 million relating to the amortisation of acquired intangible assets and related acquisition costs.
B Income of £9 million relating to regulatory-related receipts and proceeds of settlements.
C Costs of £170 million relating to corporate restructuring and efficiency programmes (including £14 million of depreciation and amortisation), costs of £64 million relating to the
integration of Sky Deutschland and Sky Italia in the enlarged Group (including £41 million of depreciation and amortisation), costs of £23 million relating to advisory fees and
share-based payments incurred as a result of offers for the Company, income of £12 million relating to regulatory related receipts and proceeds of settlements and costs of
£247 million relating to the amortisation of acquired intangible assets and related acquisition costs.
Interest income of £3 million on credit received relating to regulatory related receipts and proceeds of settlements.
D Income of £33 million relating to distribution received from associate and costs of £11 million relating to the amortisation of acquired intangible assets and related acquisition costs.
E
F Remeasurement of all derivative financial instruments not qualifying for hedge accounting.
G Profit on disposal of available-for-sale investment of £49 million.
H Tax adjusting items and the tax effect of the above items.
I Costs of £13 million relating to the amortisation of acquired intangible assets and related acquisition costs.
Corporate restructuring and efficiency programmes
Corporate restructuring and efficiency programmes include costs associated with specific programmes that the Group has established in order to
achieve reductions in ongoing operating expense. Costs of these programmes include redundancy and relocation costs, consultancy costs, contract exit
costs and the impairment or accelerated depreciation of assets that the Group no longer expects to use for their original estimated useful economic life.
Integration of Sky Deutschland and Sky Italia in the enlarged Group
Integration costs associated with the integration of Sky Deutschland and Sky Italia and are part of the Group’s plan to target £400 million of run rate
synergies by the end of 2020. The costs of implementing these plans include consultancy costs, contract exit costs and the impairment or accelerated
depreciation of assets that the Group no longer expects to use for their original estimated useful economic life.
Regulatory-related receipts and proceeds of settlements
Regulatory-related receipts and proceeds of settlements includes income received as a result of regulatory determinations and the settlement of
historical claims.
Offers for the Company
This relates to costs incurred as a result of the 21st Century Fox offer and the Comcast offer. These costs include legal and advisory fees and the impact
on share-based payment expense as a result of the offers.
135
Annual Report 2018Financial statements Non-GAAP measures – Unaudited supplemental information continued
Consolidated income statement – reconciliation of statutory and adjusted numbers (continued)
Amortisation of acquired intangible assets and related acquisition costs
Amortisation of acquired intangible assets relates to the cost of amortising intangible assets recognised in a business combination in accordance with
accounting rules. These principally relate to customer contracts and related customer relationships relating to the acquired customer bases in Germany
and Austria and Italy. Certain acquisitions made by the Group include earn-out payments or put and call options, to allow part of the consideration for the
business to be based on future performance. Where these are required to be treated as an expense under accounting rules, they are excluded from
adjusted profit with effect from the current year, as they are considered to be capital in nature and therefore do not reflect the underlying performance
of the Group.
Distribution received from associate
The Group received a cash distribution of £113 million from its associate Sky Bet following Sky Bet’s re-capitalisation during the period.
Disposal of investment
This relates to the profit arising on the disposal of an available-for-sale investment.
Remeasurement of derivative financial instruments
Remeasurement of derivative financial instruments relates to the non-cash accounting charge arising from the remeasurement of all derivative financial
instruments not qualifying for hedge accounting and hedge ineffectiveness.
Revenue
Direct-to-consumer
Content
Advertising
Operating expense
Programming
Direct network costs
Sales, general and administration
EBITDA
Operating profit
Share of results of joint ventures and associates
Investment income
Finance costs
Profit before tax
Taxation
Profit for the year
Loss attributable to non-controlling interests
Profit attributable to equity shareholders of the parent company
Earnings per share (basic)
Notes
Statutory
£m
2017
Adjusting
Items
£m
11,312
778
826
12,916
(6,200)
(964)
(4,788)
(11,952)
1,936
964
21
22
(204)
803
(112)
691
4
695
40.6p
–
–
–
–
21
–
483
504
203
504
5
(8)
(41)
460
(103)
357
(2)
355
20.8p
A
B
C
D
E
F
G
Adjusted
£m
11,312
778
826
12,916
(6,179)
(964)
(4,305)
(11,448)
2,139
1,468
26
14
(245)
1,263
(215)
1,048
2
1,050
61.4p
Notes: explanation of adjusting items for the year ended 30 June 2017
A Costs of £20 million relating to corporate restructuring and efficiency programmes and costs of £1 million relating to the integration of Sky Deutschland and Sky Italia in the enlarged
Group.
B Costs of £120 million relating to corporate restructuring and efficiency programmes (including depreciation and amortisation of £13 million), costs of £49 million relating to the
integration of Sky Deutschland and Sky Italia in the enlarged Group (including depreciation and amortisation of £30 million), costs of £56 million relating to advisory fees and
share-based payments incurred as a result of the offers for the Company, and amortisation of acquired intangible assets and related acquisition costs of £258 million.
C Amortisation of acquired intangible assets and related acquisition costs of £13 million and profit on disposal of joint venture of £8 million.
D Interest income of £8 million on credit received relating to regulatory-related receipts and proceeds of settlements.
E Credit of £41 million relating to the remeasurement of all derivative financial instruments not qualifying for hedge accounting and hedge ineffectiveness.
F Tax adjusting items and the tax effect of the above items.
G Costs relating to the amortisation of acquired intangible assets and related acquisition costs of £2 million.
136
Sky plc Reconciliation of cash generated from operations to adjusted free cash flow
for the year ended 30 June 2018
Cash generated from operations
Interest received
Taxation paid
Dividends received from joint ventures and associates
Funding to joint ventures and associates
Loan to joint venture
Purchase of property, plant and equipment
Purchase of intangible assets
Interest paid
Free cash flow
Cash paid relating to corporate restructuring and efficiency programmes
Cash paid relating to the integration of Sky Deutschland and Sky Italia in the enlarged Group
Cash paid relating to acquisition related costs
Cash paid relating to advisory fees incurred as a result of offers for the Company
Cash received relating to regulatory-related receipts and proceeds of settlements
Adjusted free cash flow
Where appropriate amounts above are shown net of applicable corporation tax.
Note
25
2018
£m
1,910
7
(151)
131
(8)
–
(662)
(523)
(248)
456
89
20
7
4
(24)
552
2017
£m
2,254
15
(163)
20
(9)
(14)
(628)
(546)
(238)
691
114
15
–
9
–
829
The financial performance of the Group is presented using a variety of alternative performance measures. These measures are not defined by IFRS
and therefore may not be directly comparable with similarly titled alternative performance measures used elsewhere. These measures should be
considered in addition to, and are not intended to be a substitute for, IFRS measures.
Adjusted results
In order to provide a measure of underlying performance, management has chosen to present adjusted results for the year which exclude items that
may distort comparability. Such items arise from events or transactions that fall within the ordinary activities of the Group but which management
believes should be separately identified to help explain underlying performance. The adjusted results are also those used by management to monitor
performance and run the business. A reconciliation of adjusted results to the closest equivalent statutory measure is provided in the tables above
for the current and prior years.
Like-for-like
Like-for-like content revenue and programming costs exclude the one-off sale of the Rio Olympic rights in 2016/17 in Italy.
Constant currency
Some of the Group’s IFRS and adjusted measures are translated at constant currency exchange rates. Constant currency exchange rates are
the average actual exchange rates of the current financial year and are used to eliminate the effects of exchange rate fluctuations in assessing
performance. Actual exchange rates are the average actual periodic rates for that financial year. The constant currency exchange rate used for the
current year is €1.13:£1 (2017: €1.16:£1). A reconciliation of the adjusted measures at constant currency to the adjusted measures at actual exchange
rates is provided below.
£m
Adjusted results
Revenue
UK and Ireland
Germany and Austria
Italy
EBITDA
UK and Ireland
Germany and Austria
Italy
Operating profit
UK and Ireland
Germany and Austria
Italy
12 months
to 30 Jun 18
12 months
to 30 Jun 17
Like-for-like
Growth
Like-for-like
Foreign
exchange
impact
12 months
to 30 Jun 17
Actual
exchange
rates
13,585
8,931
2,023
2,631
2,349
1,888
119
342
1,574
1,389
(4)
189
12,997
8,600
1,916
2,481
2,151
1,739
147
265
1,473
1,288
42
143
+5%
+4%
+6%
+6%
+9%
+9%
-19%
+29%
+7%
+8%
-110%
+32%
133
–
58
75
12
–
4
8
5
–
1
4
12,864
8,600
1,858
2,406
2,139
1,739
143
257
1,468
1,288
41
139
137
Annual Report 2018Financial statements
Non-GAAP measures – Unaudited supplemental information continued
Established and investment businesses
Established businesses refers to those businesses that have been operating for many years. This includes the Group’s entertainment and fixed line
communications businesses in the UK & Ireland, Italy and Germany & Austria. Investment businesses refers to new businesses from the first year of
launch through to their third fiscal year. Years prior to the year of launch are considered to be R&D and are absorbed within the results of Established
businesses. Sky Mobile and Sky Spain are included in Investment Businesses. The results of Established Businesses and Investment Businesses are
presented on an adjusted basis and provide information on the performance of the Group’s underlying businesses and the investment being made
in future growth.
Note/page reference
for APM to IFRS
reconciliation
Not applicable
Adjustments to
reconcile to IFRS measure
Inclusion of revenue
relating to sale of Rio
Olympics rights in Italy
in 2016/17
Inclusion of adjusting
items
Pages 135-136
Summary of alternative performance measures
APM
Equivalent IFRS measure
Like-for-like revenue
Revenue
Adjusted operating
expense
Includes:
• Programming expense
• Direct network costs
• Sales, general and
administration
expense
Operating expense
Includes:
• Programming expense
• Direct network costs
• Sales, general and
administration
expense
Adjusted operating profit Operating profit
Inclusion of adjusting
items
Pages 135-136
Established Business
EBITDA
No direct equivalent
Not applicable
Not applicable
Investment Business
EBITDA
No direct equivalent
Not applicable
Not applicable
Adjusted EBITDA
Operating profit
Inclusion of adjusting
items and depreciation
and amortisation
expense
Pages 135-136
Adjusted earnings per
share
Basic earnings per share
Inclusion of adjusting
items
Pages 135-136
Definition and purpose
Excludes the impact of the sale of the Rio
Olympics rights in 2016/17. Exclusion of this
one-off item provides an indication of the
underlying growth in revenue.
Operating expense excluding the impact
of adjusting items. This excludes items
which may distort comparability in order
to provide a measure of underlying
performance.
Operating profit excluding the impact
of adjusting items. This excludes items
which may distort comparability in order
to provide a measure of underlying
performance.
Operating profit excluding the impact
of adjusting items, depreciation and
amortisation of those businesses that
have been operating for many years. This
provides information on the performance
of the Group’s underlying businesses.
Operating profit excluding the impact
of adjusting items, depreciation and
amortisation of new businesses from the
first year of launch through to their third
fiscal year. This provides information
on the investment being made in
future growth.
Operating profit excluding the impact
of adjusting items and depreciation and
amortisation expense. EBITDA is a measure
of operating performance which
approximates the underlying operating
cash flow by eliminating non-cash items.
Profit after tax excluding the impact of
adjusting items attributable to equity
shareholders of the parent company
divided by the weighted average number
of ordinary shares in issue during the
financial period. This excludes items
which may distort comparability in order
to provide a measure of underlying
performance.
138
Sky plc APM
Equivalent IFRS measure
Effective tax rate
Statutory tax rate
Adjustments to
reconcile to IFRS measure
Inclusion of adjusting
items and their tax
impact
Note/page reference
for APM to IFRS
reconciliation
Not applicable
Net debt
Borrowings less cash and
cash equivalents and
short-term deposits
Not applicable
Page 108
Adjusted free cash flow
Net cash from operating
activities
Page 137
Inclusion of the cash flow
impact of adjusting
items. Exclusion of capital
expenditure, interest
paid and cash flows
relating to joint ventures
and associates
Net debt to EBITDA ratio No direct equivalent
Not applicable
Not applicable
Constant currency
No direct equivalent
Not applicable
Page 137
Definition and purpose
Taxation charge for the period excluding
the impact of adjusting items divided by
profit before tax excluding the impact
of adjusting items. This provides an
indication of the underlying tax rate
across the Group.
Net debt comprises current and non-
current borrowings and borrowings-
related derivative financial instruments,
offset by cash and cash equivalents and
short-term deposits. It is a measure of
the Group’s balance sheet position and
is used by credit rating agencies.
Free cash flow includes net cash from
operating activities excluding the cash
flow impact of adjusting items. It also
includes capital expenditure, interest paid
and cash flows relating to joint ventures
and associates. This measure provides
information on the Group’s cash
generation.
The net debt to EBITDA ratio is calculated
as net debt divided by adjusted EBITDA.
It is a measure of the Group’s leverage
and is used in the Group’s banking facility
covenant.
Some of the Group’s comparative financial
measures are translated at constant
currency rates of exchange using the
average exchange rates of the current
financial year. This is to eliminate the
effects of exchange rate fluctuations
in assessing performance.
139
Annual Report 2018Financial statements Shareholder information
Managing your shares and shareholder
communications
The Company’s shareholder register is maintained by its Registrar,
Equiniti. Information on how to manage your shareholdings can
be found at help.shareview.co.uk.
Shareholders can contact Equiniti on the details below in relation to
all administrative enquiries relating to their shares, such as a change
of personal details, the loss of a share certificate, out-of-date dividend
cheques, change of dividend payment methods and how to apply for
the Dividend Reinvestment Plan.
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Telephone: 0371 384 2091*
Telephone number from outside the UK: +44 121 415 7567
*
Lines are open Monday to Friday 8.30am to 5.30pm; excluding UK Bank Holidays.
Shareholders who have not yet elected to receive shareholder
documentation in electronic form can sign up by registering at
www.shareview.co.uk. Should Shareholders who have elected for
electronic communications require a paper copy of any of the
Company’s shareholder documentation, or wish to change their
instructions, they should contact Equiniti.
Accessibility
If you would like advice regarding accessibility of this document, please
contact the Accessible Customer Service team on +44 (0) 344 241 0333.
American Depositary Receipts (‘ADR’)
The Company’s ADR programme trades on the over-the-counter (‘OTC’)
market in the US. More information can be obtained from the Company’s
corporate website at www.skygroup.sky/corporate
All enquiries relating to the Company’s ADRs should be addressed to:
BNY Mellon Shareowner Services
PO Box 505000
Louisville, KY 40233-5000 USA
US residents: (888) 269-2377
If resident outside the US: +1 201 680 6825
email: shrrelations@cpushareownerservices.com
website: www.mybnymdr.com
Annual General Meeting
The venue and timing of the Company’s AGM will be detailed in the
notice convening the AGM which will be available for download
from the Company’s corporate website at www.skygroup.sky/corporate
Auditor
Deloitte LLP
1 New Street Square
London
EC4A 3BZ
Company’s registered office
Grant Way
Isleworth
Middlesex
TW7 5QD
Telephone: 0333 100 0333
Overseas: +44 333 100 0333
140
Company registration number
Registered in England and Wales under number 2247735.
Company website
Shareholders are encouraged to visit the Sky website sky.com which has
a wealth of information about the Company. There is a section designed
specifically for investors at www.skygroup.sky/corporate where investor
and media information can be accessed. This year’s Annual Report, together
with prior year documents, can be viewed there along with information on
dividends, share price and avoiding shareholder fraud.
Dividends
Dividends can be paid directly into your bank account. This is the easiest
way for shareholders to receive dividend payments and avoids the risk
of lost or out-of-date cheques. A dividend mandate form is available from
Equiniti or at www.shareview.co.uk
If you are a UK taxpayer, please note that from 6 April 2016 the Dividend
Tax Credit was replaced by a tax-free Dividend Allowance of £5,000. For the
tax year 6 April 2018 to 5 April 2019, the Dividend Allowance is £2,000. Any
dividends received above this amount will be subject to taxation. Dividends
paid on shares held within pensions and Individual Savings Accounts
(‘ISAs’) will continue to be tax-free. Further information can be found at
www.gov.uk/tax-on-dividends
An Annual Dividend Confirmation is available for shareholders who have
chosen to receive dividends directly into their bank account. The single
Annual Dividend Confirmation is usually mailed by the end of November
each year, to coincide with the final dividend payment (if applicable).
Equiniti are also able to pay dividends to shareholder bank accounts
in over 30 currencies worldwide through the Overseas Payment Service.
An administrative fee will be deducted from each dividend payment.
Further details can be obtained from Equiniti or online at
www.shareview.co.uk
Dividend Reinvestment Plan
The Company operates a Dividend Reinvestment Plan (‘DRIP’) which enables
shareholders to buy the Company’s shares on the London stock market
with their cash dividend. Further information about the DRIP is available
from Equiniti.
Financial calendar
Results for the financial year ending 30 June 2018 will be published in:
November 2018*
January 2019*
April 2019*
July 2019*
* Provisional dates
ShareGift
Shareholders who only have a small number of shares whose value makes
it uneconomic to sell them may wish to consider donating them to charity
through ShareGift, the independent charity share donation scheme
(registered charity no. 1052686). Further information may be obtained
from ShareGift on 020 7930 3737 or at sharegift.org.
Shareholder fraud
Fraud is on the increase and many shareholders are targeted every year.
If you have any reason to believe that you may have been the target
of a fraud, or attempted fraud in relation to your shareholding, please
contact Equiniti immediately.
Sky plc Sky plc
Grant Way
Isleworth
Middlesex
TW7 5QD
Telephone 0333 100 0333
sky.com
Registered in England No. 2247735
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