CNOOC Limited Annual Report 2015

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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 ReportWhile 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

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% 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

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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

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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

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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 ReportMarket 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 ReportFigure 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 ReportOutlook

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 Report1

Directors

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

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 ReportExecutive Team

1. Mark Ratcliffe
Chief Executive Officer

See previous page.

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 ReportChronology 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 ReportManagement
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 ReportManagement 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)

2014
$M

1,058

(409)

649

(322)

327

(121)

206

(58)

148

P. 14
P. 14

Annual ReportAnnual ReportIn 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 ReportRevenue commentary

Basic copper

Enhanced copper

Fibre

Value added network services

Infrastructure

Field services

Other

Total revenue

2015
$M

491

268

2014
$M

543

293

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 ReportBasic 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 ReportRevenue 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 ReportExpenditure 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

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 ReportExpenditure 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)

(12)

259

(8)

259

10–30

5–14

5–50

2–15

2–10

2–8

6–20

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 ReportThe 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)

(6)

153

159

2014
$M

(8)

(7)

126

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 ReportCapital expenditure commentary

Fibre

Copper

Common

Gross capital expenditure

2015
$M

504

597

2014
$M

566

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

504

2014
$M

338

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 ReportA 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

2014
$M

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 ReportCapital expenditure commentary (cont.)

Common capital expenditure

Information technology

Building and engineering services

Other

Total common capital expenditure

2015
$M

2014
$M

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 ReportRegulation, 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 ReportRegulation, 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 ReportAppendix 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

950

512

183

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 ReportAppendix 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)

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)

(141)

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 ReportFinancial
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 ReportIndependent 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 ReportIncome 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)

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

NOTES

2015
$M

2014
$M

1,006

1,058

(404)

602

(259)

(65)

278

(159)

127

(36)

0.23

0.19

2015
$M

(16)

(1)

(3)

(409)

649

(259)

(63)

327

(129)

206

(58)

148

0.38

0.31

2014
$M

148

(1)

149

P. 31
P. 31

Annual ReportAnnual ReportStatement 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

2015
$M

165

251

159

3,406

3,590

3,841

315

339

352

130

1,663

199

2,053

107

510

2,670

3,022

465

(3)

357

819

2014
$M

176

196

376

174

3,128

3,305

3,681

323

369

380

123

126

1,639

192

2,080

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 ReportStatement 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

465

The accompanying notes are an integral part of these financial statements

RETAINED
EARNINGS
$M

CASH FLOW
HEDGE RESERVE
$M

178

148

(60)

(5)

(60)

266

357

(1)

(16)

(1)

(3)

TOTAL
$M

624

148

(1)

149

(60)

(5)

(42)

731

(16)

(1)

819

P. 33
P. 33

Annual ReportAnnual ReportStatement 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

(414)

(48)

(132)

416

(589)

(6)

(595)

155

(138)

(96)

176

1,173

(406)

(30)

(120)

622

(690)

(7)

(697)

(3)

241

450

(505)

(42)

171

176

P. 34
P. 34

Annual ReportAnnual ReportStatement 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

271

(12)

444

(16)

(20)

(28)

416

2014
$M

148

267

(8)

479

143

622

P. 35
P. 35

Annual ReportAnnual ReportNotes 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 ReportContinuing 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 ReportNote 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

Additions

Other

Disposals

Transfers from work
in progress

180

263

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

521

(215)

(17)

(232)

289

(1)

1,559

(1,284)

(78)

(1,361)

198

(2)

(1)

(3)

103

547

(565)

7,267

547

(1)

7,815

(4,139)

(271)

(4,409)

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

6,752

(20)

(16)

(6)

(2)

607

(600)

(93)

103

7,267

(3,964)

(267)

(4,139)

103

3,128

Additions

Other

Disposals

Transfers

(1)

Transfers from work
in progress

198

253

(43)

(29)

(2)

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)

(215)

292

(1,226)

(87)

(1,284)

235

Depreciation

Disposals

Balance as at 30 June 2014 (1,716)

Net carrying amount

591

P. 38
P. 38

Annual ReportAnnual ReportNote 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)

(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

553

(344)

(65)

(409)

144

(1)

(86)

SOFTWARE
$M

OTHER
INTANGIBLES
$M

WORK IN
PROGRESS
$M

431

(21)

467

(301)

(63)

(344)

123

(1)

(52)

TOTAL
$M

519

569

(345)

(65)

(410)

159

TOTAL
$M

463

(21)

519

(302)

(63)

(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 ReportNote 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

2014
$M

500

390

250

504

(5)

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 ReportNote 3 – Debt (cont.)

EMTN

Impact of hedged rates used

EMTN at hedged rates

2015
$M

603

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

(6)

153

159

2014
$M

(7)

126

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 ReportNote 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 ReportNote 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

107

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

304

(4)

(6)

(10)

294

189

211

(4)

(8)

203

(5)

(2)

(7)

441

107

548

(13)

(12)

(25)

523

510

104

120

224

(1)

(3)

(4)

108

189

(1)

(3)

(4)

220

185

(3)

(2)

(5)

233

208

441

(5)

(8)

(13)

428

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 ReportNote 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

2014
$M

543

293

1,006

1,058

2015
$M

2014
$M

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 ReportNote 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

403

907

2014
$000’s

535

388

456

991

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

155

176

165

2014
$M

130

186

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 ReportNote 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

2014
$M

112

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

143

315

2014
$M

119

148

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 ReportNote 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)

(36)

(28)

(8)

(36)

2014
$M

206

(58)

(1)

(58)

(57)

(1)

(58)

(3)

(1)

P. 49
P. 49

Annual ReportAnnual ReportNote 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

(48)

2014
$M

(30)

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)

(1)

FINANCE
LEASES
$M

(35)

217

221

(35)

227

(35)

OTHER
$M

(8)

(5)

(3)

TOTAL
$M

190

192

(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 ReportNote 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)

(146)

(127)

(130)

(127)

(8)

(32)

(379)

(419)

296

(123)

(141)

(123)

(126)

(123)

P. 51
P. 51

Annual ReportAnnual ReportNote 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

2014
$M

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

2014
M

389

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 ReportNote 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)

2014
$M

(2)

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

1-2 YEARS
$M

2-3 YEARS
$M

3-4 YEARS
$M

4-5 YEARS
$M

GREATER THAN
5 YEARS
$M

(13)

1-2 YEARS
$M

2-3 YEARS
$M

3-4 YEARS
$M

4-5 YEARS
$M

GREATER THAN
5 YEARS
$M

(2)

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 ReportNote 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

396

0.23

148

394

0.38

Diluted earnings per share

Net earnings attributable to ordinary shareholders ($ millions)

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

469

0.19

394

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 ReportNote 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

120

123

P. 55
P. 55

Annual ReportAnnual ReportNote 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

677

1,828

2014
$M

1,242

677

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 ReportNote 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

850

(3)

927

WITHIN
1 YEAR
$M

176

575

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)

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)

215

(4)

211

(4)

677

141

891

850

892

107

127

2,056

TOTAL
$M

176

575

1,242

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)

(6)

(3)

2014
EQUITY
$M

(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

2015
$M

155

255

2014
$M

176

186

369

P. 57
P. 57

Annual ReportAnnual ReportNote 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

248

127

1,663

107

248

411

1,989

107

248

539

(318)

375

(2)

(16)

(2)

(16)

427

(16)

304

644

(16)

(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

585

(34)

(2)

(1)

448

297

379

538

(2)

(3)

(5)

(34)

(538)

731

271

123

1,639

271

419

2,042

271

101

Interest rate swaps

Cross currency interest
rate swaps

Inflows

Outflows

Electricity contracts

Forward exchange contracts

Inflows

Outflows

128

(708)

981

(6)

(34)

(4)

P. 58
P. 58

Annual ReportAnnual ReportNote 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 ReportNote 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

120

(104)

(1)

(143)

(127)

(1,663)

(107)

(73)

176

130

(119)

(4)

(148)

(123)

(1,639)

(73)

(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 ReportGovernance
& Disclosures

CONTENTS

Governance & Disclosures
The Chorus Board
Diversity at Chorus
Remuneration and Performance
Disclosures

62
62
64
65
69

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Annual ReportGovernance & 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 ReportBoard 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

* 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.

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Annual ReportAnnual ReportMarket 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

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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.

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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.

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Annual ReportAnnual ReportDirector 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

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.

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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

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Annual ReportAnnual ReportDisclosures

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

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

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.

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Annual ReportAnnual ReportDirector 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 ReportUnquoted 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

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%

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

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 Report1.

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 ReportGlossary

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

Gigabit

Gbps

HSNS

IFRS

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

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 ReportAnnual Report