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01
17
27
65
92
Chorus Board and
management overview
Management commentary
Financial statements
Governance and disclosures
Glossary
FY18 results overview
Fixed line connections
Broadband connections
FY18
FY17
FY18
FY17
1,526,000
1,602,000
1,187,000
1,186,000
Fibre connections
Net profit after tax
FY18
445,000
FY17
305,000
FY18
$85m
FY17
$113m
EBITDA1
Adjusted2 EBITDA
FY18
$653m
FY17
$652m
FY18
$653m
FY17
$710m2
Dividend
Employee engagement score
FY18
22cps
FY17
21cps
FY18
57%
FY17
81%
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 our business.
2 Adjusted to reflect the effect the NZ IFRS accounting standards adopted in FY18 would have had if they had applied in FY17.
Dear investors
Kate McKenzie
Chief Executive
Patrick Strange
Chair
We’ve made strong progress this year
in our quest to keep New Zealand new.
It is easy to overlook the scale and pace of the technological
change we’re bringing to New Zealand communities.
More than 900,000 homes and businesses now have fibre
at their gate and uptake has surged from 35% to 45% during
FY18. This has been achieved through our focus on the
more visible and challenging part of our broadband rollout
– the connection from the street into customers’ homes
and businesses. We didn’t get it right every time, but we’ve
continued to improve the experience for customers while
completing 156,000 fibre installations. That’s a 20% lift in
productivity from the previous year.
We ended the year with 64% of our broadband connections
on either fibre or high-speed VDSL broadband, up from
45% last year. This was driven by our shift to being an
active wholesaler, investing to promote awareness of
the better broadband options already available to many
New Zealanders through advertising, collaborative
campaigns with retailers and our own door knocking
initiatives. This new approach, combined with underlying
demand for broadband, helped us to turn last year’s
decline of 40,000 broadband connections into a gain of
1,000 connections for FY18. Although competition from
wireless and other fibre networks meant our total fixed line
connections continue to reduce, the pace slowed to 76,000
connections compared to 125,000 connections in FY17. This
reduction in connections was predominantly copper lines
outside of our fibre network areas.
Against this backdrop of declining connection numbers,
we took steps to implement a range of cost management
initiatives identified in our FY17 strategic review. This included
reducing our internal workforce by 12%, from peak August
2017 levels, as part of broader organisational change. We
achieved net profit after tax of $85 million and EBITDA
of $653 million, modestly above the top end of our initial
FY18 EBITDA guidance of $625 million to $650 million.
This compares with adjusted1 FY17 EBITDA of $710 million,
reflecting the effect of fewer connections on our revenues.
A fully imputed final dividend of 13 cents per share will be
paid on 9 October 2018, bringing total dividends for FY18
to 22 cents per share.
Our focus on tight cost management meant we met our
fibre capital expenditure forecasts for another year, despite
a record year for fibre connections and inflation in the wider
construction market. Our commitment to investing in a fibre
future was evident in our August 2017 UFB2+ agreement
with the Government to take fibre even further. By the end
of 2022 we’ll have extended fibre to about three-quarters
of the 87% of New Zealanders to be covered by the UFB
programme. In the meantime, our investment in VDSL
broadband upgrades has helped narrow the digital divide,
improving potential broadband speeds for up to 85,000
rural addresses.
We invested in bridging the digital divides within urban
communities too. We worked with Network for Learning,
a government education group, to trial the extension
of a school wifi network to students in the surrounding
community, using our street poles and copper cables in
new ways. This was part of our innovation initiatives, focused
on identifying opportunities to use our network assets to
develop future products and services. We’ve also run trials
to develop connectivity options for the Internet of Things,
network edge computing and television broadcasting.
The success of these trials has increased our belief in the
potential socio-economic benefits our infrastructure can
bring to New Zealanders, while providing future alternative
sources of revenue for our business.
Regulatory clarity remains critical to our focus on long-term
shareholder value. We worked through the year to assist
the progress of the utility style regulatory framework, as
initially set out in draft legislation in August 2017, through
Select Committee and revised legislation is expected before
Parliament in FY19. We look forward to working with the
Commerce Commission on a smooth and timely transition
to a framework that aligns the interests of customers and
investors through recognition of a fair return on investment.
1 Adjusted to reflect the effect the NZ IFRS accounting standards
adopted in FY18 would have had if they had applied in FY17.
This report is dated 27 August 2018 and is signed on behalf of the Board
of Chorus Limited.
1
Annual Report 2018 1.0
Keeping
New Zealand new
As a utility network operator, we take a long
term view. We want to make New Zealand better,
keeping it at the cutting edge through our network
infrastructure and the connectivity we can
provide. Our network of fibre and copper cables
connects homes and businesses nationwide, via
our exchange buildings and cabinets. About 100
retailers use our network to deliver their services
to their customers. This includes using our fibre
network for backhaul connections to mobile
network towers.
Demand for broadband has been growing very strongly,
fuelled by the emergence of broadband as the fourth utility,
together with the rollout of fibre and ongoing premises
growth, particularly in New Zealand’s largest city, Auckland.
However, the continuing evolution of technology, market
dynamics and industry regulation means we operate in an
ever changing environment. To ensure we maintain our
leading network position and a sustainable business well
into the future, we’re focused on creating an environment
for our customers and our people that optimises today’s
business and allows for us to innovate for growth.
1.1 Transforming customer experience
It’s our belief that once a home or business owner has
connected to fibre, its technological superiority will ensure
they remain connected. This means we need to make it
as easy as possible for customers to connect to our fibre
network. Fibre installations can be challenging because
of the variability in conditions between every home and
business, as well as the layers of communication and
coordination required between us, our service companies,
retailers and their customers. We’ve made significant
progress in streamlining processes with our investment in
automated platforms, but we know we need to make things
better if we’re to continue to encourage customers to make
the effort to upgrade to fibre.
This is why our number one operational priority remains
a high quality connection experience for customers
connecting to our fibre network for the first time. We
set ourselves a customer satisfaction target of 7.8 out of 10
by the end of FY18, up from 7.4 in FY17, based on a rolling
three month average of scores from a survey of newly
connected customers each month from across a range
of retail service providers.
Although we ended the year with an improved score of 7.5,
this was below our target. However, the less than desired
improvement was achieved in the context of a year of
unprecedented demand where we recruited 185 additional
field crews to deal with strong fibre demand and complete
20% more fibre installations than the prior year. The passing
of new land access legislation in the first half of FY18 also
meant we’ve been connecting a backlog of orders where
the customers had gone through a drawn out and potentially
unsatisfactory experience.
Further, results varied widely between retailers, reflecting the
multiple customer touchpoints involved in the connection
process. Customer satisfaction levels can be influenced by
everything from the quality of initial communication between
customers and their retailer, through to our communication
and technicians turning up when expected, as well as the
quality of the installation itself. Some retailers achieved
customer satisfaction scores of more than 8 out of ten,
reflecting a focus on clear expectation setting with their
customers and well developed processes. Our technicians are
completing more than 700 installations a day and typically
achieve 8 out of ten on customer satisfaction surveys.
There’s clearly still more we can do to improve the
experience for customers and we have an extensive
programme of initiatives underway including:
• streamlining the connection process for simple fibre
connections so customer effort is reduced to one visit,
rather than two. In June 2018 we were already achieving
this goal of "fibre in a day" for about 25% of customers
connected. Our goal is to reach 100% by the end of FY19.
• increasing our joint targeted marketing campaigns
with retailers so we better coordinate service
company resources.
• running more of our own door knocking campaigns
so we better align our fibre installation work with initial
network rollout activity.
• continuing to clear the backlog of complex multi-
dwelling and rights of way connections following
changes to the land access legislation.
• reducing rescheduling and cancellations by proactively
managing fibre orders to better identify missing
information and complex installations.
• improving customer expectation setting with
enhanced installation and consent information.
2
Annual Report 2018 Fibre installation crews
Completed installations
JUNE 16
524
JUNE 17
615
JUNE 18
800
JUNE 16
93k
JUNE 17
129k
JUNE 18
156k
National weighted average lead times
Technician reschedules
JUNE 16
JUNE 17
JUNE 18
17
22
13
DAYS
JUNE 16
14%
JUNE 17
4%
JUNE 18
5%
Customer escalations
Customer satisfaction
JUNE 16
JUNE 17
7%
4%
JUNE 18
4%
OF WORK IN
PROGRESSS
JUNE 16
6.9
JUNE 17
7.4
JUNE 18
7.5
OUT OF 10
(TARGET 7.8)
3
Annual Report 2018 1.2 Upgrading customers to better broadband
A reduction in the number or value of our connections
impacts our revenue and profitability. To mitigate these
risks, we’ve become an active wholesaler. This means we
are investing to raise consumer awareness of our network
footprint and service quality through advertising campaigns
and www.askforbetter.co.nz. We're also working with
retailers to encourage them to upgrade their customers to
better broadband options on our network. By the end of
FY18, 64% of our broadband connections were on VDSL or
fibre technology, up from 45% at the start of the period.
Customer recognition of the premium benefits of fibre
broadband speeds and consistent throughput capability is our
strongest competitive network advantage. We’ve seen early
evidence of customers returning to our network from wireless
alternatives as fibre becomes available. To that end, our
ongoing rollout of the UFB network remains by far the biggest
and most important investment we’re making in delivering
a better broadband experience for customers. We extended
our fibre footprint past another 150,000 homes and
businesses during the year and demand for fibre was stronger
than ever, with UFB uptake growing from 35% to 45%.
At the same time, we increased VDSL uptake by 77,000
connections. This was a positive outcome for customers
given the enhanced broadband speeds typically provided
by VDSL and the fact we charge the same rate for VDSL
and ADSL services. We invested $20 million in a project
to upgrade broadband performance for about 270,000
addresses across rural and local fibre company areas
through the deployment of vectoring technology and
new VDSL broadband electronics. We’ve seen a more than
40% average increase in download speed performance
for those customers who are now on VDSL broadband
plans and the upgrade could benefit about 85,000
rural addresses with improved broadband speeds.
1.3 Leveraging our technology advantage
Today, we can provide dedicated 1 gigabit per second
(Gbps) connections with no datacap constraints to more
than 900,000 customers across New Zealand’s largest
urban centres. By the end of 2022 we’ll have extended
that footprint to more than 1.3 million customers and
we’ve begun trialling the delivery of 10Gbps capability.
In contrast, mobile networks rely on shared capacity
and are more prone to congestion at peak times.
This difference is becoming all the more important as data
demand grows. More than 60% of New Zealand households
are estimated to be on unlimited broadband plans and
average monthly bandwidth demand on our network grew
from 155 gigabytes (GB) per customer to 210GB in the
12 months to the end of FY18. Usage for fibre customers was
higher again at an average of 297GB per month. Moreover,
much of this demand is occurring in the evening as more
New Zealanders shift to streaming video on demand services.
We’ve seen average peak usage on our network grow 37%
4
from 1,084Gpbs at 9pm in June 2017 to 1,480Gbps at
9pm in June 2018. Record peak usage for FY18 occurred
just before 9pm on May 1st with 1,658Gbps, following
the release of an update for the online game Fortnite.
There are customers who do not currently use much
data and for whom wireless networks may provide a
viable network alternative. However, ever increasing data
demands and the evolution of new data hungry devices
and applications, particularly 4K television, are continuing
to fuel the demand for bandwidth. Currently, wireless
broadband retailers have monthly datacaps limited to
240GB and only offer these services in very specific areas.
There has been much speculation about the potential
future performance of 5G technology and what it means
for fixed line networks. We are monitoring developments
and have visited international telecommunications
operators to learn more about their 5G plans. Where
deployments are occurring overseas they tend to be
in areas where fibre to the premises networks aren’t
available. Some operators have questioned the economic
viability of 5G deployments in areas where a superior fibre
service is already available. A multitude of new wireless
base stations would be required to extend 5G capability
to lower density suburban areas. This is because of the
distance and line of sight limitations for each base station.
The timeframes for the development of global 5G
standards and consumer equipment, together with
spectrum requirements, suggests 5G deployments
in New Zealand are unlikely until 2020. These initial
deployments are likely to be limited to existing cell
towers or sites. We see a complementary future with 5G,
because fixed line infrastructure will also be needed for
backhaul and power to base stations. This may create
new revenue opportunities for our business over time.
Figure 1:
Monthly average data usage per connection on our network
)
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Copper
Fibre
Average
Annual Report 2018
Peak traffic
of 1,658 Gbps
on 1st May 2018
Figure 2:
37% growth in June traffic peak year on year
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Time of day
June 2017
June 2018
Note: data represents average of traffic across all days in June, excluding corporate traffic.
1.4 Identifying new uses for our infrastructure
During the year we began trialling new ways to use our
network to provide new technology solutions for customers.
We ran a successful trial that showed we can broadcast live
4K quality TV content, via our fibre network, to customers’
televisions. This is of strong interest to local broadcasters
as an alternative, higher quality and more interactive option
than traditional broadcast mechanisms. By the end of 2022,
New Zealand’s fibre footprint will have greater coverage of
the population than terrestrial broadcasting.
This broadcasting capability will also potentially require a
dispersed content distribution network. Based on the success
of our earlier data centre trial and the growth in demand for
network edge computing capability, we’ve already begun
expanding our data centre footprint to more exchanges.
We’ve started exploring the potential uses of our network
assets to meet the expected needs for low-powered
monitoring of sensors as the Internet of Things evolves.
This included a proof of concept trial for a Long Range
Wide Area Network. Our solution used a pole-mounted
wireless access point, powered by our copper network,
to enable monitoring of hard to access locations such as
underground wastewater or sewage pumping stations.
5
Annual Report 2018
Figure 3:
Summary of key market trends
Our market drivers
What we’re doing about these drivers
Strong population and premises growth,
We’ve increased our subdivision capability and are focused on installing
particularly in Auckland.
fibre so it’s available when customers move into their new homes.
Local fibre companies (Enable, Ultra-Fast Fibre,
We’ve invested in the deployment of VDSL vectoring capability to
Northpower) are overbuilding our existing copper
improve the performance of our copper broadband network and
network with fibre as part of the Government’s
we continue to provide services on our pre-existing fibre network in
UFB programme.
these areas.
Large vertically integrated retailers are encouraging
We’ve become an active wholesaler, promoting awareness of the fibre
some of their customers to use their own fixed
wireless, cable and legacy fibre networks to reduce
and VDSL options already available to many New Zealanders through
advertising, collaborative campaigns with retailers and our own door
their wholesale network costs.
knocking initiatives.
Traditional voice only connections are declining as
We have an extensive innovation programme underway to identify
demographics and service options evolve, while legacy
potential new uses for our network infrastructure, including
business connections are migrating to new lower cost
broadcasting capability, data centres and Internet of Things
inputs on our own or alternative provider networks.
connectivity.
Communications technology is evolving,
We’re taking fibre to about three-quarters of the 87% of
potentially increasing the capability of mobile/wireless
New Zealanders to be covered by the UFB programme by the end of
technologies as a fixed line alternative for some
2022 and we’re extending our VDSL footprint. Our network provides
customers.
dedicated capacity for customers at times of peak data consumption.
6
Annual Report 2018 2.0
The UFB
rollout
We’re the major cornerstone partner in the
Government’s UFB initiative that will see a
fibre to the premises network available to
approximately 87% of New Zealanders by the
end of 2022. Our part in the network rollout
began in 2011 and will reach an estimated
1.36 million homes and businesses.
Building the communal fibre network past these homes
and businesses is estimated to cost $2.26 billion to $2.37
billion, excluding the significant cost avoided by re-using
our existing network assets such as ducts and poles.
In addition to communal network costs, we’re investing
significant capital expenditure to connect each customer
to the fibre network. The total cost of this will depend on
the level of uptake over time.
The Government is providing up to $1.33 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, including
our delivery and operational obligations, as well as the
financial and step-in management remedies available
to the Government.
We receive the Government financing as the network is built
past premises according to our agreed deployment plan
and 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. In the event that our credit
rating fell below investment grade we would require Crown
Infrastructure Partners approval to pay a dividend on our
ordinary shares and, after 2019, to continue accessing
Government financing for the UFB2 rollout.
We have fixed price contracts in place for the communal
network deployment and for subsequent connections to
customers. These contracts are with our third party service
company suppliers including Visionstream, Broadspectrum,
Downer and Universal Communications Group. We work
closely with our service company partners to maintain our
workforce at sustainable levels so we can meet customer
demand for fibre connections and deliver a good customer
experience. Technicians must undergo induction training,
including health and safety, before conducting any work on
our behalf. We also undertake regular spot checks to ensure
work meets our quality standards and customer experience
expectations.
During the year there were suggestions of isolated instances
in which some service company subcontractors may have
employed workers on a voluntary basis. We investigated
the claims and a service company subsequently ended a
subcontractor relationship. Our supplier contracts clearly
require workers to be employed according to New Zealand
law and we’re continuing to monitor compliance with our
supply chain requirements with all service companies.
Figure 4:
UFB rollout and uptake
1,400
1,200
1,000
s
n
o
i
t
c
e
n
n
o
c
f
o
r
e
b
m
u
N
800
600
400
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0
000’s
e
k
a
t
p
U
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Premises to pass by
end of 2022
˜1,054,000*
Customers able to connect
˜1.36 million
Estimated communal capital
expenditure to pass premises
$2.26 to 2.37 billion
Crown funding
(57:43 equity/debt)
up to $1.33 billion
Capital expenditure required
to connect premises
Subject to demand
JUN
2015
SEP
2015
DEC
2015
MAR
2016
JUN
2016
SEP
2016
DEC
2016
MAR
2017
JUN
2017
SEP
2017
DEC
2017
MAR
2018
JUN
2018
DEC
2022
UFB connections
UFB available addresses
Planned footprint
% Uptake (right axis)
* Includes estimated 43,000
greenfields premises for UFB1
7
Annual Report 2018
3.0
Regulatory
environment
We operate our wholesale only network within
the regulatory framework established by the
Telecommunications Act. The Act was amended
in 2011 to facilitate our demerger from Telecom
New Zealand (now Spark). We’re also subject
to the requirements of four open access deeds
of undertaking for copper, fibre and Rural
Broadband Initiative services that focus on the
provision of services on a non-discriminatory
or equivalent basis. This regime will remain in
place after 2020 except for matters that are
dealt with by the revised utility model now
being implemented by the Government.
Approximately 55% of our FY18 revenues were from
copper services with pricing and terms regulated by the
Commerce Commission (the Commission) under the Act.
The Commission set a five-year schedule of pricing for our
regulated copper services in December 2015, following
a detailed price review process.
Our fibre services aren’t currently regulated and most are
instead subject to contractual pricing and terms agreed
with the Government as part of our UFB contracts.
3.1 Moving to a regulated utility model
The pricing and terms on which we deliver copper and fibre
access services from 2020 onwards has been the subject of
a lengthy regulatory framework review. Final policy decisions
from this review were released on 1 June 2017 and a Bill was
introduced to Parliament on 8 August 2017. The Bill has been
reviewed by a Select Committee and we're now awaiting a
revised Bill for passage into legislation.
Under the proposed new framework our recent fibre
investment would be regulated according to a utility style
building block model from 2020. This model is already
used to regulate other New Zealand utility businesses,
such as electricity lines and gas networks. It is recognised
as supporting 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. Moody’s Investor
Services has noted in a credit opinion that the transition to
a regulated utility model could support a higher leverage
profile within Chorus’ Baa2 credit rating.
Key features of the proposed regime are:
• deregulation of the copper network from 1 January 2020
in areas where fibre is available and withdrawal of copper
services subject to a consumer code.
• continued regulation of the copper network in areas
where fibre is not available, with copper pricing adjusted
for inflation.
• the regulated asset base for fibre will include unrecovered
losses incurred before 2020, with pre 2011 assets valued
at depreciated historical cost and post 2011 assets at
depreciated actual cost. Crown financing will be treated
according to its actual cost to Chorus.
• confirmation of the 100/20 Mbps fibre service as the
main anchor product with a price cap to start at the
2019 level and adjusted annually for CPI for the first
regulatory period – currently 2023.
• unbundling of the fibre network to be made available
on a commercial basis from 2020.
We’re now working with the Commission to facilitate
a smooth and timely transition to the new regime.
The Commission is required to establish the key input
methodologies that will determine the starting value of
our regulated asset base, the regulatory weighted average
cost of capital, cost allocations, expenditure allowances
and our maximum allowable revenue. If this process
extends beyond 1 January 2020, key fibre and copper
prices will be frozen at the then existing pricing levels,
adjusted for inflation, for up to 24 months.
3.2 Other regulatory reviews
The Commission is currently consulting industry on
the scope of a planned study of the mobile market in
New Zealand, to look at the competitive landscape and any
emerging competition issues. We consider topics worthy
of further analysis to include the relative pricing between
mobile and fixed wireless services, the comparatively
low penetration of mobile virtual network operators, and
the potential for shared open access infrastructure and
spectrum to benefit the rollout of 5G networks.
In addition, the Commission announced in January 2018
that it was restarting its study of the backhaul market to
explore whether the current regulation for backhaul is
fit for purpose.
8
Annual Report 2018
Figure 5:
Regulation: moving to a utility model
(Regulatory framework as set out in draft legislation)
Fibre – proposed utility framework
Copper – proposed legacy framework
• Regulated asset base (RAB) with revenue cap, to
be set by Commerce Commission within two years
• Two anchor products (voice only + entry level broadband
– 100/20Mbps fibre) at 2019 prices + CPI and a price
cap for direct fibre access
• Three years after the new regime commences,
the Commission can review the revenue cap model,
as well as the anchor products, subject to specified
conditions and statutory criteria
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
Where fibre is not available:
• Copper remains regulated and TSO applies
• Copper pricing capped at 2019 levels
with CPI adjustments
• Commission required to review pricing
framework no later than 2025
Figure 6:
The New Zealand fixed line market
Rationalisation, new entrants and new business models are disrupting the NZ market.
International
media providers:
Local Media:
(Broadcast)
Local Media:
(On Demand)
Retail Service
Providers:
Fixed Line
Access
Networks:
BBC iPlayer Apple TV Google Play Netflix YouTube Hulu Amazon
Vodafone TV
Lightbox
OnDemand
3Now
Neon
TVNZ
TV3
Sky TV
via satellite and
IP set-top boxes
Vodafone
Spark
+Skinny
2degrees
Vocus
Trustpower
Others:
Slingshot, Orcon, Flip
e.g. Megatel
Contact Energy
MyRepublic
Stuff Fibre
NOW
HFC cable in
Wellington +
Christchurch
(~60k customers)
Chorus
Nationwide network access
wholesaled to ~100 retail service providers;
Fibre to pass ~1.36m homes and businesses
Local Fibre Companies:
Enable – Ultrafast Fibre – Northpower
Fibre to pass ~430k homes and businesses
Mobile network
Wireless Broadband
Power + Broadband
Note: Fibre to the premises will cover ~87% of NZ population by the end of 2022
9
Annual Report 2018 4.0
Keeping communities
connected
We recognise the reliance New Zealanders place
upon our network both as a utility service for
their daily lives and businesses, as well as a critical
lifeline service in times of emergency. A large part
of our everyday work is to ensure the 1.5 million
connections on our network receive stable and
reliable service. Our people and technicians often
go the extra mile to keep communities connected
when extreme events occur.
We have a comprehensive insurance programme typical
of large scale infrastructure utilities and we undertake
probability based loss estimate modelling. Our network
has proven resilient, despite several earthquakes above
a 7 magnitude on the Richter scale in recent years, with
damage largely restricted to localised cables and
minimal damage to our exchange buildings.
Weather events can affect our network, through faults
generated by water entering copper cables, lightning strikes,
and wind damage to poles and aerial cabling. We consider
the potential near to medium term financial impact of
climate change effects to be low. Our newer fibre network
will provide greater resiliency because it is less susceptible
to water and lightning related faults. However, fibre faults
are likely to cost more to repair on average due to the
network architecture and work required.
Despite the challenges of some extreme weather events
and damage to cables by third parties, we managed to keep
the average duration of network interruptions to 21 hours
across our fibre and copper network in FY18. We met our
fibre service level targets as contracted with the Crown:
• Layer 1: actual downtime of 63 minutes
vs limit of 120 minutes
• Layer 2: actual downtime of 6 minutes
vs limit of 30 minutes
As a wholesale network operator our cybersecurity risks
are different from those of retail-facing network operators.
We have policies, processes, and registers to ensure
cybersecurity is contemplated and addressed through
technology selection, delivery practices, and ongoing
operations of our IT systems. Our insurances cover key
cybersecurity risks and we undertake regular reviews,
including external audits and ad-hoc reviews, to provide
assurance and feedback on our assessments and controls.
10
Annual Report 2018 5.0
Our people, communities
and the environment
5.1 Health and safety
We place the utmost importance on keeping our people
healthy and safe. This includes our 933 employees and
the more than 4,000 people working on our behalf to
build, connect and maintain our network. Our health
and safety focus extends to anyone who is in, or in the
vicinity of, our workplaces.
We’ve established an open reporting culture and regularly
screen our contractors and suppliers to ensure their systems
and procedures meet our health and safety expectations.
New service company technicians must complete a work
training competency programme for field work, endorsed
by the New Zealand Qualifications Authority, before they
can work on our network.
The number of hours worked, including our service
companies, remained the same at 13 million for FY18.
There was a slight reduction in the number of lost time
injuries, while minor injuries increased slightly. This meant
the Lost Time Injury Frequency Rate (LTIFR) reduced from
1.23 in FY17 to 1.16 and the Total Recorded Injury Frequency
Rate (TRIFR) increased from 2.62 in FY17 to 3.10.
For FY19 we’re focusing our efforts on greater collaboration
and innovation with our service company partners to
enhance health and safety practices, as well as continued
development of our support for people working alone in
our offices and in the field.
Figure 7:
Injury frequency rates FY17 – FY18
5.77
3.10
2.62
e
t
a
r
y
c
n
e
u
q
e
r
f
y
r
u
n
j
I
6
5
4
3
2
1
0
1.86
1.23
1.16
TRIFR
LTIFR
FY16
FY17
FY18
LTIFR: number of lost time injuries + medical treatment injuries
+ restricted work injuries divided by total work hours × 1,000,000
TRIFR: number of lost time injuries divided by total work hours × 1,000,000
5.2 Our people
As a core part of our business strategy, we’re committed to
providing an environment where all of our employees feel
enabled and have a sense of belonging. We believe greater
diversity within our business will maximise our collective
capability, allow us to leverage diversity of thought, and
better reflect and understand our diverse customer base.
This should in turn lead to better decision making and
higher shareholder value.
We invest in recruitment, development and wellbeing
programmes supporting a diverse and inclusive, safe,
transparent and rewarding workplace. We offer flexible work
options and 75% of employees believe they have access to
flexible working arrangement that meet their lifestyle needs.
We also provide volunteer days for employees to help in their
local community, through activities such as delivering lunches
to schools, native tree planting and assisting in local hospices.
While 82% of employees feel that Chorus values diversity,
we were disappointed that overall employee engagement
reduced from 81% to 57%.1 While this is closer to the
New Zealand norm, we believe this reflects a period of
uncertainty for our people as we implemented organisational
changes to shift our business to a more cost effective and
customer focused culture. We’re working hard to increase
engagement in the year ahead.
We announced some changes to our executive team during
the year as we prepare for a future where the fibre build will
be largely complete and we seek to innovate for growth.
In September 2017, Shaun Philp joined us as the new General
Manager of People and Culture. In March 2018, Vanessa
Oakley transferred from General Counsel and Company
Secretary to lead our regulatory and business transformation
functions in the new role of General Manager of Strategy
and Business Operations. Ed Hyde, previously CEO of Spark
Ventures, started as our Chief Customer Officer in July 2018.
In August 2018, Elaine Campbell joined as the new General
Counsel and Company Secretary and our Chief Financial
Officer, Andrew Carroll, transferred to the role of General
Manager Network and Field Management.2
1 Based on our annual Aon Hewitt engagement survey.
2 He will remain as CFO until a new appointment is made.
11
Annual Report 2018
5.3 Socio-economic benefits of broadband
Fibre optic networks are compared to the advent of
electricity in terms of the potential transformative effects for
communities and economies. We take a long-term view of
our network investments and are committed to delivering
an asset for New Zealand’s ongoing social and economic
development. This is aligned with the infrastructure-related
elements of the United Nations Sustainable Development
Goals, including sustainable communities, work and
economic growth, education and health.
As our fibre rollout reaches more suburban and remote
communities we’re already seeing the socio-economic
benefits grow. Fibre connections to schools and hospitals
around New Zealand were a rollout priority under our
urban and rural rollout contracts with Government. This has
reduced the digital divide for rural students, enabling access
to new learning resources and experiences. However, as
technology-based learning becomes more prevalent in
schools it has highlighted the divide that exists within
communities between those students that have broadband
at home and those who don’t.
We’ve begun working with Network for Learning, a
government education group, to explore the use of our
network infrastructure to solve the issue of students
who are unable to access high-quality broadband
at home. Our first trial in Christchurch showed wifi
terminals mounted on our poles could be used to
extend the reach of the Haeata Community Campus’
learning network to students in surrounding homes.
Based on this initial success, we’re expanding the trial
to Rata Street School in Lower Hutt. This will involve us
and Network for Learning working with the school, the
Te Awakairangi Access Trust, Hutt City Council and the
Ministry of Education, to connect 150 homes to fibre.
A wifi access point in the home will enable students
to bring their Chromebook device home from school
and access the school’s online learning network.
$32.8B
In 2012 Alcatel Lucent’s Bell Labs found the UFB rollout
could contribute $32.8 billion in economic benefits to
New Zealand over 20 years.
$3.3B
In 2017 Sapere Research Group estimated wider social
benefits from maximum UFB uptake at about $2 billion
annually, on top of a $3.3 billion annual contribution to
New Zealand’s Gross Domestic Product from uptake
by businesses.
Health is another area in which better broadband is helping
bridge divides. Medical practitioners, for example, are
using improved video conferencing capability to provide
telemedicine consultations to their regional diabetic patients.
This is reducing travel demands on doctors and patients,
as well as improving the quality of patient monitoring.
Other groups or initiatives we’ve supported during the
year include:
• Digital Journey, a social enterprise that delivers digital
projects and initiatives to support the opportunity to
use, understand and benefit from digital services.
• the New Zealand Innovation Partnership, a network of
organisations that support digital innovation in New Zealand
across business, education and government.
• sponsorship of residential gigabit broadband services
at entry level wholesale prices through to July 2019
for Dunedin city, as part of winning of our Gigatown
competition prize.
• a GigStart Fund for Dunedin entrepreneurs and innovators
to deliver new fibre-based services.
• the GigCity Dunedin Community Fund, for groups using
fibre broadband to benefit their community.
• working with councils, business associations
and community beautification groups, such as
Keep New Zealand Beautiful, to have more than 100
of our street cabinets illustrated by local artists.
• a range of community support, learning and art
organisations which receive subsidised space within
our exchange buildings.
• a range of industry and government organisations –
TUANZ, InternetNZ, NZTech and the Local Government
New Zealand conference – that are focused on bridging
the digital divide and extending the reach of broadband.
12
Annual Report 2018 5.4 A low carbon business
Better broadband networks help establish a platform
for low carbon communities, enabling communications
options that enhance social interaction and change the
way businesses operate, including teleworking and less
car or plane travel. We’ve embraced the use of our own
technology, installing enhanced video conferencing
capability in meeting rooms throughout our regional
offices. This is fostering employee collaboration and
contributed to a 28% reduction in air travel in FY18.
We’re committed to a sustainable operating model and
we report our carbon emissions annually to CDP, a global
organisation that collects self-reported environmental
information. Our benchmarking shows we’re a low carbon
business compared to businesses internationally both
within and beyond the telecommunications industry.
This year’s emissions were 29% lower than the base year.
Annual reductions achieved in the last six years have
avoided a net cumulative 44 kilotonnes of carbon dioxide
equivalent emissions (CO2e). These reductions include
3 kilotonnes of Scope 1 direct emissions due to lower diesel
use for generators, 29 kilotonnes of Scope 2 electricity
emissions, and 12 kilotonnes of Scope 3 value chain
emissions. The net reductions in Scope 2 and 3 emissions
are mainly due to a greening national electricity grid and
energy efficiency improvements.
204
208
Tonnes
of metal
recovered for
recycling
Tonnes
of ducting
recovered
for recycling
Our total emissions were 25 kilotonnes-CO2e in
FY18, up 8% from FY17 due to an increase in thermal
electricity generation. The national grid was 83%
renewable compared to 85% last year. Network
electricity consumption and our field service vehicle
fleet accounted for around 90% of our emissions.
We have an extensive waste minimisation process for
network activities. Waste ducting from our fibre rollout
is collected and re-used in the local manufacturing of new
duct. E-waste is processed to extract precious metals and
redundant network is recycled. We’ve almost completed our
programme to replace more than 850 air conditioning units
that relied on ozone depleting refrigerant. No significant
environmental incidents were recorded during FY18.
Figure 8:
Figure 8:
Direct emissions
Direct emissions
e
2
O
e
C
2
O
s
e
C
n
s
n
e
o
n
t
n
o
o
l
i
t
K
o
l
i
K
2
2
1
1
0
0
Figure 9:
Carbon emissions
e
2
O
C
s
e
n
n
o
t
o
l
i
K
40
30
20
10
0
FY12
FY12
FY14
FY14
FY13
FY13
Diesel generators
Diesel generators
Refrigerant
Refrigerant
FY15
FY15
FY16
FY16
FY17
FY17
Company vehicles
Company vehicles
Natural gas
Natural gas
FY18
FY18
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Electricity
Refrigerant
Service company fleet
Diesel generators
Travel
Other
Note: Service company fleet emissions are included in Scope 3 value chain emissions
because the vehicles are owned and operated by third parties.
Note: Service company fleet emissions are included in Scope 3 value chain emissions
because the vehicles are owned and operated by third parties.
Note: FY18 emissions have been estimated in advance of the release of official Government
data and guidance on emission factors. Service company fleet data excludes those vehicles
operated by subcontractors to service companies. Detailed data is unavailable
for these vehicles, but we estimate they account for between 5 to 10 kilotonnes-CO2e.
13
Annual Report 2018
6.0
Outlook
It’s more than a decade since Chorus was first set
up as a business unit within Telecom New Zealand.
We decided it’s time to speak a little more loudly
about our place in the world and have refreshed
our brand, as well as our company purpose.
This heralds the transformation going on within
our business. With a new regulatory regime to
apply from 2020 and the end of our UFB rollout
shortly thereafter, we’ve begun reshaping the
way we operate with an eye to the future.
This financial year, FY19, will be the peak year of our fibre
rollout with a large step up in the number of premises to be
passed. Auckland and Wellington are expected to be largely
complete by the end of the financial year, while the UFB2
rollout will see us bridging the digital divide in a growing
number of smaller towns and communities. We need to
maintain our relentless focus on keeping the rollout on
time and on budget, so that we deliver on our contractual
commitments and the expectations of customers keenly
awaiting access to fibre.
We expect customer demand for fibre connections to
maintain its strong momentum. In larger centres where
we are approaching the end of the UFB1 rollout, awareness
of fibre is already high and there are a lot of people
keen to connect after seven years of waiting. For smaller
communities, the rollout of fibre is a high profile event that
generates strong interest of its own accord, as well as an
opportunity for retailers to compete in areas they may not
have previously marketed to. We need to keep improving
the fibre installation process so we both increase our
productivity and customers’ satisfaction with the experience.
We’ve already raised the bar by setting ourselves the target
of reducing customer effort to a single visit for a large
proportion of customers. Achieving this requires us to
work even more collaboratively with our service company
partners and retailers to get our processes and systems
working in concert.
At the same time, retailers and broadcasters are continuing
to raise New Zealanders’ awareness of online viewing options.
Spark, for example, plans to broadcast the 2019 Rugby World
Cup online. Compelling content means the utility value of our
network will grow, along with peak time data demand.
62%
of New Zealanders now stream video
on demand, up from 12% in 2014
– NZ On Air
14
Increasing uptake of 4K televisions and ultra-high definition
programming will only add to the scale of this nightly peak
in traffic. This gives us confidence that our fixed line network,
whether copper or fibre, will remain a superior service than
wireless for most customers. While talk of 5G and wireless
technology advances will no doubt continue in FY19, the
reality is that the business case for deploying small suburban
cell sites looks even more challenging when fibre is already
available to most premises and we provide dedicated
capacity to customers at a lower cost per gigabit.
We’re not alone in this view. Fibre continues to be
acknowledged globally as the most desirable form of
network connectivity. In Europe, we’re seeing fibre to the
premises deployments gain unprecedented momentum as
network operators, governments and infrastructure investors
seek to make gigabit services a reality for their markets.
As we’ve found, a long-term infrastructure focus drives
a different investment model to that typical of incumbent
telecommunications retailers, especially when the network
can leverage multiple retailers. It’s little wonder that the
New Zealand model of wholesale network access is now
regularly cited internationally as a leading example of how
to bridge the economic challenges of fibre investment.
Our network infrastructure is an amazing asset for
New Zealand and its uses are only beginning to be tapped
into. The rise of the Internet of Things and network edge
computing will keep driving the need for more connectivity
options and data capacity. Our challenge is to now turn these
emerging opportunities into commercial reality. This may
mean collaborating with entirely new classes of wholesale
customers, whether broadcasters or infrastructure service
providers, as technology advances and our open access
network create a platform for the delivery of innovative
new solutions for New Zealand homes and businesses.
The strategic changes we started making in FY18 and
are continuing through FY19 are focused on achieving
our objective of a return to modest EBITDA growth in
FY20. This aspiration is subject to no material changes
in the expected regulatory environment or competitive
outlook. Our return to broadband connection growth in
FY18, together with strong forecasts for urban housing
development and the underlying broadband trends identified
above – such as fibre uptake and the demand for streamed
video content – give us added confidence in our strategy.
By innovating for growth and optimising today’s business,
we believe our infrastructure will continue to help make
New Zealand better well into the future.
Annual Report 2018 Shaping
our future
WE’RE GOING TO
KEEP
NEW ZEALAND
NEW
WE’LL GET THERE BY
Creating an
environment for
our customers and
our people that
optimises today’s
business and allows
us to innovate for
growth
BECAUSE WE WANT TO
MAKE
NEW ZEALAND
BETTER
WE’RE FOCUSSED ON
CUSTOMER
Transform customer
experience
DIGITAL
Nothing happens
if it's not digital
PEOPLE
We're committed to
enabling our people
OPTIMISATION
We improve by getting
better at what we do
INNOVATION
New revenue
opportunities
15
Annual Report 2018 16
Annual Report 2018 Management
commentary
18 In summary
19 Revenue commentary
20 Expenditure commentary
24 Capital expenditure commentary
25 Long term capital management
17
Annual Report 2018 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
2018
$M
990
(337)
653
(387)
266
(144)
122
(37)
85
2017
$M
1,040
(388)
652
(339)
313
(154)
159
(46)
113
We report earnings before interest, income tax, depreciation
and amortisation (EBITDA) of $653 million for the year ending
30 June 2018 (FY18), an increase of $1 million on the prior year
(FY17). Net earnings decreased by $28 million year on year.
Results for FY18 largely reflect the annualised revenue impact
of declining connections from FY17, the adoption of three new
accounting standards (NZ IFRS 9, 15, and 16), and costs incurred
as part of an organisational transformation programme.
Capital expenditure of $810 million was at the top end of
the FY18 guidance range of $780 million to $820 million.
The increase from FY17 capital expenditure of $639 million
reflected growing demand for connections to our fibre
network, with about 76% of our capital spend fibre related,
as well as capitalisation of customer retention costs and
operating leases under the new accounting standards.
We will pay a final dividend of 13 cents per share on
9 October 2018 and the dividend reinvestment plan will
be available. We expect to pay a dividend of 23 cents per
share for FY19, subject to no material adverse changes in
circumstances or outlook.
Connections
30 Jun 2018
Connections
31 Dec 2017
Connections
30 Jun 2017
433,000
362,000
292,000
12,000
321,000
433,000
6,000
53,000
13,000
320,000
499,000
7,000
68,000
13,000
244,000
650,000
8,000
82,000
268,000
290,000
313,000
1,526,000
1,559,000
1,602,000
Fibre broadband (GPON)
Fibre premium (P2P)
Copper VDSL
Copper ADSL
Data services over copper
Unbundled copper
Baseband copper
Total fixed line connections
18
Annual Report 2018 Revenue commentary
Fibre broadband (GPON)
Fibre premium (P2P)
Copper based voice
Copper based broadband
Data services over copper
Value added network services
Infrastructure
Field services products
Other
Total revenue
2018
$M
198
78
133
421
27
33
23
70
7
2017
$M
123
79
163
501
32
34
23
76
9
990
1,040
Revenue overview
Our product portfolio encompasses a broad range of
wholesale broadband, data and voice services across a
mix of regulated and commercial products. Revenues
of $990 million were down compared to revenue of
$1,040 million for the prior period. This largely reflects the
continued reduction in total fixed line connections from
FY17, albeit at a slower rate in FY18, as customers migrated
to alternative fibre and wireless networks.
Fibre broadband (GPON)
Fibre broadband revenues continue to grow as customers
migrate to our growing fibre network and broadband
penetration increases. Connections grew by 48% to 433,000,
with about 69% of connections now on 100/20 Mbps plans.
Demand for 1 Gbps plans doubled during the year, reflecting
a shift in retailer marketing, and we ended the period with
about 30,000 connections. About half of these customers
are in the Dunedin ‘gigatown’ area where we are providing
sponsored pricing at entry level fibre prices until July 2019.
Fibre premium (P2P)
Fibre premium (point to point) revenues reduced slightly
as connection numbers declined, reflecting the migration
of customers from legacy HSNS Premium and Bandwidth
Fibre Access Service connections to lower cost inputs, or
alternative fibre networks. Direct Fibre Access Service and
other backhaul connections increased modestly.
Copper based voice
Copper based voice revenues continue to decline as
customers migrate from copper to either a fibre based
connection on our network, or to alternative fibre and
wireless networks. This technology driven change saw
baseband copper connections reduce by 45,000 lines
during the period and unbundled copper connections
decline by 29,000.
Data services over copper
Data services over copper connections continued to decline
as retailers transition business customers from legacy services
to cheaper fibre based services, either on our fibre network,
or on alternative local and CBD fibre networks.
Copper based broadband
Copper based broadband revenues are declining as
customers migrate from our ADSL and VDSL broadband
services to either our fibre network, or alternative fibre
and wireless networks. ADSL connections reduced
significantly during the period as we encouraged retailers to
upgrade customers to better VDSL or fibre services. VDSL
connections increased for much of the period as a result of
our initiatives, although much of this increase was in the first
half of the year. Total VDSL connections began to decline
towards the end of FY18 as retailer migrations of their ADSL
customers slowed and our ongoing fibre rollout enabled
more VDSL customers to upgrade to fibre.
19
Annual Report 2018 Value added network services
There was a slight decline in value added network services
revenue. The main driver for this category is national data
transport services, which provides network connectivity
across legacy backhaul links and aggregation handover links.
Infrastructure
Infrastructure revenues remain flat year on year and relate
to services that provide access to our network assets, such
as renting exchange space, both for unbundled copper
and commercial co-location purposes. There was ongoing
growth in demand for commercial access to our exchanges,
but this was offset by a reduction in access space for
unbundled copper. This reflected the decrease in unbundled
copper connections.
Field services
Field services revenue was down $6 million relative to FY17.
This largely reflects a continued reduction in chargeable
copper provisioning work as more customers migrate to fibre
services, where first time connections are treated as capital
expenditure. Field services revenues also include subdivision
work, chargeable cable location services, maintaining retailer
networks and relocating our network on request. Revenue
in this category is more difficult to forecast as a portion of
it is dependent on third party demand or cost recovery for
damage to our network.
Other
Other income largely consists of revenue generated from
the provision of billing and network management services
to Spark, which has decreased from FY17 in line with a
reduction in services provided. Other items include dividends
received from electricity trusts that supply us with electricity
and any other minor income.
Expenditure commentary
Operating expenses
Labour
Provisioning
Network maintenance
Other network costs
Information technology
Rent and rates
Property maintenance
Electricity
Insurance
Consultants
Regulatory levies
Other
Total operating expenses
Operating expenditure of $337 million is lower
than FY17 largely due to the adoption of NZ IFRS 15
and 16, which resulted in provisioning ($27 million),
information technology ($10 million), labour ($6 million)
and rental expenses ($6 million) being capitalised as
assets and subsequently depreciated or amortised
in accordance with the appropriate asset life.
20
2018
$M
2017
$M
73
6
87
34
54
9
15
15
3
5
13
23
74
43
87
27
60
17
13
14
3
10
13
27
337
388
Labour
Labour of $73 million represent staff costs that are not
capitalised. At 30 June 2018 we had 933 permanent and fixed
term employees, a 12% reduction from peak August 2017
levels and down from 1,032 employees at 30 June 2017.
The reduction in employees followed greater retailer
adoption of automated fibre provisioning, together with
other process and system improvements, and a wider review
of our business support function requirements. There were
one-off restructuring costs of around $5 million in FY18.
Annual Report 2018 Provisioning
Provisioning costs reduced significantly during the year.
This is because less truck rolls are required to provision
changes in service once homes and businesses are
connected to the fibre network and the adoption of
NZ IFRS 15 resulted in the capitalisation of $27 million in
costs associated with customer acquisition and retention.
Network maintenance
Network maintenance costs were flat compared to FY17.
This was despite the total number of faults on our network
decreasing as total connections declined and customers
moved to the new fibre network. The level of spend reflected
more investment in proactive fault management during the
year, a series of extreme weather events, a higher incidence of
underground faults leading to a higher average cost per fault
and inflation related increases for service company costs.
Other network costs
Other network costs relate to costs associated with service
partner contracts, engineering services, fibre access
costs from third parties, warehousing costs, fibre order
cancellation costs and the cost of network spares. The nature
of other network costs tends to be more variable in nature,
with the value incurred in the year dependent on various
project related activities incurred. For FY18 there has been an
increased focus on proactive fault management which has
increased network spares costs from the prior year. We have
also seen an increase in costs for fibre access from third
parties to support an expanded backhaul product portfolio.
Information technology
Information technology costs were $54 million and have
reduced slightly from FY17. This is mainly due to changes
in capitalisation due to NZ IFRS 15 and a tight cost control
focus to offset increasing costs from inflation. Maintenance
and support costs were largely consistent, with Spark
shared systems continuing to be replaced and offset by
our own solutions.
Rent and rates
Rent and rates costs relate to the operation of our network
estate including exchanges, radio sites and roadside cabinets.
These costs include rates that are levied on network assets
both above and below ground. The adoption of NZ IFRS 16
means most rental leases are now capitalised as a right of
use asset and subsequently depreciated over the life of the
lease, and rental payments are recognised between interest
expenses and repayment of lease liability.
Property maintenance
Property maintenance costs have continued to increase
consistent with the trend in FY17 as we complete previously
deferred maintenance activity.
Electricity
Electricity costs were slightly higher in FY18 due to increased
consumption across the electronic equipment within our
network sites. About 50% of our electricity requirements have
been hedged, with a current end date of March 2019.
Consultant
Consultant costs decreased following a one-off cost in FY17
for a strategic review of the company.
Regulatory levy
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 FY18.
Other
Other costs includes expenditure on general costs such as
advertising, telecommunications, travel, training and legal
fees. A programme of tight cost control was implemented
across areas such as travel and general corporate expenses.
21
Annual Report 2018 Depreciation and amortisation
2018
$M
2017
$M
Estimated
useful life (years)
Weighted average
useful life (years)
Depreciation
Fibre cables
Ducts and manholes
Copper cables
Cabinets
Property
Network electronics
Right of use assets
Other
Less: Crown funding
Total depreciation
Amortisation
Software
Customer retention
Other intangibles
Total amortisation
78
42
51
41
15
65
13
–
(22)
283
61
43
–
104
72
39
53
45
19
67
–
–
(21)
274
65
–
–
65
20
20–50
10–30
5–20
5–50
2–25
10–50
2–10
2–8
0–3
6–21
20
49
22
14
25
9
28
6
4
2
21
The weighted average useful life represents the useful life in
each category weighted by the net book value of the assets.
During the year ended 30 June 2018, $810 million
of expenditure on network assets and software was
capitalised, along with $33 million of additional leases.
The ‘UFB communal’ and ‘Fibre connections and fibre
layer 2’ included in ‘fibre’ capital expenditure was largely
capitalised against the network assets categories of fibre
cables (43%) and ducts and manholes (40%). The average
depreciation rate for UFB communal infrastructure spend
is based on an estimated life of 39 years, reflecting the very
high proportion of long life assets being constructed.
Software and other intangibles largely consist of the software
components of billing, provisioning and operational systems,
including spend on Spark-owned systems and customer
retention assets capitalised under NZ IFRS 15.
Chorus expects that incremental costs incurred in acquiring
new contracts with new and existing customers are
recoverable, and capitalised these as customer retention
assets. In the comparative period, such costs were
recognised as operating expenses when incurred. Capitalised
customer retention assets are amortised when related
revenues are recognised either upfront or over the life of
the contract (currently estimated to be within a maximum
of three years). In the period to 30 June 2018, the amount
of amortisation was $43 million and there was no impairment
in relation to the costs capitalised.
Our depreciation profile is expected to continue to change,
reflecting the greater mix of longer dated assets for the
UFB and RBI rollouts, while our amortisation profile is
expected to remain consistent. The amortisation of Crown
funding is expected to increase over time and will continue
to offset depreciation.
22
Annual Report 2018 Finance income and expense
(Income)/expense
Finance income
Finance expense
Interest on syndicated bank facility
Interest on EMTN – GBP
Interest on EMTN – EUR
Interest on fixed rate NZD bonds
Other interest expense
Capitalised interest
Interest costs
Fair value adjustment on interest rate swaps not in hedge relationship
Ineffective portion of changes in fair value of cash flow hedges
Total finance expenses excluding CIP securities (notional) interest
CIP securities (notional) interest
Total finance expense
2018
$M
(7)
4
53
39
18
22
(4)
132
(3)
5
134
17
151
2017
$M
(10)
16
53
27
18
18
(4)
128
6
17
151
13
164
Interest costs increased by $4 million year on year. The increase
is due to a full year of interest being incurred for the EUR EMTN
issued during FY17. This increase was largely offset by a
reduced syndicated bank facility debt held during the course
of the year and a decreased weighted effective interest rate
on debt at 5.96% (30 June 2017: 6.1%).
Other interest expense includes lease interest of $18 million
(30 June 2017: $14 million) due to the change in treatment
of leases under NZ IFRS 16, and $3 million amortisation
(30 June 2017: $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 GBP and EUR EMTNs
with cross currency interest rate swaps. The floating interest
on the GBP cross currency interest rate swaps has been fully
hedged using interest rate swap instruments, along with a
portion of the floating interest on the EUR cross currency
interest rate swaps.
Ineffectiveness
The decrease in total finance expense is mainly due to the
change in accounting treatment under NZ IFRS 9 of currency
basis risk, arising from the EUR EMTN hedging arrangements.
During FY17 (under NZ IAS 39), the expense associated
with this (2017: $10 million pre-tax) flowed through
ineffectiveness in finance expense – whereas in FY18 this
expense ($4 million pre-tax) is moved to the cost of hedging
reserve in equity.
The foreign exchange exposure on the EUR EMTN has been
fully hedged and interest rate exposure partially hedged.
For hedge accounting purposes the hedging relationship
consists of a fair value hedge and two cash flow hedges.
The GBP EMTN hedging relationship was reset with a fair
value of $49 million on 9 December 2013 following the
close out of the interest rate swaps relating to the EMTN.
This amount is being amortised over the life of the derivative
and flows as ineffectiveness in the income statement. As at
30 June 2018 a further $8 million remains in the hedge
reserve to be amortised in relation to this reset. In FY18,
ineffectiveness of $7 million (30 June 2017: $6 million)
flowed through interest expense relating to the amortisation
of this reset. This was offset by a $2 million credit from
a risk adjustment on the EUR EMTN, following the NZ
IFRS 9 transition.
Taxation
The 2018 effective tax rate of 28% equates to the statutory
rate of 28%. There are no material permanent differences
between net earnings before income tax and what is, or will
be, taxable for the year to 30 June 2018.
23
Annual Report 2018 Capital expenditure commentary
Fibre
Copper
Common
Gross capital expenditure
Gross capital expenditure for the year to 30 June 2018 was
$810 million. This was in the top half of the FY18 guidance
range of $780 million to $820 million because of strong
demand for fibre connections. The additional step up in
gross capital expenditure from FY17 was the result of the
capitalisation of $60 million in customer retention costs
following the adoption of NZ IFRS 15.
Fibre capital expenditure
UFB communal
Fibre connections and fibre layer 21
Fibre products and systems
Other fibre connections and growth
Customer retention costs
Total fibre capital expenditure
2018
$M
620
132
58
810
2017
$M
503
79
57
639
Chorus expects that incremental costs incurred in acquiring
new contracts with new and existing customers are
recoverable, and capitalised these as customer retention
assets. In the comparative period, such costs were
recognised as operating expenses when incurred.
2018
$M
231
294
17
65
13
620
2017
$M
183
258
17
45
–
503
1 Layer 2 equipment, such as gigabit capable passive optical network ports, is installed ahead of demand as the UFB footprint expands.
Fibre capital expenditure includes spend specifically focused
on fibre assets and represents about 76% of our FY18 gross
capital expenditure.
About $89 million was upfront investment for ‘backbone’
network to enable the connection of multiple customers
located along rights of way or in multi dwelling units.
The cost of the deployment of the UFB communal network
for the year was $231 million. This included $77 million
for communal network scheduled to be submitted to CIP
for testing in FY19. About $60 million was spent on UFB2
deployment in FY18. The average cost per UFB1 premises
passed during the year was about $1,570. This was in the top
half of FY18 guidance for an average cost of $1,500 to $1,600.
Fibre connections and layer 2 spend was $294 million with fibre
connections installed for 156,000 customers nationwide. This
was an increase of 27,000 installations year on year, reflecting
the addition of more fibre field crews to support the strong
demand for fibre as our fibre footprint continues to expand.
The average UFB1 cost per premises connected for standard
residential premises and some non-standard single dwelling
unit installations and service desk costs was $1,037, excluding
the long run average cost of layer 2 equipment. This was
below the lower end of the expected FY18 cost range of
$1,050 to $1,200, reflecting service desk costs spread across
a higher volume of connections. Only a small number of
UFB2 connections have been completed to date.
Investment in other fibre connections and growth increased by
$20 million as we undertook a pole replacement programme in
UFB areas, backhaul fibre was deployed to UFB2 communities
and demand for greenfields fibre connectivity continued to grow.
24
Annual Report 2018 Copper capital expenditure
Network sustain
Copper connections
Copper layer 2
Product fixed
Customer retention
Total copper capital expenditure
2018
$M
45
2
34
4
47
132
2017
$M
29
4
44
2
–
79
Copper capital expenditure during the year was $132 million.
The increase of $53 million from FY17 was largely the result
of $47 million of customer retention costs being capitalised
following the adoption of NZ IFRS 15.
Network sustain expenditure increased by $16 million to
$45 million as a result of more proactive maintenance, a pole
replacement programme outside our fibre areas and roadworks
related projects undertaken on a cost recovery basis.
Capital expenditure on copper connections has reduced
markedly as customer demand shifts to our fibre network or
alternative networks.
Copper layer 2 spend included an approximately $20 million
programme of work to enhance copper broadband
performance in selected areas through the deployment of
VDSL vectoring technology.
Common capital expenditure
Information technology
Building and engineering services
Other
Total common capital expenditure
2018
$M
35
20
3
58
2017
$M
34
19
4
57
Common capital expenditure of $58 million was consistent
with spend for FY17. Information technology spend increased
slightly from FY17 as we continue to invest in establishing our
own supporting platforms and technologies. Building and
engineering services was also at similar levels to FY17 as we
continued to upgrade certain exchanges to meet increasing
power and regulatory requirements. ‘Other’ common capital
expenditure includes items such as office accommodation
and equipment and was slightly down on FY17.
Contributions to capital expenditure
We received $6 million in contributions towards our gross
capital expenditure in FY18 for instances where central or
local government authorities asked us to relocate or rebuild
existing network. These contributions are included as part
of Crown funding.
Long term capital management
We will pay a final dividend of 13.0 cents per share on
9 October 2018 to all holders registered at 5.00pm
25 September 2018. The shares will be quoted on an
ex-dividend basis from 24 September 2018. The dividends
paid will be fully imputed, at a 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 26 September 2018.
During the UFB build programme to 2020, the Board expects
to be able to provide shareholders with modest dividend
growth from a base of 20 cents per share paid for FY16, subject
to no material adverse changes in circumstances or outlook.
For FY19, Chorus expects to pay a dividend of 23 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 2018, we had a long term
credit rating of BBB/stable outlook by Standard & Poor’s and
Baa2/stable by Moody’s Investors Service.
25
Annual Report 2018 26
Annual Report 2018 Financial
statements
28 Independent auditor’s report
31 Income statement
31 Statement of comprehensive income
32 Statement of financial position
33 Statement of changes in equity
34 Statement of cash flows
36 Notes to the financial statements
27
Annual Report 2018 Independent auditor’s report
To the shareholders of Chorus Limited
Report on the consolidated financial statements
Opinion
In our opinion, the accompanying consolidated financial
statements of Chorus Limited (the company) and its
subsidiaries (the Group) on pages 31 to 63:
i. present fairly in all material respects the Group’s financial
position as at 30 June 2018, its financial performance
and cash flows for the year ended on that date; and
ii. comply with New Zealand Equivalents to International
Financial Reporting Standards (NZ IFRS) and
International Financial Reporting Standards.
We have audited the accompanying consolidated financial
statements which comprise:
— the consolidated statement of financial position as at
30 June 2018;
— the consolidated income statement, statements of
other comprehensive income, changes in equity and
cash flows for the year then ended; and
— notes, including a summary of significant accounting
policies and other explanatory information.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (New Zealand) (‘ISAs (NZ)’). We believe
that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
We are independent of the Group in accordance with
Professional and Ethical Standard 1 (Revised) Code of Ethics
for Assurance 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
accordance with these requirements and the IESBA Code.
Our responsibilities under ISAs (NZ) are further described in
the Auditor’s responsibilities 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, tax compliance
services and other assurance services. 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 $7.7 million, determined with reference to
a benchmark of Group profit before tax. We chose this
benchmark because, in our view, this is a key measure
of the Group’s performance.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
consolidated 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
The key audit matter
Capitalisation of assets
How the matter was addressed in our audit
Refer to Note 2 to the Financial Statements.
Our audit procedures included:
During the year ended 30 June 2018 the Group has spent
$721 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:
— Examining that the controls to recognise capital projects in the
fixed asset register are effective 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.
28
Annual Report 2018 The key audit matter
How the matter was addressed in our audit
Capitalisation of assets (continued)
— decision to capitalise or expense costs relating to
— Evaluating a sample of assets under construction in which no costs
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
— estimation of the useful life of the asset once the costs
are capitalised. There is also judgment when estimating
asset lives due to the uncertainty of the impact of
technological change.
Chorus funding
Refer to Notes 4, 6, 7 and 19 to the Financial Statements.
The CIP securities and interest rate derivatives are
a key audit matter due to their significance to the
Group’s 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 CIP securities, including
consideration of transition and disclosure impacts
following Chorus’ early adoption
of NZ IFRS 9 Financial Instruments.
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 with external suppliers.
— Assessing the useful economic lives of the assets, by comparing
to industry benchmarks and our knowledge of the business and
its operations.
Our audit procedures to assess the valuation and accounting treatment
for the Group’s interest rate derivatives and CIP securities included:
— Our financial instrument specialists re-valuing all interest rate
derivatives using valuation models and inputs independent from
those utilised by management. The valuations considered new
accounting requirements following Chorus’ transition to NZ IFRS 9.
— 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, following NZ IFRS 9 requirements,
by independently modelling the future changes in the value of these
instruments to assess whether the underlying derivatives were effective.
— Our financial instrument specialists reviewing the adjustment
to opening retained earnings and new disclosure requirements
following Chorus’ transition to NZ IFRS 9.
— Assessing the accounting treatment of the CIP securities. We read
the underlying loan agreement and analysed the various features of
the loan agreement to determine whether the CIP securities were a
debt or equity instrument.
— Evaluating the valuation of the CIP 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 CIP 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.
Revenue recognition
Refer to Note 9 to the Financial Statements.
Our audit procedures included:
Accuracy of revenue is considered to be a key audit matter
due to the nature of the underlying billing processes that
existed following the Chorus demerger from Spark in 2011.
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 may be disputed by Chorus’
customers who have a different view of their consumption
of the Chorus network. Due to the legacy nature of these
products, the volumes are decreasing each year and are
approximately 13% of revenue in the current financial year.
In the year ended 30 June 2018 Chorus has early adopted
NZ IFRS 15 Revenue from Contracts with Customers.
The early adoption of this standard has impacted how
Chorus treat certain costs to obtain/fulfil customer
contracts. Incremental costs incurred to obtain/fulfil
a customer contract are now capitalised and amortised
over the expected life of the relationship with that customer.
Previously these costs were expensed as incurred.
— Evaluating the Group’s recognition of revenue by assessing any
revenue disputes recorded in the industry’s dispute reporting tool
by Chorus customers. We compared the disputes raised by Chorus
customers to the revenue recorded by Chorus and checked a
sample of settled disputes to the final settlement agreements.
— Independently confirming the accuracy of a sample of outstanding
debtor balances with Chorus customers.
— Agreeing a sample of revenue adjustments recorded during the year
to authorised credit notes.
With respect to incremental costs incurred to obtain/fulfil a customer
contract, our sample testing included:
— Agreeing these costs to invoice and other supporting documentation
to ensure that the costs were incremental in nature and incurred in
the process of obtaining/fulfilling a customer contract;
— Assessing whether incremental costs are appropriately amortised
over the expected life of the relationship with the customer; and
— Evaluating the appropriateness of the expected life of the relationship
with the customer by observing historical customer information.
29
Annual Report 2018 Other information
The Directors, on behalf of the Group, are responsible
for the other information included in the entity’s Annual
Report. Other information includes the Chorus Board
and management overview, management commentary,
disclosures relating to corporate governance and 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 obtained in the audit or
otherwise appears materially misstated. 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.
Use of this independent auditor’s report
This independent auditor’s 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
independent 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 independent auditor’s
report, or any of the opinions we have formed.
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
— to issue an independent auditor’s report that includes
our opinion.
Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance
with ISAs NZ will always detect a material misstatement
when it exists.
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:
http://www.xrb.govt.nz/standards-for-assurance-
practitioners/auditors-responsibilities/audit-report-1/
This description forms part of our independent auditor’s report.
The engagement partner on the audit resulting in this
independent auditor’s report is Ed Louden.
Responsibilities of the Directors for the
consolidated financial statements
The Directors, on behalf of the Group, are responsible for:
For and on behalf of
— the preparation and fair presentation of the consolidated
financial statements in accordance with generally accepted
accounting practice in New Zealand (being New Zealand
Equivalents to International Financial Reporting Standards)
and International Financial Reporting Standards;
KPMG
Wellington
27 August 2018
— implementing necessary internal control to enable the
preparation of consolidated financial statements that are
fairly presented and free from material misstatement,
whether due to fraud or error; and
— 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 intend to liquidate or to cease
operations, or have no realistic alternative but to do so.
30
Annual Report 2018 Income statement
For the year ended 30 June 2018
(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)
Notes
9
1,10
1,2
1,3
1,4
14
17
17
Statement of comprehensive income
For the year ended 30 June 2018
(Dollars in millions)
Net earnings for the year
Other comprehensive income
Items that will be reclassified subsequently to the 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
Movement in cost of hedging reserve
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.
Notes
19
19
19
19
2018
$M
990
(337)
653
(283)
(104)
266
7
(151)
122
(37)
85
0.20
0.16
2018
$M
85
(3)
–
(1)
(3)
(7)
78
2017
$M
1,040
(388)
652
(274)
(65)
313
10
(164)
159
(46)
113
0.28
0.23
2017
$M
113
12
(7)
(1)
–
4
117
31
Annual Report 2018 Statement of financial position
As at 30 June 2018
(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
Derivative financial instruments
Trade and other receivables
Software and other intangibles
Network assets
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Lease payable
Derivative financial instruments
Total current liabilities excluding Crown funding
Current portion of Crown funding
Total current liabilities
Non-current liabilities
Derivative financial instruments
Lease payable
Debt
Deferred tax payable
Total non-current liabilities excluding CIP and Crown funding
Crown Infrastructure Partners (CIP) securities
Crown funding
Total non-current liabilities
Total liabilities
Equity
Share capital
Reserves
Retained earnings
Total equity
Total liabilities and equity
The accompanying notes are an integral part of these financial statements.
The financial statements are approved and signed on behalf of the Board.
Notes
15
14
11
19
5
19
11
3
2
12
5
19
7
19
5
4
14
6
7
16
19
2018
$M
50
12
154
3
5
224
74
7
182
4,439
4,702
4,926
370
6
19
395
21
416
210
237
1,807
224
2,478
273
737
3,488
3,904
590
(36)
468
1,022
4,926
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
4,438
Patrick Strange
Chair
Authorised for issue on 27 August 2018
32
Kate McKenzie
Chief Executive Officer and Managing Director
Annual Report 2018 Statement of changes in equity
Notes
Share capital
$M
Retained
earnings
$M
Hedging-related
reserves
$M
481
416
(26)
For the year ended 30 June 2018
(Dollars in millions)
Balance at 1 July 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
Impact of adopting NZ IFRS 9 at 1 July 2017 (net of tax)
Impact of adopting NZ IFRS 15 at 1 July 2017 (net of tax)
Balance at 1 July 2017
Comprehensive income
Net earnings for the year
Other comprehensive income
Ineffective portion of changes in fair value of cash flow hedges
Amortisation of de-designated cash flow hedges transferred to
income statement
Movement in cost of hedging reserve
Total comprehensive income
Contributions by and (distributions to) owners:
Dividends
Supplementary dividends
Tax credit on supplementary dividends
Dividend reinvestment plan
Issue of new shares
Total transactions with owners
Balance at 30 June 2018
19
19
19
16
16
16
1
1
19
19
19
16
16
16
The accompanying notes are an integral part of these financial statements.
Total
$M
871
113
12
(7)
(1)
117
(83)
9
(9)
40
(1)
(44)
944
–
20
964
85
(3)
(1)
(3)
78
(90)
10
(10)
47
23
(20)
–
–
–
–
–
–
–
–
40
(1)
39
520
–
–
520
–
–
–
–
–
–
–
–
47
23
70
590
113
–
–
–
113
(83)
9
(9)
–
–
(83)
446
7
20
473
85
–
–
–
85
(90)
10
(10)
–
–
(90)
468
–
12
(7)
(1)
4
–
–
–
–
–
–
(22)
(7)
–
(29)
–
(3)
(1)
(3)
(7)
–
–
–
–
–
–
(36)
1,022
33
Annual Report 2018 Statement of cash flows
For the year ended 30 June 2018
(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 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 inflow/(outflow) from leases
Crown funding (including CIP securities)
Issuance of share capital
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
2018
$M
2017
$M
1,002
1,070
3
(350)
(30)
(117)
508
(766)
(4)
(770)
(15)
117
23
70
(10)
(43)
142
(120)
170
50
6
(397)
(38)
(117)
524
(638)
(4)
(642)
3
117
–
785
(675)
(44)
186
68
102
170
14
15
34
Annual Report 2018 Reconciliation of net earnings to net cash flows from operating activities
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)
Movement in cost of hedging reserve
Other
Change in current assets and liabilities:
Increase in trade and other receivables
Increase in trade and other payables
Increase in income tax receivable
Net cash flows from operating activities
2018
$M
85
305
(22)
104
21
5
3
5
2017
$M
113
295
(21)
65
6
17
–
27
506
502
15
(24)
11
2
508
19
1
2
22
524
Reconciliation of movements of liabilities to cash flows arising from financing activities
Balance at 1 July 2017
Movements from cash flows
Payment of lease liabilities
Proceeds from funding
Proceeds from repayment of borrowings
Proceeds from issue of share capital
Dividends paid
Total changes from financing cash flows
Non-cash movements
Movements in fair value
(including foreign exchange rates)
Transaction costs and amortisation
related to financing
Accruals
Dividend reinvestment plan
Impact of adopting NZ IFRS 9, 15, 16
Lease additions
Net earnings for the year
Balance at 30 June 2018
Debt
$M
Crown funding
$M
CIP securities
$M
Lease payable
$M
Share capital
$M
Retained earnings
$M
1,609
698
203
159
520
473
–
70
(10)
–
–
60
135
3
–
–
–
–
–
–
76
–
–
–
76
–
(22)
6
–
–
–
–
–
41
–
–
–
41
–
17
12
–
–
–
–
(15)
–
–
–
–
(15)
–
–
–
–
47
52
–
–
–
–
23
–
23
–
–
–
47
–
–
–
–
–
–
–
(43)
(43)
–
–
–
(47)
–
–
85
1,807
758
273
243
590
468
The accompanying notes are an integral part of these financial statements.
35
Annual Report 2018 Notes to the financial statements
Reporting entity and statutory base
Chorus includes Chorus Limited together with its subsidiaries.
The accounting policies adopted and methods of computation
have been applied consistently throughout the periods presented
Chorus is New Zealand’s largest fixed line communications
infrastructure services provider. It maintains and builds a
in these financial statements, except for the three new
accounting standards.
network predominantly made up of copper and fibre cables,
NZ IFRS 9 Financial Instruments
local telephone exchanges, and cabinets.
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
Infrastructure Partners Limited (previously Crown Fibre Holdings)
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 part 7 of the Financial Markets Conduct Act 2013.
They comply with New Zealand equivalents to International
NZ IFRS 9 addresses the classification and measurement
of financial assets and financial liabilities, the impairment
of financial assets and hedge accounting. The only material
impact on Chorus of adopting this standard is in relation to
hedge accounting, where new rules more closely align hedge
accounting with Chorus’ risk management activities, with the
result being less reported volatility in the income statement.
Changes in the fair value of the cost to convert foreign currency
to NZD of Chorus’ cross currency interest rate swaps are now
separately accounted for as a cost of hedging and recognised
in a new reserve within equity (cost of hedging reserve).
This accounting treatment was not possible under the previous
accounting rules, where such changes in fair value were
recognised within the income statement.
Chorus has early adopted NZ IFRS 9 with a date of initial
application of 1 July 2017. As a result, Chorus has changed its
accounting policy for certain financial instruments. Chorus has
elected to apply NZ IFRS 9 on a retrospective basis (as if the new
standard always existed), however has not restated comparative
information. Instead, the impact of adopting the new standard on
financial instruments is reflected in opening equity on 1 July 2017.
Financial Reporting Standards (NZ IFRS) as appropriate for
NZ IFRS 15 Revenue from Contracts with Customers
profit-oriented entities, and with International Financial
Chorus has early adopted NZ IFRS 15 with a date of initial
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.
application of 1 July 2017. As a result, Chorus has changed
its accounting policy for customer retention costs as
detailed below.
Chorus has recognised the cumulative effect of initially applying
NZ IFRS 15 as an adjustment to the opening balance of equity at
1 July 2017. Comparative information has not been restated and
continues to be reported under NZ IAS 18.
Customer retention costs
Chorus previously recognised costs when acquiring new
contracts with new and existing customers as expenses when
they were incurred. Under NZ IFRS 15, Chorus capitalises these
as costs of obtaining a contract (collectively referred to as
customer retention costs) when they are incremental and, if they
A number of new accounting standards, NZ IFRS 9: ‘Financial
are expected to be recovered, it amortises them consistently
Instruments’, NZ IFRS 15: ‘Revenue from Contracts with Customers’
with the pattern of revenue for the related contract.
and NZ IFRS 16: ‘Leases’ have been issued. Chorus has elected to
early adopt these standards from 1 July 2017. Further information is
detailed below and comparative information is presented in note 1.
36
Annual Report 2018 NZ IFRS 16 Leases
Crown Fibre Holdings renamed
Chorus has early adopted NZ IFRS 16 with a date of initial
During July 2017 the New Zealand Government repurposed
application of 1 July 2017 and has not restated comparative
Crown Fibre Holdings (CFH) and changed the name to Crown
information. As a result, Chorus has changed its accounting
Infrastructure Partners (CIP). The repurpose has no material
policy for lease contracts as described below.
impact on Chorus’ relationship.
As a lessee
As a lessee, Chorus previously classified leases as operating or
Accounting estimates and judgements
In preparing the financial statements management has made
finance leases based on its assessment of whether the lease
estimates and assumptions about the future that affect the
transferred substantially all the risks and rewards incidental to
reported amounts of assets and liabilities at the date of the
ownership of the underlying asset to Chorus. Under NZ IFRS 16,
financial statements and the reported amounts of revenue
Chorus recognises right of use assets and lease liabilities on
and expenses during the period. Actual results could differ
balance sheet for most leases.
from those estimates.
(i)
Leases previously classified as operating leases under
NZ IAS 17: Leases
On 1 July 2017, lease liabilities were measured at the present
value of the remaining lease payments, discounted at Chorus’
incremental borrowing rate at that date.
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.
Right of use assets were measured at an amount equal to the
Network assets (note 2)
lease liability. The right of use asset is subsequently depreciated
Assessing the appropriateness of useful life and residual value
using the straight line method over the shorter of the estimated
estimates of network assets requires a number of factors to be
useful lives of the right of use asset or the remaining estimated
lease term. The estimated useful lives of right of use assets are
determined on the same basis as those of property and equipment.
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.
Chorus presents right of use assets in Network Assets (note 2)
and lease liabilities (note 5) separately on the face of the
Statement of financial position.
Software and other intangibles (note 3)
Assessing the appropriateness of the period over which
customer retention costs are amortised requires a number of
Chorus used the following practical expedients when applying
factors to be considered such as the product the customer
the new lease standard NZ IFRS 16 to leases previously classified
retention costs relate to, technological advances, retail service
as operating leases under NZ IAS 17:
provider activities and regulation.
• Applied a single discount rate to a portfolio of leases with
Leases (note 5)
similar characteristics; and
• Applied the exemption not to recognise right of use assets and
liabilities for leases with less than 12 months of lease term.
Chorus assesses at lease commencement whether it is
reasonably certain to exercise extension options where included
in the contract, and where it is reasonably certain, the extension
period has been included in the lease liability calculation.
(ii)
Leases previously classified as finance leases under
NZ IAS 17: Leases
CIP securities (note 6)
For leases that were previously classified as finance leases under
NZ IAS 17, the carrying amount of the right of use asset and the
lease liability at 1 July 2017 (transition date) are determined at the
lease asset and lease liability under NZ IAS 17 immediately before
that date.
As a lessor
Chorus is not required to make any adjustments on transition
to NZ IFRS 16 for leases in which it acts as a lessor.
Reclassification and re-statement of comparatives
Management have reclassified the revenue streams (note 9)
from prior periods to simplify reporting and align with
the products and services of Chorus, and provide greater
transparency to readers. This recognises the evolving nature of
the industry from being copper to fibre based, and is consistent
with internal management reporting provided to Senior
Management and the Board.
Determining the fair value of the CIP securities requires
assumptions on expected future cash flows and discount rates
based on future long dated swap curves.
Crown funding (note 7)
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.
Financial risk management (note 20)
Credit valuations are adjusted to reflect credit risk as required
by NZ IFRS 9: Financial Instruments. 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.
37
Annual Report 2018 Note 1 – Comparative information for transition to new NZ IFRS standards
To provide further information and increased transparency, adjusted comparative totals are disclosed below.
NZ IFRS 9 Financial Instruments
On transition to NZ IFRS 9, Chorus recognised a cost of
hedging reserve within equity of $6 million (net of tax)
and an adjustment to the cash flow hedge reserve of
$1 million (net of tax). Opening retained earnings was
also adjusted accordingly. Had NZ IFRS 9 applied to the
comparative periods presented, $10 million for the year
ended 30 June 2017 of hedge ineffectiveness (recorded
within finance expense) would have gone to the new
cost of hedging reserve within equity, pre-tax.
Transfer from FY17 interest expense
Tax at 28%
Net NZ IFRS 9 adjustment to retained earnings on 1 July 2017
Cost of hedging
reserve
$M
Cashflow
hedge reserve
$M
Total NZ IFRS 9
adjustments
$M
8
(2)
6
2
(1)
1
10
(3)
7
NZ IFRS 15 Revenue from Contracts with Customers
incurred and capitalised post-transition date, are amortised
On transition to NZ IFRS 15, Chorus recognised an additional
over the life of the contract, which management have assessed
$27 million of customer retention assets (included within
as up to three years in tenure.
‘Software and other intangibles’) relating to open contracts on
transition date. This was adjusted for tax and booked directly
to retained earnings. These costs, including additional costs
The following tables summarise the impact of adopting
NZ IFRS 15 on Chorus’ consolidated financial statements
for the period ended 30 June 2018.
Recognised on 1 July 2017:
Prior periods customer retention assets (note 2)
Amortisation of prior periods customer retention assets (note 2)
Customer retention costs net of amortisation
Tax at 28%
Net NZ IFRS 15 adjustment to retained earnings on 1 July 2017
Impacts for the year ended 30 June 2018:
Income statement:
Amortisation
Operating expenses
Tax expense
Note 10 – Operating expenses:
Labour
Provisioning
Information technology costs
Other (modem upgrades)
Balance sheet:
Deferred tax
Software and other intangibles
$M
38
(11)
27
(7)
20
As reported
$M
NZ IFRS 15
adjustment
$M
Balance without
adoption of
NZ IFRS 15
$M
(104)
(337)
(37)
(73)
(6)
(54)
–
224
182
43
(60)
–
(6)
(27)
(10)
(17)
(12)
(42)
(61)
(397)
(37)
(79)
(33)
(64)
(17)
212
140
Had NZ IFRS 15 applied to comparative periods presented,
NZ IFRS 16 Leases
operating expenses would have decreased by $50 million for
the year ended 30 June 2017 with a corresponding increase to
‘Software and other intangibles’, and an increase to amortisation
of approximately $34 million.
On transition to NZ IFRS 16, Chorus recognised $206 million (net
of amortisation) of right of use assets and lease liabilities. There
was no difference to recognise in retained earnings. Included in
this was right of use assets previously relating to finance leases
under NZ IAS 17 of $157 million.
38
Annual Report 2018 Note 1 – Comparative information for transition to new NZ IFRS standards (cont.)
When measuring lease liabilities, Chorus discounted lease
The following table reconciles the value of right of use assets
payments using its incremental borrowing rates at 1 July 2017.
that came on to the balance sheet at 1 July 2017:
The weighted average rate applied is 6.06%.
Operating leases
Commitment – 30 June 2017
Discounted value – 1 July 2017
Finance leases
Finance Lease Liability – 30 June 2017
Lease reset
Discounted value – 1 July 2017
Total lease liabilities recognised at 1 July 2017 (net of amortisation)
$M
64
49
159
(2)
157
206
Had NZ IFRS 16 applied to comparative periods presented for
increased by $3 million. Offsetting these increases would have
the year ended 30 June 2017, the depreciation charge would
been a corresponding decrease in rent and rates of $8 million.
have increased by $6 million, and finance expense would have
Note 2 – Network assets
In the statement of financial position, network assets are stated
Depreciation is charged on a straight-line basis to write down the
at cost less accumulated depreciation and any accumulated
cost of network assets to their estimated residual value over their
impairment losses. The cost of additions to network assets
estimated useful life. Estimated useful lives are as follows:
and work in progress constructed by Chorus includes the
cost of all materials used in construction, direct labour costs
Fibre cables
specifically associated with construction, interest costs that are
Ducts, manholes and poles
attributable to the asset, resource management consent costs
and attributable overheads.
Repairs and maintenance costs are recognised in the income
statement as incurred.
Estimating useful lives and residual values of network assets
Copper cables
Cabinets
Property
Network electronics
Right of use assets
The determination of the appropriate useful life for a particular
Other
asset requires management to make judgements about,
amongst other factors, the expected period of service potential
20 years
20–50 years
10–30 years
5–20 years
5–50 years
2–25 years
10–50 years
2–10 years
of the asset, the likelihood of the asset becoming obsolete as
Other network assets include motor vehicles, network
a result of technological advances, the likelihood of Chorus
ceasing to use the asset in our business operations and the
effect of government regulation.
management and administration systems and radio infrastructure.
Any future adverse impacts arising when assessing the carrying
value or lives of network assets could lead to future impairment
Where an item of network assets comprises major components
losses or increases in depreciation charges that could affect
having different useful lives, the components are accounted for
future earnings.
as separate items of network assets.
An item of network assets and any significant part is
Where the remaining useful lives or recoverable values have
derecognised upon disposal or when no future economic
diminished due to technological, regulatory or market condition
benefits are expected from its use or disposal. Where network
changes, depreciation is accelerated. The assets’ residual values,
assets are disposed of, the profit or loss recognised in the
useful lives, and methods of depreciation are reviewed annually
income statement is calculated as the difference between the
and adjusted prospectively, if appropriate.
sale price and the carrying value of the asset.
Leased assets and corresponding liabilities are recognised as
‘right of use’ assets, and depreciated over the life of the lease.
39
Annual Report 2018 Note 2 – Network assets (cont.)
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.
30 June 2018
Cost
Fibre
cables
$M
Ducts,
manholes,
and poles
$M
Copper
cables
$M
Cabinets
$M
Property
$M
Network
electronics
$M
Right
of use
assets
$M
Other
$M
Work in
progress
$M
Total
$M
Balance at 30 June 2017
1,566
2,007
2,369
583
564
1,673
–
Transfers due to adoption of
NZ IFRS 16 at 1 July 2017
Additions due to adoption of
NZ IFRS 16 at 1 July 2017
Additions
Disposals
Transfers from work in
progress
Other
(6)
–
–
–
–
–
–
(4)
222
225
–
–
–
–
–
–
15
–
–
(173)
–
179
–
–
(2)
39
–
–
–
(6)
17
2
–
–
(30)
49
–
–
92
28
–
5
Balance at 30 June 2018
1,782
2,228
2,384
620
404
1,735
261
Accumulated depreciation
Balance at 30 June 2017
(460)
(515)
(1,883)
(354)
(261)
(1,443)
–
Transfers due to adoption of
NZ IFRS 16 at 1 July 2017
Depreciation
Disposals
Other
–
–
–
–
(78)
(42)
(51)
(41)
–
–
–
–
–
–
–
–
Balance at 30 June 2018
(538)
(557)
(1,934)
(395)
Net carrying amount
1,244
1,671
450
225
22
(15)
5
(2)
(251)
153
–
(22)
(65)
33
–
(1,475)
260
(13)
–
–
(35)
226
5
–
–
–
–
–
–
5
(2)
–
–
–
–
(2)
3
124
8,891
–
–
721
–
(638)
–
–
49
721
(42)
–
7
207
9,626
–
(4,918)
–
–
–
–
–
–
(305)
38
(2)
(5,187)
207
4,439
30 June 2017
Cost
Fibre
cables
$M
Ducts,
manholes
and poles
$M
Copper
cables
$M
Cabinets
$M
Property
$M
Network
electronics
$M
Other
$M
Work in
progress
$M
Total
$M
Balance at 1 July 2016
1,336
1,835
2,353
537
540
1,638
Additions
Other
Disposals
Transfers from work in
progress
–
–
–
–
–
–
–
–
–
–
–
(3)
230
172
16
49
–
7
(2)
19
–
–
(53)
88
Balance at 30 June 2017
1,566
2,007
2,369
583
564
1,673
Accumulated depreciation
Balance at 1 July 2016
Depreciation
Disposals
Other
(388)
(72)
–
–
(476)
(1,830)
(39)
(53)
–
–
–
–
(311)
(45)
2
–
Balance at 30 June 2017
(460)
(515)
(1,883)
(354)
Net carrying amount
1,106
1,492
486
229
(250)
(19)
1
7
(261)
303
(1,429)
(67)
53
–
(1,443)
230
4
–
–
–
1
5
(2)
–
–
–
(2)
3
99
8,342
592
8
–
592
15
(58)
(575)
–
124
8,891
–
–
–
–
–
(4,686)
(295)
56
7
(4,918)
124
3,973
There are no restrictions on Chorus’ network assets or any
the contractual commitment for acquisition and construction of
network assets pledged as securities for liabilities. At 30 June 2018
network assets was $448 million (30 June 2017: $507 million).
40
Annual Report 2018 Note 2 – Network assets (cont.)
Depreciation
Depreciation charged on network assets
Less: Crown funding – Ultra-Fast Broadband
Crown funding – Rural Broadband Initiative
Crown funding – Other
Total depreciation
2018
$M
305
(12)
(8)
(2)
283
2017
$M
295
(11)
(8)
(2)
274
Chorus receives funding from the Crown to finance the capital
of each reporting period for any indicators of impairment.
expenditure associated with the development of the UFB
If any such indication exists, the recoverable amount of the
network, rural broadband services and other services. Funding is
asset is estimated. An impairment loss is recognised in earnings
offset against depreciation over the life of the assets the funding
whenever the carrying amount of an asset exceeds its estimated
is used to construct.
Refer to note 7 for information on Crown funding.
Property Exchanges
Chorus has leased exchange space and commercial co-
location space owned by Spark which is subject to finance lease
arrangements (included within right of use assets). Chorus in
turn leases exchange space and commercial co-location space
owned by Chorus to Spark under a finance lease arrangement.
For sites that it does not own, Chorus recognises its share of
the assets based on occupancy percentage, as well as a liability
for the future payments due. For sites that it does own, Chorus
derecognises the share of the asset used by Spark, as well as
recognising a receivable for the future receipts due.
recoverable amount. Should the conditions that gave rise to the
impairment loss no longer exist, and the assets are no longer
considered to be impaired, a reversal of an impairment loss
would be recognised immediately in earnings.
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
their net present value using a discount rate that reflects current
market assessments of the time value of money and the risks
specific to the business.
Capitalised interest
Finance costs are capitalised on qualifying items of network
The ‘Other’ asset and accumulated depreciation movement in
assets and software assets at an annualised rate of 6.00%
the year to 30 June 2018 is $5 million (30 June 2017: $7 million)
(30 June 2017: 6.50%). Interest is capitalised over the period
mainly reflecting consumer price index adjustments on Spark’s
required to complete the assets and prepare them for their
use of Chorus owned sites.
Impairment
The carrying amounts of non-financial assets including network
assets, software and other intangibles are reviewed at the end
intended use. In the current year finance costs totalling
$4 million (30 June 2017: $4 million) have been capitalised
against network assets and software assets.
Right of use assets
Balance 1 July 2017 (net)
Additions
Depreciation charge
Balance at 30 June 2018
Fibre cables
Ducts, manholes,
and poles
Property
6
3
–
9
21
7
(2)
26
179
23
(11)
191
Total
206
33
(13)
226
Right of use assets are the present value of leases held by Chorus
Chorus has used a single discount rate to a portfolio of leases
as a lessee, as defined in the accounting policies (previously
across the two main portfolios of leases (‘Property’ and ‘Ducts,
recognised as finance and operating leases). Leases are
manholes, and poles’) due to the long term usage nature of
capitalised at the present value of the minimum lease payments
the underlying assets used to service the same network. This is
at inception of the lease.
reflective of the longer term nature of infrastructure assets.
The nature of these assets are similar enough that borrowing
rates on commercial debt would not change asset to asset.
The incremental borrowing rate is reviewed annually.
41
Annual Report 2018 Note 3 – Software and other intangibles
Software and other intangible assets are initially measured
and capitalised these as customer retention assets. In the
at cost. The direct costs associated with the development of
comparative period, such costs were recognised as operating
network and business software for internal use are capitalised
expenses when incurred. Customer retention assets are
where project success is probable and the capitalisation
amortised when related revenues are recognised upfront or
criteria is met. Following initial recognition, software and
over the life of the contract (currently estimated to be within
other intangible assets are stated at cost less accumulated
a maximum of three years). In the period to 30 June 2018,
amortisation and impairment losses. Software and other
the amount of amortisation was $43 million and there was
intangible assets with a finite life are amortised from the
no impairment in relation to the costs capitalised.
date the asset is ready for use on a straight-line basis over its
estimated useful life which is as follows:
Other intangibles mainly consist of land easements.
Software
Customer retention
Other intangibles
At each reporting date, Chorus reviews the carrying amounts of its
2–8 years
software and other intangible assets to determine whether there is
0–3 years
6–21 years
any indication that those assets have suffered an impairment loss.
For impairment policy and process refer to note 2.
Customer retention costs
Chorus expects that incremental costs incurred in acquiring
Where estimated useful lives or recoverable values have
diminished due to technological change or market conditions,
amortisation is accelerated.
new contracts with new and existing customers are recoverable,
There are no restrictions on software and other intangible assets,
or any intangible assets pledged as securities for liabilities.
30 June 2018
Cost
Balance at 30 June 2017
Adjustments at 1 July 2017 (on adoption of NZ IFRS 15)
Additions
Disposals
Transfers from work in progress
Balance at 30 June 2018
Accumulated amortisation
Balance at 30 June 2017
Adjustments at 1 July 2017 (on adoption of NZ IFRS 15)
Amortisation
Disposals
Balance at 30 June 2018
Net carrying amount
30 June 2017
Cost
Balance at 1 July 2016
Additions
Transfers from work in progress
Balance at 30 June 2017
Accumulated amortisation
Balance at 1 July 2016
Amortisation
Balance at 30 June 2017
Net carrying amount
Total
$M
681
38
117
(12)
–
824
(539)
(11)
(104)
12
(642)
182
Software
$M
Customer
retention
$M
Other intangibles
$M
Work in progress
$M
639
–
–
(12)
67
694
(538)
–
(61)
12
(587)
107
–
38
–
–
58
96
–
(11)
(43)
–
(54)
42
6
–
–
–
–
6
(1)
–
–
–
(1)
5
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
36
–
117
–
(125)
28
–
–
–
–
–
28
Total
$M
634
47
–
681
(474)
(65)
(539)
142
At 30 June 2018 the contractual commitment for acquisition of software and other intangible assets was $11 million
(30 June 2017: $13 million).
42
Annual Report 2018 Note 4 – Debt
Debt is included as non-current liabilities except for those
effective interest method. Some borrowings are designated
with maturities less than 12 months from the reporting date,
in fair value hedge relationships, which means that any change
which are classified as current liabilities.
in market interest and foreign exchange rates result in a change
Debt is initially measured at fair value, less any transaction costs
in the fair value adjustment on that debt.
that are directly attributable to the issue of the instruments.
The weighted effective interest rate on debt including the effect of
Debt is subsequently measured at amortised cost using the
derivative financial instruments was 5.96% (30 June 2017: 6.06%).
Syndicated bank facility C
Euro medium term notes GBP
Euro medium term notes EUR
Fixed rate NZD Bonds
Less: facility fees
Total debt
Current
Non-current
Due date
May 2020
Apr 2020
Oct 2023
May 2021
2018
$M
60
507
852
400
(12)
2017
$M
–
462
762
400
(15)
1,807
1,609
–
–
1,807
1,609
Syndicated bank facilities
facility that is available for future operating activities is
As at 30 June 2018 Chorus had $350 million committed syndicated
facilities on market standard terms and conditions (30 June 2017:
$290 million (30 June 2017: $350 million). The syndicated bank
facility is held with bank and institutional counterparties rated
$350 million). The amount undrawn of the syndicated bank
– 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%
2018
$M
507
852
2017
$M
462
762
Chorus has EUR 500 million of Euro Medium Term Notes issued
principal and NZD floating interest payments. For the GBP cross
at a fixed rate of 1.125% (30 June 2017: EUR 500 million, 1.125%).
currency interest rate swaps the floating interest rate exposure
They will mature in October 2023 and have been swapped back
on the NZD interest payments has been hedged using interest
to $785 million (30 June 2017: $785 million) using cross currency
rate swaps. The EUR cross currency interest rate swaps are
interest rate swaps (see note 19).
partially hedged for the NZD interest payments using interest
Chorus has in place cross currency interest rate swaps to
rate swaps (notional amount $450 million).
hedge the foreign currency exposures to the EMTN. The cross
The following table reconciles EMTN at hedged rates to EMTN
currency interest rate swaps entitle Chorus to receive GBP and
at spot rates as reported under NZ IFRS. EMTN at hedged rates
EUR principal and GBP and EUR fixed coupon payments for NZD
is a non-GAAP measure and is not defined by NZ IFRS.
EMTN (at spot rates)
Impact of fair value hedge
Impact of hedged rates used
EMTN at hedged rates
The fair value of EMTN, calculated based on the present value
of future principal and interest cash flows, discounted at market
interest rates at balance date, was $558 million (30 June 2017:
$526 million) compared to a carrying value of $507 million
(30 June 2017: $462 million) for the GBP EMTN, and $875 million
(30 June 2017: $776 million) compared to a carrying value of
$852 million (30 June 2017: $762 million) for the EUR EMTN.
This fair value has been determined using Level 2 of the fair value
hierarchy as described in note 19.
2018
EUR
$M
852
12
(79)
785
2017
EUR
$M
762
17
6
785
2018
GBP
$M
507
–
170
677
2017
GBP
$M
462
–
215
677
43
Annual Report 2018 Note 4 – Debt (cont.)
Fixed rate NZD Bonds
Fixed rate NZD Bonds
Chorus has $400 million of unsecured, unsubordinated
debt securities that have been issued at a fixed rate of 4.12%
(30 June 2017: $400 million, 4.12%). The maturity date is May 2021.
Schedule of maturities
Due 1 to 2 years
Due 2 to 3 years
Due 3 to 4 years
Due over 5 years
Total due after one year
Less: facility fees
Interest rate
4.12%
2018
$M
400
2017
$M
400
2018
$M
567
400
–
852
1,819
(12)
1,807
2017
$M
–
462
400
762
1,624
(15)
1,609
No debt has been secured against assets. However, there are
Refer to note 20 for information on financial risk management.
financial covenants and event of default triggers, as defined in
the various debt agreements. During the current year Chorus
fully complied with the requirements set out in its financing
agreements (30 June 2017: full compliance).
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 not in hedge relationship
Ineffective portion of changes in fair value of cash flow hedges
Other interest expense
Capitalised interest
Total finance expense excluding CIP securities (notional) interest
CIP securities (notional) interest
Total finance expense
2018
$M
4
53
39
18
(3)
5
22
(4)
134
17
151
2017
$M
16
53
27
18
6
17
18
(4)
151
13
164
Other interest expense includes $18 million lease interest
ineffectiveness in the income statement. As at 30 June 2018
expense (30 June 2017: $14 million) and $4 million of
a further $8 million remains in the hedge reserve to be
amortisation arising from the difference between fair value
amortised in relation to this reset (30 June 2017: $15 million).
and proceeds realised from the swaps reset (30 June 2017:
In FY18, ineffectiveness of $7 million (30 June 2017: $6 million)
$3 million) (refer to note 19).
The GBP EMTN hedging relationship was reset with a fair value
of $49 million on 9 December 2013 following the close out
of the interest rate swaps relating to the EMTN. This amount
is being amortised over the life of the derivative and flows as
flowed through interest expense relating to the amortisation
of this reset. This was offset by a $2 million credit from a risk
adjustment following NZ IFRS 9 adjustments on the EUR EMTN
(30 June 2017: $2 million debit).
44
Annual Report 2018 Note 5 – Leases
Chorus is a lessee and lessor of certain network assets under
life of the lease. The corresponding right of use asset incurs
lease arrangements. On adoption of NZ IFRS 16, from 1 July 2017
depreciation over the estimated useful life of the asset.
Chorus recognises lease liabilities on balance sheet for all leases
except those determined short-term or low value. On inception
of a new lease, the lease payable is measured at the present
value of the remaining lease payments, discounted at Chorus’
incremental borrowing rate at that date. Practical expedients
within the standard have been applied to allow a single
discount rate to a portfolio of leases with similar characteristics.
Lease costs are recognised through interest expense over the
In the prior period, lease costs relating to operating leases were
recognised on a straight-line basis over the life of the lease.
Finance leases, which effectively transferred substantially all
the risks and benefits of ownership of the leased assets, were
capitalised at the lower of the leased asset’s fair value or the
present value of the minimum lease payments at inception
of the lease.
Lease liabilities
Liabilities
Maturity analysis – contractual discounted cash flows
Less than one year
Between one and five years
More than five years
Total lease payable
Current
Non-Current
Operating lease rental commitments that were payable in the
prior period, at 30 June 2017 were as follows: less than one year
$8 million; between one and five years $26 million; more than
five years $30 million.
Amounts recognised in Income statement:
Interest on lease payable
Expenses relating to short-term leases
Expenses relating to leases of low-value assets
Amounts recognised in Statement of cash flows:
Principle payments (net)
Lease interest
2018
$M
2017
$M
6
23
214
243
6
237
–
–
159
159
–
159
2018
$M
18
–
–
(15)
(15)
Lease interest in the above table is included in the interest paid
The extension options held are exercisable only by Chorus and
expense in the cashflow statement.
not by the lessors. Chorus assesses at lease commencement
Extension options
Most leases contain extension options exercisable by Chorus
up to one year before the end of the non-cancellable contract
period. Where practicable, Chorus seeks to include extension
options in new leases to provide operational flexibility.
whether it is reasonably certain to exercise the extension
options, and where it is reasonably certain, the extension period
has been included in the lease liability calculation. Chorus
reassesses whether it is reasonably certain to exercise the
options if there is a significant event of significant change in
circumstances within its control.
Fibre cables
Ducts, manholes and poles
Property
Total lease payable
Lease liabilities recognised
(discounted)
$M
Potential future lease payments
not included in lease liabilities
(discounted)
$M
9
28
206
243
–
1
–
45
Annual Report 2018 Note 5 – Leases (cont.)
Other leases
Chorus also leases IT equipment with contract terms of one
to three years. These leases are of low value. The Group has
elected not to recognise right of use assets and lease liabilities
for these leases.
Lease receivable
Chorus has leased exchange space and commercial colocation
arrangements. The term of the leases vary from three years
to ten years and include rights of renewal.
The full term has been used in the calculation of finance lease
receivables as it is likely due to the specialised nature of the
buildings that the leases will be renewed to the maximum
term. The payable and receivable under these finance lease
arrangements are net settled in cash.
space owned by Spark. Chorus in turn leases exchange space
Lease income from lease contracts in which Chorus acts
and commercial co-location space to Spark under finance lease
as a lessor is as below:
Finance leases
Finance income on the net investment in the lease
2018
$M
8
2017
$M
8
Finance lease income of $8 million received in FY18 is offset
The following table sets out a maturity analysis of lease receivable:
against the lease cash outflow.
Less than one year
One to four years
Total lease payments
Non-current lease payables is shown net of non-current lease receivable.
2018
$M
5
15
20
2017
$M
8
20
28
Note 6 – CIP Securities
Ultra-Fast Broadband (UFB)
(up to a maximum of $189 million equity securities for UFB2).
Chorus receives funding from the Crown to finance construction
There are no CIP warrants in relation to UFB2 and UFB2+
costs associated with the development of the UFB network.
funding. The total committed funding available for Chorus for
For the first phase of the UFB network build (UFB1) Chorus
the second phase is expected to be $407 million.
receives funding at a rate of $1,118 for every premises passed
(as certified by CIP), in return Chorus issues CIP equity securities,
CIP debt securities and CIP 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 issued and Chorus receives $1,118
funding in return. CIP warrants are issued for nil value. The total
committed funding available for Chorus over the period of UFB1
network construction is expected to be $929 million.
The CIP equity and debt securities are recognised initially
at fair value plus any directly attributable transaction costs.
Subsequently, they are measured at amortised cost using the
effective interest method. The fair value is derived by discounting
the equity securities and debt securities per premises passed by
the effective rate based on market rates. The difference between
funding received and the fair value of the securities is recognised
as Crown funding (note 7). Over time, the CIP debt and equity
securities increase to face value and the Crown funding is
In January 2017 Chorus was contracted to build 84% of the
released against depreciation and reduces to nil.
second phase of the UFB network build (UFB2), amounting to
168,240 premises.
CIP equity securities
In August 2017 Chorus was contracted to build an expansion to
the second phase of the UFB network build (UFB2+), amounting
to an additional 54,500 premises. The funding terms are the
same as UFB2 announced in January 2017, detailed further
below. The rollout will be completed by 2022.
For UFB2 and UFB2+ there are five different funding rates
applied, at an average rate of $1,828 for every premise passed
(as certified by CIP). In return for the CIP funding, CIP equity
and debt securities will be issued on very similar terms as UFB1
securities. Chorus can elect the mix of securities to be issued
CIP 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 CIP.
Dividends will become payable on a portion of the CIP equity
securities from 2025 (2030 for UFB2 and UFB2+) onwards,
with the portion of CIP equity securities that attract dividends
increasing over time.
46
Annual Report 2018 Note 6 – CIP Securities (cont.)
CIP equity securities can be redeemed by Chorus at any time by
a discount rate of 8.5%) of the sum repayable on the CIP debt
payment of the issue price or issue of new ordinary shares (at a
securities, and the initial subordinated portion is the difference
5% discount to the 20-day volume weighted average price) to
between the issue price of the CIP debt security and the value
the holder. In limited circumstances CIP equity securities may be
of the senior portion.
converted by the holder into voting preference or ordinary shares.
CIP warrants
The CIP equity securities are required to be disclosed as a liability
until the liability component of the compound instrument expires.
CIP debt securities
CIP debt securities are unsecured, non-interest bearing and
carry no voting rights at meetings of holders of Chorus ordinary
shares. Chorus is required to redeem the CIP debt securities
in tranches from 2025 (2030 for UFB2 and UFB2+) to 2036 by
Chorus issues CIP warrants to CIP for nil consideration along
with each tranche of CIP equity securities. Each CIP warrant
gives CIP the right, on a specified exercise date, to purchase at a
set strike price a Chorus share to be issued by Chorus. The strike
price for a CIP warrant is based on a total shareholder return of
16% per annum on Chorus shares over the period December
2011 to June 2036.
repaying the face value to the holder.
At balance date Chorus had issued a total 10,705,346 warrants
The principal amount of CIP debt securities consists of a senior
portion and a subordinated portion. The senior portion ranks
equally with all other unsecured, unsubordinated creditors of
Chorus, and has the benefit of any negative pledge covenant
that may be contained in any of Chorus’ debt arrangements.
The subordinated portion ranks above ordinary shares of Chorus.
The initial value of the senior portion is the present value (using
which had a fair value and carrying value that approximated
zero (30 June 2017: 8,496,986 warrants issued). The number of
fibre connections made by 30 June 2020 impacts the number
of warrants that could be exercised. Because fibre connections
already exceed 20% before 30 June 2020, the number of
warrants that would be able to be exercised is 10,705,346
(30 June 2017: 8,496,986).
At balance date the component parts of debt and equity instruments including notional interest were:
Fair value on initial recognition
Balance at 1 July
Additional securities recognised at fair value
Balance at 30 June
Accumulated notional interest
Balance at 1 July
Notional interest
Balance at 30 June
Total CIP securities
2018
2017
CIP debt
securities
$M
CIP equity
securities
$M
Total CIP
securities
$M
CIP debt
securities
$M
CIP equity
securities
$M
Total CIP
securities
$M
102
30
132
18
8
26
158
68
23
91
15
9
24
115
170
53
223
33
17
50
273
81
21
102
11
7
18
120
51
17
68
9
6
15
83
132
38
170
20
13
33
203
The fair value of CIP debt securities at balance date was
Key assumptions in calculations on initial recognition
$187 million (30 June 2017: $137 million) compared to a carrying
On initial recognition, the discount rate between 5.16% to 9.84%
value of $158 million (30 June 2017: $120 million). The fair
(30 June 2017: 7.22% to 10.26%) for the CIP equity securities
value of CIP equity securities at balance date was $145 million
and 4.62% to 6.84% (30 June 2017: 5.08% to 7.52%) for the CIP
(30 June 2017: $102 million) compared to a carrying value of
debt securities used to discount the expected cash flows is
$115 million (30 June 2017: $83 million). The fair value has been
based on the NZ swap curve. The swap rates were adjusted for
calculated using discount rates from market rates at balance
Chorus specific credit spreads (based on market observed credit
date and using Level 2 of the fair value hierarchy as described
spreads for debt issued with similar credit ratings and tenure).
in note 20.
The discount rate on the CIP equity securities is capped at
Chorus’ estimated cost of (ordinary) equity.
47
Annual Report 2018 Note 7 – Crown funding
Funding from the Crown is recognised at fair value where there is reasonable assurance that the funding is receivable and all
attached conditions will be complied with. Crown funding is then recognised in earnings as a reduction to depreciation expense on a
systematic basis over the useful life of the asset the funding was used to construct.
Fair value on initial recognition
Balance at 1 July
Additional funding recognised at fair
value
Balance at 30 June
Accumulated amortisation of funding
Balance at 1 July
Amortisation
Balance at 30 June
Total Crown funding
Current
Non-current
2018
2017
UFB
$M
RBI
$M
Other
$M
Total
$M
UFB
$M
RBI
$M
Other
$M
Total
$M
471
242
77
–
548
242
(29)
(12)
(41)
507
(22)
(8)
(30)
212
46
5
51
(10)
(2)
(12)
39
759
398
242
82
73
–
841
471
242
(18)
(11)
(29)
(14)
(8)
(22)
442
220
(61)
(22)
(83)
758
21
737
39
7
46
(8)
(2)
(10)
36
679
80
759
(40)
(21)
(61)
698
19
679
Ultra-Fast Broadband (UFB)
that have not been tested by CIP) was approximately 700,000
Chorus receives funding from the Crown to finance construction
at 30 June 2018.
costs associated with the development of the UFB network.
During the period Chorus has recognised funding for 114,077
(UFB1 112,124; UFB2 1,953) premises passed (30 June 2017:
UFB1 98,884; UFB2 nil) where the premises was passed and
tested by CIP as at 30 June 2018.
Continued recognition of the full amount of the Crown funding
is contingent on certain material performance targets being met
by Chorus. The most significant of these material performance
targets relate to compliance with certain specifications under
user acceptance testing by Crown Infrastructure Partners.
This brings the total number of premises passed and tested by
Performance targets to date have been met.
CIP at 30 June 2018 to approximately 685,000 (30 June 2017:
573,000). The total number of premises passed (including those
Note 8 – Segmental reporting
An operating segment is a component of an entity that engages
All of Chorus’ operations are provided in New Zealand, therefore
in business activities from which it may earn revenues and incur
no geographic information is provided.
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.
Three Chorus customers met the reporting threshold
of 10 percent of Chorus’ operating revenue in the year
to 30 June 2018. The total revenue for the year ending
Chorus’ Chief Executive Officer (CEO) has been identified
30 June 2018 from these customers was $489 million
as the chief operating decision maker for the purpose of
(30 June 2017: $541 million), $203 million (30 June 2017:
segmental reporting.
$212 million) and $116 million (30 June 2017: $117 million).
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
CEO in assessing performance, allocating resources and making
strategic decisions.
48
Annual Report 2018 Note 9 – Operating revenue
Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf
of third parties. Chorus recognises revenue when it transfers control over a product or service to a customer. In practice, there is no
significant change to Chorus’ revenue recognition as a result of transition to NZ IFRS 15.
Chorus services provided to customers Nature, performance obligation and timing of revenue
Fibre and copper connections
Providing access to the Chorus fixed lines network to enable connections to the internet.
Chorus recognises revenue as it provides this service to its customers. Revenue from
installations of connections are recognised upon completion of the connection at a
point in time. Unbilled revenues from the billing cycle date to the end of each month are
recognised as revenue during the month the service is provided. Revenue is deferred in
respect of the portion of fixed monthly charges that have been billed in advance.
Value added network services
Providing enhanced access to the Chorus fixed lines network to enable internet access,
through backhaul and handover links services to connect across wider areas and to higher
quality levels. Recognition is same as described for fibre and copper connections above.
Infrastructure
Providing physical storage and site-sharing rental services for co-location of third party or
shared assets. This is billed and recognised on a monthly basis.
Field services
Providing services in the field to protect, strengthen, and increase the available network
– for example, installation services, wiring and consultation services. This is billed and
recognised as the service is provided.
Revenue by service
Fibre broadband
Fibre premium
Copper based voice
Copper based broadband
Data services copper
Value added network services
Infrastructure
Field services products
Other
Total operating revenue
2018
$M
198
78
133
421
27
33
23
70
7
2017
$M
123
79
163
501
32
34
23
76
9
990
1,040
49
Annual Report 2018 Note 10 – Operating expenses
Labour
Provisioning
Network maintenance
Other network costs
Information technology
Rent and rates
Property maintenance
Electricity
Insurance
Consultants
Regulatory levies
Other
Total operating expenses
2018
$M
73
6
87
34
54
9
15
15
3
5
13
23
2017
$M
74
43
87
27
60
17
13
14
3
10
13
27
337
388
Labour
Charitable and political donations
Labour of $73 million (30 June 2017: $74 million) represents
Other costs include charitable donations to Consumer
employee costs related to non-capital expenditure.
Pension contributions
Included in labour are payments to the New Zealand
Government Superannuation Fund of $0.36 million
Foundation of $89,000 (30 June 2017: Manaiakalani Education
Trust $75,000; the Consumer Foundation $12,550; and smaller
contributions to three other charities $2,313). Chorus has not
made any political donations (30 June 2017: nil).
(30 June 2017: $0.32 million) and contributions to KiwiSaver of
Auditor remuneration
$3.3 million (30 June 2017: $2.9 million). At 30 June 2018 there
Included in other expenses are fees paid to auditors:
were 18 employees in New Zealand Government Superannuation
Fund (30 June 2017: 21 employees) and 877 employees in
KiwiSaver (30 June 2017: 962 employees). Chorus has no other
obligations to provide pension benefits in respect of employees.
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
2018
$000's
504
308
40
4
–
352
856
2017
$000's
493
308
–
30
46
384
877
1 Relates to attendance at the Annual Shareholders Meeting (30 June 2017: Relates to attendance at the Annual Shareholders Meeting and assurance
relating to EUR EMTN comfort letters).
2 Other services were nil (30 June 2017: Other services included 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 was previously owned by KPMG).
50
Annual Report 2018 Note 11 – Trade and other receivables
Trade and other receivables are initially recognised at the fair value of the amounts to be received, plus transaction costs (if any).
They are subsequently measured at amortised cost (using the effective interest method) less impairment losses.
Trade receivables
CIP receivable
Other receivables
Prepayments
Trade and other receivables
Current
Non-current
2018
$M
98
18
23
139
22
161
154
7
2017
$M
100
–
22
122
24
146
139
7
Trade receivables are non-interest bearing and are generally
required payments and makes provision for doubtful debt
on terms of 20 working days or less.
where debt is more than 90 days overdue. There have been
CIP receivable is for premises passed and tested by CIP for which
funding has not been received. Refer subsequent events for
details of payments received since 30 June (note 21).
Chorus maintains a provision for impairment losses when there
is objective evidence of its customers being unable to make
no significant individual impairment amounts recognised as an
expense. Trade receivables are net of allowances for disputed
balances with customers.
The ageing profile of trade receivables is as follows:
Not past due
Past due 1–30 days
Past due 31–60 days
2018
$M
92
5
1
98
2017
$M
94
5
1
100
Chorus has a concentrated customer base consisting
dispute resolution process. Chorus has $6 million of accounts
predominantly of a small number of retail service providers.
receivable that are past due but not impaired (30 June 2017:
The concentrated customer base heightens the risk that a dispute
$6 million). The carrying value of trade and other receivables
with a customer, or a customer’s failure to pay for services, will
approximate the fair value. The maximum credit exposure is
have a material adverse effect on the collectability of receivables.
limited to the carrying value of trade and other receivables.
Any disputes arising that may affect the relationship between
There is no change to recognition of receivables as a result
the parties will be raised by relationship managers and follow a
of NZ IFRS 15.
Note 12 – Trade and other payables
Trade and other payables are initially recognised at fair value less transaction costs (if any). They are subsequently measured at
amortised cost using the effective interest method. Trade and other payables are non-interest bearing and are normally settled
within 30 day terms. The carrying value of trade and other payables approximate their fair values.
Trade payables
Accruals
Personnel accrual
Revenue billed in advance
Trade and other payables
Current
Non-current
2018
$M
89
198
20
63
370
370
–
2017
$M
86
182
20
58
346
346
–
51
Annual Report 2018 Note 13 – Commitments
Network infrastructure project agreement
Capital expenditure
Chorus is committed to deploying infrastructure for premises
Refer to note 2 and note 3 for details of capital expenditure
in the UFB candidate areas awarded to Chorus, to be built
commitments.
according to annual build milestones and to be complete by
no later than December 2019 for UFB1 and December 2022
for UFB2 and 2+. In total it is expected that the communal
infrastructure will pass an estimated 1,053,600 premises.
Chorus has estimated that it will cost $2.3 to $2.4 billion to
build the communal UFB network by the end of 2022.
Lease commitments
Refer to note 5 for details of lease 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.
This lease has commenced as expected during the year ended
30 June 2018, and has been captured in the leases payable total.
Note 14 – Taxation
Tax expense comprises current and deferred tax, calculated using
Deferred tax is recognised in respect of temporary differences
the tax rate enacted or substantively enacted at balance date
between the carrying amounts of assets and liabilities in
and any adjustments to tax payable in respect of prior years.
the financial statements and the amounts used for taxation
Tax expense is recognised in the income statement except
purposes. A deferred tax asset is recognised only to the extent
when it relates to items recognised directly in the statement
of comprehensive income, in which case the tax expense is
recognised in the statement of comprehensive income.
it is probable it will be utilised.
Current tax expense
Recognised in income statement
Net earnings before tax
Tax at 28%
Tax effect of adjustments
Other non-taxable items
Tax expense reported in income statement
Comprising:
Current tax expense
– Current year
– Adjustments in respect of prior periods
Deferred tax expense
– Current year
– Adjustments in respect of prior periods
Recognised in other comprehensive income
Movement in hedging related reserves
Tax at 28%
Tax expense reported in other comprehensive income
Comprising:
Deferred tax expense
52
2018
$M
122
(35)
(2)
(37)
(11)
(5)
(25)
4
(37)
(10)
3
3
3
3
2017
$M
159
(45)
(1)
(46)
(40)
–
(6)
–
(46)
6
(2)
(2)
(2)
(2)
Annual Report 2018 Note 14 – Taxation (cont.)
Opening equity tax expense
Current and deferred tax arising on the adoption of NZ IFRS 9
and NZ IFRS 15 which have been recognised directly in
opening equity rather than the income statement or other
comprehensive income.
Recognised in opening equity
Opening retained earnings
Opening other comprehensive income
Net earnings before tax
Tax at 28%
Income tax expense reported in opening equity
Current
Deferred
Current tax payable / (receivable)
Balance at 1 July
Prior period adjustment
Opening equity adjustment
Tax liability for the year
Tax paid
Balance at 30 June
Deferred tax payable
2018
$M
37
(10)
27
(7)
(7)
(3)
(4)
2018
$M
(1)
5
3
11
(30)
(12)
Balance at 1 July 2016
Recognised in the income statement
Recognised in other comprehensive income
Balance at 30 June 2017
Balance at 1 July 2017
Recognised in opening equity
Recognised in the income statement
Recognised in other comprehensive income
Balance at 30 June 2018
Fair value
portion of
derivatives
$M
EMTN
debt
securities
$M
Changes in
fair value
of hedging
reserves
$M
Network
assets,
software
and other
intangibles
$M
Finance
leases
$M
Other
$M
(5)
1
–
(4)
(4)
–
1
–
(3)
7
(2)
–
5
5
–
(2)
–
3
(9)
–
2
(7)
(7)
(3)
–
(3)
238
16
–
254
254
7
40
–
(13)
301
(37)
(5)
–
(42)
(42)
–
(23)
–
(65)
–
(4)
–
(4)
(4)
–
5
–
1
Imputation credits
There are $137 million (30 June 2017: $154 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 2018.
2017
$M
–
–
–
–
–
–
–
2017
$M
(3)
–
–
40
(38)
(1)
Total
$M
194
6
2
202
202
4
21
(3)
224
53
Annual Report 2018 Note 15 – Cash and call deposits
Cash and call deposits are held with bank and financial
institutions counterparties rated at a minimum of A+,
based on rating agency Standard & Poor’s ratings.
There are no cash or call deposit balances held that are not
available for use.
The carrying values of cash and call deposits approximate
their fair values. The maximum credit exposure is limited
to the carrying value of cash and call deposits.
Cash and call deposits denominated in foreign currencies
are retranslated into New Zealand dollars at the spot rate
of exchange at the reporting date. All differences arising
on settlement or translation of monetary items are taken to
the income statement.
Cash flow
Cash flows from derivatives in cash flow and fair value hedge
relationships are recognised in the cash flow statement in the
same category as the hedged item.
For the purposes of the statement of cash flows, cash is
considered to be cash on hand, in banks and cash equivalents,
including bank overdrafts and highly liquid investments that are
readily convertible to known amounts of cash which are subject
to an insignificant risk of changes in values.
Note 16 – Equity
Share capital
Movements in Chorus Limited’s issued ordinary shares were as follows:
Balance 1 July
Dividend reinvestment plan
Issue of new shares
Balance at 30 June
2018
Number of shares
(millions)
2017
Number of shares
(millions)
411
12
6
429
401
10
–
411
Chorus Limited has 429,641,197 fully paid ordinary shares
Chorus Limited issues securities to CIP based on the number of
(30 June 2017: 411,001,665 fully paid ordinary shares).
premises passed. CIP securities are a class of security that carry
The issued shares have no par value. The holders of ordinary
no right to vote at meetings of holders of Chorus Limited ordinary
shares are entitled to receive dividends as declared from time
shares but carry a preference on liquidation. Refer to note 6 for
to time, and are entitled to one vote per share at meetings of
additional information on CIP securities.
Chorus Limited. Under Chorus 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.
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
On 10 October 2017 and 16 April 2018 fully imputed dividends
Employee equity building scheme
of 12.5 cents per share and 9 cents per share respectively was
paid to shareholders. These two dividend payments totalled
$90 million (30 June 2017: 20.5 cents, $83 million).
Eligible shareholders (those resident in New Zealand or Australia)
can choose to have Chorus Limited reinvest all or part of
their dividends in additional Chorus Limited shares. For the
year ended 30 June 2018, 12,333,060 shares (30 June 2017:
10,201,926) with a total value of $47 million (30 June 2017:
$40 million) were issued in lieu of dividends. In the October issue
the dividend reinvestment plan was underwritten to the value of
$51 million for 13,692,543 new shares, of which 6,306,472 new
shares were issued for $23 million.
Chorus operates an employee equity building scheme to
provide employees the opportunity to become familiar with
the shareholder experience. Chorus and eligible employees
contribute together to purchase shares on market. The shares
are then held by the Trustee (Trustees Executors Limited) and
vest to participating employees after a three year period.
No new scheme was started in the year ended 30 June 2018
so there were nil shares purchased for the employee share
plan this year (30 June 2017: 100,415 shares, $3.74 per share).
At 30 June 2018 the scheme holds 176,978 shares on behalf
of 636 employees (30 June 2017: 776 employees), as part of
existing plans.
Long-term performance share scheme
Chorus operates a long-term performance share scheme
for selected key management personnel.
54
Annual Report 2018 Note 16 – Equity (cont.)
The August 2015 issue featured two grants. The shares relating
Participants have been provided with interest-free limited
to the first grant vested on 30 June 2017 (2 year grant), and the
recourse loans to fund the 481,907 shares purchased under the
shares relating to the second grant vested on 30 June 2018
LTI scheme (30 June 2017: 580,104 shares). There were 107,336
(3 year grant). The 3 year grant is made up of two tranches,
shares for the 2017 issue purchased on market at an average
the first with a relative performance hurdle (Chorus’ actual total
price of $4.03, with 80,767 shares which had been forfeited
shareholder return compared to other members of the NZX50)
being included in the 2017 issue. 165,358 shares vested on
and the second with an absolute performance hurdle (Chorus’
30 June 2018 but are not eligible for transfer until 27 August 2018.
actual total shareholder return being greater than 10.8% per
annum compounding).
The LTI scheme is an equity settled scheme and treated as an
option plan for accounting purposes. Each tranche of each grant
The August 2016 issue consisted of one three year grant.
was valued separately. The tranche with a relative performance
The shares have a vesting date of 22 September 2019 and an
hurdle was valued using a Monte Carlo simulation while the
expiry date of 22 September 2020. The grant has an absolute
tranche with the absolute performance hurdle was valued using
performance hurdle (Chorus’ actual total shareholder return
the Black Scholes valuation model.
equalling or being greater than 9.8% per annum compounding)
ending on the vesting date, with provision for monthly retesting
in the following twelve month period (noting that the total
shareholder return continues to increase through this period).
The August 2017 issue consisted of one three year grant.
The combined option cost for the year ended 30 June 2018
of $268,000 has been recognised in the income statement
(30 June 2017: $312,000).
Significant assumptions used in the valuation models are:
The shares have a vesting date of 8 September 2020 and an
1) a volatility of the Chorus share price of 33%,
expiry date of 8 September 2021. The grant has an absolute
performance hurdle (Chorus’ actual total shareholder return
equalling or being greater than 10.6% per annum compounding)
2) that dividends will be paid over the term of the scheme, and
3) an absolute TSR performance threshold percentage.
ending on the vesting date, with provision for monthly retesting
Reserves
in the following twelve month period (noting that the total
shareholder return continues to increase through this period).
Refer note 19 for information on the cash flow hedge reserve
and cost of hedging reserve.
The shares are held by a nominee (Chorus LTI Trustee Limited)
on behalf of the participants, until after the shares vest when the
nominee is directed to transfer or sell the shares. Or if the shares
do not vest they may be held or sold by the nominee. The shares
carry the same rights as all other shares.
Note 17 – Earnings per share
The calculation of basic earnings per share at 30 June 2018
of ordinary shares outstanding during the period of 422 million
is based on the net earnings for the year of $85 million
(30 June 2017: 406 million), calculated as follows:
(30 June 2017: $113 million), and a weighted average number
Basic earnings per share
Net earnings attributable to ordinary shareholders ($ 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 CIP equity securities (millions)
Ordinary shares required to settle CIP warrants (millions)
Denominator – diluted weighted average number of shares (millions)
Diluted earnings per share (dollars)
2018
2017
85
422
0.20
85
422
94
11
527
0.16
113
406
0.28
113
406
72
8
486
0.23
The number of ordinary shares that would have been required
to settle all CIP equity securities and CIP warrants on issue at
30 June has been used for the purposes of the diluted earnings
per share calculation.
Net tangible assets per security
Net tangible assets per security for the period 30 June 2018 was
$1.78 (30 June 2017: $1.95).
55
Annual Report 2018 Note 18 – Related party transactions
Transactions with related parties
these entities are in the ordinary course of business. Chorus has
Certain Chorus Directors have relevant interests in a number of
loans to employees and nominees receivable at 30 June 2018
companies that we have transactions with in the normal course
of $1.6 million (30 June 2017: $1.6 million) as outlined in the
of business. A number of Directors are also non-executive
employee share plan section of note 16. All loans outstanding
Directors of other companies. Any transactions undertaken with
are interest-free limited recourse loans.
Key management personnel compensation
Short term employee benefits
Termination benefits
Other long term benefits
Share based payments
2018
$000's
8,013
1,539
590
268
10,410
2017
$000's
7,532
–
–
274
7,806
This table includes gross remuneration of $1.1 million (30 June 2017: $1.1 million) paid to Directors and $9.3 million
(30 June 2017: $6.7 million) paid to key management personnel for the year.
Note 19 – Derivative financial instruments
Chorus uses derivative financial instruments to reduce its
Finance expense includes any unrealised ineffectiveness arising
exposure to fluctuations in foreign currency exchange rates,
from the Euro Medium Term Notes (EMTN) hedge relationship.
interest rates and the spot price of electricity. The use of hedging
Following the close out of the cross currency interest rate swaps
instruments is governed by the treasury policy approved by the
and interest rate swaps relating to the EMTN (GBP) the hedge
Board. Derivatives are initially recognised at fair value on the
relationship was reset in December 2013 with a fair value of
date a derivative contract is entered into and are subsequently
$49 million. The unamortised balance of this original fair value
remeasured to fair value with an adjustment made for credit risk in
at 30 June 2018 is $8 million (30 June 2017: $15 million). As long
accordance with NZ IFRS 9: Financial Instruments. The fair values
as the hedge remains effective any future gains or losses will
are estimated on the basis of the quoted market prices for similar
be processed through the hedge reserve, however the initial
instruments in an active market or quoted prices for identical or
fair value will flow to interest expense in the income statement
similar instruments in inactive markets. Where quoted prices are
at some time over the life of the derivatives as ineffectiveness.
not available, the fair value of financial instruments is valued using
It will be a non-cash charge. Neither the direction, nor the
models where all significant inputs are observable.
rate of the impact on the income statement can be predicted.
The method of recognising the resulting remeasurement
gain or loss depends on whether the derivative is designated
as a hedging instrument. If the derivative is not designated
as a hedging instrument, the remeasurement gain or loss is
recognised immediately in the income statement.
During the year ended 30 June 2014 interest rate swaps with a
face value of $676 million and fair value of $31 million were reset
at the prevailing market interest rates. These transactions realised
$30 million of cash and resulted in an $11 million gain being
recorded in the cash flow hedge reserve to be amortised over the
period to 2020. During the year ended 30 June 2018 amortisation
of $4 million was recognised in finance income (30 June 2017:
$4 million) and $3 million was recognised in finance expense
(30 June 2017: $3 million). New swaps that hedge the same
underlying exposure and risk profile were entered into on the
same date, but at a higher effective borrowing cost (4.89%
compared to 3.99% prior to the transaction).
Due to the complex nature of this instrument, practical
expedients as introduced by NZ IFRS 9 have been applied for the
EMTN (GBP), thus the designation remains unchanged. For the
year to 30 June 2018 a debit of $7 million ineffectiveness was
recognised within finance expense in the income statement
(30 June 2017: $6 million debit).
In November 2016, Chorus repaid the Syndicated Bank Facility B
and the associated interest rate swaps expired, except one
that has been maintained and is not in a designated hedging
relationship. The fair value re-measurement of unrealised gains
or losses on the interest rate swaps that are not held in a hedging
relationship is recognised immediately in finance expense in the
income statement. For the period to 30 June 2018 $3 million
credit was recognised in finance expense (30 June 2017:
$6 million debit).
56
Annual Report 2018 Note 19 – Derivative financial instruments (cont.)
In conjunction with the EMTN (EUR) 500 million issued
Cash flow hedges
on 18 October 2017, Chorus entered into cross currency
interest rate swaps to hedge the foreign currency and foreign
interest rate risks on the EMTN (EUR). These swaps have an
aggregate principal of EUR 500 million on the receive leg
and NZD 785 million on the pay leg. Using the cross currency
interest rate swap, Chorus will pay NZD floating interest rates
For cash flow hedges the effective part of the changes
in fair value of the hedging derivative are deferred in other
comprehensive income and are transferred to the income
statement when the hedged item affects the income statement.
Any gain or loss relating to the ineffective portion of the hedging
instrument in cash flow hedge relationships are recognised in
and receive EUR nominated fixed interest with coupon payments
the income statement.
matching the underlying notes. Chorus designated the EMTN
and cross currency interest rate swaps into three part-hedging
relationships; a fair value hedge of EUR benchmark interest
rates, a cash flow hedge of margin and a cash flow hedge of
Hedge accounting is discontinued when the hedge instrument
expires or is sold, terminated, exercised, or no longer qualifies
for hedge accounting.
the principal exchange. For the period to 30 June 2018, there
Once hedging is discontinued, any cumulative gain or loss
was $2 million credit from a risk adjustment following NZ IFRS 9
previously recognised in other comprehensive income is
adjustments on the EUR EMTN, recognised in ineffectiveness
recognised in profit or loss either:
(30 June 2017: $2 million debit). The cost of hedging (the fair
value of the change in currency basis spread) was recognised
• at the same time as the forecast transaction; or
in the cost of hedging reserve in the Statement of changes in
• immediately if the transaction is no longer expected to occur.
equity (refer note 1).
In addition to this, forward dated interest rate swaps have been
entered into during the reporting period. These are all held in
effective hedging relationships and their unrealised gains or
losses are recognised in the cash flow hedge reserve.
Hedge accounting
Cash flow hedge reserve
The cash flow hedge reserve comprises the effective portion of
the cumulative net change in the fair value of cash flow hedging
instruments related to hedged transactions that have not yet
affected the income statement.
For cash flow hedges, the effective portion of gains or losses
Chorus designates certain derivatives as either:
from remeasuring the fair value of the hedging instrument is
• Fair value hedges (of the fair value of recognised assets or
liabilities or firm commitments); or
recognised in other comprehensive income and accumulated
in the cash flow hedge reserve. Accumulated gains or losses
are subsequently transferred to the income statement when the
• Cash flow hedges (of highly probable forecast transactions).
hedged item affects the income statement, or when the hedged
At inception each hedge relationship is formalised in NZ IFRS 9
compliant hedge documentation.
Chorus has a 1:1 hedge ratio and sources of ineffectiveness are
driven by credit value adjustment of derivatives, except for the
GBP EMTN relationship as explained above.
item is a forecast transaction that is no longer expected to occur.
Alternatively, when the hedged item results in a non-financial
asset or liability, the accumulated gains and losses are included
in the initial measurement of the cost of the asset or liability.
A reconciliation of movements in the cash flow hedge reserve
follows:
Opening balance
Impact of adopting NZ IFRS 9 at 1 July 2017 (net of tax)
Opening balance at 1 July
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
Tax expense
Closing balance
2018
$M
22
1
23
4
–
1
(1)
27
2017
$M
26
–
26
(15)
9
1
1
22
57
Annual Report 2018 Note 19 – Derivative financial instruments (cont.)
The periods in which the cash flows associated with cash flow hedges are expected to impact earnings are as follows:
30 June 2018
Cross currency interest rate swaps
Interest rate swaps
Forward exchange contracts
30 June 2017
Cross currency interest rate swaps
Interest rate swaps
Forward exchange contracts
Within 1 year
$M
1–2 years
$M
2–3 years
$M
3–4 years
$M
4–5 years
$M
Greater than
5 years
$M
–
–
2
2
–
–
2
2
20
23
1
44
–
–
–
–
–
–
–
–
13
31
–
44
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
13
–
15
12
–
–
12
Fair value hedges
To hedge the interest rate risk and foreign currency risk on the
Under a fair value hedge, the hedged item is revalued at fair value
EUR EMTN, Chorus uses cross currency interest rate swaps.
in respect of the hedged risk. This revaluation is recognised in the
For hedge accounting purposes these swaps were aggregated
income statement to offset the mark-to-market revaluation of the
and designated as two cash flow hedges and a fair value hedge.
hedging derivative.
Once hedging is discontinued, the fair value adjustment to the
carrying amount of the hedged item arising from the hedged
risk is amortised through the Income statement from that date
through to maturity of the hedged item. If the hedged item is
derecognised any corresponding fair value hedge adjustment
is immediately recognised in the income statement.
Cost of hedging reserve
Chorus hedges a portion of the EUR EMTN for Euro fixed rate
interest to Euro floating rate interest via a fair value hedge.
In this case the change in the fair value of the hedged risk is also
attributed to the carrying value of the EMTN (refer to note 4).
The cost of hedging reserve captures changes in the fair value
on 1 July 2017 (refer note 1). These changes were previously
of the cost to convert foreign currency to NZD of Chorus’
recognised as ineffectiveness in finance expenses.
cross currency interest rate swaps on the EUR EMTN. This is
a new accounting treatment since the adoption of NZ IFRS 9
A reconciliation of movements in the cost of hedging reserve
follows:
Opening balance
Impact of adopting NZ IFRS 9 at 1 July (net of tax)
Opening balance at 1 July
Change in currency basis spreads (when excluded from the designation)
Tax expense
Closing balance
2018
$M
–
6
6
4
(1)
9
58
Annual Report 2018 Note 19 – Derivative financial instruments (cont.)
Hedging instruments used (pre-tax):
Life to date values as at 30 June 2018
Year to date values recognised during the
year ended 30 June 2018
Carrying amount
of the hedging
instrument
Hedge effectiveness
in reserves
Hedge
effectiveness
Hedge
ineffectiveness
Nominal
amount
of the
hedging
instrument
$M
Assets
$M
Liabilities
$M
Change in
value used for
calculating
hedge
ineffectiveness
$M
Cost of
hedging
reserve
$M
Cash
flow
hedge
(OCI)
$M
Cash flow
hedge
reclassified
to the
Income
statement
$M
Fair value
hedge
(Income
statement
gain)
$M
Recognised
in the Income
statement loss
$M
Currency
Maturity
years
Average
rate
Cash flow hedges
Cross currency
interest rate swaps
NZD:GBP
5 Floating
677
2
(150)
Interest rate swaps
NZD
2
4.89%
676
–
(33)
Interest rate swaps
(including forward
dated)
Forward exchange
rate contracts
Forward exchange
rate contracts
NZD
1–8
3.25%
1,150
–
(18)
NZD:USD
1–2 0.7189
54
–
NZD:SEK
1–2 5.8288
87
5
–
–
Fair value and cash flow hedges
(34)
(33)
(18)
–
5
–
–
–
–
–
(38)
(11)
18
–
5
Cross currency
interest rate swaps
NZD:EUR
5 Floating
785
70
(25)
60
(12)
(85)
Total hedged derivatives
Unhedged derivatives
3,429
77
(226)
(20)
(12)
(111)
Interest rate swap
NZD
1
3.68%
250
Total derivatives
Current
Non-current
3,679
–
–
–
77
3
74
(3)
(229)
19
210
–
(20)
–
–
–
–
(12)
(111)
–
–
46
–
–
–
2
84
132
–
132
–
–
–
–
–
(5)
(5)
–
(5)
(7)
–
–
–
–
2
(5)
–
(5)
All hedging instruments can be found in the derivative finance
Credit risk associated with derivative financial instruments
assets and liabilities in the Statement of financial position. Items
is managed by ensuring that transactions are executed with
taken to the Income statement have been recognised in finance
counterparties with high quality credit ratings along with credit
expenses (refer note 4).
exposure limits for different credit classes. The counterparty credit
risk is monitored and reviewed by the Board on a regular basis.
59
Annual Report 2018 Note 20 – Financial risk management
Chorus’ financial instruments consist of cash, short-term
principal and EUR fixed coupon payments for $785 million
deposits, trade and other receivables (excluding prepayments),
principal and floating NZD interest payments. The exchange gain
investments and advances, trade payables and certain other
or loss resulting from the translation of EMTN denominated in
payables, syndicated bank facility, EMTN, fixed rate NZD bonds,
foreign currency to NZD is recognised in the income statement.
derivative financial instruments and CIP securities. Financial risk
The movement is offset by the translation of the principal value
management for currency and interest rate risk is carried out
of the related cross currency interest rate swap.
by the treasury function under policies approved by the Board.
Chorus’ risk management policy approved by the Board, provides
the basis for overall financial risk management.
As at 30 June 2018, Chorus did not have any significant
unhedged exposure to currency risk (30 June 2017: no significant
unhedged exposure to currency risk). A 10% increase or decrease
Chorus does not hold or issue derivative financial instruments
in the exchange rate, with all other variables held constant, has
for trading purposes. All contracts have been entered into with
minimal impact on profit and equity reserves of Chorus.
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
Electricity 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
Chorus’ exposure to foreign currency fluctuations predominantly
to reduce the exposure to electricity spot price movements.
arise from the foreign currency debt and future commitment
Chorus has designated the electricity contracts as cash flow
to purchase foreign currency denominated assets. The primary
hedge relationships.
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
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.
and cross currency interest rate swaps to manage the foreign
Interest rate risk
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
Chorus has interest rate risk arising from the cross currency
interest rate swap converting the foreign debt into a floating rate
NZD obligation. Where appropriate, Chorus aims to reduce the
uncertainty of changes in interest rates by entering into interest
rate swaps to fix the effective interest rate to minimise the cost
of net debt and manage the impact of interest rate volatility on
earnings. The interest rate risk on the entire GBP cross currency
interest rate swaps and a portion of the EUR cross currency
interest rate swaps have been hedged using interest rate swaps.
Interest rate repricing analysis
Within
1 year
$M
50
–
250
–
(5)
295
170
535
–
–
(5)
700
1–2 years
$M
2–3 years
$M
3–4 years
$M
4–5 years
$M
Greater than
5 years
$M
–
–
677
–
(5)
672
–
–
250
–
(5)
245
–
–
400
–
(1)
399
–
–
677
–
(5)
672
–
–
–
–
2
2
–
–
400
–
(1)
399
–
–
–
–
2
2
–
–
–
–
2
2
–
535
–
273
170
978
–
–
–
203
168
371
Total
$M
50
535
1,327
273
163
2,348
170
535
1,327
203
154
2,389
30 June 2018
Floating rate
Cash and deposits
Debt
Fixed rate
Debt (after hedging)
CIP securities
Leases (net settled)
30 June 2017
Floating rate
Cash and deposits
Debt
Fixed rate
Debt (after hedging)
CIP securities
Leases (net settled)
60
Annual Report 2018 Note 20 – Financial risk management (cont.)
Sensitivity analysis
A change of 100 basis points in interest rates with all other variables held constant, would increase or decrease equity (after hedging)
and earnings after tax by the amounts shown below:
100 basis point increase
100 basis point decrease
2018
$M
Profit or (loss)
2018
$M
Equity (increase)
or decrease
2017
$M
Profit or (loss)
2017
$M
Equity (increase)
or decrease
3
(3)
(50)
45
4
(4)
20
(20)
Credit risk
Chorus has certain derivative transactions that are subject
In the normal course of business, we incur counterparty credit
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 financial
derivatives. As at 30 June 2018 no collateral was posted.
instruments.
The maximum exposure to credit risk at the reporting date was
as follows:
Cash and call deposits
Trade and other receivables
Derivative financial instruments
Finance lease receivable
Maximum exposure to credit risk
Notes
15
11
19
5
2018
$M
50
139
77
5
271
2017
$M
170
122
1
5
298
Refer to individual notes for additional information on credit risk.
offset is enforceable only on the occurrence of future events
Chorus enters into derivative transactions under the International
Swaps and Derivatives Association (ISDA) master agreements.
The ISDA agreements do not meet the criteria for offsetting
in the statement of financial position. This is because Chorus
such as a default on the bank loans or other credit events.
The potential net impact of this offsetting is shown below.
Chorus does not hold and is not required to post collateral
against its derivative positions.
does not currently have any legally enforceable right to offset
Net derivatives after applying rights of offset under
recognised amounts. Under the ISDA agreements the right to
ISDA agreements:
Derivative assets
Derivative liabilities
Net amount
2018
$M
77
(229)
(152)
2017
$M
1
(271)
(270)
61
Annual Report 2018 Note 20 – Financial risk management (cont.)
Liquidity risk
Liquidity risk is the risk that we will encounter difficulty raising liquid funds to meet commitments as they fall due or foregoing
investment opportunities, resulting in defaults or excessive debt costs. Prudent liquidity risk management implies maintaining
sufficient cash and the ability to meet its financial obligations. Chorus’ exposure to liquidity risk based on contractual cash flows
relating to financial liabilities is summarised below:
Interest rate swaps
54
55
23
19
13
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
370
243
370
451
1,807
1,973
273
383
370
9
66
–
–
9
573
–
–
13
431
–
–
(1,498)
101
–
1,575
1
–
4
(89)
92
(44)
67
1
(68)
70
(551)
520
–
(21)
22
(10)
38
–
–
–
–
16
12
–
–
(10)
38
–
–
–
–
16
12
–
–
(10)
38
–
–
–
–
388
879
383
–
(873)
874
–
–
–
30 June 2018
Non derivative financial liabilities
Trade and other payables
Leases (net settled)
Debt
CIP securities
Derivative financial liabilities
Cross currency interest rate swaps:
Inflows
Outflows
Electricity contracts
Forward exchange contracts:
Inflows
Outflows
30 June 2017
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
Non derivative financial liabilities
Trade and other payables
Finance leases (net settled)
Debt
CIP securities
Derivative financial liabilities
268
154
268
450
1,609
1,867
203
320
Interest rate swaps
49
55
Cross currency interest rate swaps:
Inflows
Outflows
Electricity contracts
Forward exchange contracts:
Inflows
Outflows
–
(1,397)
225
1,840
–
–
3
1
(54)
57
268
9
59
–
23
(40)
67
1
(45)
48
–
8
59
–
19
(40)
73
–
(9)
9
–
9
520
–
13
(502)
757
–
–
–
–
13
425
–
–
(9)
43
–
–
–
–
18
9
–
–
(9)
45
–
–
–
–
393
797
320
–
(797)
855
–
–
–
The gross (inflows)/outflows of derivative financial liabilities
At balance date, Chorus had available $290 million under the
disclosed in the previous table represent the contractual
syndicated bank facilities (30 June 2017: $350 million).
undiscounted cash flows relating to derivative financial liabilities
held for risk management purposes and which are usually not
closed out prior to contractual maturity. The disclosure shows
net cash flow amounts for derivatives that are net cash settled
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 maintaining prudent levels of short term debt maturities.
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.
62
Annual Report 2018 Note 20 – Financial risk management (cont.)
Hedge accounting
Chorus designates and documents the relationship between
hedging instruments and hedged items, as well as the risk
management objective and strategy for undertaking various
hedge transactions. At hedge inception (and on an ongoing
basis), hedges 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:
Level 1:
Quoted market prices – financial instruments with
quoted prices for identical instruments in active markets.
Level 2: Valuation techniques using observable inputs –
financial instruments with quoted prices for similar
instruments in active markets or quoted prices for
identical or similar instruments in inactive markets.
Where quoted prices are not available, the fair value
of financial instruments is valued using models where
(a) the hedging instrument expires or is sold, terminated, or
all significant inputs are observable.
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 19 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.
For those instruments, recognised at fair value in the statement
of financial position, fair values are determined as follows:
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 19 and are all Level 2
(30 June 2017: Level 2).
Cross currency interest rate swaps, interest rate swaps and
forward-dated 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
to the derivative.
Note 21 – Post balance date events
Dividends
CIP securities and Crown funding
On 27 August 2018 Chorus declared a dividend in respect of
There was one call notice issued on 29 June 2018 for 8,040
year ended 30 June 2018. The total amount of the dividend
premises (UFB1) for which $9 million funding was received on
is $56 million, which represents a fully imputed dividend of
4 July 2018. This call notice was accrued for in these financial
13 cents per ordinary share.
statements. Additional to this, one call notice was issued since
30 June 2018 to CIP in respect to 7,528 premises (UFB1), with a
total aggregate issue price of $8 million. Of these, 5,676 premises
had been passed and tested by CIP before 30 June 2018 so
were also accrued for in these financial statements ($6 million).
A further 1,953 premises (UFB2) were passed and tested by CIP
by 30 June 2018 and were also accrued for in these financial
statements ($3 million), and will be called for by September 2018.
63
Annual Report 2018 64
Annual Report 2018 Governance
and disclosures
66 Our Board
68 Corporate governance framework
73 Managing risk
75 Acting ethically
77 Diversity and inclusion
80 Remuneration and performance
86 Disclosures
92 Glossary
65
Annual Report 2018 Our Board
Patrick Strange
BE (Hons), PhD
Chair
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
on the board of Essential
Energy Australia.
Patrick is chair of our
Nominations and Corporate
Governance Committee.
Mark Cross
BBS, CA
Prue Flacks
LLB, LLM
Director since 1 November
2016; 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 chair of
Milford Asset Management,
MFL Mutual Fund and
Superannuation Investments,
and a director of Z Energy,
Argosy Property and
Genesis Energy.
Mark is a member of
Chartered Accountants
Australia and New Zealand
and a chartered member of
the New Zealand Institute
of Directors.
Mark is on our Audit and Risk
Management Committee.
Prue is a professional director
with experience across a
range of industries.
Prue was formerly a
commercial lawyer and
a partner in the national
law firm Russell McVeagh
for 20 years. Her expertise
included corporate
and regulatory matters,
corporate finance,
capital markets and
business restructuring.
Prue is currently a director
of Bank of New Zealand
and Mercury NZ, and chair
of Queenstown Airport
Corporation. She is a
chartered member of
the New Zealand Institute
of Directors.
Prue is chair of our Human
Resources and Compensation
Committee and on our
Nominations and Corporate
Governance Committee.
Jon Hartley
BA Econ Accounting
(Hons), Fellow ICA
(England & Wales),
Associate ICA (Australia),
Fellow AICD
Deputy Chair
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 chair
of SkyCity, deputy chair of
ASB Bank and Sovereign
Assurance Company, director
of Mighty River Power, CEO
of Brierley New Zealand
and Solid Energy, and CFO
of Lend Lease in Australia.
Jon is currently chair of
Timberlands, VisionFund
International and the
Wellington City Mission
and a trustee of World
Vision New Zealand.
Jon is on our Audit and Risk
Management Committee
and our Nominations and
Corporate Governance
Committee.
66
Annual Report 2018 Our Board and management are committed to
ensuring our people act ethically, with integrity
and in accordance with our policies and values.
Murray Jordan
MProp
Director since 1 September
2015; Independent
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 on our
Human Resources and
Compensation Committee.
Jack Matthews
BA Philosophy, College
of William and Mary
Director since 1 July 2017;
Independent
Kate McKenzie
BA, LLB
Managing Director
since 20 February 2017;
Non-independent
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 chair of
MediaWorks, a director
of The Network for Learning
and APN Outdoor Group and
a former director of Trilogy
International and Crown
Fibre Holdings.
Jack is on our Human
Resources and Compensation
Committee.
Kate has an extensive
communications
infrastructure background
including as Telstra Australia’s
Chief Operations Officer,
responsible for Telstra’s field
services, IT and network
architecture and operations.
Prior to that, Kate 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 is
a member of Chief Executive
Women and has had a long
history of involvement in
promoting the interests of
indigenous communities.
Anne Urlwin
BCom, FCA, CFInstD,
MAICD, FNZIM, ACIS
Director since 1 December
2011; Independent
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.
Anne is a director of Tilt
Renewables, City Rail
Link, Southern Response
Earthquake Services, Steel
& Tube Holdings, OnePath
Life (NZ), and Summerset
Group. Anne is also
independent chair of the
Ngāi Tahu Te Rūnanga Audit
and Risk Committee, the
former chair of commercial
construction group
Naylor Love Enterprises,
Lakes Environmental, the
New Zealand Blood Service,
internet domain name
registry operator NZRS and
a former director of
Meridian Energy.
Anne is chair of our Audit
and Risk Management
Committee.
67
Annual Report 2018 Corporate governance framework
As a New Zealand company listed on the NZX our corporate
governance policies and practices meet or exceed the
standards of that market. We have adopted and fully
followed the recommendations set out in the NZX Corporate
Governance Code following its implementation.
Although we have an ASX “foreign exempt” listing status1
we also continue to take into account the ASX Corporate
Governance Code in our governance practices and policies.
Our Board regularly reviews and assesses our governance
policies, processes and practices to identify opportunities
for enhancement.
Our corporate governance practices are outlined below
and in our Corporate Governance Statement available at
www.chorus.co.nz/governance.
Key corporate governance documents are also available at
www.chorus.co.nz/governance.
Our Board’s role
Our Board is appointed by shareholders and has overall
responsibility for strategy, culture, health and safety,
governance and performance.
Board membership
Our Board’s skills, experience and composition supports
effective governance and decision making, positioning
it to add value.
Supported by the Nominations and Corporate Governance
Committee (NCGC) our Board regularly assesses its
composition utilising a skills matrix and annual evaluation
processes. Training is provided or recruitment undertaken
if new or additional skills or experience are required. This
ensures there is diversity of thought, skills and expertise and
that our Board remains aligned with our strategic direction.
As at 30 June 2018 we had eight Directors (seven
independent Directors and the Managing Director).
Directors are not appointed for specified terms. However,
our Constitution and the NZX listing rules require at least
one third of our Directors to retire at each annual
shareholders meeting (ASM).2
We recognise that women and ethnic minorities are
still under-represented in the leadership of New Zealand
businesses and our Board remains actively conscious
of this in its succession planning. More information on
our approach to diversity is set out later in this report.
Our Board Charter sets out our Board’s roles and responsibilities. They include:
Strategy &
performance
Financial oversight
& reporting
• Developing strategy
• Approving and reviewing performance against strategy, business plans and budgets
• Monitoring the integrity of, and where appropriate approving, financial and corporate reporting
(including external audit)
• Setting, monitoring and reviewing our internal audit plan
Risk management
• Ensuring an appropriate risk management framework has been established, setting risk appetite,
regularly reviewing principal risks and overseeing the management of material business risks
Health & safety
• Setting the strategy, culture and expectations in relation to health and safety
Board composition
& performance
• Reviewing and evaluating Board, Board committee and individual Director performance
• Board succession planning
• Appointing members to Board committees
Governance
• Overseeing corporate governance, including reviewing key governance documents
• Carrying out the functions specifically reserved to our Board and its committees under Board approved
policies and committee charters
• Monitoring compliance with our continuous disclosure obligations
People
• Reviewing and approving remuneration and people strategies, structures and policies
• Appointing and removing our CEO, CFO and General Counsel & Company Secretary
• Assessing the measurable objectives set for, and progress towards achieving, our diversity and
inclusiveness goals
Significant transactions
• Approving major capital expenditure and business activities outside the limits delegated to management
1 An ASX foreign exempt listing is based on the principle of “substituted compliance”. This means our primary obligation is to comply with the NZX
listing rules (as our “home exchange”). As a result we do not need to follow or report against compliance with the ASX Corporate Governance Code.
2 Directors holding office the longest since last standing for election/re-election are those required to retire. Retiring Directors may stand for re-election.
Kate McKenzie, as Managing Director, is exempt from these requirements but must stand for re-election at least once every five years.
68
Annual Report 2018 Figure 10:
Director tenure
Figure 11:
Board gender diversity
12%
50%
38%
0–3 years
3–6 years
6+ years
Female
Male
Our Board has determined that collectively its Directors have a broad range of managerial, financial, accounting and industry
skills and experience in the key areas set out below.
Skill/experience
Description
Combined Board
Capital markets
and investment
Experience in, and understanding of, capital markets, market regulation,
capital investment and the investor experience
Communications
Understanding, expertise and/or experience in communications connectivity,
connectivity and
adopting new technologies, leveraging and implementing technologies
technology
Governance –
financial, audit,
legal, listed company
Experience with, and a commitment to, high corporate governance standards
including in listed companies
Understanding financial business drivers, and/or experience implementing or
overseeing financial accounting, external reporting and internal financial controls
Physical infrastructure
Experience in leading, and/or understanding of, physical infrastructure operations,
and operations including
including contracting
contracting, safety and
risk
Commitment and experience in management of workplace safety
Experience anticipating and identifying key risks and monitoring the effectiveness
of risk management frameworks and controls
Governance –
Executive experience in leading large businesses, developing and implementing
executive experience
strategy and strategic objectives, assessing business plans and driving execution
in large businesses
Infrastructure
regulation
Understanding the current and developing regulatory environment, complexities
and actual and potential impacts
Expertise identifying and managing legal, regulatory, public policy and corporate
affairs issues
Customer
experience
Experience in customer-led transformation, customer focus and/or customer
centric organisations
Substantial experience
Moderate experience
Some experience
69
Annual Report 2018 Appointment
Our Board may appoint additional Directors to our Board
or to fill a casual vacancy.
The independence, qualification, skills and experience
needed for the future and those of existing Board members
are reviewed before appointing new Directors. External
advisors are also engaged to identify potential candidates.
To be eligible for selection, candidates must demonstrate
appropriate qualities and satisfy our Board they will commit
the time needed to be fully effective in their role.
Appropriate checks are undertaken before a candidate
is appointed or recommended for election as a Director,
including as to the person’s character, experience,
education, criminal record and bankruptcy history.
Shareholders may also nominate candidates for appointment
to our Board. In addition, under the agreements entered into
with CIP relating to our UFB fibre upgrades, CIP is entitled to
nominate one person as an independent Director (they have
never used this right).
We have written agreements with each non-executive Director
setting out the terms of their appointment, including obligations
and responsibilities, compliance with our policies (including
code of ethics and securities trading) and continuing education.
Director induction and education
Our Director induction programme ensures new Directors
are appropriately introduced to management and our
business, acquaints Directors with relevant industry
knowledge and familiarises them with key governance
documents and stakeholder relationships.
Our Directors are expected to continuously educate
themselves to ensure they maintain appropriate expertise
to effectively perform their duties.
We hold dedicated Board education sessions covering
a range of topical matters, which this year included:
• Technical, industry and regulatory developments
domestically and internationally;
• Innovation and disruptive technologies;
• Current and emerging business and technology trends; and
• Culture, ways of working and working preferences.
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.
Our Board also formally engages in annual:
• Reviews of our Board chair and deputy chair, and chairs of
our standing Board committees;
• Confirmations of our Board chair and deputy chair, and
chairs of our standing Board committees; and
• Performance discussions of individual Directors standing
for re-election.
Our Board has carried out, in the reporting period, an internal
review of its performance, that of individual Directors and
standing Board committees using the evaluation process
developed and overseen by our NCGC.
In addition to Board performance reviews, our Board also
takes a forward focused approach to future Board capability,
composition and the potential contribution of each
existing Director.
Independent advice
A Director may, with our chair’s prior approval (or in the chair’s
absence deputy chair’s approval), take independent professional
advice (including legal advice) and request the attendance of
advisers at Board and Board committee meetings.
Independence
All our Directors are independent directors except for
Kate McKenzie, our CEO and Managing Director.
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 our Board Charter.
These disqualifying relationships reflect those set out in
the NZX listing rules and ASX Corporate Governance Code.
Our Board has not set financial materiality thresholds for
determining independence but considers materiality in
the context of each relationship and from the perspective
of the parties to that relationship.
Delegation of authority
Our Board has overall responsibility for strategy,
culture, health and safety, governance and performance.
Implementation of our Board approved strategy, business
plan and governance frameworks, and responsibility for
developing our culture and health and safety practices, is
delegated by the Board to management through the CEO.
As such our CEO (with the support of her executive team)
is responsible for Chorus’ day-to-day management and
operations and reports to the Board on key performance,
management and operational matters.
Review and evaluation of Board performance
Our Board uses internally and externally facilitated
performance and evaluation processes overseen by
our NCGC. As part of this process our chair meets
with Directors individually to discuss performance.
Our CEO sub-delegates authority to her executive team
and they sub-delegate their authority to other Chorus
employees within specified financial and non-financial limits.
Formal policies and procedures govern the parameters and
operation of these delegations.
70
Annual Report 2018 Three standing Board committees also assist our Board in
carrying out its responsibilities. Some Board responsibilities,
powers and authorities are delegated to those committees.
Other committees may be established and specific
responsibilities, powers and authorities delegated
to those committees and/or to particular Directors.
Board committees
Board committees assist our Board by focusing on specific
responsibilities in greater detail than is possible for the Board
as a whole. Each standing Board committee has a Board
approved charter and chair.
Audit and Risk
Management Committee
Our
Shareholders
Chorus
Limited Board
Human Resources and
Compensation Committee
CEO
Executive
Team
Our
People
Nominations and Corporate
Governance Committee
Audit and Risk Management Committee (ARMC)
Role
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 (chair), Jon Hartley, Mark Cross
Independence
All committee members are independent Directors
Responsibilities
• Overseeing the quality and integrity of external financial reporting
• Considering the adequacy of internal controls
• Regularly reviewing principal risks and risk, compliance and fraud reporting
• Recommending to our Board the appointment, and if necessary removal, of the external auditor
• Assessing the adequacy of the external audit and independence of the external auditor
• Reviewing and monitoring the internal audit plan and reporting
• Overseeing the independence and objectivity of the internal audit function
• Reviewing compliance with applicable laws, regulations and standards
Human Resources and Compensation Committee (HRCC)
Role
Our HRCC assists our Board in overseeing people policies and strategies, including remuneration and
performance frameworks
Members
Prue Flacks (chair), Murray Jordan, Jack Matthews
Independence
All committee members are independent Directors
Responsibilities
• Reviewing remuneration and human resources strategy, structure and policies
• Approving annual remuneration increase guides and budgets
• Approving the employment terms of our CEO’s executive direct reports
• Approving, on the recommendation of our CEO, the appointment of our CEO’s executive direct reports (except
our CFO and General Counsel & Company Secretary whose appointment is approved by our Board)
• Reviewing candidates for, and the performance and remuneration of, our CEO
• Reviewing our CEO’s performance evaluation of her executive direct reports
• Developing and annually reviewing and assessing diversity and its reporting
• Overseeing recruitment, retention and termination policies and procedures for senior management
• Making recommendations (including proposing amendments) to our Board with respect to senior executive
(including CEO) incentive remuneration plans
• Annually reviewing non-executive Director remuneration and recommending any changes to the Board
71
Annual Report 2018 Nominations and Corporate Governance Committee (NCGC)
Role
Our NCGC assists our Board in promoting and overseeing continuous improvement of good corporate
governance
Members
Patrick Strange (chair), Jon Hartley, Prue Flacks
Independence
All committee members are independent Directors
Responsibilities
• Identifying and recommending suitable candidates for appointment to our Board and Board committees
• Considering the size, skills mix and composition of our Board
• Developing, reviewing and making recommendations to our Board on corporate governance principles
• Establishing, developing and overseeing a process for the annual review and evaluation of Board, Board
committee, and individual Director performance
• Developing and reviewing Board succession planning (including for the chair)
• Monitoring compliance with our codes of ethics and managing breaches of the Director Code of Ethics
• Reviewing and overseeing the induction of new Directors and the continuous education of our Board
Board and Board committee meeting attendance in the year ended 30 June 2018
Regular Board
meetings
Other Board
meetings1
ARMC
HRCC
NCGC
Total number of
meetings held
Patrick Strange
Jon Hartley
Mark Cross
Prue Flacks
Murray Jordan
Jack Matthews2
Anne Urlwin
Kate McKenzie3
Keith Turner4
8
8
8
7
8
8
8
8
8
2
6
6
6
6
6
5
6
6
6
1
4
4
4
4
5
5
5
4
1
2
2
2
2
Notes:
1 Includes dedicated Board education, and strategy and business planning, meetings. Directors also have at least one
health and safety site visit each year.
2 Jack Matthews joined our HRCC on 10 November 2017.
3 Kate McKenzie is not a member of any Board committee but attended all committee meetings as CEO and an observer.
4 Keith Turner stepped down from our Board and HRCC on 1 November 2017.
Director attendances at committee meetings of which they are not members are not recorded above.
72
Annual Report 2018 Managing risk
Like all businesses, we are exposed to a range
of risks. Our risk management activities aim
to ensure we identify, prioritise and manage
key risks so we can execute our strategies and
achieve our goals.
Risk management
No business can thrive without taking risk. Effective risk
management is about informed risk taking and appropriate
and active risk management.
We seek to understand and respond to our current and
future business environment, actively and robustly evaluating
opportunities and initiatives which protect and achieve
our business strategies. We strive to understand, meet and
appropriately balance stakeholders’ expectations to deliver
value to shareholders and a sustainable environment for
Chorus in the long term.
Our Board
Our Board is ultimately responsible for risk management
governance:
• Annually setting risk appetite and tolerances and
reviewing principal risks;
Principal risks
Principal risks are our key risks. These are assessed on a
risk profile identifying likelihood of occurrence and potential
severity of impact. Current principal risk categories are
identified via a comprehensive enterprise risk management
framework encompassing financial and non-financial risks.
They include:
• Business risk: e.g. network quality and availability;
customer; competitive environment; IT; suppliers;
technological change;
• People & culture: e.g. health & safety; engagement;
capability; talent;
• Regulatory risk: e.g. regulatory environment;
legal compliance; and
• Financing risk: e.g. capital management.
Risk management processes
Our Managing Risk Policy mandates one framework
for risk management to:
• Integrate risk management in line with our Board’s
risk appetite into structures, policies, processes and
procedures; and
• Approving and regularly reviewing our Managing Risk
Policy and risk management framework;
• Deliver regular principal risk reviews, reporting
and monitoring.
• Promoting a culture of proactively managing risk; and
• Through our ARMC, providing risk oversight and monitoring.
Risk appetite
Our risk appetite sets our tolerable levels of risk and
forms a dynamic link between strategy, target setting
and risk management. It draws together risk metrics and
management to set boundaries for day-to-day decision
making and reporting.
Principal risks are owned by relevant executives. This
promotes integration into operations and planning and
a culture of proactive risk management. Notwithstanding
individual ownership, our CEO and executive hold collective
responsibility for considering how risk and events inter-relate
and for managing our overall risk profile.
Principal risks are reported to our ARMC quarterly and
as required by exception. Our ARMC reports to our Board.
Principal risks are assessed with each responsible executive
The risk and
control environment
1. Risk identification and description
5. Annual risk reviews
Assurance
Management assurance
Independent assurance
(including internal audit,
external audit)
– Completeness,
accuracy and validity
of principal risks
– Effectiveness of the
risk management
process
– Risk identification and description
– Recording principal risks
2. Risk assessment and ratings
– Risk assessment (likelihood and impact)
– Risk ratings (critical, high, medium, low)
3. Risk mitigations
– Risk responses
– Action plans
– Mitigating controls
4. Regular risk reporting
– Mitigation status
– Current and potential risks
– Risk trends
– Action plan status
73
Annual Report 2018 and collectively with the executive team before being
reported to the ARMC. This allows for constructive challenge
and debate. Project and functional area risk assessment and
monitoring is undertaken by each responsible executive
with assistance from our Manager Risk & Business Assurance.
Our Board also receives management and other internal and
external reporting over risk positions and risk management
operation (including from internal audit plans approved by
the ARMC) through our overall governance framework.
Our risks are not static. Our CEO and executive regularly seek
to identify emerging risks in line with our strategic direction
and risk management framework.
Before our Board approves the financial statements, our
CEO and CFO provide a certificate as to the appropriateness
of those financial statements.
Internal audit
We operate a co-sourced internal audit model with our
Manager Risk & Business Assurance supported by external
advisors (principally PricewaterhouseCoopers) to provide
additional resource and specialist expertise as required.
The responsibilities of our internal audit function include:
• Assisting our ARMC and Board in their assessment of
internal controls and risk management;
• Developing an audit plan for review and approval by the
ARMC each year;
• Undertaking the plan and reporting progress against it,
significant changes, results and issues identified; and
• Escalating issues as appropriate (including to our ARMC
and/or Board chairs).
Our executive team and ARMC monitor key outstanding
internal audit issues and recommendations as part of regular
quarterly reporting and review.
Our ARMC has direct and unrestricted access to our internal
audit function, including meeting them without management.
Our Manager Risk & Business Assurance has a management
reporting line to our General Counsel & Company Secretary
and a direct reporting line to our ARMC. Our ARMC reviews
the remuneration and incentive arrangements of our
Manager Risk & Business Assurance each year.
External auditor
Our Board and ARMC monitor the ongoing independence
and quality of our external auditor. Our ARMC also meets
with our external auditor without management present.
Our ARMC Charter and External Auditor Independence
Policy amongst other things:
• Prohibit the provision of certain non-audit services
by our external auditor;
• Require ARMC pre-approval of all audit and permitted
non-audit services;
• Require our external auditor lead/engagement partner
to be rotated every five years (with a five year cooling off
period) and other audit partners to be rotated every seven
years (with a two year cooling off period);
• Require our ARMC to review our external auditor’s fees half
yearly (including the ratio of fees for audit vs. non-audit
services); and
• Impose restrictions on the employment of former external
audit personnel.
The non-audit services undertaken by our external auditor
KPMG in the year to 30 June 2018 are set out in note 10 of
the financial statements in this report. Those services were
provided in accordance with our ARMC Charter and External
Auditor Independence Policy and did not affect KPMG’s
independence, including because:
• They were approved only where we were satisfied they
would not have a material bearing on KPMG’s external
audit procedures; and
• They did not involve KPMG acting in a managerial or
decision-making capacity.
KPMG confirm their independence via independence
declarations every six months.
Our external auditors attend our ASM each year.
74
Annual Report 2018 Acting ethically
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, including
in respect of:
• Conflicts of interest;
• Gifts and personal benefits;
• Use of corporate property, opportunities and information;
• Confidentiality;
• Compliance with laws and policies; and
• Reporting unethical behaviour.
We have communicated our codes of ethics and provided
training to our Directors and employees. Our people are also
encouraged to report any unethical behaviour. All reported
breaches of our codes of ethics are investigated.
Other policies reinforce the behaviours we expect at Chorus,
including:
• Bribery & gifts: Acceptance of bribes, or gifts/other
benefits which could be perceived as influencing
decisions, are prohibited under our People Code of
Ethics Policy. Our Acceptance of Gifts Policy sets out the
parameters within which gifts and entertainment may
be accepted and our approval processes for gifts and
entertainment over $150.
• Anti-bullying, Harassment and Discrimination: Our Anti-
bullying, Harassment and Discrimination Policy reinforces
our commitment to a psychologically and physically
safe working environment including our zero tolerance
approach to bullying, harassment and discrimination.
• Whistle blowing and fraud: Our Whistle Blowing and
Fraud policies allow for confidential reporting of serious
misconduct or wrongdoing and suspected fraud or
corruption.
We did not receive any reports of serious instances
of unethical behaviour in the year to 30 June 2018.
Trading in Chorus securities
All non-executive Directors are encouraged to hold
Chorus shares.
All trading in Chorus securities by Directors and employees
must be in accordance with our Insider Trading Policy.
That policy prohibits trading in Chorus securities while in
possession of inside information and requires, amongst
other things:
• Directors to notify, and obtain consent from, the chair
(or in the chair’s case, the chair of our ARMC) before
trading; and
• Employees identified as potentially coming across
information which may be market sensitive (“restricted
persons”), to obtain consent from our General Counsel &
Company Secretary (or in our General Counsel & Company
Secretary’s case, our Board chair) before trading.
Trading in Chorus shares or NZX listed bonds by Directors is
disclosed to our Board, the NZX and ASX. Trading by “senior
managers” is disclosed to the NZX.
Market disclosures
We are committed to providing timely, consistent and
credible information to promote orderly market behaviour
and investor confidence. We believe disclosure should be
evenly balanced 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.
Our disclosure policies are designed to ensure:
• Roles of Directors, executives and employees are clearly
set out.
• Appropriate reporting and escalation mechanisms are
established to ensure potentially material matters are
escalated appropriately.
• There are robust and documented confidentiality protocols
in place where appropriate.
• Only authorised spokespersons comment publicly, within
the bounds of information which is either already publicly
known or non-material.
Our approach to tax
We take our tax obligations seriously and work closely with
Inland Revenue to ensure we meet our tax obligations.
We obtain external advice and Inland Revenue’s views
(through informal correspondence, determinations or rulings)
in respect of unusual or material transactions.
As we operate only in New Zealand all our tax is paid in
New Zealand at the prevailing corporate tax rate (currently
28%). We have paid all taxes we owe and all tax compliance
obligations are up to date.
75
Annual Report 2018 Shareholder communications
and meetings
We are committed to fostering constructive
relationships with shareholders that encourage
engagement with us, including by:
• Communicating clearly and effectively with them;
• Giving ready access to balanced and understandable
information;
• Making it easy for shareholders to participate in general
meetings; and
• Maintaining an up to date website providing information
about our business and affairs.
Our investor relations programme is designed to further
facilitate two-way communication with shareholders, provide
them and other market participants with an understanding
of our business, governance and performance and an
opportunity to express their views. As part of this programme
we enable investors and other interested parties to ask
questions and obtain information, meet with investors and
analysts and undertake formal investor presentations. Our
annual and half year results presentations are made available
to all investors via webcast.
Annual meetings are held in main centres and webcast to
enable shareholders to view and hear proceedings online.
We enable shareholders to vote by proxy ahead of meetings
without having to physically attend or participate in those
meetings and adopt the one share one vote principle,
conducting voting at shareholder meetings by poll.
Shareholders are also able to ask questions of, and express
their views in respect of, our Board, management and
auditors (including via appointed proxies) at and before
annual meetings.
We encourage shareholders to communicate with us and
our share registrar electronically, including by providing
email communication channels and online contact details
and instructions on our website.
76
Annual Report 2018 Diversity and inclusion
81% of our employees see evidence that
we are committed to being a fully inclusive
workplace for all employees.
Figure 12:
Gender by age
Our business purpose is to keep New Zealand new. This
is a purpose fundamentally about people. If we're to truly
deliver on this, we know we need the best people, in
the best environment, in which the best ideas can grow.
We value the differences our people bring to Chorus.
We believe greater diversity and inclusion within our
business will maximise our collective capability, allow
us to leverage diversity of thought, and better reflect and
understand our diverse customer base. This in turn should
lead to better decision making and higher shareholder value.
Diversity and Inclusion at Chorus is about Belonging.
Our strategy to promote Belonging is focused on building
an inclusive culture which strengthens our collective
capability. We aim to attract, identify and retain diverse
talent and leverage the diversity of our people.
Belonging is brought to life at
Chorus through four focus areas:
1
Flexible and adaptable workforce
As the world of work rapidly changes our employees
will need to continuously adapt and evolve to succeed.
In turn, we also need to be flexible in the way we ask
our people to work to get the best out of them. We’re
committed to offering flexible work options that suit
a variety of roles and personal circumstances. We’re
working on more initiatives to support this, including
trialling new workspaces, reviewing leave policies
and challenging traditional ways of working. We offer
change and resilience workshops to our employees,
with 75% of our people leader community and 50%
of our employee population participating to date.
2
Diverse leadership
Our objective is for gender and ethnic diversity in our
leadership population equal to the gender and ethnic
distribution of Chorus.
We had five male and three female directors at 30 June
2018, consistent with the prior year. Non-executive
directors were also the same at the end of FY18 with
five male and two female non-executive directors. Our
executive (officers or senior managers), comprising our
chief executive and her leadership team, had six male
and four female members as at 30 June 2018 (30 June
2017: six male, three female).
100%
80%
60%
40%
20%
0
48
67
133
172
113
132
13
56
62
132
<30
30-39
40-49
50-59
60+
Figure 13:
Gender by length of service
100%
80%
60%
40%
20%
0
79
128
114
134
62
124
33
27
33
79
50
74
<1yr
1-2yrs
3-5yrs
6-9yrs
10-19yrs
20yrs+
Figure 14:
Gender by group
100%
80%
60%
40%
20%
0
320
468
L
L
A
S
U
R
O
H
C
51
94
E
L
P
O
E
P
S
R
E
D
A
E
L
4
6
E
V
I
T
U
C
E
X
E
3
5
S
R
O
T
C
E
R
D
I
2
5
S
R
O
T
C
E
R
D
I
E
V
I
T
U
C
E
X
E
-
N
O
N
77
Annual Report 2018
78% of our employees agree we
have practices and programmes
that support them to maintain
or adopt a healthy lifestyle.
We’re committed to increasing the representation of
women and ethnic groups at leadership levels in our
organisation. We’re in the second year of our women in
leadership programme, UP, with a further fifteen senior
women leaders participating. The 2017 programme
resulted in nine of the attendees taking new roles
within our business.
We currently have two of our leaders participating
in an external Pasifika leadership programme.
All directors have completed a Team Management
Profile (TMP) and participated in the TMP workshop.
The TMP profile is used by all teams at Chorus to
understand different working styles. This enables
our teams, including the Board, to appreciate the
importance of having a team of individuals working
together who all have different experiences, views
and self-reflections.
Pay equity analysis has been completed as part of
our annual remuneration review and action taken
to address identified anomalies. Our commitment
to pay equity and addressing any gender pay inequity
is ongoing.
Wellbeing
We take a holistic approach to wellbeing, providing
education and programmes to support physical,
emotional, career and financial wellbeing. Employees
have participated in nutrition seminars and recently
completed a 10,000 steps a day challenge in teams
across the organisation.
Inclusive culture
Creating a culture where everyone feels they belong
is at the heart of our strategy. We’re working towards
Rainbow Tick accreditation to ensure our workplace
is supportive for members of the Rainbow community.
Another significant initiative was the celebration of
Pink Shirt Day, marking our commitment to a bullying,
harassment and discrimination free workplace. An
updated anti-bullying, harassment and discrimination
policy has been implemented along with training for
all people leaders to support our zero tolerance stance.
Diversity metrics and objectives
as at 30 June 2018
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 well against the policy
generally. We continue to consciously focus on this as
we support a culture of inclusion at Chorus.
3
4
Latin American
Middle Eastern
African
Other
Māori
Asian
European
Pacific Peoples
NZ European
Figure 15:
Ethnicity by group
100%
80%
60%
40%
20%
0
PEOPLE LEADERS
ALL CHORUS
78
Annual Report 2018 Average age of employees
FY17
FY18
41.8
42.3
BENCHMARK
42.00
STATISTICS NZ
Employees in 14 NZ locations
FY17
1,032
FY18
933
FY18
8.7
Average
employees
years service
Auckland
512 Employees
Hamilton
58 Employees
Wellington
215 Employees
Christchurch
118 Employees
North Island other
17 Employees
South Island other
13 Employees
79
Annual Report 2018
Remuneration
and performance
Our remuneration model
Our remuneration model is designed to enable the
achievement of our strategy, whilst ensuring that remuneration
outcomes align employee and shareholder interests.
Remuneration is governed through the Board, assisted
by our Human Resources and Compensation Committee
(HRCC). Our HRCC supports the Board by overseeing our
remuneration strategy and policy. See figure 16.
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 her executive leadership team
also have the potential to earn a Long Term Incentive (LTI).
Both STI and LTI are deemed at risk because the outcome
is determined by performance against a combination of
financial and non-financial objectives.
Fixed remuneration
Fixed remuneration (not at risk) consists of base salary and
other benefits including KiwiSaver. 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.
Short term incentive
Short term incentive (STI) payments are an at risk component,
that are set as a percentage of fixed remuneration, from 5%
to 30% 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 if payable, are
paid out at a multiplier of between 0× and 1.75× for the CEO
and her executive leadership team, and between 0× and 2.8×
for other employees.
Company performance goals are set and reviewed annually by
our Board to align with shareholder value. A greater focus on
customer experience was introduced for FY18 STI measures.
FY18 STI company goals:
• 30% based on EBITDA;
• 30% based on customer experience (keeping customers
connected and meeting customer expectations);
• 20% based on broadband connections; and
• 20% based on progress against key strategic initiatives
as assessed by our Board.
Fundamental to our STI structure is a gateway goal.
The philosophy of the gateway goal is to provide a
preliminary threshold of financial success and affordability,
before any other measures can be considered. If the
gateway goal is not achieved, no STI is payable.
Individual performance goals for all employees are tailored to
their roles, with 70% of goals based on what they achieve and
30% based on how they perform their role, including 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 (0× to 2.8× their
STI percentage) depending on the level of company and
individual performance.
Figure 16:
Our remuneration policy is designed around five guiding principles:
Fair to all — employees and shareholders,
sharing in Chorus' success.
Commitment to pay equity, alignment with our shareholders’
expectations, and we will ensure we are not overpaying or
underpaying our people through robust market analysis.
Supports a Performance focused culture.
Rewards aligned with performance.
Valued — by our people.
We have a diverse workforce and aim to provide
an appropriate suite of rewards that provide value,
now and in the future.
Simple — to understand and administer.
Simplicity promotes understanding,
clarity and perception of fairness.
Point of difference — how we know it is Chorus.
Supports our vision, mission, values,
purpose and employee value proposition.
1
2
3
4
5
80
Annual Report 2018 Long term incentives
Our LTI scheme aims to reward and retain key executives.
The LTIs are at risk payments designed to align the interests
of executives and shareholders and encourage longer term
decision making.
Our LTI is described in more detail in note 16 of the
financial statements.
Employee equity building scheme
We’ve previously had an employee equity building scheme
to encourage employees to think and act as shareholders.
The shares under the scheme are held by a trustee for a
three-year period. For more details, refer to note 16 of
the financial statements.
In FY18, the employee equity scheme was placed on hold.
The catalyst for this was the pending (and now confirmed)
tax legislation changes that could have negatively impacted
the employee equity scheme.
Chief Executive remuneration
CEO remuneration consists of fixed remuneration, STI and
LTI. In addition to participating in the Executive LTI scheme,
on her appointment the Board granted Kate McKenzie 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 and above that
CEO remuneration for FY17 and FY18 was:
rewarded by the executive LTI scheme. Our CEO continues
to have a significant portion of her remuneration linked to
performance and at risk. Total remuneration for our CEO
continues to be determined using a range of external factors,
including advice from external remuneration specialists and
is reviewed annually by our HRCC and Board.
CEO remuneration performance pay
The scenario chart below demonstrates the elements of the
CEO remuneration design in the year ended 30 June 2018.
s
d
n
a
s
u
o
h
T
$
4,000
3,000
2,000
1,000
0
13%
11%
43%
2%
16%
35%
100%
47%
33%
FIXED
ON-PLAN
MAXIMUM
Base
Annual variable
Long-term incentives
Extended long-term incentives
Kate McKenzie
Fixed remuneration
Pay for performance
Total remuneration
FY18
FY172
Salary
1,200,000
475,385
STI
1,019,475 1
370,233 3
LTI
–
–
2,219,475
845,618
1 STI for FY18 performance period (paid FY19).
2 Kate McKenzie became CEO on 20 February 2017.
3 STI for FY17 performance period (paid FY18).
Other benefits paid to Kate McKenzie:Company Kiwisaver contributions: FY18: $47,220 (FY17: $14,261)
Five year summary of CEO remuneration:
CEO
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
Kate McKenzie FY18
FY17
Mark Ratcliffe
FY18
FY17
FY16
FY15
FY14
2,219,475
845,618
–
1,981,987
2,249,276
1,877,143
1,696,507
1. Three year grant made 1 July 2015.
65%
60%
–
48%
75%
57%
40%
–
–
–
–
100%
100%
–
–
–
89%
100%
70%
69%
107%
–
–
–
–
–
FY15 – FY18 1
100%
FY15 – FY17
–
–
–
FY13 – FY15
FY12 – FY14
FY11 – FY13
81
Annual Report 2018
The table below outlines the CEO’s STI, LTI and extended LTI schemes for the performance period ending 30 June 20181:
Description
Performance measures
Percentage achieved
STI
Set at 75% of base remuneration.
Based on key financial and non-
financial performance measures.
• Company performance – see
FY18 STI Company goals table
on page 80 for weightings.
65%
• Individual performance – based
on business fundamentals (both
financial and non-financial),
connections, customer experience
and strategic initiatives.
LTI – loan to
shares scheme
Three-year grant made September
2017, equivalent to 33% of base
remuneration.
Chorus TSR performance over grant
period must exceed 10.6% on an
annualised basis, compounding.
Assessed September
2020 with possible
retesting up to
September 2021.
Extended LTI
One-time four-year grant 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 Chorus TSR performance
over grant period must exceed average
cost of equity over the period plus 1%.
Assessed February 2021,
with possible retesting
up to February 2021.
1 The STI payments for FY18 will be paid in FY19.
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
30 June
2018
NZX50
Chorus
The graph above shows Chorus’ TSR performance against the NZX50 between 30 June 2013 and 30 June 2018.
82
Annual Report 2018
Median pay gap
The median pay gap represents the number of times greater
CEO remuneration is to an employee paid at the median of
all our employees. At 30 June 2018, the CEO’s base salary at
$1,200,000 was 13.1 times that of the median employee at
$91,000 per annum.
Our CEO’s total remuneration, including STI, was 20.9 times
the total remuneration of the median employee (including STI)
at $100,068.
The current Living Wage is $20.55 per hour. We do not have
any permanent Chorus employee earning less than the
current living wage or the $20-an-hour minimum wage,
which the Government has recently signalled it plans to
adopt by 2021.
Employee remuneration range for the year ended
30 June 2018
The following table shows the number of employees and
former employees who received remuneration and other
benefits, including redundancy payments, in excess of
$100,000 during the year ended 30 June 2018.
During the year, certain employees received contributions
towards membership of the Marram Trust (a community
healthcare and holiday accommodation provider), received
contributions toward their Government Superannuation
Fund (a legacy benefit provided to a small number of
employees) and, if a member, received contributions of 3%
of gross earnings towards their KiwiSaver accounts. These
amounts are not included in these remuneration figures.
Any benefits received by employees that do not have an
attributable value are also excluded.
The remuneration paid to, and other benefits received by,
Kate McKenzie in her capacity as CEO, are detailed on pages
81 to 82, and are excluded from the following table.
Remuneration range $ (Gross)
1,070,001 – 1,080,000
840,001 – 850,000
680,001 – 690,000
660,001 – 670,000
620,001 – 630,000
600,001 – 610,000
490,001 – 500,000
390,001 – 400,000
370,001 – 380,000
360,001 – 370,000
350,001 – 360,000
340,001 – 350,000
330,001 – 340,000
310,001 – 320,000
300,001 – 310,000
290,001 – 300,000
280,001 – 290,000
270,001 – 280,000
260,001 – 270,000
250,001 – 260,000
240,001 – 250,000
230,001 – 240,000
220,001 – 230,000
210,001 – 220,000
200,001 – 210,000
190,001 – 200,000
180,001 – 190,000
170,001 – 180,000
160,001 – 170,000
150,001 – 160,000
140,001 – 150,000
130,001 – 140,000
120,001 – 130,000
110,001 – 120,000
100,001 – 110,000
Grand Total
Number of employees in the year ended
30 June 2018 (based on actual payments)
1
1
1
1
1
1
1
1
1
4
2
1
1
2
4
4
4
4
7
8
7
9
11
6
13
22
29
30
30
43
49
54
44
61
84
542
83
Annual Report 2018 Director remuneration
Fee structure for the year to 30 June 2018
Our Director fee structure for the year to 30 June 2018 is below. Total remuneration available to Directors (in their capacity as
such) in the year ended 30 June 2018 was fixed at our 2016 annual shareholders’ meeting at $1,149,500.
Annual fee structure
Board fees:
Board chair
Deputy chair
Non-executive Director
Board committee fees:
Audit and Risk Management Committee
Chair
Member
Human Resources and Compensation Committee
Chair
Member
Nominations and Corporate Governance Committee
Chair
Member
UFB Steering Committees
Member
Year ended 30 June 2018 $ Year ended 30 June 2017 $
223,650
167,750
111,850
32,000
16,000
22,470
11,500
16,720
8,880
33,450
223,650
167,750
111,850
32,000
16,000
22,470
11,500
16,720
8,880
33,450
Notes:
1 Directors ceased sitting on the UFB Steering Committees from December 2017.
2 The Board chair and deputy chair receive Board fees only. Other Directors receive committee fees in addition to their Board fees.
3 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.
4 Directors may be paid an additional daily rate of $2,400 for additional work as determined and approved by our chair and where
the payment is within the total fee pool available. No such fees were paid in the year ended 30 June 2018.
Fees paid to Directors (in their capacity as such) in the year ended 30 June 2018
Director
Total fees $
Board fees
ARMC
HRCC
NCGC UFB Steering Committees
Patrick Strange
Jon Hartley
Mark Cross
Prue Flacks
Murray Jordan
Jack Matthews
Anne Urlwin
Kate McKenzie
Keith Turner
223,650
167,750
127,850
143,200
123,350
119,160
143,850
–
55,689
Total
1,104,499
223,650
167,750
111,850
111,850
111,850
111,850
111,850
–
37,769
988,419
16,000
32,000
48,000
22,470
11,500
7,310
6,625
47,905
8,880
8,880
11,295
11,295
Notes:
1 Amounts are gross and exclude GST (where applicable).
2 Jack Matthews was appointed to our HRCC from 10 November 2017.
3 Kate McKenzie as CEO did not receive any remuneration in her capacity as a Director.
4 Keith Turner stepped down from our Board and HRCC, and the UFB Steering Committees, on 1 November 2017.
5 Directors (other than the CEO) did not receive any other benefits.
6 Directors are entitled to be reimbursed for travel and incidental expenses incurred in performance of their duties in addition to the above fees.
84
Annual Report 2018 Fee structure from 1 July 2018
Our HRCC reviews the remuneration of non-executive Directors annually based on criteria developed by that committee.
Based on that committee’s recommendation the Board has approved the following fee structure from 1 July 2018.
Total Director remuneration will remain within the limit fixed by shareholders in 2016.
Annual fee structure
Board fees:
Board chair
Deputy chair
Non-executive Director
Board committee fees:
Audit and Risk Management Committee
Chair
Member
Human Resources and Compensation Committee
Chair
Member
Nominations and Corporate Governance Committee
Chair
Member
From 1 July 2018
$
223,650
167,750
114,000
32,600
16,300
22,900
11,750
16,720
8,880
Notes:
1 The Board chair and deputy chair will receive Board fees only. Other Directors will receive committee fees in addition to their Board fees.
2 Directors (except the CEO) will not participate in a bonus or profit-sharing plan, receive compensation in share options, or have superannuation
or any other scheme entitlements or retirement benefits.
3 Directors may be paid an additional daily rate of $2,400 for additional work as determined and approved by our chair and where the payment
is within the total fee pool available.
85
Annual Report 2018 Disclosures
Group structure
Chorus Limited has two wholly owned subsidiaries:
Chorus New Zealand Limited (CNZL) and Chorus
LTI Trustee Limited (CLTL).
Chorus Limited
Chorus New Zealand Limited
Chorus LTI Trustee Limited
Chorus Limited is the entity listed on the NZX, ASX and
Luxembourg stock exchanges. It is also the borrowing entity
under the group’s main financing arrangements and the
entity which has partnered with the Crown for the UFB build.
CNZL undertakes (and is the contracting entity for) Chorus’
operating activities and is the guarantor of Chorus Limited’s
borrowing. CNZL also employees all Chorus people. CNZL
has its own constitution but its Board is the same as the
Chorus Limited Board.
CLTL was incorporated in December 2014 as trustee
for our long term incentive plan.
Disclosures in respect of CNZL and CLTL are set out
in the “Subsidiaries” section below.
Indemnities and insurance
Chorus indemnifies Directors under our Constitution
for liabilities and costs they may incur for their acts or
omissions as Directors (including costs and expenses
of defending actions for actual or alleged liability) to the
maximum extent permitted by law. We have also entered
into deeds of indemnity with each Director under which:
• Chorus indemnifies the Director for liabilities incurred
in their capacity as a Director and as officers of other
Chorus companies.
• Directors are permitted to access company records
while Directors and after they cease to hold office
(subject to certain conditions).
Deeds of indemnity have also been entered into on similar
terms with certain senior employees for 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 senior employees for liability
arising from their acts or omissions in their capacity as
Directors or employees on commercial terms. The policy
does not cover dishonest, fraudulent, malicious or wilful
acts or omissions.
Directors
Director changes during the year ended 30 June 2018
Jack Matthews was appointed as a Director from 1 July 2017.
Keith Turner stepped down as a Director at our
annual shareholders’ meeting on 1 November 2017.
86
Annual Report 2018 Director interests and trading in shares
As at 30 June 2018, Directors had a relevant interest (as defined in the Financial Markets Conduct Act 2013)
in approximately 0.035% of shares as follows:
Current Directors
Interest as at 30 June 2018
Transactions during the reporting period
Director
Shares
Interest
Number
of shares
Nature of transaction
Consideration Date
Patrick Strange 25,000 Beneficial interest
–
–
–
–
Mark Cross
12,000 Beneficial owner of ordinary
12,000
On market acquisition
$46,800
11 October 2017
shares as beneficiary of
Alpha Investment Trust;
power to exercise voting
rights and acquire/dispose
of financial products as
director of trustee
Prue Flacks
11,714
Registered holder and
254
Acquisition of shares on
$960.12
17 April 2018
beneficial owner
reinvestment of dividends
under Chorus’ Dividend
Reinvestment Plan
343
Acquisition of shares on
$1,292.15
10 October 2017
reinvestment of dividends
under Chorus’ Dividend
Reinvestment Plan
Murray Jordan 21,306 Registered holder and
462
Acquisition of shares on
$1,746.36
17 April 2018
beneficial owner of ordinary
reinvestment of dividends
shares as trustee and
under Chorus’ Dividend
beneficiary of Endeavour
Reinvestment Plan
Trust
624
Acquisition of shares on
$2,350.73
10 October 2017
reinvestment of dividends
under Chorus’ Dividend
Reinvestment Plan
Anne Urlwin
13,968 Director and shareholder of
302
Acquisition of shares on
$1,141.56
17 April 2018
8,000
On market acquisition
$31,200
8 September 2017
registered holder
reinvestment of dividends
under Chorus’ Dividend
Reinvestment Plan
410
Acquisition of shares on
$1,544.55
10 October 2017
reinvestment of dividends
under Chorus’ Dividend
Reinvestment Plan
Kate McKenzie 65,862 Beneficial interest under
65,862
Off market purchase of
$265,320
25 September 2017
Chorus’ long term incentive
plan1
shares granted under
Chorus’ long term
incentive plan
1 Shares held by trustee and vest subject to certain performance targets being met over performance period.
87
Annual Report 2018 Former Directors1
Transactions during the reporting period
Director
Number of shares Nature of transaction
Consideration Date
Keith Turner
147
Acquisition of shares on reinvestment of dividends under
$555.66
17 April 2018
Chorus’ Dividend Reinvestment Plan
198
Acquisition of shares on reinvestment of dividends under
$745.91
10 October 2017
Chorus’ Dividend Reinvestment Plan
1 Trading while a Director.
Changes in Director interests
Patrick Strange Ceased as director of New Zealand Clearing and Depository Corporation Limited
Jon Hartley
Became chair of Timberlands Limited
Ceased as director of VisionFund Myanmar Limited and Mission Foods Limited
Ceased as a member of the Ministry of Business and Innovation and Employment’s Risk Advisory Committee
Ceased as a member of Foreign Affairs and Trade International Development Commercial Advisory Panel
Ceased as deputy chair of Sovereign Assurance Company Limited
Mark Cross
Ceased as director of Aspect Productivity Technology Limited
Ceased as director of Challenge Petroleum Limited
Ceased as board member of Triathlon New Zealand Incorporated
Prue Flacks
Became chair of Queenstown Airport Corporation Limited
Ceased as consultant to Russell McVeagh
Jack Matthews Chair of MediaWorks Holdings Limited and director of MediaWorks Finance Limited, MediaWorks Investments
Limited, MediaWorks Kiwi Radio Limited, MediaWorks Radio Limited, MediaWorks TV Limited, APN Outdoor Group
Limited, Trilogy International Limited and The Network for Learning Limited
Became a director of Bravo TV New Zealand Limited and a director and shareholder of PI Meson Limited
Ceased as director of Trilogy International Limited
Anne Urlwin
Became a director of City Rail Link Limited and Tilt Renewables Limited
Ceased as chair of Naylor Love Enterprises Limited and as director of Naylor Love Construction Limited,
Naylor Love Limited, and Naylor Love Properties Limited
Kate McKenzie
Became a member of Mahuki Advisory Board
Director restrictions
No person who is an ‘associated person’ of a
telecommunications services provider in New Zealand
may be appointed or hold office as a Director. NZX has
granted a waiver to allow this restriction to be included
in our Constitution.
Securities and security holders
Ordinary shares
Chorus Limited’s shares are quoted on the NZX Main Board
and on the ASX and trade under the ‘CNU’ ticker. There were
429,641,197 ordinary shares on issue at 30 June 2018 and
31 July 2018. 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).
88
Annual Report 2018 Constitutional ownership restrictions
Ownership restrictions carried through at demerger and
incorporated into our Constitution in agreement with the
Crown require prior Crown approval for any person to:
of voting rights (in which case the voting rights vest in our
chair) 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.
• Have a relevant interest in 10% or more of our shares; or
• Other than a New Zealand national, have a relevant
interest in more than 49.9% of our shares.
We were advised:
• In December 2017 that the Crown approved certain funds
managed by L1 Capital Pty Ltd having a collective relevant
interest in up to 15% of our shares.
• In 2012 that the Crown approved AMP Capital Holdings
Limited and its related companies acquiring a relevant
interest in up to 15% of our shares.
If our Board or the Crown determines there are reasonable
grounds for believing a person has a relevant interest in our
shares in excess of the ownership restrictions, our Board
may, after following certain procedures, prohibit the exercise
Shareholder distribution as at 31 July 2018
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. ASX has also granted a waiver in respect of
the refusal to register a transfer of shares which is or
may be in breach of the ownership restrictions.
Takeovers protocol
We have established a takeovers protocol setting out
the procedure to be followed if there is a takeover offer,
including managing communications between insiders
and the bidder and engagement of an independent
adviser. The protocol includes the option of establishing
an independent takeover committee, and the likely
composition and implementation of that committee.
Holding
Number of holders
% of holders
Total number of
shares held
% of shares issued
1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
100,001 and over
Total
14,675
6,221
1,853
1,332
85
24,166
60.73%
25.74%
7.67%
5.51%
0.35%
100%
5,438,755
15,665,491
13,408,286
29,803,361
365,325,304
429,641,197
1.27%
3.65%
3.12%
6.94%
85.03%
100%
Substantial holders
We have received substantial product holder notices from shareholders as follows:
Notices received as at 30 June 2018
Notices received as at 31 July 2018
Number of
ordinary shares held
% of shares on issue
Number of
ordinary shares held
% of shares on issue
L1 Capital Pty Ltd
Allan Gray Group
Accident Compensation Corporation
63,601,466
36,839,475
21,245,803
14.80%
8.674%
5.003%
63,601,466
36,839,475
21,245,803
14.80%
8.674%
5.003%
89
Annual Report 2018 Twenty largest shareholders as at 31 July 2018
Rank
Holder name
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
New Zealand Central Securities Depository Limited
HSBC Custody Nominees (Australia) Limited
JP Morgan Nominees Australia Limited
HSBC Custody Nominees (Australia) Limited
Citicorp Nominees Pty Limited
National Nominees Limited
L1 Capital Pty Ltd
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