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Annual Report | 2017
Annual Report | 2017
1
1
Chorus Board and management overview
Chorus Board and management overview
15 Management commentary
15 Management commentary
25
25
Financial statements
Financial statements
57 Governance and disclosures
57 Governance and disclosures
76 Glossary
76 Glossary
FY17 result overview
FIXED LINE CONNECTIONS
BROADBAND CONNECTIONS
FY17
FY16
1,602,000
7%
1,727,000
FY17
FY16
1,186,000
3%
1,226,000
FIBRE CONNECTIONS
NET PROFIT AFTER TAX
FY17
FY16
305,000
69%
180,000
FY17
$113m
FY16
$91m
EBITDA1
ADJUSTED2 EBITDA
FY17
$652m
FY16
$594m
FY17
$652m
FY16
$677m2
DIVIDEND
EMPLOYEE ENGAGEMENT SCORE
FY17
21cps
FY16
20cps
FY17
81%
FY16
83%
1 Earnings before interest, income tax, depreciation and amortisation (EBITDA) is a non-GAAP profit measure. We monitor this as a key performance
indicator and we believe it assists investors in assessing the performance of the core operations of the business.
2 Adjusted to reflect the change in regulated copper pricing from 16 December 2015 and the effect of capitalisation of certain labour and IT costs
previously expensed. Refer to Appendix one on page 23 for the detailed calculation.
Annual Report | 2017 Chorus Board and management overview
Kate McKenzie Chief Executive
Patrick Strange Chairman
This report is dated 28 August 2017 and is signed on behalf of the Board of Chorus Limited.
Dear Investors
We made substantial progress this year in our drive to bring better
A fully imputed final dividend of 12.5 cents per share will be paid
broadband to more New Zealanders. We’re now more than two-
on 10 October 2017, bringing total dividends for FY17 to 21 cents
thirds of the way towards our original goal of bringing ultra-fast
per share. The dividend reinvestment plan has been popular with
broadband (UFB) within reach of more than one million customers
shareholders and will be available again so we may retain cash
by 2020. By the end of June 2017 we’d already achieved 35% uptake,
for network investment purposes.
connecting more than 275,000 customers to fibre broadband in our
UFB areas. That’s a significant increase from the 24% uptake at the
start of FY17 and well ahead of our initial contractual target of 20%
uptake by 2020. Our employee engagement score of 81% shows
our people believe strongly in the contribution they’re making to
New Zealand’s future through the rollout of this critical infrastructure.
We achieved net profit after tax of $113 million and delivered a good
financial performance for the year with EBITDA of $652 million.
This was underpinned by a strong focus on costs as we streamlined
copper provisioning processes and began capitalising more labour
expenses relating to certain fibre provisioning service desk costs.
However, FY17 EBITDA declined relative to adjusted1 EBITDA of
The strength of demand for fibre broadband gave us the
$677 million for FY16. This reflects a reduction in revenue as other
confidence in January to announce an extension of our UFB
fibre companies gain connections in their fibre rollout areas and
partnership with the Government. This time to extend fibre to
large vertically integrated retailers encourage their customers on to
approximately 200,000 more customers. More than half of
their own wireless broadband networks. In response, we launched
New Zealand’s population will be able to connect to our fibre
a campaign in May to promote the benefits and availability of better
network when the rollout is complete. When you combine our
fixed line broadband and this has had positive early results.
areas with those to be served by the Government’s other fibre
partners, fibre broadband has been committed to about 85% of the
population with just $1.5 billion in Government financing. It’s little
wonder that New Zealand’s rollout is now cited by other countries
as an example of success for both model and cost.
We undertook a strategic review during the year to consider
technology and industry developments. New Zealand is very
different from most other countries where fibre networks haven’t
been built. Fibre is clearly the best technology to meet the
ever increasing and changing data demands of customers and
Network investment also requires financial and regulatory stability.
retailers. Given the likely infrastructure requirements and service
During the year the Government took some significant steps
characteristics of future wireless technology, and the extensive
that will see us transition to a utility-type regulatory framework
nature of our fibre to the home network, we believe wireless
from 2020. This promises to allow UFB network providers the
will continue to be a largely complementary access technology.
opportunity to earn normal returns over the lifetime of their
We believe our assets can potentially also support a number of
investments. Our evolution towards a utility model continued to
future uses that are still in their infancy.
encourage shareholder interest out of Australia, leading to our
inclusion in the S&P/ASX 200 Index in May 2017. During FY17, our
market capitalisation increased from $1.7 billion to $1.9 billion and
total shareholder returns were 18% for the period.
1 Adjusted to reflect the change in regulated copper pricing from 16 December 2015 and the effect of capitalisation of certain labour and IT costs
previously expensed. Refer to Appendix one on page 23 for the detailed calculation.
P | 1
Annual Report | 2017 1. Connecting customers to better broadband
Last year we acknowledged we needed to become a more
customer-oriented broadband company. We devoted considerable
focus to customer outcomes during FY17.
1.1 The fibre installation experience
CUSTOMER SATISFACTION1
Improving the fibre connection process and delivering a high
quality connection experience for customers was our number one
operational priority for the year.
Our fibre installation workforce grew to 615 field crews by the end
of FY17, up from 524 crews at the start. They completed 129,000
new fibre connections nationwide during FY17, a substantial
increase from 93,000 connections in FY16. Productivity improved
significantly after we reorganised service company responsibility for
fibre installations in October. That helped reduce national weighted
average lead times for a connection from 17 working days in June
2016 to 11 days by April 2017. Lead times subsequently increased
to 22 days by the end of June after we received about 28,000 fibre
orders in May. This was our largest ever month of orders and 33%
higher than in May 2016.
The best measure of our improvement is customer satisfaction
with fibre installations. Customers on average rated the overall
experience 7.4 out of 10 by the end of June 2017, a significant
increase from 6.9 out of 10 in June 2016. There’s clearly still a
way to go before we achieve our goal of delivering an effortless
experience for customers. Clear communication with customers,
technicians turning up when expected and making sure every
installation meets our expected standards are the keys to better
results. We supported improved communication processes by
offering to manage all customer interaction for retailers from
early 2016. We’ve now reduced this support as retailers have
implemented their own processes, or moved to our new automated
fibre provisioning system.
These process improvements and increased productivity have
helped reduce reschedules by our technicians from 14% to 4%.
Customer escalations reduced from 7% to 4%, reflecting our
initiatives to ensure our quality standards are met and the growing
experience of our field crews following the initial ramp up in the
workforce to meet demand.
Our focus on improving the fibre installation experience included
JUNE 16
6.9
out of 10
JUNE 17
7.4
out of 10
PROVIDING RESIDENTIAL SERVICE
WHEN SCHEDULED
JUNE 16
78%
JUNE 17
91%
TECHNICIAN RESCHEDULES
JUNE 16
14%
JUNE 17
4%
trialling new initiatives to make the connection process more
CUSTOMER ESCALATIONS
seamless for customers. For example, we’ve begun testing new
connection methods, such as approaching groups of homeowners
on a street by street basis to have their fibre installation completed,
rather than waiting for them to place an order individually. We’ve
also been working with subdivision developers to provide new
homes with working fibre connections when building work is
completed. In the past, the homeowner would have to move into
the premises and then order the final connection, resulting in a
service delay.
JUNE 16
7%
JUNE 17
4%
1 As measured on a three month rolling average.
P | 2
Annual Report | 2017 1.2 Maintaining our focus on copper
Figure 1:
network connections
While the fibre network may be the growth area of our business,
we remain committed to ensuring the approximately 1.3 million
connections on our copper network receive stable and reliable
service. Following a challenging 2016 winter, our service companies
employed more people and we undertook a focused proactive
maintenance programme. We’re very pleased with the way the
network performed through two cyclones in autumn and the speed
with which customers were reconnected. Restoration times were
still within a world-class 24 hour mark at the end of June.
Our copper broadband network continues to deliver high quality
service. For example, a copper fixed line connection has an average
fault rate of once every five years, with loss of service being about
18 hours on average, which stacks up very favourably against
international comparisons. However, there are a small percentage
Our UFB uptake
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of customers who are not receiving the level of reliability and
JUNE 2013
JUNE 2014
JUNE 2015
JUNE 2016
JUNE 2017
Customers connected
% Uptake
stability they should. During the year we identified about 20,000
copper lines that were no longer meeting acceptable levels of
service and we encouraged retailers to proactively migrate those
customers to our new fibre network.
Figure 2:
UFB rollout and uptake by region
BUILD 100% COMPLETE
Figure 1:
Our UFB uptake
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JUNE 2013
JUNE 2014
JUNE 2015
JUNE 2016
JUNE 2017
Customers connected
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Initial 2020 target: 20% uptake
Actual FY17 uptake: 35%
Uptake June 2016
Uptake June 2017
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P | 3
Annual Report | 2017
2. Our challenges and opportunities
As a network business, the core of what we do is fundamentally
simple. Our purpose is to bring better broadband to
New Zealanders through ongoing investment and innovation
and the more people that connect to our network, the better
the returns on our network investment should be. However, we
operate in a complex environment, in part because much of our
business is heavily regulated. This is further complicated by the
unique dynamics of New Zealand’s telecommunications market,
built around structural separation of the historical incumbent
Figure 3:
Regulation: moving to a utility model
(Final regulatory framework policy decisions announced
by Government on 1 June)
Fibre – post 2020 utility framework
vertically integrated retail operator (i.e. Telecom New Zealand, now
• Regulated asset base (RAB) to be set by
Spark) from its wholesale only network arm (i.e. Chorus), and the
Commerce Commission:
continuing evolution of technology and customer demand.
Bearing in mind these complexities, the following are the material
challenges and opportunities we’re currently focused on.
2.1 Regulatory environment
Current regulatory framework
- depreciated historical cost for pre 2011 assets
- depreciated actual cost for post 2011 assets and
- increased by unrecovered losses incurred pre 2020
- no retrospective effi ciency review
• Revenue cap with commercial geographically
averaged pricing except for:
We currently operate within the regulatory framework established
by the Telecommunications Act. This framework was amended
- two anchor products (voice only + entry level
broadband – 100/20Mbps fi bre) at 2019 prices + CPI
in 2011 to facilitate our demerger from Telecom New Zealand.
- similar price cap for direct fi bre access
Approximately 65% of our FY17 revenues were from copper services
with pricing and terms regulated by the Commerce Commission
(the Commission) under the Act. As we saw with the copper price
reviews conducted by the Commission between early 2012 and
late 2015, changes to copper pricing can have a significant impact
on our business. At the conclusion of its price review process
in December 2015, the Commission set a five-year schedule of
pricing for our regulated copper services.
Our fibre services aren’t currently regulated. Most are instead
subject to contractual pricing and terms agreed with the
Government as part of our UFB1 and UFB2 contracts. The UFB1
contract applies through to the end of the UFB1 rollout in December
2019. The UFB2 contract applies through to the end of that rollout.
- after 2023 the Commission can review the revenue
cap model, as well as the anchor products subject to
specifi ed conditions & statutory criteria
Copper – post 2020 legacy framework
WHERE FIBRE IS AVAILABLE:
• Copper network to be deregulated and
Telecommunications Service Obligation (TSO) removed
• Chorus can withdraw copper service, subject to
minimum consumer protection requirements
While there is a lot of oversight from the regulator and the
Crown contract, since December 2015 we have been able to
WHERE FIBRE IS NOT AVAILABLE:
• Copper remains regulated and TSO applies
be increasingly focused on customer experience and ongoing
• Copper pricing capped at 2019 levels
investment and innovation for the future.
with CPI adjustments
• Commission required to review pricing framework no
later than 2025
We’re also subject to the requirements of the Commerce Act 1986,
Fair Trading Act 1986 and four open access deeds of undertaking
for copper, fibre and Rural Broadband Initiative services. These
deeds represent a series of legally binding obligations focused on
the provision of services on a non-discriminatory or equivalent
basis. The Commission can recommend to the Communications
Minister that services not currently regulated be regulated and
vice versa.
This regime will remain in place after 2020 except for matters that
are dealt with in the revised utility model.
P | 4
Annual Report | 2017 Moving to a utility model
2.2 Network demand and substitution
The pricing and terms on which we deliver copper and fibre access
The New Zealand broadband market has been growing
services from 2020 onwards has been the subject of a government
consistently for many years, fuelled by the emergence of
regulatory framework review. The Government released its final
broadband as the fourth utility and ongoing premises growth.
policy decisions from this review on 1 June 2017.
In Auckland, for example, about 400,000 new homes are forecast
The Government has decided that our newer fibre investment will
to be needed by 2040.
be regulated under a utility style building block model framework.
Against this backdrop, the total number of fixed line connections on
This model is already used to regulate other New Zealand
our network reduced from 1,727,000 to 1,602,000 during FY17. This
utility businesses such as electricity lines and gas networks. It
reflects three significant competitive dynamics:
is recognised as supporting efficient private sector investment
to meet network upgrades and increasing consumer demands
through ongoing incentives to innovate, invest and improve
efficiency for the long term benefit of customers. The copper
network will be deregulated in areas where fibre is available, but will
remain regulated where fibre is not available. Key features of the
proposed regime are summarised in Figure 3.
• Fixed line competition, primarily in those areas where the
Government’s three other fibre network partners – Northpower
(Whangarei area), Ultra-Fast Fibre (central North Island), and
Enable (Christchurch area) – are building fibre to the premises
networks. They had connected approximately 140,000
customers by the end of June 2017, up from an estimated
85,000 customers at the end of June 2016. We also face
The Government will need to pass legislation to implement
competition from Vodafone’s hybrid fibre coaxial cable network
these proposed changes. A Bill was introduced to Parliament on
in Wellington and Christchurch which it has been marketing
8 August 2017. The legislative process won’t be completed until
as a fibre alternative. In addition, there are metro and backhaul
after the general election scheduled for September 2017. If and
when legislation is passed, it will be subject to interpretation and
fibre networks operated by providers including Vector, Citylink,
Unison, Vocus, Vodafone and Spark in some areas.
implementation by the Commission.
Legislative detail will be important to ensure the Commission
implements a smooth transition to the new regime in time for 2020
without shocks for anyone. The Commission will need to determine
key input methodologies that will set the rules for then setting the
• Fixed wireless competition from large vertically integrated retailers
seeking to leverage their mobile network investments. Spark,
for example, has announced an intention to reduce its Chorus
network costs and increase margins by encouraging 20-25% of
its copper broadband customers to move to fixed wireless.
starting value of our regulated asset base, the regulatory weighted
• Ongoing reduction in voice only lines as customer demand
average cost of capital, cost allocations, expenditure allowances
declines. This reflects a combination of changing demographics,
and our maximum allowable revenue. There is the possibility that in
households switching to mobile only voice connections and
exercising discretion the Commission sets the initial regulated asset
consolidation of multiple lines.
base and our revenue cap, for example, at lower than expected
levels. There will also be information disclosure requirements.
The Commission’s input methodologies and price/quality
determination process will be subject to the different forms of
merits review by the Courts.
In the event that the Commission doesn’t complete its process
by 2020, the Government proposal is that key fibre and copper
prices will be frozen at the then existing pricing levels, adjusted for
inflation, for up to 24 months.
We’ll continue to be an active participant in the ongoing legislative
and regulatory process outlined above. There is a clear need for the
framework to strike a balance between providing the broadband
innovation and quality customers want with the need for investors
to receive a fair return on the significant network investments
they’ve made. Many investors have made their own submissions
to this effect through the earlier phases of the regulatory review.
We welcome the Government’s progress to date towards a refreshed
regulatory framework that supports efficient investment without
costly duplication of utility infrastructure.
P | 5
Annual Report | 2017 Figure 4:
The New Zealand fixed line market
Rationalisation, new entrants and new business models are disrupting the NZ market.
BBC iPlayer Apple TV Google Play Netfl ix YouTube Hulu Amazon
LOCAL MEDIA (BROADCAST)
Sky TV
Deploying IP
set-top boxes
LOCAL MEDIA (ON DEMAND)
Neon
Lightbox
RETAIL SERVICE PROVIDER
TVNZ
OnDemand
TV3
3Now
Vodafone
Spark
(+Skinny)
2degrees
Vocus
Trustpower
Others
e.g. Megatel
MyRepublic, NOW,
Stuff Fibre
MOBILE NETWORK
Peak hour – an ever growing mountain of data
FIXED LINE ACCESS NETWORK
HFC cable:
Wellington +
Christchurch
~60k customers
Chorus
Nationwide network access
wholesaled to ~100 retail service providers;
Fibre to pass ~1.3m homes and businesses
Local Fibre Companies
Enable
Northpower
Ultrafast Fibre
Fibre to pass ~430k homes and businesses
Peak hour – an ever growing mountain of data
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Time of day
June 2016
June 2017
Note: data represents average of traffic across all days in June, excluding corporate traffic.
Wireless Broadband
Power + Broadband
Note: UFB fi bre network will cover ~85% of NZ population
Enabling and promoting better broadband
A reduction in connections has consequences for our revenues and
profitability, as does customers shifting from higher cost services
to alternative lower cost services. To mitigate these risks we’re
continually investing in our copper and fibre services and working
with retailers to enhance the customer experience.
We made a lot of enhancements to our network during the
year to provide customers with better broadband options.
This work included:
As a structurally separated wholesaler, we’ve tended to rely
on retailers to promote our network services to their existing
and potential customers. However, we don’t believe it’s in
customers’ interests to switch to potentially inferior wireless
networks, especially when they aren’t fully aware of the potential
consequences for their existing home network set-up or their
broadband experience as data needs increase. Given these
considerations and the changing market dynamics, we decided
to take steps to raise awareness of the better broadband options
already available to customers on our network.
• extending fibre past 106,000 more premises for the UFB rollout
Our initiatives have included making more network information
• making gigabit services available across our fibre footprint
about VDSL and fibre availability public via the address checker
• increasing the entry level 30Mbps fibre service to 50Mbps
• deploying new Dynamic Line Management technology to
automatically improve the stability of copper broadband
connections, resulting in a significant improvement in
average speeds
• upgrading 125 rural broadband cabinets with fibre optic cable
and VDSL broadband capability.
on our website (see www.chorus.co.nz/broadband-checker)
and launching our first ever mainstream advertising campaign
in May 2017. The campaign encouraged New Zealanders to ask
for better (see www.askforbetter.co.nz) and generated a strong
response, with about 83,000 website visitors and 31,000 address
checks. We also worked directly with retailers to encourage them
to upgrade their customers to better broadband by providing
contributions to their upgrade costs.
P | 6
Figure 5:
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Peak 1,084 Gbps
51%
INCREASE
Peak 1,084 Gbps
51%
INCREASE
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4
1
5
4
:
4
1
5
1
:
5
1
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4
:
5
1
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1
:
6
1
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:
6
1
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:
7
1
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:
7
1
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:
8
1
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8
1
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:
9
1
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:
9
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1
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1
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2
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2
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3
2
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4
:
3
2
Time of day
June 2016
June 2017
Note: data represents average of traffic across all days in June, excluding corporate traffic.
Annual Report | 2017
Figure 4:
Figure 5:
Peak hour – an ever growing mountain of data
1,100
1,000
900
800
700
600
500
400
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200
100
0
)
s
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Peak 1,084 Gbps
51%
INCREASE
6am
3pm
6pm
9pm
5
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Time of day
June 2016
June 2017
Note: data represents average of traffic across all days in June, excluding corporate traffic.
The New Zealand fixed line market
Rationalisation, new entrants and new business models are disrupting the NZ market.
BBC iPlayer Apple TV Google Play Netfl ix YouTube Hulu Amazon
TVNZ
OnDemand
TV3
3Now
LOCAL MEDIA (BROADCAST)
Sky TV
Deploying IP
set-top boxes
LOCAL MEDIA (ON DEMAND)
Neon
Lightbox
RETAIL SERVICE PROVIDER
MOBILE NETWORK
Vodafone
2degrees
Vocus
Trustpower
Spark
(+Skinny)
Others
e.g. Megatel
MyRepublic, NOW,
Stuff Fibre
FIXED LINE ACCESS NETWORK
HFC cable:
Wellington +
Christchurch
~60k customers
Chorus
Nationwide network access
wholesaled to ~100 retail service providers;
Fibre to pass ~1.3m homes and businesses
Local Fibre Companies
Enable
Northpower
Ultrafast Fibre
Fibre to pass ~430k homes and businesses
Peak time data demand favours fixed line broadband
Figure 5:
Our promotion of better broadband has been supported by
growing awareness of the importance of reliable broadband
Peak hour – an ever growing mountain of data
at peak demand times. As Figure 5 shows, between June 2016
fixed wireless networks share capacity and are more prone to
This congestion results in service degradation when most
congestion at peak times.
people are online in the evening, illustrated by independent
Wireless Broadband
Power + Broadband
Note: UFB fi bre network will cover ~85% of NZ population
9pm each evening. This trend is continuing as more and more
1,000
New Zealanders use their broadband connection to stream video
900
and below 60% in rural areas. In contrast, copper and fibre fixed
line performance remains stable at around 95% or better. Another
and June 2017 we saw a 51% increase in the average amount
of data traffic through our network at the peak time around
1,100
testing by Truenet. Figure 6 shows wireless median best speed
Peak 1,084 Gbps
performance reducing at peak times to almost 75% in urban areas
800
content on demand. Where feasible, we design our fixed line
)
s
p
network, whether copper or fibre, to support peak time demand
b
G
and provide a reliable and consistent performance. In contrast,
700
(
consequence of peak time congestion is the significant increase in
buffering, where video content pauses because of delays in content
51%
INCREASE
downloading, as shown in Figure 7.
t
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Figure 6:
400
100
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June 2017: Peak speed
90
85
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l
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Time of day
June 2017
Note: data represents average of traffic across all days in June, excluding corporate traffic.
M
A
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M
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8
M
A
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P
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8
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1
Urban ADSL
Urban VDSL
Fibre
Rural ADSL
Rural VDSL
Cable
Urban Fixed Wireless
Rural Fixed Wireless
Source: TrueNet Urban and Rural Broadband Reports – April – June 2017
P | 7
Annual Report | 2017
Fixed line and 5G – a complementary future
While there is much speculation and marketing hype about
the potential speeds and performance of so-called 5G mobile
developments, the transmission and capacity characteristics of
fibre optic technology give us confidence that fibre broadband
will continue to outperform mobile technology. Global 5G
standards aren’t expected to be agreed before 2020. This means 5G
deployments are unlikely to occur until later in 2020 unless network
operators risk deploying non-standard equipment. We already offer
1 gigabit per second connections into New Zealand homes and
these have no datacap constraints. By 2020 we’ll have completed
our UFB1 fibre rollout in large cities and towns and we’ll be well
advanced on our UFB2 rollout to smaller centres.
4.8%
There is also uncertainty about the economic case for mobile
network operators to undertake the small cell 5G deployments
needed to deliver higher mobile speeds. A multitude of sites will
be required for transmission purposes and each small cell site will
only serve a very limited number of customers due to line of sight
requirements. This is in addition to the spectrum and fibre backhaul
assets likely to be required. We, therefore, envisage a potentially
important and complementary future for shared infrastructure
operators such as us in a 5G future.
2.3 The UFB rollout
We’re a cornerstone partner in phases 1 and 2 of the Government’s
UFB initiative. This initiative is building a fibre to the home network to
approximately 85% of New Zealanders. Our network rollout began
in 2011 and will pass about one million premises. An estimated
1.3 million customers will be able to connect to this network.
Building the fibre network past these homes and businesses is
estimated to cost more than $2 billion. This amount excludes the
significant additional cost of connecting each customer, the total
cost of which will depend on the level of uptake over time.
The Government, through Crown Fibre Holdings (CFH), is providing
up to $1.22 billion in financing. This financing was agreed to
help make the business case for building the UFB network ahead
of demand and acknowledging the significant risks involved.
We receive the Government financing as the network is built past
premises according to our agreed deployment plan. We issue
debt and equity securities in return. The debt will be redeemed in
tranches from 2025 to 2036, while an increasing portion of the
equity securities attract dividend payments from 2025 onwards.
Given the large funding requirements related to the UFB rollout,
it’s critical that we maintain an appropriate capital structure for our
financial profile. The Board considers that a ‘BBB’ or equivalent
credit rating is appropriate for a company such as ours. If our
credit rating falls below investment grade we would require CFH
approval to pay a dividend on our ordinary shares and, after 2019,
to continue accessing Government financing for the UFB2 rollout.
Figure 7:
Buffering average vs peak hours (8-9pm)
35%
30%
25%
20%
15%
10%
5%
0
s
t
n
e
m
e
r
u
s
a
e
m
l
l
a
f
o
%
a
s
a
s
t
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e
v
e
g
n
i
r
e
f
f
u
B
29.0%
25.8%
11.1%
0.2%
0.1%
0.1%
0.4%
0.0%
0.0%
WIRELESS
(MOBILE)
FIBRE
VDSL
2.0%
0.4%
ADSL
April 2017
May 2017
June 2017
Source data: TrueNet Urban Broadband Report – April-June 2017
There are customers who do not use much data and for whom
wireless networks may provide a viable network alternative.
However, our view is that ever increasing data demands and the
evolution of new data hungry devices and applications, such as 4K
televisions and virtual reality, will only continue to fuel the demand
for bandwidth. More than 60% of New Zealand households are
thought to be on unlimited broadband plans and average monthly
bandwidth demand on our network has reached 155 gigabytes per
customer. We’re forecasting average monthly data usage of 680GB
per customer by 2020 based on historical growth rates. Currently,
wireless broadband retailers have monthly datacaps of up to 120GB
and only offer unlimited data on fixed line plans.
Figure 8:
Average monthly data usage per connection
on our network
250GB
200GB
150GB
100GB
50GB
0
155
123
102
84
DEC 2015
JUNE 2016
DEC 2016
JUNE 2017
Copper
Fibre
Average
Source data: Chorus
P | 8
Annual Report | 2017
Figure 9:
UFB rollout summary
UFB1
UFB2
TOTAL
PREMISES TO BE PASSED
up to 830,900
up to 168,200
up to ~1 million
ESTIMATED COMMUNAL
CAPEX TO PASS PREMISES
$1.75 to $1.80 billion
$370 to $410 million (includes rights
of way with more than 10 premises)
$2.12 to $2.21 billion
CFH FUNDING
up to $929 million
50% CFH debt, 50% CFH equity
up to $291 million
35% CFH debt, 65% CFH equity
up to $1.22 billion
CUSTOMERS ABLE TO
CONNECT BY ROLLOUT END
~1.1 million
~203,000
~1.3 million
CONNECTION CAPEX
subject to demand
If we breach our design, build, delivery or operational obligations
Earthquakes
under the UFB contract, the Government may be entitled to
In recent years we’ve had several major earthquakes that have
remedies such as default payments, financial penalties, liquidated
demonstrated the resilience of our network.
damages and management step in and termination rights.
We are, therefore, very focused on ensuring the UFB rollout
progresses smoothly. Our confidence in our delivery of the UFB1
rollout is reflected in our UFB2 agreement with the Government
announced in January 2017, which will extend fibre to about
200,000 more customers.
Like any large scale, long duration infrastructure construction
project, the UFB rollout could be subject to unforeseen costs.
To mitigate this risk we have fixed contracts in place for the
communal network deployment (i.e. past homes and businesses),
• The Christchurch earthquakes of 2010 and 2011 resulted in
limited damage to our network despite the largest quake
of 7.1 magnitude. Despite the ground acceleration forces
experienced, damage to our exchange buildings was minimal
and instead tended to be to localised cables.
• The Kaikoura earthquakes in November 2016, with the largest
quake of 7.8 magnitude, also resulted in limited damage to our
network. The greatest impact was on the coastal fibre routes
owned by other network providers.
as well as the connections to customers. These contracts are with
Cybersecurity
third party suppliers including Visionstream, Broadspectrum, Downer
As a lifeline utility provider we have a strong focus on avoiding
and Universal Communications Group. Our agreements with these
network disruption and mitigating potential cybersecurity risks. This
third parties generally contain binding service level requirements
focus includes security governance through policies, processes, and
and provide for remedies for failure. We’re working closely with our
registers to ensure that cybersecurity risks are contemplated and
service company partners on the installation experience because
addressed through technology selection, delivery practices, and
poor customer experience entails potential reputational risk for
ongoing operations of IT systems. Regular external reviews provide
us. We’ve made good progress this year, but there’s still work to be
assurance and feedback on our cybersecurity risk assessments and
done and we need to balance fluctuations in demand with the need
controls. These include external audits and ad-hoc reviews.
As a wholesale network operator our risks are different from those
of retail-facing network operators. Our insurances cover key
cybersecurity risks and potential liabilities from cybersecurity events
are limited through our customer contracts.
to maintain our workforce at sustainable levels.
2.4 Network assets and cybersecurity
Our network infrastructure may be damaged or interrupted by
a range of factors. These include equipment or power failure,
cable cuts, and damage caused by weather, earthquake, fire or
third parties. Network damage or interruption could result in lost
revenue, higher capital expenditure and operating costs, liabilities to
retailers and reputational consequences.
We have a comprehensive insurance programme typical of large
scale infrastructure utilities and we utilise modelling from GNS
Science to undertake probability based loss estimate modelling.
P | 9
Annual Report | 2017 3. Our people, communities and the environment
3.1 Health & safety
We also saw proof of our progress in a reduction in injury rates.
We place the utmost importance on keeping our people healthy
During the 13 million hours worked in FY17 we, including our
and safe. This includes our 1,032 employees and the more than
service companies, recorded:
4,000 people working on our behalf to build, connect and maintain
our network. Our health and safety focus also extends to anyone
who is in, or in the vicinity of, our workplaces.
We’ve increased our focus on critical risks, established an open
reporting culture and are continuing to improve our health and
• a Total Recorded Injury Frequency Rate (TRIFR) of 2.62 vs 5.77
in FY16 (this is lost time injuries + medical treatment injuries +
restricted work injuries divided by total work hours x 1,000,000.
This is a global standard that we can use to benchmark ourselves).
• a Lost Time Injury Frequency Rate (LTIFR) of 1.23 vs 1.86 in FY16
safety reporting so we can identify learnings from incidents and
(this is the number of lost time injuries divided by total work
opportunities for targeted initiatives. We’ve worked closely with
hours x 1,000,000. Again, this is a global measure).
our service company partners to standardise our tracking and
reporting measures. We regularly screen our contractors and
suppliers to ensure their systems and procedures meet our health
and safety expectations. We also require that new service company
technicians complete a work training competency programme for
field work, endorsed by the New Zealand Qualifications Authority,
before they can work on our network.
While these rates show improvement, too many injuries are
still occurring. We want to do better than just complying with
standard requirements. For FY18 we intend to focus our efforts
on specific initiatives including:
• working closely with our contracted partners to address
ongoing incidents involving ladder work and strikes on
The evolution of our health and safety programme is reflected
in the fact that during the year we achieved Tertiary Level in
an Accident Compensation Corporation Workplace Safety
Management Practices audit. Our graduation from Primary to
Tertiary Level recognises we have a clear record of established
systems and practices operating effectively in our workplace.
Figure 10:
Injury frequency rates FY16 – FY17
underground networks
• reducing driving incidents
• enhancing our procedures for people working alone in
our offices and in the field.
5.77
2.62
1.86
1.23
TRIFR
LTIFR
FY16
FY17
e
t
a
r
y
c
n
e
u
q
e
r
f
y
r
u
n
j
I
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
P | 10
Annual Report | 2017
3.2 Our people and communities
Keeping communities connected
We had our first change in leadership this year with our founding
We’re also busy in numerous local communities through our
chief executive, Mark Ratcliffe, stepping down in February 2017 after
everyday work as a nationwide network owner and builder.
successfully navigating us through the regulatory turbulence of the
Our service company crews often go the extra mile to keep
last five years. Kate McKenzie is our new chief executive and was
communities connected when our network is affected by extreme
previously Chief Operations Officer of Telstra in Australia. Kate brings
events and we work closely with Civil Defence organisations.
a breadth of regulatory, operational and customer experience.
We interact closely with councils and community groups to discuss
As a core part of our business strategy, we’re committed to
providing equal opportunity to all of our employees. We believe
this will maximise our collective capability, allow us to leverage
diversity of thought, better reflect and understand our diverse
customer base and, as a result, lead to better decision making and
our network plans and initiatives. For the next phase of the UFB
rollout, for example, we’ve met with more than 50 local councils
to discuss our deployment plans and identify opportunities to
reduce disruption to communities through infrastructure sharing
and coordinated work programmes.
higher shareholder value. We invest in recruitment, development
A low carbon network
and wellbeing programmes supporting a diverse and inclusive,
safe, transparent and rewarding workplace. Our people share a
strong commitment to our goal of delivering better broadband
for New Zealanders. For the sixth consecutive year we received
best employer accreditation from Aon Hewitt with an employee
engagement score of 81%. Although this was down slightly from
83% in 2016, it is still a very strong score and indicates we’re
providing a positive workplace experience for employees. About
400 of our people used their sponsored volunteer day to help their
local community through activities such as tree planting, assisting in
local hospices and other community projects.
Socio-economic benefits of broadband
We’re an ultra-low carbon business. Our investment in better
broadband networks is helping establish a platform for low carbon
communities, by enabling communications options that enhance
social interaction and change the way businesses operate, including
teleworking and less car or plane travel. We’re committed to a
sustainable operating model and we report our carbon emissions
annually to CDP, a global organisation that collects companies self-
reported environment information.
Our greenhouse gas emissions are reducing at world-class
rates. In the five years since our FY12 base year we’ve reduced
our emissions by 36%. In FY17 our emissions were 23 kilotonnes
of carbon dioxide equivalents, down 11% from FY16. Network
We believe our network will benefit communities by delivering
electricity consumption and our field service vehicle fleet
significant socio-economic benefits. Alcatel Lucent’s Bell Labs
accounted for 87% of our emissions. We source electricity from
found that UFB could contribute $32.8 billion in economic
the national grid and this was 85% renewable in FY17. No significant
benefits to New Zealand over 20 years. Sapere Research Group
environmental incidents were recorded during FY17.
recently estimated wider social benefits from maximum UFB
uptake at about $2 billion annually, on top of a $3.3 billion annual
Figure 11:
contribution to GDP from uptake by businesses. Some of the socio-
economic benefits include distance learning, e-health, interactive
conferencing and remote working. We’re working with a range of
groups to help foster innovative uses of our network and achieve
Greenhouse gas emissions
these projected benefits, including:
40,000
• supporting the New Zealand Innovation Partnership, a network
of organisations that support digital innovation in New Zealand
30,000
across business, education and government
• backing the rollout of CO.STARTERS, a programme that helps
create a strong support network for business start-ups, into five
towns and cities
20,000
e
2
O
C
s
e
n
n
o
T
• donating $75,000 to the Manaiakalani Education Trust to help
10,000
expand their digital training model for Māori and Pasifika students
from low income households
FY12 base
• sponsoring residential gigabit broadband services in Dunedin
at entry level wholesale prices through to December 2018.
Dunedin won our Gigatown competition in 2014
• contributing to a Gig-Start Fund, for Dunedin entrepreneurs and
innovators to deliver new fibre-based services, and the GigCity
Dunedin Community Fund, for groups using fibre to benefit
their community
• sponsoring the Health & Science category of the 2017
New Zealand Innovators Awards.
0
FY12
FY13
FY14
FY15
FY16
FY17
Electricity
Refrigerant
Service Company Fleet
Diesel Generators
Travel
Other
P | 11
Annual Report | 2017
4. Outlook
We’ve been building a fantastic infrastructure asset for New Zealand
FY18, so we can achieve the Government’s objective of a smooth
since 2011 and fibre broadband will soon be available more widely
implementation by the regulator by 2020.
than in almost any other country in the world. It’s a great example
of how a bold vision, pursued by committed people who care
deeply about what they’re doing for New Zealand, can lead to
remarkable things. The job’s not done yet though. We need to keep
delivering our UFB rollout on time and on budget.
Our other near term focus remains customer experience. We know
we need to continue to work hard to make the fibre installation
experience as seamless as possible, so customers don’t delay
switching to fibre, or consider opting for alternative broadband
networks. We’ll keep collaborating with our service companies and
We’re focused on making sure, as the owner and operator of a
retailers to make the process faster and simpler, including trying
utility asset critical to New Zealand, that we’re well positioned to
new methods such as completing installations in batches while
grow and thrive into the future. A stable regulatory environment
we’re building the network down the street. By making things
is central to this. We took some important steps towards this in
simpler, customer experience and cost reduction should follow.
FY17 with the Government acknowledging that broadband is just
as essential as electricity, or water, with its final policy decision
for a path to a utility-like regulatory framework. We look forward
to working to finalise the legislative details of this new regime in
We recognise that fibre’s widespread recognition as the
premium broadband product means we’ll continue to lose
copper connections to the Government’s other fibre partners.
Figure 12:
What we’re focused on
Better broadband
Transforming customer experience and cost
• Driving broadband uptake and retention
• Optimising the fibre/VDSL connection experience
• Providing customers with a network that is fast,
reliable and congestion free
for customers
•
Implementing new models for fibre connection
Delivering the future broadband network
Creating opportunities to grow
• Delivering our UFB rollout on time and on budget
• Underpinned by a regulatory framework that supports
ongoing investment
•
Identifying new open access business opportunities,
including the role of fibre in future uses cases such as
non-broadband access points and the Internet of Things
P | 12
Annual Report | 2017 However, we’re confident our fixed line network – whether copper
At the same time, we’re thinking carefully about the ways in
or fibre – offers solid reliability and consistent performance that
which we can leverage our network for future products and
makes it superior to wireless technology more often than not. As
services as technology evolves. New Zealand has already shown
viewing habits shift online and peak time data usage grows, it is
how efficient fibre investment can avoid the costly duplication
network capacity that matters and that is where a fixed line network
of utility infrastructure and deliver healthy retail competition.
has a distinct advantage. Growing customer reliance on digital
Now we’re turning our minds to how we might use our urban fibre
platforms will make network resilience increasingly critical.
footprint for new non-broadband connections, like closed circuit
One of the benefits of operating an open access network is that it
has fostered an increasingly competitive retail market. This means
we have a range of retailers willing to promote better broadband
TV or wireless network micro-cells, and responding to growing
demand for dispersed cloud computing by utilising our exchanges
as data centres.
options as a means of growing their market share. We’ll continue
There are many opportunities to consider and they give us reason
working with them to let New Zealanders know that better
to believe our business has a bright and interesting future.
broadband is already available for many of them, whether its fibre or
VDSL broadband on our copper network where fibre isn’t available.
We may see more network competition emerge in rural areas, with
the Government due to allocate $150 million in grants to extend
rural broadband coverage and address mobile coverage black spots.
The Government’s initiatives will not solve the digital divide for all
rural residents. Our ongoing investment in rural areas will inevitably
be shaped by the future regulatory settings and our ability to earn a
fair return.
We’re also focused on the future make-up of our network. With
growing fibre uptake and the proposed regulatory changes from
2020, we’re starting to plan for when we might start switching off
parts of the copper network in our fibre areas. That is still some
time in the future and customers will be informed well in advance.
Figure 13:
Leveraging the utility of our network
FIBRE BACKHAUL
FIBRE CABLE
COPPER CABLE
NZ PREMISES GROWTH:
~400,000 NEW HOMES EXPECTED
IN AUCKLAND BY 2040
URBAN FIBRE FOOTPRINT ENABLING
NEW NON-BROADBAND CONNECTIONS
(E.G. CCTV, MICRO CELLS)
RURAL
URBAN
NATIONAL NETWORK FOOTPRINT
DATA GROWTH DRIVING DEMAND
EXCHANGE DIVERSITY AND
ENABLES HD ONLINE TV TO 95%+
FOR REGIONAL AND MOBILE
NETWORK PROXIMITY AN ASSET
OF PREMISES
BACKHAUL
FOR DATA CENTRE USAGE
RETAIL SERVICE PROVIDERS
International cable
P | 13
Annual Report | 2017 P | 14
Annual Report | 2017 Management
commentary
16
In summary
17 Revenue commentary
18 Expenditure commentary
21 Capital expenditure commentary
23
Long term capital management
23 Appendix one
P | 15
Annual Report | 2017 Management commentary
Operating revenue
Operating expenses
Earnings before interest, income tax, depreciation and amortisation
Depreciation and amortisation
Earnings before interest and income tax
Net interest expense
Net earnings before income tax
Income tax expense
Net earnings for the year
In summary
2017
$M
1,040
(388)
652
(339)
313
(154)
159
(46)
113
2016
$M
1,008
(414)
594
(327)
267
(140)
127
(36)
91
We report earnings before interest, income tax, depreciation and
Capital expenditure for FY17 was $639 million. This was marginally
amortisation (EBITDA) of $652 million for the year ending 30 June
below updated FY17 guidance range of $640 million to $680 million
2017 (FY17), an increase of $58 million on the prior year. Net
and largely reflects a combination of slightly lower than forecast
earnings increased by $22 million year on year.
demand for fibre connections and lower than expected average
Results for FY17 reflect a full 12 months of benchmarked
Unbundled Bitstream Access (UBA) pricing being in effect. In the
connection costs. About 79% of our capital spend was fibre related,
mainly for the UFB programme.
prior year, this pricing was only effective for five and a half months
We will pay a final dividend of 12.5 cents per share on 10 October
with aggregate copper pricing applied for the remaining months.
2017. The dividend reinvestment plan will be available. We expect to
The FY17 results also reflect the impact of capitalisation of certain
service desk costs.
pay a dividend of 22 cents per share for FY18, subject to no material
adverse changes in circumstance or outlook.
CONNECTIONS
30 JUN 2017
CONNECTIONS
31 DEC 2016
CONNECTIONS
30 JUN 2016
976,000
1,109,000
1,221,000
81,000
1,000
213,000
18,000
8,000
98,000
1,000
207,000
10,000
9,000
108,000
2,000
197,000
9,000
10,000
305,000
244,000
180,000
1,602,000
1,678,000
1,727,000
650,000
244,000
292,000
784,000
199,000
231,000
900,000
159,000
167,000
1,186,000
1,214,000
1,226,000
Baseband copper
UCLL
SLU/SLES
Naked copper (UBA / VDSL)
Baseband IP
Data services over copper
Fibre (mass market + premium business)
Total fixed line connections
Copper UBA (includes naked UBA)
VDSL (includes naked VDSL)
Fibre (mass market)
Total broadband connections
P | 16
Annual Report | 2017 Revenue commentary
Basic copper
Enhanced copper
Fibre
Value added network services
Infrastructure
Field services
Other
Total revenue
2017
$M
450
248
198
36
23
76
9
2016
$M
489
242
133
35
20
83
6
1,040
1,008
Revenue overview
About 292,000 of our fibre connections were to mass market
Our product portfolio encompasses a broad range of wholesale
customers (which includes lower speed business and education
broadband, data and voice services across a mix of regulated and
connections).
commercial products. Revenue increased compared to the prior
period broadly reflecting the net effect of:
Customers continued to favour higher speed fibre plans over the
entry level 50Mbps plan. By 30 June 2017 approximately 69%
• Changes in regulated copper pricing between the Commission’s
of mass market fibre connections were on plans of 100Mbps or
benchmarking and final pricing review decision; and
greater, compared to 54% at the start of the period.
• A reduction of 125,000 total fixed line connections (from
1,727,000 to 1,602,000).
Copper
At 30 June 2017, there were approximately 976,000 baseband
copper lines, a decrease of 245,000 lines from 30 June 2016.
This reduction was partially offset by the migration of connections
to our other fixed line connection products such as VDSL and fibre.
Premium business fibre connections remained stable at 13,000
connections, although there was a shift in connection types with
Direct Fibre Access Service connections increasing to about 5,000
connections, while Bandwidth Fibre Access Service and HSNS
Premium fibre connections totalled 7,000 at the end of the period.
The remaining 1,000 premium business fibre connections are
largely backhaul connections.
The number of unbundled lines declined to 82,000 (including
Value added network services
1,000 Sub Loop Unbundled lines (offered in conjunction with our
The main revenue driver for this category is national data transport
commercial Sub Loop Extension Service)).
Uptake of VDSL continued to grow, up from 159,000 at 30 June 2016
to 244,000 by 30 June 2017 as we continued to expand our VDSL
footprint and promoted its availability more widely.
services, which provide network connectivity across backhaul links
as well as aggregation handover links. Although retailers have been
replacing legacy backhaul connections with alternative cheaper
inputs, revenues in this category increased because overall demand
for transport and bandwidth solutions has grown.
‘Data service over copper’ connections continued to decline as
retailers opted for cheaper inputs. Baseband IP connections grew
Infrastructure
as some retailers used the service to deliver their own voice over
Infrastructure revenue relates to services that provide access to
our network assets, such as renting exchange space. This revenue
category increased as retailers purchased more co-location space
to support their network growth.
internet protocol service over copper.
Fibre
Fibre revenues are earned from our business fibre products (such
as HSNS Premium) and UFB residential and business fibre services.
This includes UFB backhaul and Direct Fibre Access Services, which
provide point to point networking solutions and can be used to
deliver backhaul connections to mobile sites.
Nationwide fibre connections increased more than two thirds
during the year, from 180,000 to 305,000 lines. This was driven
by the growing demand for fibre services and the ongoing
expansion of the UFB footprint. We had approximately 275,000
fibre connections within the areas where we had deployed UFB
communal network at 30 June 2017, up from 156,000 connections
at 30 June 2016.
P | 17
Annual Report | 2017 Revenue commentary (cont.)
Field services
Maintenance revenues are generated when faults are on the retail
Field services revenues includes work performed by service company
service provider’s network rather than ours, and depend on the
technicians providing new services, chargeable cable location services,
number of reported faults. It is difficult to establish specific trends
maintaining retail service provider networks and relocating our
in this revenue category because it is dependent on third party
network on request. As we utilise service companies to perform field
demand or damage to our network by third parties.
services work, there is a direct cost associated with all field services
revenues recognised in the network maintenance expense category.
We receive provisioning revenues when technicians install services and
the revenue is dependent on the number and nature of orders, and the
Other
Other income largely consists of revenue generated from the
provision of billing and network management services to Spark,
dividends received from electricity trusts that supply us with
type of work required. There was reduced copper provisioning work in
electricity and any other minor income.
FY17, partially offset by higher greenfields and infill subdivision work.
Expenditure commentary
Operating expenses
Labour costs
Provisioning
Network maintenance
Other network costs
Information technology costs
Rent and rates
Property maintenance
Electricity
Insurance
Consultants
Regulatory levies
Other
2017
$M
2016
$M
74
43
87
27
60
17
13
14
3
10
13
27
78
60
89
34
65
16
12
14
3
4
13
26
Total operating expenses
388
414
Operating expenditure of $388 million is lower than FY16 largely
orders, the type of work required to fulfil them, technician labour,
due to a significant reduction in provisioning costs and the effect of
material and overhead costs. Field provisioning costs have declined
the capitalisation of certain service desk costs ($14.8 million labour
as fibre uptake increases and fewer copper services are ordered.
costs and $6.7 million IT costs).
Labour costs of $74 million for the year represent staff costs that
The unit cost per truck roll has also decreased as more connections
are completed without a technician visit to the customer’s premises.
are not capitalised. Excluding the impact of the capitalisation,
Network maintenance costs are driven by the number of reported
labour costs increased largely due to the annualised impact of
faults, the type of work required to fix the faults and the extent of
additional people employed in the prior year. At 30 June 2017 we
our proactive maintenance programme. Our network maintenance
had 1,032 permanent and fixed term employees, up from 944
costs fell slightly in FY17, despite more adverse weather and
employees at 30 June 2016. We employed additional people to:
earthquake events compared to FY16.
• establish an inventory and spares function that was previously
The total number of faults decreased as more customers shifted
outsourced
• assist with the increase in greenfields subdivision activity
• develop new IT systems and processes.
to the newer fibre network and total connections declined.
The average cost per fault reduced because of a slightly lower
proportion of more expensive time and material faults in FY17
compared to FY16. We also completed slightly more chargeable
Provisioning costs are incurred where we provide new or changed
maintenance work on retailers’ networks during the period.
services to our customers. These costs are driven by the volume of
P | 18
Annual Report | 2017 Expenditure commentary (cont.)
Other network costs relate to costs associated with service
Property maintenance costs increased as some previously deferred
partner contract costs, engineering services, project costs unable
maintenance was completed.
to be capitalised, and the cost of network spares. These costs
reduced significantly in FY17 as one-off programmes, such as the
enhancement of network records, were largely incurred in FY16 and
costs fell for fibre orders that were subsequently cancelled.
Electricity is used to operate the network electronics and this is
dependent on the number of sites, electricity consumption and
electricity prices. Electricity costs remained largely flat, despite
increased line charges and additional network related consumption,
Information technology costs were $60 million after excluding the
as electricity prices were lower in FY17 than FY16. About 50% of
$6.7 million of IT costs now included in the capital costs of new
our requirements have been hedged, with a current end date of
fibre connections. Overall, maintenance and support costs have
March 2019.
remained largely consistent with Spark shared systems continuing
to be replaced and offset by our own solutions. Non-capital related
project costs were slightly higher due to costs coming through
in FY17 relating to work on the decommissioning of Spark-linked
systems and equipment.
Rent and rates costs relate to the operation of our network estate
(for example, exchanges, radio sites and roadside cabinets). Rates are
Consultant costs increased as a result of the current review of the
telecommunications regulatory framework and a strategic review
of the organisation.
Regulatory levy reflects the amount paid for the Telecommunications
Development Levy and the Telecommunications Regulation Levy. The
expense for the current year reflects the estimated liability for FY17.
levied on network assets both above and below ground. The aerial
‘Other’ includes expenditure on general costs such as advertising,
deployment of fibre has resulted in increased pole rental costs and
telecommunications, travel, training and legal fees. Overall savings
the assets deployed as part of the UFB rollout are being progressively
in most areas were offset by an advertising campaign to raise
included in the rating calculations of local bodies.
awareness of the better broadband options available to customers.
Depreciation and amortisation
2017
$M
2016
$M
ESTIMATED
USEFUL LIFE
(YEARS)
WEIGHTED AVERAGE
USEFUL LIFE
(YEARS)
Depreciation
Copper cables
Fibre cables
Ducts and manholes
Cabinets
Property
Network electronics
Other
Less: Crown funding
Total depreciation
Amortisation
Software
Other intangibles
Total amortisation
53
72
39
45
19
67
–
(21)
274
65
–
65
56
60
35
41
18
68
–
(15)
263
64
–
64
10–30
20
20–50
5–20
5–50
2–15
2–10
2–8
6–20
22
20
49
10
30
9
6
4
20
The weighted average useful life represents the useful life in each
Software and other intangibles largely consist of the software
category weighted by the net book value of the assets.
components of billing, provisioning and operational systems,
During the year ended 30 June 2017, $639 million of expenditure on
network assets and software was capitalised. The ‘UFB communal’
and ‘Fibre connections and fibre layer 2’ included in ‘fibre’ capital
including spend on Spark-owned systems. A total of $47 million of
software was capitalised during the year, which will be amortised
over an average of four years.
expenditure was largely capitalised against the network assets
Our depreciation profile is expected to continue to change,
categories of fibre cables (48%) and ducts and manholes (33%).
reflecting the greater mix of longer dated assets for the UFB and
The average depreciation rate for UFB communal infrastructure
RBI rollouts. The offset of Crown funding against depreciation
spend is based on an estimated life of 38 years, reflecting the very
is expected to continue to increase over time as the amount of
high proportion of long life assets being constructed.
funding received from the Crown accumulates, with the associated
amortisation to depreciation increasing accordingly.
P | 19
Annual Report | 2017 Expenditure commentary (cont.)
Net finance expense
Finance income
Finance expense
Interest on syndicated bank facility
Interest on EMTN – GBP
Interest on EMTN – EUR
Interest on fixed rate NZD bonds
Fair value adjustment on interest rate swap
Ineffective portion of change in fair value of cash flow hedges
Other interest expense
Capitalised interest
Total finance expenses excluding Crown funding
Crown Fibre Holdings securities (notional interest)
Total finance expense
2017
$M
(10)
16
53
27
18
6
17
18
(4)
151
13
164
2016
$M
(7)
60
53
–
3
9
17
(5)
137
10
147
Interest costs (excluding ineffectiveness, fair value adjustments and
The foreign exchange exposure on the EUR EMTN has been fully
Crown funding) for FY17 was the same as FY16 at $128 million. Debt
hedged and interest rate exposure partially hedged. For hedge
of $1,609 million (30 June 2016: $1,540 million) increased during
accounting purposes the hedging relationship consists of a fair
the year and the higher interest expense was offset by a decreased
value hedge and two cash flow hedges. Ineffectiveness on the cash
weighted effective interest rate on debt (30 June 2017: 6.1%;
flow hedges of $11 million flowed through interest expense as a
30 June 2016: 6.6%).
non-cash charge.
We continued to restructure our debt during the year, with
The GBP EMTN hedging relationship was reset with a fair value of
$665 million of syndicated bank facility debt being repaid early and
$49 million on 9 December 2013 following the close out of the
replaced with EUR 500 million of Euro Medium Term Notes (EMTN)
interest rate swaps relating to the EMTN. During the current year,
($785 million). The EMTN was issued on 18 October 2016 with a
ineffectiveness of $6 million (30 June 2016: $9 million) flowed
fixed interest rate of 1.125% and maturity date 18 October 2023.
through interest expense. A further $15 million remains in the
Other interest expense includes finance lease interest of $14 million
(30 June 2016: $13 million) and $3 million amortisation (30 June
2016: $3 million) arising from the difference between fair value and
proceeds realised from the GBP EMTN interest rate swap reset.
At a minimum, we aim to maintain 50% of our debt obligations at
a fixed rate of interest. We have fully hedged the foreign exchange
exposure on the EUR and GBP EMTNs with cross currency interest
rate swaps. The floating interest on the GBP cross currency
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.
Taxation
The 2017 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
interest rate swaps has been fully hedged using interest rate swap
year to 30 June 2017.
instruments, along with a portion of the floating interest on the EUR
cross currency interest rate swaps.
As at 30 June 2017, approximately 71% (30 June 2016: 88%) of the
outstanding debt obligation was fixed through derivative or fixed
rate debt arrangements.
Ineffectiveness
The increase in total finance expense largely arises from
ineffectiveness on the new EUR EMTN cash flow hedges of
$11 million and $6 million of non-cash costs relating to a
$250 million interest rate swap that is not currently in a hedging
relationship for accounting purposes.
P | 20
Annual Report | 2017 Capital expenditure commentary
Fibre
Copper
Common
Gross capital expenditure
2017
$M
503
79
57
639
2016
$M
486
67
40
593
Gross capital expenditure for the year to 30 June 2017 was $639 million and includes capitalised labour and IT costs relating to certain fibre
provisioning service desk costs. This was slightly below the FY17 guidance range of $640 million to $680 million. This was the result of a
combination of slightly lower than forecast demand for fibre connections and lower than expected average connection costs.
Fibre capital expenditure
UFB communal
Fibre connections and fibre layer 2 1
Fibre products and systems
Other fibre connections and growth
RBI
Total fibre capital expenditure
2017
$M
183
258
17
45
–
503
2016
$M
194
205
18
47
22
486
Fibre capital expenditure includes spend specifically focused
fibre uptake. The programme view was also updated from $900
on fibre assets and was about 79% of our FY17 gross capital
to $1,100 to a new range of $1,050 to $1,250, in 2011 dollars, to
expenditure spend.
The cost of the deployment of UFB communal network for the
year was $183 million. This included $41 million spent on work in
progress for communal network scheduled to be completed in
include the capitalisation of certain labour and IT costs. We expect
to be able to hold average standard connection costs per unit flat
in nominal terms across the term of the UFB1 contract rather than
secure further economies in connection costs.
the following year, of which $3 million was spent on beginning
A significant proportion of the fibre connections spend was upfront
UFB2 deployment.
The average cost per premises passed during the year was $1,651.
This was marginally above the top end of FY17 guidance for an
average cost of $1,550 to $1,650 reflecting a different timing
investment for ‘backbone’ network to enable the connection of
customers located along rights of way or in multi dwelling units.
This spend ultimately enables multiple customers in a building, or
along a right of way, to connect.
of completion and handover of more expensive premises than
During FY17 we agreed with CFH that we would continue to fund
originally anticipated.
Fibre connections and layer 2 spend was $258 million as the
volume of fibre connections grew as a result of our expanding UFB
footprint and increasing uptake. Demand for higher cost premium
business fibre connections was a little lower than in FY16.
non-standard residential connections through to the end of the
build period (2019) on the basis that these costs are likely to be
recognised in the future regulatory framework. In the event that
this hasn’t occurred by 31 December 2020, or not all of our actual
UFB non-standard installation costs are included in the asset base,
the dates on which we must redeem or provide dividends on the
The average cost per premises connected for standard residential
CFH debt and equity securities will be postponed. At a maximum,
premises and some non-standard single dwelling unit installations
postponement would contribute approximately $60 million of
and service desk costs was $1,122, excluding the long run average
cost of layer 2 equipment.1 This was at the lower end of the
expected FY17 cost range of $1,100 to $1,250, reflecting a cheaper
actual mix of connection types. This cost now also includes
$21.5 million of capitalised labour and IT costs relating to certain
fibre provisioning service desk costs that were previously expensed.
In October we announced we expect to track at the top end of
the total UFB1 programme view for the average cost to connect
standard residential premises, due to higher mobilisation costs
in a time of relatively full employment and higher than expected
value towards non-standard installation costs incurred from 2017
to the end of 2019.
Fibre products and systems investment continued with Fibre
Fulfilment Capability taking over from the Business to Business
Portal project completed in FY16.
Capital expenditure of $45 million on other fibre connections
and growth reflected increased investment in ‘greenfield’ fibre
subdivisions and ongoing investment in fibre transport to support
regional backhaul and broadband capacity.
1 Layer 2 equipment, such as gigabit capable passive optical network ports, is installed ahead of demand as the UFB footprint expands.
P | 21
Annual Report | 2017 Capital expenditure commentary (cont.)
Copper capital expenditure
Network sustain
Copper connections
Copper layer 2
Product fixed
Total copper capital expenditure
2017
$M
29
4
44
2
79
2016
$M
29
5
29
4
67
Copper capital expenditure was $79 million for the year. The increase
Capital expenditure on copper connections was down slightly.
reflected further investment in copper broadband capacity and
Demand for copper connections has reduced as demand shifts to
growth to provide better broadband for customers.
the UFB network and a contribution for new connections is required.
Network sustain expenditure includes capital expenditure where
Copper layer 2 reflects investment in network electronics and
the network is being upgraded, or where the replacement of
equipment as a consequence of demand for broadband capacity
poles, cabinets and cables is more cost effective than reactive
and growth. During FY17 we also invested $8 million in rural
maintenance. Investment to upgrade and replace copper network
broadband cabinet upgrades and $9 million in VDSL upgrades.
increased during the period, but was offset by reductions in
requests to shift network for roadworks purposes.
Common capital expenditure
Information technology
Building and engineering services
Other
Total common capital expenditure
2017
$M
34
19
4
57
2016
$M
25
13
2
40
Common capital expenditure was $57 million.
Contributions to capital expenditure
Information technology spend increased, largely as a result of
a project to replace legacy copper provisioning platforms and
continued investment in other supporting technologies.
Building and engineering services spend also increased because
we partially upgraded some exchanges and replaced older fuel
tanks and generators.
‘Other’ common capital expenditure includes items such as office
accommodation and equipment.
We received $7 million in contributions towards our gross capital
expenditure in FY17 for network damaged by third parties, or
instances where central or local government authorities asked us
to relocate or rebuild existing network. These contributions are
included as part of Crown funding.
P | 22
Annual Report | 2017 Long term capital management
We will pay a final dividend of 12.5 cents per share on 10 October
During the UFB build programme to 2020, the Board expects to be
2017 to all holders registered at 5.00pm 26 September 2017.
able to provide shareholders with modest dividend growth from
The shares will be quoted on an ex-dividend basis from
a base of 20 cents per share paid for FY16, subject to no material
25 September 2017. The dividends paid will be fully imputed, at a
adverse changes in circumstances or outlook.
ratio of 28/72, in line with the corporate income tax rate. In addition,
a supplementary dividend of 2.2 cents per share will be payable to
shareholders who are not resident in New Zealand.
The dividend reinvestment plan will remain in place for the final
dividend at a discount rate of 3%. Shareholders who have previously
elected to participate in the dividend reinvestment plan do not
need to take any further action. For those shareholders who wish
to participate, election notices to participate must be received by
5.00pm (NZ time) on 27 September 2017.
For FY18, Chorus expects to pay a dividend of 22 cents per share,
subject to no material adverse changes in circumstance or outlook.
The Board considers that a ‘BBB’ or equivalent credit rating is
appropriate for a company such as Chorus. It intends to maintain
capital management and financial policies consistent with these
credit ratings. At 30 June 2017, we had a long term credit rating
of BBB/stable outlook by Standard & Poor’s and Baa2/stable by
Moody’s Investors Service.
Appendix one
Non statutory measure: adjusted EBITDA
For comparative purposes this flows the pricing through FY16 as
This appendix provides a high level summary of Chorus’ adjusted
though the pricing had changed on 1 July 2015 and as though the
EBITDA for information purposes. It has been prepared on
capitalisation of certain labour ($16 million) and IT costs ($8 million)
the basis of the final pricing principle determinations effective
had occurred in FY16.
16 December 2015 and capitalisation of service desk costs.
Adjusted operating revenue
Operating expenses
Adjusted EBITDA
Total operating revenue
Total operating expenses
EBITDA
FY17
$M
1,040
(388)
652
ADJUSTED
FY16
$M
1,067
(390)
677
%
(2.6)
(0.5)
(3.8)
STATUTORY
RESULTS
$M
ADD: UBA AND UCLL
PRICE CHANGE
$M
LESS: TRANSACTION
CHARGE PRICE
CHANGE
$M
ADD: SERVICE DESK
CAPITALISATION
$M
ADJUSTED FY16
$M
1,008
(414)
594
65
-
65
(6)
-
(6)
-
(24)
(24)
1,067
(390)
677
P | 23
Annual Report | 2017 P | 24
Annual Report | 2017 Financial
statements
26
29
Independent auditor’s report
Income statement
29 Statement of comprehensive income
30 Statement of financial position
31
32
Statement of changes in equity
Statement of cash flows
34 Notes to the financial statements
P | 25
Annual Report | 2017 Independent auditor’s report
To the shareholders of Chorus Limited
Report on the audit of the consolidated financial statements
Opinion
Basis for opinion
In our opinion, the accompanying consolidated financial
We conducted our Audit in accordance with International Standards
statements of Chorus Limited and its subsidiaries (the “Group”) on
on Auditing (New Zealand) (ISA’s (NZ)). We believe that the audit
pages 29 to 56:
evidence we have obtained is sufficient and appropriate to provide
i. present fairly in all material respects the Group’s financial position
a basis for our opinion.
as at 30 June 2017, its financial performance and cash flows for
We are independent of the Group in accordance with Professional
the year ended on that date; and
and Ethical Standard 1 (Revised) Code of Ethics for Assurance
ii. comply with New Zealand equivalents to International Financial
Reporting Standards (NZ IFRS) and International Financial
Reporting Standards.
Practitioners issued by the New Zealand Auditing and Assurance
Standards Board and the International Ethics Standards Board for
Accountants’ Code of Ethics for Professional Accountants (IESBA
Code), and we have fulfilled our other ethical responsibilities in
We have audited the accompanying consolidated financial
accordance with these requirements and the IESBA Code.
statements which comprise:
Our responsibilities under International Standards on Auditing
— the consolidated statement of financial position as at 30 June 2017;
(New Zealand) are further described in the Auditor’s Responsibilities
— the consolidated income statement, statement of comprehensive
income, statement of changes in equity, and statement of cash
flows for the year then ended; and
— notes, including a summary of significant accounting policies and
other explanatory information.
P | 26
for the Audit of the Consolidated Financial Statements section of
our report.
Our firm has also provided other services to the Group in relation
to regulatory audit services, technical accounting advice and other
assurance services. The Group sponsor an award at the KPMG
Innovation Council. Subject to certain restrictions, partners and
employees of our firm may also deal with the Group on normal
terms within the ordinary course of trading activities of the business
of 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.
Materiality
The scope of our audit was influenced by our application of
materiality. Materiality helped us to determine the nature, timing
and extent of our audit procedures and to evaluate the effect of
misstatements, both individually and on the consolidated financial
statements as a whole. The materiality for the consolidated
financial statements as a whole was set at $7.8 million. This was
determined with reference to a benchmark of Group profit before
tax. We chose profit before tax as the benchmark as the Group is
a profit oriented business and in our view, this is a key measure of
the of the Group’s performance. Materiality represents 5% of the
benchmark.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the Group
financial statements in the current period. We summarise below
those matters and our key audit procedures to address those
matters in order that the shareholders as a body may better
understand the process by which we arrived at our audit opinion.
Our procedures were undertaken in the context of and solely for the
purpose of our statutory audit opinion on the consolidated financial
statements as a whole and we do not express discrete opinions on
separate elements of the consolidated financial statements.
Annual Report | 2017 THE KEY AUDIT MATTER
HOW THE MATTER WAS ADDRESSED IN OUR AUDIT
1. Capitalisation and asset lives
As disclosed in note 1 of the financial statements, the Group has
Our audit procedures in this area included, among others:
network assets of $3,973 million (2016: $3,656 million). During the
year ended 30 June 2017 the Group has spent over $590 million in
network asset additions as it continues with its purpose of bringing
better broadband to New Zealanders.
Capitalisation of these costs and useful lives assigned to these
assets are a key audit matter due to the significance of network
assets to the Group’s business, and due to the judgement
involved in the:
— decision to capitalise or expense costs relating to the network.
This decision depends on whether the expenditure is considered
to enhance the network (and therefore capital), or to maintain
the current operating capability of the network (and therefore
an expense);
— estimation of the stage of completion of assets under
construction; and
— Examining the operating effectiveness of controls around
the addition of capital projects into the fixed asset register
and the approval of the asset life annual review.
— Assessing the nature of costs incurred in capital projects
by checking a sample of costs to invoice to determine
whether the description of the expenditure met the
capitalisation criteria.
— Evaluating a sample of assets under construction in which
no costs had been incurred in the final three months of
the financial reporting period. We challenged the status of
those assets under construction to determine whether they
remained appropriately capitalised.
— Assessing, on a sample basis, whether the accruals recorded
for assets under construction were calculated in accordance
with the progress of construction and the arrangements
— estimation of the useful life of the asset once the costs are
with external suppliers.
capitalised. There is also judgment when estimating asset lives
due to the uncertainty of the impact of technological change.
— Assessing the useful economic lives of the assets, by
comparing to industry benchmarks and our knowledge of
the business and its operations.
2. Chorus funding
As disclosed in notes 3, 4, 5 and 18 of the financial statements,
The procedures we performed to assess the valuation and
the Group has external debt of $1,609 million (2016: $1,540 million),
accounting treatment for the Group’s interest rate derivatives
crown funding of $698 million (2016: $639 million) and derivative
and CFH securities included:
financial instruments of $276 million (2016: $214 million).
— Our financial instrument specialists re-valued all interest rate
The CFH securities, cross-currency and interest rate derivatives
derivatives using valuation models and inputs independent
are a key audit matter due to their significance to the Group’s
from those utilised by management.
consolidated statement of financial position. There is complexity
and judgement involved in determining the appropriate valuation
and accounting treatment for the interest rate derivatives and the
CFH securities.
— Evaluating the hedge effectiveness of the interest rate
derivatives hedging the GBP and EUR denominated Euro
Medium Term Notes. In both instances, our financial
instrument specialists assessed the effectiveness of these
hedges by independently modelling the future changes
in the value of these instruments to assess whether the
underlying derivatives were effective.
— Assessing the accounting treatment of the CFH securities.
We read the underlying loan agreement and analysed
the various features of the loan agreement to determine
whether the CFH securities were a debt or equity instrument.
— Evaluating the valuation of the CFH securities. Our valuation
specialists assessed the methodology used by management
for determining the amounts allocated to debt and
government grant.
— Assessing the inputs used in the valuation of the CFH
securities. On a sample basis we compared interest rates
and credit spreads to independent sources of information to
determine an acceptable range of valuation inputs.
P | 27
Annual Report | 2017 THE KEY AUDIT MATTER
3. Accuracy of revenue
HOW THE MATTER WAS ADDRESSED IN OUR AUDIT
As disclosed in note 7 of the consolidated financial statements,
The procedures we performed to conclude on the accuracy of
the Group has revenue of $1,040 million (2016: $1,008 million).
revenue included:
Accuracy of revenue is considered to be a key audit matter due to
— Evaluating the Group’s recognition of revenue by assessing
the nature of the underlying billing processes that existed following
any revenue disputes recorded in the industry’s dispute
the Chorus demerger from Spark in 2011.
reporting tool by Chorus customers. We compared the
There are certain legacy products where the billing is based on
network consumption which cannot be easily linked to a physical
end user connection. There is a risk that revenue billed on this basis
disputes raised by Chorus customers to the revenue
recorded by Chorus and checked a sample of settled
disputes to the final settlement agreements.
may be disputed by Chorus’ customers who have a different view of
— Independently confirming the accuracy of a sample of
their consumption of the Chorus network. Due to the legacy nature
outstanding debtor balances with Chorus customers.
of these products, the volumes are decreasing each year and are
approximately 18% of revenue in the current financial year.
— Agreeing a sample of revenue adjustments recorded during
the year to authorised credit notes.
Other information
The Directors, on behalf of the Group, are responsible for
the other information included in the entity’s Annual Report.
— assessing the ability to continue as a going concern. This includes
disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless they either
Other information may include the Chorus Board and management
intend to liquidate or to cease operations, or have no realistic
overview, disclosures relating to corporate governance and
alternative but to do so.
statutory information. Our opinion on the consolidated financial
statements does not cover any other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements
our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the consolidated financial statements or our knowledge
Auditor’s responsibilities for the audit of the
consolidated financial statements
Our objective is:
— to obtain reasonable assurance about whether the consolidated
financial statements as a whole are free from material
misstatement, whether due to fraud or error; and
obtained in the audit or otherwise appears materially misstated.
— to issue an Auditor’s Report that includes our opinion.
If, based on the work we have performed, we conclude that there is
a material misstatement of this other information, we are required
to report that fact. We have nothing to report in this regard.
Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with International
Standards on Auditing (New Zealand) will always detect a material
Use of this audit report
misstatement when it exists.
This report is made solely to the shareholders as a body.
Our audit work has been undertaken so that we might state
to the shareholders those matters we are required to state to
them in the Auditor’s Report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the shareholders as a body, for
our audit work, this report or any of the opinions we have formed.
Responsibilities of the Directors for the consolidated
financial statements
The Directors, on behalf of the Group, are responsible for:
— the preparation and fair presentation of the consolidated financial
statements in accordance with generally accepted accounting
practice in New Zealand (being NZ IFRS) and International
Financial Reporting Standards;
Misstatements can arise from fraud or error. They are considered
material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken on
the basis of these consolidated financial statements.
A further description of our responsibilities for the Audit of these
consolidated financial statements is located at the External
Reporting Board (XRB) website at: https://www.xrb.govt.nz/
standards-for-assurance-practitioners/auditing-standards/
This description forms part of our Auditor’s Report.
— implementing necessary internal control to enable the
Ed Louden
preparation of consolidated financial statements that are fairly
For and on behalf of KPMG
presented and free from material misstatement, whether due to
fraud or error; and
Wellington
28 August 2017
P | 28
Annual Report | 2017 Income statement
F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 1 7
(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 7
(DOLLARS IN MILLIONS)
Net earnings for the year
Other comprehensive income
Items that will be reclassified subsequently to income statement when specific
conditions are met
Ineffective portion of changes in fair value of cash flow hedges
Effective portion of changes in fair value of cash flow hedges
Amortisation of de-designated cash flow hedges transferred to income statement
Other comprehensive income net of tax
Total comprehensive income for the year net of tax
The accompanying notes are an integral part of these financial statements
NOTE
15
15
15
NOTES
2017
$M
2016
$M
7
8
1
2
3
12
16
16
1,040
1,008
(388)
652
(274)
(65)
313
10
(164)
159
(46)
113
0.28
0.23
2017
$M
113
12
(7)
(1)
4
117
(414)
594
(263)
(64)
267
7
(147)
127
(36)
91
0.23
0.19
2016
$M
91
7
(29)
(1)
(23)
68
P | 29
Annual Report | 2017 Statement of financial position
A S AT 3 0 J U N E 2 0 1 7
(DOLLARS IN MILLIONS)
Current assets
Cash and call deposits
Income tax receivable
Trade and other receivables
Derivative financial instruments
Finance lease receivable
Total current assets
Non-current assets
Trade and other receivables
Software and other intangibles
Network assets
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Derivative financial instruments
Total current liabilities excluding Crown funding
Current portion of Crown funding
Total current liabilities
Non-current liabilities
Derivative financial instruments
Finance lease payable
Debt
Deferred tax payable
Total non-current liabilities excluding CFH securities and Crown funding
CFH securities
Crown funding
Total non-current liabilities
Total liabilities
Equity
Share capital
Reserves
Retained earnings
Total equity
NOTES
13
12
9
18
14
9
2
1
10
18
5
18
14
3
12
4
5
15
15
2017
$M
170
1
139
1
5
316
7
142
3,973
4,122
4,438
346
46
392
19
411
231
159
1,609
202
2,201
203
679
3,083
3,494
520
(22)
446
944
2016
$M
102
3
158
1
4
268
10
160
3,656
3,826
4,094
347
24
371
17
388
191
136
1,540
194
2,061
152
622
2,835
3,223
481
(26)
416
871
Total liabilities and equity
4,438
4,094
The accompanying notes are an integral part of these financial statements
On behalf of the Board
Patrick Strange, Chairman
Kate McKenzie, Managing Director
Authorised for issue on 28 August 2017
P | 30
Annual Report | 2017
Statement of changes in equity
F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 1 7
(DOLLARS IN MILLIONS)
Balance at 1 July 2015
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
Contributions by and (distributions to) owners:
Dividends
Supplementary dividends
Tax credit on supplementary dividends
Dividend reinvestment plan
Employee share plan
Total transactions with owners
Balance at 30 June 2016
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
Contributions by and (distributions to) owners:
Dividends
Supplementary dividends
Tax credit on supplementary dividends
Dividend reinvestment plan
Employee share plan
Total transactions with owners
Balance at 30 June 2017
NOTE
SHARE CAPITAL
$M
RETAINED
EARNINGS
$M
CASH FLOW
HEDGE RESERVE
$M
465
357
–
–
–
–
–
–
–
–
17
(1)
16
481
–
–
–
–
–
–
–
–
40
(1)
39
520
91
–
–
–
91
(32)
3
(3)
–
–
(32)
416
113
–
–
–
113
(83)
9
(9)
–
–
(83)
446
15
15
15
15
15
15
15
15
15
15
15
15
(3)
–
7
(29)
(1)
(23)
–
–
–
–
–
–
(26)
–
12
(7)
(1)
4
–
–
–
–
–
–
(22)
The accompanying notes are an integral part of these financial statements
TOTAL
$M
819
91
7
(29)
(1)
68
(32)
3
(3)
17
(1)
(16)
871
113
12
(7)
(1)
117
(83)
9
(9)
40
(1)
(44)
944
P | 31
Annual Report | 2017 Statement of cash flows
F O R T H E Y E A R E N D E D 3 0 J U N E 2 0 1 7
(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 finance leases
Crown funding (including CFH securities)
Proceeds from debt
Repayment of debt
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
2017
$M
2016
$M
1,070
1,003
6
(397)
(38)
(117)
524
(638)
(4)
(642)
3
117
785
(675)
(44)
186
68
102
170
3
(404)
(47)
(120)
435
(569)
(5)
(574)
5
179
585
(593)
(15)
161
22
80
102
12
13
P | 32
Annual Report | 2017 Statement of cash flows (cont.)
R E C O N C I L I AT I O N O F N E T E A R N I N G S T O N E T C A S H F L O W S F R O M O P E R AT I N G A C T I V I T I E S
(DOLLARS IN MILLIONS)
Net earnings for the year
Adjustment for:
Depreciation charged on network assets
Amortisation of Crown funding
Amortisation of software and other intangible assets
Deferred income tax
Ineffective portion of changes in fair value of cash flow hedges (pre-tax)
Other
Change in current assets and liabilities:
Change in trade and other receivables
Change in trade and other payables
Change in income tax receivable
Net cash flows from operating activities
The accompanying notes are an integral part of these financial statements
2017
$M
113
295
(21)
65
6
17
27
502
19
1
2
22
524
2016
$M
91
278
(15)
64
4
9
11
442
(11)
19
(15)
(7)
435
P | 33
Annual Report | 2017 Notes to the financial statements
Chorus includes Chorus Limited together with its subsidiaries.
Chorus is New Zealand’s largest fixed line communications
infrastructure services provider. It maintains and builds a network
predominantly made up of local telephone exchanges, cabinets,
copper and fibre cables.
Chorus Limited is a profit-orientated company registered in
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
Spark New Zealand Limited (Spark). The demerger was a condition
of an agreement with Crown Fibre Holdings Limited (CFH) to enable
Chorus Limited to provide the majority of the Crown’s Ultra-Fast
Broadband (UFB). 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) and has bonds
quoted on the NZX debt market. 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.
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 with
New Zealand equivalents to International Financial Reporting
Standards (NZ IFRS) as appropriate for profit-oriented entities, and
with International Financial Reporting Standards.
These financial statements are expressed in New Zealand dollars.
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.
Accounting policies and standards
Accounting policies that summarise the measurement basis used
and are relevant to the understanding of the financial statements
are provided throughout the accompanying notes.
The accounting policies adopted have been applied consistently
throughout the periods presented in these financial statements.
New accounting standards – NZ IFRS 9 Financial Instruments,
NZ IFRS 15 Revenue from Contracts with Customers and
NZ IFRS 16 Leases have been issued. Chorus intend to early
adopt these standards for the year ended 30 June 2018. Further
information is detailed below:
NZ IFRS 9 Financial Instruments
NZ IFRS 9 Financial Instruments addresses the classification
and measurement of financial assets and financial liabilities, the
impairment of financial assets and hedge accounting.
P | 34
NZ IFRS 9 hedge accounting rules align hedge accounting
more closely with Chorus’ risk management activities in the
following areas:
The adoption of NZ IFRS 9 will permit Chorus to reduce reported
volatility in the income statement as NZ IFRS 9 enables Chorus to
record the change in the fair value of the cost to convert foreign
currency into New Zealand dollars in the cost of hedging reserve, a
new reserve under Other Comprehensive Income. This accounting
treatment was not possible under the current accounting standards.
The retrospective application of the new accounting treatment
under IFRS 9 will have approximately $9 million positive impact on
the reported net earnings for the year.
Furthermore, NZ IFRS 9’s more principle based approach will
enable Chorus to hedge account for some of its interest rate swaps
that could not be hedge accounted under the current accounting
standards. While this is expected to reduce income statement
volatility over time, the interest rate swaps in place on transition
to NZ IFRS 9 may not be fully effective hedges so a portion of the
mark to market adjustment for these will continue to be reflected in
finance expense.
No other significant changes are expected as a result of the
classification, measurement and impairment requirements of IFRS 9.
NZ IFRS 15 Revenue from Contracts with Customers
NZ IFRS 15 enables the capitalisation of costs and revenue items
incurred in acquiring and retaining customers, and for these items
to be amortised over the course of the customer relationship.
The adoption of this standard will change Chorus’ accounting
policy around the treatment of incremental costs incurred in
acquiring new customers and retaining existing customers,
including customer incentives for an initial period. The estimated
impact of adopting this standard, based on earnings for the year
ended 30 June 2017, is an increase in revenue of $4 million,
increase in amortisation of $14 million, and decrease in expenses of
$44 million. The impact to net earnings is nil over the duration of the
customer relationship. These figures exclude any tax implications.
NZ IFRS 16 Leases
NZ IFRS 16 introduces a single lessee accounting model and
requires a lessee to recognise assets and liabilities for all leases with
a term of more than 12 months, unless the underlying asset is of low
value. Accounting by lessors is unchanged under NZ IFRS 16.
A lessor continues to classify its leases as operating leases or finance
leases, and to account for those two types of leases differently.
Management are in the process of finalising the assets subject to
lease agreements and the impact of these on the balance sheet
and income statement. Management’s process to date highlights
that the impact is expected to be material (greater that $20 million)
given Chorus’ asset intensive nature. The agreements identified to
date relate to poles, buildings, easements and IT equipment.
Annual Report | 2017 Accounting estimates and judgements
CFH securities (note 4)
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
during the period. Actual results could differ from those estimates.
Estimates and assumptions are regularly evaluated and are based
on historical experience and other factors, including expectations
of future events that are believed to be reasonable under the
circumstances. The principal areas of judgement in preparing
these financial statements are set out below.
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, technological advances, regulation and
expected disposal proceeds from the future sale of the asset.
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)
Exercising judgement when recognising Crown funding to
determine if conditions of the funding contract have 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.
Leases (note 14)
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 adjusting 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
Depreciation is charged on a straight-line basis to write down
at cost less accumulated depreciation and any accumulated
the cost of network assets to its estimated residual value over its
impairment losses. The cost of additions to network assets and work
estimated useful life. Estimated useful lives are as follows:
in progress constructed by Chorus includes the cost of all materials
used in construction, direct labour costs specifically associated
with construction, interest costs that are attributable to the asset,
Copper cables
Fibre cables
resource management consent costs and attributable overheads.
Ducts and manholes
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
Cabinets
Property
Network electronics
Other
10-30 years
20 years
20-50 years
5-20 years
5-50 years
2-15 years
2-10 years
factors, the expected period of service potential of the asset, the
Other network assets include motor vehicles, network
likelihood of the asset becoming obsolete as a result of technological
management and administration systems and radio infrastructure.
advances, the likelihood of Chorus ceasing to use the asset in our
business operations and the effect of government regulation.
Any future adverse impacts arising when assessing the carrying value
or lives of network assets could lead to future impairment losses or
Where an item of network assets comprises major components
increases in depreciation charges that could affect future earnings.
having different useful lives, the components are accounted for
as separate items of network assets.
An item of network assets and any significant part is derecognised
upon disposal or when no future economic benefits are expected
Where the remaining useful lives or recoverable values have
from its use or disposal. Where network assets are disposed of, the
diminished due to technological, regulatory or market condition
profit or loss recognised in the income statement is calculated as the
changes, depreciation is accelerated. The asset’s residual values,
difference between the sale price and the carrying value of the asset.
useful lives, and methods of depreciation are reviewed annually
and adjusted prospectively, if appropriate.
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 | 35
Annual Report | 2017 Note 1 – Network assets (cont.)
AS AT 30 JUNE 2017
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 2016
2,353
1,336
1,835
537
540
1,638
Additions
Other
Disposals
Transfers from work in progress
–
–
–
16
–
–
–
–
–
–
230
172
Balance as at 30 June 2017
2,369
1,566
2,007
Accumulated depreciation
Balance as at 1 July 2016
(1,830)
(388)
Depreciation
Disposals
Other
(53)
(72)
–
–
–
–
(476)
(39)
–
–
Balance as at 30 June 2017
(1,883)
(460)
(515)
Net carrying amount
486
1,106
1,492
–
–
(3)
49
583
(311)
(45)
2
–
(354)
229
–
7
(2)
19
–
–
(53)
88
564
1,673
(250)
(19)
1
7
(261)
303
(1,429)
(67)
53
–
(1,443)
230
4
–
–
–
1
5
(2)
–
–
–
(2)
3
99
8,342
592
8
–
(575)
592
15
(58)
–
124
8,891
–
–
–
–
–
(4,686)
(295)
56
7
(4,918)
124
3,973
AS AT 30 JUNE 2016
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 2015
2,333
1,136
1,690
485
521
1,559
Additions
Other
Disposals
–
–
–
–
–
–
–
–
–
Transfers from work in progress
20
200
145
Balance as at 30 June 2016
2,353
1,336
1,835
Accumulated depreciation
–
–
–
52
537
–
–
–
19
540
–
–
–
79
1,638
Balance as at 1 July 2015
(1,774)
(328)
(441)
(270)
(232)
(1,361)
Depreciation
Disposals
Balance as at 30 June 2016
Net carrying amount
(56)
–
(1,830)
523
(60)
–
(388)
948
(35)
–
(476)
1,359
(41)
–
(311)
226
(18)
–
(250)
290
(68)
–
(1,429)
209
4
–
–
(1)
1
4
(3)
–
1
(2)
2
87
7,815
528
528
–
–
(516)
–
(1)
–
99
8,342
–
–
–
–
(4,409)
(278)
1
(4,686)
99
3,656
There are no restrictions on Chorus’ network assets or any network
contractual commitment for acquisition and construction of
assets pledged as securities for liabilities. At 30 June 2017 the
network assets was $507 million (30 June 2016: $341 million).
Depreciation
Depreciation charged on network assets
Less: Crown funding – Ultra-Fast Broadband
Crown funding – Rural Broadband Initiative
Crown funding – Other
Total depreciation
2017
$M
295
(11)
(8)
(2)
274
2016
$M
278
(8)
(6)
(1)
263
Chorus receives funding from the Crown to finance the capital
expenditure associated with the development of the UFB network,
rural broadband services and other services. Funding is offset against
depreciation over the life of the assets the funding is used to construct.
Refer to note 5 for information on Crown funding.
P | 36
Annual Report | 2017
Note 1 – Network assets (cont.)
Property Exchanges
loss no longer exist, and the assets are no longer considered to be
Chorus has leased property exchange space owned by Spark
impaired, a reversal of an impairment loss would be recognised
subject to finance lease arrangements. These have been included
immediately in earnings.
in network assets under the property category. As at 30 June 2017
the property exchange assets capitalised under a finance lease
had a cost of $173 million (30 June 2016: $162 million) together
with accumulated depreciation of $22 million (30 June 2016:
$21 million).
The recoverable amount is the greater of an asset’s value in use
and fair value less costs to sell. Chorus’ assets do not generate
independent cash flows and are therefore assessed from a single
cash-generating unit perspective. In assessing the recoverable
amount, the estimates of future cash flows are discounted to
The Other cost movement under property exchanges relates to
their net present value using a discount rate that reflects current
a reassessment of the extent of Spark’s use of Chorus owned
market assessments of the time value of money and the risks
assets during the year. This resulted in the recognition of
$7 million previously derecognised assets and $7 million
accumulated depreciation.
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
specific to the business.
During the year ended 30 June 2017 there was no impairment
loss on the network assets or software and other intangibles
(30 June 2016: nil).
Capitalised interest
Finance costs are capitalised on qualifying items of network assets
and software assets at an annualised rate of 6.50% (30 June 2016:
6.50%). 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 $4 million (30 June 2016: $5 million)
have been capitalised against network assets and software assets.
Note 2 – Software and other intangibles
Software and other intangible assets are initially measured at cost.
At each reporting date, Chorus reviews the carrying amounts of its
The direct costs associated with the development of network and
software and other intangible assets to determine whether there is
business software for internal use are capitalised where project
any indication that those assets have suffered an impairment loss.
success is probable and the capitalisation criteria is met. Following
For impairment policy and process refer to note 1.
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
Other intangibles mainly consist of land easements.
Where estimated useful lives or recoverable values have
diminished due to technological change or market conditions,
amortisation is accelerated.
There are no restrictions on software and other intangible assets
or any software and other intangible assets pledged as securities
for liabilities. At 30 June 2017 the contractual commitment for
acquisition of software and other intangible assets was $13 million
(30 June 2016: $6 million).
P | 37
Annual Report | 2017 Note 2 – Software and other intangibles (cont.)
AS AT 30 JUNE 2017
Cost
Balance as at 1 July 2016
Additions
Transfers from work in progress
Balance as at 30 June 2017
Accumulated amortisation
Balance as at 1 July 2016
Amortisation
Balance as at 30 June 2017
Net carrying amount
AS AT 30 JUNE 2016
Cost
Balance as at 1 July 2015
Additions
Transfers from work in progress
Balance as at 30 June 2016
Accumulated amortisation
Balance as at 1 July 2015
Amortisation
Balance as at 30 June 2016
Net carrying amount
SOFTWARE
$M
OTHER
INTANGIBLES
$M
WORK IN
PROGRESS
$M
597
–
42
639
(473)
(65)
(538)
101
6
–
–
6
(1)
–
(1)
5
31
47
(42)
36
–
–
–
36
SOFTWARE
$M
OTHER
INTANGIBLES
$M
WORK IN
PROGRESS
$M
553
–
44
597
(409)
(64)
(473)
124
6
–
–
6
(1)
–
(1)
5
10
65
(44)
31
–
–
–
31
TOTAL
$M
634
47
–
681
(474)
(65)
(539)
142
TOTAL
$M
569
65
–
634
(410)
(64)
(474)
160
Note 3 – Debt
Debt is included as non-current liabilities except for those with
interest method. Some borrowings are designated in fair value
maturities less than 12 months from the reporting date, which are
hedge relationships, which means that any change in market
classified as current liabilities.
interest and foreign exchange rates result in a change in the fair
Debt is initially measured at fair value, less any transaction costs
value adjustment on that debt.
that are directly attributable to the issue of the instruments. Debt
The weighted effective interest rate on debt including the effect of
is subsequently measured at amortised cost using the effective
derivative financial instruments was 6.06% (30 June 2016: 6.63%).
Syndicated bank facility B
Syndicated bank facility C
Euro medium term notes – GBP
Euro medium term notes – EUR
Fixed rate NZD Bonds
Less: facility fees
Current
Non-current
P | 38
DUE DATE
Apr 2019
May 2020
Apr 2020
Oct 2023
May 2021
2017
$M
–
–
462
762
400
(15)
1,609
–
1,609
2016
$M
415
250
485
–
400
(10)
1,540
–
1,540
Annual Report | 2017 Note 3 – Debt (cont.)
Syndicated bank facilities
conditions (30 June 2016: $925 million). The amount of undrawn
In November 2016 syndicated facility B was repaid and cancelled.
syndicated bank facility that is available for future operating
At this time Facility C was repaid and remained available for
activities is $350 million (30 June 2016: $260 million).
future operating activities. In May 2017 Facility C was extended
from $250 million to $350 million and the termination date from
May 2019 to May 2020. As at 30 June 2017 Chorus had $350 million
committed syndicated bank facilities on market standard terms and
The syndicated bank facility is held with bank and institutional
counterparties rated – A to AAA, based on rating agency Standard
& Poor’s ratings.
Euro Medium Term Notes (EMTN)
FACE VALUE
GBP 260 million
EUR 500 million
INTEREST RATE
6.75%
1.125%
2017
$M
462
762
2016
$M
485
–
On 18 October 2016 Chorus issued EUR 500 million of Euro
interest payments. For the GBP cross currency interest rate swaps
Medium Term Notes at a fixed rate of 1.125%. They will mature in
the floating interest rate exposure on the NZD interest payments
October 2023 and have been swapped back to $785 million using
have been hedged using interest rate swaps. The EUR cross
cross currency interest rate swaps (see note 18).
currency interest rate swaps are partially hedged for the NZD interest
Chorus has in place cross currency interest rate swaps to hedge the
payments using interest rate swaps (notional amount $250 million).
foreign currency exposure to the EMTN. The cross currency interest
The following table reconciles EMTN at hedged rates to EMTN at
rate swaps entitle Chorus to receive GBP and EUR principal and GBP
spot rates as reported under IFRS. EMTN at hedged rates is a non-
and EUR fixed coupon payments for NZD principal and NZD floating
GAAP measure and is not defined by NZ IFRS.
EMTN
Impact of fair value hedge
Impact of hedged rates used
EMTN at hedged rates
2017
EUR
$M
762
17
6
785
2016
EUR
$M
–
–
–
–
2017
GBP
$M
462
–
215
677
2016
GBP
$M
485
–
192
677
The fair value of EMTN, calculated based on the present value of
$485 million) for the GBP EMTN, and $776 million (30 June 2016: nil)
future principal and interest cash flows, discounted at market interest
compared to a carrying value of $762 million (30 June 2016: nil) for
rates at balance date, was $526 million (30 June 2016: $566 million)
the EUR EMTN. This fair value has been determined using Level 2 of
compared to a carrying value of $462 million (30 June 2016:
the fair value hierarchy as described in note 19.
Fixed rate NZD Bonds
Fixed rate NZD Bonds
INTEREST RATE
4.12%
2017
$M
400
2016
$M
400
On 6 May 2016 $400 million of unsecured, unsubordinated debt securities were issued at a fixed rate of 4.12%. The maturity date is May 2021.
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: facility fees
2017
$M
–
–
462
400
–
762
1,624
(15)
1,609
2016
$M
–
–
665
485
400
–
1,550
(10)
1,540
P | 39
Annual Report | 2017 Note 3 – Debt (cont.)
No debt has been secured against assets. However, there are
complied with the requirements set out in its financing agreements
financial covenants and event of default triggers, as defined in the
(30 June 2016: full compliance).
various debt agreements. During the current year Chorus fully
Refer to note 19 for information on financial risk management.
Finance expense
Interest on syndicated bank facility
Interest on EMTN – GBP
Interest on EMTN – EUR
Interest on fixed rate NZD bonds
Fair value adjustment on interest rate swap
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
2017
$M
16
53
27
18
6
17
18
(4)
151
13
164
2016
$M
60
53
–
3
–
9
17
(5)
137
10
147
Other interest expense includes $14 million finance lease interest
interest rate swaps relating to the GBP EMTN. During the current
expense (30 June 2016: $13 million) and $3 million of amortisation
year ineffectiveness of $6 million (30 June 2016: $9 million) flowed
arising from the difference between fair value and proceeds realised
through interest expense. A further $15 million remains in the
from the swaps reset (30 June 2016: $3 million) (refer to note 18).
hedge reserve and will flow as ineffectiveness to interest expense in
The GBP EMTN hedging relationship was reset with a fair value of
$49 million on 9 December 2013 following the close out of the
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.
Note 4 – CFH securities
UFB1
Crown funding is released against depreciation over the useful lives
Chorus receives funding from the Crown to finance construction
of the relevant UFB assets, and reduces to nil.
costs associated with the development of the UFB network. For
the first phase of the UFB network build (UFB1) 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 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
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.
issued and Chorus receives $1,118 funding in return. CFH warrants
Dividends will become payable on a portion of the CFH equity
are issued for nil value. The total committed funding available for
securities from 2025 onwards, with the portion of CFH equity
Chorus over the period of UFB1 network construction is expected
securities that attract dividends increasing over time.
to be $929 million.
CFH equity securities can be redeemed by Chorus at any time
The CFH equity and debt securities are recognised initially at fair
by payment of the issue price or issue of new ordinary shares (at
value plus any directly attributable transaction costs. Subsequently
a 5% discount to the 20-day volume weighted average price) to
they are measured at amortised cost using the effective interest
the holder. In limited circumstances CFH equity securities may be
method. The fair value is derived by discounting the $559 of equity
converted by the holder into voting preference or ordinary shares.
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
P | 40
The CFH equity securities are required to be disclosed as a liability
until the liability component of the compound instrument expires.
Annual Report | 2017 Note 4 – CFH securities (cont.)
CFH debt securities
CFH warrants
CFH debt securities are unsecured, non-interest bearing and carry
Chorus issues CFH warrants to CFH for nil consideration along with
no voting rights at meetings of holders of Chorus ordinary shares.
each tranche of CFH equity securities. Each CFH warrant gives CFH
Chorus is required to redeem the CFH debt securities in tranches
the right, on a specified exercise date, to purchase at a set strike price
from 2025 to 2036 by repaying the face value to the holder.
a Chorus share to be issued by Chorus. The strike price for a CFH
The principal amount of CFH debt securities consists of a senior
portion and a subordinated portion. The senior portion ranks
warrant is based on a total shareholder return of 16% per annum on
Chorus shares over the period December 2011 to June 2036.
equally with all other unsecured, unsubordinated creditors of
At balance date Chorus had issued a total 8,496,986 warrants
Chorus, and has the benefit of any negative pledge covenant
which had a fair value and carrying value that approximated
that may be contained in any of Chorus’ debt arrangements. The
zero (30 June 2016: 15,502,118 warrants issued). Changes to
subordinated portion ranks above ordinary shares of Chorus.
the Non Standard Installation agreement and UFB1 agreements
The initial value of the senior portion is the present value (using
resulted in all series one warrants being cancelled in March 2017,
a discount rate of 8.5%) of the sum repayable on the CFH debt
only series two warrants remain. The number of fibre connections
securities, and the initial subordinated portion will be the difference
made by 30 June 2020 impacts the number of warrants that could
between the issue price of the CFH debt security and the value of
be exercised, because fibre connections already exceed 20% before
the senior portion.
30 June 2020, the number of warrants that would be able to be
exercised is 8,496,986 (30 June 2016: 6,658,739).
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
Notional interest
Balance as at 30 June
Total CFH securities
2017
2016
CFH DEBT
SECURITIES
$M
CFH EQUITY
SECURITIES
$M
TOTAL CFH
SECURITIES
$M
CFH DEBT
SECURITIES
$M
CFH EQUITY
SECURITIES
$M
TOTAL CFH
SECURITIES
$M
81
21
102
11
7
18
120
51
17
68
9
6
15
83
132
38
170
20
13
33
203
60
21
81
6
5
11
92
37
14
51
4
5
9
60
97
35
132
10
10
20
152
The fair value of CFH debt securities at balance date was
UFB2
$137 million (30 June 2016: $97 million) compared to a carrying
In January 2017 Chorus was contracted to build 84% of the second
value of $120 million (30 June 2016: $92 million). The fair
phase of the UFB network build (UFB2), amounting to 168,240
value of CFH equity securities at balance date was $102 million
premises. Chorus’ UFB2 build commenced prior to 30 June 2017
(30 June 2016: $65 million) compared to a carrying value of
however no Crown funding was recognised in the year ending
$83 million (30 June 2016: $60 million). The fair value has been
30 June 2017.
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 in calculations on initial recognition
The build process and funding under UFB2 is similar to UFB1. Chorus
will receive funding at an average rate of $1,731 per premises
passed. In return we will issue CFH equity securities and CFH
On initial recognition, the discount rate between 7.22% to 10.26%
debt securities. The total committed funding available for Chorus
(30 June 2016: 8.46% to 12.05%) for the CFH equity securities and
over the period of UFB2 network construction is expected to be
5.08% to 7.52% (30 June 2016: 5.91% to 8.57%) for the CFH debt
$291 million. The debt securities are interest free and are repayable
securities used to discount the expected cash flows is based on
from June 2030. Dividends on the equity securities are payable
the NZ swap curve. The swap rates were adjusted for Chorus
from June 2030.
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.
P | 41
Annual Report | 2017 Note 5 – Crown funding
Funding from the Crown is recognised at fair value where there is
in earnings as a reduction to depreciation expense on a
reasonable assurance that the funding is receivable and all attached
systematic basis over the useful life of the asset the funding
conditions will be complied with. Crown funding is then recognised
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
Amortisation
Balance as at 30 June
Total Crown funding
Current
Non-current
2017
2016
UFB
$M
RBI
$M
OTHER
$M
TOTAL
$M
UFB
$M
RBI
$M
OTHER
$M
TOTAL
$M
398
73
471
(18)
(11)
(29)
442
242
–
242
(14)
(8)
(22)
220
39
7
46
(8)
(2)
(10)
36
304
94
398
(10)
(8)
(18)
211
31
242
(8)
(6)
(14)
380
228
33
6
39
(7)
(1)
(8)
31
679
80
759
(40)
(21)
(61)
698
19
679
548
131
679
(25)
(15)
(40)
639
17
622
Ultra-Fast Broadband
Continued recognition of the full amount of the Crown funding is
Chorus receives funding from the Crown to finance construction
contingent on certain material performance targets being met by
costs associated with the development of the UFB network. During
Chorus. The most significant of these material performance targets
the year, Chorus has recognised funding for 98,884 premises
relate to the number of premises passed by fibre optic cables by
passed (30 June 2016: 121,253) where user acceptance testing was
key dates and compliance with certain specifications under user
complete at 30 June 2017. This brings the total premises passed
acceptance testing by Crown Fibre Holdings. Performance targets
where user acceptance testing was complete at 30 June 2017 to
to date have been met.
approximately 573,000 (30 June 2016: 474,000).
Note 6 – Segmental reporting
An operating segment is a component of an entity that engages
in business activities from which it may earn revenues and incur
expenses and for which operating results are regularly reviewed by
the entity’s chief operating decision maker and for which discrete
financial information is available.
Chorus’ Chief Executive Officer has been identified as the chief
operating decision maker for the purpose of segmental reporting.
Chorus has determined that it operates in one segment
providing nationwide fixed line access network infrastructure.
The determination is based on the reports reviewed by the Chief
Executive Officer in assessing performance, allocating resources
and making strategic decisions.
All of Chorus’ operations are provided in New Zealand, therefore no
geographic information is provided.
Three Chorus customers met the reporting threshold of 10 percent
of Chorus’ operating revenue in the year to 30 June 2017. The total
revenue for the year ending 30 June 2017 from these customers was
$541 million (30 June 2016: $570 million), $212 million (30 June 2016:
$204 million) and $117 million (30 June 2016: $113 million).
P | 42
Annual Report | 2017 Note 7 – Operating revenue
Revenue is recognised to the extent that it is probable that the
Chorus recognises revenue as it provides services to its customers.
economic benefits will flow to Chorus and the revenue can be
Billings are generally made on a monthly basis. Unbilled revenues
reliably measured, regardless of when the payment is being made.
from the billing cycle date to the end of each month are recognised
Revenue is measured at the fair value of the consideration received
as revenue during the month the service is provided. Revenue is
or receivable.
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
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.
2017
$M
450
248
198
36
23
76
9
2016
$M
489
242
133
35
20
83
6
1,040
1,008
2017
$M
74
43
87
27
60
17
13
14
3
10
13
27
2016
$M
78
60
89
34
65
16
12
14
3
4
13
26
Total operating expenses
388
414
Labour costs
Charitable and political donations
Labour costs of $74 million (30 June 2016: $78 million) represents
Other costs include charitable donations to the Manaiakalani
employee costs related to non-capital expenditure.
Education Trust ($75,000), the Consumer Foundation ($12,550)
Pension contributions
Included in labour costs are payments to the New Zealand
Government Superannuation Fund of $323,000 (30 June 2016:
and smaller contributions to three other charities (total of $2,313)
(30 June 2016: total of $2,500). Chorus has not made any political
donations (30 June 2016: nil).
$339,000) and contributions to KiwiSaver of $2,907,000
Operating leases
(30 June 2016: $2,778,000). At 30 June 2017 there were 21
Rent and rates costs include leasing and rental expenditure
employees in New Zealand Government Superannuation Fund
of $7 million for property, network infrastructure and items of
(30 June 2016: 22 employees) and 962 employees in KiwiSaver
equipment (30 June 2016: $7 million).
(30 June 2016: 849 employees). Chorus has no other obligations to
provide pension benefits in respect of employees.
P | 43
Annual Report | 2017 Note 8 – Operating expenses (cont.)
Auditor remuneration
Included in other expenses are fees paid to auditors:
Audit and review of statutory financial statements
Regulatory audit and assurance work
Tax compliance services
Other assurance services1
Other services2
Total other services
Total fees paid to the auditor
2017
$000's
493
308
–
30
46
384
877
2016
$000's
483
317
6
4
47
374
857
1 Relates to attendance at the Annual Shareholders Meeting and assurance relating to EUR EMTN comfort letters.
2 Other services includes preparation and presentation of hedge accounting training and sponsorship of an award category at the New Zealand
Innovation Awards, run by the New Zealand Innovation Council, which is owned by KPMG.
Note 9 – Trade and other receivables
Trade and other receivables are initially recognised at the fair value
are subsequently measured at amortised cost (using the effective
of the amounts to be received, plus transaction costs (if any). They
interest method) less impairment losses.
Trade receivables
Other receivables
Prepayments
Trade and other receivables
Current
Non-current
2017
$M
100
22
122
24
146
139
7
2016
$M
126
20
146
22
168
158
10
Trade receivables are non-interest bearing and are generally on
than 90 days overdue. There have been no significant individual
terms of 20 working days or less.
impairment amounts recognised as an expense. Trade receivables
Chorus maintains a provision for impairment losses when there is
are net of allowances for disputed balances with customers.
objective evidence of its customers being unable to make required
The ageing profile of trade receivables is as follows:
payments and makes provision for doubtful debt where debt is more
Not past due
Past due 1-30 days
Past due 31-60 days
2017
$M
94
5
1
100
2016
$M
105
18
3
126
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 a dispute
The concentrated customer base heightens the risk that a dispute
resolution process. Chorus has $6 million of accounts receivable
with a customer, or a customer’s failure to pay for services, will have
that are past due but not impaired (30 June 2016: $21 million).
a material adverse effect on the collectability of receivables.
The carrying value of trade and other receivables approximate the
fair value. The maximum credit exposure is limited to the carrying
value of trade and other receivables.
P | 44
Annual Report | 2017 Note 10 – Trade and other payables
Trade and other payables are initially recognised at fair value less
Trade and other payables are non-interest bearing and normally
transaction costs (if any). They are subsequently measured at
settled within 30 day terms. The carrying value of trade and other
amortised cost using the effective interest method.
payables approximate their fair values.
Trade payables
Accruals
Personnel accrual
Revenue billed in advance
Trade and other payables
Current
2017
$M
86
182
20
58
346
346
2016
$M
98
176
19
54
347
347
Note 11 – Commitments
Network infrastructure project agreement
Lease commitments
Chorus is committed to deploying infrastructure for premises in
Chorus has buildings, car parks and site licenses under operating
the UFB candidate areas awarded to Chorus, to be built according
lease arrangements. The future non-cancellable minimum operating
to annual build milestones and to be complete by no later than
lease commitment as at 30 June 2017 was $64 million (30 June 2016:
December 2019 for UFB1 and December 2024 for UFB2. In total
$42 million). Refer to note 14 for further information on leases.
it is expected that the communal infrastructure will pass an
estimated 999,000 premises. Chorus has estimated that it will cost
$2.1 – $2.2 billion to build the communal UFB network by the end
of 2024.
Capital expenditure
Refer to note 1 and note 2 for details of capital expenditure
commitments.
In March 2017 Chorus and Vodafone entered into a fibre swap
agreement relating to an RBI settlement. This resulted in a ten year
fibre lease commitment of $3 million with Chorus as the Lessee. The
lease is expected to commence in approximately November 2017.
Note 12 – Taxation
Tax expense comprises current and deferred tax, calculated
Deferred tax is recognised in respect of temporary differences
using the tax rate enacted or substantively enacted at balance
between the carrying amounts of assets and liabilities in the
date and any adjustments to tax payable in respect of prior
financial statements and the amounts used for taxation purposes.
years. Tax expense is recognised in the income statement except
A deferred tax asset is recognised only to the extent it is probable it
when it relates to items recognised directly in the statement
will be utilised.
of comprehensive income, in which case the tax expense is
recognised in the statement of comprehensive income.
P | 45
Annual Report | 2017 Note 12 – Taxation (cont.)
Current tax expense
Recognised in income statement
Net earnings before tax
Tax at 28%
Tax effect of adjustments
Other non taxable items
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
Current tax (receivable)/payable
Balance as at 1 July
Tax liability for the year
Tax paid
Balance as at 30 June
Deferred tax
2017
$M
159
(45)
(1)
(46)
(40)
(6)
(46)
(6)
(2)
(2)
–
(2)
(2)
2017
$M
(3)
40
(38)
(1)
(ASSETS)/LIABILITIES
Balance at 1 July 2015
Recognised in the income statement
Recognised in other comprehensive income
Balance as at 30 June 2016
Recognised in the income statement
Recognised in other comprehensive income
Balance as at 30 June 2017
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
FINANCE
LEASES
$M
OTHER
$M
(6)
1
–
(5)
1
–
(4)
16
(9)
–
7
(2)
–
5
–
–
(9)
(9)
–
2
(7)
227
11
–
238
16
–
254
(35)
(2)
–
(37)
(5)
–
(42)
(3)
3
–
–
(4)
–
(4)
Imputation credits
There are $154 million (30 June 2016: $138 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 2017.
P | 46
2016
$M
127
(36)
–
(36)
(32)
(4)
(36)
32
9
9
–
9
9
2016
$M
12
32
(47)
(3)
TOTAL
$M
199
4
(9)
194
6
2
202
Annual Report | 2017 Note 13 – Cash and call deposits
Cash and call deposits are held with bank and financial institutions
at the reporting date. All differences arising on settlement or
counterparties rated at a minimum of A+, based on rating agency
translation of monetary items are taken to the income statement.
Standard & Poor’s ratings.
Cash flow
There are no cash or call deposit balances held that are not
Cash flows from derivatives in cash flow and fair value hedge
available for use.
relationships are recognised in the cash flow statement in the same
The carrying values of cash and call deposits approximate their
category as the hedged item.
fair values. The maximum credit exposure is limited to the carrying
For the purposes of the statement of cash flows, cash is considered
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
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.
Note 14 – Leases
Chorus is a lessee of certain network assets under both operating
and finance lease arrangements. Lease costs relating to operating
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
leases are recognised on a straight-line basis over the life of the
leased asset, whether or not to include renewal options in the lease
lease. Finance leases, which effectively transfer substantially all the
term, and determining an appropriate discount rate to calculate the
risks and benefits of ownership of the leased assets, are capitalised
present value of the minimum lease payments.
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
transfers substantially all the risks and rewards of ownership to Chorus.
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.
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.
2017
$M
2016
$M
(9)
(48)
(393)
(450)
296
(154)
4
9
(167)
(154)
5
(159)
(154)
(8)
(35)
(369)
(412)
280
(132)
4
15
(151)
(132)
4
(136)
(132)
P | 47
Annual Report | 2017 Note 14 – Leases (cont.)
Property exchanges
Chorus has leased exchange space and commercial co-
location space owned by Spark which is subject to finance
years and include rights of renewal. 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
lease arrangements. Chorus in turn leases exchange space and
will be renewed to the maximum term. The payable and receivable
commercial co-location space to Spark under a finance lease
under these finance lease arrangements are net settled in cash.
arrangement. The term of the leases vary from three years to ten
The finance lease arrangement above reflects the net finance lease
receivable and payable position.
Operating leases
Non-cancellable operating lease rentals are payable as follows:
Less than one year
Between one and five years
More than five years
Total
2017
$M
8
26
30
64
2016
$M
6
14
22
42
Chorus has entered into leasing arrangements for properties,
or extended based on terms that would then be agreed with the
network infrastructure and other items of equipment which are
lessor. There are no other significant lease terms that relate to
classified as operating leases. Certain leases are able to be renewed
contingent rents, purchase options or other restrictions on Chorus.
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
2017
M
401
10
411
2016
M
396
5
401
Chorus Limited has 411,001,665 fully paid ordinary shares
Chorus Limited issues securities to CFH based on the number of
(30 June 2016: 400,799,739 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.
On 7 October 2016 and 4 April 2017 a fully imputed interim dividend
of 8.5 cents per share and 12 cents per share respectively was paid
to shareholders. These two dividend payments totalled $83 million
(30 June 2016: $32 million).
Should Chorus Limited return capital to shareholders, any return of
capital that arose on demerger is expected to be taxable as Chorus
Limited had zero available subscribed capital on demerger.
Employee share plans
Employee equity building scheme
Chorus operates an employee equity building scheme to
provide employees the opportunity to become familiar with the
shareholder experience. Chorus and eligible employees contribute
Eligible shareholders (those resident in New Zealand or Australia)
together to purchase shares on market. The shares are then held
can choose to have Chorus Limited reinvest all or part of their
by the Trustee (Trustees Executors Limited) and vest to participating
dividends in additional Chorus Limited shares. For the year ended
employees after a three year period.
30 June 2017, 10,201,926 shares (30 June 2016: 4,429,972) with a
total value of $40 million (30 June 2016: $17 million) were issued in
lieu of dividends.
P | 48
A total of 776 employees (30 June 2016: 638 employees)
participated in the scheme, 100,415 shares (30 June 2016: 125,290
shares) were purchased at an average price of $3.74 per share
Annual Report | 2017 Note 15 – Equity (cont.)
(30 June 2016: $2.67 per share). At 30 June 2017 the scheme holds
The LTI scheme is an equity settled scheme and treated as an
362,909 shares on behalf of 776 employees.
option plan for accounting purposes. Each tranche of each grant
Long-term performance share scheme
Chorus operates a long-term performance share scheme for
selected key management personnel.
The August 2015 issue featured two grants. The shares relating to
the first grant have a vesting date of two years from 30 June 2015
(2 year grant), and the shares relating to the second grant have
a vesting date of three years from 30 June 2015 (3 year grant).
was valued separately. The tranche with a relative performance
hurdle was valued using a Monte Carlo simulation while the tranche
with the absolute performance hurdle was valued using the Black
Scholes valuation model.
The combined option cost for the year ended 30 June 2017
of $312,000 has been recognised in the income statement
(30 June 2016: $218,000).
Each grant is made up of two tranches, the first with a relative
Significant assumptions used in the valuation models are: 1) a
performance hurdle (Chorus’ actual Total Shareholder Return (TSR)
volatility of the Chorus share price of 33%, 2) that dividends will
compared to other members of the NZX50) and the second with
be paid over the term of the scheme, and 3) an absolute TSR
an absolute performance hurdle (Chorus’ actual TSR being greater
performance threshold of 9.8%.
than 10.8% per annum compounding).
Reserves
The August 2016 issue consisted of one three year grant. The shares
Cash flow hedge reserve
have a vesting date of 22 September 2019 and an expiry date of
The cash flow hedge reserve comprises the effective portion of
22 September 2020. The grant has an absolute performance hurdle
(Chorus’ actual TSR equalling or being greater than 9.8% per annum
the cumulative net change in the fair value of cash flow hedging
instruments related to hedged transactions that have not yet
compounding) ending on the vesting date, with provision for
affected earnings.
monthly retesting in the following twelve month period (noting that
the TSR continues to increase through this period).
For cash flow hedges, the effective portion of gains or losses from
remeasuring the fair value of the hedging instrument is recognised
The shares are held by a nominee (Chorus LTI Trustee Limited)
in other comprehensive income and accumulated in the cash
on behalf of the participants, until after the shares vest when the
flow hedge reserve. Accumulated gains or losses are subsequently
nominee is directed to transfer or sell the shares. Or if the shares do
transferred to the income statement when the hedged item affects
not vest they may be held or sold by the nominee. The shares carry
the income statement, or when the hedged item is a forecast
the same rights as all other shares.
Participants have been provided with interest-free limited recourse
loans to fund the 580,104 shares purchased under the LTI scheme
(30 June 2016: 446,016 shares). The shares were purchased on
market at an average price of $2.95. 192,020 shares vested on
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
30 June 2017 but are not eligible for transfer until 25 August 2017.
flow hedge is recognised immediately in the income statement.
A reconciliation of movements in the cash flow hedge reserve
follows:
Opening balance
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
Closing balance
2017
$M
26
(12)
7
1
22
2016
$M
3
(7)
29
1
26
P | 49
Annual Report | 2017 Note 15 – Equity (cont.)
The periods in which the cash flows associated with cash flow hedges are expected to impact earnings are as follows:
AS AT 30 JUNE 2017
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
Cross currency interest rate swaps
Interest rate swaps
Forward exchange contracts
Electricity contracts
–
–
2
–
2
–
–
–
–
–
13
31
–
–
44
–
–
–
–
–
–
–
–
–
–
12
–
–
–
12
AS AT 30 JUNE 2016
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
Cross currency interest rate swaps
Interest rate swaps
Forward exchange contracts
Electricity contracts
–
1
3
–
4
–
–
1
–
1
–
7
–
–
7
(6)
45
–
–
39
–
–
–
–
–
–
–
–
–
–
As at 30 June 2017 the cash flow reserve contained $36 million
purposes these swaps were aggregated and designated as two cash
of non-cash amounts (30 June 2016: $25 million) and these have
flow hedges and a fair value hedge. Chorus hedges a portion of the
been excluded from the table above.
EUR EMTN for Euro fixed rate interest to Euro floating rate interest
Fair value hedges
Gains or losses from remeasuring the fair value of the hedging
instrument are recognised in the income statement together with
via a fair value hedge. In this case the change in the fair value of the
fair value hedging instrument is also attributed to the carrying value
of the EMTN (refer to note 3).
any changes in the fair value of the hedged asset or liability.
Chorus did not have any hedging arrangements designated as a fair
To hedge the foreign currency risk on the EUR EMTN Chorus
used Cross Currency Interest Rate Swaps. For hedge accounting
value hedge in the prior year.
Note 16 – Earnings per share
The calculation of basic earnings per share at 30 June 2017 is based
outstanding during the period of 406 million (30 June 2016:
on the net earnings for the year of $113 million (30 June 2016:
397 million), calculated as follows:
$91 million), and a weighted average number of ordinary shares
BASIC EARNINGS PER SHARE
Net earnings attributable to ordinary shareholders ($ millions)
Denominator – weighted average number of ordinary shares (millions)
Basic earnings per share (dollars)
Diluted earnings per share
Net earnings attributable to ordinary shareholders ($ millions)
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)
2017
113
406
0.28
113
406
72
8
486
0.23
2016
91
397
0.23
91
397
69
7
473
0.19
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.
P | 50
Annual Report | 2017 Note 17 – Related party transactions
Transactions with related parties
Chorus has loans to employees and nominees receivable at
Certain Chorus Directors have relevant interests in a number of
30 June 2017 of $1.6 million (30 June 2016: $1.2 million) as outlined
companies that we have transactions with in the normal course of
in the employee share plan section of note 15. All loans outstanding
business. A number of Directors are also non-executive Directors of
are interest-free limited recourse loans.
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
2017
$000's
7,532
–
–
–
274
7,806
2016
$000's
7,197
–
–
872
218
8,287
This table above includes remuneration of $1,083,000 (30 June 2016: $1,012,000) paid to Directors for the year.
Note 18 – Derivative financial instruments
Chorus uses derivative financial instruments to reduce its exposure
Finance expense includes any non-cash ineffectiveness arising from
to fluctuations in foreign currency exchange rates, interest rates
the EMTN hedge relationship. Following the close out of the interest
and the spot price of electricity. The use of hedging instruments is
rate swaps relating to the GBP EMTN the hedge relationship was
governed by the treasury policy approved by the Board. Derivatives
reset in December 2013 with a fair value of $49 million. The balance
are initially recognised at fair value on the date a derivative contract
at 30 June 2017 is $15 million (30 June 2016: $21 million). As long
is entered into and are subsequently remeasured to fair value with
as the hedge remains effective any future gains or losses will be
an adjustment made for credit risk in accordance with NZ IFRS 13:
processed through the hedge reserve, however the ineffectiveness
Fair Value Measurement. The fair values are estimated on the basis
will flow to interest expense in the income statement at some time
of the quoted market prices for similar instruments in an active
over the life of the derivatives. It will be a non-cash charge. Neither
market or quoted prices for identical or similar instruments in
the direction, nor the rate of the impact on the income statement
inactive markets and financial instruments valued using models
can be predicted. For the year ended 30 June 2017 ineffectiveness
where all significant inputs are observable.
of $6 million was recognised in the income statement
The method of recognising the resulting remeasurement gain
(30 June 2016: $9 million).
or loss depends on whether the derivative is designated as
In November 2016, Chorus repaid the Syndicated Bank Facility
a hedging instrument. If the derivative is not designated as a
and the associated Interest Rate Swaps expired. One Interest Rate
hedging instrument, the remeasurement gain or loss is recognised
Swap (IRS) has been maintained and is not in a designated hedging
immediately in the income statement.
relationship. The fair value remeasurement non-cash gains or
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
losses on this IRS are recognised immediately in finance expense
in the income statement. For the period to 30 June 2017 $6 million
was recognised in finance expense (30 June 2016: nil).
$30 million of cash and resulted in an $11 million gain being
In conjunction with the EUR EMTN 500 million issued on
recorded in the cash flow hedge reserve to be amortised over the
18 October 2016, Chorus entered into Cross Currency Interest Rate
period to 2020. During the year ended 30 June 2017 amortisation
Swaps to hedge the foreign currency and foreign interest rate risks
of $4 million was recognised in finance income (30 June 2016:
on the EUR EMTN. These swaps have an aggregate principal of EUR
$4 million) and $3 million was recognised in finance expense
500 million and NZD 785 million. Chorus will pay New Zealand
(30 June 2016: $3 million). New swaps that hedge the same
Dollar floating interest rates and receive EUR denominated fixed
underlying exposure and risk profile were entered into on the same
interest which match the underlying notes. For the period to
date, but at a higher effective borrowing cost (4.89% compared to
30 June 2017 $11 million of non-cash charges relating to the
3.99% prior to the transaction).
change in fair value of this hedge relationship was recognised in
finance expense.
P | 51
Annual Report | 2017 Note 18 – Derivative financial instruments (cont.)
2017
$M
2016
$M
1
1
–
–
18
25
3
–
46
31
200
–
231
2017
$M
926
677
785
1
3
42
11
5
1
1
–
–
18
2
4
–
24
57
133
1
191
2016
$M
1,141
677
–
1
1
52
19
6
2,450
1,897
Current derivative assets
Cross currency interest rate swaps
Non-current derivative assets
Cross currency interest rate swaps
Current derivative liabilities
Interest rate swaps
Cross currency interest rate swaps
Forward exchange rate contracts
Electricity contracts
Non-current derivative liabilities
Interest rate swaps
Cross currency interest rate swaps
Forward exchange rate contracts
The notional values of contract amounts outstanding are as follows:
Interest rate swaps
Cross currency interest rate swaps
Forward exchange rate contracts
Electricity contracts
CURRENCY
MATURITY
NZD
NZD:GBP
NZD:EUR
2019-2020
2020
2023
NZD:AUD
2017-2018
NZD:EUR
2017-2018
NZD:USD
2017-2019
NZD:SEK
2017-2018
NZD
2017-2019
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.
P | 52
Annual Report | 2017 Note 19 – Financial risk management
Financial risk management
Interest rate risk
Chorus’ financial instruments consist of cash, short-term deposits,
Chorus has interest rate risk arising from the cross currency
trade and other receivables (excluding prepayments), investments and
interest rate swap converting the foreign debt into a floating rate
advances, trade payables and certain other payables, syndicated bank
New Zealand dollar obligation. Where appropriate, Chorus aims to
facility, EMTN, fixed rate NZD bonds, derivative financial instruments
reduce the uncertainty of changes in interest rates by entering into
and CFH securities. Financial risk management for currency and
interest rate swaps to fix the effective interest rate to minimise the
interest rate risk is carried out by the treasury function under policies
cost of net debt and manage the impact of interest rate volatility
approved by the Board. Chorus’ risk management policy approved by
on earnings. The interest rate risk on the entire GBP cross currency
the Board, provides the basis for overall financial risk management.
interest rate swaps and a portion of the EUR cross currency interest
rate swaps have been hedged using interest rate swaps.
Chorus does not hold or issue derivative financial instruments
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 and cross currency
interest rate swaps to manage the foreign exchange exposure.
Chorus has issued GBP 260 million and EUR 500 million foreign
currency debt in the form of EMTN. For the GBP EMTN Chorus has
in place cross currency interest rate swaps under which Chorus
receives GBP 260 million principal and GBP fixed coupon payments
for $677 million principal and floating NZD interest payments.
For the EUR EMTN Chorus has in place cross currency interest
rate swaps under which Chorus receives EUR 500 million principal
and EUR fixed coupon payments for $785 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.
As at 30 June 2017, Chorus did not have any significant unhedged
exposure to currency risk (30 June 2016: 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.
Price risk
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
electricity contracts as cash flow hedge relationships.
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.
P | 53
Annual Report | 2017 Note 19 – Financial risk management (cont.)
Interest rate repricing analysis
AS AT 30 JUNE 2017
Floating rate
Cash and deposits
Debt (after hedging)
Fixed rate
Debt (after hedging)
CFH securities
Finance lease (net settled)
AS AT 30 JUNE 2016
Floating rate
Cash and deposits
Debt
Fixed rate
Debt (after hedging)
CFH securities
Finance lease (net settled)
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
TOTAL
$M
170
535
–
–
(5)
700
–
–
250
–
(5)
245
–
–
677
–
(5)
672
–
–
400
–
(1)
399
–
–
–
–
2
2
–
–
–
203
168
371
170
535
1,327
203
154
2,389
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
TOTAL
$M
102
–
–
–
(4)
98
–
–
–
–
(4)
(4)
–
200
465
–
(5)
660
–
–
677
–
(4)
673
–
–
400
–
(1)
399
–
–
–
152
150
302
Sensitivity analysis
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
In the normal course of business, we incur counterparty credit
2017
$M
PROFIT OR (LOSS)
2017
$M
EQUITY
2016
$M
PROFIT OR (LOSS)
4
(4)
20
(20)
(4)
4
Chorus has certain derivative transactions that are subject
to bilateral credit support agreements that require us or the
risk from financial instruments, including cash, trade and other
counterparty to post collateral to support the value of certain
receivables, finance lease receivables and derivative
derivatives. As at 30 June 2017 no collateral was posted.
financial instruments.
The maximum exposure to credit risk at the reporting date was
as follows:
NOTES
13
9
18
14
2017
$M
170
122
1
5
298
2016
$M
102
146
1
4
253
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.
P | 54
102
200
1,542
152
132
2,128
2016
$M
EQUITY
1
(2)
Annual Report | 2017 Note 19 – Financial risk management (cont.)
Liquidity risk
Liquidity risk is the risk that we will encounter difficulty raising
costs. Prudent liquidity risk management implies maintaining
sufficient cash and the ability to meet its financial obligations.
liquid funds to meet commitments as they fall due or foregoing
Chorus’ exposure to liquidity risk based on contractual cash flows
investment opportunities, resulting in defaults or excessive debt
relating to financial liabilities is summarised below:
CARRYING
AMOUNT
$M
CONTRACTUAL
CASHFLOW
$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
49
55
23
19
13
–
268
154
1,609
203
268
450
1,867
320
268
9
59
–
–
8
59
–
–
9
520
–
–
13
425
–
–
225
–
–
3
(1,397)
1,840
1
(54)
57
(40)
67
1
(45)
48
(40)
73
–
(9)
9
(502)
757
–
–
–
(9)
43
–
–
–
AS AT 30 JUNE 2017
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 2016
Non derivative financial liabilities
Trade and other payables
Finance lease (net settled)
Debt
CFH securities
Derivative financial liabilities
CARRYING
AMOUNT
$M
CONTRACTUAL
CASHFLOW
$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
274
132
1,540
152
274
412
1,841
265
274
8
76
–
–
8
76
–
–
7
739
–
–
9
534
–
Interest rate swaps
75
82
22
22
21
17
Cross currency interest rate swaps
Inflows
Outflows
Electricity contracts
Forward exchange contracts
Inflows
Outflows
–
135
–
–
5
(617)
817
5
(67)
73
(33)
35
3
(50)
54
(33)
34
2
(17)
19
(33)
35
–
–
–
(518)
713
–
–
–
The gross (inflows)/outflows of derivative financial liabilities
maintaining prudent levels of short term debt maturities. At balance
disclosed in the previous table represent the contractual
date, Chorus had available $350 million under the syndicated bank
undiscounted cash flows relating to derivative financial liabilities
facilities (30 June 2016: $260 million).
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
and gross cash inflow and outflow amounts for derivatives that
have simultaneous gross cash settlement (for example forward
exchange contracts).
Chorus manages liquidity risk by ensuring sufficient access
to committed facilities, continuous cash flow monitoring and
Capital risk management
Chorus manages its capital considering shareholders’ interests, the
value of our assets and 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
headroom. In the longer term, the Board continues to consider a
‘BBB’ rating appropriate for a business like Chorus.
P | 55
–
18
9
–
–
(9)
45
–
–
–
–
393
797
320
–
(797)
855
–
–
–
–
12
416
–
–
–
–
–
–
–
–
368
–
265
–
–
–
–
–
–
Annual Report | 2017 Note 19 – Financial risk management (cont.)
Hedge accounting
Chorus designates and documents the relationship between
hedging instruments and hedged items, as well as the risk
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
management objective and strategy for undertaking various hedge
inactive markets and financial instruments valued using models
transactions. At hedge inception (and on an ongoing basis), hedges
where all significant inputs are observable.
are assessed to establish if they are effective in offsetting changes
in fair values or cash flows of hedged items. Hedge accounting
is discontinued 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.
Fair value
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.
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 2016: Level 2).
Cross currency interest rate swaps and interest rate swaps
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.
Electricity swaps
Fair value is estimated on the ASX forward price curve that relates
For those instruments, recognised at fair value in the statement of
to the derivative.
financial position, fair values are determined as follows:
The carrying amounts of financial assets and liabilities are as
Level 1: Quoted market prices – financial instruments with quoted
follows:
prices for identical instruments in active markets.
CARRIED AT COST OR
AMORTISED COST
2017
$M
CARRIED AT FAIR VALUE
2017
$M
CARRIED AT COST OR
AMORTISED COST
2016
$M
CARRIED AT FAIR VALUE
2016
$M
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
170
100
22
–
–
(86)
–
(182)
(154)
(1,609)
(203)
–
–
–
1
(277)
–
–
–
–
–
–
102
126
20
–
–
(98)
–
(176)
(132)
(1,540)
(152)
–
–
–
1
(215)
–
–
–
–
–
Note 20 – Post balance date events
Dividends
Crown Fibre Holdings renamed
On 28 August 2017 Chorus declared a dividend in respect of year
During July 2017 the New Zealand government repurposed
ended 30 June 2017. The total amount of the dividend is $51.4
Crown Fibre Holdings (CFH) and changed the name to Crown
million, which represents a fully imputed dividend of 12.5 cents
Infrastructure Partners (CIP). The repurpose will have no material
per ordinary share.
impact on Chorus’ relationship.
P | 56
Annual Report | 2017
Governance
and disclosures
58 Our Board
62 Diversity and inclusion
64 Remuneration and performance
70 Disclosures
76 Glossary
P | 57
Annual Report | 2017 Corporate governance and disclosures
Our Board and management are committed to ensuring our people act ethically,
with integrity and in accordance with our policies and values.
Corporate governance framework
Our governance practices and policies:
• Reflect, are consistent with, and during the year ended 30 June
Our Board regularly reviews and assesses our governance policies,
processes and practices to identify opportunities for enhancement
and to ensure they reflect our operations and culture.
2017 did not materially differ from, the NZX Main Board Listing
More detail on our corporate governance is available in our
Rules and NZX Corporate Governance Best Practice Code; and
Corporate Governance Statement available at www.chorus.co.nz/
• Take the new NZX Corporate Governance Code and ASX
Corporate Governance Council’s Corporate Governance
Principles and Recommendations into account.
governance.
Our Board
Patrick Strange
BE (Hons), PhD
Chairman
Director since 6 April 2015; independent
Patrick has spent 30 years working as a senior
executive and director in both private and listed
companies, including 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 Mercury NZ,
NZX Limited, Auckland International Airport and
is also on the board of Essential Energy Australia.
He is a former director of WorkSafe New Zealand.
Patrick is chairman of our Nominations and
Corporate Governance Committee.
Jon Hartley
BA Econ Accounting (Hons), Fellow ICA (England
& Wales), Associate ICA (Australia), Fellow AICD
Anne Urlwin
BCom, FCA, CFInstD, MAICD, FNZIM, ACIS
Director since 1 December 2011; independent
Deputy 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,
deputy chairman of ASB Bank, 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 Sovereign
Assurance Company, chairman of VisionFund
International and the Wellington City Mission
and a trustee of World Vision New Zealand.
Jon is also a shareholder advisor to Kaingaroa
Timberlands, a member of the Ministry of
Business Innovation and Employment’s Risk
Advisory Committee, and a member of the
Ministry of Foreign Affairs and Trade International
Development Commercial Advisory Panel.
Jon is a member of our Audit and Risk
Management and Nominations and Corporate
Governance Committees.
Anne has extensive directorship experience across
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 chairman of commercial construction
group Naylor Love Enterprises and a director of
Southern Response Earthquake Services, Steel
& Tube Holdings, OnePath Life (NZ), Summerset
Group and City Rail Link. Anne is also independent
chairman of the Ngāi Tahu Te Rūnanga Audit and
Risk Committee, the former chairman of Lakes
Environmental, the New Zealand Blood Service,
internet domain name registry operator NZRS and
a former director of Meridian Energy.
Anne is chairman of our Audit and Risk
Management Committee.
P | 58
Annual Report | 2017 Kate McKenzie
BA, LLB
Managing Director since 20 February 2017; non-
independent
Kate has an extensive communications infrastructure
background, most recently as Telstra Australia’s
Chief Operations Officer, responsible for Telstra’s
field services, IT and network architecture and
operations. Prior to that, Kate also held other senior
positions at Telstra including Group Managing
Director, Innovation, Products and Marketing,
Group Managing Director, Wholesale, and Group
Managing Director, Regulatory, Public Policy and
Communications.
Prior to joining Telstra, Kate was a CEO in the NSW
Government of the Departments of Commerce,
Industrial Relations and the Workcover Authority.
Kate is currently on the board of Allianz, having
previously been on the boards of Foxtel, Sydney
Water, Reach, CSL and Workcover. She is also a
member of Chief Executive Women and has had
a long history of involvement in promoting the
interests of indigenous communities.
Keith Turner
BE (Hons), ME, PhD, DistFIPENZ
Jack Matthews
BA Philosophy, College of William and Mary
Director since 1 December 2011; independent
Director since 1 July 2017; independent
Keith was CEO of New Zealand electricity
generator and retailer Meridian Energy for nine
years from its establishment. He is currently
chairman of Fisher & Paykel Appliances and
Damwatch, a former chairman of Emirates Team
New Zealand, deputy chairman of Auckland
International Airport and director of Spark
Infrastructure (an Australian listed company).
Keith has taken part in much of the electricity sector
reform, including the separation of Transpower from
Electricity Corporation of New Zealand (ECNZ), the
separation of Contact Energy from ECNZ and the
eventual break up of ECNZ into three companies.
Keith is a member of our Human Resources
and Compensation Committee and on the UFB
Steering Committee.
Jack is an experienced director who has held
a number of senior leadership positions within
the media, telecommunications and technology
industries in Australia and New Zealand.
Most recently, Jack was CEO of Fairfax Media’s
Metro Division where he was responsible for
managing and integrating the print, online and
mobile assets of The Sydney Morning Herald,
The Age and The Canberra Times. Prior to that,
Jack was CEO of Fairfax Digital, Chief Operating
Officer of Jupiter TV (Japan) and CEO of
TelstraSaturn based in Wellington.
Jack is currently the chairman of MediaWorks and
a director of Trilogy International, The Network for
Learning and APN Outdoor Group and a former
director of Crown Fibre Holdings Limited.
Mark Cross
BBS, CA
Murray Jordan
MProp
Prue Flacks
LLB, LLM
Director since 1 November 2016; independent
Director since 1 September 2015; independent
Director since 1 December 2011; independent
Mark has extensive corporate finance experience,
both as a professional director and consultant, and
during his earlier investment banking career.
Mark has held senior positions with Deutsche
Bank in London and Australia, and prior to that at
Lloyds Corporate Finance/Southpac Corporation in
Australia and New Zealand.
Mark is currently chairman of Milford Asset
Management, MFL Mutual Fund and Superannuation
Investments, and a director of Z Energy, Argosy
Property and Genesis Energy. He is also a board
member of Triathlon NZ.
Mark is a member of Chartered Accountants
Australia and New Zealand and the New Zealand
Institute of Directors.
Mark is a member of our Audit and Risk
Management Committee.
Murray has extensive experience in the management
of highly customer focused organisations and
in navigating extremely complex stakeholder
environments, including, as Managing Director
of Foodstuffs North Island, one of New Zealand’s
largest companies.
Murray has also previously held various general
manager positions at Foodstuffs and management
roles in the property investment and development
sectors. He is a director of Metcash Limited, an
ASX listed company, SkyCity and Stevenson Group,
and a board Trustee of Starship Foundation.
Murray is a member of our Human Resources and
Compensation Committee.
Prue is a director of Bank of New Zealand and
Mercury NZ.
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 chairman of our Human Resources and
Compensation Committee and a member of
our Nominations and Corporate Governance
Committee.
P | 59
Annual Report | 2017 Our Board’s role and delegation of authority
Board committees
Our Board is appointed by shareholders and has overall
Board committees assist our Board by focusing on specific
responsibility for strategy, culture, health and safety, governance
responsibilities in greater detail than is possible for the Board as
and performance.
The Board Charter sets out our Board’s roles and responsibilities.
Our Board has delegated its authority, in part, to our CEO. Our CEO
in turn sub-delegates authority to other Chorus people. Formal
policies and procedures govern the parameters and operation of
these delegations.
There are three standing Board committees to assist our Board in
carrying out its responsibilities. Some Board responsibilities, powers
a whole. Each standing Board committee has a Board approved
charter and chairman. All standing Board committee members are
independent Directors.
Audit and Risk Management Committee (ARMC)
Our ARMC assists our Board in ensuring oversight of all matters
relating to risk management, financial management and controls
and financial accounting, audit and reporting.
Members: Anne Urlwin (chairman), Jon Hartley and Mark Cross.
and authorities are delegated to those committees. Other ad-hoc
Human Resources and Compensation Committee (HRCC)
Board sub-committees or standing committees may be established
and specific responsibilities, powers and authorities delegated to
those committees and/or to particular Directors.
Board and Board committee charters and other key
governance documents are available on our website at
www.chorus.co.nz/governance.
Board membership
Our Board seeks to ensure that through its skills mix and
composition it is positioned to add value.
As at 30 June 2017 we had eight Directors (seven independent
Directors and the Managing Director). Jack Matthews joined
the Board on 1 July 2017. One of our longer serving Directors,
Keith Turner, has indicated he intends to stand down at this year’s
annual shareholders’ meeting.
Our Board has a broad range of managerial, financial, accounting
and industry experience.
Independence
For a Director to be considered independent our Board must
affirmatively determine he or she does not have a disqualifying
relationship as set out in the Board Charter.
Our HRCC assists our Board in overseeing people policies and
strategies, including:
• Remuneration frameworks; and
• Developing and annually reviewing and assessing diversity and
its reporting.
Members: Prue Flacks (chairman), Keith Turner and Murray Jordan.
Nominations and Corporate Governance Committee (NCGC)
Our NCGC assists our Board in promoting and overseeing
continuous improvement of good corporate governance including:
• Identifying and recommending suitable candidates for
nomination as Directors and members of Board committees; and
• Establishing, developing and overseeing a process for our Board
to annually review and evaluate the performance of our Board, its
committees and individual Directors.
Members: Patrick Strange (chairman), Jon Hartley and Prue Flacks.
P | 60
Annual Report | 2017 Board and Board committee meeting attendance in the year ended 30 June 2017
REGULAR BOARD
MEETINGS
OTHER BOARD
MEETINGS1
ARMC
Total number of meetings held
Patrick Strange2
Jon Hartley
Anne Urlwin
Kate McKenzie3
Keith Turner
Mark Cross4
Murray Jordan
Prue Flacks
Clayton Wakefield5
Mark Ratcliffe6
8
8
8
8
3
8
6
8
8
2
5
4
2
4
4
2
4
4
4
3
2
3
3
4
4
HRCC
6
6
6
6
1
NCGC
DDC7
3
3
3
3
1
1
1
1
1
1
Includes dedicated Board health and safety, education, strategy and business planning, meetings. Directors also have at least one health and safety site
visit each year.
2 Patrick Strange was a member of our ARMC until 1 January 2017 and attended all ARMC meetings until then.
3 Kate McKenzie joined our Board on 20 February 2017 and attended all Board meetings after that date.
4 Mark Cross joined our Board on 1 November 2016 and attended all Board meetings after that date. Mark joined our ARMC on 1 January 2017 and
attended all ARMC meetings after that date.
5 Clayton Wakefield stepped down from our Board and HRCC on 1 November 2016.
6 Mark Ratcliffe stepped down as CEO and from our Board on 20 February 2017.
7 Due diligence ad-hoc Board sub-committee established to oversee our EUR500 million EMTN issue.
Kate McKenzie is not a member of any Board committee but attended all committee meetings as CEO and an observer from her
appointment date.
Director attendances at committee meetings of which they are not members are not recorded above.
Managing risk
We have a Managing Risk Policy to:
• Ensure our Board sets the risk appetite and regularly reviews
principal risks;
• Integrate risk management in line with our Board’s risk appetite
into structures, policies, processes and procedures; and
• Deliver regular principal risk reviews, reporting and monitoring.
Our Board sets and reviews our risk management framework.
Our ARMC oversees and monitors risk and compliance with our risk
management framework. Regular reporting on risk management,
including the management of material business risks and the
effectiveness of our internal controls, supports this.
Codes of ethics
Directors and employees are expected to act honestly and with
high standards of personal integrity. Codes of ethics for our
Directors and employees set the expected minimum standards
for professional conduct. These codes facilitate behaviour and
decisions that are consistent with our values, business goals and
legal and policy obligations.
Trading in Chorus securities
Under our insider trading policy:
• Directors must obtain consent from our Board chairman (or in
the chairman’s case, the chair of our ARMC) before dealing in
Chorus Limited securities; and
• “Restricted Persons” must obtain consent from our General
Robust risk assessment processes are carried out in addition to the
Counsel & Company Secretary (or in the General Counsel &
above including:
Company Secretary’s case, our Board chairman) before dealing
• Annual strategic risk assessment with a longer time horizon;
in Chorus Limited securities.
• Annual principal risk assessment within a business plan horizon;
Director induction and education
• Quarterly reporting to the ARMC and specific project reporting;
Our Director induction programme ensures new Directors are
and
appropriately introduced to management and our business.
• Ongoing strategic risk assessment by our Board.
Our Directors are expected to continuously educate themselves to
ensure they have appropriate expertise to effectively perform their
duties. Visits to our operations, briefings from key management,
industry experts and key advisers, together with educational and
stakeholder visits, are also arranged for our Board.
P | 61
Annual Report | 2017 Independent advice
Market disclosures
A Director may, with our chairman’s prior approval (or in the
We are committed to providing timely, consistent and credible
chairman’s absence deputy chairman’s approval), take independent
information to promote orderly market behaviour and investor
professional advice (including legal advice) and request the
confidence. We believe disclosure should be evenly balanced
attendance of such advisers at Board and Board committee meetings.
during good times and bad, and that all parties in the investment
community have fair access to information.
We have a Board approved Disclosure Policy and a CEO approved
Market Disclosure Policy setting out our disclosure responsibilities
and processes in more detail. Both policies are regularly reviewed.
Review and evaluation of Board performance
Our chairman meets with Directors to discuss individual
performance. Our Board has carried out, in the reporting period,
an external review of our Board’s performance, that of individual
Directors and standing Board committees using the evaluation
process developed and overseen by our NCGC.
Diversity and inclusion
Belonging at Chorus
gender pay gap in almost all roles, but the opportunity exists to
As a core part of our business strategy, we are committed to
increase the number of women in senior roles.
providing equal opportunity to all of our employees. We believe
this will maximise our collective capability, allow us to leverage
diversity of thought, better reflect and understand our diverse
customer base and, as a result, lead to better decision making
and higher shareholder value.
We recognise that women and ethnic minorities are still
To help with this, we have been piloting a new leadership
programme for our senior women leaders called “UP”. Participants
in UP are also partnered with other female leaders in the
business, to connect, share learning and extend the benefits of
the programme. We are a support partner for the Global Women
organisation and have two more female leaders on the Global
under-represented in the leadership of New Zealand businesses,
Women Breakthrough Leaders programme in 2017.
including Chorus, and that proactive programmes are necessary
to correct this.
Our CEO is the only female CEO in the NZX50 at this time.
Our chairman and CEO are part of the Champions for Change
Our Board approved Diversity and Inclusiveness (D&I) Policy
initiative in New Zealand.
addresses this issue.
We adjusted our approach to ethnicity reporting this year. There
Our policy is implemented through a D&I framework including
is significant under-representation of Asian and Pacific people
leaders. People who identify in these ethnic groups are among our
newest employees in our customer services teams. This presents
an opportunity for ongoing focus in talent management and
development plans.
Executive Steering and Employee Working Groups. We are
currently focused on four strategic initiatives:
• Flexible working
• Diverse leadership
• Gender pay equity
• Career transition planning
Our D&I programme is integrally linked with our values
and wellbeing programme under the pillar of “Belonging at
Chorus”. It emphasises educating and developing our people
leaders, alongside employee lifecycle initiatives and internal
communications to celebrate D&I, such as “Humans of Chorus”
stories and local and global cultural events.
We are focused on refreshing and improving awareness in key
policies to increase work arrangements that enable our people to
balance their work and personal lives at every career stage.
Under-representation of women in senior roles is a key issue.
In December 2016, we commissioned an independent review
on gender pay equity. We have more men than women in senior
positions at Chorus, which means that we pay more of our total
remuneration budget to men than women. We have carried out
in depth analysis and on a like for like basis, there is no discernible
P | 62
Annual Report | 2017 Diversity metrics and objectives as at 30 June 2017
Based on the annual review of effectiveness of our D&I Policy and our measurable diversity metrics and objectives, our Board considers
that overall we are making progress towards achieving our D&I objectives and that we have performed satisfactorily against the policy
generally. We do not have the balance of diversity we aspire to and we continue to consciously focus on this. Our current measurable
metrics and objectives set by the Board on recommendation of the HRCC are summarised below:
METRIC
DESCRIPTION
OBJECTIVE (BENCHMARK)
AS AT 30 JUNE 2017
AS AT 30 JUNE 2016
Age profiles
Median age
42.7 years (Statistics
New Zealand National
Labour Force
Projections 2016)
Employee
satisfaction
Response to the
diversity question
“This organisation values
differences in education,
experience, ideas, work
styles, and perspectives”
85% Aon Hewitt
Best Employer
Standard of 2017
Ethnicity by
role1
Organisational groupings
by ethnicity
(A different approach was
used for self-reporting in
2017)
People leader
population
distribution =
total company
population
distribution.
Flexible
working
arrangements
Percentage of the
population utilising flexible
working arrangements
No objective
– for information.
41.8 years
42.2 years
87%
People
Leaders
1%
1%
11%
0%
3%
1%
75%
2%
4%
3%
Total
Pop’n
1%
7%
8%
0%
2%
0%
African
Asian
European
Latin American
Māori
Middle Eastern
New Zealand
59%
European
Other
2%
Pacific Peoples 14%
Did not disclose 7%
Focus on refreshing policy and
education into our employee
lifecycle and culture to support
successful and sustainable
flexible working arrangements2
Africa
Asia
Europe
South America
Māori
Australia
New Zealand
Pacific Island
Unknown/
not disclosed
85%
People
Leaders
1%
3%
12%
1%
3%
0%
79%
1%
Total
Pop’n
1%
17%
8%
0%
3%
1%
64%
5%
1%
0%
n/a
Gender by
role
Organisational groupings
by gender
People leader
population
distribution =
total company
population
distribution
40% 60% All
34% 66%
33% 67%
People Leaders3
Officers/Senior
Executives4
38% 62% Board5
29% 71%
Non-executive
Board6
39% 61%
34% 66%
22% 78%
25% 75%
29% 71%
All
People Leaders3
Officers/Senior
Executives4
Board5
Non-executive
Board6
Average age 35.4 years
Gender
43%
57%
Average age 37.3 years
Gender
43%
57%
Rookie ratio
New employees by age,
ethnicity and gender
No objective
– for information
Internal hire
rate
New appointments
identifying internal vs
external hire rate
66% of roles in
layers 1-3
1 Ethnicity is self-reported, this year fresh data was gathered with a question
added to the end of the Engagement Survey to align with Statistics NZ Level 2
Classifications. We have seen a switch in the way that employees have chosen
to identify themselves in FY17 as a result. Using this methodology employees
can identify with up to 3 (out of 22) different ethnicities versus only one choice.
2 Flexible working arrangements haven’t been recorded on an ongoing basis
to date. Instead we are focused on refreshing policy and education into our
employee lifecycle and culture to support successful and sustainable flexible
working arrangements.
3 People Leaders have management and leadership roles within Chorus and
other Chorus people formally reporting to them.
1%
African
9%
Asian
8%
European
0%
Latin American
2%
Maori
Middle Eastern
0%
New Zealand European 47%
0%
Other
Pacific Peoples
34%
Unknown / not disclosed 0%
2%
Africa
19%
Asia
7%
Australia
15%
Europe
1%
Māori
54%
New Zealand
2%
Pacific Island
Unknown / not disclosed 0%
55% of all appointments have
been internal. 65% of roles
in layers 1-3 were appointed
from internal candidates.
47% of all appointments have
been internal. 20% of roles
in layers 1-3 were appointed
from internal candidates7.
4 Chorus’ Officers/Senior Executives are its Chief Executive and her leadership
team other than the Executive Assistant. As at 30 June 2017, Chorus had 3
female and 6 male Officers/Senior Executives (30 June 2016: 2 female, 7 male).
5 As at 30 June 2017, Chorus had 3 female and 5 male directors (30 June 2016:
2 female, 6 male).
6 As at 30 June 2017, Chorus had 2 female and 5 male non-executive directors
(30 June 2016: 2 female, 5 male).
7 Due to a data error this was reported as 13% in our 2016 Annual Report.
That error is now corrected.
P | 63
Annual Report | 2017
Remuneration and performance
Remuneration model
Long term incentives
We offer long term incentives under an executive LTI share scheme
to reward and retain key executives, align the interests of executives
and shareholders and encourage longer term decision making.
The LTI is described in more detail in Note 15 of the financial
statements on page 48.
Employee equity building scheme
We have an employee equity building scheme to encourage
employees to think and act as shareholders. The shares under the
scheme are held by a trustee and assessed against performance
criteria generally after a three year period. For more details, refer to
Note 15 of the financial statements.
CEO remuneration
CEO remuneration consists of fixed remuneration, an STI and
an LTI. CEO remuneration is reviewed annually by the HRCC and
Board after reviewing Chorus’ performance, the CEO’s individual
performance and advice from external remuneration specialists.
Kate McKenzie took over from Mark Ratcliffe as CEO on
20 February 2017. Their remuneration for the periods they were
CEO is set out below.
As Mark Ratcliffe stood down as CEO part way through FY17, the
Board agreed that his LTI for FY17 should be replaced with a cash
payment subject to performance measures designed to reflect the
value added through that year.
Kate McKenzie’s remuneration is structured on the same basis
as Mark Ratcliffe’s except that, in addition to participating in the
Executive LTI scheme, the Board granted a one-time LTI (“Extended
LTI”) to recognise and reward the potential to add significant
shareholder value through an increase in total shareholder return
over the next few years over and above that rewarded by the
Executive LTI scheme.
Our remuneration model is designed to align employee and
shareholder interests and to be simple, clear and fair. It aims to
attract, retain and motivate high-calibre employees to all levels of
the Company, at the same time driving performance, customer
focus and personal development. Our Board regularly reviews our
remuneration design.
All employees have fixed remuneration, targeted at the market
median, and the potential to earn a Short Term Incentive (STI).
The CEO and members of the executive leadership team also have
the potential to earn a Long Term Incentive (LTI). Both STI and LTI
are variable elements of remuneration and are only paid if both
Company and individual performance goals have been met.
Fixed remuneration
Fixed remuneration is adjusted each year based on data from
independent remuneration specialists. Employees’ fixed
remuneration is based on a matrix of their own performance and
their current position when compared to the market. We have
updated our job evaluation system in 2017 to improve accuracy and
transparency of job matching to the most relevant market data.
Short term incentive
STI values are set as a percentage of fixed remuneration, from 5% to
33% based on the complexity of the role (the CEO’s STI is a higher
percentage of fixed remuneration as set out later in this report).
STI payments are determined following a review of Company and
individual performance and paid out at a multiplier of between 0x
and 1.75x for the CEO and executive leadership team, and between
0x and 2.8x for all other employees.
Company performance goals are set and reviewed annually by our
Board to align with shareholder value. If Company goals are not
met, including a “gateway” goal, no STI is payable. In the year ended
30 June 2017, the Company goals were:
• 40% based on EBITDA;
• 40% based on completion of fibre connections; and
• 20% based on progress against key strategic initiatives as
assessed by our Board.
Individual performance goals for all employees are tailored to their
role, with 70% of the goals based on ‘what’ they achieve and 30%
based on ‘how’ they perform their role, which includes a health and
safety component for all people leaders.
As an example of how STI is calculated, an employee with fixed
remuneration of $80,000 and an STI element of 10% may receive
between $0 and $22,400 (0x to 2.8x their STI percentage)
depending on the level of Company performance and their
individual performance.
P | 64
Annual Report | 2017 CEO remuneration for performance periods ending 30 June 2017 and 30 June 2016
Mark Ratcliffe (CEO to 20 February 2017):
FIXED REMUNERATION
PAY FOR PERFORMANCE
TOTAL
REMUNERATION
SALARY
NON-TAXABLE
BENEFITS1
SUBTOTAL
STI
STI
EXTENSION4
LTI
REPLACEMENT
LTI
SUBTOTAL
FY17
FY16
820,595
895,868
19,120
20,800
839,715
567,0002
-
278,272
297,000
1,142,272
1,981,987
916,668
772,2003
371,029
189,3795
-
1,332,608
2,249,276
Kate McKenzie (CEO from 20 February 2017):
FIXED REMUNERATION
PAY FOR PERFORMANCE
TOTAL
REMUNERATION
FY17
SALARY
475,385
NON-TAXABLE
BENEFITS
-
SUBTOTAL
475,385
STI
370,2332
LTI
-
SUBTOTAL
370,233
845,618
1 Accommodation allowance in place of hotel/meal costs in Auckland
(CEO Wellington based).
2 STI for FY17 performance period (paid FY18)
3 STI for FY16 performance period (paid FY17)
4 STI Extension for performance period FY14 to FY16 in place of LTI
(scheme has now ended)
5 LTI for performance period FY13 to FY15 (vested FY16)
Five Year Remuneration Summary
Mark Ratcliffe (CEO to 20 February 2017):
Other benefits paid to Mark Ratcliffe:
Company KiwiSaver contributions: FY17: $47,860 (FY16: $65,806)
Medical insurance: FY17: $4,253 (FY16: $7,064)
Other benefits paid to Kate McKenzie:
Company KiwiSaver contributions: FY17: $14,261 (FY16: n/a)
TOTAL REMUNERATION
% STI AWARDED
AGAINST MAXIMUM
% STI EXTENSION
AWARDED AGAINST
MAXIMUM
% LTI AWARDED
AGAINST MAXIMUM
% LTI REPLACEMENT
AWARDED AGAINST
MAXIMUM
SPAN OF LTI
PERFORMANCE PERIOD
FY17
FY16
FY15
FY14
FY13
1,981,987
2,249,276
1,877,143
1,696,507
1,227,419
48%
75%
57%
40%
34%
-
100%
100%
-
-
100%
70%
69%
107%
-
100%
-
-
-
-
FY15 – FY17
FY13 – FY15
FY12 – FY14
FY11 – FY13
-
Kate McKenzie (CEO from 20 February 2017):
TOTAL REMUNERATION
% STI AWARDED
AGAINST MAXIMUM
FY17
845,618
60%
P | 65
Annual Report | 2017 Five Year Summary – Total Shareholder Return (TSR) Performance
n
r
u
t
e
r
e
g
a
t
n
e
c
r
e
P
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
-20.00
-40.00
-60.00
30 June
2013
30 June
2014
30 June
2015
30 June
2016
30 June
2017
NZX50
Chorus
The TSR summary above shows the performance of Chorus’ shares against the NZX50 between 30 June 2013 and 30 June 2017.
Description of former CEO STI, LTI Replacement and LTI schemes for performance period ending 30 June 20171
Mark Ratcliffe (CEO to 20 February 2017):
DESCRIPTION
PERFORMANCE MEASURES
PERCENTAGE OF MAXIMUM AWARDED
SCHEME
STI
Set at 75% of base
remuneration for FY17 on-
plan performance, up to a
maximum of 1.75x or 131% of
base remuneration where the
highest levels of both company
and individual performance
measures are achieved.
Company performance measures:
• 40% on EBITDA
• 40% on Fibre connections; and
• 20% on progress against key strategic
initiatives as assessed by our Board
Individual performance measures:
• Health & Safety performance
• Regulatory environment and funding
• Brand profile and trust
• Business plan delivery
• Customer experience and culture
Tranche 1: Relative TSR performance against
NZX50 (fixed at date of grant) with 50%
available at 50th percentile and 100% available
at 75th percentile (pro-rata in between).
Tranche 2: TSR performance over grant
period must exceed 10.8% on an annualised
basis, compounding.
48%
100% (both tranches)
LTI – loan to
shares scheme
Two-year grant made 1 July
2015, equivalent to 33% of
base remuneration on entry
($278,272), divided into two
tranches of $139,136 each.
Extended LTI -
cash
Replacement cash incentive
for the FY17 year, due to
CEO standing down. Set at a
maximum value of 33% of base
remuneration.
• Business plan delivery
• Total Shareholder return
• ‘Good Leaver’ standards met
100%
1 The STI, LTI and LTI replacement payments for FY17 were paid in FY18.
Grants made, but not yet vested, to Mark Ratcliffe under the LTI scheme
SCHEME
DESCRIPTION
MEASURES
LTI – loan to
shares scheme
Three-year grant made 1 July
2015, equivalent to 33% of
base remuneration on entry
($278,272), divided into two
tranches of $139,136 each.
Tranche 1: Relative TSR performance against
NZX50 (fixed at date of grant) with 50%
available at 50th percentile and 100% available
at 75th percentile (pro-rata in between).
Tranche 2: TSR performance over grant
period must exceed 10.8% on an annualised
basis, compounding.
VESTING
Due to vest FY18
P | 66
Annual Report | 2017
Description of current CEO STI, LTI schemes for performance period ending 30 June 20171
Kate McKenzie (CEO from 20 February 2017):
SCHEME
DESCRIPTION
PERFORMANCE MEASURES
PERCENTAGE OF MAXIMUM AWARDED
STI
Set at 75% of base remuneration
for FY17 on-plan performance
(pro-rated), up to a maximum
of 1.75x or 131% of base
remuneration where the highest
levels of both company and
individual performance measures
are achieved.
Company performance measures:
• 40% on EBITDA
• 40% on Fibre connections; and
• 20% on progress against key strategic
initiatives as assessed by our Board
Individual performance measures:
• Business plan
• Connections and customer service
• Strategic Review
60%
1 The STI, LTI and LTI replacement payments/shares transferred for FY17 were paid in FY18.
Grants made, but not yet vested, to Kate McKenzie under the LTI scheme
SCHEME
DESCRIPTION
MEASURES
PAYMENT
Cash
One-time four-year grant with an amount payable
calculated by reference to the increase in TSR
over and above that rewarded by the executive LTI
scheme capped at NZ$2,000,000
Annualised TSR performance over grant
period must exceed average cost of
equity over the period plus 1%
February 2021, with
possible retesting up
to February 2022
Current CEO remuneration performance pay
The Board has elected, in the interests of transparency, to disclose
in advance the structure and package that will apply for FY18.
FIXED REMUNERATION
PAY FOR PERFORMANCE
TOTAL
REMUNERATION
SALARY
NON-TAXABLE
BENEFITS
SUBTOTAL
STI
LTI GRANTED2
EXTENDED LTI3
SUBTOTAL
FY18
1,200,000
-
1,200,000
900,000
396,000
500,000
1,796,000
2,996,000
2 This LTI is granted in FY18 and if hurdles are met, paid in shares in FY21.
CEO remuneration performance pay
3 The maximum payable per annum, if the cap were reached at the end of the four year vesting period, for the four year Extended LTI.
The following table demonstrates the elements of CEO remuneration for FY18.
s
d
n
a
s
u
o
h
T
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2%
16%
35%
47%
100%
13%
11%
43%
33%
FIXED
ON-PLAN
MAXIMUM
Base
Annual variable
Long-term incentives
Long-term incentives extension
P | 67
Annual Report | 2017 Employee remuneration range during the year ended
30 June 2017
Median pay gap
The median pay gap represents the number of times greater the
The table below shows the number of employees and former
CEO remuneration is to an employee paid at the median of all
employees who received remuneration and other benefits in excess
Chorus employees. At 30 June 2017, the CEO’s base salary at
of $100,000 during the year ended 30 June 2017.
$1,200,000, (on an annualised basis) was 13.8 times that of the
During the year, certain employees participated in Chorus’
median employee at $86,857 per annum.
employee equity building scheme, received contributions towards
The CEO’s total remuneration on an annualised basis, including
membership of the Marram Trust (a community healthcare and
STI, was 25.8 times the total remuneration of the median employee
holiday accommodation provider), received contributions toward
(including STI) at $96,436.
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.
The remuneration paid to, and other benefits received by, Mark
Ratcliffe in his capacity as CEO for the period to 20 February 2017,
and Kate McKenzie in her capacity as CEO from 20 February 2017, are
detailed on pages 64 to 67, and are excluded from the table below.
REMUNERATION RANGE
$ (GROSS)
NUMBER OF EMPLOYEES IN THE YEAR ENDED
30 JUNE 2017 (BASED ON ACTUAL PAYMENTS)
870,001-880,000
590,001-600,000
560,001-570,000
540,001-550,000
460,001-470,000
430,001-440,000
360,001-370,000
350,001-360,000
340,001-350,000
330,001-340,000
320,001-330,000
310,001-320,000
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
P | 68
1
1
1
2
1
1
2
1
2
3
1
1
5
3
5
5
7
9
7
9
7
9
16
14
26
35
38
49
49
45
57
61
Director remuneration
Our Director fee structure is below. Total remuneration available to
non-executive Directors in the year ended 30 June 2017 was fixed
at our 2016 annual shareholders’ meeting at $1,149,500.
Our HRCC reviews the remuneration of Directors annually based
on criteria developed by that committee.
ANNUAL FEE STRUCTURE
Base fees:
Board chairman
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
UFB Steering Committees
YEAR ENDED
30 JUNE 2017 $
YEAR ENDED
30 JUNE 2016 $
223,650
167,750
111,850
214,000
160,500
107,000
32,000
16,000
22,470
11,500
16,720
8,880
32,000
16,000
21,500
11,000
16,000
8,500
Member
33,450
32,000
The Board chairman and deputy chairman receive base fees only.
Other Directors receive committee fees in addition to their base fee.
Directors (except the CEO) do not participate in a bonus or profit-
sharing plan, do not receive compensation in share options, and
do not have superannuation or any other scheme entitlements or
retirement benefits.
Directors may be paid an additional daily rate of $2,400 for
additional work as determined and approved by our chairman and
where the payment is within the total fee pool available. No such
fees were paid in the year ended 30 June 2017.
Annual Report | 2017 Remuneration paid to Directors (in their capacity as such) in the year ended 30 June 2017
DIRECTOR
Patrick Strange1
Jon Hartley2
Anne Urlwin
Kate McKenzie
Keith Turner
Mark Cross3
Murray Jordan
Prue Flacks
Clayton Wakefield4
Mark Ratcliffe
Total
TOTAL FEES $
BASE FEES
ARMC
HRCC
NCGC
UFB STEERING
COMMITTEES
-
-
32,000
8,000
223,650
167,750
143,850
-
156,800
82,567
123,350
143,200
41,459
-
223,650
167,750
111,850
111,850
74,567
111,850
111,850
37,594
11,500
11,500
22,470
3,865
-
-
8,880
33,450
1,082,626
950,961
40,000
49,335
8,800
33,450
1 Patrick Strange was a member of our ARMC until 1 January 2017. As Board chairman he did not receive any fees for being an ARMC or NCGC member.
2 As deputy chairman Jon Hartley did not receive any fees for being an ARMC or NCGC member.
3 Mark Cross joined our Board on 1 November 2016 and our ARMC on 1 January 2017.
4 Clayton Wakefield stepped down from our Board and HRCC on 1 November 2016.
Notes:
Directors (other than the CEO) did not receive any other benefits.
Amounts are gross and exclude GST (where applicable).
Directors are entitled to be reimbursed for travel and incidental
Neither Mark Ratcliffe as former CEO, nor Kate McKenzie as current
expenses incurred in performance of their duties in addition to the
CEO, received any remuneration in his/her capacity as a Director.
above fees.
P | 69
Annual Report | 2017 Disclosures
Directors
Director changes during the year ended 30 June 2017
Clayton Wakefield stepped down as a Director at our annual
shareholders’ meeting on 1 November 2016.
Mark Ratcliffe stepped down as a Director on 20 February 2017.
Mark Cross was appointed as a Director at our annual shareholders’
meeting on 1 November 2016.
Kate McKenzie was appointed as a Director from 20 February 2017.
Subsequent changes
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, directors of subsidiaries
or as directors of non-Chorus companies in which Chorus holds
interests.
We have 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.
Jack Matthews was appointed as a Director from 1 July 2017. Keith
Director interests in shares
Turner has indicated that he intends to step down as a Director at
As at 30 June 2017, Directors had a relevant interest (as defined in
our 2017 annual shareholders’ meeting.
the Financial Markets Conduct Act 2013) in approximately 0.017% of
Indemnities and insurance
We have entered into deeds of indemnity with each Director
for potential liabilities or costs they may incur for their acts or
omissions as Directors.
Current Directors
shares as follows:
AS AT 30 JUNE 2017
TRANSACTIONS DURING THE REPORTING PERIOD
DIRECTOR
SHARES
INTEREST
SHARES NATURE OF TRANSACTION
CONSIDERATION DATE
NUMBER OF
Patrick Strange
25,000 Beneficial interest
15,000 On-market acquisition
$65,250.00 1 September 2016
Anne Urlwin
13,256
Director and
shareholder of
registered holder
Keith Turner
6,418
Legal and
beneficial interest
254
Acquisition under Chorus’
dividend reinvestment plan
$1,027.25 4 April 2017
2,500 On-market acquisition
$10,050.00 9 March 2017
310
123
186
Acquisition under Chorus’
dividend reinvestment plan
Acquisition under Chorus’
dividend reinvestment plan
Acquisition under Chorus’
dividend reinvestment plan
$1,138.23 7 October 2016
$497.45 4 April 2017
$682.94 7 October 2016
Murray Jordan
12,220 Beneficial interest
12,220 On-market acquisition
$49,857.60 21 February 2017
Prue Flacks
11,117
Legal and
beneficial interest
213
322
Acquisition under Chorus’
dividend reinvestment plan
Acquisition under Chorus’
dividend reinvestment plan
$861.44 4 April 2017
$1,182.29 7 October 2016
Total
68,011
Former Directors1
FORMER DIRECTOR
NUMBER OF SHARES
Clayton Wakefield
Mark Ratcliffe
642
4,500
NATURE OF
TRANSACTION
Acquisition under
Chorus’ dividend
reinvestment plan
Acquisition under
Chorus’ dividend
reinvestment plan
1 Trading while a Director.
P | 70
CONSIDERATION DATE
INTEREST
$2,357.23 7 October 2016
Beneficial interest
$16,522.65
7 October 2016
Beneficial interest
Annual Report | 2017 Changes in Director interests
Current Directors
Patrick Strange
Ceased as director of: Ausgrid; Endeavour Energy.
Jon Hartley
Became: a shareholder advisor to Kaingaroa Timberlands Limited; a member of the Ministry of Business
Innovation and Employment’s Risk Advisory Committee; a member of the Ministry of Foreign Affairs and
Trade International Development Commercial Advisory Panel.
Ceased as deputy chairman of: ASB Bank Limited.
Anne Urlwin
Became a director of: City Rail Link Limited.1
Director of: Allianz Australia Insurance Limited (NZ); Allianz Australia Limited (Aus) and its related companies
(Allianz Australia Life Insurance Limited; Allianz Australia Insurance Limited; CIC Allianz Insurance Limited);
MCK Consulting Pty Limited; New Zealand Telecommunications Carrier Forum.
Kate McKenzie
Keith Turner
Director and shareholder of: MCK Family Holdings Pty Limited.
Member of: Mahuki Advisory Board.2
Became a director of: Damwatch Holdings Limited; Damwatch Engineering Limited.
Ceased as director of: Spark Infrastructure RE Ltd.
Director of: Argosy Property Limited; Genesis Energy Limited; Z Energy Limited and subsidiaries.
Mark Cross
Director and shareholder of: Alpha Investment Partners Limited; Aspect Productivity Technology Limited;
Emcee Squared Limited; MFL Mutual Fund Limited; Milford Asset Management Limited (and a director of its
subsidiaries including: Milford Capital Investments Limited; Milford Private Equity Limited; MPE II GP Limited);
Superannuation Investments Limited; Virsae Group Limited.
Trustee of: Cross Family Trust; Triathlon Youth Foundation New Zealand.
Board member of: Triathlon New Zealand Incorporated.
Murray Jordan
Became a director of: SKYCITY Entertainment Group Limited; Stevenson Group Limited.
1 From 1 July 2017.
2 From 3 July 2017.
Former Directors3
Clayton Wakefield
Became a director of: The Cooperative Bank.
Became a shareholder of: Commercial Information Systems New Zealand Limited.
Ceased as director of: Columbus Financial Services Limited; Consumer Finance Limited; Consumer Insurance
Services Limited; Fisher & Paykel Finance Holdings Limited; Fisher & Paykel Finance Limited; Fisher & Paykel
Financial Services Limited; and Retail Financial Services Limited.
Became a director and shareholder of: Te Awanga Investments Limited.
Became a beneficial shareholder of: Vocus Communications Limited; Trustpower Limited.
Mark Ratcliffe
Became a trustee and beneficiary of: Ratcliffe Barker Family Trust.
Ceased as beneficial shareholder of: Telstra Corporation Limited.
Ceased as a trustee and beneficiary of: Matapouri Family Trust.
3 Changes in interests while a Director.
P | 71
Annual Report | 2017
Director restrictions
Non-standard designation
No person who is an ‘associated person’ of a telecommunications
NZX has attached a ‘non-standard’ designation to Chorus
services provider in New Zealand may be appointed or hold office
Limited because of the ownership restrictions in our Constitution
as a Director. NZX has granted a waiver to allow this restriction to be
(described below).
included in our Constitution.
External audit
Constitutional ownership restrictions
Ownership restrictions carried through at demerger and
The non-audit related fees paid to our external auditor during the
incorporated into our Constitution in agreement with the Crown
year ended 30 June 2017 (as detailed in Note 8 to the Financial
prohibit any person:
Statements) were permitted non-audit services under our External
Auditor Independence Policy.
Securities and security holders
• From having a relevant interest in 10% or more of shares, unless
the prior written consent of the New Zealand Government is
obtained; or
Stock exchange listings and American Depositary Receipts
Chorus Limited’s shares are quoted on the NZX Main Board and on
the ASX and trade under the ‘CNU’ ticker.
• Other than a New Zealand national, from having a relevant
interest in more than 49.9% of shares, unless the prior written
consent of the New Zealand Government is obtained.
American Depositary Shares, each representing five 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’ with Bank of New York Mellon as depositary bank.
Chorus Limited has also issued:
• $400 million of bonds quoted on the NZX debt market
(the NZDX);
If our Board or the New Zealand Government determines there
are reasonable grounds for believing that a person has a relevant
interest in shares in excess of the ownership restrictions, our Board
may, after following certain procedures, prohibit the exercise
of voting rights (in which case the voting rights shall vest in our
chairman) and may force the sale of shares. Our Board may also
decline to register a transfer of shares if it reasonably believes the
transfer would breach the ownership restrictions.
• EUR500 million EMTNs quoted on the ASX; and
NZX has granted waivers allowing our Constitution to include the
power of forfeiture, the restrictions on transferability of shares and
our Board’s power to prohibit the exercise of voting rights relating
to these ownership restrictions.
We were advised by the Crown in 2012 that AMP Capital Holdings
Limited and its related companies have been granted approval,
should they choose to exercise it in future, to acquire a relevant
interest in 10% or more (but not exceeding 15%) of shares.
• GBP260 million EMTNs quoted on the Luxembourg
Stock Exchange.
NZX waivers
A summary of all waivers granted and published by NZX in the
12 months ending 30 June 2017 and relied on is available on our
website at www.chorus.co.nz/investor-centre.
ASX disclosures
Chorus Limited and its subsidiaries are incorporated in
New Zealand.
Chorus Limited 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).
Our Constitution contains limitations on the acquisition of
securities, as described below.
For the purposes of ASX listing rule 1.15.3 Chorus Limited continues
to comply with the NZX listing rules.
Registration as a foreign company
Chorus Limited has registered with the Australian Securities
and Investments Commission as a foreign company and has
been issued an Australian Registered Body Number (ARBN) of
152 485 848.
Quoted shares
As at 30 June 2017 there were 411,001,665 shares on issue.
Each 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).
P | 72
Annual Report | 2017 Unquoted securities
SECURITY
CFH1 equity securities
CFH1 debt securities
CFH1 equity warrants
NUMBER OF SECURITIES ISSUED IN THE
YEAR ENDED 30 JUNE 2017
TOTAL NUMBER OF SECURITIES ON
ISSUE AS AT 28 JULY 2017
HOLDER
PERCENTAGE
HELD
54,628,834
54,628,834
2,730,758
324,633,660 Crown Fibre Holdings Limited
324,633,660 Crown Fibre Holdings Limited
8,627,317 Crown Fibre Holdings Limited
100%
100%
100%
The terms of issue for the CFH1 securities are set out in the subscription agreement with CFH and summarised in Note 4 of the Financial
Statements and on Chorus’ website at www.chorus.co.nz/financial-results.
Shareholder distribution as at 28 July 2017
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
Bondholder distribution as at 28 July 2017
BONDHOLDING
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
100,001 and over
Total
Substantial holders
We have received notice of substantial product holders as follows:
L1 Capital Pty Ltd
Macquarie Group Limited
Allan Gray Australia Pty Ltd
NUMBER OF
HOLDERS
% OF HOLDERS
TOTAL NUMBER
OF SHARES HELD
% OF SHARES
ISSUED
16,083
63.1%
5,805,036
6,249
1,728
1,339
91
24.52%
15,443,393
6.78%
5.25%
0.36%
12,510,313
30,202,094
347,040,829
25,490
100%
411,001,665
1.41%
3.76%
3.04%
7.35%
84.44%
100%
NUMBER OF
HOLDERS
% OF HOLDERS
TOTAL NUMBER
OF BONDS HELD
% OF BONDS
ISSUED
156
381
1,182
145
1,864
8.37%
20.44%
780,000
3,659,000
63.41%
42,905,000
7.78%
352,656,000
100%
400,000,000
0.20%
0.91%
10.73%
88.16%
100%
AS AT 30 JUNE 2017
AS AT 28 JULY 2017
NUMBER OF
ORDINARY
SHARES HELD
30,102,405
28,508,613
25,007,837
% OF SHARES ON
ISSUE
7.32%
6.93%
NUMBER OF
ORDINARY
SHARES HELD
30,102,405
28,508,613
6.085%
25,007,837
% OF SHARES ON
ISSUE
7.32%
6.93%
6.085%
Chorus Limited had 411,001,665 shares on issue on 30 June and 28 July 2017.
P | 73
Annual Report | 2017 Twenty largest shareholders as at 28 July 2017
RANK
HOLDER NAME
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
New Zealand Central Securities Depository Limited *
JP Morgan Nominees Australia Limited
HSBC Custody Nominees (Australia) Limited
National Nominees Limited
Citicorp Nominees Pty Limited
L1 Capital Pty Ltd
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