CNOOC Limited
Annual Report 2015

Plain-text annual report

Chorus Annual Report 2015 P13 Management commentary P61 Governance & Disclosures P29 Financial statements P73 Glossary Chorus Board and Management FY15 Overview Title Here Jon Hartley Interim chairman Mark Ratcliffe Managing Director and CEO This report is dated 23 August 2015 and is signed on behalf of the Board of Chorus Limited. Chorus’ financial result for FY15 was impacted substantially by the requirement to implement initial regulatory pricing decisions based on international benchmarking, with EBITDA* down by $47 million compared to FY14. This regulatory pricing remains under review and the ongoing uncertainty has overshadowed positive increases in fixed line and broadband connections, as well as Chorus’ work on the Ultra-Fast and rural broadband rollouts that continue to deliver better broadband ahead of schedule. Chorus made significant progress during FY15 to reshape its business and protect shareholder value by absorbing some of the impact from the December 2014 regulated price cuts. These business initiatives delivered results ahead of target for the year, partially offsetting the very significant reduction in regulated pricing. This, together with slightly improved draft copper pricing, has helped the share price recover some value although dividends remain suspended. FY15 HIGHLIGHTS FY14 COMPARISON EBITDA* $602m Earnings before interest, income tax, depreciation and amortisation NPAT $91m Net profit after tax EBITDA* NPAT $649m Earnings before interest, income tax, depreciation and amortisation $148m Net profit after tax FIXED LINE CONNECTIONS 1,794,000 UFB PROGRAMME 44% COMPLETE FIXED LINE CONNECTIONS UFB PROGRAMME 1,777,000 31% COMPLETE * EBITDA is a non-GAAP profit measure calculated as reported profit for the period before net finance expense, tax, depreciation and amortisation. Chorus monitors this as a key indicator of Chorus’ performance and believes it assists investors in assessing the performance of the core operations of the business. Annual Report Highlights and challenges Highlights Total fixed line connections increased to 1,794,000 and broadband connections grew to 1,207,000. UFB build now complete for five towns and the UFB and RBI rollouts both on schedule, with about 588,000 end-users able to access better broadband capability. New service company agreements enabled Chorus to narrow its UFB rollout guidance and lower FY15 connection costs. Chorus’ Gigatown competition increased UFB awareness significantly and will bring socio-economic benefits to the Dunedin community as the winners of subsidised gigabit capability. Government released proposals, including amendments to property access regimes, that would help speed up the installation of UFB. Challenges Regulated price cuts based on the Commerce Commission’s initial benchmarked pricing have been in effect from 1 December 2014, reducing revenues significantly. Draft final pricing is an improvement, but remains below 2011 pricing. Delays in the final pricing process have necessitated Chorus’ managing for cash focus lasting for a much longer period with consequential effects on discretionary investment and network operating practices. Growth in fibre connections is driving additional demands on capital expenditure during a period of constrained cash. Improving provisioning processes to meet growing fibre demand. Chorus is working with its industry and service company partners to enhance the experience for end-users. Long term network investment remains challenging in the absence of clarity on a post 2020 regulatory framework and may constrain Chorus’ participation in further Government broadband initiatives. P. 1 Delivering better broadband Chorus is proud to be building communications networks that will The other half is special equity which begins to attract dividends provide long term benefits for end-users and New Zealand as a from 2025 if not redeemed. whole. This work is already making a real difference. The average broadband speed on Chorus’ network has increased from 11Mbps in December 2011 to 18Mbps and almost 60% of end-users can access a better broadband service than they are currently using. Chorus’ rollout is tracking to schedule with work now completed in five towns – Ashburton, Taupo, Timaru, Blenheim, Oamaru – and 495,000 end-users across all of Chorus’ deployment areas already able to connect to fibre. A further five towns are expected to be The scale of work required for the Ultra-Fast Broadband (UFB) completed in FY16. Cities such as Wellington and Auckland are and Rural Broadband Initiative (RBI) rollouts should not be naturally taking longer to complete given their relative scale. underestimated. The eight-year UFB rollout is New Zealand’s Figure 1 shows rollout progress to 30 June 2015. largest ever communications construction project and will ultimately reach 75% of New Zealanders. In Chorus’ 24 deployment areas (representing approximately 70% of the Government UFB programme), about $1.1 billion has been invested to take fibre to the boundary of 368,000 premises or 44% of Chorus’ target. About $390 million had been received in Crown financing to 30 June 2015. The Crown will ultimately provide $929 million, half of which is debt that Chorus must repay from 2025 onwards. UFB deployment work has largely moved from built up business areas to suburban zones, enabling Chorus to shift to fixed price contracts with its largest service company partners. This added certainty meant Chorus was able to narrow the expected cost range for the UFB rollout (excluding connection costs) from the previous range of $1.7 to $1.9 billion to a new range of $1.75 to $1.80 billion. Figure 1: Progress by Chorus UFB Area as at 30 June 2015 AUCKLAND (inc. Waiheke , Waiuku, Pukekohe) 372,000 premises 38% complete TAUPO 9,900 premises 100% complete LEVIN 7,100 premises 33% complete KAPITI 16,400 premises 30% complete WELLINGTON 126,200 premises 33% complete NELSON 23,500 premises 55% complete GREYMOUTH 3,500 premises 83% complete ASHBURTON 8,100 premises 100% complete QUEENSTOWN 4,900 premises 82% complete INVERCARGILL 19,700 premises 60% complete P. 2 ROTORUA 20,900 premises 90% complete WHAKATANE 5,500 premises 61% complete GISBORNE 12,300 premises 36% complete NAPIER/HASTINGS 40,900 premises 44% complete FEILDING 5,600 premises 32% complete PALMERSTON NORTH 27,900 premises 62% complete MASTERTON 8,500 premises 89% complete BLENHEIM 11,100 premises 100% complete TIMARU 12,800 premises 100% complete OAMARU 5,800 premises 100% complete DUNEDIN 44,500 premises 52% complete PREMISES = TOTAL UFB PREMISES IN CANDIDATE AREA, EXCLUDING GREENFIELDS Annual ReportWhile fibre demand is growing, demand remains highly variable broadband charts to be ranked 1st in Australasia for broadband from town to town. Uptake across all Chorus areas averaged 14% speed (Ookla “Net Index” global broadband rankings April 2015). at 30 June 2015. Chorus is continuing to work closely with its service company partners and retail service providers to streamline connection processes. Current consent requirements are extending connection times and constraining demand. Chorus therefore welcomed the Government’s announcement in June that it will consider amending the way in which network operators like Chorus must seek permission to access private property, particularly in situations like shared driveways and apartment buildings. Urban New Zealanders are not the only ones benefitting from Chorus’ investment in better broadband. The RBI rollout is almost finished with new or upgraded broadband coverage extended to 93,000 rural lines and just 10,500 more to be covered in FY16. Rural demand for better broadband, combined with Chorus’ network being available via a wide range of service providers, has seen broadband uptake across these lines reach 85%. RBI fibre has also been extended to more than 1,000 schools and over 100 RBI In November 2014, Dunedin won Chorus’ highly successful wireless broadband tower sites. The Government is funding the Gigatown competition and we are continuing to support majority of the RBI rollout through an industry levy, which Chorus Dunedin’s evolution as a digital innovation hub by funding the is a significant contributor to, with Chorus also directly providing introduction of the Co.Starters franchise from the United States approximately 15-20% of the investment required to fund its fixed for aspiring entrepreneurs. There are already some positive early line portion of the rollout. signs with Chorus’ gigabit capability helping Dunedin jump up the Figure 2: Regional fibre uptake vs build : UFB Uptake by Candidate Area – 30 June 2015 ) % ( l s e s s e r d d a e b a p a c o t e v i t a e r e k a t p U l 20 18 16 14 12 10 8 6 4 2 0 U R A M A O I M E H N E L B O P U A T U R A M T I N O T R U B H S A A U R O T O R N O T R E T S A M H T U O M Y E R G N W O T S N E E U Q U K U A W I N O S L E N I N D E N U D E N A T A K A H W L L I G R A C R E V N I H T R O N N O T S R E M L A P I S G N T S A H / R E P A N I I I T P A K I G N D L I E F I N V E L D N A L K C U A E N R O B S I G E H O K E K U P D N A L S I E K E H A W I E N O Z N O T G N I L L E W UFB uptake June % of build complete June Chart shows end-user uptake as a proportion of UFB capable addresses (i.e. network is commissioned for service) ranked according to proportion of build complete premises in each area 100 90 80 70 60 50 40 30 20 10 0 ) s e s i m e r p ( l d e t e p m o c d l i u b f o % P. 3P. 3 Annual ReportAnnual Report Regulatory developments Regulatory developments continued to be the single most Figure 3: Aggregate copper pricing 38.39 38.43 34.44 45.92 50 45 40 35 30 25 0 I G N C R P I 1 1 0 2 R E B M E C E D D E K R A M H C N E B L A T N I I I ) 3 1 0 2 R E B M E V O N ( I G N C R P I I I G N C R P L A N I F T F A R D ) 4 1 0 2 R E B M E C E D ( ) 5 1 0 2 Y L U J ( D E G A R E V A I I - G N C R P L A N I F T F A R D R E H T R U F important factor affecting Chorus and its shareholders during FY15. Revenues from Chorus’ copper network provide the basis for Chorus’ ongoing investment in better broadband infrastructure, particularly the roughly $3 billion cost to build and connect New Zealanders in Chorus’ UFB areas. These revenues remain the subject of an ongoing final review by the Commerce Commission (the Commission). As Chorus has said since 2012, when the Commission made its first decision to reduce Chorus’ copper line pricing on the basis of international benchmarking, New Zealand regulatory pricing needs to reflect the costs of building and maintaining networks in New Zealand. That is why Chorus exercised its legislative right to request that the Commission review its pricing by modelling the s r a l l o D cost of building a network in New Zealand. The Commission has since concluded that: “New Zealand’s local loop network is unique when compared to overseas benchmarks… Simplistic comparisons of international wholesale broadband prices do not tell the true story.” (Commerce Commission media release, 2 July 2015) However, the Commission’s final review is based on the concept of a hypothetically efficient operator and in its most recent 2 July 2015 further draft decision the Commission proposed an annual price path for monthly copper broadband pricing, from $37.89 in Year 1 to $39.08 in Year 5. This suggests an average price of $38.43, which is below the $45.92 aggregate price that applied in 2011 when Chorus was demerged from Telecom New Zealand, but above the $34.44 aggregate price established by the initial benchmarking process. P. 4P. 4 Annual ReportAnnual Report The Commission’s modeling assumptions have a significant The regulatory pricing delays have ongoing consequences for bearing on the pricing produced by their model. For example,the a wide range of stakeholders. Chorus continues to maintain a Commission notes that a weighted average cost of capital (WACC) handbrake on all discretionary spending, with current and future of 6.53% would have increased the Year 1 aggregate monthly price implications for end-users and retail service providers. Investment from $37.89 to $39.40. The 2 July decision has reduced WACC programmes involving proactive maintenance and information from 6.47% to 6.03%. This is about 25% below most independent analysts’ estimates of Chorus’ WACC. Chorus continues to believe that the draft pricing significantly technology platforms remain deferred wherever possible as a result. Chorus’ higher cost recovery requirements are dampening end-user demand for new network extensions to homes and businesses. undervalues the true cost of network investment in New Zealand. Chorus is also unable to make any decisions on dividends until it Extensive data from its network rollout experience, urban UFB pricing agreed with the Crown and the comparable value of knows the final price it will be operating under. As the New Zealand Shareholders’ Association noted, the prolonged regulatory regulated electricity networks all support the view that aggregate uncertainty means shareholders are receiving no income return on pricing should be at or above 2011 levels. Significant portions of their investment and it does not help the credibility of New Zealand’s Chorus’ real world network have also been excluded from the capital markets. Framework review Continued investment by Chorus is crucial because, as a nationwide open access network operator, its investment underpins the delivery of services by any retail service providers that wish to use the network. This open access structure is helping level the competitive playing field by enabling new service providers to enter the New Zealand broadband market and in turn deliver their own new and innovative services. New Zealand therefore needs a fit-for-purpose regulatory framework that brings price, quality and investment conversations together if consumer demands for better services are to continue to be realised. Chorus believes a building block model, as is already applied to other regulated utilities in New Zealand and the National Broadband Network in Australia, is the most logical and internationally recognised approach that can deliver long term certainty for all stakeholders. The Government is expected to commence a review of the Telecommunications Act this year, with a view to implementing an updated regulatory regime to apply from 2020, when the contractual provisions for UFB pricing come to an end. For a complete overview of Chorus’ regulatory environment, please see the Regulation, legislation and litigation section in the Management Commentary. Commission’s model. Despite the Commission’s views on benchmarking, the Commission’s latest draft decision also proposes to make a 30% reduction, or around $12 million annually, to the one-off fees Chorus charges to retail service providers. This proposed reduction is based on international benchmarking of the fees charged in a selection of European countries, whereas Chorus’ charges are competitively tendered rates with New Zealand service companies. Chorus considers it a well established principle that the final monthly broadband pricing determined by the Commission’s modeling will be aligned to the date when the incorrect benchmark pricing was first applied. It is, therefore, concerning that the majority view in the Commission’s 2 July decision is that there should be no such correction of the initial pricing and the final pricing should instead apply from the conclusion of the current review process. This would be a significant reversal on previous Commission views and decisions. Chorus has borne the significant financial impact of the benchmark pricing decisions since December 2012 and the Commission’s two draft determinations have clearly established that the benchmark pricing was too low. The Commission’s December 2014 views suggested that 1 December 2014 would be the effective date and the Commission has previously required Chorus to repay retail service providers from December 2012 for a decision on other transaction charges made in April 2014. Because Chorus has been required to charge the $34.44 monthly benchmarked price since 1 December 2014, the financial impact on Chorus is compounded by the timeframe for the Commission’s review process. The Commission has changed the timetable for concluding the review four times, with the date for a final decision ultimately delayed from December 2014 to December 2015. P. 5P. 5 Annual ReportAnnual ReportMarket overview Chorus is New Zealand’s largest fixed line communications However, the number of end-users also taking a broadband infrastructure services provider with fixed line broadband available connection from Chorus continues to increase with growth of to 97% of its lines nationwide. 4% to 1,207,000 connections by 30 June 2015. The number of fixed line connections on Chorus’ network has In July 2015 the Organisation for Economic Co-operation and been relatively static at approximately 1.8 million for some Development (OECD) reported that New Zealand was ranked years now. 15th in the OECD for broadband penetration and first for growth in fibre volumes to December 2014. Chorus summary connection facts Total fixed line connections Baseband copper UCLL SLU/SLES Naked Basic / Enhanced UBA / naked VDSL Data services over copper Fibre Total Broadband Basic UBA Naked Basic UBA Enhanced UBA Naked Enhanced UBA VDSL Naked VDSL Fibre (mass market) CONNECTIONS 30 JUN 2015 CONNECTIONS 31 DEC 2014 CONNECTIONS 30 JUN 2014 1,794,000 1,408,000* 123,000 3,000 159,000 13,000 88,000 1,782,000 1,435,000 127,000 4,000 136,000 15,000 65,000 1,777,000* 1,471,000** 127,000 4,000 117,000 16,000 42,000 1,207,000 1,186,000 1,163,000 96,000 10,000 792,000 118,000 85,000 31,000 75,000 135,000 10,000 792,000 103,000 70,000 23,000 53,000 164,000 9,000 802,000 93,000 49,000 15,000 31,000 * Includes about 16,000 lines identified following billing changes and reviews. ** Revised in October 2014 to exclude 4,000 connections previously counted as intact but non-revenue generating. P. 6P. 6 Annual ReportAnnual ReportFigure 4: Chorus’ Network KEY Fibre Copper 39,000km fibre Fibre backhaul links local exchanges to other exchanges or retail service provider networks Fibre-fed broadband cabinets provide broadband to about 90 percent of New Zealanders Fibre to the premises enables Ultra-Fast Broadband services 602 local exchanges Mobile service provider cell tower The access network connects a home, business or structure to the telecommunications equipment – often a local exchange The core of Chorus’ business is the nationwide network of fibre • Some retail service providers have ‘unbundled’ Chorus’ network optic cables (39,000km) and copper cables (130,000km) that by installing their own broadband equipment in exchanges connect homes and businesses to each other. These cables and paying Chorus for the rental of the copper access line. typically connect back to local telephone exchanges, of which Unbundling is declining with the growth in fibre demand. Chorus has about 600 nationwide. Chorus fibre also connects About 7% of Chorus’ lines were unbundled at 30 June 2015. many mobile phone towers owned by mobile service providers. About 7,000 cabinets provide interconnection points for around 50% of the lines in the Chorus network. A large number of these cabinets are like mini telephone exchanges and have electronic broadband equipment installed in them. • Spark (formerly Telecom New Zealand), Vodafone and 2 Degrees operate mobile phone networks and are deploying 4G technology upgrades. • Vodafone, CallPlus and Now are among a range of fixed wireless network providers. An estimated 25,000 end-users are served by Other networks A range of network operators compete with Chorus’ fixed line network across different areas around New Zealand. These networks include: wireless networks in New Zealand. Industry developments Chorus is prohibited from selling services directly to end-users and provides open access wholesale services to approximately • The local fibre companies (LFCs) – Northpower, Ultrafast 100 retail service providers. Fibre and Enable Networks – that have also partnered with the Government to build fibre past about 365,000 premises in nine of the 33 UFB areas. As at 30 June 2015, it is estimated they had passed approximately 250,000 end-users and had 35,000 connections. • Vodafone’s cable network in Wellington, Kapiti and Christchurch connects about 60,000 broadband end-users. It also has business fibre networks in all major central business areas and a national transport and backhaul network. • Vector, Vocus Communications, Citylink and Unison operate fibre networks of varying sizes, typically focused on the backhaul and business markets. The retail service provider landscape is changing rapidly as global industry trends, combined with the new market dynamic created by the UFB rollout, foster the entry of new market participants and simultaneously drive existing retail service providers to seek scale. Notable developments during FY15 included: • Australian telecommunications operator Vocus Communications announced in July 2014 that it was purchasing FX Networks and its 4,100km fibre network. • Callplus completed its purchase of Orcon in July 2014, increasing its retail market share to approximately 15% and making it New Zealand’s third largest retail service provider. P. 7P. 7 Annual ReportAnnual Report• MyRepublic, a Singapore-based retail service provider, launched Another significant industry dynamic is the rapid growth in video operations in New Zealand in October 2014 with a focus on on demand services, combined with the uptake of uncapped fibre-based services. • Vocus Communications and Spark announced a new fibre construction joint venture in February 2015. broadband plans. Chorus’ network traffic increased 77% during the year with the launch of services from Netflix, Neon (Sky TV) and Lightbox (Spark) helping promote online viewing options. • New Zealand’s third largest mobile operator, 2degrees, The increase in bandwidth demand created peak-time constraints purchased Snap in March 2015. • In April 2015, Australian telecommunications company M2 announced it was purchasing Callplus. • Vodafone announced the purchase of WorldxChange in June 2015. • M2 purchased Woosh’s customer base in July 2015. on a limited number of Chorus’ network links necessitating work to provide additional network capacity. The Commission’s pricing reviews will be a key determinant of ongoing investment for bandwidth demand growth, particularly as Chorus already delivers network capacity well above the regulated minimum for the broadband service. Governance and corporate sustainability In March, Sue Sheldon resigned after chairing the Board since Chorus’ demerger. Chorus thanks her for her stewardship, Chorus is focused on enhancing its sustainable operating model to efficiently deliver its needs of today without compromising its particularly through the challenging regulatory turbulence of the needs of tomorrow. Chorus continued programmes to replace last few years. The Board welcomes Dr Patrick Strange as a director and believes his experience with utility regulation, particularly as former chief executive of Transpower, will be valuable. Murray Jordan will join the Board from 1 September 2015, bringing strong customer and stakeholder experience from his role as Managing Director of Foodstuffs North Island. With the full support of the Board, network batteries, fuel tanks and ozone depleting substances from air conditioners with more sustainable alternatives. Data is reported to the Carbon Disclosure Project, a leading global carbon benchmark. About 340 Chorus people helped their local communities through the volunteer day programme and employees also donated to local charities through Chorus’ payroll giving programme. Dr Strange will be appointed as chairman from 1 September 2015. Chorus aims to provide shareholders with as much insight into Jon Hartley has been interim chairman of the Chorus Board its business as possible and has received positive feedback since April 2015, and will take up the position of deputy chairman on the content of its prior Annual Reports. A PwC report on “Communication through reporting” described Chorus’ 2014 annual report as a leading example, alongside the BBC’s, of prominently presenting information that is critical to understanding the performance of the entity. Chorus aspires to continue to meet that standard and welcomes shareholders’ feedback. following Dr Strange’s appointment. In June 2015 Chorus became the first New Zealand company to win the Best of the Best supreme award in the Aon Hewitt Best Employer awards. About 150 Australasian companies were involved, with Chorus having to demonstrate excellence in employee engagement, leadership effectiveness and a high- performance culture. It was the fourth consecutive year in which Chorus has received best employer accreditation, with a 2015 employee engagement score of 82%. Chorus has a range of health and safety performance measures and governance reporting that underpin the Board’s strong focus on Chorus’ risks and the development of a strong safety culture. This focus extends to Chorus’ contractors. Chorus continued to enhance its health and safety management processes and systems, attaining ACC Workplace Safety Management Practices accreditation in June 2015, and preparing for expected new Health & Safety legislation. P. 8P. 8 Annual ReportAnnual ReportOutlook Chorus is committed to delivering better broadband for Chorus made significant progress during FY15 to reshape its New Zealanders while also achieving a fair rate of return on business and absorb some of the impact from the December 2014 the investment that underpins the ongoing development of regulated price cuts. These business initiatives delivered results New Zealand’s fixed line communications network. ahead of target for the year, partially offsetting the very significant Operationally, Chorus remains focused on continuing to deliver on its contractual commitments under the UFB and RBI rollouts and meeting the cost profiles advised to shareholders. UFB uptake reduction in regulated pricing. Further challenges are expected in FY16 from wider industry dynamics and the consequences of managing the business for cash for an extended period, including: is expected to continue to grow as the network footprint expands • The continued reduction in discretionary proactive maintenance and the level of uptake will have an important bearing on capital spend which will ultimately result in more network faults. expenditure demands for FY16. Significant work is going into refining the UFB connection experience for end-users and possible Government changes to the access and consent regimes may remove some of the complexity and impediments to uptake. • The deferral of IT investment previously earmarked to separate from Spark is necessitating continued reliance on multiple legacy systems, resulting in increased IT operating expenditure. • UFB uptake will continue to erode demand for Chorus’ There may be some light at the end of the regulatory tunnel existing copper network in UFB areas where Chorus is not the with the Commission’s recent regulatory decisions supporting Government’s partner. an increase in copper pricing relative to its prior benchmarking processes. However, until Chorus receives a final pricing decision it must continue to operate on the reduced pricing introduced on 1 December 2014. • The availability of an enhanced and in some cases relatively new product set (such as Very High Speed Digital Subscriber Line, mass market fibre, baseband IP) is driving increased provisioning demands and additional labour and provisioning cost into Chorus. This means discretionary activity and investment will remain • Retail service providers will continue to focus on reducing their restricted for at least the first half of FY16. Consistent with previous wholesale input costs from Chorus, whether by taking alternative advice, Chorus will update investors on dividend policy once or lower grade products, or using non-Chorus network inputs the Commission’s final pricing review is complete. The extent to and suppliers. which various initiatives to reshape the business will be adjusted is ultimately linked to the level and timing of the Commission’s pricing decisions. Despite these challenges, Chorus is focused on improving returns to shareholders and securing a regulatory environment that enables shareholders to earn a fair return on the investment they Longer term investment decisions also remain challenging in this are making to bring better broadband to New Zealand. context, exacerbated by the absence of a post 2020 regulatory framework. Chorus’ ability to participate in the Government’s proposal to undertake further phases of UFB and RBI investment is inextricably linked to the need for regulatory clarity and recognition of a fair rate of return on the cost of efficiently building networks in New Zealand. Chorus firmly believes that the draft final pricing to date undervalues Chorus’ network relative to its own extensive analysis and experience, including through the UFB and RBI rollouts. Chorus is well placed to help New Zealand realise the socio- economic benefits of broadband as demand for digital connectivity grows. We are seeing growing demand for better broadband for educational, business and entertainment purposes, reinforcing Chorus’ role as an essential utility provider. A fit-for-purpose regulatory framework will help New Zealand realise even greater broadband potential. P. 9 Annual Report1 4 2 5 Directors 3 6 7 1. Jon Hartley, BA Econ Accounting (Hons), Fellow ICA (England & Wales), Associate ICA (Australia), Fellow AICD Interim chairman; Director since 1 December 2011; independent Jon is a Chartered Accountant and Fellow of the Australian Institute of Company Directors. He has held senior roles across a diverse range of commercial and not for profit organisations in several countries, including as chairman of SkyCity, director of Mighty River Power, CEO of Brierley New Zealand and Solid Energy, and CFO of Lend Lease in Australia. Jon is currently deputy chairman of ASB Bank and Sovereign Assurance Company, chairman of VisionFund International and the Wellington City Mission and a trustee of World Vision New Zealand. Jon is chairman of Chorus’ Nominations and Corporate Governance Committee and a member of its Audit and Risk Management Committee. 2. Anne Urlwin, BCom, CA, F InstD, FNZIM, ACIS 3. Clayton Wakefield, BSc (Computer Science), GradDip Mgmt, CMInstD Director since 1 December 2011; independent Director since 1 December 2011; independent Anne is chairman of Naylor Love Enterprises and a director of Southern Response Earthquake Services, Steel & Tube Holdings, OnePath Life (NZ) and Summerset Group. Anne is also the independent chairman of the Ngai Tahu Te Runanga Audit and Risk Committee. Her previous directorship experience encompasses many sectors, including energy, health, construction, regulatory services, internet infrastructure, research, banking, forestry and the primary sector, as well as education, sports administration and the arts. She is the former chairman of Lakes Environmental, the New Zealand Blood Service, the New Zealand Domain Name Registry and a former director of Meridian Energy. Anne is chairman of Chorus’ Audit and Risk Management Committee. Clayton has over 30 years’ experience in the banking, financial services, telecommunications and technology industries and is a Chartered Member of the Institute of Directors. Clayton is currently a director of Fisher & Paykel Finance and its subsidiaries, a former chairman of Electronic Transactions Services and Visa New Zealand, a former director of Endace and a former executive director and owner of Techspace. From 2001 to 2007 Clayton was Head of Technology and Operations at ASB Bank. Clayton is chairman of Chorus’ Human Resources and Compensation Committee. 4. Keith Turner, BE (Hons), ME, PhD DistFIPENZ Director since 1 December 2011; independent 5. Mark Ratcliffe, BA Accounting Managing Director since 9 December 2011; non-independent Dr Keith Turner was CEO of New Zealand electricity generator and retailer Meridian Energy for nine years from its establishment in 1999. He is currently chairman of Fisher & Paykel Appliances and a director of Spark Infrastructure, an Australian listed company. Keith was formerly chairman of Emirates Team New Zealand and deputy chairman of Auckland International Airport. Keith has had an extensive career in electricity, taking part in much of its reform, including the separation of Transpower from Electricity Corporation of New Zealand (ECNZ) in 1992, the separation of Contact Energy from ECNZ in 1996 and the eventual break up of ECNZ into three companies in 1999. Keith is a member of Chorus’ Human Resources and Compensation Committee, its Nominations and Corporate Governance Committee and a member of the UFB Steering Committee. Mark has been CEO of Chorus since it was established in 2007 as an operationally separate business unit within Telecom and was appointed as its first CEO when it became a separately listed entity in 2011. In a 20 year career with Telecom, Mark held finance, marketing, product development, product management and IT roles. Mark was promoted to the executive team in 1999 where he was CIO (including a period as joint CEO of AAPT in Australia) and then COO Technology and Wholesale before becoming CEO of Chorus. From May 2010, he led the team that secured Chorus’ participation in the Government’s UFB initiative and the demerger of Chorus and Telecom. Note: Murray Jordan will join the Board from 1 September 2015. P. 10 6. Patrick Strange, BE (Hons), PhD Director since 6 April 2015; independent Dr Patrick Strange has spent 30 years working as a senior executive and director in both private and listed companies, including for more than six years as Chief Executive of Transpower where he oversaw Transpower’s $3.8 billion of essential investment in the National Grid. Patrick is currently a director of Mighty River Power, Worksafe New Zealand, NZX Limited and of the joint board of Ausgrid, Endeavour Energy and Essential Energy, Australia. Patrick is a member of Chorus’ Audit and Risk Management Committee. 7. Prue Flacks, LLB, LLM Director since 1 December 2011; independent Prue is a director of Bank of New Zealand and Mighty River Power. She is a barrister and solicitor with extensive experience in commercial law and, in particular, banking, finance and securities law. Her areas of expertise include corporate and regulatory matters, corporate finance, capital markets, securitisation and business restructuring. Prue is a consultant to Russell McVeagh, where she was previously a partner for 20 years. Prue is a member of Chorus’ Nominations and Corporate Governance Committee and its Human Resources and Compensation Committee. Annual ReportExecutive Team 3 6 9 1. Mark Ratcliffe Chief Executive Officer See previous page. 4 7 10 2 5 8 2. Andrew Carroll, MCA (Hons) Chief Financial Officer Andrew joined Chorus after nine years with Telecom where he was involved in a range of corporate finance and M&A activity, including the Gen-i acquisition and the sale of Yellow Pages. Prior to this he worked in investment banking for a decade. Andrew worked closely with the Chorus team on the UFB negotiations with Crown Fibre Holdings and throughout the demerger process. 3. Ed Beattie General Manager, Infrastructure 4. Ewen Powell, BE Chief Technology Officer 5. Ian Bonnar General Manager, Corporate Relations Ed has more than 30 years’ experience in building and maintaining fixed line and mobile telecommunications networks in New Zealand. He managed the delivery of the successful Fibre to the Node programme from 2008 to 2011 and played a lead role in the Christchurch earthquake response and restoration activities. As General Manager Infrastructure, Ed has primary responsibility for the UFB and RBI network rollouts. Ewen has over 20 years’ experience in managing the technology, services and partnerships that operate a national communications network. He has spent time in both the supplier and operator communities with much of his career spent at Telecom. Ewen’s focus is on deploying core enterprise systems to run the business and develop technology capabilities to provision and manage the new fibre network. Ian was appointed General Manager Corporate Relations in October 2014 with overall responsibility for protecting and enhancing the reputation of Chorus with its stakeholders. Before joining Chorus in 2013 he held a range of positions at Telecom, including Head of Communications, and was communications lead on the UFB negotiations and the Chorus demerger. 6. Nick Woodward General Manager, Customer Service 7. Paula Earl-Peacock General Manager, Human Resources 8. Tim Harris, LLB, MBA Chief Commercial Officer Nick’s career combines a wide range of IT, sales, customer and project management experience in the financial and telecommunications industries. His roles have seen him work across the United States and Europe for Hutchison 3G UK and Household Bank in the United Kingdom. Paula joined Chorus in November 2014, and has over 20 years’ experience in generalist human resources roles in both New Zealand and Australia. Her most recent role was in consumer goods with Mars Petcare in Australia, she has also worked in the financial services, consulting and retail sectors. Paula’s focus is on the development of high performance organisations through constructive leadership, and the development of people, culture and teams. Tim joined Chorus in October 2014 as Chief Commercial Officer with responsibility for leading Chorus’ Marketing, Sales and Corporate Strategy functions. Tim has held a number of senior roles, most recently as Managing Director of BT Global Services South-East Asia. Tim has an MBA from the UK-based Cranfield School of Management. 9. Vanessa Oakley, LLB (Hons) General Counsel & Company Secretary 10. Irene Lovejoy Executive Assistant Vanessa has extensive experience in law and policy, especially in relation to regulated infrastructure businesses. A qualified lawyer in New Zealand, England and Wales, Vanessa joined Chorus after playing a key role in the UFB contract, legislative and demerger processes. She previously held roles in the public and private sectors, including as a key adviser to United Kingdom and New Zealand regulators and across the Telecom group. Irene has worked with Chorus CEO Mark Ratcliffe for more than 15 years, bringing a unique insight that adds value to the development of the Chorus executive team. Before joining Chorus, Irene spent 22 years with Telecom where she held roles in the marketing, technology and corporate teams. P. 11 Annual ReportChronology of significant Chorus announcements 18 July 2014 22 July 2014 25 July 2014 Chorus announces an agreement with Crown Fibre Holdings (CFH) that provides the option of bringing forward UFB funding subject to various conditions. The Commission announces an investigation relating to proposed changes to the regulated Unbundled Bitstream Access (UBA) service. This is in parallel to considering Chorus’ proposed Boost services. Chorus announces it has agreed amendments to its committed bank facilities to provide significant additional financial flexibility and funding certainty. This includes agreeing no dividends will be paid until the later of the Commission’s review processes or 30 June 2015. 4 September 2014 The Commission releases a consultation paper on proposed changes to Chorus’ regulated UBA service. 8 September 2014 The Court of Appeal dismisses Chorus’ appeal on the UBA price set by the Commission’s initial benchmarking process. 7 October 2014 Chorus provides insights into cost modelling by Analysys Mason showing the cost to re-build the copper network, without re-using existing infrastructure, would be around $16 billion. 16 October 2014 The Commission suspends its investigation into Chorus’ proposed changes to the regulated UBA service after Chorus put its proposed changes on hold. 25 November 2014 New service company agreements for the cost of connections to the UFB network enable Chorus to reduce its connections cost guidance. 2 December 2014 The Commission releases its draft final cost modelling decision, proposing an aggregate price of $38.39 compared to the $34.44 price previously derived from its initial benchmarking review. Chorus releases an update of Analysys Mason’s modelling which continues to show prices should be at or above 2011 levels. 4 December 2014 Standard & Poor’s revises Chorus’ outlook to stable. 17 December 2014 Moody’s revises Chorus’ outlook to stable. 19 December 2014 The Commission advises that it is extending the final cost modelling timetable by five months with final determinations due by September 2015 instead of April 2015. The Commission also says its emerging view is that final prices should only be effective from 1 December 2014. 23 December 2014 Chorus concludes further service company agreements for the cost of connections to the UFB network and agrees a fixed price UFB deployment contract with Visionstream for the Auckland UFB area. 23 February 2015 Chorus narrows the UFB communal capital expenditure guidance range to $1.75 to $1.80 billion, from a previous range of $1.70 to $1.90 billion. This follows the agreement of a fixed price UFB deployment contract with Downer. 19 March 2015 Sue Sheldon announces she is resigning as chairman effective 31 March 2015. 7 April 2015 Dr Patrick Strange is appointed to the Chorus Board effective 6 April 2015. 15 April 2015 The Commission advises that it intends to further extend the final cost modelling review timetable with final determinations delayed to December 2015. 25 June 2015 Murray Jordan is appointed to the Chorus Board effective 1 September 2015. 2 July 2015 The Commission releases its further draft final cost modelling determination, re-confirming the initial benchmarking prices were too low. A majority of Commissioners propose that the final pricing should be implemented at the conclusion of the Commission’s process, rather than from the date when Chorus was required to begin charging the initial benchmarking pricing. P. 12 Annual ReportManagement Commentary CONTENTS In summary Revenue commentary Expenditure commentary Capital expenditure commentary Long term capital management Regulation, legislation and litigation Appendix one 15 16 19 22 24 25 27 Annual Report P. 13 P. 13 Annual ReportManagement commentary Operating revenue Operating expenses Earnings before interest, income tax, depreciation and amortisation Depreciation and amortisation Earnings before interest and income tax Net interest expense Net earnings before income tax Income tax expense Net earnings for the year 2015 $M 1,006 (404) 602 (324) 278 (151) 127 (36) 91 2014 $M 1,058 (409) 649 (322) 327 (121) 206 (58) 148 P. 14 P. 14 Annual ReportAnnual ReportIn summary EBITDA Significant items that impacted the operating results for Chorus in Chorus reports earnings before interest, income tax, depreciation FY15 include the reduction in UBA pricing and associated changes to and amortisation (EBITDA) of $602 million for the year ending the UBA transaction charges. Excluding the impact of these changes 30 June 2015 (FY15), a decrease of $47 million on the prior year. consistently across both years results in adjusted EBITDA for FY15 of Results for FY15 were affected by a material reduction in Unbundled Bitstream Access (UBA) pricing following the introduction of the Commerce Commission’s (the Commission) initial benchmarked pricing on 1 December 2014, and a wide range of cash management $546 million and $518 million for FY14. A comparison of the adjusted full year results for the year ended 30 June 2015 with the adjusted results for the year ended 30 June 2014 (FY14), and commentary on the items being adjusted is included in appendix one. initiatives (‘the initiatives’) Chorus implemented to partially offset Capital expenditure the very significant loss in financial flexibility resulting from the UBA price reduction. As outlined in the results announcement on 24 February 2014, Chorus undertook a fundamental review to identify an extensive range of operating cost out, capital expenditure reductions and revenue initiatives that would reshape the business. Chorus also indicated that there may be impacts on longer term incremental revenue and additional operating costs due to the extent of the short term cost out initiatives. Revenue decreased significantly as a result of the UBA price reduction. Other smaller reductions in revenues occurred because retail service providers asked Chorus to do less maintenance work on their networks and following the expiry of the Spark transitional services agreements on 30 June 2014. These revenue declines were partially offset by some of the initiatives Chorus implemented in FY15, primarily in the field services, infrastructure and enhanced copper revenue categories. Continued growth in demand for broadband and fibre products over the year also increased revenues. Capital expenditure for the year ended 30 June 2015 was $597 million. Approximately 85% of Chorus’ capital expenditure was focused on fibre related investment, principally for the Ultra-Fast Broadband (UFB) and Rural Broadband Initiative (RBI) deployment programmes. UFB communal capital expenditure totalled $236 million, with build work completed for about 368,000 premises by 30 June 2015. A further $140 million was spent connecting end-users to the fibre network. Continuing cash constraints are impacting the capital expenditure choices being made and may ultimately result in the sacrifice of value enhancing capital expenditure to the detriment of stakeholders. Dividends As part of the 25 July 2014 bank amendments Chorus agreed that no dividends will be paid until the later of the conclusion of the Commission’s final pricing review processes or 30 June 2015. Following further delays the Commission’s final pricing review is currently expected to be completed in December 2015, almost three Costs decreased in aggregate by more than 1%, reflecting an years after the Commission was requested to undertake the reviews. intensive cost reduction programme as part of the initiatives, such as deferral of non-critical maintenance costs, tight control of provisioning costs and other expenses. This cost reduction programme was partially offset by growth in labour, information technology (IT), electricity costs and regulatory levies. Growth in IT costs reflected a new stand-alone Chorus IT environment and the need to run duplicate platforms, exacerbated by delays in the IT separation programme due to deferred capital expenditure. Growth in connection numbers for both fibre and copper based Very High Speed Digital Subscriber Line (VDSL) installations have driven increases in personnel numbers, with the associated increase in costs, as the processes to provision these products are less mature and more labour intensive. In addition, Chorus has agreed an optional funding backstop with Crown Fibre Holdings (CFH) which gives Chorus the option to bring forward part of CFH’s existing investment funding. If Chorus needed to use the facility, Chorus would be unable to pay a dividend before December 2019 without CFH approval, unless Chorus normalises the CFH funding profile. The facility is only available from October 2015 and automatically terminates if not used by 30 June 2016. P. 15 P. 15 Annual ReportAnnual ReportRevenue commentary Basic copper Enhanced copper Fibre Value added network services Infrastructure Field services Other Total revenue 2015 $M 491 268 98 36 21 84 8 2014 $M 543 293 75 38 19 75 15 1,006 1,058 Revenue overview Basic copper Chorus’ product portfolio encompasses a broad range of Basic copper incorporates core regulated products that, while an broadband, data and voice wholesale services. It includes a mix important part of the portfolio, are founded on earlier technology of regulated and commercial copper and legacy products, and fibre products. and product variants that are being superseded by enhanced copper and fibre services. It includes most of Chorus’ layer 1 Revenue declined compared to the prior period. UBA pricing reduced from $21.46 to $10.92 from 1 December 2014 as a result of the Commission’s benchmarking price decision of 5 November 2013. network products such as the copper voice input Unbundled Copper Low Frequency Service (UCLFS), Unbundled Copper Local Loop (UCLL), Sub Loop Unbundling (SLU), Sub Loop Extension Service (SLES) and Basic UBA (including broadband Total fixed line connections increased by 17,000 connections (from only naked Basic UBA connections). 1,777,000 to 1,794,000). In addition, with the reduction in UBA pricing there is now a differential in pricing between basic copper connections and the price charged for VDSL and fibre connections, resulting in higher average revenue per VDSL and fibre connection. A summary of Chorus’ connection numbers for key products is on page 6. Basic copper revenues are continuing to decline as retail service providers migrate end-users from Basic UBA broadband services to enhanced copper and Internet Protocol (IP) voice services. The majority of basic copper revenues are derived from Chorus’ baseband copper services (including UCLFS) which retail service providers can use as an input into traditional voice offers. At 30 June 2015, there were approximately 1,408,000 baseband copper lines1, a decrease of 63,000 lines from 30 June 2014. This reduction was offset by the migration of connections to Chorus’ other fixed line connection products. In particular, ‘naked’ connections (naked Basic UBA, naked Enhanced UBA and naked VDSL) grew by 42,000 lines. There continued to be a significant number of baseband copper lines that would typically have been disconnected but are currently being retained by end-users who have switched to a fibre connection because their retail service provider required the copper line for voice service delivery. The number of unbundled exchanges grew from 189 to 214 over the year, while the number of unbundled lines declined to 126,000. The total comprised 123,000 UCLL lines and 3,000 SLU lines (offered in conjunction with Chorus’ commercial Sub Loop Extension Service). UCLL lines are currently charged at a geographically averaged price of $23.52. Prior to December 2014, the price was $19.08 for urban and $35.20 for non-urban lines following the Commission’s re-benchmarking of UCLL pricing in December 2012. The pricing of these services is still subject to a final pricing review – see the Regulation, legislation and litigation section. 1 For reporting purposes, this total includes instances where UCLFS is combined with UBA connections. From 1 December 2014, the UBA Standard Terms Determination includes the UCLFS component. The price outcome is the same as if these connections were billed for naked UBA and zero for UCLFS/Baseband. P. 16 P. 16 Annual ReportAnnual ReportBasic UBA is a broadband service delivered on a ‘best efforts’ Fibre basis, typically using older generation technology. The number of Basic UBA connections declined to about 106,000 connections at 30 June 2015 as end-users transition to better broadband products. UBA pricing reduced from $21.46 to $10.92 from 1 December 2014 as a result of the Commission’s initial benchmarked price decision of 5 November 2013. The pricing of this service is still subject to a final cost modelled review by the Commission – see the Regulation, legislation and litigation section. Enhanced copper Enhanced copper includes copper based next generation regulated and commercial products that deliver higher speed capability, a better end-user experience and can assist the transition to fibre. It includes Enhanced UBA, VDSL, Baseband IP voice input service and High Speed Network Service (HSNS) Lite for business data on copper. Fibre revenues are earned from Chorus’ existing business fibre products (such as HSNS Premium) and new UFB residential and business fibre services. This category also captures UFB backhaul and Direct Fibre Access Service, which provide point to point networking solutions and can be used to deliver backhaul connections to mobile sites. Fibre connections nationwide more than doubled during the year, increasing from 42,000 to 88,000 lines. This growth reflected new demand linked to the ongoing expansion of the UFB footprint and continued demand for new business and carrier connections via Chorus’ existing fibre network. Chorus had approximately 68,000 fibre connections within the areas where it had deployed UFB communal network at 30 June 2015, up from 27,000 connections at 30 June 2014. This total includes a combination of residential UFB connections and new, or pre-UFB, business fibre connections Chorus’ enhanced copper revenue declined because UBA pricing within the areas where Chorus’ UFB network was built. reduced from $21.46 to $10.92 from 1 December 2014 applied to Enhanced UBA and VDSL connections. Enhanced UBA connections were approximately 910,000 at About 75,000 of Chorus’ fibre connections were mass market end-users (which includes UFB Bitstream 2 and 3 and education connections). UFB uptake has increased as the UFB coverage area 30 June 2015, an increase from 895,000 at 30 June 2014. has grown and fibre has become more mainstream. However, uptake Uptake of VDSL has continued to increase significantly, up from 64,000 at 30 June 2014 to 116,000 by 30 June 2015. VDSL varies widely from area to area, largely reflecting the degree of retail service provider focus on promoting fibre services in each area. utilises existing copper based capability and can provide download The majority of end-users are on entry level 30Mbps fibre products. speeds of about 20-50Mbps and upload speeds of up to 10Mbps, During FY15 Chorus introduced new 100Mbps plans at a $40 subject to an end-user’s distance from the broadband equipment wholesale price to help establish this speed as the entry level fibre and line capability. About 60% of lines nationwide are able to wholesale product. Approximately 30% of Chorus’ residential mass support VDSL, including a growing number of rural users within market connections are on speeds of 100Mbps or greater. the RBI rollout footprint. Direct Fibre Access Service connections were about 5,000 of ‘Data service over copper’ connections reduced by 3,000 lines as total fibre connections at 30 June 2015. Bandwidth Fibre Access retail service providers scrutinised input costs. Service and HSNS Premium fibre connections (also referred to as Baseband IP connections, used by retail service providers to deliver a voice over internet protocol service over copper, continued to grow but are not yet material. Baseband IP is currently available across about 10% of Chorus’ lines. Bitstream 4) accounted for the remaining 8,000 fibre connections. Demand for business fibre connections has been predominantly for higher grade HSNS Premium connections rather than Bitstream 3 services. This may change over time as the UFB network makes Bitstream 3 services more widely available and retail service providers start to introduce new fibre products based on the lower grade UFB inputs. Value added network services The main revenue driver for this category is national data transport services, which provide network connectivity across backhaul links. The nature of these services means volumes and revenues in this category were largely unchanged. P. 17 P. 17 Annual ReportAnnual ReportRevenue commentary (cont.) Infrastructure Other Infrastructure revenue relates to services that provide access to Other income has consisted largely of revenue generated from Chorus’ network assets. Chorus provides commercial access to its the demerger transitional services agreements with Spark and has exchanges, poles and other infrastructure. Co-location revenue declined as several of these agreements expired at 30 June 2014. derives from retail service providers and other network operators Chorus continues to provide certain services to Spark including installing their equipment in Chorus exchanges, as well as leased billing and network management services which largely makes up commercial space in exchange buildings. the remainder of other revenues. Infrastructure revenue has increased due to strong growth in Approximately $2 million was received in FY14 for Christchurch commercial co-location, which enables retail service providers earthquake related insurance proceeds. to interconnect with Chorus’ UFB footprint. The capacity for this product to grow much further is limited. Field services This category includes work performed by Chorus’ service company technicians providing new services, chargeable cable location services, maintaining retail service provider networks and relocating or extending Chorus’ network on request. As Chorus utilises service companies to perform field services work, there is a direct cost associated with all field services revenues recognised in the provisioning and network maintenance expense categories. Provisioning revenues are generally based on orders for technicians to install services and are driven by the number and nature of orders, and the type of work required. Maintenance revenues are generated when faults are proven to be on the retail service provider’s, rather than Chorus’ network, and are driven by the number of reported faults and proactive maintenance programmes performed on behalf of retail service providers. It is difficult to establish specific trends in this revenue category because it is dependent on third party demand or damages to Chorus’ network by third parties. However the revenue associated with on-charging maintenance costs for work done on retail service provider networks has declined as they are choosing to do more of this work themselves. Field Services revenues have increased year on year as a result of more up front charging being undertaken and the changed charging regime from December 2014, whereby UBA became the primary service and Chorus is able to recover more of its costs of installing services. Chorus is also recovering a greater proportion of its costs for greenfields and infill subdivisions. Prior year field services revenues included connection charges for various products. UCLFS connection charges were reset so that they were the same (and backdated) as the benchmarked UCLL connection charges that were set in December 2012. P. 18 P. 18 Annual ReportAnnual ReportExpenditure commentary Operating expenses Labour costs Provisioning Network maintenance Other network costs Information technology costs Rent and rates Property maintenance Electricity Insurance Consultants Regulatory levies Other 2015 $M 2014 $M 73 58 91 34 65 14 11 14 4 3 15 22 72 58 99 38 55 12 12 13 4 4 10 32 Total operating expenses 404 409 Operating expenditure has decreased by 1.2% relative to FY14. Network maintenance costs relate to fixing network faults and any A tight focus on controlling costs and managing for cash operational expenditure arising from the proactive maintenance throughout the year has seen decreases in many of the expense programme. Where faults are on a retail service provider’s network, categories, partially offset by growth in labour, IT costs, electricity rather than Chorus’ network, Chorus charges the retail service and regulatory levies. Maintenance costs have decreased due to provider for this service. Network maintenance costs are driven by favourable weather conditions and the deferral of all non-essential the number of retail service provider reported faults, the type of expenditure, while the IT cost increases reflect the costs of new work required to fix the faults and the extent of Chorus’ proactive stand-alone Chorus IT infrastructure and some duplication of costs maintenance programme. as Chorus progressively exits Spark systems. Areas of significant change include: The costs associated with maintenance on retail service provider networks has fallen, by approximately $3 million, due to retail Labour costs of $73 million for the year represent staff costs that service providers choosing to maintain more of their own network are not capitalised. At 30 June 2015 Chorus had 842 permanent themselves, with the associated revenue reduction. Chorus and fixed term employees. This was up from 823 employees at network maintenance costs are lower by approximately $5 million 30 June 2014. A further 33 people were employed in the customer due to a number of initiatives to reduce overall costs, favourable services team to support continued growth in fibre provisioning weather conditions and some change in mix, with copper faults and complex provisioning as the processes to provision these falling while fibre faults have increased slightly. The initiatives to products are less mature and more manual in nature. The reduce overall costs have included removing the proactive element subdivision team was insourced during the year, while business that was a core part of certain fault fixes. Some initiatives, while restructuring as a result of the initiatives resulted in the number saving cash in the short term, will result in more faults in the mid of roles across the rest of the business declining. to long term. Provisioning costs are incurred where Chorus provides new or Other network costs relate to costs associated with service partner changed service to retail service providers. The total provisioning contract costs, engineering services, project costs unable to be cost is driven by the volume of orders, the type of work required capitalised and the cost of network spares. Any costs which have to fulfil them, technician labour, material and overhead costs. been incurred for fibre orders that are subsequently cancelled are While the volume of provisioning truck rolls has decreased year included in other network costs. As with other expense items, there on year, the mix of products being purchased has changed and has been a reduction in discretionary spend particularly associated a Consumer Price Index price increase on the costs charged by with projects, engineering services, proactive maintenance and service companies has resulted in higher costs for Chorus. The some service partner related costs (which has more than offset provisioning cost per truck roll for VDSL installations is greater, increasing costs of cancelled fibre orders). due to it being a more labour intensive product to provision, and strong uptake of VDSL has resulted in higher upfront costs which are recovered as revenue over time. Other provisioning costs are declining as the uptake of fibre increases. P. 19 P. 19 Annual ReportAnnual ReportExpenditure commentary (cont.) Information technology costs of $65 million represent the costs and assets being deployed through the UFB rollout, with new UFB paid directly by Chorus to third party vendors, as well as the assets also being included in the rating calculations of local bodies. operating expenditure component of systems which are shared with Spark. In late FY14 Chorus established a data centre, network operations centre, cloud based desktop system, information management system and enterprise resource planning system to enable the migration of some Spark systems to Chorus. FY15 includes a full year of the ongoing maintenance and support Electricity costs have increased slightly on the previous year as a result of increased line charges and additional network related consumption. Chorus hedges its electricity usage to minimise volatility in electricity spot prices. About 50% of Chorus’ requirements have been hedged with a rolling three year horizon. costs for these systems. The overall relative spend has increased Consultant costs have decreased during the current year as reflecting the increased flexibility that has been built into a number a number of projects have been deferred and discretionary of these systems (and advantages to flexible working that a cloud based desktop environment brings) as well as the costs associated consultant resource cost avoided. There has continued to be a significant amount of spend on the multiple streams of regulatory with purchasing virtual servers and databases to support a smaller work through FY15. scale organisation. In addition to this the delay of the Spark separation programme has resulted in the duplication of some costs for longer than initially expected. Regulatory levies reflects the amount paid for the Telecommunications Development Levy and the Telecommunications Regulation Levy. The FY13 and FY14 levies Rent and rates, property maintenance, electricity and insurance costs relate to the operation of Chorus’ network estate (e.g. were finalised during FY15. The expense for the current year reflects the FY15 accrual as well as a catch up for the difference exchanges, radio sites and roadside cabinets). Rates are levied on between the previous year accruals and the final actual costs. network assets both above and below ground. Electricity is used to operate the network electronics and this is dependent on the number of sites, electricity consumption and electricity prices. ‘Other’ includes expenditure on general costs such as advertising, telecommunications, travel, training and legal fees. The largest reduction in other expenses relates to advertising following the Rent and rates costs have increased during the period as the aerial conclusion of Chorus’ Gigatown campaign. Tight cost control on deployment of UFB fibre resulted in increased pole rental costs discretionary spend has resulted in a decrease in all other costs. Depreciation and amortisation 2015 $M 2014 $M ESTIMATED USEFUL LIFE (YEARS) WEIGHTED AVERAGE USEFUL LIFE (YEARS) 58 50 31 36 17 78 1 (12) 259 65 - 65 63 38 22 35 16 87 6 (8) 259 63 - 63 10–30 20 50 5–14 5–50 2–15 2–10 2–8 6–20 22 20 50 10 16 8 6 5 20 Depreciation: Copper cables Fibre cables Ducts and manholes Cabinets Property Network electronics Other Less: Crown funding Total depreciation Amortisation: Software Other intangibles Total amortisation P. 20 P. 20 Annual ReportAnnual ReportThe weighted average useful life represents the useful life in each Software and other intangibles largely consist of the software category weighted by the net book value of the assets. components of billing, provisioning and operational systems, During the year ended 30 June 2015 $597 million of network assets and software were capitalised. The ‘UFB communal’ and ‘UFB connections and fibre layer 2’ included in ‘fibre’ capital including Chorus spend on Spark-owned systems. A total of $86 million of software was capitalised during the year, which will be amortised over an average of five years. expenditure was largely capitalised against the network assets Chorus’ depreciation profile is expected to continue to change, categories of fibre cables (28%) and ducts and manholes (71%). reflecting the greater mix of longer dated assets for the UFB The average depreciation rate for UFB communal infrastructure and RBI rollouts. The amortisation of Crown funding against spend is currently 36 years, reflecting the very high proportion of depreciation is expected to continue to increase over time as the long life assets being constructed, with ducts and manholes having amount of funding received from the Crown accumulates, with a depreciation rate of 50 years. the associated amortisation to depreciation increasing accordingly. Net finance expense Finance income Finance expense Interest on syndicated bank facility Interest on EMTN Ineffective portion of change in fair value of cash flow hedge Other interest expense Capitalised interest Total finance expenses excluding CFH Securities CFH securities (notional interest) Total finance expense 2015 $M (8) 68 53 19 19 (6) 153 6 159 2014 $M (8) 64 49 - 20 (7) 126 3 129 Interest costs increased in FY15 largely reflecting the increased New Zealand (TMNZ) and $3 million amortisation (30 June 2014: weighted effective interest rate on debt (6.9% in FY15 compared $2 million) arising from the difference between fair value and to 6.3% in FY14). Slightly offsetting this was lower average debt proceeds realised from the interest rate swap reset. through the period. At a minimum, Chorus aims to maintain 50 percent of its debt The weighted effective interest rate on debt has increased due obligations at a fixed rate of interest. It has fully hedged the foreign to Moody’s Investor Services rating downgrade (as a consequence exchange exposure on the EMTN with cross currency interest rate of the Commission’s initial benchmarked UBA decision) and the swaps. The floating interest on these derivatives has been hedged impact of the December 2013 reset of interest rate swaps (with using interest rate swap instruments. The exposure to floating rate a face value of $676 million and fair value of $31 million) to the interest on the syndicated bank facility has been reduced using prevailing market interest rates (4.89% compared to 3.99% prior interest rate swaps. to the transaction). These transactions realised $30 million of cash and generated a finance expense of $1 million, being the difference between the fair value of the swaps and the proceeds realised. The reset swaps hedge the same underlying exposure and risk profile but at a higher effective borrowing cost. The Euro Medium Term Notes (EMTN) hedging relationship was reset with a fair value of $49 million on 9 December 2013 following the close out of the interest rate swaps relating to the EMTN. During the current year, ineffectiveness of $19 million (30 June 2014: no ineffectiveness) flowed through interest expense. A further $30 million remains in the hedge reserve and will flow as ineffectiveness to interest expense in the income statement at some time over the life of the derivatives. It will be a non-cash charge. Neither the direction, nor the rate of the impact on the income statement can be predicted Other interest expense includes finance lease interest of $13 million (30 June 2014: $13 million), $2 million (30 June 2014: nil) of costs relating to the financing tax payments through Tax Management As at 30 June 2015, approximately 51% (30 June 2014: 68%) of the outstanding debt obligation was fixed through derivative or fixed rate debt arrangements, with a further 15% of the outstanding debt obligation being fixed in August 2015. Taxation The 2015 effective tax rate of 28% equates to the statutory rate of 28%. There are no material permanent differences between net earnings before income tax and what is, or will be, taxable for the year to 30 June 2015. Payments of provisional tax will continue to be paid via a tax financing arrangement with TMNZ as required. This means that Chorus notifies TMNZ that they wish to make ‘payment’ via tax financing, and TMNZ then arranges for a payment to the Inland Revenue Department on Chorus’ behalf. This effectively results in a delayed cash flow for Chorus. P. 21 P. 21 Annual ReportAnnual ReportCapital expenditure commentary Fibre Copper Common Gross capital expenditure 2015 $M 504 60 33 597 2014 $M 566 61 52 679 Gross capital expenditure for the year to 30 June 2015 was final cost modelled pricing process, slightly less than the February $597 million. This was below the guidance range of $625 million estimated fibre connections combined with lower than expected to $650 million (updated in February 2015 as a result of revised demand for ‘backbone’ network spend in multi-dwelling and rights connection capex estimates) and reflects ongoing restrictions of way premises. on discretionary spending as a result of delays in the regulatory Fibre capital expenditure UFB communal UFB connections and fibre layer 2 Fibre products and systems Other fibre connections and growth RBI Total fibre capital expenditure 2015 $M 236 140 26 63 39 504 2014 $M 338 74 38 63 53 566 Fibre capital expenditure includes spend specifically focussed to narrow its previous communal guidance for the UFB rollout from on fibre assets (layer 0 and layer 1 UFB network assets), spend $1.7 – $1.9 billion to $1.75 – $1.8 billion. to support the fibre network (IT delivering fibre products) and programmes largely focussed on fibre (UFB and RBI). Fibre capital expenditure represents about 85% of Chorus’ gross capital expenditure spend, mainly for the UFB and RBI programmes. UFB communal network deployment continued at full pace with build work completed for about 368,000 premises at 30 June 2015. This represented the addition of 107,000 premises with build complete during the year, or 1,000 premises ahead of target. There were 495,000 end-users able to be connected to the UFB network. UFB connections and layer 2 spend increased from $74 million at 30 June 2014 to $140 million for this year as the volume of fibre connections continued to grow in line with Chorus’ expanding UFB footprint and increasing uptake. Layer 2 equipment, such as Gigabit capable passive optical network ports and splitters, was installed ahead of demand as the UFB footprint grew. Installation processes and close co-ordination with retail service providers remain key areas of focus as Chorus continues to establish a sustainable framework for UFB connections, particularly The cost of the deployment of UFB communal network for the in the context of variable regional demand. At 30 June, Chorus had year was $236 million. This included $44 million spent on work about 68,000 connections within the areas where it had deployed in progress for communal network scheduled to be completed UFB. This represents about 6% of end-users within the Chorus in the following year, slightly higher than the $42 million in the planned UFB footprint by 2020. previous year. The average cost per premises connected for standard residential The average cost per premises passed was $2,134 for UFB premises premises and some non-standard single dwelling unit installations during the year ended 30 June 2015. This was below Chorus’ was $1,233, excluding the long run average cost of layer 2 equipment. guidance of an average cost of $2,150 to $2,400 for the year and This was within the expected range of $1,150 to $1,350 advised in is a consequence of the build programme shifting from more November following new service company agreements that provide expensive central business district areas into residential areas, for fixed pricing, varying according to specified deployment types. aerial deployment options becoming available (subject to access conditions) and the fixed price deployment contracts entered into with service companies in the middle of this financial year. These new fixed price deployment contracts with Visionstream and Downer (responsible for approximately 90% of Chorus’ UFB build areas) provide additional certainty on deployment costs through the remainder of the UFB deployment period. This enabled Chorus There is no change to Chorus’ 2011 total UFB programme view of an average cost of $900 – $1,100 real (circa $1,000 – $1,200 in 2015 dollars) average cost to connect standard residential end-user premises, inclusive of the long run average cost of layer 2 equipment. P. 22 P. 22 Annual ReportAnnual ReportA significant proportion of the UFB connections spend to Fibre products and systems spend reduced to $26 million as 30 June 2015 was incurred in providing ‘backbone’ network to Chorus concluded its major investment programme in fibre enable the connection of end-users located along rights of way or inventory systems to improve the ordering and provisioning in multi-dwelling units. This spend represents upfront investment process for fibre connections. as it ultimately enables multiple end-users in a building, or along a right of way, to connect to UFB. Capital expenditure of $63 million on other fibre connections and growth reflected demand for fibre connections in areas where UFB Chorus is able to recover some connection costs in instances has not yet been deployed, new ‘greenfield’ fibre subdivisions, fibre where the connection is ‘non-standard’ as defined by the UFB lifecycle investment and regional backhaul connections for retail contract with CFH. In November 2012 Chorus made $20 million service provider data traffic. Business and residential demand for of funding available to encourage fibre uptake with free installation new network has been affected by Chorus’ cost recovery approach for some non-standard residential connections. This was increased while it awaits the outcome of the regulatory final cost modelled to $28 million as part of a March 2014 package of improvements pricing review process. to the UFB initiative agreed with CFH. The period over which this funding will be available will depend on the volume and type of non-standard installations encountered. In Chorus’ assessment, with growing fibre uptake plus increasing deployment in rights of way and multi-dwelling units, Chorus’ non-standard installation fund is likely to expire at some point in 2016. Chorus and CFH are currently discussing opportunities to potentially extend the fund’s life as well as its optimal future scope. Copper capital expenditure Spend for the RBI rollout continued to reduce as the programme nears its conclusion in FY16. Chorus’ part in the initiative is delivering ahead of expectations with broadband uptake of about 85% and the total programme cost tracking towards the lower end of the $280 – $295 million range at 30 June 2015. Chorus expects to receive approximately $236 million in Government grant funding for the rollout (see the Contributions to capital expenditure section below). Network sustain Copper connections Copper layer 2 Product fixed Total copper capital expenditure 2015 $M 34 11 11 4 60 2014 $M 35 15 10 1 61 Copper capital expenditure was $60 million for the year, with Capital expenditure on copper connections occurs where there the slight decrease reflecting Chorus’ continuing focus on cash is demand for copper connections for residential or business management due to the prevailing regulatory uncertainty. end-users, such as infill housing or new buildings. Demand for Network sustain expenditure refers to capital expenditure where the network is being upgraded or network elements such as poles, cabinets and cables are replaced. This is typically where there is risk of network failure or degraded service for end-users and copper connections decreased during the period. This is attributed to the combined effect of some ‘new’ demand shifting to the UFB network and the dampening of demand because of Chorus’ current policy of cost recovery for new connections. network replacement is deemed more cost effective than reactive Copper layer 2 reflects investment in network electronics and maintenance. Requests to shift network for roadworks purposes equipment as a consequence of demand for broadband capacity continued to increase but the cost is largely recovered in ‘Crown and growth. This increased slightly as a result of increased Funding – other’. bandwidth demand, driven by growing online video consumption, necessitating Chorus’ investment in enhanced capacity at a small number of network locations. Capital expenditure on ‘Product fixed’ also increased as Chorus developed new commercial products, such as Boost VDSL. P. 23 P. 23 Annual ReportAnnual ReportCapital expenditure commentary (cont.) Common capital expenditure Information technology Building and engineering services Other Total common capital expenditure 2015 $M 19 13 1 33 2014 $M 35 12 5 52 Common capital expenditure was $33 million. This was a significant Contributions to capital expenditure reduction from $52 million in the prior year because of the deferral Chorus receives significant financing and contributions towards of further information technology projects to separate Chorus’ its gross capital expenditure each year. During the year to 30 June systems from Spark, pending the outcome of the regulatory pricing 2015, Chorus received contributions from the following sources: review, and completion of the standalone enterprise, business intelligence and desktop systems in 2014. Building and engineering services reflects the capital spent on growth and plant replacement (e.g. power and air conditioning) at Chorus exchanges, buildings and remote sites. Discretionary investment was significantly reduced during the period, but i) RBI funding: The Crown is contributing grant funding of about $236 million (excluding school lead-in contributions) towards Chorus’ layer 0 and layer 1 capital spend over the five-year rollout. The grant is payable on completion of build work and varies each year subject to the agreed build programme and the grantable network that is built. For the year ended 30 June 2015 this was offset by additional spending required for earthquake $22 million was recognised. strengthening of buildings. ii) Other: Chorus is able to recover the cost of other capital spend ‘Other’ includes items such as office accommodation and in certain circumstances. This includes replacing network equipment and the prior year included spend on post demerger damaged by third parties, or instances where central or local accommodation requirements. government authorities ask Chorus to relocate or rebuild existing network. A total of $5 million was recognised in the current year and is included as part of Crown funding given its modest size. Long term capital management Chorus’ principal sources of liquidity are operating cash flows, Chorus indicated in February 2015 that capital management external borrowing from established debt programmes such as initiatives would form part of Chorus’ approach to addressing the the EMTN and bank facilities and Crown funding for the UFB build very material reduction in revenues resulting from implementation as UFB milestones are completed. It also receives grants from the of the Commission’s initial pricing principle decision from Crown in relation to its RBI build programme. 1 December 2014. This has involved withdrawal of dividend The Chorus Board’s broader capital management objectives include maintaining an investment grade credit rating with headroom. In the longer term, the Board continues to consider guidance, changes to the CFH funding arrangements and committed bank facilities. Due to the delays in the Commission processes these initiatives are still required. a ‘BBB’ rating appropriate for a business like Chorus. At 30 June 2015, Chorus had a long term credit rating of BBB/ stable outlook by Standard & Poor’s (30 June 2014: BBB/negative) and Baa3/stable by Moody’s Investors Service (30 June 2014: Baa3/negative). P. 24 P. 24 Annual ReportAnnual ReportRegulation, legislation and litigation Significant developments in Chorus’ regulatory environment UCLL and SLU pricing during the year are set out below. This should be read in conjunction with previous disclosures which are available online at: www.chorus.co.nz/investor-centre. Chorus Open Access Deeds of Undertaking Chorus is bound by three open access deeds of undertaking (Deeds). The Copper, Fibre and Rural Broadband Initiative undertakings represent a series of legally binding obligations focused around the provision of services on a non-discriminatory or equivalent basis. Chorus submitted a transition plan to the Minister for Communications in late 2012 relating to the actions required to move to ending the sharing arrangements between Spark and Chorus, as required by the Deeds. Chorus provides annual updates to the plan, the most recent was provided in late 2014. Telecommunications Services Obligations and Levies The Telecommunications Services Obligations (TSO) is the regulatory mechanism by which universal service obligations for residential, local access and calling services are imposed and administered. Chorus is required to maintain lines and coverage obligations, and provide a voice input service. On 9 July 2013, the Government issued a discussion document on the TSO, as part of a scheduled review and Chorus made submissions. The timing for a formal update on the review from Government is unknown and there is no guarantee or certainty of the outcome. The terms, including price, for UCLL and SLU are currently regulated by the Commission. On 3 December 2012, the Commission issued a final decision on its benchmarking review of the price Chorus can charge for UCLL. The final averaged UCLL price of $23.52 represented a 3.8% reduction. The UCLL price is linked to a number of other Chorus services, meaning that the UCLFS and SLU prices, and some UBA prices, were impacted by the decision. Chorus applied to the Commission to review the UCLL price, using a final pricing principle of Total Service Long Run Incremental Cost (TSLRIC). The application was made on the basis that Chorus considered that the initial price set by the Commission by reference to benchmarking underestimates the TSLRIC of providing the UCLL in New Zealand. Spark, Vodafone, CallPlus and Kordia also made final pricing principle applications. In December 2014, the Commission issued a draft determination, with a proposed UCLL price of $28.22 and SLU price of $14.45. In July 2015, the Commission released a further draft determination, which proposed a glide path for pricing over a five-year period, which would be the equivalent of a constant price for UCLL of $27.59 and SLU of $10.84. The Commission expects to complete the final pricing principle process in December 2015. Unbundled Copper Low Frequency Service To meet TSO requirements, Chorus has made a technology neutral voice input service, baseband, available on a commercial The Telecommunications Development Levy (TDL) is an industry basis. The pricing of a subset of this service, UCLFS (a voice input levy of $50 million per year from FY10 and initially scheduled to reduce to $10 million each year from FY16. In May 2015, the service offered over the copper access network), is set at the averaged UCLL price as determined by the Commission. Because Government extended the TDL so that the levy will continue to be the UCLFS price is linked to the UCLL price, a new UCLFS price $50 million per year until FY19, reducing to $10 million each year of $23.52 per month applied from 3 December 2012 (previously thereafter, as part of its RBI extension policy. On 22 December 2014, the Commission determined that Chorus was liable for $11.5 million of the TDL for FY14. Chorus is also required to contribute towards the Commission’s costs through a Telecommunications Regulatory Levy (TRL). Chorus was determined to be liable for $1.1 million of the TRL for FY14. $24.46 per month). Any change to the UCLL price as a result of the final pricing principle process should flow through to the UCLFS price. The UCLFS price flows contractually to the baseband price. As noted above, the Commission expects to complete its reviews by December 2015. P. 25 P. 25 Annual ReportAnnual ReportRegulation, legislation and litigation (cont.) UBA pricing Regulatory framework review The terms, including price, for UBA are currently regulated by the Under amendments made to the Telecommunications Act to Commission. On 5 November 2013, the Commission issued an facilitate Chorus’ demerger, the Government is required to initial benchmarked decision on UBA pricing for a reduction in commence a review of the regulatory framework by 2016, with price from $21.46 to $10.92 per month based on benchmarking a particular focus on the framework to apply once the UFB build of pricing in two countries. The Commission’s initial benchmarked is complete in 2020. price of $10.92 applied from 1 December 2014. On 8 February 2013 the Government announced that it was Chorus applied to the Commission to review the UBA price, using bringing forward the regulatory review and on 7 August 2013 it a final pricing principle of TSLRIC. The application was made released a discussion paper proposing a phased approach – on the basis that Chorus considered that the initial price set by with an immediate focus on copper pricing. The Government the Commission by reference to benchmarking underestimates has indicated its intention to continue the review and is currently the TSLRIC of providing UBA in New Zealand. Spark, Vodafone, expected to issue a discussion paper in 2015. CallPlus and Orcon also made final pricing principle applications. In December 2014, the Commission issued a draft determination, with a proposed UBA price of $10.17. In July 2015, the Commission released a further draft determination, which proposed a glide path for pricing over a five-year period, which would be the equivalent of a constant UBA price of $10.84. The Commission expects to complete the final pricing principle process in December 2015. Consenting requirements On 9 June 2015 the Government issued a discussion paper proposing a range of options for optimising the consent process for rights of way and multi-dwelling units. The timing and outcome of any consequential law changes is not known. Other legislation In parallel with the Commission’s review process, Chorus asked the Chorus is subject to other legislative requirements such as the High Court to determine whether the Commission was correct in requirements of the Commerce Act 1986, Fair Trading Act 1986, law to rely on pricing from two countries when setting the initial as well as telecommunications codes. UBA price and whether s18(2A) of the Telecommunications Act was considered as intended. The High Court dismissed Chorus’ appeal. Chorus appealed that decision to the Court of Appeal. The Court of Appeal dismissed Chorus’ appeal. Commercial UBA variants On 14 May 2014, Chorus announced that it proposed to launch two new commercial UBA variants – Boost HD and Boost VDSL – that would have provided a line speed commitment to end-users. In accordance with the requirements of the UBA Standard Terms Determination (STD), Chorus gave notice to the Commission of the proposed Boost services. The Commission initiated a process to assess whether the Boost services are, or should be, covered by the existing STD. Chorus is also subject to the Telecommunications (Interception Capability and Security) Act 2013 (TICSA), which replaces the Telecommunications (Interception Capability) Act 2004. The TICSA has reduced Chorus’ obligations to provide lawful interception capability as Chorus is no longer required to pre-invest in lawful interception solutions for wholesale network services and infrastructure level services. However, the TICSA introduced new obligations on network operators to prevent, sufficiently mitigate or remove network security risks arising from public telecommunications networks. Chorus, like other network operators, is obliged to engage with the Government Communications Security Bureau where it might affect New Zealand’s national security and this has the potential to On 22 July 2014, the Commission announced that it had received drive significant compliance costs. a complaint that the changes Chorus proposed to make to the regulated UBA service in parallel to the Boost services were in breach of the STD. The Commission initiated an investigation. In October 2014, the Commission suspended the investigation following Chorus’ announcement that it had put some proposals Litigation Chorus has ongoing claims, investigations and inquiries, none of which are currently expected to have significant effect on the financial position or profitability of Chorus. on hold. In April 2015, the Commission ended its investigation. Chorus cannot reasonably estimate the adverse effect, if any, on The Commission has not offered any final views on the interpretation of the UBA STD or on when and whether commercial services may be offered. A review of the non-price terms of the UBA STD is expected. The timing and scope of the review is uncertain. Chorus if any of the outstanding claims or inquiries are ultimately resolved against Chorus’ interest. There can be no assurance that such cases will not have a significant effect on Chorus’ business, financial position, and results of operations or profitability. P. 26 P. 26 Annual ReportAnnual ReportAppendix one Non statutory measure: adjusted EBITDA This appendix provides a high level trend analysis of the adjusted EBITDA. It has been prepared on the basis of prevailing regulatory pricing. The initial benchmarked pricing changed on 1 December 2014 and for comparative purposes this appendix flows the pricing through both FY14 and FY15 as though the pricing had changed on 1 July 2013. In addition, FY14 has been adjusted for the non-recurring insurance proceeds and UCLFS backdating of transaction charges. The commentary included here is for information purposes only. Appendix one has not been audited. Summary Adjusted operating revenue Operating expenses Adjusted EBITDA ADJUSTED 2015 $M ADJUSTED 2014 $M 950 (404) 546 927 (409) 518 % 2.5 (1.2) 5.4 The table above shows comparable adjusted results for FY15 when compared to the adjusted results for FY14. The details of the items which have been adjusted will be discussed in further detail over the page. Adjusted FY15 has shown good revenue growth, with a slight reduction in expenses, resulting in a modest EBITDA increase. The result is underpinned by a comprehensive programme of revenue, operating expenses and capital expenditure initiatives. Adjusted operating revenue Basic copper Enhanced copper Fibre Value added network services Infrastructure Field services Other Total adjusted operating revenue ADJUSTED 2015 $M ADJUSTED 2014 $M 482 217 98 36 21 88 8 950 512 183 75 38 19 87 13 927 % (5.9) 18.6 30.7 (5.3) 10.5 1.1 (38.5) 2.5 Once prevailing regulatory pricing is flowed through both periods under review the ongoing trend of a decline in basic copper revenue emerges. As with previous periods a certain amount of this decline relates to the continued migration from basic copper to enhanced copper. In addition, there has been a steady migration of end-users from copper to fibre services throughout the year. There is now a price differential between basic copper (UBA) and VDSL / fibre, resulting in an uplift in average revenue per connection for all VDSL and fibre connections. Field services revenue has been adjusted to reflect the impact of the changes in UBA transaction charges (effectively showing the change in the transaction charges as if they occurred on 1 July 2013) and the impact of backdating the UCLFS transaction charges in FY14. Excluding this, field services revenue has increased as a result of cost recovery initiatives for greenfields subdivisions. All other revenue categories are unchanged, so no additional commentary is provided to that included in the main body of the management commentary. P. 27 P. 27 Annual ReportAnnual ReportAppendix one (cont.) Adjustments to the results Both the FY15 and FY14 results contain a number of balances that do not make them directly comparable in isolation. These adjusted balances have been removed from the balances described above so that a more direct comparison can be made. The adjustments made to the statutory balances are discussed below. Adjusted FY15 results Operating revenue Operating expenses EBITDA LESS: UBA AND UCLL PRICE CHANGE $M ADD: UBA TRANSACTION CHARGES $M (60) - (60) 4 - 4 2015 $M 1,006 (404) 602 ADJUSTED 2015 $M 950 (404) 546 Included in FY15 is the impact of the UBA and UCLL price change (flowing the impact of the price reduction through the first five months of the period) and reflecting the UBA transaction charges in the first five months of the period. Adjusted FY14 results Operating revenue Operating expenses EBITDA 2014 $M 1,058 (409) 649 LESS: INSURANCE PROCEEDS $M LESS: UBA AND UCLL PRICE CHANGE $M ADD: UCLFS $M ADD: UBA TRANSACTION CHARGES $M (2) - (2) (141) - (141) 3 - 3 9 - 9 ADJUSTED 2014 $M 927 (409) 518 FY14 has been adjusted to reflect the impact of the UBA and UCLL price change (flowing the impact of the price change through FY14) and reflecting the UBA transaction charges through the period. The backdating of the UCLFS price change and $2 million of insurance proceeds have been excluded from operating revenue. The UCLFS monthly charge price change (which occurred during FY14) has flowed consistently through FY14 and FY15. P. 28 Annual ReportFinancial Statements CONTENTS Independent auditor’s report Income statement Statement of comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the financial statements 30 31 31 32 33 34 36 P. 29 Annual ReportIndependent auditor’s report T O T H E S H A R E H O L D E R S O F C H O R U S L I M I T E D We have audited the accompanying consolidated financial statements of Chorus Limited and its subsidiary (‘’the group’’) on pages 31 to 60. The financial statements comprise the consolidated statement of financial position as at 30 June 2015, the consolidated income statement and consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Directors’ responsibility for the consolidated financial statements The directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with generally accepted accounting practice in New Zealand, the New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Our firm has also provided regulatory audit services, other assurance services and tax compliance services to the group. These matters have not impaired our independence as auditor of the group. The firm has no other relationship with, or interest in, the group. Opinion In our opinion, the consolidated financial statements on pages 31 to 60 comply with generally accepted accounting practice in New Zealand and present fairly, in all material respects, the consolidated financial position of Chorus Limited as at 30 June 2015 and its consolidated financial performance and cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards. Carrying value of assets We draw your attention to Pages 36 to 37 of the financial statements which explains that significant uncertainties exist in relation to future regulatory, legal and political outcomes that may impact the assessment of the carrying value of Chorus’ assets. Our opinion is not qualified in respect of this matter. 23 August 2015 Wellington P. 30 P. 30 Annual ReportAnnual ReportIncome statement F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 1 5 (DOLLARS IN MILLIONS) Operating revenue Operating expenses Earnings before interest, income tax, depreciation and amortisation Depreciation Amortisation Earnings before interest and income tax Finance income Finance expense Net earnings before income tax Income tax expense Net earnings for the year Earnings per share Basic earnings per share (dollars) Diluted earnings per share (dollars) 7 8 1 2 3 12 16 16 Statement of comprehensive income F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 1 5 (DOLLARS IN MILLIONS) Net earnings for the year Other comprehensive income Items that will be reclassified subsequently to income statement when specific conditions are met Ineffective portion of changes in fair value of cash flow hedges Effective portion of changes in fair value of cash flow hedges Amortisation of de-designated cash flow hedges transferred to income statement Other comprehensive income net of tax Total comprehensive income for the year net of tax The accompanying notes are an integral part of these financial statements NOTE 15 15 15 NOTES 2015 $M 2014 $M 1,006 1,058 (404) 602 (259) (65) 278 8 (159) 127 (36) 91 0.23 0.19 2015 $M 91 14 (16) (1) (3) 88 (409) 649 (259) (63) 327 8 (129) 206 (58) 148 0.38 0.31 2014 $M 148 - 2 (1) 1 149 P. 31 P. 31 Annual ReportAnnual ReportStatement of financial position A S AT 3 0 J U N E 2 0 1 5 (DOLLARS IN MILLIONS) Current assets Cash and call deposits Trade and other receivables Derivative financial instruments Finance lease receivable Total current assets Non-current assets Derivative financial instruments Trade and other receivables Software and other intangibles Network assets Total non-current assets Total assets Current liabilities Trade and other payables Income tax payable Derivative financial instruments Total current liabilities excluding Crown funding Current portion of Crown funding Total current liabilities Non-current liabilities Derivative financial instruments Finance lease payable Debt Deferred tax payable Total non-current liabilities excluding CFH securities and Crown funding CFH securities Crown funding Total non-current liabilities Total liabilities Equity Share capital Reserves Retained earnings Total equity NOTES 13 9 18 14 18 9 2 1 10 12 18 5 18 14 3 12 4 5 15 15 2015 $M 80 165 3 3 251 14 11 159 3,406 3,590 3,841 315 12 12 339 13 352 61 130 1,663 199 2,053 107 510 2,670 3,022 465 (3) 357 819 2014 $M 176 196 1 3 376 3 - 174 3,128 3,305 3,681 323 32 14 369 11 380 123 126 1,639 192 2,080 73 417 2,570 2,950 465 - 266 731 Total liabilities and equity 3,841 3,681 The accompanying notes are an integral part of these financial statements On behalf of the Board Jon Hartley, Interim chairman Authorised for issue on 23 August 2015 Mark Ratcliffe, Managing Director P. 32 P. 32 Annual ReportAnnual ReportStatement of changes in equity F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 1 5 (DOLLARS IN MILLIONS) Balance at 1 July 2013 Comprehensive income Net earnings for the year Other comprehensive income Amortisation of de-designated cash flow hedges transferred to income statement Effective portion of changes in fair value of cash flow hedges Total comprehensive income Contributions by and (distributions to) owners: Dividends Supplementary dividends Tax credit on supplementary dividends Dividend reinvestment plan Total transactions with owners Balance at 30 June 2014 Comprehensive income Net earnings for the year Other comprehensive income Ineffective portion of changes in fair value of cash flow hedges Effective portion of changes in fair value of cash flow hedges Amortisation of de-designated cash flow hedges transferred to income statement Total comprehensive income Balance at 30 June 2015 NOTE SHARE CAPITAL $M 447 15 15 15 15 15 15 15 - - - - - - - 18 18 465 - - - - - 465 The accompanying notes are an integral part of these financial statements RETAINED EARNINGS $M CASH FLOW HEDGE RESERVE $M 178 148 - - 148 (60) (5) 5 - (60) 266 91 - - - 91 357 (1) - (1) 2 1 - - - - - - - 14 (16) (1) (3) (3) TOTAL $M 624 148 (1) 2 149 (60) (5) 5 18 (42) 731 91 14 (16) (1) 88 819 P. 33 P. 33 Annual ReportAnnual ReportStatement of cash flows F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 1 5 (DOLLARS IN MILLIONS) Cash flows from operating activities Cash was provided from/(applied to): Cash received from customers Finance income Payment to suppliers and employees Taxation paid Interest paid Net cash flows from operating activities Cash flows applied to investing activities Cash was applied to: Purchase of network assets and software and intangible assets Capitalised interest paid Net cash flows applied to investing activities Cash flows from financing activities Cash was provided from/(applied to): Net proceeds from/(repayment of) finance leases Crown funding (including CFH securities) Proceeds from debt Repayment of debt Settlement of derivatives Dividends paid Net cash flows from financing activities Net cash flow Cash at the beginning of the year Cash at the end of the year The accompanying notes are an integral part of these financial statements NOTES 2015 $M 2014 $M 1,006 4 (414) (48) (132) 416 (589) (6) (595) 3 155 63 (138) - - 83 (96) 176 80 1,173 5 (406) (30) (120) 622 (690) (7) (697) (3) 241 450 (505) 30 (42) 171 96 80 176 12 18 13 P. 34 P. 34 Annual ReportAnnual ReportStatement of cash flows (cont.) R E C O N C I L I AT I O N O F N E T E A R N I N G S T O N E T C A S H F L O W S F R O M O P E R AT I N G A C T I V I T I E S (DOLLARS IN MILLIONS) Net earnings for the year Adjustment for: Depreciation charged on network assets Amortisation of Crown funding Amortisation of software and other intangible assets Deferred income tax Ineffective portion of changes in fair value of cash flow hedges (pre-tax) Other Change in current assets and liabilities: Change in trade and other receivables Change in trade and other payables Change in income tax (receivable)/payable Net cash flows from operating activities The accompanying notes are an integral part of these financial statements 2015 $M 91 271 (12) 65 8 19 2 444 (16) 8 (20) (28) 416 2014 $M 148 267 (8) 63 1 - 8 479 92 24 27 143 622 P. 35 P. 35 Annual ReportAnnual ReportNotes to the financial statements Reporting entity and statutory base unrealised gains and losses resulting from intra-group transactions Chorus Limited is a profit-orientated company registered in and dividends are eliminated in full. New Zealand under the Companies Act 1993 and a FMC Reporting Entity for the purposes of the Financial Markets Conduct Act 2013. Chorus Limited was established as a standalone, publicly listed entity on 1 December 2011, upon its demerger from Telecom Corporation of New Zealand Limited (Telecom), now known as Accounting policies Accounting policies that summarise the measurement basis used and are relevant to the understanding of the financial statements are provided throughout the accompanying notes. Spark New Zealand Limited (Spark). The demerger was a condition The accounting policies adopted have been applied consistently of an agreement with Crown Fibre Holdings Limited (CFH) to enable Chorus Limited to be the Crown’s Ultra-Fast Broadband throughout the periods presented in these financial statements. Certain comparative information has been reclassified to conform (UFB) provider in 24 regions, representing approximately 70% of with the current year’s presentation. the UFB coverage area. Chorus Limited is listed and its ordinary shares quoted on the NZX main board equity security market (NZX Main Board) and on the Australian Stock Exchange (ASX). American Depositary Shares, each representing five ordinary shares (and evidenced by American Depositary Receipts), are not listed but are traded on the over-the-counter market in the United States. There are no new standards, amendments or interpretations that have been issued and effective, that are expected to have a significant impact on the Group. Prior period reclassifications On 1 July 2014 Chorus migrated its general ledger from Spark’s The financial statements presented are those of Chorus Limited shared SAP finance system to its own independent SAP finance (the Company, Parent or the Parent Company) together with its system. As part of this migration the general ledger hierarchy subsidiaries (the Chorus Group, Group or Chorus). Nature of operations Chorus is New Zealand’s largest fixed line communications infrastructure services provider. Chorus maintains and builds a was reviewed and certain expenditure items and assets were re-presented in the financial statements. Specifically for the year ended 30 June 2014 $7 million of labour recoveries were reclassified from other costs to labour costs and $8 million net book value of assets previously classified as network assets were network predominantly made up of local telephone exchanges, reclassified to software and other intangibles. cabinets, copper and fibre cables. Basis of preparation These financial statements have been prepared in accordance with generally accepted accounting practice in New Zealand (NZ GAAP) and the Financial Reporting Act 2013. They comply Critical accounting estimates and assumptions In preparing the financial statements management has made estimates and assumptions about the future that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses with New Zealand equivalents to International Financial Reporting during the period. Actual results could differ from those estimates. Standards (NZ IFRS) as appropriate for profit-oriented entities, and with International Financial Reporting Standards. Estimates and assumptions are regularly evaluated and are based on historical experience and other factors, including expectations These financial statements are expressed in New Zealand dollars, of future events that are believed to be reasonable under the which is Chorus’ functional currency. References in these financial circumstances. The principal areas of judgement in preparing these statements to ‘$’,‘NZ$’ and ‘NZD’ are to New Zealand dollars, financial statements are set out below. references to ‘USD’ are to US dollars, references to ‘AUD’ are to Australian dollars, references to ‘EUR’ are to Euros and references to ‘GBP’ are to pounds sterling. All financial information has been rounded to the nearest million, unless otherwise stated. The measurement basis adopted in the preparation of these financial statements is historical cost, modified by the revaluation of financial instruments as identified in the specific accounting policies below and the accompanying notes. Basis of consolidation Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the Parent Company, using consistent accounting policies. All intra-group balances, transactions, Network assets (note 1) Assessing the appropriateness of useful life and residual value estimates of network assets requires a number of factors to be considered such as the physical condition of the asset, expected period of use of the asset by Chorus, technological advances, regulation and expected disposal proceeds from the future sale of the asset. The regulatory environment is currently having a significant impact on the operating environment of Chorus, including its future cash flows. The initial benchmarked price for the copper broadband service (UBA) is priced at a level substantially below previous pricing levels which came into effect from 1 December 2014. The initial benchmarked price for the unbundled copper local loop (UCLL) service are subject to final cost model processes. In addition to this the Government is expected to continue a review of the regulatory framework (regulatory review). P. 36 P. 36 Annual ReportAnnual ReportContinuing uncertainty in the existing copper regulatory regime with construction, interest costs that are attributable to the asset, and uncertainty on the regulatory environment post 2020 are resource management consent costs and attributable overheads. causing challenges on the estimates of Chorus’ future cash flows for a number of reasons. These include: • Chorus has applied to the Commerce Commission (the Commission) for a final pricing principle review of its initial benchmarked 2013 UBA decision and initial benchmarked 2012 UCLL decision which means the Commission is undertaking cost modelling to determine the price of those new services rather than benchmarking prices against those in other countries. Two draft decisions have indicated the initial benchmarked prices were too low. A final decision is expected Repairs and maintenance costs are recognised in the income statement as incurred. Estimating useful lives and residual values of network assets The determination of the appropriate useful life for a particular asset requires management to make judgements about, amongst other factors, the expected period of service potential of the asset, the likelihood of the asset becoming obsolete as a result of technological advances, the likelihood of Chorus ceasing to use the asset in its business operations and the effect of government regulation. by December 2015. The outcome is unknown until that time; Where an item of network assets comprises major components • Chorus continues to develop options available to it, and within having different useful lives, the components are accounted for its own control, to mitigate the impact of the Commission’s as separate items of network assets. benchmarked pricing; Where the remaining useful lives or recoverable values have • Other regulatory processes under the existing framework diminished due to technological, regulatory or market condition may open and the outcomes or potential implications are changes, depreciation is accelerated. The asset’s residual values, unknown; and • The potential regulatory framework for post 2020 will not be known specifically until after the conclusion of the regulatory review. The outcome and timing of this review is unknown. While the Directors believe that the carrying value of Chorus’ assets remain appropriate, adverse outcomes in relation to any of these uncertainties could have a significant impact on the carrying value of Chorus’ assets. CFH securities (note 4) Determining the fair value of the CFH securities requires assumptions on expected future cash flows and discount rates based on future long dated swap curves. Crown funding (note 5) useful lives, and methods of depreciation are reviewed annually and adjusted prospectively, if appropriate. Depreciation is charged on a straight-line basis to write down the cost of network assets to its estimated residual value over its estimated useful life. Estimated useful lives are as follows: Copper cables Fibre cables Ducts and manholes Cabinets Property Network electronics Other 10-30 years 20 years 50 years 5-14 years 5-50 years 2-15 years 2-10 years Chorus must exercise judgement when recognising Crown Other network assets include motor vehicles, network funding to determine if conditions of the funding contract have management and administration systems and radio infrastructure. been satisfied. This judgement will be based on the facts and circumstances that are evident for each contract at the time of preparing the financial statements. Any future adverse impacts arising when assessing the carrying value or lives of Chorus’ network assets could lead to future impairment losses or increases in depreciation charges that could Leases (note 14) affect future earnings. Determining whether a lease agreement is a finance lease or operating lease requires judgement as to whether the agreement transfers substantially all the risks and rewards of ownership to Chorus. Financial risk management (note 19) Credit valuations have been adjusted to reflect credit risk as required by NZ IFRS 13: Fair Value Measurement. The effect of credit risk is quantified using an expected future exposure methodology where credit default swap prices are used to represent the probability of default. Note 1 – Network assets In the statement of financial position, network assets are stated at cost less accumulated depreciation and any accumulated impairment losses. The cost of additions to network assets and work in progress constructed by Chorus includes the cost of all materials used in construction, direct labour costs specifically associated An item of network assets and any significant part is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Where network assets are disposed of, the profit or loss recognised in the income statement is calculated as the difference between the sale price and the carrying value of the asset. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Land and work in progress are not depreciated. P. 37 P. 37 Annual ReportAnnual ReportNote 1 – Network assets (cont.) AS AT 30 JUNE 2015 Cost COPPER CABLES $M FIBRE CABLES $M DUCTS AND MANHOLES $M CABINETS $M PROPERTY $M NETWORK ELECTRONICS $M OTHER $M WORK IN PROGRESS $M TOTAL $M Balance as at 1 July 2014 2,307 956 1,427 444 507 1,519 4 Additions Other Disposals Transfers from work in progress - - - - - - - - - - - - 26 180 263 41 Balance as at 30 June 2015 2,333 1,136 1,690 485 Accumulated depreciation Balance as at 1 July 2014 (1,716) (278) Depreciation Disposals Balance as at 30 June 2015 (1,774) Net carrying amount 559 (58) (50) - - (328) 808 (410) (31) - (441) 1,249 (234) (36) - (270) 215 - - - 14 521 (215) (17) - (232) 289 - - (1) 41 1,559 (1,284) (78) 1 (1,361) 198 - - - - 4 (2) (1) - (3) 1 103 547 2 - (565) 7,267 547 2 (1) - 87 7,815 - - - - (4,139) (271) 1 (4,409) 87 3,406 AS AT 30 JUNE 2014 Cost COPPER CABLES $M FIBRE CABLES $M DUCTS AND MANHOLES $M CABINETS $M PROPERTY $M NETWORK ELECTRONICS $M OTHER $M WORK IN PROGRESS $M TOTAL $M Balance as at 1 July 2013 2,258 758 1,174 420 530 1,502 15 95 6,752 - - (20) - 9 4 (16) (6) 20 (2) 2 607 607 1 - - (600) 1 (93) - - 103 7,267 - - - - (3,964) (267) 92 (4,139) 103 3,128 Additions Other Disposals Transfers - - - - - - (1) 1 - - - - - - - - Transfers from work in progress 49 198 253 24 - - (43) 1 19 - - (29) (2) 48 Balance as at 30 June 2014 2,307 956 1,427 444 507 1,519 Accumulated depreciation Balance as at 1 July 2013 (1,653) (240) (63) (38) - - (278) 678 (388) (22) - (410) 1,017 (199) (35) - (234) 210 (242) (16) 43 (215) 292 (1,226) (87) 29 (1,284) 235 Depreciation Disposals Balance as at 30 June 2014 (1,716) Net carrying amount 591 P. 38 P. 38 Annual ReportAnnual ReportNote 1 – Network assets (cont.) There are no restrictions on Chorus network assets or any network assets pledged as securities for liabilities. At 30 June 2015 the contractual commitment for acquisition and construction of network assets was $448 million (30 June 2014: $17 million). Depreciation Depreciation charged on network assets Less: Crown funding – Ultra-Fast Broadband Crown funding – Rural Broadband Initiative Crown funding – Other Total depreciation 2015 $M 271 (6) (4) (2) 259 2014 $M 267 (3) (3) (2) 259 Chorus receives funding from the Crown to finance the capital The recoverable amount is the greater of an asset’s value in use expenditure associated with the development of the Ultra-Fast and fair value less costs to sell. Chorus’ assets do not generate Broadband network, rural broadband services and other services. independent cash flows and are therefore assessed from a single The contract for Ultra-Fast Broadband is agreed between the cash-generating unit perspective. In assessing the recoverable Parent and Crown Fibre Holdings. The Parent receives the Crown amount, the estimates of future cash flows are discounted to their funding directly, however the construction of the network assets net present value using a discount rate that reflects current market is carried out by Chorus New Zealand Limited (subsidiary). Funding assessments of the time value of money and the risks specific to is offset against depreciation over the life of the assets the funding the business. is used to construct. During the year ended 30 June 2015 there were no indicators Refer to note 5 for information on Crown funding. of impairment so no additional work was performed. During the Property Exchanges Chorus has leased property exchange space owned by Spark subject to finance lease arrangements. These have been included in Chorus’ network assets under the property category. year ended 30 June 2014 there was an indicator of impairment and additional work was performed. No impairment losses were recognised on assets, software and other intangibles during the year ended 30 June 2014. As at 30 June 2015 the property exchange assets capitalised Capitalised interest under a finance lease had a cost of $157 million (30 June 2014: Finance costs are capitalised on qualifying items of network assets $157 million) together with accumulated depreciation of $16 million and software assets at an annualised rate of 6.50% (30 June 2014: 6.00%). Interest is capitalised over the period required to complete the assets and prepare them for their intended use. In the current year finance costs totalling $6 million (30 June 2014: $7 million) have been capitalised against network assets and software assets. (30 June 2014: $12 million). Network electronics Chorus has joint arrangements for use of certain network electronics assets with Spark. The equipment used by Chorus is included in the network electronics category. As at 30 June 2015 the equipment capitalised had a cost of $16 million (30 June 2014: $16 million) together with accumulated depreciation of $14 million (30 June 2014: $12 million). Impairment The carrying amounts of non-financial assets including network assets, software and other intangibles are reviewed at the end of each reporting period for any indicators of impairment. If any such indication exists, the recoverable amount of the asset is estimated. An impairment loss is recognised in earnings whenever the carrying amount of an asset exceeds its estimated recoverable amount. Should the conditions that gave rise to the impairment loss no longer exist, and the assets are no longer considered to be impaired, a reversal of an impairment loss would be recognised immediately in earnings. P. 39 P. 39 Annual ReportAnnual Report Note 2 – Software and other intangibles Software and other intangible assets are initially measured at cost. The direct costs associated with the development of network and business software for internal use are capitalised where project success is probable and the capitalisation criteria is met. Following initial recognition, software and other intangible assets are stated at cost less accumulated amortisation and impairment losses. Software and other intangible assets with a finite life are amortised from the date the asset is ready for use on a straight-line basis over its estimated useful life which is as follows: Software Other intangibles 2-8 years 6-20 years At each reporting date, Chorus reviews the carrying amounts of its software and other intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. For impairment policy and process refer to note 1. Where estimated useful lives or recoverable values have diminished due to technological change or market conditions, amortisation is accelerated. There are no restrictions on Chorus software and other intangible assets or any software and other intangible assets pledged as securities for liabilities. At 30 June 2015 the contractual commitment for acquisition of software and other intangible assets was $4 million (30 June 2014: $11 million). Other intangibles mainly consist of land easements. SOFTWARE $M OTHER INTANGIBLES $M WORK IN PROGRESS $M 467 - 86 553 (344) (65) (409) 144 6 - - 6 (1) - (1) 5 46 50 (86) 10 - - - 10 SOFTWARE $M OTHER INTANGIBLES $M WORK IN PROGRESS $M 431 - 5 (21) 52 467 (301) (63) 20 (344) 123 6 - - - - 6 (1) - - (1) 5 26 72 - - (52) 46 - - - - 46 TOTAL $M 519 50 - 569 (345) (65) (410) 159 TOTAL $M 463 72 5 (21) - 519 (302) (63) 20 (345) 174 AS AT 30 JUNE 2015 Cost Balance as at 1 July 2014 Additions Transfers from work in progress Balance as at 30 June 2015 Accumulated amortisation Balance as at 1 July 2014 Amortisation Balance as at 30 June 2015 Net carrying amount AS AT 30 JUNE 2014 Cost Balance as at 1 July 2013 Additions Other Disposals Transfers from work in progress Balance as at 30 June 2014 Accumulated amortisation Balance as at 1 July 2013 Amortisation Disposals Balance as at 30 June 2014 Net carrying amount P. 40 P. 40 Annual ReportAnnual ReportNote 2 – Software and other intangibles (cont.) assets, as well as a liability for the future payments due, similar to a Shared systems and other cost movement Chorus shares a number of Information Technology (IT) systems with Spark, with some systems owned by Chorus and some owned by Spark. Due to the terms of the governance framework in place, these systems are deemed to be jointly controlled assets, as defined in NZ IFRS 11: Joint Arrangements. For assets that it does not own, Chorus recognises its share of the jointly controlled finance lease. For assets that it does own, Chorus derecognises the share of the asset used by Spark, as well as recognising a receivable for the future receipts due. The other cost movement in 2014 of $5 million relates to a reassessment of the extent of Spark’s use of Chorus owned assets during the year. As at 30 June 2015 Chorus recognised jointly controlled system assets owned by Spark with a net book value in Chorus financial statements of $1 million (30 June 2014: $2 million). Note 3 – Debt Debt is initially measured at fair value, less any transaction costs Debt is included in non-current liabilities except for debt with that are directly attributable to the issue of the instruments. Debt maturities less than 12 months from the reporting date, which are is subsequently measured at amortised cost using the effective classified as current liabilities. Syndicated bank facility A Syndicated bank facility B Syndicated bank facility Euro medium term notes Less: syndicated loans facility fee Current Non-current interest method. The weighted effective interest rate on debt including the effect of derivative financial instruments was 6.90% (30 June 2014: 6.28%). DUE DATE Jul 2016 Nov 2017 May 2019 Apr 2020 2015 $M 450 365 250 603 (5) 1,663 - 1,663 2014 $M 500 390 250 504 (5) 1,639 - 1,639 Syndicated bank facilities The syndicated bank facilities are held with bank and institutional As at 30 June 2015 Chorus had in place $1,500 million committed counterparties rated -A to AAA, based on rating agency Standard syndicated bank facilities on market standard terms and conditions & Poor’s ratings. In July 2014 Chorus extended the maturity of (30 June 2014: $1,600 million). The amount of undrawn syndicated syndicated bank facility A from November 2015 to July 2016. bank facilities that is available for future operating activities is $435 million (30 June 2014: $460 million). However, subject to an agreement with its bank lenders, Chorus has agreed, among other things, to limit total drawings across all committed bank facilities to $1.2 billion until outcomes from the Commission’s final pricing principle process are known. This agreement means that there Chorus utilises hedging instruments to manage the interest rate risk associated with the syndicated bank facilities. The Group manages interest rate exposure within Board approved parameters set out in the treasury policy. The carrying value of syndicated bank facilities approximates their is $135 million available under bank facilities for immediate use. fair value. Euro Medium Term Notes (EMTN) FACE VALUE GBP 260 million INTEREST RATE 6.75% 2015 $M 603 2014 $M 504 Chorus has in place cross currency interest rate swaps to hedge The following table reconciles EMTN at hedged rates to EMTN the foreign currency exposure to the EMTN. The cross currency at spot rates as reported under IFRS. EMTN at hedged rates is a interest rate swaps entitle Chorus to receive GBP principal and GBP non-GAAP measure and is not defined by NZ IFRS. fixed coupon payments for NZD principal and NZD floating interest payments. The floating interest rate exposure on the NZD interest payments has been hedged using interest rate swaps. P. 41 P. 41 Annual ReportAnnual ReportNote 3 – Debt (cont.) EMTN Impact of hedged rates used EMTN at hedged rates 2015 $M 603 74 677 2014 $M 504 173 677 The fair value of EMTN, calculated based on the present value $552 million) compared to a carrying value of $603 million of future principal and interest cash flows, discounted at market (30 June 2014: $504 million). This fair value has been determined interest rates at balance date, was $690 million (30 June 2014: using Level 2 of the fair value hierarchy as described in note 19. Schedule of maturities Current Due 1 to 2 years Due 2 to 3 years Due 3 to 4 years Due 4 to 5 years Due over 5 years Total due after one year Less: syndicated loans facility fee 2015 $M - 450 365 250 603 - 1,668 (5) 1,663 2014 $M - 500 - 390 250 504 1,644 (5) 1,639 None of Chorus’ debt has been secured against assets. However, Chorus New Zealand Limited (subsidiary) has provided a guarantee there are financial covenants and event of default triggers, as to the lenders in respect of the Chorus Limited syndicated bank defined in the various debt agreements. During the current year facilities and EMTN. Chorus fully complied with the requirements set out in its financing agreements (30 June 2014: full compliance). Refer to note 19 for information on financial risk management. Finance expense Interest on syndicated bank facility Interest on EMTN Ineffective portion of changes in fair value of cash flow hedges (pre-tax) Other interest expense Capitalised interest Total finance expense excluding CFH securities CFH securities (notional interest) Total finance expense 2015 $M 68 53 19 19 (6) 153 6 159 2014 $M 64 49 - 20 (7) 126 3 129 Other interest expense includes $13 million finance lease interest The EMTN hedging relationship was reset with a fair value of expense (30 June 2014: $13 million), $2 million of costs relating $49 million on 9 December 2013 following the close out of the to the financing of tax payments through Tax Management interest rate swaps relating to the EMTN. During the current year New Zealand (TMNZ) (30 June 2014: nil) and $3 million ineffectiveness of $19 million (30 June 2014: no ineffectiveness) (30 June 2014: $2 million) amortisation arising from the flowed through interest expense. A further $30 million remains difference between fair value and proceeds realised from the in the hedge reserve and will flow as ineffectiveness to interest swaps reset (refer to note 18). expense in the income statement at some time over the life of the derivatives. It will be a non-cash charge. Neither the direction, nor the rate of the impact on the income statement can be predicted. P. 42 P. 42 Annual ReportAnnual ReportNote 4 – CFH securities Chorus receives funding from the Crown to finance construction costs associated with the development of the UFB network. Chorus receives funding at a rate of $1,118 for every premises passed (as certified by CFH), in return Chorus issues CFH equity securities, CFH debt securities and CFH warrants. The equity and debt securities issued by Chorus have an issue price of $1 and are issued on a 50:50 basis. For each premises passed, $559 of equity securities and $559 of debt securities are issued by Chorus for which Chorus receives $1,118 funding in return. CFH warrants are issued for nil value. The total committed funding available for Chorus over the period of UFB network construction is expected to be $929 million. The CFH equity and debt securities are recognised initially at fair value plus any directly attributable transaction costs. Subsequently they are measured at amortised cost using the effective interest method. The fair value is derived by discounting the $559 of equity securities and $559 of debt securities per premises passed by the effective interest rate based on market rates. The difference between funding received ($1,118 per premises passed) and the fair value of the securities is recognised as Crown funding. Over time, the CFH debt and equity securities increase to face value and the Crown funding is released against depreciation and reduces to nil. CFH equity securities CFH equity securities are a class of non-interest bearing security that carry no right to vote at meetings of holders of Chorus ordinary shares, but entitle the holder to a preferential right to repayment on liquidation and additional rights that relate to Chorus’ performance under its construction contract with CFH. Dividends will become payable on a portion of the CFH equity securities from 2025 onwards, with the portion of CFH equity securities that attract dividends increasing over time. A greater portion of CFH equity securities attract dividends if the proportion of premises with a fibre connection within Chorus’ coverage area at 30 June 2020 does not exceed 20%. The dividend rate will be equal to the New Zealand 180-day bank bill rate plus a margin of 6%. CFH equity instruments can be settled by issuing Chorus shares valued at a 5% discount to the 20-day volume weighted average price for Chorus shares traded in ordinary trading on the NZX Main Board. After this, the liability component is measured at amortised cost using the effective interest method and the Crown funding is amortised to depreciation on a systematic basis over the useful lives of the relevant UFB assets. CFH debt securities CFH debt securities are unsecured, non-interest bearing and carry no voting rights at meetings of holders of Chorus ordinary shares. Chorus is required to redeem the CFH debt securities in tranches from 2025 to 2036 (at the latest) by repaying the face value to CFH. An accelerated repayment schedule applies if the proportion of premises with a fibre connection within Chorus’ coverage area at 30 June 2020 does not exceed 20%. The CFH debt securities are treated as a financial liability with a Crown funding component due to the instrument including an interest free loan from a government entity. On initial recognition the difference between the face value of the CFH debt securities and their fair value (calculated using market inputs) is recorded as Crown funding. After this the liability component is measured at amortised cost using the effective interest method and the Crown funding is amortised to depreciation on a systematic basis over the useful lives of the relevant UFB assets. The principal amount of CFH debt securities consists of a senior portion and a subordinated portion. The senior portion ranks equally with all other unsecured, unsubordinated creditors of Chorus, and has the benefit of any negative pledge covenant that may be contained in any of Chorus’ debt arrangements. The subordinated portion ranks above ordinary shares of Chorus. The initial value of the senior portion is the present value (using a discount rate of 8.5%) of the sum repayable on the CFH debt securities, and the initial subordinated portion will be the difference between the issue price of the CFH debt security and the value of the senior portion. CFH warrants Chorus issues CFH warrants to CFH for nil consideration along with each tranche of CFH equity securities. Each CFH warrant gives CFH the right, on a specified exercise date, to purchase at a set strike price a Chorus share to be issued by Chorus. A CFH warrant will therefore be ‘in the money’ to the extent that the price that CFH can realise for the Chorus share exceeds the price paid to exercise The CFH equity securities are treated as a compound financial the CFH warrant. The strike price for a CFH warrant is based on a instrument with a Crown funding component due to the total shareholder return of 16% per annum on Chorus shares over instrument including an interest free loan from a government the period December 2011 to June 2036. Therefore, a holder of entity. On initial recognition, the fair value of the liability a CFH warrant is only likely to exercise the CFH warrant if total component of the compound instrument is calculated using shareholder return on Chorus shares has exceeded 16% per annum market inputs with no residual amounts allocated to equity. over the issue date period from June 2025 to June 2036. Until the liability component of the compound instrument expires the CFH equity securities are required to be disclosed as a liability. The difference between the face value of the CFH equity securities and the fair value of the liability component is then recorded as Crown funding. At balance date Chorus had issued in total 10,987,036 warrants which had a fair value and carrying value that approximated zero (30 June 2014: 7,261,722 warrants issued). The number of premises with fibre connections made by 30 June 2020 impacts the number of warrants that could be exercised. Should the number of premises with fibre connections at 30 June 2020 exceed 20% then the number of warrants that would be able to be exercised is 4,722,349 (30 June 2014: 3,124,672). P. 43 P. 43 Annual ReportAnnual ReportNote 4 – CFH securities (cont.) At balance date the component parts of debt and equity instruments including notional interest were: Fair value on initial recognition: Balance as at 1 July Additional securities recognised at fair value Balance as at 30 June Accumulated notional interest: Balance as at 1 July Current year notional interest Balance as at 30 June Total CFH securities 2015 2014 CFH DEBT SECURITIES $M CFH EQUITY SECURITIES $M TOTAL CFH SECURITIES $M CFH DEBT SECURITIES $M CFH EQUITY SECURITIES $M TOTAL CFH SECURITIES $M 43 17 60 3 3 6 66 26 11 37 1 3 4 41 69 28 97 4 6 10 107 19 24 43 1 2 3 46 10 16 26 - 1 1 27 29 40 69 1 3 4 73 Refer to note 21 for further information on these securities. Discount rate The fair value of CFH debt securities at balance date was $63 million (30 June 2014: $48 million) compared to a carrying value of $66 million (30 June 2014: $46 million). The fair value of CFH equity securities at balance date was $41 million (30 June 2014: $33 million) compared to a carrying value of $41 million (30 June 2014: $27 million). The fair value has been calculated using discount rates from market rates at balance date and using Level 2 of the fair value hierarchy as described in note 19. Key assumptions Although Chorus believes that the estimate of the liability components of the CFH securities on initial recognition is appropriate, the use of different methodologies or assumptions could lead to different measurements of these component On initial recognition, the discount rate between 8.86% to 11.61% (30 June 2014: 8.88% to 10.98%) for the CFH equity securities and 5.98% to 8.14% (30 June 2014: 6.18% to 7.65%) for the CFH debt securities used to discount the expected cash flows is based on long dated New Zealand swap curves. The swap rates were adjusted for Chorus specific credit spreads (based on market observed credit spreads for debt issued with similar credit ratings and tenure). The discount rate on the CFH equity securities is capped at Chorus’ estimated cost of (ordinary) equity. Expected cash flows Timing of principal repayments and dividend cash flows has been based on forecasts that reflect economically rational outcomes given the terms of the CFH debt and equity securities. parts. The liability components of the CFH securities have been Repayment dates have been based on an estimate that the calculated using expected cash flows discounted at risk-adjusted proportion of premises with a fibre connection within Chorus’ discount rates. As the number of CFH securities expected to be coverage area will exceed 20% at 30 June 2020. issued increases over time the potential impact of alternative methodologies and assumptions will become increasingly material. Key inputs and assumptions used in these calculations on initial recognition include: Sensitivity analysis Chorus considers that it is reasonably possible that future outcomes may be different from the assumptions applied and could require a material adjustment to the carrying amount of the component parts of the CFH securities. The number of premises with fibre connections assumed to have been made by 30 June 2020 is one of the key sensitivities implicit in the measurement of the CFH securities. A change in this proportion would result in the following impact on the financial statements: ACTUAL ALTERNATIVE OUTCOME IMPACT ON FINANCIAL STATEMENTS Increase CFH debt securities liability by $11.0 million (30 June 2014: $8.0 million) ≥ 20% < 20% Decrease Crown funding by $11.0 million (30 June 2014: $8.0 million) Increase CFH equity securities liability by $11.0 million (30 June 2014: $8.5 million) ≥ 20% < 20% Decrease Crown funding by $11.0 million (30 June 2014: $8.5 million) CFH debt securities Fibre premises connection proportion CFH equity securities Fibre premises connection proportion P. 44 P. 44 Annual ReportAnnual Report Note 5 – Crown funding Funding from the Crown is recognised at fair value where there is reasonable assurance that the funding is receivable and Chorus complies with all attached conditions. Crown funding is then recognised in earnings as a reduction to depreciation expense on a systematic basis over the useful life of the asset the funding was used to construct. Fair value on initial recognition: Balance as at 1 July Additional funding recognised at fair value Balance as at 30 June Accumulated amortisation of funding: Balance as at 1 July Current year amortisation Balance as at 30 June Total CFH securities Current Non-current 2015 2014 UFB $M RBI $M OTHER $M TOTAL $M UFB $M RBI $M OTHER $M TOTAL $M 224 80 304 (4) (6) (10) 294 189 22 211 (4) (4) (8) 203 28 5 33 (5) (2) (7) 26 441 107 548 (13) (12) (25) 523 13 510 104 120 224 (1) (3) (4) 108 81 189 (1) (3) (4) 220 185 21 7 28 (3) (2) (5) 23 233 208 441 (5) (8) (13) 428 11 417 Ultra-Fast Broadband Rural Broadband Initiative Chorus receives funding from the Crown to finance construction Chorus receives Crown funding from the Ministry of Business, costs associated with the development of the UFB network. During Innovation and Employment (MBIE) for capital expenditure incurred the year, Chorus has recognised funding for 92,189 premises under the Rural Broadband Initiative. passed (30 June 2014: 142,554) where user acceptance testing was complete at 30 June 2015. This brings the total premises passed at 30 June 2015 to approximately 353,000 (30 June 2014: 261,000). Chorus is entitled to claim payment for the grantable costs attributable for deploying the rural cabinets, links, schools, hospitals, health centres and mobile sites. The MBIE will pay Chorus Continued recognition of the full amount of the Crown funding is one dollar of funding for each dollar of grantable costs incurred contingent on certain material performance targets being met by by Chorus up to a maximum funding limit of around $236 million. Chorus. The most significant of these material performance targets In addition the MBIE reimburses Chorus for all capital expenditure relate to the number of premises passed by fibre optic cables by attributable to school lead-ins. key dates and compliance with certain specifications under user acceptance testing by CFH. Other Chorus receives funding towards the cost of relocation of communications equipment, school lead-ins and extending the network coverage to rural areas. Note 6 – Segmental reporting Chorus has determined that it operates in one segment An operating segment is a component of an entity that engages providing nationwide fixed line access network infrastructure. in business activities from which it may earn revenues and incur The determination is based on the reports reviewed by the Chief expenses and for which operating results are regularly reviewed by Executive Officer in assessing performance, allocating resources the entity’s chief operating decision maker and for which discrete and making strategic decisions. financial information is available. All of Chorus’ operations are provided in New Zealand, therefore Chorus’ Chief Executive Officer has been identified as the chief no geographic information is provided. operating decision maker for the purpose of segmental reporting. Two Chorus customers met the reporting threshold of 10 percent of Chorus’ operating revenue in the year to 30 June 2015. The total revenue for the year ending 30 June 2015 from one customer was $641 million (30 June 2014: $775 million) and from the other customer was $164 million (30 June 2014: $125 million). P. 45 P. 45 Annual ReportAnnual ReportNote 7 – Operating revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to Chorus and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable. Chorus recognises revenue as it provides services to its customers. Billings are generally made on a monthly basis. Unbilled revenues from the billing cycle date to the end of each month are recognised as revenue during the month the service is provided. Revenue is deferred in respect of the portion of fixed monthly charges that have been billed in advance. Revenue from installations and connections is recognised upon completion of the installation or connection. Basic copper Enhanced copper Fibre Value added network services Infrastructure Field services Other Total operating revenue Note 8 – Operating expenses Labour costs Provisioning Network maintenance Other network costs Information technology costs Rent and rates Property maintenance Electricity Insurance Consultants Regulatory levies Other 2015 $M 491 268 98 36 21 84 8 2014 $M 543 293 75 38 19 75 15 1,006 1,058 2015 $M 73 58 91 34 65 14 11 14 4 3 15 22 2014 $M 72 58 99 38 55 12 12 13 4 4 10 32 Total operating expenses 404 409 Labour costs participated in the scheme. Under the scheme, 185,168 shares Labour costs of $73 million (30 June 2014: $72 million) represents (30 June 2014: 106,984 shares) were purchased at an average price employee costs related to non-capital expenditure. Share based payments In September 2013 Chorus implemented an employee equity building scheme to better align employee and shareholder interests. A total of 652 employees (30 June 2014: 622 employees) of $1.76 per share (30 June 2014: $2.90 per share). The shares are held by a trustee and vest to participating employees after a three year period. As at 30 June 2015 the scheme holds 268,968 shares on behalf of 704 members. P. 46 P. 46 Annual ReportAnnual ReportNote 8 – Operating expenses (cont.) Charitable and political donations Pension contributions Included in labour costs are payments to the New Zealand Government Superannuation Fund of $357,000 (30 June 2014: $369,000) and contributions to KiwiSaver of $2,180,000 (30 June 2014: $1,878,000). At 30 June 2015 there were 25 employees in the New Zealand Government Superannuation Fund (30 June 2014: 27 employees) and 720 employees in KiwiSaver (30 June 2014: 676 employees). Chorus has no other obligations Other costs include charitable donations of $3,000 to Active Minds Aotearoa (30 June 2014: $25,000 to Wellington Free Ambulance). Chorus has not made any political donations (30 June 2014: nil). Operating leases Rent and rates costs include leasing and rental expenditure of $5 million for property, network infrastructure and items of equipment (30 June 2014: $5 million). to provide pension benefits in respect of employees. Auditor remuneration Included in other expenses are fees paid to auditors: Audit and review of statutory financial statements Regulatory audit and assurance work1 Tax compliance services Other assurance services2 Other services3 Total other services Total fees paid to the auditor 2015 $000’s 504 397 3 3 - 403 907 2014 $000’s 535 388 36 3 29 456 991 1 Includes the audit of Information Disclosure Determination, Telecommunications Services Obligations and Telecommunications Development Levy. 2 Relates to attendance at the Annual General Meeting. 3 Primarily relates to accounting advice relating to financial instrument disclosure. Note 9 – Trade and other receivables Trade and other receivables are initially recognised at the fair value of the amounts to be received, plus transaction costs (if any). They are subsequently measured at amortised cost (using the effective interest method) less impairment losses. Trade receivables Other receivables Prepayments Trade and other receivables Current Non-current 2015 $M 120 35 155 21 176 165 11 2014 $M 130 56 186 10 196 196 - Trade receivables are non-interest bearing and are generally payments and makes provision for doubtful debt where debt on terms of 20 working days or less. is more than 90 days overdue. There have been no significant Chorus maintains a provision for impairment losses when there is objective evidence of its customers being unable to make required individual impairment amounts recognised as an expense. Trade receivables are net of allowances for disputed balances with customers. P. 47 P. 47 Annual ReportAnnual ReportNote 9 – Trade and other receivables (cont.) The ageing profile of trade receivables as at 30 June 2015 is as follows: Not past due Past due 1-30 days Past due 31-60 days Past due 61-90 days Past due over 90 days 2015 $M 106 10 4 - - 2014 $M 112 11 3 4 - 120 130 Chorus has a concentrated customer base consisting Any disputes arising that may affect the relationship between the predominantly of a small number of retail service providers. parties will be raised by relationship managers and follow the Chorus The concentration of Chorus’ customer base heightens the dispute resolution process. Chorus has $14 million of accounts risk that a dispute with a customer, or a customer’s failure to receivable that are past due but not impaired (30 June 2014: pay for services, will have a material adverse effect on Chorus’ $18 million). The carrying value of trade and other receivables collectability of receivables. approximate the fair value. The maximum credit exposure is limited to the carrying value of trade and other receivables. Note 10 – Trade and other payables Trade and other payables are initially recognised at fair value less transaction costs (if any). They are subsequently measured at amortised cost using the effective interest method. Trade payables Joint arrangements Accruals Personnel accrual Revenue billed in advance Trade and other payables Current Non-current 2015 $M 104 1 143 22 45 315 315 - 2014 $M 119 4 148 20 32 323 323 - Trade and other payables are non-interest bearing and normally Joint arrangements settled within 30 day terms. The carrying value of trade and other Certain network electronic assets and shared systems owned by payables approximate their fair values. Spark are required for continued use by Chorus post demerger. The right to use these assets has been granted by Spark under joint arrangements over the life of the assets. P. 48 P. 48 Annual ReportAnnual ReportNote 11 – Commitments Network infrastructure project agreement approximately 1,000 schools, 53 rural hospitals and health centres. It will enable approximately 57% of rural users to access broadband Chorus is committed to deploying infrastructure for premises in speeds of at least 5Mbps. the UFB candidate areas awarded to Chorus, to be built according The estimated cost of the build is in the range of $280 – $295 million. to annual build milestones and to be complete by no later than 31 December 2019. In total it is expected that the communal infrastructure will pass an estimated 830,900 premises. Chorus has estimated that it will cost $1.75 – $1.8 billion to build the communal UFB network by the end of 2019. Rural Broadband Initiative As part of the Rural Broadband Initiative, Chorus is committed to deploying approximately 3,300 kilometres of fibre to connect Capital expenditure Refer to note 1 and note 2 for details of capital expenditure commitments. Lease commitments Chorus has buildings, car parks and site licenses under operating lease arrangements. The future non-cancellable minimum operating lease commitment as at 30 June 2015 was $21 million (30 June 2014: $27 million). Refer to note 14 for further information on leases. Note 12 – Taxation Tax expense comprises current and deferred tax, calculated using the tax rate enacted or substantively enacted at balance date and any adjustments to tax payable in respect of prior years. Tax expense is recognised in the income statement except when it relates to items recognised directly in the statement of comprehensive income, in which case the tax expense is recognised in the statement of comprehensive income. Deferred tax expense is recognised in respect of temporary differences between the carrying amounts of assets and liabilities in the financial statements and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent it is probable it will be utilised. Current tax expense Recognised in income statement Net earnings before tax Tax at 28% Tax effect of adjustments Other non taxable items Adjustments in respect of prior periods Tax expense reported in income statement Comprising: Current tax expense Deferred tax expense Recognised in other comprehensive income Net movement in cash flow hedge reserve (pre-tax) Tax at 28% Tax expense reported in other comprehensive income Comprising: Current tax expense Deferred tax expense 2015 $M 127 (36) (1) 1 (36) (28) (8) (36) 4 1 1 - 1 1 2014 $M 206 (58) (1) 1 (58) (57) (1) (58) (3) (1) (1) - (1) (1) P. 49 P. 49 Annual ReportAnnual ReportNote 12 – Taxation (cont.) Current tax payable Balance as at 1 July 2014 Tax liability for the year Tax paid Balance as at 30 June 2015 2015 $M 32 28 (48) 12 2014 $M 5 57 (30) 32 For the year ended 30 June 2015 the effective tax rate of 28% equates to the statutory rate (30 June 2014: 28%). The balance of the 2014 tax financed through TMNZ was settled on 4 June 2015 and is reflected in the tax paid above. The first payment of provisional tax for the 2015 tax year was financed through TMNZ, deferring the cash outflow until 6 June 2016. The second instalment of provisional tax for 2015 was paid directly to the Inland Revenue Department and is reflected in tax paid above. Deferred tax (ASSETS)/LIABILITIES Balance at 1 July 2013 Recognised in the income statement Recognised in other comprehensive income Balance as at 30 June 2014 Recognised in the income statement Recognised in other comprehensive income Balance as at 30 June 2015 Imputation credits FAIR VALUE PORTION OF DERIVATIVES $M EMTN DEBT SECURITIES $M CHANGES IN FAIR VALUE OF CASH FLOW HEDGES $M NETWORK ASSETS, SOFTWARE AND OTHER INTANGIBLES $M - (6) - (6) - - 16 - - 16 - - (6) 16 - - 1 1 - (1) - FINANCE LEASES $M (35) - - 217 4 - 221 (35) 6 - - - 227 (35) OTHER $M (8) 3 - (5) 2 - (3) TOTAL $M 190 1 1 192 8 (1) 199 There are $120 million (30 June 2014: $88 million) of imputation credits available for subsequent reporting periods. The imputation credit balance represents the balance of the imputation credit account at the end of the reporting year, adjusted for imputation credits that will arise from the payment of provisional tax relating to the year ended 30 June 2015. Note 13 – Cash and call deposits Cash flow Cash flows from derivatives in cash flow and fair value hedge relationships are recognised in the cash flow statement in the same category as the hedged item. For the purposes of the statement of cash flows, cash is considered to be cash on hand, in banks and cash equivalents, including bank overdrafts and highly liquid investments that are readily convertible to known amounts of cash which are subject to an insignificant risk of changes in values. Cash and call deposits are held with bank and financial institutions counterparties rated at a minimum of A+, based on rating agency Standard & Poor’s ratings. Interest earned on call deposits is based on the daily deposit rate. There are no cash or call deposit balances held by Chorus that are not available for use. The carrying values of cash and call deposits approximate their fair values. The maximum credit exposure is limited to the carrying value of cash and call deposits. Cash and call deposits denominated in foreign currencies are retranslated into New Zealand dollars at the spot rate of exchange at the reporting date. All differences arising on settlement or translation of monetary items are taken to the income statement. P. 50 P. 50 Annual ReportAnnual ReportNote 14 – Leases Chorus is a lessee of certain network assets under both operating and finance lease arrangements. Lease costs relating to operating leases are recognised on a straight-line basis over the life of the lease. Finance leases, which effectively transfer to Chorus substantially all the risks and benefits of ownership of the leased assets, are capitalised at the lower of the leased asset’s fair value or the present value of the minimum lease payments at inception of the lease. The leased assets and corresponding liabilities are recognised, and the leased assets are depreciated over their estimated useful lives. Determining whether a lease agreement is a finance lease or an operating lease requires judgement as to whether the agreement Finance leases transfers substantially all the risks and rewards of ownership to Chorus. Judgement is required on various aspects that include, but are not limited to, the fair value of the leased asset, the economic life of the leased asset, whether or not to include renewal options in the lease term, and determining an appropriate discount rate to calculate the present value of the minimum lease payments. Classification as a finance lease means the asset is recognised in the statement of financial position as network assets whereas for an operating lease no such asset is recognised. Chorus has exercised its judgement on the appropriate classification of network asset leases, and has determined a number of lease arrangements are finance leases. Assets/(liabilities) Expected future lease payments: Less than one year Between one and five years More than five years Total expected future lease payments Less: future finance charges Present value of expected future lease payments Present value of expected future lease payments payable: Less than one year Between one and five years More than five years Total present value of expected future lease payments Classified as: Current asset – finance lease receivable Non-current liability – finance lease payable Total The carrying value of the finance leases approximates their fair value. 2015 $M 2014 $M (8) (31) (372) (411) 284 (127) 3 16 (146) (127) 3 (130) (127) (8) (32) (379) (419) 296 (123) 3 15 (141) (123) 3 (126) (123) P. 51 P. 51 Annual ReportAnnual ReportNote 14 – Leases (cont.) Property exchanges Chorus has leased exchange space and commercial co-location space owned by Spark which is subject to finance lease arrangements. Chorus in turn leases exchange space and commercial co-location space owned by Chorus to Spark under a finance lease arrangement. The term of the lease where Chorus is lessee is for ten years with multiple rights of renewal for a further Operating leases twenty five years. The term of the lease where Chorus is lessor is for three years with two rights of renewal for a further three years each. The full term has been used in the calculation of finance lease payables and receivables as it is likely due to the specialised nature of the buildings that the leases will be renewed to the maximum term. The payable and receivable under these finance lease arrangements are net settled in cash. The finance lease arrangement above reflects the net finance lease receivable and payable position. Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years More than five years Total 2015 $M 5 11 5 21 2014 $M 6 15 6 27 Chorus has entered into leasing arrangements for properties, that would then be agreed with the lessor. There are no other network infrastructure and other items of equipment which are significant lease terms that relate to contingent rents, purchase classified as operating leases. Certain leases are subject to Chorus options or other restrictions on Chorus. being able to renew or extend the lease period based on terms Note 15 – Equity Share capital Movements in Chorus Limited’s issued ordinary shares were as follows: NUMBER OF SHARES (MILLIONS) Balance 1 July Dividend reinvestment plan Balance at 30 June 2015 M 396 - 396 2014 M 389 7 396 Chorus Limited has 396,369,767 fully paid ordinary shares Chorus Limited issues securities to CFH based on the number of (30 June 2014: 396,369,767 fully paid ordinary shares). The issued premises passed. CFH securities are a class of security that carry shares have no par value. The holders of ordinary shares are entitled no right to vote at meetings of holders of Chorus Limited ordinary to receive dividends as declared from time to time, and are entitled shares but carry a preference on liquidation. Refer to note 4 for to one vote per share at meetings of Chorus Limited. Under Chorus additional information on CFH securities. Limited’s constitution, Crown approval is required if a shareholder wishes to have a holding of 10% or more of Chorus Limited’s ordinary shares, or if a shareholder who is not a New Zealand national wishes to have a holding of 49.9% or more of ordinary shares. Chorus Limited has a Dividend Reinvestment Plan where eligible shareholders (those resident in New Zealand or Australia) can choose to have Chorus Limited reinvest all or part of their future dividends in additional Chorus Limited shares. For the year ended 30 June 2014, 7,070,718 shares with a total value of $18 million were issued in lieu of dividends. The Dividend Reinvestment Plan is currently suspended. Should Chorus Limited return capital to shareholders, any return of capital that arose on demerger from Telecom (now known as Spark) is expected to be taxable as Chorus Limited had zero available subscribed capital on demerger. There were no dividends declared or paid by Chorus Limited during the year ended 30 June 2015. The 2013 final dividend of 15.5 cents per share, $60 million, was paid during the year ending 30 June 2014. P. 52 P. 52 Annual ReportAnnual ReportNote 15 – Equity (cont.) Reserves Cash flow hedge reserve The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet affected earnings. For cash flow hedges, the effective portion of gains or losses from remeasuring the fair value of the hedging instrument is recognised A reconciliation of movements in the cash flow hedge reserve follows: in other comprehensive income and accumulated in the cash flow hedge reserve. Accumulated gains or losses are subsequently transferred to the income statement when the hedged item affects the income statement, or when the hedged item is a forecast transaction that is no longer expected to occur. Alternatively, when the hedged item results in a non-financial asset or liability, the accumulated gains and losses are included in the initial measurement of the cost of the asset or liability. The remeasurement gain or loss on the ineffective portion of a cash flow hedge is recognised immediately in the income statement. Opening balance Ineffective portion of changes in fair value of cash flow hedges Effective portion of changes in fair value of cash flow hedges Net amounts reclassified from cash flow hedge reserve to income statement Closing balance 2015 $M - (14) 16 1 3 2014 $M 1 - (2) 1 - The periods in which the cash flows associated with cash flow hedges are expected to impact earnings are as follows: AS AT 30 JUNE 2015 Cross currency interest rate swaps Interest rate swaps Forward exchange contracts Electricity contracts AS AT 30 JUNE 2014 Cross currency interest rate swaps Interest rate swaps Forward exchange contracts Electricity contracts WITHIN 1 YEAR $M - - - 1 1 WITHIN 1 YEAR $M - - - - - 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M GREATER THAN 5 YEARS $M - 1 - - 1 - - - - - - 3 - - 3 (13) 32 - - 19 - - - - - 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M GREATER THAN 5 YEARS $M - - - - - - (2) - - (2) - - - - - - - - - - 3 6 - - 9 As at 30 June 2015 the cash flow reserve contained $21 million of non-cash amounts (30 June 2014: $7 million) and these have been excluded from the table above. Fair value hedges Gains or losses from remeasuring the fair value of the hedging instrument are recognised in the income statement together with any changes in the fair value of the hedged asset or liability. Chorus did not have any hedging arrangements designated as a fair value hedge in the current year (30 June 2014: nil). P. 53 P. 53 Annual ReportAnnual ReportNote 16 – Earnings per share The calculation of basic earnings per share at 30 June 2015 is based on the net earnings for the year of $91 million (30 June 2014: $148 million), and a weighted average number of ordinary shares outstanding during the period of 396 million (30 June 2014: 394 million), calculated as follows: Basic earnings per share Net earnings attributable to ordinary shareholders ($ millions) Denominator – weighted average number of ordinary shares (millions) Basic earnings per share (dollars) 2015 2014 91 396 0.23 148 394 0.38 Diluted earnings per share Net earnings attributable to ordinary shareholders ($ millions) 91 148 Weighted average number of ordinary shares (millions) Ordinary shares required to settle CFH equity securities (millions) Ordinary shares required to settle CFH warrants (millions) Denominator – diluted weighted average number of shares (millions) Diluted earnings per share (dollars) 396 68 5 469 0.19 394 80 4 478 0.31 The number of ordinary shares that would have been required to settle all CFH equity securities and CFH warrants on issue at 30 June has been used for the purposes of the diluted earnings per share calculation. Note 17 – Related party transactions Transactions with related parties Certain Chorus directors have relevant interests in a number of companies with which Chorus has transactions in the normal course of business. A number of Chorus’ directors are also non-executive directors of other companies. Any transactions undertaken with these entities are in the ordinary course of business. Key management personnel compensation Short term employee benefits Post employment benefits Termination benefits Other long term benefits Share based payments The table above includes remuneration of $887,474 (30 June 2014: $889,500) paid to directors for the year. 2015 $000’s 6,389 - - 331 - 2014 $000’s 5,491 - - 316 - 6,720 5,807 P. 54 P. 54 Annual ReportAnnual ReportNote 18 – Derivative financial instruments $30 million of cash and resulted in an $11 million gain being Chorus uses derivative financial instruments to reduce its exposure to fluctuations in foreign currency exchange rates, interest rates and the spot price of electricity. The use of hedging instruments is governed by the treasury policy approved by the Board. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to fair value with an adjustment made for credit risk in accordance with NZ IFRS 13: Fair Value Measurement. The fair values are estimated on the basis of the quoted market prices for similar instruments in an active market or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable. The method of recognising the resulting remeasurement gain or loss depends on whether the derivative is designated as a hedging instrument. If the derivative is not designated as a hedging instrument, the remeasurement gain or loss is recognised immediately in the income statement. During the year ended 30 June 2014 interest rate swaps with a face value of $676 million and fair value of $31 million were reset at the prevailing market interest rates. These transactions realised recorded in the cash flow hedge reserve to be amortised over the period to 2020. During the year ended 30 June 2015 amortisation of $4 million was recognised in finance income (30 June 2014: $3 million) and $3 million was recognised in finance expense (30 June 2014: $2 million). New swaps that hedge the same underlying exposure and risk profile were entered into on the same date, but at a higher effective borrowing cost (4.89% compared to 3.99% prior to the transaction). Finance expense includes any ineffectiveness arising from the EMTN hedge relationship. Following the close out of the interest rate swaps relating to the EMTN the hedge relationship was reset on 9 December 2013 with a fair value of $49 million. As long as the hedge remains effective any future gains or losses will be processed though the hedge reserve, however the $49 million will flow as ineffectiveness to interest expense in the income statement at some time over the life of the derivatives. It will be a non- cash charge. Neither the direction, nor the rate of impact on the income statement can be predicted. For the year ended 30 June 2015 ineffectiveness of $19 million was recognised in the income statement (30 June 2014: no ineffectiveness). Current derivative assets Interest rate swaps Cross currency interest rate swaps Non-current derivative assets Interest rate swaps Cross currency interest rate swaps Current derivative liabilities Interest rate swaps Cross currency interest rate swaps Electricity contracts Non-current derivative liabilities Interest rate swaps Cross currency interest rate swaps 2015 $M 2014 $M - 3 3 - 14 14 11 - 1 12 39 22 61 1 - 1 3 - 3 5 8 1 14 3 120 123 P. 55 P. 55 Annual ReportAnnual ReportNote 18 – Derivative financial instruments (cont.) The notional values of contract amounts outstanding are as follows: Interest rate swaps Forward exchange rate contracts Cross currency interest rate swaps Electricity contracts CURRENCY MATURITY NZD 2015-2020 NZD:AUD 2015 NZD:EUR 2015-2016 NZD:USD NZD:GBP 2015 2020 NZD 2015-2018 2015 $M 1,141 - 1 1 677 8 1,828 2014 $M 1,242 2 5 - 677 5 1,931 Credit risk associated with derivative financial instruments is managed by ensuring that transactions are executed with counterparties with high quality credit ratings along with credit exposure limits for different credit classes. The counterparty credit risk is monitored and reviewed by the Board on a regular basis. Note 19 – Financial risk management Financial risk management Chorus’ financial instruments consist of cash, short-term deposits, trade and other receivables (excluding prepayments), investments and advances, trade payables and certain other payables, syndicated As at 30 June 2015, Chorus did not have any significant unhedged exposure to currency risk (30 June 2014: no significant unhedged exposure to currency risk). A 10% increase or decrease in the exchange rate, with all other variables held constant, has minimal impact on profit and equity reserves of Chorus. bank facilities, EMTN, derivative financial instruments and CFH Price risk securities. Financial risk management for currency and interest rate risk is carried out by the treasury function under policies approved by the Board. Chorus’ risk management policy approved by the Board, provides the basis for overall financial risk management. In the normal course of business, Chorus is exposed to a variety of financial risks which include the volatility in electricity prices. Chorus has entered into electricity swap contracts to reduce the exposure to electricity spot price movements. Chorus has designated the Chorus does not hold or issue derivative financial instruments electricity contracts in cash flow hedge relationships. for trading purposes. All contracts have been entered into with major creditworthy financial institutions. The risk associated with these transactions is the cost of replacing these agreements at the current market rates in the event of default by a counterparty. Currency risk Chorus’ exposure to foreign currency fluctuations predominantly arise from the foreign currency debt and future commitment to purchase foreign currency denominated assets. The primary objective in managing foreign currency risk is to protect against the risk that Chorus assets, liabilities and financial performance will fluctuate due to changes in foreign currency exchange rates. Chorus enters into foreign exchange contracts, foreign currency options and cross currency interest rate swaps to manage the foreign exchange exposure. A 10% increase or decrease in the spot price of electricity, with all other variables held constant, has minimal impact on profit and equity reserves of Chorus. Interest rate risk Chorus has interest rate risk arising from the cross currency interest rate swap converting the foreign debt into a floating rate New Zealand dollar obligation and the floating rate on the drawn down portion of the syndicated bank facilities. Chorus aims to reduce the uncertainty of changes in interest rates by entering into interest rate swaps to fix the effective interest rate to minimise the cost of net debt and manage the impact of interest rate volatility on earnings. The interest rate risk on the cross currency interest rate swaps has been hedged using interest rate swaps. The interest rate exposure on the syndicated banking facilities has been hedged up Chorus has issued GBP 260 million foreign currency debt in the to $215 million with the remaining paying floating interest (30 June form of EMTN. Chorus has in place cross currency interest rate 2014: $565 million). swaps under which Chorus receives GBP 260 million principal and GBP fixed coupon payments for $677 million principal and floating NZD interest payments. The exchange gain or loss resulting from the translation of EMTN denominated in foreign currency to New Zealand dollars is recognised in the income statement. The movement is offset by the translation of the principal value of the related cross currency interest rate swap. P. 56 P. 56 Annual ReportAnnual ReportNote 19 – Financial risk management (cont.) Interest rate repricing analysis AS AT 30 JUNE 2015 Floating rate Cash and deposits Debt Fixed rate Debt (after hedging) CFH securities Finance lease (net settled) AS AT 30 JUNE 2014 Floating rate Cash and deposits Debt Fixed rate Joint arrangements Debt (after hedging) CFH securities Finance lease (net settled) Sensitivity analysis WITHIN 1 YEAR $M 80 850 - - (3) 927 WITHIN 1 YEAR $M 176 575 4 350 - (3) 1,102 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M GREATER THAN 5 YEARS $M TOTAL $M - - 215 - (4) 211 - - - - (4) (4) - - - - (4) (4) - - 677 - (4) 673 - - - 107 146 253 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M GREATER THAN 5 YEARS $M - - - - - (3) (3) - - - 215 - (4) 211 - - - - - (4) (4) - - - - - (4) (4) - - - 677 73 141 891 80 850 892 107 127 2,056 TOTAL $M 176 575 4 1,242 73 123 2,193 A change of 100 basis points in interest rates with all other variables held constant, would increase/(decrease) equity (after hedging) and earnings after tax by the amounts shown below: 100 basis point increase 100 basis point decrease Credit risk 2015 PROFIT OR (LOSS) $M 2015 EQUITY $M 2014 PROFIT OR (LOSS) $M (5) 5 (6) 5 (3) 3 2014 EQUITY $M (7) 7 In the normal course of its business, Chorus incurs counterparty credit risk from financial instruments, including cash, trade and other receivables, finance lease receivables and derivative financial instruments. Chorus has certain derivative transactions that are subject to bilateral credit support agreements that require Chorus or the counterparty to post collateral to support the value of certain derivatives. As at 30 June 2015 no collateral was posted. The maximum exposure to credit risk at the reporting date was as follows: Cash and call deposits Trade and other receivables Derivative financial instruments Finance lease receivable Maximum exposure to credit risk Refer to individual notes for additional information on credit risk. NOTES 13 9 18 14 2015 $M 80 155 17 3 255 2014 $M 176 186 4 3 369 P. 57 P. 57 Annual ReportAnnual ReportNote 19 – Financial risk management (cont.) investment opportunities, resulting in defaults or excessive debt Liquidity risk Liquidity risk is the risk that Chorus will encounter difficulty raising liquid funds to meet commitments as they fall due or foregoing costs. Prudent liquidity risk management implies maintaining sufficient cash and the ability to meet its financial obligations. Chorus’ exposure to liquidity risk based on contractual cash flows relating to financial liabilities is summarised below: CARRYING AMOUNT $M CONTRACTUAL CASH FLOW $M LESS THAN 1 YEAR $M 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M 5+ YEARS $M Interest rate swaps 50 54 14 248 127 1,663 107 248 411 1,989 107 248 8 539 - - 22 1 - - (318) 375 6 (2) 2 (16) 18 3 (2) 2 - 8 75 - 15 (16) 18 2 - - - 8 427 - 11 (16) 18 1 - - - 8 - 8 304 644 - 8 - 6 (16) 19 (254) 302 - - - - - - - 371 - 107 - - - - - - CARRYING AMOUNT $M CONTRACTUAL CASH FLOW $M LESS THAN 1 YEAR $M 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M 5+ YEARS $M AS AT 30 JUNE 2015 Non derivative financial liabilities Trade and other payables Finance lease (net settled) Debt CFH securities Derivative financial liabilities Cross currency interest rate swaps Inflows Outflows Electricity contracts Forward exchange contracts Inflows Outflows AS AT 30 JUNE 2014 Non derivative financial liabilities Trade and other payables Finance lease (net settled) Debt CFH securities Derivative financial liabilities - 8 585 - 2 (34) 49 2 (2) 2 - 8 73 - (1) - 8 448 - - 8 297 - - 379 538 73 (2) (3) (5) (34) 51 (34) 52 (34) 54 (538) 731 - - - - - - - - - - - - 271 123 1,639 73 271 419 2,042 73 271 8 101 - Interest rate swaps 8 1 10 Cross currency interest rate swaps Inflows Outflows Electricity contracts Forward exchange contracts Inflows Outflows - 128 1 - - (708) 981 5 (6) 6 (34) 44 3 (4) 4 P. 58 P. 58 Annual ReportAnnual ReportNote 19 – Financial risk management (cont.) in fair values or cash flows of hedged items. Chorus discontinues The gross (inflows)/outflows of derivative financial liabilities disclosed in the previous table represent the contractual undiscounted cash flows relating to derivative financial liabilities held for risk management purposes and which are usually not closed out prior to contractual maturity. The disclosure shows net cash flow amounts for derivatives that are net cash settled hedge accounting if (a) the hedging instrument expires or is sold, terminated, or exercised; (b) the hedge no longer meets the criteria for hedge accounting; or (c) the hedge designation is revoked. Hedges are classified into two primary types: cash flow hedges and fair value hedges. Refer to note 15 for additional information on cash flow and fair value hedge reserves. and gross cash inflow and outflow amounts for derivatives that have simultaneous gross cash settlement (for example forward Fair value exchange contracts). Chorus manages liquidity risk by ensuring sufficient access to committed facilities, continuous cash flow monitoring and maintaining prudent levels of short term debt maturities. At balance Under NZ IFRS, financial instruments are either carried at amortised cost, less any provision for impairment losses, or fair value. The only significant variances between instruments held at amortised cost and their fair value relates to the EMTN. date, Chorus has available $435 million under the syndicated bank For those instruments, recognised at fair value in the statement facilities (30 June 2014: $460 million). However, subject to an of financial position, fair values are determined as follows: agreement with its bank lenders, Chorus has agreed, among other things, to limit total drawings across all committed bank facilities to $1.2 billion until outcomes from the Commission’s final pricing principle process are known. This agreement means that there is $135 million available under bank facilities for immediate use, refer to note 3 for more information on the facilities. In addition, a $10 million overdraft facility is in place to manage short term cash funding requirements. Capital risk management Chorus manages its capital considering shareholders’ interests, the value of Chorus assets and Chorus’ credit ratings. The capital Chorus manages consists of cash and debt balances. The Chorus Board’s broader capital management objectives include maintaining an investment grade credit rating with Level 1: Quoted market prices – financial instruments with quoted prices for identical instruments in active markets. Level 2: Valuation techniques using observable inputs – financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable. Level 3: Valuation techniques with significant non-observable inputs – financial instruments valued using models where one or more significant inputs are not observable. The relevant financial assets and financial liabilities and their respective fair values are outlined in note 18 and are all Level 2 (30 June 2014: Level 2). headroom. In the longer term, the Board continues to consider Cross currency interest rate swaps and interest rate swaps a ‘BBB’ rating appropriate for a business like Chorus. Hedge accounting Chorus designates and documents the relationship between hedging instruments and hedged items, as well as the risk Fair value is estimated by using a valuation model involving discounted future cash flows of the derivative using the applicable forward price curve (for the relevant interest rate and foreign exchange rate) and discount rate. management objective and strategy for undertaking various hedge Electricity swaps transactions. At hedge inception (and on an ongoing basis), hedges are assessed to establish if they are effective in offsetting changes Fair value is estimated on the ASX forward price curve that relates to the derivative. P. 59 P. 59 Annual ReportAnnual ReportNote 19 – Financial risk management (cont.) The carrying amounts of financial assets and liabilities are as follows: Loans and receivables Cash and call deposits Trade receivables Other receivables Designated in a hedging relationship Derivative financial assets Derivative financial liabilities Other financial liabilities Trade accounts payable Joint arrangements Accruals Finance lease (net settled) Debt CFH securities CARRIED AT COST OR AMORTISED COST 2015 $M CARRIED AT FAIR VALUE 2015 $M CARRIED AT COST OR AMORTISED COST 2014 $M CARRIED AT FAIR VALUE 2014 $M 80 120 35 - - (104) (1) (143) (127) (1,663) (107) - - - 17 (73) - - - - - - 176 130 56 - - (119) (4) (148) (123) (1,639) (73) - - - 4 (137) - - - - - - Note 20 – Contingencies programme will take approximately three years to complete. Chorus is undertaking a programme to assess the presence and Chorus considers it has a contingent liability for the identification condition of any asbestos containing materials (ACM) within its and removal of ACM in buildings not yet assessed. Chorus is unable property portfolio and take appropriate action where buildings are to reliably determine the removal costs associated with buildings identified as containing ACM. It is expected that the assessment yet to be assessed, but it is not expected to be material. Note 21 – Post balance date events CFH securities and Crown funding Chorus issued a call notice on 22 July 2015 to CFH with an aggregate issue price of $13 million which is allocated as follows: CFH debt securities $2 million, CFH equity securities $1 million and Crown funding $10 million. This funding has been accrued in the financial statements at 30 June 2015 representing the portion of the call notice where user acceptance testing was complete. In addition, 372,958 CFH warrants were issued. Chorus issued a call notice on 18 August 2015 to CFH with an aggregate issue price of $7 million and 209,434 warrants. This funding is not recognised in the financial statements at 30 June 2015. P. 60 P. 60 Annual ReportAnnual ReportGovernance & Disclosures CONTENTS Governance & Disclosures The Chorus Board Diversity at Chorus Remuneration and Performance Disclosures 62 62 64 65 69 P. 61 Annual ReportGovernance & Disclosures Chorus’ Board and management are committed to ensuring that our people act ethically, with integrity and in accordance with Chorus’ policies and values. Corporate governance framework • Australian Stock Exchange (ASX) Listing Rules and the ASX Chorus is incorporated in New Zealand and has its shares quoted Corporate Governance Council’s Corporate Governance on the New Zealand and Australian stock exchanges. Principles and Recommendations (ASX Corporate Governance Chorus’ governance practices and policies therefore reflect, and are consistent with, the: • New Zealand Exchange Ltd (NZX) Main Board Listing Rules and NZX Corporate Governance Best Practice Code; Code); and • Financial Markets Authority’s Corporate Governance Principles and Guidelines (FMA Corporate Governance Code). The Board regularly reviews and assesses Chorus’ governance policies, processes and practices to identify opportunities for enhancement and to ensure they reflect Chorus’ operations and culture. The Chorus Board Role of the Board and delegation of authority Board Committees The Board is appointed by Chorus’ shareholders and has Each standing Board Committee has a Board approved Charter overall responsibility for the strategy, culture, governance and and chairman and assist the Board by focusing on specific performance of Chorus. The Board’s roles and responsibilities are set out in its Charter. The Board has delegated its authority, in part, to the Chief Executive Officer (CEO). The CEO may, in turn, sub-delegate authority to other Chorus people. Formal policies and procedures govern the parameters and operation of these delegations. The Board has established three standing Board Committees to assist it in carrying out its responsibilities. The Board has delegated some of its responsibilities, powers and authorities to those Committees. The Board may also establish other ad-hoc or standing committees and delegate specific responsibilities, powers and authorities to those committees and to particular directors. The Board and Board Committee Charters, and other key governance documents, are available on Chorus’ website at responsibilities in greater detail than is possible for the Board as a whole. All Board Committee members are independent directors. Audit and Risk Management Committee (ARMC) The ARMC assists the Board in ensuring oversight of all matters relating to risk management, financial management and controls and the financial accounting, audit and reporting of Chorus. Members: Anne Urlwin (chairman), Jon Hartley and Patrick Strange. Human Resources and Compensation Committee (HRCC) The HRCC assists the Board in overseeing people policies and strategies, including: • Chorus’ remuneration frameworks; and • Reviewing candidates for, and the performance and remuneration of, the CEO. www.chorus.co.nz/governance. Members: Clayton Wakefield (chairman), Prue Flacks and Board membership The Board seeks to ensure that through its skills mix and composition it is positioned to add value to Chorus. The Board currently has seven directors (six independent directors and a managing director)2 with a broad range of managerial, financial, accounting and industry experience. See page 10 for more information on the skills and experience of the directors. For a director to be considered independent, the Board must affirmatively determine that the director does not have a disqualifying relationship as set out in the Board Charter. 2 Murray Jordan will join the Chorus Board from 1 September 2015. P. 62 P. 62 Keith Turner. Nominations and Corporate Governance Committee (NCGC) The NCGC assists the Board in promoting and overseeing continuous improvement of good corporate governance. The NCGC’s role includes identifying and recommending suitable candidates for nomination to be members of the Board and Board Committees, and establishing, developing and overseeing a process for the Board to annually review and evaluate the performance of the Board, its Committees and individual directors. Members: Jon Hartley (chairman), Prue Flacks and Keith Turner. Annual ReportAnnual ReportBoard and Board Committee meeting attendance in the year ended 30 June 2015 Total number of meetings held Jon Hartley++ Anne Urlwin Clayton Wakefield Keith Turner Mark Ratcliffe Prue Flacks Patrick Strange** Sue Sheldon++ BOARD MEETINGS SPECIAL BOARD MEETINGS ARMC HRCC NCGC 11 11 11 11 11 10 11 5 6 9 7 9 7 8 8 8 0 9 6 6 6 5* 2* 6^ 4* 1 5 5 5* 5* 5 5 5^ 5 1* 3* 5 5 2* 1* 2+ 5^ 5 0 3 * Attended meetings as an observer and not as a Committee member. + Attended meetings as an observer up to 7 April 2015 and as a Committee member from 8 April 2015. ^ Mark Ratcliffe is not a member of any Board Committees but attends all Board Committee meetings as CEO and as an observer, and may be asked to leave at any time. ** Patrick Strange joined the Board on 6 April 2015 and became a member of the ARMC on 8 April 2015. ++ Sue Sheldon resigned as chairman and a director effective 31 March 2015. Jon Hartley became interim chairman on 1 April 2015. Managing risk Chorus has a Managing Risk Policy to: • Ensure the Board sets the risk appetite and reviews principal risks annually; • Integrate risk management in line with the Board’s risk appetite into structures, policies, processes and procedures; and • Deliver regular principal risk reviews and monitoring. Chorus’ Board sets, and annually reviews, Chorus’ risk management framework. As part of its role, the ARMC is responsible for overseeing and monitoring risk and ensuring compliance with Chorus’ risk management framework. The ARMC receives regular reporting on risk management, including the management of material business risks and the effectiveness of Chorus’ internal controls. Codes of ethics • Chorus’ “Restricted Persons” must obtain consent from the General Counsel & Company Secretary (or in the General Counsel & Company Secretary’s case, the chairman) before dealing in Chorus securities. Directors and other Chorus people are also prohibited from dealing in Chorus securities while in possession of inside information under the Financial Markets Conduct Act 2013 and the Australian Corporations Act 2001. Director induction and education Chorus has a director induction programme to ensure new directors are appropriately introduced to management and the Chorus business. All directors are expected to continuously educate themselves to ensure they have appropriate expertise to effectively perform their duties. Visits to Chorus operations, briefings from key management, industry experts and key advisers to Chorus, together Chorus expects its directors and employees to conduct themselves with educational and stakeholder visits, briefings or meetings are in accordance with the highest ethical standards. Chorus has also arranged for the Board. Codes of Ethics for its directors and employees that set the expected standards for their professional conduct. These codes are intended to facilitate decisions that are consistent with Chorus’ values, business goals and legal and policy obligations. Trading in Chorus securities Chorus has an insider trading policy under which: • Directors must obtain consent from the chairman (or in the chairman’s case, the chair of the ARMC) before dealing in Chorus securities; and Independent advice A director may, with the chairman’s prior approval, take independent professional advice (including legal advice) and request the attendance of such an adviser at a Board or Board Committee meeting. Review and evaluation of Board performance The chairman meets with directors to discuss individual performance. The Board has carried out, in the reporting period, a review of the Board’s performance, that of individual directors and Board Committees utilising the Board evaluation process developed and overseen by the NCGC. P. 63 P. 63 Annual ReportAnnual ReportMarket disclosures Chorus is committed to providing timely, consistent and credible information to promote orderly market behaviour and investor • The corporate governance principles adopted and followed by it did not materially differ from NZX’s Corporate Governance Best Practice Code; and confidence. Chorus believes it is imperative that disclosure be • It met the principles set out in the FMA Corporate evenly balanced during good times and bad and that all parties in Governance Code. the investment community have fair access to this information. Corporate Governance Statement Compliance with corporate governance codes More information on Chorus’ corporate governance is available Chorus considers that during the year ended 30 June 2015: in its Corporate Governance Statement available at • It followed each of the recommendations set out in the ASX Corporate Governance Code; www.chorus.co.nz/governance/key-documents/ principal-governance-documents. Diversity at Chorus Diversity and inclusiveness at Chorus work, both of which ultimately lead to increased customer and Chorus has a Board approved Diversity and Inclusiveness Policy. shareholder value. Chorus believes that having a team of individuals working together The focus of Chorus’ policy is to value differences as a business who offer different backgrounds, experiences and perspectives, advantage through attraction and development practices. strengthens its ability to perform as a business. Chorus defines diversity as the characteristics that make one individual similar to, or different from, another and inclusiveness Chorus aims to develop its people leaders to behave constructively and in an inclusive way as a core capability, while at the same time recognising and differentiating individual performance. as embracing a variety of people and their views in everyday The HRCC recommends measurable diversity objectives to the Board that are set and assessed annually. Diversity metrics as at 30 June 2015 The Board has set the following measurable objectives for achieving greater diversity at Chorus: MEASURE DESCRIPTION AS AT 30 JUNE 2015 AS AT 30 JUNE 2014 BENCHMARK Age profiles Median age 41.7 years 41.5 years Employee satisfaction 86% Response to the diversity question “The work environment is very open and accepting of individual differences” 85% Ethnicity by role1 Organisational groupings by ethnicity 1% Africa 17% Asia 1% Australia 8% Europe 3% Maori 63% New Zealand 5% Pacific Island South America 0% Unknown/not disclosed 2% Total People pop’n Leaders 0% 3% 0% 13% 3% 79% 1% 1% 0% Africa Asia Australia Europe Maori New Zealand Pacific Island South America Unknown/not disclosed Total People pop’n Leaders 0% 2% 0% 13% 4% 79% 1% 1% 0% 1% 15% 1% 8% 4% 66% 5% 0% 1% 42 years. Statistics New Zealand National Labour Force Projections updated August 2012 85% Aon Hewitt Best Employer People leader population distribution = total company population distribution 45%2 3.9% working part-time hours New measure – no benchmark set Flexible working arrangements Percentage of the population utilising flexible working arrangements P. 64 P. 64 Annual ReportAnnual Report MEASURE DESCRIPTION AS AT 30 JUNE 2015 AS AT 30 JUNE 2014 Gender by role Organisational groupings by gender Rookie ratio The previous year’s intake by age, ethnicity and gender 38% 62% All 34% 66% People Leaders3 22% 29% 33% 67% Non-executive Board6 78% Officers/Senior Executives4 71% Board5 71% People Leaders3 78% Officers/Senior Executives4 39% 61% All 29% 22% 43% 57% Board5 50% 50% Non-executive Board6 56% Average age 35.9 years Gender 44% Africa Asia Australia Europe Maori New Zealand Pacific Island Unknown/ not disclosed 55% Average age 36.4 years Gender 45% Africa Asia Australia Europe Maori New Zealand Pacific Island Unknown/ not disclosed 2% 25% 1% 10% 1% 51% 4% 6% 1% 27% 2% 11% 1% 53% 5% 2% BENCHMARK People leader population distribution = total company population distribution No measure – for information Internal hire rate The previous year’s appointments identifying internal vs external hire rate 1 Ethnicity is self-reported. 47% of all appointments have been internal. 60% of roles in layers 1-37 were recruited internally 45% of all appointments have been internal. 88% of roles in layers 1-37 were recruited internally 66% of roles in layers 1-37 2 A survey was introduced in FY15 to capture flexible working arrangements as well as part time working. Previously only part time working arrangements were measured. 3 People Leaders have Chorus people formally reporting to them. 4 Chorus’ Officers/Senior Executives are its Chief Executive and those reporting to the Chief Executive other than the Executive Assistant. As at 30 June 2015, Chorus had 2 female and 7 male Officers/Senior Executives (30 June 2014, 2 female, 7 male). 5 As at 30 June 2015, Chorus had 2 female and 5 male directors (30 June 2014, 3 female, 4 male). 6 As at 30 June 2015, Chorus had 2 female and 4 male non-executive directors (30 June 2014, 3 female, 3 male). 7 “Layers 1–3” means the CEO, those reporting to the CEO, and those reporting to them. Based on the annual review of the effectiveness of Chorus’ Diversity and Inclusiveness Policy and Chorus’ measurable diversity objectives, the Board considers that overall Chorus is making good progress towards achieving its diversity and inclusiveness objectives and has performed well against the policy generally. Remuneration and Performance Chorus’ remuneration model Short term incentives Chorus’ remuneration model is based on principles of alignment to Chorus’ STIs are focussed on differentiating high performance shareholder value, simplicity, clarity and fairness, and remuneration and rewarding delivery. outcomes based on both individual and company performance. Chorus’ STIs contain two performance targets: a company All Chorus employees have a fixed remuneration and short term performance target and an individual performance target. Chorus incentive (STI) component in their remuneration packages. must achieve the company target, and an individual his or her own A limited number of employees also have a long term incentive target, for a payment to be received under the STIs. (LTI) component. Performance targets are reviewed annually to ensure alignment The Board regularly reviews Chorus’ remuneration model. with shareholder interests. In the year ended 30 June 2015 key Fixed remuneration Chorus’ fixed remuneration model is based on a matrix of individual employee performance and position in the market remuneration range. The model is informed and adjusted each year based on data from multiple independent remuneration specialists. performance targets were focused on EBITDA and capital efficiency (e.g. cost per premises passed, cost per premises connected). Payments are calculated as a percentage of fixed remuneration and role complexity and are determined following review of company and individual performance. Multipliers range from 0x to 2.8x. P. 65 P. 65 Annual ReportAnnual Report Long term incentives Director remuneration Chorus introduced an LTI scheme for its executives on demerger Total remuneration available to non-executive directors in the in 2011. The LTI was primarily designed to align the interests of year ended 30 June 2015 was fixed at Chorus’ 2014 annual Chorus’ executives and shareholders. An STI Extension Programme shareholders’ meeting at $1,100,000. is operating in place of that LTI scheme from December 2013 to March 2016. Remuneration paid to directors (in their capacity as such) in the year ended 30 June 2015: The Board has reviewed the LTI design and, on the basis of independent advice, intends to introduce a new scheme in late 2015. DIRECTOR STI Extension Programme Jon Hartley (interim chairman)* An STI Extension Programme was introduced for certain Anne Urlwin executives while long term measures have been subject to external uncertainties. The STI Extension Programme was intended to retain and reward key executives based on specific performance criteria, until a period of relative stability has been restored. Managing performance Chorus’ performance management approach is based on fostering and rewarding valuable business outcomes. All Chorus people have performance and development plans, which are regularly reviewed with their people leaders. Clayton Wakefield Keith Turner Mark Ratcliffe Patrick Strange** Prue Flacks Sue Sheldon*** Total * Jon Hartley became interim chairman on 1 April 2015. ** Patrick Strange joined the Chorus Board on 6 April 2015. TOTAL FEES $ 152,125 139,000 128,500 151,956 - 28,893 126,500 160,500 887,474 Performance plans are developed by individuals after participating *** Sue Sheldon resigned as chairman and a director effective 31 March 2015. in ‘Line of Sight’ sessions, which enable them to link Chorus’ strategy with their functional plans and individual roles. Notes: Performance plans include outcome based objectives, behavioural (i) Amounts are gross and exclude GST (where applicable). measures and an individual development plan. (ii) All non-executive directors receive a base fee. Formal performance reviews are undertaken annually for all Chorus people. As part of this, people leaders seek feedback and participate in peer review and calibration sessions, resulting in an overall performance rating and remuneration recommendation that determines an individual’s total pay (fixed remuneration and STI). A similar process is undertaken each year for the executive team, with the CEO making recommendations to the HRCC for executive team members, and the HRCC chairman leading the performance review of the CEO, making recommendations to the Board. These processes are consistent with those set out in the HRCC Charter, allow the Board to provide input into individual performance outcomes, total reward approvals (fixed remuneration, target STI and LTI) and development plans and were undertaken in the year ended 30 June 2015. (iii) Board Committee fees are not paid to the chairman of the Board. (iv) A fee is paid to other non-executive directors for being a member of a Board Committee or the UFB Steering Committee in addition to the base fees. (v) Directors are entitled to be paid or reimbursed for reasonable travelling, accommodation and other expenses without shareholder authorisation. Any such expenses are excluded. (vi) No superannuation was paid to, or other scheme for retirement benefits existed for, any director (except for the CEO). (vii) Directors (other than the CEO) did not receive any other benefits. (viii) Mark Ratcliffe, as CEO, does not receive any remuneration in his capacity as a director. The CEO’s remuneration is summarised on the following page. P. 66 P. 66 Annual ReportAnnual ReportDirector remuneration structure Notes: On the advice of independent consultants, the Board adopted (i) Board Committee fees are paid to directors, except the the fee structure noted below on 1 July 2013. That fee structure chairman and deputy chairman of the Board, in addition applied in the year ended 30 June 2015 and applies again from to base fees. 1 July 2015 with the exception of the fees payable to the deputy chairman. The Board has decided to appoint a deputy chairman from 1 September 2015 with a fee reflecting the additional work that role entails. (ii) Directors may be paid an additional daily rate of $2,400 for additional work as determined and approved by the chairman and where the payment is within the total fee pool available. No such fees were paid in the year ended 30 June 2015. ANNUAL FEE STRUCTURE FROM 1 JULY 2015 $ ANNUAL FEE STRUCTURE YEAR ENDED 30 JUNE 2015 $ (iii) No director receives compensation in share options. (iv) No director (except the CEO) participates in a bonus or profit-sharing plan. Base fees: Chairman of the Board Deputy chairman Non-executive director Board Committee fees: Audit and Risk Management Committee Chairman Member Human Resources and Compensation Committee Chairman Member Nominations and Corporate Governance Committee Chairman Member 214,000 160,500 107,000 214,000 - 107,000 32,000 16,000 21,500 11,000 32,000 16,000 21,500 11,000 16,000 8,500 (v) No superannuation is payable to, or other scheme for retirement benefits exist for, any director (except for the CEO). The HRCC reviews the remuneration of directors annually based on criteria developed by that Committee. CEO remuneration The CEO’s remuneration consists of fixed and variable remuneration, STI and LTI. The CEO’s remuneration package is reviewed annually by the HRCC and Board after reviewing CEO and Chorus performance and taking advice from external remuneration specialists. Remuneration paid to the CEO in the year ended 30 June 2015 COMPONENT Fixed remuneration Short term incentive 16,000 Short term incentive extension 8,500 Long term incentive payments $ (GROSS) 831,355 521,490 185,515 99,565 20,800 1,658,725 UFB Steering Committee Non-taxable accommodation payments Member 32,000 32,000 Total remuneration paid In addition, $55,932 KiwiSaver and medical insurance payments were made on behalf of the CEO in the year ended 30 June 2015. The following LTI payments were made, or liabilities are due to be calculated and paid. They are all cash payments: GRANT YEAR VESTING YEAR DETAIL 2012 2015 A cash LTI grant was made by Chorus in September 2012 to the value of $349,779 (gross). The cash value was converted into Equity Equivalent Units (EEUs) based on dividing the target value by the volume weighted average price of Chorus shares for a defined 20 day trading period. A number of post-allocation performance hurdles have been introduced by the Board for this grant. Performance against these measures is considered annually but for the purposes of the grant it is the collated three year performance that determines the vesting multiplier on the grant. POTENTIAL VALUE A maximum of 104,853 EEUs converted back into a cash value at vesting based on share price performance at that time. P. 67 P. 67 Annual ReportAnnual Report Employee remuneration range The table alongside shows the number of employees and former REMUNERATION RANGE $ (GROSS) NUMBER OF EMPLOYEES IN THE YEAR ENDED 30 JUNE 2015 (BASED ON ACTUAL PAYMENTS) employees who, in their capacity as such, received remuneration 1,650,001-1,660,000 and other benefits in excess of $100,000 during the year ended 30 June 2015. During the year, certain employees participated in Chorus’ employee equity building scheme, received contributions towards membership of the Marram Trust (a community healthcare and holiday accommodation provider), received contributions toward their Government Superannuation Fund (a legacy benefit provided to a small number of employees) and, if a member, received contributions of 3% of gross earnings towards their KiwiSaver accounts. These amounts are not included in these remuneration figures. Any benefits received by employees that do not have an attributable value are also excluded. Employee Equity Building Scheme Chorus implemented an employee equity building scheme in 2013 to better align employee and shareholder interests. A total of 652 Chorus employees participated in the scheme in the year ended 30 June 2015. Chorus contributed up to $499 per participating employee. A total of 185,168 Chorus shares were purchased on market under the scheme at $1.76 per share. The shares are held by a trustee and vest to participating employees after a three year period. 760,001-770,000 580,001-590,000 560,001-570,000 480,001-490,000 360,001-370,000 350,001-360,000 330,001-340,000 320,001-330,000 310,001-320,000 300,001-310,000 290,001-300,000 280,001-290,000 270,001-280,000 260,001-270,000 250,001-260,000 240,001-250,000 230,001-240,000 220,001-230,000 210,001-220,000 200,001-210,000 190,001-200,000 180,001-190,000 170,001-180,000 160,001-170,000 150,001-160,000 140,001-150,000 130,001-140,000 120,001-130,000 110,001-120,000 100,000-110,000 1 1 1 2 1 1 3 1 2 1 1 2 1 3 4 2 7 5 7 8 4 15 9 13 18 22 42 43 42 48 47 P. 68 P. 68 Annual ReportAnnual ReportDisclosures Directors Directors during the year ended 30 June 2015 Sue Sheldon resigned as chairman, and a director, effective 31 March 2015. No other directors resigned during the year ended 30 June 2015. Patrick Strange was appointed as a director on 6 April 2015. The Board has also agreed to appoint Murray Jordan as a director from 1 September 2015. Indemnities and insurance Chorus has entered into deeds of indemnity with each director for potential liabilities or costs they may incur for their acts or omissions as directors. Director interests in Chorus shares Deeds of indemnity have also been entered into with certain senior employees for potential liabilities and costs they may incur for their acts or omissions as employees of Chorus, directors of Chorus subsidiaries or as directors of non-Chorus companies in which Chorus holds interests. Chorus has a directors’ and officers’ liability insurance policy in place covering directors and employees for liability arising from their acts or omissions in their capacity as directors or employees. The policy does not cover dishonest, fraudulent, malicious or wilful acts or omissions. As at 30 June 2015, directors had a relevant interest (as defined in the Financial Markets Conduct Act 2013) in approximately 0.04% of Chorus’ shares as follows: DIRECTOR SHARES INTEREST NUMBER OF SHARES PURCHASED (SOLD) AS AT 30 JUNE 2015 TRANSACTIONS DURING THE REPORTING PERIOD Clayton Wakefield 20,712 Beneficial interest Keith Turner Anne Urlwin Mark Ratcliffe Prue Flacks 5,994 Legal and beneficial interest 10,000 Director and shareholder of registered holder 105,333 Beneficial interest 5,142 Legal and beneficial interest 5,240 Trustee of family trusts Nil Nil Nil Nil Nil Nil Total 152,421 Changes in director interests Jon Hartley Appointed as a director of VisionFund Myanmar Ltd and a trustee of Wellington Diocesan Board of Trustees. Anne Urlwin Ceased being a director of OnePath Insurance Services (NZ) Ltd. Ceased being a director, shareholder, and trustee of shareholder of Trango Capital Ltd. Clayton Wakefield Appointed as a director of Columbus Financial Services Ltd and a committee member of the Auckland Branch of the Institute of Directors. Ceased being a director and shareholder of Techspace Ltd and Techspace Investments Ltd. Ceased being executive director and shareholder of Techspace Consulting Ltd. Keith Turner Ceased being chairman of Team New Zealand AC35 Challenge Ltd and deputy chairman of Auckland International Airport Ltd. Mark Ratcliffe Appointed as a director of The New Zealand Initiative Ltd. Change in beneficial interest in Spark New Zealand Ltd ordinary shares. Patrick Strange Interests noted as a director of Mighty River Power Ltd, WorkSafe New Zealand, Networks NSW (Ausgrid, Endeavour Energy, Essential Energy), and Waitahoata Farms Ltd on appointment. Appointed as a director Prue Flacks Nil. of NZX Ltd. Sue Sheldon* Appointed as a member of the Christchurch City Council Capital Release Project Group. * Sue Sheldon resigned as a director effective 31 March 2015. P. 69 P. 69 Annual ReportAnnual ReportDirector restrictions Quoted securities Under Chorus’ constitution, no person who is an ‘associated As at 30 June 2015 there were 396,369,767 ordinary shares on issue. person’ of a telecommunications services provider in New Zealand may be appointed or hold office as a director. NZX has granted Chorus a waiver to allow its constitution to include this restriction. External audit Each ordinary share confers on its holder the right to attend and vote at a shareholder meeting (including the right to cast one vote on a poll on any resolution). Non-standard designation The non-audit related fees paid to the auditor during the financial period (as detailed in Note 8 to the Financial Statements) were permitted non-audit services under Chorus’ External Auditor NZX has attached a ‘non-standard’ designation to Chorus because of the ownership restrictions in Chorus’ constitution (described below). Independence Policy. Shares and shareholders Chorus’ constitutional ownership restrictions Chorus’ constitution includes ownership restrictions that prohibit Stock exchange listings and American Depositary Receipts any person: Chorus’ shares are quoted on the NZX Main Board and on the ASX. Chorus trades under the ticker ‘CNU’. American Depositary Shares, each representing five ordinary shares and evidenced by American Depositary Receipts, are not listed but are traded on the over-the-counter market in the United States under the ticker ‘CHRYY’. Chorus’ depositary is the Bank of New York Mellon. Chorus has also issued GBP260 million foreign currency debt in the form of European medium term notes (EMTNs). Chorus is listed, and the EMTNs quoted, on the Luxembourg Stock Exchange. NZX waivers • From having a relevant interest in 10% or more of Chorus’ shares, unless the prior written consent of the New Zealand Government is obtained; or • Other than a New Zealand national, from having a relevant interest in more than 49.9% of Chorus’ shares, unless the prior written consent of the New Zealand Government is obtained. If the Board or the New Zealand Government determines there are reasonable grounds for believing that a person has a relevant interest in voting shares in excess of the ownership restrictions, the Board may, after following certain procedures, prohibit the exercise of voting rights (in which case the voting rights shall vest in the chairman) and may force the sale of shares. The Board may also A summary of all waivers granted and published by NZX in the decline to register a transfer of shares if it reasonably believes the 12 months ending on 30 June 2015 and relied on by Chorus is transfer would breach the ownership restrictions. available on Chorus’ website at www.chorus.co.nz. ASX disclosures • Chorus’ place of incorporation is New Zealand. • Chorus is not subject to Chapters 6, 6A, 6B and 6C of the Australian Corporations Act 2001 dealing with the acquisition of shares (including substantial shareholdings and takeovers). NZX has granted Chorus waivers allowing Chorus’ constitution to include the power of forfeiture, the restrictions on transferability of Chorus shares and the Board’s power to prohibit the exercise of voting rights relating to these ownership restrictions. Chorus has been advised by the Crown that AMP Capital Holdings Ltd and its related companies have been granted approval, should • Chorus’ constitution contains limitations on the acquisition they choose to exercise it in future, to acquire a relevant interest in of securities, as described below. Registration as a foreign company Chorus has registered with the Australian Securities and Investments Commission as a foreign company. Chorus has been issued an Australian Registered Body Number (ARBN) of 152 485 848. 10% or more (but not exceeding 15%) of Chorus shares. P. 70 P. 70 Annual ReportAnnual ReportUnquoted securities SECURITY CFH Equity Securities CFH Debt Securities CFH Warrants NUMBER OF SECURITIES ISSUED IN YEAR ENDED 30 JUNE 2015 TOTAL NUMBER OF SECURITIES ON ISSUE AS AT 24 JULY 2015 HOLDER 63,246,022 63,246,022 3,725,314 200,156,146 Crown Fibre Holdings Ltd 200,156,146 Crown Fibre Holdings Ltd 11,359,994 Crown Fibre Holdings Ltd PERCENTAGE HELD 100% 100% 100% CFH equity securities are a unique class of security that carry no CFH warrants are an option to acquire ordinary shares on a right to vote at meetings of holders of ordinary shares but entitle specified exercise date at a set strike price and have been issued in the holder to a right to a repayment preference on liquidation. two series, with different repayment schedules. On 30 June 2020 Dividends become payable on a portion of CFH equity securities one series will be cancelled depending on whether a 20% fibre from 2025, with the portion increasing over time. A greater portion up-take threshold is met. The terms of issue for the CFH equity securities, CFH debt securities and CFH warrants are set out in the subscription agreement with CFH and summarised on Chorus’ website at www.chorus.co.nz/investor-information/annual-reports/ annual-reports. of CFH equity securities attract dividends if a 20% fibre up-take threshold is not met by 30 June 2020. CFH equity securities can be redeemed by Chorus at any time by payment of the issue price or issue of new ordinary shares (at a 5% discount to the 20-day volume weighted average price) to the holder. In limited circumstances CFH equity securities may be converted by the holder into voting preference or ordinary shares. CFH debt securities are unsecured, non-interest bearing and carry no voting rights at meetings of holders of ordinary shares. Chorus is required to redeem the CFH debt securities in tranches from 2025 to 2036 (at the latest) by repaying the issue price to the holder. An accelerated repayment schedule applies if a 20% fibre up-take threshold is not met by 30 June 2020. Shareholder distribution as at 24 July 2015 NUMBER OF HOLDERS % OF TOTAL HOLDERS TOTAL NUMBER OF SHARES HELD % OF ORDINARY SHARES ISSUED SHAREHOLDING 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total Substantial holders 22,304 6,293 1,707 1,353 94 31,751 70.25 19.82 5.38 4.26 0.30 100 6,622,639 15,413,469 12,649,222 32,444,002 329,240,435 396,369,767 Chorus received notice of substantial product/security holders as follows: AS AT 30 JUNE 2015 AS AT 24 JULY 2015 Accident Compensation Corporation L1 Capital Pty Ltd NUMBER ORDINARY SHARES HELD 28,293,763 19,953,203 % 7.14 5.03 NUMBER ORDINARY SHARES HELD 28,293,763 ceased being a substantial holder Chorus also received substantial product/security holder notices in respect of Jason Familton and Jonathan Davis. Neither Mr Familton nor Mr Davis are individually substantial holders. Notices were submitted on the basis of the aggregation of interests in securities held by them personally and held by Accident Compensation Corporation (ACC) given the qualified powers they may have to exercise voting rights and acquire or dispose of Chorus shares beneficially owned by ACC. P. 71 P. 71 1.67 3.89 3.19 8.19 83.06 100 % 7.14 Annual ReportAnnual Report1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Twenty largest shareholders as at 24 July 2015 Shareholders holding less than a marketable parcel RANK HOLDER NAME HOLDING % 163,662,963 41.29 As at 24 July 2015 there were 10,423 shareholders holding less than a marketable parcel of A$500 of shares (based on a closing market price of A$2.53). 30,774,486 7.76 On-market buy-back New Zealand Central Securities Depository Limited* JP Morgan Nominees Australia Limited National Nominees Limited 30,341,157 7.65 HSBC Custody Nominees (Australia) Limited 23,361,633 5.89 Citicorp Nominees Pty Limited 19,781,153 4.99 RBC Investor Services Australia Nominees Pty Limited (Bkcust A/C) 9,823,082 2.47 Ronald James Woodrow HSBC Custody Nominees (Australia) Limited (A/C 3) FNZ Custodians Limited Deutsche Securities New Zealand Limited HSBC Custody Nominees (Australia) Limited (Nt-Comnwlth Super Corp A/C) 4,739,781 1.19 3,870,679 0.97 3,701,246 0.93 2,831,162 0.71 2,731,178 0.68 There is no current on-market buy-back. Net tangible assets per security As at 30 June 2015, consolidated net tangible assets per share was $1.62 (30 June 2014: $1.43). Net tangible assets per share is a non-GAAP financial measure and is not prepared in accordance with NZIFRS. Revenue from ordinary activities and net profit In the year ended 30 June 2015 Chorus’: • Revenue from ordinary activities decreased 4.9% to $1,006 million; and • Profit from ordinary activities after tax, and net profit, attributable to shareholders decreased 38.5% to $91 million. Subsidiaries Chorus New Zealand Ltd Kingfisher Nominees Pty Limited 2,475,755 0.62 Directors: Mark Ratcliffe (chairman), Andrew Carroll, Nick Investment Custodial Services Limited (A/C C) 1,987,320 0.50 Woodward, Vanessa Oakley and Lucy Riddiford (as alternate director for Vanessa Oakley). BNP Paribas Noms Pty Ltd (DRP) 1,919,842 0.48 New Zealand Depository Nominee Limited (A/C 1) Cash Account 1,901,087 0.47 Bond Street Custodians Limited (Macq High Conv Fund A/C) 1,702,394 0.42 Brian Hall resigned as a director of Chorus New Zealand Ltd on 4 September 2014. Nick Woodward was appointed as a director of Chorus New Zealand Ltd on 21 October 2014. Director remuneration Forsyth Barr Custodians Limited (1-33) FNZ Custodians Limited (DRP NZ A/C) 1,661,671 0.41 The directors of Chorus New Zealand Ltd are all employees and do not receive any remuneration in their capacity as directors. 1,198,625 0.30 Changes in director interests Citicorp Nominees Pty Limited (Colonial First State Inv A/C) 1,065,289 0.26 Mark Ratcliffe: Appointed as a director of The New Zealand Initiative Ltd. Change in beneficial interest in Spark New Zealand 20. Sandhurst Trustees Limited (S I S F A/C) 1,000,000 0.25 Ltd ordinary shares. * New Zealand Central Securities Depository Ltd provides a custodial depository service which allows electronic trading of securities by its members. P. 72 Nick Woodward: Interests in Spark New Zealand Ltd and Chorus Ltd ordinary shares noted on appointment. Chorus LTI Trustee Ltd Chorus LTI Trustee Ltd was incorporated on 11 December 2014 and has undertaken no transactions since then. Directors: Clayton Wakefield, Keith Turner and Prue Flacks. No Chorus LTI Trustee Ltd directors resigned in the year ended 30 June 2015. Director remuneration The directors of Chorus LTI Trustee Ltd are all directors of Chorus Ltd and do not receive any remuneration in their capacity as directors of Chorus LTI Trustee Ltd. Other subsidiaries Chorus has no other subsidiaries. Annual ReportGlossary Backbone network Fibre cabling and other shared network elements required either in the common areas of multi-dwelling units to connect individual apartments/offices, or to serve premises located along rights of way. Bandwidth fibre access A fibre service that provides dedicated bandwidth (up to 10Gbps download speed) between an end-user and their retail service provider’s equipment in the local exchange. Baseband A technology neutral voice input service that can be bundled with a broadband product or provided on a standalone basis. Baseband IP Used by retail service providers to provide a copper voice service from their exchange equipment via Chorus equipment in cabinets or exchanges. Bitstream 2,3,4 Refers to services defined under the UFB contract. Bitstream 2 and 3 are mass market services (between 30Mbps and 100Mbps downstream speeds). Bitstream 4 is a premium fibre service, which is the equivalent of HSNS fibre for corporate and UFB priority end-users. CFH Crown Fibre Holdings Limited, the Government organisation that manages New Zealand’s rollout of Ultra-Fast Broadband infrastructure. Chorus Chorus Limited and subsidiaries. Commission Commerce Commission – the independent Crown Entity whose responsibilities include overseeing the regulation of the telecommunications sector. Direct fibre access Also known as ‘dark’ fibre, a fibre service that provides a point to point fibre connection and can be used to deliver backhaul connections to mobile sites. EBITDA EMTN FY Gigabit Gbps HSNS IFRS IP IT Earnings before interest, income tax, depreciation and amortisation. European Medium Term Note. Financial year – twelve months ended 30 June. e.g. FY15 is from 1 July 2014 to 30 June 2015. The equivalent of 1 billion bits. Gigabit Ethernet provides data transfer rates of about 1 gigabit per second. Gigabits per second. A measure of the average rate of data transfer. High Speed Network Service – a high speed Layer 2 service with dedicated bandwidth on either copper or fibre. International Financial Reporting Standards – the rules that the financial statements have to be prepared by. UCLL Internet Protocol. Information Technology. Layer 0, 1, 2 Refers to the layers within the Open Systems Interconnection model. Layer 0 is ducts and manholes. Layer 1 is the physical cables and co-location space. Layer 2 is the data link layer including broadband electronics. LFCs Local Fibre Companies – refers to the three other organisations the Government has contracted with for the UFB rollout in non-Chorus areas. OECD RBI share SLES SLU STD TDL TRL TSLRIC TSO UBA UCLFS UFB VDSL MBIE Mbps Ministry of Business, Innovation and Employment – the Government Ministry that oversees telecommunications policy and the RBI rollout. Megabits per second – a measure of the average rate of data transfer. Naked broad- band/UBA Broadband only connections, where the end-user does not also take an analogue voice service. Organisation for Economic Co-operation and Development. Rural Broadband Initiative – refers to the Government programme to improve and enhance broadband coverage in rural areas by 2016. Means an ordinary share in Chorus. Sub Loop Extension Service – enables retail service providers to connect a sub loop UCLL line from a cabinet to the exchange. Sub Loop Unbundling – where retail service providers use the regulated copper line service available between the premises and cabinet. Standard Terms Determination. Telecommunications Development Levy – a $50 million annual levy on telecommunications companies, including Chorus, introduced by Government in FY10 to fund rural broadband. Scheduled to reduce to $10 million from FY20. Telecommunications Regulatory Levy – an annual levy on telecommunications companies, including Chorus, to fund the Commerce Commission’s costs. Total Service Long Run Incremental Cost – a forward- looking cost based methodology used by the Commission in its final price review process. Telecommunications Services Obligation – a universal service obligation under which Chorus must maintain certain coverage and service on the copper network. Unbundled Bitstream Access – regulated service that enables retail service providers to use Chorus equipment to deliver broadband to end-users. Unbundled Copper Low Frequency Service – a subset of the baseband voice input service offered over copper, with pricing set at the averaged UCLL price. Unbundled Copper Local Loop – a regulated service enabling retail service providers to offer voice and broadband services on copper lines using their own electronic equipment in the exchange. Ultra-Fast Broadband – refers to the Government programme to build a fibre to the premises network to 75% of New Zealanders by 2020. Very High Speed Digital Subscriber Line – a copper- based technology that provides data transmission up to about 50Mbps downstream and 20Mbps upstream. P. 73 Annual ReportAnnual Report Directory Registered Offices New Zealand Level 10 1 Willis Street Wellington New Zealand Phone: +64 4 896 4004 Australia C/- Allens Corporate Services Pty Limited Level 5, Deutsche Bank Place 126 Phillip Street Sydney NSW 2000 Australia Phone: +61 2 9230 4000 ARBN 152 485 848 Registrars Depository BNY Mellon Shareowner Services P.O. Box 30170 College Station, TX 77842-3170 Phone: +1 201 680 6825 Email: www.bnymellon.com/shareowner shrrelations@bnymellon.com New Zealand Computershare Investor Services Limited Private Bag 92119 Auckland 1142 New Zealand Phone: +64 9 488 8777 Fax: +64 9 488 8787 Email: enquiry@computershare.co.nz www.investorcentre.com/nz Australia Computershare Investor Services Pty Limited GPO Box 3329 Melbourne 3001 Australia Freephone: 1 800 501 366 Fax: +61 3 9473 2500 Email: enquiry@computershare.co.nz www.investorcentre.com/nz Forward looking statements and disclaimer This annual report may contain forward looking statements regarding future events and the future financial performance of Chorus, including forward looking statements regarding industry trends, regulation and the regulatory environment, strategies, capital expenditure, the construction of the UFB network, credit ratings and future financial and operational performance. These forward looking statements are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond Chorus’ control, and which may cause actual results to differ materially from those expressed in the statements contained in this annual report. No representation, warranty or undertaking, express or implied, is made as to the fairness, accuracy or completeness of the information contained, referred to or reflected in this annual report, or any information provided orally or in writing in connection with it. Please read this annual report in the wider context of material previously published by Chorus and released through the NZX and ASX. Except as required by law or the listing rules of the NZX and ASX, Chorus is not under any obligation to update this annual report at any time after its release, whether as a result of new information, future events or otherwise. P. 74 

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