Better broadband is right under your feet. Ask for it. 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 300K 250K 200K 150K 100K 50K 0 d e t c e n n o c s r e m o t s u C 14% 8% 3% 35% 24% 40% 35% 30% 25% 20% 15% 10% 5% 0% e k a t p u e g a t n e c r e P 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 300K 250K 200K 150K 100K 50K 0 d e t c e n n o c s r e m o t s u C 24% 14% 8% 3% 35% 35% 30% 25% 20% e k a t p u e g a t n e c r e P JUNE 2013 JUNE 2014 JUNE 2015 JUNE 2016 JUNE 2017 Customers connected % Uptake I M E H N E L B A U R O T O R U K U A W I U R A M T I H T U O M Y E R G N O T R U B H S A N W O T S N E E U Q U R A M A O N O T R E T S A M O P U A T E N A T A K A H W I N V E L N O S L E N D N A L S I E K E H A W I L L I G R A C R E V N I H T R O N N O T S R E M L A P E H O K E K U P I G N D L I E F E N R O B S I G I N D E N U D I T I P A K D N A L K C U A N O T G N I L L E W I S G N T S A H / R E I P A N Initial 2020 target: 20% uptake Actual FY17 uptake: 35% Uptake June 2016 Uptake June 2017 s e s i m e r p e t e p m o c d l l i u b f o % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 15% s e s s e 10% r d d a e 5% b a l l i a v 0% a e r b i f o t e v i t a l e r e k a t p u % 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 6am 3pm 6pm 9pm 5 1 : 0 0 5 4 : 0 0 5 1 : 1 0 5 4 : 1 0 5 1 : 2 0 5 4 : 2 0 5 1 : 3 0 5 4 : 3 0 5 1 : 4 0 5 4 : 4 0 5 1 : 5 0 5 4 : 5 0 5 1 : 6 0 5 4 : 6 0 5 1 : 7 0 5 4 : 7 0 5 1 : 8 0 5 4 : 8 0 5 1 : 9 0 5 4 : 9 0 5 1 : 0 1 5 4 : 0 1 5 1 : 1 1 5 4 : 1 1 5 1 : 2 1 5 4 : 2 1 5 1 : 3 1 5 4 : 3 1 5 1 : 4 1 5 4 : 4 1 5 1 : 5 1 5 4 : 5 1 5 1 : 6 1 5 4 : 6 1 5 1 : 7 1 5 4 : 7 1 5 1 : 8 1 5 4 : 8 1 5 1 : 9 1 5 4 : 9 1 5 1 : 0 2 5 4 : 0 2 5 1 : 1 2 5 4 : 1 2 5 1 : 2 2 5 4 : 2 2 5 1 : 3 2 5 4 : 3 2 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: 1,100 1,000 900 800 700 600 500 400 300 200 100 0 ) s p b G ( t u p h g u o r h T k r o w t e N Figure 5: 1,100 1,000 900 800 700 600 500 400 300 200 100 0 ) s p b G ( t u p h g u o r h T k r o w t e N Peak 1,084 Gbps 51% INCREASE Peak 1,084 Gbps 51% INCREASE 6am 3pm 6pm 9pm 5 1 : 0 0 5 4 : 0 0 5 1 : 1 0 5 4 : 1 0 5 1 : 2 0 5 4 : 2 0 5 1 : 3 0 5 4 : 3 0 5 1 : 4 0 5 4 : 4 0 5 1 : 5 0 5 4 : 5 0 5 1 : 6 0 5 4 : 6 0 5 1 : 7 0 5 4 : 7 0 5 1 : 8 0 5 4 : 8 0 5 1 : 9 0 5 4 : 9 0 5 1 : 0 1 5 4 : 0 1 5 1 : 1 1 5 4 : 1 1 5 1 : 2 1 5 4 : 2 1 5 1 : 3 1 5 4 : 3 1 5 1 : 4 1 5 4 : 4 1 5 1 : 5 1 5 4 : 5 1 5 1 : 6 1 5 4 : 6 1 5 1 : 7 1 5 4 : 7 1 5 1 : 8 1 5 4 : 8 1 5 1 : 9 1 5 4 : 9 1 5 1 : 0 2 5 4 : 0 2 5 1 : 1 2 5 4 : 1 2 5 1 : 2 2 5 4 : 2 2 5 1 : 3 2 5 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 1,000 900 800 700 600 500 400 300 200 100 0 ) s p b G ( t u p h g u o r h T k r o w t e N Peak 1,084 Gbps 51% INCREASE 6am 3pm 6pm 9pm 5 1 : 0 0 : 5 4 0 0 5 1 : 1 0 5 4 : 1 0 5 1 : 2 0 5 4 : 2 0 5 1 : 3 0 5 4 : 3 0 5 1 : 4 0 : 5 4 4 0 5 1 : 5 0 5 4 : 5 0 5 1 : 6 0 : 5 4 6 0 5 1 : 7 0 5 4 : 7 0 5 1 : 8 0 : 5 4 8 0 5 1 : 9 0 : 5 4 9 0 5 1 : 0 1 5 4 0 1 : 5 1 : 1 1 5 4 : 1 1 5 1 : 2 1 5 4 : 2 1 5 1 : 3 1 5 4 : 3 1 5 1 : 4 1 5 4 4 1 : 5 1 : 5 1 5 4 : 5 1 5 1 : 6 1 5 4 6 1 : 5 1 : 7 1 5 4 : 7 1 5 1 : 8 1 5 4 8 1 : 5 1 : 9 1 5 4 9 1 : 5 1 : 0 2 : 5 4 0 2 5 1 : 1 2 5 4 : 1 2 5 1 : 2 2 5 4 : 2 2 5 1 : 3 2 5 4 : 3 2 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 u p h g u o r h T k r o w t e N : i t 200 300 95% 600 5 1 : 0 0 5 4 0 0 y a d f o e m 100 100% 0 500 Figure 6: 400 100 95 June 2017: Peak speed 90 85 80 75 70 65 60 55 y b s d a o n w o d e t s e b n a d e M June 2016 f o d e e p s 5 4 4 0 80% 90% 60% 5 4 : 2 0 5 4 : 3 0 5 1 : 4 0 85% 5 4 : 1 0 5 1 : 2 0 65% 70% 5 1 : 3 0 55% 5 1 : 1 0 75% l i f : l i M A 2 M A 4 M A 2 1 6am 3pm 6pm 9pm 5 1 : 5 0 5 4 : 5 0 5 1 : 6 0 : 5 4 6 0 5 1 : 7 0 5 4 : 7 0 5 1 : 8 0 : 5 4 8 0 5 1 : 9 0 : 5 4 9 0 5 1 : 0 1 5 4 0 1 : 5 1 : 1 1 5 4 : 1 1 5 1 : 2 1 5 4 : 2 1 5 1 : 3 1 5 4 : 3 1 5 1 : 4 1 5 4 4 1 : 5 1 : 5 1 5 4 : 5 1 5 1 : 6 1 5 4 6 1 : 5 1 : 7 1 5 4 : 7 1 5 1 : 8 1 5 4 8 1 : 5 1 : 9 1 5 4 9 1 : 5 1 : 0 2 : 5 4 0 2 5 1 : 1 2 5 4 : 1 2 5 1 : 2 2 5 4 : 2 2 5 1 : 3 2 5 4 : 3 2 Time of day June 2017 Note: data represents average of traffic across all days in June, excluding corporate traffic. M A 6 M A 8 M A 0 1 M P 2 1 M P 2 M P 4 M P 6 M P 8 M P 0 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 n 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 LtdBNP Paribas Nominees Pty Ltd Bond Street Custodians Limited FNZ Custodians Limited HSBC Custody Nominees (Australia) Limited Ronald James Woodrow Netwealth Investments Limited Talston Pty Ltd New Zealand Depository Nominee Limited Cash Account Custodial Services Limited Citicorp Nominees Pty Limited PT (Booster Investments) Nominees Limited Investment Custodial Services Limited JBWere (NZ) Nominees Limited Bond Street Custodians Limited HOLDING 127,461,232 44,412,525 33,208,377 27,105,591 26,715,979 9,337,955 8,761,413 8,242,300 7,273,643 7,156,447 4,857,495 2,591,632 2,394,466 2,380,779 2,085,998 1,935,994 1,612,061 1,521,984 1,399,947 1,396,363 % 31.01% 10.80% 8.07% 6.59% 6.50% 2.27% 2.13% 2.00% 1.76% 1.74% 1.18% 0.63% 0.58% 0.57% 0.50% 0.47% 0.39% 0.37% 0.34% 0.33% * New Zealand Central Securities Depository Limited provides a custodial depository service which allows electronic trading of securities by its members. Net tangible assets per security As at 30 June 2017, consolidated net tangible assets per share was $1.95 (30 June 2016: $1.77). Net tangible assets per share is a non-GAAP financial measure and is not prepared in accordance with NZIFRS. Revenue from ordinary activities and net profit In the year ended 30 June 2017: • Revenue from ordinary activities increased 3% to $1,040 million; and • Profit from ordinary activities after tax, and net profit, attributable to shareholders increased 24% to $113 million. P | 74 Annual Report | 2017 Subsidiaries Chorus New Zealand Limited No other Chorus New Zealand Limited directors resigned or were Directors as at 30 June 2017: Kate McKenzie (chairman), Andrew appointed in the year ended 30 June 2017. Carroll, Nick Woodward, Vanessa Oakley and Lucy Riddiford (as alternate director for Vanessa Oakley). Director remuneration The directors of Chorus New Zealand Limited during the year Mark Ratcliffe resigned as a Chorus New Zealand Limited director ended 30 June 2017 were all employees and did not receive any on 20 February 2017. Kate McKenzie was appointed a director from remuneration in their capacity as directors. that date. Changes in director interests 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 Director and shareholder of: MCK Family Holdings Pty Limited. Member of: Mahuki Advisory Board.1 Became a director and shareholder of: Te Awanga Investments Limited. Became a beneficial shareholder of: Vocus Communications Limited; Trustpower Limited. Mark Ratcliffe2 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. 1 From 3 July 2017. 2 Changes in interests while a director. Chorus LTI Trustee Limited Chorus LTI Trustee Limited was incorporated on 11 December 2014 as trustee for our long term incentive plan. Directors: Prue Flacks, Murray Jordan and Keith Turner. Clayton Wakefield resigned as a director of Chorus LTI Trustee Limited effective 1 November 2016. Murray Jordan was appointed as a director of Chorus LTI Trustee Limited from 10 November 2016. Director remuneration The directors of Chorus LTI Trustee Limited are all directors of Chorus Limited and do not receive any remuneration in their capacity as directors of Chorus LTI Trustee Limited. Other subsidiaries Chorus Limited has no other subsidiaries. P | 75 Annual Report | 2017 Glossary Backbone network Fibre cabling and other shared network elements IT Information Technology. required either in the common areas of multi- dwelling units to connect individual apartments/ offices, or to serve premises located along rights of way. Is the portion of the network that links local exchanges to other exchanges or retail service provider networks. A fibre service that provides dedicated bandwidth (up to 10Gbps download speed) between customers and their retail service provider’s equipment in the local exchange. A technology neutral voice input service that can be bundled with a broadband product or provided on a standalone basis. Used by retail service providers to provide a copper voice service from their exchange equipment via Chorus equipment in cabinets or exchanges. Backhaul Bandwidth fibre access Baseband Baseband IP Board Chorus Limited’s Board of Directors. Building block model CFH Refers to a methodology used for regulating monopoly utilities. Under BBM a regulated supplier’s allowed revenue is equal to the sum of the underlying components or ‘building blocks’, consisting of the return on capital, depreciation, operating expenditure and various other components such as tax. Crown Fibre Holdings Limited, the Government organisation that manages New Zealand’s rollout of Ultra-Fast Broadband infrastructure. CFH was renamed Crown Infrastructure Partners in July 2017. Chorus Chorus Limited and subsidiaries. Commission Commerce Commission – the independent Crown Entity whose responsibilities include overseeing the regulation of the telecommunications sector. Constitution Chorus Limited’s Constitution. CPI Consumers Price Index (inflation). Direct fibre access Also known as ‘dark’ fibre, a fibre service that RAB RBI share SLES SLU TSO TSR UBA UCLFS provides a point to point fibre connection and can be used to deliver backhaul connections to mobile sites. A director of Chorus Limited. Earnings before interest, income tax, depreciation and amortisation. UCLL European Medium Term Note. Financial year – twelve months ended 30 June. e.g. FY17 is from 1 July 2016 to 30 June 2017. UFB The equivalent of 1 billion bits. Gigabit Ethernet provides data transfer rates of about 1 gigabit per second. Gigabits per second. A measure of the average rate of data transfer. VDSL High Speed Network Service – a high speed Layer 2 service with dedicated bandwidth on either copper or fibre. International Financial Reporting Standards – the rules that the financial statements have to be prepared by. Internet Protocol. Director EBITDA EMTN FY Gigabit Gbps HSNS IFRS IP P | 76 Layer 0, 1, 2 LFCs Mbps Refers to the layers within the Open Systems Interconnection model. Layer 0 is ducts and manholes. Layer 1 is the physical cables and co-location space. Layer 2 is the data link layer including broadband electronics. Local Fibre Companies – refers to the three other organisations the Government has contracted with for the UFB rollout in non-Chorus areas. Megabits per second – a measure of the average rate of data transfer. Naked copper Broadband only connections, where the customer does not also take an analogue voice service. Regulatory Asset Base refers to the value of total investment by a regulated utility in the assets which will generate revenues over time. Rural Broadband Initiative – refers to the Government programme to improve and enhance broadband coverage in rural areas between 2011 and 2016. Means an ordinary share in Chorus. Sub Loop Extension Service – enables retail service providers to connect a sub loop UCLL line from a cabinet to the exchange. Sub Loop Unbundling – where retail service providers use the regulated copper line service available between the premises and cabinet. Telecommunications Services Obligation – a universal service obligation under which Chorus must maintain certain coverage and service on the copper network. Total shareholder return. Unbundled Bitstream Access – regulated service that enables retail service providers to use Chorus equipment to deliver broadband to customers. Unbundled Copper Low Frequency Service – a subset of the baseband voice input service offered over copper, with pricing set at the averaged UCLL price. Unbundled Copper Local Loop – a regulated service enabling retail service providers to offer voice and broadband services on copper lines using their own electronic equipment in the exchange. Ultra-Fast Broadband refers to the Government programme to build a fibre to the premises network to about 85% of New Zealanders. UFB1 refers to the original phase of the rollout to 75% of New Zealanders. UFB2 was a subsequent phase announced in January 2017. Very High Speed Digital Subscriber Line – a copper-based technology that provides data transmission up to about 100Mbps downstream and 50Mbps upstream. Annual Report | 2017 Forward looking statements and disclaimer This annual report: • May contain forward looking statements. These statements are not guarantees or predictions of future performance. They involve known and unknown risks, uncertainties and other factors, many of which are beyond Chorus’ control, and which may cause actual results to differ materially from those expressed in the statements contained in this annual report. • • Includes statements relating to past performance. These should not be regarded as reliable indicators of future performance. Is current at its release date. Except as required by law or the NZX Main Board and ASX listing rules, Chorus is not under any obligation to update this annual report or the information in it at any time, whether as a result of new information, future events or otherwise. • Contains non-GAAP financial measures, including EBITDA and “adjusted EBITDA”. These measures may differ from similarly titled measures used by other companies because they are not defined by GAAP or IFRS. Although Chorus considers those measures provide useful information they should not be used in substitution for, or isolation of, Chorus’ audited financial statements. Refer to Appendix one on page 23 for further detail relating to EBITDA measures. • May contain information from third parties Chorus believes reliable. However, no representations or warranties are made as to the accuracy or completeness of such information. • Should be read in the wider context of material previously published by Chorus and released through the NZX and ASX. • Does not constitute investment advice or an offer or invitation to purchase Chorus securities. P | 77 Annual Report | 2017 Directory Registered Offices New Zealand Level 10 1 Willis Street Wellington New Zealand Phone: +64 4 896 4004 Australia C/- Allens Corporate Services Pty Limited Level 4, Deutsche Bank Place 126 Phillip Street Sydney NSW 2000 Australia Phone: +61 2 9230 4000 ARBN 152 485 848 Registrars ADR Depository BNY Mellon Shareowner Services C/- Computershare Investor Services P.O. Box 43078 Providence, RI 02940-3078 United States of America Phone: +1 201 680 6825 Email: www.bnymellon.com/shareowner shrrelations@bnymellon.com New Zealand Computershare Investor Services Limited Private Bag 92119 Victoria Street West Auckland 1142 New Zealand Phone: +64 9 488 8777 Fax: +64 9 488 8787 Email: enquiry@computershare.co.nz www.investorcentre.com/nz Australia Computershare Investor Services Pty Limited GPO Box 3329 Melbourne 3001 Australia Freephone: 1 800 501 366 Fax: +61 3 9473 2500 Email: enquiry@computershare.co.nz www.investorcentre.com/nz