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Annual Report 2016

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SKY NETWORK TELEVISION LIMITED ANNUAL REPORT JUNE 2016 The way we consume entertainment continues to evolve at a rapid pace. This is an exciting new era for SKY that we look forward to taking to a new level with Vodafone NZ. NEW PLATFORMS. MORE CONTENT, MORE CHOICE. IT’S FAST FORWARD FOR SKY. SKY ANNUAL REPORT 2016 3 SKY AT A GLANCE YEAR IN REVIEW Chairman’s Letter Chief Executive’s Letter Board of Directors IN FOCUS Creating a Leading Telecommunications and Media Group We’ve got the Best Shows from the Best Studios Good Sport Full Stream Ahead COMMUNITY AND SPONSORSHIP SKY CHANNELS 2016 FINANCIALS Financial Overview Financial Trends Directors’ Responsibility Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Independent Auditors’ Report OTHER INFORMATION Corporate Governance Interests Register Company and Bondholder Information Waivers and Information Share Market and Other Information Directory 2 4 6 10 12 14 16 18 20 22 24 25 29 31 32 33 34 35 36 63 64 65 67 69 74 75 76 2 SKY ANNUAL REPORT 2016 SKY AT A GLANCE CUSTOMERS This year we have more total customers across all our products, with digital offerings FAN PASS and NEON driving the growth. 852,679 KIWIS ENJOY SKY EVERY DAY FINANCIAL PERFORMANCE Our financial performance remains strong. $928M REVENUE $325M EBITDA SOCIAL SKY’s social reach continues to grow, with over 800,000 followers across our entertainment and sports brands on the country’s most popular social media platforms. Our social content gains over 13 million impressions per month with both entertainment and sports content resonating with audiences in New Zealand and around the world. 800,000 FOLLOWERS 13M IMPRESSIONS PER MONTH INNOVATION We are constantly reviewing how we can deliver the entertainment our customers want, in the way they want. Each week hundreds of thousands of pieces of great content are downloaded via SKY GO, FAN PASS, NEON and SKY On Demand. CONTENT We have New Zealand’s largest portfolio of content with entertainment, sports, movies, news and much more. It can be viewed on a variety of platforms and devices. We’ve secured exclusive premium content and long term rights with Disney, Discovery, HBO, Universal, Warner Bros., SANZAR Rugby, NZ Cricket, Netball NZ and the NRL. TOTAL STAFF SENIOR EXECUTIVES 47% FEMALE 53% MALE 37% FEMALE 63% MALE $147M NPAT 1,254 EMPLOYEES TOTAL DIVIDEND 30 PER SHARE PEOPLE We employ over 1,200 permanent employees and work with over 500 contractors hailing from many different countries. Over 50% of us have been part of the crew for more than five years. INVESTORS We have achieved strong growth over the years and continue to deliver profits. Our dividend policy provides our investors with continuous returns. COMMUNITY We love supporting local communities and are proud to be a Five Star Partner of the Starship Foundation. We’re contributing to the rebuild of Christchurch via the Christchurch Earthquake Appeal by gifting one million dollars over a five year period. We’re supporting talented young kiwi athletes through our SKY NEXT programme, giving them funding and support. We’re also the major sponsor of the Special Christmas Children’s Parties, which our staff give their time to freely. SKY ANNUAL REPORT 2016 3 CUSTOMERS This year we have more total customers across all our products, with digital offerings FAN PASS and NEON driving the growth. 852,679 KIWIS ENJOY SKY EVERY DAY FINANCIAL PERFORMANCE Our financial performance remains strong. $928M REVENUE $325M EBITDA SOCIAL SKY’s social reach continues to grow, with over 800,000 followers across our entertainment and sports brands on the country’s most popular social media platforms. Our social content gains over 13 million impressions per month with both entertainment and sports content resonating with audiences in New Zealand and around the world. 800,000 FOLLOWERS 13M IMPRESSIONS PER MONTH PEOPLE We employ over 1,200 permanent employees and work with over 500 contractors hailing from many different countries. Over 50% of us have been part of the crew for more than five years. $147M NPAT 1,254 EMPLOYEES TOTAL STAFF SENIOR EXECUTIVES 47% FEMALE 53% MALE 37% FEMALE 63% MALE INNOVATION We are constantly reviewing how we can deliver the entertainment our customers want, in the way they want. Each week hundreds of thousands of pieces of great content are downloaded via SKY GO, FAN PASS, NEON and SKY On Demand. CONTENT We have New Zealand’s largest portfolio of content with entertainment, sports, movies, news and much more. It can be viewed on a variety of platforms and devices. We’ve secured exclusive premium content and long term rights with Disney, Discovery, HBO, Universal, Warner Bros., SANZAR Rugby, NZ Cricket, Netball NZ and the NRL. INVESTORS We have achieved strong growth over the years and continue to deliver profits. Our dividend policy provides our investors with continuous returns. TOTAL DIVIDEND 30 PER SHARE COMMUNITY We love supporting local communities and are proud to be a Five Star Partner of the Starship Foundation. We’re contributing to the rebuild of Christchurch via the Christchurch Earthquake Appeal by gifting one million dollars over a five year period. We’re supporting talented young kiwi athletes through our SKY NEXT programme, giving them funding and support. We’re also the major sponsor of the Special Christmas Children’s Parties, which our staff give their time to freely. 4 SKY ANNUAL REPORT 2016 CHAIRMAN’S LETTER SKY IS IN A STRONG POSITION TO FACE THE FUTURE. Dear shareholders The 2016 financial year has been very challenging and this can be seen in our results. SKY’s revenue is up at an all-time high of $928.2 million from $927.5 million in the previous period, however net profit after tax fell 14.4% to $147.1 million from $171.8 million reflecting higher programming costs and increased churn following the Rugby World Cup. It should also be noted that these results include $13.4 million of costs associated with progressing the acquisition of Vodafone New Zealand. While traditional SKY subscribers are declining we have seen good growth for our new online products and a pleasing overall growth in subscriber numbers from 851,561 to 852,679. SKY customers in 2016 comprised 729,058 residential and wholesale subscribers and 123,621 other subscribers including hotels, motels, and restaurants, along with NEON, FAN PASS and IGLOO. Average revenue per user (ARPU) was fairly flat dropping from $79.54 to $78.63 or down 1.2%. This can be attributed to the change of balance in SKY to new NEON and FAN PASS customers. For SKY’s board and management team there has been an intense focus this financial year on the future options for SKY to develop and grow its business, eventuating in the proposed merger with Vodafone. This transaction is one of the largest in New Zealand’s history and has required dedication from the team to secure an excellent future for SKY’s shareholders, customers and staff. Commerce Commission and Overseas Investment Office approvals have been sought, with an indicated decision time at the end of 2016. I, along with SKY’s board and staff are looking forward to working with Vodafone to deliver New Zealanders the very best in entertainment into the future. I thank our shareholders for considering the proposal and voting overwhelmingly 99% in favour of our recommendation to merge with Vodafone New Zealand. SKY is in a strong position to face the future. We have extensive content deals in place with entertainment and sports rights that you can read more about later in this report. Our digital products, fuelled with the very best content, are off to a strong start, and can only be enhanced further with Vodafone’s global telecommunications expertise. Our software rollout to all SKY boxes is complete and I am pleased to report nearly 30% of boxes are internet connected and enjoying content downloaded online. The coming year has plenty to look forward to. The Rio Olympics dominated screens during August. The America’s Cup and 2017 Lions Tour, exclusively on SKY, will grab the attention of many New Zealanders. I’m also delighted to see the very best of world golf and football firmly back on SKY screens. In August 2015 Susan Paterson ONZM joined SKY’s board. Susan has been a professional director for the past 15 years and is a Fellow of the Institute of Directors. Among other board roles she is the Chair of Airways Corporation of New Zealand Ltd, Chair of IT consultancy Theta Systems Ltd and former Deputy Chair of Abano SKY ANNUAL REPORT 2016 5 The way we consume entertainment continues to evolve at a rapid pace. This is an exciting new era for SKY that we look forward to taking to a new level with Vodafone NZ. SKY IS IN A STRONG POSITION TO FACE THE FUTURE. Healthcare Ltd. Susan brings a wealth of experience and we welcome her to SKY’s board. This year more than any other I thank John Fellet and all of SKY’s staff and contractors for their dedication and hard work. Thank you also to you, our shareholders for your continued support. I am pleased to announce a final dividend of 15 cents per share. Peter Macourt Chairman $928.2M REVENUE IS AT AN ALL TIME HIGH 2016 2015 2014 2013 2012 (NZD 000) 928,200 927,525 909,001 885,024 843,074 6 SKY ANNUAL REPORT 2016 CHIEF EXECUTIVE’S LETTER Dear shareholders This is the 15th CEO letter that has been my pleasure to send to you. My goal, as always, is to write this letter as if it was going to a shareholder whose only knowledge about the company was gleaned from this annual report. The financial information contained in this report is quite detailed but still only gives you a financial snapshot of the business. In this letter I try to keep you up to date with the financial and non-financial trends I am seeing. SKY is a multi-platform entertainment company. We deliver a wide range of content every day to our customers, including movies, television series, music, sports, documentaries, news and much more. INDUSTRY DISRUPTION The opening topic in each of my last two letters has centered on the ongoing change in the media industry. When I joined SKY in 1991 the three nationwide Free to Air (FTA) channels did not start their programming day until 3pm. Video stores renting out “videos” were everywhere and jam packed on Friday and Saturday nights. Now we have numerous nationwide and regional FTA channels which schedule content 24 hours a day, and any number of online options. I cannot remember the last time I saw a Blockbuster store or a VCR machine for sale. Back in 1991, SKY was in the right place at the right time as New Zealanders looked for more options than what normal FTAs could offer. We need to ensure that SKY continues to be in the right place at the right time. Two years ago if you asked me how SKY was doing I would have said we have the right content mix for New Zealand and the best delivery platform for the majority of New Zealand. My biggest concerns would have been the new business models that the roll out of the Ultra-Fast Broadband (UFB) would bring. In fact with 4G we started seeing a younger generation consuming more video on their mobile devices and telecommunications companies entering the content game. These firms were offering “triple play options” of voice, internet and video content. And more worrisome, telecommunication firms were acquiring content and giving it away to drive data usage of their broadband customers. PENDING MERGER After much debate at board level we determined the best option for SKY’s future was a merger with Vodafone New Zealand. I am pleased many of you felt the same way with 99% of voting shareholders agreeing to the decision. The shareholders agreed to increase SKY’s outstanding shares from 397 million to 798 million and using these additional shares as well as cash to buy Vodafone New Zealand from Vodafone Group Plc. The result will have Vodafone Group Plc being a 51% owner of the merged companies of SKY and Vodafone New Zealand. There are still two hurdles to clear. We need to get clearance from the Commerce Commission and the Overseas Investment Office, a date for a Commerce Commission decision has been set for 11 November this year. I think it is our best option. As I will discuss later, in the last few years the roll out of UFB and changing demographics have generated the launch of numerous new business models. These changes have challenged all incumbent media players both in New Zealand and the rest of the world. This merger will give SKY ANNUAL REPORT 2016 7 “ The SKY and Vodafone merger will give us a pathway to deliver content to the next generation of customers.” WE NEED TO ENSURE THAT SKY CONTINUES TO BE IN THE RIGHT PLACE AT THE RIGHT TIME. us a pathway to deliver content to the next generation of customers. NEW TRENDS A Macquarie Report issued in 2015 said that in 2004 advertising on the internet accounted for less than 1% of total advertising revenue, but by 2014 the figure had increased to 24.7%. While it has impacted television advertising revenue, most of the revenue has been diverted from newspapers who have seen their share of revenue drop from 38.1% of total advertising spend in New Zealand to 20.3%, a significant decrease. In that same report it said that data used by fixed-line broadband subscribers rose from 10GBs in 2011 to 32GBs a month in 2014. Mobile phone usage, which I think is the next frontier in video consumption, has seen data usage double from the previous year. In another report issued by a firm called NPD in March 2016, it was claimed that 81% of all US smartphone users now stream video on their devices. This usage was being driven primarily by users under the age of 25. This age group spends twice as much time watching video content on YouTube and Netflix apps compared to users over the age of 25. While the majority of video streaming occurs over the Wi-Fi network, smartphones users now rely on mobile data more than ever. According to the “NPD Smartmeter”, an opt-in metering application that tracks live smartphone and tablet usage behavior, the average US smartphone user consumes close to 3GBs of mobile data per month, with video streaming services driving data consumption. NEW BUSINESS MODELS We have successfully launched both NEON, a general entertainment Subscription Video on Demand Service (SVOD) and FAN PASS which allows an individual to order SKY Sport Channels 1 through 4 for a day, week or month. These are considered OTT (Over the Top) services which use the internet for delivery. The biggest concern any traditional pay television company has in launching these OTT services is ensuring that they expand your subscriber base as opposed to cannibalising it. And to this degree we have been successful. As of 30 June 2016 we had 852,679 subscribers between our traditional subscribers and new OTT customers, an increase on the 2014/2015 financial year. Each month we look at all new internet based customers and so far we are seeing less than 3% of them were traditional SKY subscribers in the previous three months. It is important to note that at this stage these new internet based services are not as shareholder friendly as our traditional core satellite subscribers. Keep in mind when we first went from SKY’s original UHF based three channel offering, to the first of our satellite offering, our financials were negative on each conversion for the first few years. Likewise the same financial pain was felt when the original satellite customers migrated to the first of the MY SKY decoders and again later on when they upgraded to high definition. That said, the new internet based customers typically don’t require much in the way of capital expenditure. The subscriber typically provides their 8 SKY ANNUAL REPORT 2016 WE HAVE INTELLECTUAL PROPERTY OF YEARS OF EXPERIENCE THAT TELLS US EXACTLY WHAT EVERY PIECE OF CONTENT IS WORTH TO NEW ZEALANDERS. own decoder in the form of a computer, Smart TV or smartphone. The subscriber does a self-install connecting to the available Wi-Fi as opposed to SKY rolling out a truck and installing. There is also very limited customer interaction with customer service representatives. And finally these internet offerings can ramp up much faster than we could in the traditional business because of the need we have for lead time to acquire vehicles, contractors and train technicians. On the other hand internet based customers have no problems in disconnecting one week and re-subscribing a few weeks later. With multiple offerings in the market they will go and sample all of them one at a time selecting and watching their programming jewels before moving on to the next SVOD service. I think the biggest problem is that these services tend to be priced too low to be commercially viable. A good example is Netflix, the largest SVOD company in the world with over 80 million subscribers. In its latest quarterly results they reported US $2,105,204,000 in revenues and US $40,755,000 in profits or a 1.9% profit margin. They are the most profitable and largest SVOD service in the world with a profit significantly less than ours. Financial Statement COMPARISONS In comparing this year’s financial statements to last year there are a couple things you should know. The first is that in preparation for the Vodafone New Zealand acquisition we performed a large amount of due diligence. This involved hiring the best experts we could and contracting Citibank who acted as our advisor. The due diligence cost came to about $13 million. This figure is a one off expense and there was no similar expenditure in last year’s account. The other big jump in costs for the year ending 30 June 2016 was in programming expenditures. In a lot of industries competition normally results in a price war. In the content industry it becomes an arms race. Content deals that we have signed over the last three years are now being recognised in the year ending 30 June 2016 and 30 June 2017. CONTENT COSTS At SKY we know that we do our customers no favour by paying whatever it takes to win every bid. We walk that fine line between trying to retain or obtain all the content our customers want yet acquiring it at a price they will accept. One of the two greatest strengths we have is that we have built the best platform to amortise content in New Zealand (and by “built” I mean digesting large financial losses for a decade before we could get to a critical size). Other companies can and have outbid us for content but we can break even at a higher price than anyone else. In these periods one cannot take the stand to win every content fight at all costs. The second advantage is that we have intellectual property of years of experience that tells us exactly what every piece of content is worth to New Zealanders. But this does not mean we win every time. Over the years there have been periods of a surge in innovation where new entrants entered the field typically around a technical advancement. In the 1990s two telecommunication companies (Telecom and Saturn) both started laying cable for broadcasting television and started acquiring content at prices we were not prepared to match. While the prices seemed too high we spent far more time studying their business model to see if we should transition our UHF system to cable. We instead went with a satellite delivery model where we could cover all of New Zealand. Around 2000, Telecom’s TIVO (a digital TV recorder service) launched and started outbidding us for pay-per-view rights. We did not see a business model that had limited content and required an upfront $500 investment by customers making sense for a large segment of the population. After the TIVO model collapsed, rights costs returned to normal. A few years later Freeview was announced promising many more FTA channels. Existing FTAs, including Prime, were promised additional bandwidth for new FTA channels. All the other networks took advantage of the grant. We felt that tripling the number of FTAs would not triple the number of viewers. As a result content costs initially went up, while viewers were spread out across many more options. Over the next few years the existing FTAs converted their new channels into Plus 1s (a second channel that is just a delayed channel) thus giving one the ability to earn two revenue streams from the same content. Content costs soon reduced. In the last three years there has been a resurgence in content costs. It is somewhat ironic. There has never been more television content. This year the industry is on track to produce a staggering 425 original scripted series in English up from a record output a few years ago of 371. That doesn’t factor in the additional reality shows, sports, movies or children’s programmes. So we have more programmes than ever before, costing more than ever before, on more platforms than ever before, spread over a similar population size during the same size day. Even in sport, a field of endeavour that you think is impervious to expansion, entrepreneurs are inventing or “recreating” new sports. A good example is darts. It was once only seen in pubs. Now it is the highest rated sports event on our platform over the Christmas holidays. With the oversupply of content and a deflationary economic environment one would expect the price of content to hit an all-time low. Sadly that has not been the case. SKY ANNUAL REPORT 2016 9 ADVERTISING REVENUES Our Advertising Sales Department continues to defy industry results. Selling television air time has never been more of a challenge. In seven of the last nine quarters television advertising has declined year on year. In the two improved quarters revenue increases were driven by the success SKY had in selling advertising for the 2015 Rugby and Cricket World Cups. I believe there are two reasons for this decline. As mentioned earlier the consumer has more options to view content than ever before and it is growing. This makes it particularly hard on large linear channels who currently dominate viewing ratings. When I arrived in New Zealand in 1995 the three FTA channels combined had 95% of the ratings in the country. Now you would have to combine the top 100 TV channels to get to 95%. The second biggest impact is caused by video on demand. Be it SVOD competitors, social media platforms like YouTube or Facebook or existing linear channels offering catch-up, the “appointment viewing” concept that built up the strength of linear channels has now truly been broken. We have exciting times ahead – we look forward to bringing New Zealanders more great content, more great viewing platforms and continuing support of grassroots sport in New Zealand. Finally don’t forget to attend the AGM which will take place at the Pullman Hotel Auckland (Regatta Room D), Corner Princes Street and Waterloo Quadrant, Auckland, on 20 October 2016, commencing at 2.00pm. John Fellet Chief Executive Officer ONCE AGAIN BLAME TECHNICAL INNOVATION The roll out of the UFB has been another technical innovation that allowed new business models to launch. Some of these new competitors are not “burdened with our knowledge” of what the content deals are worth. They get excited about creating new business models to deliver content and then they have to go out and buy content to test their model. UFB allowed companies like Coliseum and SVOD companies to launch three years ago. Over the following three years we lost the English Premier League, The Professional Golfers’ Association, The European Golfers’ Association, The Ladies Professional Golfers’ Association and other European Rugby competitions. Lightbox, Quickflix and Netflix all launched and started hoovering up content on the entertainment side. Once again pundits predicted the demise of SKY. The content market had become irrational. We can take a stand not to ever be outbid for content rights again. While that is a staunch position, we run the risk of not taking a back step on content at the expense of a financially sound future. We can take a stand and refuse to pay anything more than what we know the content is worth but then we run the risk of being a principled company, but not necessarily a financially strong one. Instead we took the middle road. We took a deep breath, analysed the competing models, revalued the content and determined what we could lose and what we needed to hold on to. In that transition, as well as a couple of others before, the key step we took was to secure the most important content. The content rule applies now as well. We have secured SANZAR Rugby, Cricket, the NRL and Netball. In addition, we locked down the FIFA World Cups until 2022 and the Olympic Games through to 2024. The gold standard with premium entertainment is HBO, which provides SKY and Prime with such shows as Game of Thrones and True Detective. If there was one studio you would not want to lose to a competitor during a difficult time, it would be Disney. In addition to their Star Wars Franchise and great movies in general, they also own the Marvel stable which holds the record of winning 12 straight opening box office weekends in a row. For our linear channels we have protected Discovery, Viacom and Disney. This cornerstone content along with another 400 contracts improves our navigation through the siege. These insurance policies came at a cost. In securing important movies, sports, television series and channels we have seen our content costs go up by the largest dollar amount in our history. Our biggest agreement we have is the SANZAR rugby contract. This five year deal started in January 2016. IMPORTANCE OF SKY TO NEW ZEALAND SPORT These insurance policies also come with another important benefit. By securing the SANZAR rugby contract, the NRL, cricket and netball contracts, we have continued our long running support of grassroots sport in New Zealand. In fact, over the last decade, SKY has spent over one billion dollars on sports rights and sports production. New Zealand rugby, New Zealand netball, New Zealand cricket, New Zealand rugby league – these competitions and sporting bodies have all benefitted from the immense financial contribution made by SKY. CHURN You will note our churn was up for the year. It was 17.5% vs last year’s 14.5%. While I am always disappointed when churn goes up this has been the hardest year we have ever encountered. We had more competitors launch against us than all the other years combined. We also sadly scored an “own goal”. In late 2015 we launched new software to our MY SKY boxes that greatly enhanced viewing options by allowing our customers to download additional content on demand via the internet. While this improvement was much beloved by the majority of customers (we now have over a million downloads a month), a sizeable number of customers had trouble reading the new font that came with the new software. The font was improved but not before we broke the trust of some subscribers. 10 SKY ANNUAL REPORT 2016 BOARD OF DIRECTORS PETER MACOURT CHAIRMAN JOHN FELLET DIRECTOR AND CEO JOHN WALLER DIRECTOR Mr Fellet joined SKY as chief operating officer in 1991. He was appointed as chief executive in January 2001 and as a director of SKY in April 2001. Mr Fellet holds a BA degree in Accounting from Arizona State University, United States and has over 36 years’ experience in the pay television industry, including ten years’ experience with Telecommunications Inc. in the United States. Mr Macourt was appointed as chairman of the board of SKY in August 2002. He is a director of Prime Media Limited and Virtus Health Limited, and a former director and chief operating officer of News Limited based in Sydney, Australia. Previously Mr Macourt has also served as a director of Premier Media, Foxtel, Independent Newspapers Limited and a number of subsidiaries and associated companies of the News Corporation Limited. He holds a degree in commerce from the University of New South Wales, is a member of the Australian Institute of Chartered Accountants and the Australian Institute of Company Directors. Mr Macourt is chairman of SKY’s Nomination and Remuneration Committee and Related Parties Committee. Mr Waller was appointed a director of SKY in April 2009. He was a partner at PricewaterhouseCoopers for over 20 years, was a member of their board and led their Advisory practice. He is a director of Donaghys Limited, Property for Industry Limited, GS Group Services, Global Motors NZ and various other companies. On 31 January 2015, Mr Waller retired as Chairman of the Eden Park Trust Board. On 31 July 2015, he retired as Chairman of Bank of New Zealand and as a director of National Australia Bank Limited, Bank of New Zealand, BNZ Investments and National Equities Limited. He has also announced his retirement as a director of Fonterra Co-operative Group Limited, effective 31 August 2016. Mr Waller is Chairman of SKY’s Audit and Risk Committee and a member of the Nomination and Remuneration Committee. SKY ANNUAL REPORT 2016 11 DEREK HANDLEY DIRECTOR GERALDINE MCBRIDE DIRECTOR SUSAN PATERSON DIRECTOR Ms McBride was appointed to the board in September 2013. She is a BSc Zoology major from Victoria University, served as president of SAP North America, president of SAP Asia Pacific Japan and global vice president of Dell Services. Ms McBride is a director of Fisher and Paykel Healthcare Corporation Limited and National Australia Bank Limited and is the chief executive and founder of MyWave Holdings, a leading edge consumer experience and enterprise relationship technology company. Mr Handley was appointed to the board in September 2013. Mr Handley is an entrepreneur who recently created the Aera Foundation, a venture studio advancing new models that fuse social and financial goals. Before that he spent two years helping Sir Richard Branson set up the B Team, a global non-profit leadership collective. In 2001 at the age of 23, he co-founded The Hyperfactory, one of the first agencies in the world to recognise the power of mobile devices for connecting consumers, brands and mass media (acquired by NYSE-listed Meredith Corporation). Mr Handley has attended Massey University, MIT Sloan School of Management, Singularity University and was named a Distinguished Alumni of Victoria University. Ms Paterson began her career as a pharmacist and later completed an MBA at London Business School, leading to a career in management and strategy consulting in New Zealand, Europe and the United States of America. She is now a professional director and a Chartered Fellow of the Institute of Directors. Ms Paterson is Chair of Airways and Theta, and a director of Goodman NZ, Arvida Group and Les Mills NZ. She is also a Member of the Electricity Authority, Chairman of Home of Cycling (Avantidrome), and past director or Chair of a number of commercial infrastructure and growth companies. In 2015 Ms Paterson was made an Officer of the New Zealand Order of Merit for her services to corporate governance. 12 SKY ANNUAL REPORT 2016 CREATING A LEADING TELECOMMUNICATIONS AND MEDIA GROUP SUMMARY OF THE DEAL SKY will acquire 100% of shares in Vodafone NZ and will pay Vodafone Group Plc $3.44 billion, consisting of $1.25 billion in cash and $2.19 billion satisfied by issuing new shares to Vodafone Group Plc, equivalent to 51% of the total number of shares that will be on issue following completion. With the full support of SKY’s board, shareholders voted overwhelmingly in support of the proposed merger with 99% in favour. NEXT STEPS Commerce Commission and Overseas Investment Office approvals have been sought. Decisions are expected at the end of 2016. 100%SKY’S SHARES IN VODAFONE NZ 3.44B TOTAL VALUE OF DEAL 51%SHARES ISSUED ON COMPLETION SKY ANNUAL REPORT 2016 13 99% OF SHAREHOLDER VOTES IN FAVOUR OF THE MERGER WITH VODAFONE “ We knew it was the right way to go but it is still particularly gratifying to get such a resounding yes from the company’s owners.” John Fellet TRANSACTION HIGHLIGHTS anD BeneFitS • Creating a market leader in New Zealand • Using the enhanced scale and expertise • Improving the customer experience • Enhancing the ability to create attractive packages • Driving accelerated data growth • Leveraging Vodafone Group’s global capabilities • Realising cost, capital expenditure and revenue synergies • Significant opportunities to generate additional revenue synergies • Stronger cash flow generation 14 SKY ANNUAL REPORT 2016 WE’VE GOT THE BEST SHOWS FROM THE BEST STUDIOS SKY has long been proud to bring New Zealanders the best in premium entertainment content from the best international studios. Over the last 12 months we have renewed and greatly expanded our core content deals, providing greater access for our viewers to the must-see shows and movies they want, however and whenever they choose to see them. Our HBO and CBS deals continue to provide SKY viewers the best in quality drama, while SKY is also renowned for its breadth and depth of its feature film deals. Together they add up to the most exciting television viewing in New Zealand from the world’s premier studios. HBO provides outstanding drama for SoHo and NEON, with shows like Game Of Thrones, The Night Of and Westworld. Meanwhile, SKY’s deal with CBS and Showtime makes titles like Ray Donovan, Billions, and the much anticipated return of Twin Peaks, all available exclusive to SKY, SKY On Demand, and also to NEON customers. We’ve targeted the world’s best independent international drama – American Crime Story: The People vs O.J. Simpson, with its outstanding 22 Emmy nominations mesmerised SoHo viewers this year, and titles such as Fear The Walking Dead, 11.22.63, Shannara, Roadies, Kingdom and Into The Badlands are all available exclusively on SKY and NEON. Closer to home, SKY Movies and Prime viewers can look forward to exciting New Zealand releases like the upcoming reinvigorated Goodbye Pork Pie and Chasing Great: The Richie McCaw Story. So too SKY Movies and NEON will be home to Disney’s new “homegrown instant classic” Moana, directed by Taika Waititi with voice talent from Jemaine Clement and Temuera Morrison. Many major movie studio deals have been renewed by SKY during the 2016 financial year including Universal, Warner Bros., MGM, and Twentieth Century Fox. These studios join Disney, the home of Marvel and Star Wars, in providing an incredible and exclusive range of new feature titles every month for SKY Movies viewers, now with enhanced On Demand rights, and we have exclusive NEON rights to titles from all these studios. Showtime ©2016 “Ray Donovan” Showtime Networks Inc. All rights reserved. RAY DONOVAN is available on SoHo and NEON.  SKY ANNUAL REPORT 2016 15 They don’t come better than this WARNER BROS. 20TH CENTURY FOX UNIVERSAL MGM BEST FROM THE BEST In the last 12 months, SKY has renewed and expanded its core content deals with the world’s best movie studios. To supplement these blockbuster studio releases, the new deal we’ve signed with E1 Entertainment gives new access to quality drama and independent feature films that will intrigue viewers and enhance SKY Movies’ already rich offering, again with versatile On Demand viewing options for Movies subscribers. POP UP CHANNELS Innovation has been flourishing at SKY as we look for fresh ways to expand and curate content. Our Pop up channels, like Game Of Thrones for SoHo subscribers, Star Wars and the upcoming Harry Potter Pop up for SKY Movies viewers are proving very popular. We’ve also shown Pop up channels for The Zone, and every school holidays Disney Family Movies has a well viewed Pop up. SKY Basic customers enjoyed an Attenborough Pop up which attracted 900,000 viewer hours in just nine days! PRIME Prime continues to stake out its territory as the New Zealand home for quality, well-researched documentaries with its major new documentary series Uncharted. This six-part series, an international collaboration with Australia and the UK and supported by New Zealand On Air, sees actor Sam Neill retrace Captain Cook’s three Pacific voyages. In addition, Prime has commissioned Loggers, a new 10-part series that follows the working lives of a Māori whānau in the high stakes forestry business and the dangers they face every day. A one-hour documentary called All In The Mind will also make us all wiser by explaining the structural differences between male and female brains. Finally, Prime has had funding approved for the return series of this year’s enormously popular local documentaries, Forensics and Decades In Colour, as well as another series of University Challenge. 16 SKY ANNUAL REPORT 2016 GOOD SPORT BIG EVENTS ON SKY RWC 2015 – As the exclusive rights holder the 2015 Rugby World Cup proved very successful with New Zealanders watching the event and, of course, the incredible success of our All Blacks. Rio Olympics – This year all eyes turned to SKY’s exclusive coverage of the Rio Olympic Games. That included access to 12 channels of gripping Olympic coverage, a new SKY Olympics app, plus up to 15 hours a day free to air on Prime. What’s more, SKY has winter and summer Olympic rights though to 2024. ALL THE BEST SPORT EXCLUSIVELY ON SKY Providing the backbone for SKY Sport are all the top sports played and watched in New Zealand; Rugby, Cricket, Netball and Rugby League. SKY has worked hard over many years to secure rights to deliver a world class viewing experience of these popular codes. We have long term deals and relationships with each and we look forward again to supporting these organisations and players while delivering great drama to the screens of our SKY Sport and FAN PASS viewers – week in, week out. America’s Cup – For the first time, the exclusive home of the America’s Cup will be SKY. During 2016 and 2017 we’ll be following Emirates Team New Zealand through the qualifying events towards the finals in Bermuda in June 2017. British and Irish Lions – Perhaps the most anticipated event of all is the British and Irish Lion’s Tour of New Zealand in June and July 2017. More than 20,000 fans are expected to fly into New Zealand for this event and we know many screens will be tuned into this action across the country.  SKY ANNUAL REPORT 2016 17 THE BEST IN INTERNATIONAL EVENTS AND LOCAL SPORTS OUR SPORTS TROPHY CABINET IS FULL PREMIUM INTERNATIONAL FOOTBALL ON BEIN SPORTS For football fans the viewing could not be better than on SKY. beIN SPORTS 1 is a 24/7 dedicated Premier League channel broadcasting live football games, highlights and studio shows, and is available in HD for customers with an HD ticket. beIN SPORTS 2 shows the best of live European football from the Spanish La Liga, English Football League Cup and Sky Bet Championship. Further live games from the UEFA Champions League and UEFA Europa League complement SKY Sport’s existing coverage of these competitions. For extended football coverage, subscribers to the beIN SPORTS tier also have access to up to three Pop up channels. To top that, SKY also has rights to the FIFA World Cups through to 2022. WELCOME BACK EPL AND WELCOME BACK GOLF New service providers will continue to come and go but SKY is here for the long haul. After a short hiatus we are excited to have the English Premier League, The Professional Golfers’ Association, The European Golfers’ Association and The Ladies Professional Golfers’ Association firmly back with SKY. 18 SKY ANNUAL REPORT 2016 FULL STREAM AHEAD SKY GO SKY GO continues to grow and the iOS and Android apps have been downloaded 420,000 times. It’s the perfect supplement to a SKY subscription with customers flocking to the service when they can’t get to their big screen at home. We’ve invested a lot of effort into improving the reliability of New Zealand’s largest service for live online subscription content. Customers tell us SKY GO is one of the best things they love about SKY. ON DEMAND With our major software upgrade complete and a brand new window into the world of SKY in every home, we are delighted to see nearly 30% of homes have already connected their boxes to the internet to access SKY On Demand. Each week more than 100,000 titles are downloaded and that number is set to keep climbing. SKY On Demand gives SKY customers so much more value and convenience. With around 5,000 TV, movie and sports titles available at any time, we love to see what our customers are enjoying – right now it’s hard to knock Game of Thrones off the top perch, but plenty of great movies titles are vying for that position. 4M DOWNLOADS OF SKY ON DEMAND TITLES SINCE LAUNCH SKY ANNUAL REPORT 2016 19 SKY GO Wherever and whenever you want to watch. NEON NEON has had a very successful year with strong growth, surpassing one million monthly content requests earlier in 2016. The NEON app has been downloaded 100,000 times across Samsung Smart TV’s, iOS, Android and Xbox. Ensuring NEON is available on more devices has been a tremendous achievement in the past year. Look out for more to come. About half of NEON’s viewership is on a desktop computer and half on devices. Unsurprisingly, Game of Thrones, again, sits at the top of the most downloaded list. And SKY’s NEON is the only subscription video on demand service to offer this critically acclaimed show. FAN PASS It has been a winning year for FAN PASS with New Zealanders appreciating the flexible and quality service. The ability to enjoy SKY’s sports channels and very recently the introduction of pay-per-view events with no long term contact, has proven a winning formula for sports fans without SKY. The app, available for Samsung Smart TVs, iOS, Android and Apple TV has been downloaded more than 60,000 times and we see strong growth ahead. All Black matches are the most popular viewing on FAN PASS and we expect they will remain so. 20 SKY ANNUAL REPORT 2016 COMMUNITY AND SPONSORSHIP THE STARSHIP FOUNDATION For 15 years SKY has been right behind the Starship Foundation as it raises much needed funds for our National Children’s Hospital. We are proud to be a Starship Foundation Five Star Partner. SKY AMBASSADOR: SHAUN JOHNSON SKY Ambassador Shaun Johnson has come with us to schools across New Zealand to meet, inspire and train some of his biggest fans. In the past year, SKY became the key sponsor of Starship’s National Air Ambulance, a vital service to which we have dedicated all our fundraising. We launched Starship Regular Giving through our staff payroll and SKY Department Fundraising which proves everyone at SKY is passionate about Starship. Furthermore, thousands of customers got behind the cause by purchasing some of our most popular channels during our $5 channel initiative, with every dollar raised going to Starship. Beyond providing valuable funds, we’ve loved putting a smile on Starship children’s faces wherever possible with SKY in every room, regular Starship movie nights and visits from famous TV characters like Paw Patrol and athletes like Shaun Johnson and our SKY NEXT team. WE’RE GETTING CHRISTCHURCH SCHOOL KIDS BACK ON THE TURF This year SKY gifted large artificial turfs to eleven Christchurch primary schools who lost or incurred significant damage to their playing fields during the earthquakes. The gift, worth $200,000, is part of our $1 million five-year commitment to help repair Christchurch. We’ve focused our efforts on sport and recreational facilities because these are fundamental to the health and wellbeing of local communities, particularly their young people. SKY SPECIAL CHILDREN’S CHRISTMAS PARTIES Hundreds of SKY crew from all across New Zealand volunteered again this year to create an incredible day filled with bouncy castles, life size television characters, games, activities, rides and prizes for 10,000 children at SKY Special Children’s Parties in Hawkes Bay, Taranaki, Christchurch, Wellington, Waikato and Auckland. SKY has supported Special Children’s Christmas Parties for 12 years, and we are really proud to be naming rights sponsor and have all our staff get behind these special kids.  SKY ANNUAL REPORT 2016 21 SAM WEBSTER Track Cycling ETHAN MITCHELL Track Cycling EMMA TWIGG Rowing ANGIE PETTY Track Running KANE RUSSELL Hockey LUUKA JONES Canoe Slalom JACKO GILL Shot Put JASMINE PEREIRA Football TYLA NATHAN-WONG Rugby Sevens SUPPORTING TALENTED KIWI ATHLETES SKY NEXT supports young, talented Kiwi athletes on their epic journey to succeed. We are really proud of our team members who represented New Zealand at the Rio 2016 Olympics. 22 SKY ANNUAL REPORT 2016 SKY CHANNELS As at 30 June 2016 TYPES OF CHANNELS KEY Basic Channels Sport Channels Specialist Channels 47 12 9 Movie Channels Free-to-air Channels Radio Channels 10 12 8 PPV Event Channels PPV Movie Channels PPV Adult Channels Audio Music Channels 14 Total 1 9 3 125 Created and produced by SKY 47 BASIC CHANNELS R When available (055) 12 SPORT CHANNELS When available (056) When available (057) When available (058) SKY ANNUAL REPORT 2016 23 9 SPECIALIST CHANNELS 10 MOVIE CHANNELS When available During school holidays 12 FREE-TO-AIR CHANNELS 8 RADIO CHANNELS OTHER 14 Audio Music Channels 1 PPV Event Channel SKY GO 9 PPV Movie Channels 3 PPV Adult Channels 2016 FinancialS FINANCIAL OVERVIEW FINANCIAL TRENDS DIRECTORS’ RESPONSIBILITY STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS’ REPORT 25 29 31 32 33 34 35 36 63 Financial OVeRVieW SKY ANNUAL REPORT 2016 25 SUMMARY The net profit after tax has decreased to $147.1 million for the year ended 30 June 2016, a decrease of 14.4% on the previous year’s net profit after tax of $171.8 million. Earnings before interest, tax, depreciation and amortisation (“EBITDA”) decreased by 14.3% to $325.3 million. Operating expenses include costs relating to the acquisition of Vodafone NZ of $13.4 million. Adjusted EBIDTA would be $338.7 million, a decrease of 10.8% from the prior year. The results are summarised as follows: For the years ended 30 June IN NZD MILLIONS Financial performance data Total revenue Total operating expenses EBITDA Less Depreciation, amortisation and impairment Net finance costs Net profit before income tax Income tax expense Profit after tax 16%PROFIT 2016 2015 % inc/(dec) 928.2 602.9 325.3 100.2 20.1 205.0 57.9 147.1 927.5 547.7 379.8 119.2 21.7 238.9 67.1 171.8 0.1 10.1 (14.3) (15.9) (7.4) (14.2) (13.7) (14.4) TAX 6%INCOME 2%FINANCIAL EXPENSES 11%DEPRECIATION, AMORTISATION AND IMPAIRMENT INCOME STATEMENT CATEGORIES AS A % OF REVENUE 65%OPERATING EXPENSES 26 SKY ANNUAL REPORT 2016 Financial OVeRVieW (CONTINUED) REVENUE ANALYSIS SKY’s total revenue increased to $928.2 million, as follows: For the years ended 30 June IN NZD MILLIONS Residential – Digital Residential – MYSKY Other subscription revenue Total subscription revenue Advertising Installation and other revenue Total other revenue Total revenue 2016 160.3 592.8 79.3 832.4 74.0 21.8 95.8 928.2 2015 192.5 567.5 71.2 831.2 69.5 26.8 96.3 927.5 % inc/(dec) (16.7) 4.5 11.4 0.1 6.5 (18.7) (0.5) 0.1 Residential subscription revenue decreased marginally by 0.9% to $753.1 million due to fewer satellite customers. The decrease is mainly due to a lower uptake of premium services (Sports and Movies) and lower pay-per-view buys. Other subscription revenue includes commercial revenue earned from SKY subscriptions at hotels, motels, restaurants and bars throughout New Zealand, revenue derived from transmission of programming for third parties and revenue from other subscription services such as NEON, FAN PASS and IGLOO. This revenue increased 11.4% to $79.3 million in 2016. Advertising sales revenue increased by 6.5% to $74.0 million in 2016. Pay television advertising revenues increased from $45.2 million in 2015 to $49.3 million in 2016, an increase of 9.1% whilst Prime revenues increased from $24.3 million in 2015 to $24.7 million in 2016, partly due to additional revenue from the Rugby World Cup earned in the current year. Installation and other revenues decreased by 18.7% to $21.8 million in 2016. This is mainly the result of low installation revenue due to customers moving to lower price services and lower outside broadcasting revenue. 17%RESIDENTIAL DIGITAL 2%INSTALLATION AND OTHER REVENUE 8%ADVERTISING 9%OTHER SUBSCRIPTION REVENUE REVENUE SPLIT 64%RESIDENTIAL MYSKY SKY ANNUAL REPORT 2016 27 EXPENSE ANALYSIS A breakdown of SKY’s operating expenses for 2016 and 2015 is provided below: IN NZD MILLIONS Programming Subscriber related costs Broadcasting and infrastructure Other costs Depreciation, amortisation and impairment Total operating expenses 2016 331.1 106.3 96.0 69.5 100.2 703.1 2016 % of revenue 35.7 11.5 10.3 7.5 10.8 75.8 2015 296.6 107.1 91.2 52.9 119.2 667.0 2015 % of revenue % inc/(dec) 32.0 11.5 9.8 5.7 12.9 71.9 11.6 (0.7) 5.4 31.4 (15.9) 5.4 Programming costs comprise both the costs of purchasing programme rights and also programme operating costs. Programme rights costs include the costs of sports rights, pass-through channel rights (e.g. Disney Channel, Living Channel, etc.), movies (including PPV) and music rights. Programme operating costs include the costs of producing live sports events, satellite and fibre linking costs and in-house studio produced shows. SKY’s programming expenses have increased to 35.7% of revenue in 2016, from 32.0% in 2015. The higher programming costs in 2016 included the rights costs of the Rugby World Cup as well as the new SANZAAR contract from 1 January 2016, costs relating to On Demand content and new channels such as “Turbo and TLC”. A significant proportion of SKY’s programme rights costs are in Australian dollars (AUD) dollars and United States dollars (USD). This means the NZ dollar cost included in SKY’s accounts is affected by the strength of the NZ dollar during a particular year and by SKY’s foreign exchange hedging policy. The board’s policy is to hedge a minimum of 85% of the forecast exposures over 0 to 12 months, up to 50% of variable exposures over 13 to 24 months and up to 30% over 25 to 36 months. Fixed price contracts denominated in foreign currencies are fully hedged at the time of placing the order. Subscriber related costs include the costs of servicing and monitoring equipment installed at subscribers’ homes, indirect installation costs, the costs of SKY’s customer service department, sales and marketing costs and general administrative costs associated with SKY’s ten provincial offices. In 2016, subscriber related costs decreased marginally to $106.3 million. 10%OTHER COSTS 14%DEPRECIATION, AMORTISATION AND IMPAIRMENT 14%BROADCASTING AND INFRASTRUCTURE EXPENSES SPLIT 47%PROGRAMMING 15%SUBSCRIBER RELATED COSTS 28 SKY ANNUAL REPORT 2016 Financial OVeRVieW (CONTINUED) EXPENSE ANALYSIS (CONTINUED) Broadcasting and infrastructure costs consist of transmission and linking costs for transmitting SKY, Prime and IGLOO’s television signals from its studios in Auckland to other locations in New Zealand and the costs of operating SKY’s television stations at Mt Wellington and Albany. The costs of leasing seven transponders on the Optus D1 satellite are included, as is the cost of high definition television broadcasting. Broadcasting and infrastructure costs have increased by 5.4% to $96.0 million or 10.3% of revenue compared to 9.8% in the prior year due to increased internet delivery costs for on demand content and OTT products (NEON, FANPASS). Other costs include advertising costs, the overhead costs relating to corporate management and the affiliated businesses such as IGLOO and FATSO. These costs have increased by 31.4% to $69.5 million from $52.9 million in the prior year due mainly to the professional fees of $13.4 million incurred in relation to the planned acquisition of Vodafone NZ which was announced in July 2016 (refer note 17 of the financial statements). Depreciation, amortisation and impairment costs include depreciation charges for subscriber equipment including satellite dishes and decoders owned by SKY and fixed assets such as television station facilities. Depreciation, amortisation and impairment costs have decreased by 15.9% to $100.2 million for the current year due to many assets being fully depreciated. Impairment charges in the current year were $NiI compared with $10.7 million in the prior year. Finance costs, net have decreased marginally from $21.7 million to $20.1 million. The reduction in interest is due to reduced interest rates on the floating rate borrowings which are not hedged. SKY’s weighted average interest rates are as follows: Bank loans Bonds Finance lease Combined weighted average Capital expenditure SKY’s capital expenditure over the last five years is summarised as follows: IN NZD MILLIONS Subscriber equipment Installation costs HD broadcasting truck Other Total capital expenditure 2016 63.8 32.6 – 32.4 128.8 2015 22.8 29.7 – 63.0 115.5 2014 20.6 36.9 – 35.5 93.0 2016 6.19% 5.33% 0.00% 5.47% 2013 22.9 40.2 – 19.3 82.4 2015 6.46% 5.40% 6.80% 5.66% 2012 57.4 48.9 2.6 28.0 136.9 Capital expenditure increased by $13.3 million in 2016 to $128.8 million. Subscriber equipment expenditure increased substantially by $41.0 million due to the acquisition of the new internet enabled decoders being rolled out to customers to replace the old legacy digital decoders. Installation costs were marginally up by $2.9 million. Other capital expenditure of $32.4 million included $15.9 million of software additions (mainly internet connectivity for SKY’s decoders), $5.8 million of other plant and equipment, as well as $10.7 million of capital work in progress. Financial tRenDS SKY ANNUAL REPORT 2016 29 incOme Statement – FiVe YeaR SUmmaRY IN NZD 000 2016 2015 2014 2013 2012 For the year ended 30 June Total revenue Total operating expenses (1) (4) EBITDA (2) (4) Less 928,200 602,914 325,286 927,525 547,756 379,769 909,001 529,961 379,040 885,024 531,884 353,140 843,074 507,052 336,022 Depreciation and amortisation 100,241 119,194 126,143 134,260 134,119 Net interest expense and financing charges Unrealised losses/(gains) on currency and other Net profit before income tax (4) 19,684 21,696 27,097 29,193 29,346 371 204,990 – 238,879 1,293 224,507 692 188,995 923 171,634 Balance SHeet – FiVe YeaR SUmmaRY IN NZD 000 2016 2015 2014 2013 2012 As at 30 June Property, plant, equipment and non-tangible intangibles Goodwill Total assets Total debt and lease liabilities Working capital (3) Total liabilities Total equity (1) Exclusive of depreciation and amortisation. 331,157 1,425,331 1,943,564 348,085 (35,230) 612,641 299,243 1,425,331 1,942,021 350,763 (36,285) 604,818 302,929 1,426,393 1,865,369 387,191 (48,325) 624,205 338,002 1,424,494 1,900,293 483,786 (39,790) 718,396 388,646 1,424,494 1,962,467 472,469 (20,717) 708,603 1,330,923 1,337,203 1,241,164 1,181,897 1,253,864 (2) Net profit before income tax, interest expense, depreciation and amortisation, unrealised gains and losses on currency and interest rate swaps. (3) Working capital excludes current borrowing, bonds and derivative financial instruments. (4) Exclusion of Vodafone acquisition costs of $13,371,000 (refer note 3) would result in a normalised adjusted EBITDA of $338,657,000 and adjusted net profit before income tax of $218,361,000. 30 SKY ANNUAL REPORT 2016 Financial tRenDS (CONTINUED) DEPRECIATION AND CAPITAL EXPENDITURE IN NZD 000 Depreciation Capital expenditure 2016 100,241 128,800 2015 119,194 115,500 2014 126,143 93,000 2013 134,260 82,400 2012 134,119 136,900 HISTORY OF DIVIDEND PAYMENTS (BY CALENDAR YEAR IN CENTS PER SHARE) Interim dividend (paid in March) Final dividend (paid in September) Total ordinary dividend Special dividend Total dividend paid 2016 15.0 – 15.0 – 15.0 2015 15.0 15.0 30.0 – 30.0 2014 14.0 15.0 29.0 – 29.0 2013 12.0 12.0 24.0 – 24.0 2012 11.0 11.0 22.0 32.0 54.0 SUBSCRIBER BASE The following operating data has been taken from the Company records and is not audited. As at 30 June Total subscribers Average monthly revenue per residential subscriber Gross churn (2) 2016 2015 2014 2013 2012 852,679 851,561 865,055 855,898 846,931 78.63 (1) 79.54 17.5% 14.5% 77.52 13.2% 75.83 14.4% 71.93 14.2% (1) Includes IGLOO, NEON and FAN PASS not included in previous periods. (2) Gross churn refers to the percentage of residential subscribers over the 12-month period ended on the date shown who terminated their satellite pay TV subscription net of existing subscribers who transferred their service to new residences during the period. DIRECTORS’ RESPONSIBILITY STATEMENT SKY ANNUAL REPORT 2016 31 The directors of Sky Network Television Limited (the Group) are responsible for ensuring that the financial statements of the Group present fairly the financial position of the Group as at 30 June 2016 and the results of its operations and cash flows for the year ended on that date. The directors consider that the financial statements of the Group have been prepared using appropriate accounting policies, consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting and accounting standards have been followed. The directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of the financial position of the Group and facilitate compliance of the financial statements with the Financial Markets Conduct Act 2013. The directors consider they have taken adequate steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The directors have pleasure in presenting the financial statements of the Group for the year ended 30 June 2016. The board of directors of Sky Network Television Limited authorise these financial statements for issue on 25 August 2016. For and on behalf of the board of directors Peter Macourt Chairman John Waller Director 25 August 2016 32 SKY ANNUAL REPORT 2016 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2016 IN NZD 000 Total revenue Expenses Programming Subscriber related costs Broadcasting and infrastructure Depreciation, amortisation and impairment Other costs Operating profit Finance costs, net Profit before tax Income tax expense Profit for the year Attributable to: Equity holders of the Company Non-controlling interests Earnings per share Basic and diluted earnings per share (cents) OTHER COMPREHENSIVE INCOME Profit for the year Items that may be reclassified subsequently to profit and loss Cash flow hedges Income tax effect Other comprehensive income for the year, net of income tax 13 Total comprehensive income for the year Attributable to: Equity holders of the Company Non-controlling interest Notes 2 2016 928,200 2015 927,525 3 4 5 331,050 106,340 96,040 100,241 69,484 703,155 225,045 20,055 204,990 57,867 147,123 146,718 405 147,123 296,559 107,136 91,184 119,194 52,877 666,950 260,575 21,696 238,879 67,115 171,764 171,581 183 171,764 13 37.70 44.09 147,123 171,764 (49,989) 13,997 (35,992) 111,131 110,726 405 111,131 56,972 (15,951) 41,021 212,785 212,602 183 212,785 SKY ANNUAL REPORT 2016 33 Notes 2016 2015 6 7 12 8 9 1 12 11 11 10 12 11 11 5 12 13 13 22,863 70,030 79,765 2,982 17,895 69,509 72,813 28,424 175,640 188,641 283,316 1,473,172 4,832 6,604 1,767,924 1,943,564 282,219 1,442,355 – 28,806 1,753,380 1,942,021 199,912 – 200,817 7,071 9,670 417,470 49,468 98,705 36,047 10,951 195,171 612,641 577,403 (5,112) 757,417 – 3,294 184,218 12,284 1,320 201,116 49,424 298,045 48,438 7,795 403,702 604,818 577,403 30,880 727,441 1,329,708 1,335,724 1,215 1,330,923 1,943,564 1,479 1,337,203 1,942,021 CONSOLIDATED BALANCE SHEET As at 30 June 2016 IN NZD 000 Current assets Cash and cash equivalents Trade and other receivables Programme rights inventory Derivative financial instruments Non-current assets Property, plant and equipment Intangible assets Available for sale investment Derivative financial instruments Total assets Current liabilities Bonds Lease liabilities Trade and other payables Income tax payable Derivative financial instruments Non-current liabilities Bank loans Bonds Deferred tax Derivative financial instruments Total liabilities Equity Share capital Hedging reserve Retained earnings Total equity attributable to equity holders of the Company Non-controlling interest Total equity Total equity and liabilities Peter Macourt Chairman John Waller Director For and on behalf of the board 25 August 2016 34 SKY ANNUAL REPORT 2016 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2016 ATTRIBUTABLE TO OWNERS OF THE PARENT Notes Share capital Hedging reserve Retained earnings Non- controlling interest Total Total equity IN NZD 000 For the year ending 30 June 2016 Balance at 1 July 2015 Profit for the year Cash flow hedges, net of tax 13 Total comprehensive income for the year Transactions with owners in their capacity as owners Dividend paid Supplementary dividends Foreign investor tax credits Balance at 30 June 2016 For the year ending 30 June 2015 Balance at 1 July 2014 Profit for the year Cash flow hedges, net of tax 13 Total comprehensive income for the year Transactions with owners in their capacity as owners Change in non-controlling interest Dividend paid Supplementary dividends Foreign investor tax credits Balance at 30 June 2015 577,403 30,880 727,441 1,335,724 – 146,718 146,718 1,479 405 1,337,203 147,123 – – – – – – – (35,992) – (35,992) – (35,992) (35,992) 146,718 110,726 405 111,131 – – – – (116,742) (116,742) (669) (117,411) (14,965) (14,965) 14,965 14,965 – – (14,965) 14,965 (116,742) (116,742) (669) (117,411) 577,403 (5,112) 757,417 1,329,708 1,215 1,330,923 577,403 (10,141) 672,605 1,239,867 1,297 1,241,164 – – – – – – – – – 171,581 171,581 183 171,764 41,021 – 41,021 – 41,021 41,021 171,581 212,602 183 212,785 – – – – – (3) (3) (116,742) (116,742) (14,317) (14,317) 14,317 14,317 (1) – – – (4) (116,742) (14,317) 14,317 (116,745) (116,745) (1) (116,746) 577,403 30,880 727,441 1,335,724 1,479 1,337,203 CONSOLIDATED STATEMENT OF caSH FLOWS For the year ended 30 June 2016 IN NZD 000 Cash flows from operating activities Profit before tax Adjustments for: Depreciation, amortisation and impairment Unrealised foreign exchange loss Interest expense Bad debts and movement in provision for doubtful debts Amortisation of bond issue costs Other non-cash items Movement in working capital items: (Increase)decrease in receivables Increase in payables Increase in programme rights Cash generated from operations Interest paid Income tax paid Net cash from operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Acquisition of property, plant, equipment and intangibles Acquisition of available for sale investment Net cash used in investing activities Cash flows from financing activities Repayment of borrowings – bank loan Advances received – bank loan Payment of finance lease liabilities Payment of bank facility fees Dividend paid to minority shareholders Dividends paid Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year SKY ANNUAL REPORT 2016 35 Notes 2016 2015 204,990 238,879 3 4 4 3 4 1 11 11 100,241 305 20,379 2,427 573 419 (2,736) 23,576 (6,952) 343,222 (20,920) (46,458) 275,844 – (128,803) (4,832) (133,635) (103,000) 103,000 (3,294) (1,571) (669) (131,707) (137,241) 4,968 17,895 22,863 119,194 423 22,496 3,328 571 263 2,589 11,518 (29,924) 369,337 (22,756) (63,666) 282,915 46 (115,462) – (115,416) (126,000) 96,000 (7,375) (1,022) – (131,059) (169,456) (1,957) 19,852 17,895 36 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS For the year ended 30 June 2016 1. GENERAL INFORMATION This section sets out the Group’s accounting policies that relate to the financial statements as a whole. Where an accounting policy is specific to one note, the policy is described in the note to which it relates. SKY Network Television Limited (SKY) is a Company incorporated and domiciled in New Zealand. The address of its registered office is 10 Panorama Road, Mt Wellington, Auckland, New Zealand. The consolidated financial statements of the Group for the year ended 30 June 2016 comprise the Company, Sky Network Television Limited and its subsidiaries. SKY is a company registered under the Companies Act 1993 and is a reporting entity under Part 7 of the Financial Markets Conduct Act 2013. The Group’s primary activity is to operate as a provider of multi-channel, pay television and free-to-air television services in New Zealand. These financial statements were authorised for issue by the Board on 25 August 2016. Basis of preparation The financial statements of the Group have been prepared in accordance with the requirements of Part 7 of the Financial Markets Conduct Act 2013, the NZX Main Board Listing Rules and the ASX Listing Rules. Accounting policies applied in these financial statements comply with NZ IFRS effective for the year beginning 1 July 2015, as applicable to SKY as a profit-oriented entity. The Group financial statements are in compliance with International Financial Reporting Standards (IFRS). These financial statements are prepared on the basis of historical cost except where otherwise identified. The financial statements are presented in New Zealand dollars. Group structure The Group has a majority share in the following subsidiaries, all of which are incorporated in and have their principal place of business in New Zealand: Name of Entity Principal Activity Parent Interest held SKY DMX Music Limited Commercial Music SKY Ventures Limited (previously Cricket Max Limited) Investment Media Finance Limited Outside Broadcasting Limited Screen Enterprises Limited Igloo Limited Believe It Or Not Limited Non-trading Broadcasting services Online DVD rental Multi-channel pay television Entertainment quizzes SKY SKY SKY SKY SKY SKY SKY 2016 50.50% 100.00% 100.00% 100.00% 100.00% 100.00% 51.00% 2015 50.50% 100.00% 100.00% 100.00% 100.00% 100.00% 51.00% During the year Cricket Max Limited was renamed SKY Ventures Limited and given a mandate by the Board to undertake minority equity investments in certain early stage companies which are aligned to the Group’s strategic objectives. In March 2016 SKY Ventures acquired a 15.79% interest in 90 Seconds Pty Limited (a cloud video production company) for a cost of $4.8 million. This investment is classified as an available for sale financial asset, recognised initially and subsequently at fair value, with changes in fair value recognised in other comprehensive income. During the prior year the Group sold its interest in SKY Arena Limited. Basis of consolidation The Group financial statements consolidate the financial statements of the Company and its subsidiaries. The acquisition method of accounting is used to account for the acquisition of subsidiaries and businesses by the Group. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair value of the assets transferred and the liabilities incurred. Each identifiable asset and liability is generally measured at its acquisition date fair value except if another NZ IFRS requires another measurement basis. The excess of the consideration of the acquisition and the amount of any non-controlling interest in the acquired company, less the Group’s share of the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed is recognised as goodwill. Acquisition related costs are expensed as incurred. SKY ANNUAL REPORT 2016 37 1. GENERAL INFORMATION (CONTINUED) Subsidiaries Subsidiaries are entities that are controlled, either directly or indirectly, by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns from its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date on which control ceases. Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as are unrealised gains unless the transaction provides evidence of an impairment of the asset transferred. Transactions with non-controlling interests Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. New standards, amendments and interpretations Other than NZ IFRS 9 “Financial Instruments’, NZ IFRS 15 “Revenue from contracts with customers” and NZ IFRS 16 “Leases”, there are no new standards, amendments or interpretations that have been issued and effective, or not yet effective, that are expected to have a significant impact on the Group. The Group has yet to assess the full impact of NZ IFRS 9 (effective date: 1 January 2018), NZ IFRS 15 (effective date: 1 January 2018) and NZ IFRS 16 (effective date: 1 January 2019). Goods and services tax (GST) The statement of comprehensive income and statement of cash flows have been prepared so that all components are stated exclusive of GST. All items in the balance sheet are stated net of GST, with the exception of receivables and payables, which include GST invoiced. Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to SKY’s group of executive directors who are the chief operating decision-makers. SKY’s group of executive directors is responsible for allocating resources and assessing performance of the operating segments. SKY operates in a single business segment; the provision of multi-channel television services in New Zealand. 2. REVENUE IN NZD 000 Residential satellite subscriptions Other subscriptions Advertising Other revenue 2016 753,115 79,286 74,046 21,753 2015 760,000 71,183 69,540 26,802 928,200 927,525 Revenue comprises the fair value of the sales of goods and services, net of goods and services tax and is recognised as follows: Subscription revenue – over the period to which the subscription relates. Unearned subscriptions and deferred revenues are revenues that have been invoiced relating to services not yet performed, principally subscriptions paid in advance (refer note 10); Advertising revenue – over the period in which the advertising is screened; Other revenue – when the product has been delivered to the customer or retailer or in the accounting period in which the actual service is provided. Other revenue comprises revenues received from installation of decoders and other non-subscriber related revenue. 38 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 3. OPERATING EXPENSES Profit before tax includes the following separate expenses/(credits): IN NZD 000 Depreciation, amortisation and impairment Depreciation of property, plant and equipment (1) Impairment of property, plant and equipment Amortisation of intangibles Impairment of intangibles Total depreciation, amortisation and impairment Bad and doubtful debts Movement in provision Net write-off Total bad and doubtful debts Fees paid to external auditors Audit fees paid to principal auditors (2) Other services by principal auditors Audit of regulatory returns Other assurance services (3) Agreed upon procedures (4) Advisory services by principal auditors Treasury Consulting services (5) Total fees to external auditors Professional fees in relation to acquisition of Vodafone NZ Employee costs (6) KiwiSaver employer contributions Donations Operating lease and rental expenses Related party transactions Remuneration of key personnel (included in employee costs) Directors’ fees Total related party transactions Notes 2016 2015 8 8 9 9 6 89,086 – 11,155 – 99,023 1,981 9,468 8,722 100,241 119,194 (218) 2,427 2,209 (27) 3,328 3,301 264 269 6 1 6 27 8 312 13,371 100,674 2,244 366 37,265 12,172 626 12,798 6 1 – 27 – 303 – 93,672 1,977 347 39,523 12,132 619 12,751 (1) The majority of depreciation, amortisation and impairment relates to broadcasting assets (refer note 8 and 9). (2) The audit fee includes the fee for both the annual audit of the financial statements and the review of the interim financial statements. (3) Other assurance services comprise reporting on trust deed requirements. (4) Agreed upon procedures were undertaken in relation to the Special Shareholders Meeting. (5) Consulting services in relation to the economic contribution of the NZ film and TV sector. (6) All employee costs are short-term employee benefits. Leases under which all the risks and benefits of ownership are substantially retained by the lessor are classified as operating leases. Operating lease payments are recognised as an expense in the periods the amounts are payable. Employee entitlements to salaries and wages and annual leave, to be settled within 12 months of the reporting date represent present obligations resulting from employees’ services provided up to the reporting date, calculated at undiscounted amounts based on remuneration rates that the Group expects to pay. Bonus plans are recognised as a liability and an expense for bonuses based on a formula that takes into account the economic value added by employees during the reporting period. The Group recognises this provision where contractually obliged or where there is a past practice that has created a constructive obligation. 4. Finance cOStS, net IN NZD 000 Finance income Interest income Finance expense Interest expense on bank loans Interest expense on bonds Finance lease interest Amortisation of bond costs Bank facility finance fees Total interest expense (net) Unrealised exchange (gain)/loss – foreign currency payables Unrealised exchange loss/(gain) – foreign currency hedges Realised exchange gain – foreign currency payables Realised exchange (loss)/gain – foreign currency hedges SKY ANNUAL REPORT 2016 39 2016 2015 (695) (695) 2,127 15,995 31 573 1,653 20,379 (4,962) 5,267 (484) 550 (800) (800) 3,570 16,412 571 571 1,372 22,496 4,742 (4,319) (418) (5) 20,055 21,696 Interest income is recognised on a time-proportion basis using the effective interest method, which is the rate that exactly discounts estimated future cash flow receipts through the expected life of the financial asset to that asset’s net carrying amount. Borrowing costs directly attributable to acquisition, construction or production of an asset that takes a substantial period of time to prepare for its intended use are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist of interest and other costs that the Group incurs with the borrowing of funds. Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Non-monetary items carried at fair value that are denominated in foreign currencies are translated to New Zealand dollars at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not re-translated. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at the year-end exchange rate of monetary assets and liabilities denominated in foreign currencies are recognised in profit and loss except where hedge accounting is applied and foreign exchange gains and losses are deferred in other comprehensive income. 40 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 5. TAXATION Income tax expense The total charge for the year can be reconciled to the accounting profit as follows: IN NZD 000 Profit before tax Prima facie tax expense at 28% Non deductible expenses Prior year adjustment Other Income tax expense Allocated between Current tax payable Deferred tax Income tax expense Imputation credits IN NZD 000 Imputation credits available for subsequent reporting periods based on a tax rate of 28%. 2016 204,990 57,397 585 (115) – 2015 238,879 66,886 613 (171) (213) 57,867 67,115 56,261 1,606 57,867 69,683 (2,568) 67,115 2016 77,347 2015 67,066 The above amounts represent the balance of the imputation account as at the end of the reporting period adjusted for: • Imputation credits that will arise from the payment of the amount of the provision for income tax. • Imputation debits that will arise from the payment of dividends (excluding the final dividend announced in August). Availability of these credits is subject to continuity of ownership requirements. Current income tax expense Income tax expense represents the sum of the tax currently payable and deferred tax, except to the extent that it relates to items recognised directly in other comprehensive income, in which case the tax expense is also recognised in other comprehensive income. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in profit and loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using the rates that have been enacted or substantively enacted by the balance date. SKY ANNUAL REPORT 2016 41 5. TAXATION (CONTINUED) Deferred tax liabilities and (assets) The following are the major deferred tax liabilities and assets and the movements thereon during the current and prior reporting periods. IN NZD 000 For the year ended 30 June 2016 At 1 July 2015 NZ IAS 39 hedging adjustment credited direct to other comprehensive income (Credited)/charged to profit and loss Balance at 30 June 2016 Deferred tax reversing within 12 months Deferred tax to reverse after more than 12 months For the year ended 30 June 2015 At 1 July 2014 NZ IAS 39 hedging adjustment credited direct to other comprehensive income (Credited)/charged to profit and loss Balance at 30 June 2015 Deferred tax reversing within 12 months Deferred tax to reverse after more than 12 months Notes Fixed assets Leased assets Other Hedges through equity Total 9,028 28,978 (1,576) 12,008 48,438 13 – – – (13,997) (13,997) 2,888 11,916 2,610 9,306 11,916 2,139 31,117 (5,348) 36,465 31,117 (3,421) (4,997) (4,997) – (4,997) – (1,989) (721) (1,268) (1,989) 16,647 26,378 (4,027) (3,943) 13 – (7,619) 9,028 2,409 6,619 9,028 – – 15,951 2,600 28,978 (114) 29,092 28,978 2,451 (1,576) (1,576) – 12,008 5,676 6,332 (1,576) 12,008 – (2,568) 1,606 36,047 (8,456) 44,503 36,047 35,055 15,951 48,438 6,395 42,043 48,438 Certain deferred tax assets and liabilities have been offset as allowed under NZ IAS 12 where there is a legally enforceable right to set off current tax assets against current tax liabilities and where the deferred tax assets and liabilities are levied by the same taxation authority. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction neither affects accounting nor taxable profit or loss. Deferred income tax is determined using tax rates that have been enacted or substantively enacted by the balance date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Key estimates and assumptions Deferred tax assets are recognised for unused tax losses and other deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses and other deductible temporary differences can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised based upon the likely timing and level of future taxable profits. No deferred tax asset has been recognised in relation to Igloo Limited’s (IGLOO) accumulated losses of $12,150,000 (30 June 2015: $12,150,000). Those tax losses can be carried forward for use against future taxable profits of IGLOO subject to meeting the requirements of the income tax legislation including shareholder continuity. 42 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 6. TRADE AND OTHER RECEIVABLES IN NZD 000 Trade receivables Less provision for impairment of receivables Trade receivables – net Other receivables Prepaid expenses Balance at end of year Deduct prepaid expenses Balance financial instruments IN NZD 000 Residential subscribers Commercial subscribers Wholesale customers Advertising Commercial music Other Note 2016 62,120 (763) 61,357 678 7,995 2015 64,404 (981) 63,423 830 5,256 70,030 69,509 14 (7,995) 62,035 (5,256) 64,253 Gross Impairment Gross Impairment 2016 2015 36,435 5,269 10,190 7,057 129 3,040 62,120 244 54 – 103 17 345 763 40,653 4,792 10,046 6,111 102 2,700 64,404 531 13 – 156 9 272 981 Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Collectability of trade receivables is reviewed on an on-going basis. Debts which are known to be uncollectible are written off. A provision for impairment of trade receivables is established when there is objective evidence, such as default or delinquency in payments, that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the effective interest rate. The amount of the provision is expensed in profit and loss. SKY ANNUAL REPORT 2016 43 6. TRADE AND OTHER RECEIVABLES (CONTINUED) As at 30 June, the ageing analysis of trade receivables is as follows: IN NZD 000 Not past due Past due 0-30 days Past due 31-60 days Past due 61-90 days Greater than 90 days Neither past due nor impaired 53,359 – – – – 53,359 2016 Past due but not impaired – 5,863 1,005 331 799 7,998 Neither past due nor impaired 55,589 – – – – 55,589 Impaired 11 65 40 215 432 763 2015 Past due but not impaired – 6,380 1,105 225 124 7,834 Impaired – 51 88 258 584 981 Accounts receivables relating to advertising sales are individually impaired when it is clear that the debt is unlikely to be recovered. Impairment for all other trade receivables is calculated as a percentage of overdue subscribers in various time buckets based on historical performance of subscriber payments. Movements in the provision for impairment of receivables were as follows: IN NZD 000 Opening balance Charged during the year Utilised during the year Closing balance Notes 3 2016 981 2,209 (2,427) 763 2015 1,008 3,301 (3,328) 981 The creation and release of the provision for impaired receivables has been included in subscriber related costs in profit and loss. Amounts charged to the allowance account are generally written off when there is no expectation of receiving additional cash. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable. The Group does not hold any collateral as security. 7. PROGRAMME RIGHTS INVENTORY IN NZD 000 Cost Less utilisation Balance at end of year 2016 147,670 (67,905) 79,765 2015 136,983 (64,170) 72,813 The current year programme rights’ utilisation charge of $271,658,000 (2015: $236,868,000) is included within programming expenses in profit and loss. Programme rights are recognised at cost, as an asset in the balance sheet provided the programme is available and the rights period has commenced at the balance date. Long-term sports rights are executory contracts as the obligation to pay for the rights does not arise until the event has been delivered. Most sports rights contracts are, however, payable in advance and as such, are recognised only to the extent of the portion of the amount paid not yet utilised. Rights are expensed over the period they relate to on a proportionate basis depending on the type of programme right and the expected screening dates, generally not exceeding twelve months. Any rights not expected to be utilised are written off during the period. 44 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 8. PROPERTY, PLANT AND EQUIPMENT IN NZD 000 For the year ended 30 June 2016 Cost Balance at 1 July 2015 Transfer between categories Transfer to software assets Additions Disposals Balance at 30 June 2016 Accumulated depreciation Balance at 1 July 2015 Depreciation for the year Disposals Balance at 30 June 2016 Net book value at 30 June 2016 For the year ended 30 June 2015 Cost Balance at 1 July 2014 Transfer between categories Transfer to software assets Additions Disposals Balance at 30 June 2015 Accumulated depreciation Balance at 1 July 2014 Depreciation for the year Impairment charge Disposals Balance at 30 June 2015 Net book value at 30 June 2015 Land, buildings and leasehold improvements Broadcasting and studio equipment Decoders and associated equipment Capitalised installation costs Other plant and equipment Projects under development Total 58,199 2,409 – 2,986 (5) 158,539 452,128 427,338 78 – 703 (4,052) – – – – 67,292 (39,038) 32,559 (56,367) 78,241 2,043 – 2,039 (772) 38,553 1,212,998 (4,530) (26,023) 10,655 – (26,023) 116,234 – (100,234) 63,589 155,268 480,382 403,530 81,551 18,655 1,202,975 18,213 2,266 (1) 20,478 43,111 130,152 9,501 (4,042) 398,063 30,169 336,924 39,189 (39,038) (56,367) 135,611 389,194 319,746 19,657 91,188 83,784 51,103 154,687 536,104 579,571 115 – 7,134 (153) 9,909 – – – – – 8,606 22,298 29,692 (14,663) (106,274) (181,925) 47,427 7,961 (758) 54,630 26,921 69,433 3,793 – 7,656 (2,641) – – – – 930,779 89,086 (100,206) 919,659 18,655 283,316 22,844 1,413,742 (13,817) (991) – (991) 30,517 105,903 – (305,656) 58,199 158,539 452,128 427,338 78,241 38,553 1,212,998 16,262 1,996 – (45) 18,213 39,986 134,781 10,009 – 469,025 35,312 – 475,068 43,781 – (14,638) (106,274) (181,925) 130,152 398,063 336,924 28,387 54,065 90,414 40,149 7,925 1,981 (2,628) 47,427 30,814 – – – – – 1,135,285 99,023 1,981 (305,510) 930,779 38,553 282,219 Land, buildings and leasehold improvements at 30 June 2016 includes land with a cost of $8,820,000 (30 June 2015: $8,820,000). In the current year there are no assets subject to finance leases. In the prior year the net book value of assets held by subsidiaries and subject to finance leases totalled $2,825,000 of which $2,457,000 was included in broadcasting and studio equipment and $368,000 was included in other plant and equipment. Depreciation related to broadcasting assets (including decoders and capitalised installation costs) of $78,859,000 (30 June 2015: $89,102,000) accounts for the majority of the total depreciation charge. Due to immateriality of the remaining depreciation, no allocation has been made across expense categories in profit and loss. SKY ANNUAL REPORT 2016 45 8. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses except land which is shown at cost less impairment. Cost includes expenditure that is directly attributable to the acquisition of the items. Capitalised installation costs are represented by the cost of satellite dishes, installation costs and direct labour costs. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that the future economic benefits embodied within the item will flow to the Group and the cost of the item can be measured reliably. The cost of additions to plant and other assets constructed by the Group consist of all appropriate costs of development, construction and installation, comprising material, labour, direct overhead and transport costs. For qualifying assets directly attributable interest costs incurred during the period required to complete and prepare the asset for its intended use are capitalised as part of the total cost. All other costs are recognised in profit and loss as an expense as incurred. Additions in the current year include $575,000 of capitalised labour costs (30 June 2015: $1,686,000) Costs may also include transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and recognised in other costs in profit and loss. Depreciation Property, plant and equipment are depreciated using the straight-line method so as to allocate the costs of assets to their residual values over their estimated useful lives as follows: Assets Land Leasehold improvements Buildings Broadcasting and studio equipment Decoders and associated equipment Other plant and equipment Capitalised installation costs Time Nil 5 – 50 years 50 years 5 – 10 years 4 – 5 years 3 – 10 years 5 years Projects under development are not depreciated until commissioned. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance date. Key estimates and assumptions The estimated life of technical assets such as decoders and other broadcasting assets is based on management’s best estimates. Changes in technology may result in the economic life of these assets being different from that estimated previously. The board and management regularly review economic life assumptions of these assets as part of management reporting procedures. 46 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 9. INTANGIBLE ASSETS IN NZD 000 For the year ended 30 June 2016 Cost Balance at 1 July 2015 Transfer from projects under development Additions Disposals Balance at 30 June 2016 Accumulated amortisation Balance at 1 July 2015 Amortisation for the year Disposals Balance at 30 June 2016 Net book value at 30 June 2016 For the year ended 30 June 2015 Cost Balance at 1 July 2014 Transfer from projects under development Additions Disposals Balance at 30 June 2015 Accumulated amortisation Balance at 1 July 2014 Amortisation for the year Impairment charge Disposals Balance at 30 June 2015 Net book value at 30 June 2015 Software Broadcasting rights Other intangibles Indefinite life goodwill Total 96,849 26,023 15,949 (5,228) 2,185 3,167 1,426,293 1,528,494 – – – – – – – – – 26,023 15,949 (5,228) 133,593 2,185 3,167 1,426,293 1,565,238 81,535 10,300 (5,228) 86,607 46,986 88,206 991 8,789 (1,137) 96,849 65,551 9,361 7,760 (1,137) 81,535 15,314 564 855 – 1,419 766 3,078 – – 3,078 962 – – 962 86,139 11,155 (5,228) 92,066 89 1,425,331 1,473,172 2,185 3,167 1,426,293 1,519,851 – – – – – – – – – 991 8,789 (1,137) 2,185 3,167 1,426,293 1,528,494 457 107 – – 564 1,621 3,078 – – – 3,078 – – 962 – 962 69,086 9,468 8,722 (1,137) 86,139 89 1,425,331 1,442,355 The majority of the amortisation and impairment charge relates to broadcasting intangibles. Consequently no allocation has been made across expense categories in profit and loss. Goodwill represents the excess of the cost of acquisition over the fair value of the Group’s share of the net identifiable assets, liabilities and contingent liabilities of the acquired subsidiary at the date of acquisition and the fair value of the non-controlling interest in the acquiree. The goodwill balance is allocated to the Group’s single operating segment. The majority of the goodwill ($1,422,115,000) arose as a result of the acquisition of SKY by Independent Newspapers Limited (INL) in 2005. Subsequent acquisitions have resulted in immaterial increases to goodwill. Broadcasting rights, consisting of UHF spectrum licences, are recognised at cost and are amortised on a straight-line basis over the lesser of the period of the licence term and 20 years. Software development costs recognised as assets are amortised over their estimated useful lives (three to five years). Direct costs associated with the development of broadcasting and business software for internal use are capitalised where it is probable that the asset will generate future economic benefits. Capitalised costs include external direct costs of materials and services consumed and direct payroll-related costs for employees (including contractors) directly associated with the project and interest costs incurred during the development stage of a project. Additions in the current year to software include $9,591,000 of accumulated capitalised labour costs, $5,707,000 of which were incurred in the current year (30 June 2015: $1,672,000). SKY ANNUAL REPORT 2016 47 9. INTANGIBLE ASSETS (CONTINUED) Key estimates and assumptions Assets that are subject to amortisation and depreciation are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. Impairment losses in the prior year represent the write-down of certain intangible assets where the estimated recoverable amount is less than the carrying value. In the prior year the impairment loss of $7,760,000 represented the write-down of certain intangible assets relating to new products to the recoverable amount. The impairment was recognised because it is considered unlikely that these products will generate future cash flows in excess of the carrying value. Assets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested at each reporting date for impairment and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Group operates as a single business segment and monitors goodwill for the business as a whole. If the testing indicates the carrying value exceeds the recoverable amount, goodwill is considered to be impaired. The recoverable amounts of cash generating units (CGU’s) have been determined based on value-in-use calculations. The value-in-use calculation is based on estimated future cash flows derived from the most recent financial budgets and forecasts approved by management for the next five years and incorporates a present value calculation based on a long term growth rate of 0% and a pre-tax discount rate of 12.5%. In the prior year the long term growth rate was 0.0% and the pre-tax discount rate was 12.5%. Key assumptions are subscriber numbers, churn rates, foreign exchange rates, expected changes to revenue and costs and a discount rate based on current market rates adjusted for risks specific to the business. Growth rates are based on expected forecasts and changes in prices and direct costs based on past practice and expectations of future changes in the market. The Group also compares its estimated recoverable amount with the market capitalisation value at the balance date. Sensitivity of recoverable amounts The assessment of value-in-use is most sensitive to the assumptions made for the net gain in subscriber numbers and the USD/NZD exchange rate. Based on the sensitivity analysis carried out, directors believe that no reasonable change in any of the key assumptions would cause the carrying value of goodwill to exceed its recoverable amount. 48 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 10. TRADE AND OTHER PAYABLES IN NZD 000 Trade payables Unearned subscriptions and deferred revenue Employee entitlements Accruals Balance at end of year Less Unearned subscriptions and deferred revenue Balance financial instruments Note 2016 84,302 66,175 15,353 34,987 2015 75,582 66,238 13,495 28,903 200,817 184,218 14 (66,175) 134,642 (66,238) 117,980 Trade and other payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest method. 11. BORROWINGS IN NZD 000 Bank loans Bonds Lease liabilities Repayment terms IN NZD 000 Less than one year Between one and five years More than five years Bank Loans 2016 Current Non-current – 199,912 – 49,468 98,705 – Total 49,468 298,617 – 199,912 148,173 348,085 2016 199,912 49,468 98,705 348,085 2015 Current Non-current – – 3,294 3,294 49,424 298,045 – Total 49,424 298,045 3,294 347,469 350,763 2015 3,294 249,037 98,432 350,763 The Group has a four year revolving credit bank facility expiring 17 July 2020 from a syndicate of banks comprising ANZ National Bank Limited, Bank of New Zealand, Commonwealth Bank of Australia and Westpac Bank. In July 2015, SKY increased the facility limit from $200 million to $250 million. In June 2016, the facility limit was increased to $350 million. Interest is charged on drawings under the facility at a rate between 1.45% and 2.15% per annum above the average bid rate for the purchase of bank accepted bills of exchange. There is a commitment fee payable on the undrawn balance of the facility of between 0.96% and 0.64% per annum. There are no required repayment tranches of the facility. The facility can be partially or fully cancelled at SKY’s discretion. In July 2016 the bank facility limit was decreased to $300 million. In the prior year, SKY decreased its facility limit from $400 million to $200 million. No security other than a negative pledge over the total Group’s assets has been provided. Cash balances held with the Bank of New Zealand are subject to a netting arrangement. Bank overdrafts of $2,744,000 (30 June 2015: $3,022,000) have been set off against the cash balances. Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit and loss over the period of the borrowings, using the effective interest method. Arrangement fees are amortised over the term of the loan facility. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance date. Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less. Bank overdrafts that are repayable on demand and which form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. SKY ANNUAL REPORT 2016 49 11. BORROWINGS (CONTINUED) Bonds On 16 October 2006, the Group issued bonds for a value of $200 million which were fully subscribed (Bond A). On 31 March 2014 the Group issued bonds for a value of $100 million which were fully subscribed (Bond B). Terms and conditions of outstanding bonds are as follows: Nominal interest rate Market yield Issue date Date of maturity IN NZD 000 Carrying amount Fair value Face value 2016 2015 Bond A 3.38% 4.97% 16-Oct-06 16-Oct-16 199,912 199,000 200,000 Bond B 6.25% 4.01% 31-Mar-14 31-Mar-21 98,705 109,644 100,000 Bond A 4.43% 5.48% 16-Oct-06 16-Oct-16 199,613 199,200 200,000 Bond B 6.25% 4.72% 31-Mar-14 31-Mar-21 98,432 107,655 100,000 Bonds are recognised initially at fair value less costs of issue. Costs of issue are amortised over the period of the bonds. Subsequent to initial recognition, bonds are stated at amortised cost with any difference between cost and redemption value being recognised in profit and loss over the period of the bonds, using the effective interest method. Bonds are classified in the balance sheet as non-current liabilities unless settlement of the liability is due within twelve months after the balance date. The difference between carrying amount and fair value has not been recognised in the financial statements as the bonds are intended to be held until maturity. Lease Liabilities The Group has no obligations under finance leases in the current year. The prior year obligation of $3,294,000 has been repaid in full. Interest paid in the current period includes $31,000 (2015: $571,000) relating to finance leases. The effective interest rate is 6.8%. The fair value of the finance lease liabilities at 30 June 2016 was $Nil (30 June 2015: $3,294,000). Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Assets acquired under finance leases are included as non-current assets in the balance sheet. The lower of fair value and the present value of the minimum lease payments is recognised as an asset at the beginning of the lease term and depreciated on a straight-line basis over the shorter of the lease term or the expected useful life of the leased asset. A corresponding liability is also established and each lease payment is allocated between the liability and interest expense so as to produce a constant period rate of interest on the remaining balance of the liability. 50 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 12. DeRiVatiVe Financial inStRUmentS 2016 2015 IN NZD 000 Notes Assets Liabilities Notional amounts Assets Liabilities Notional amounts Interest rate swaps – cash flow hedges Interest rate swaps – fair value through profit and loss Total interest rate derivatives Forward foreign exchange contracts – cash flow hedges – 105 105 (9,663) 198,000 – 10,000 (9,663) 208,000 9 – 9 (8,132) 188,000 – – (8,132) 188,000 9,481 (7,594) 478,778 51,662 (979) 501,589 Forward foreign exchange contracts – dedesignated – (3,364) 55,057 5,559 (4) 41,071 Total forward foreign exchange derivatives 9,481 9,586 (10,958) 533,835 (20,621) 741,835 57,221 57,230 (983) 542,660 (9,115) 730,660 Analysed as: Current Non-current Derivatives used for hedging – cash flow hedges At fair value through profit or loss 14 14 2,982 6,604 9,586 9,481 (9,670) 279,281 28,424 (10,951) 462,554 28,806 (1,320) (7,795) 253,160 477,500 (20,621) 741,835 57,230 (9,115) 730,660 (17,257) 676,778 105 (3,364) 65,057 51,671 5,559 (9,111) 689,589 (4) 41,071 Exchange rates Foreign exchange rates used at balance date for the New Zealand dollar are: 9,586 (20,621) 741,835 57,230 (9,115) 730,660 USD AUD GBP EUR JPY 2016 0.7091 0.9544 0.5276 0.6385 2015 0.6802 0.8864 0.4333 0.6091 72.7466 83.2497 Forward foreign exchange contracts The hedged highly probable forecast transactions denominated in foreign currency are expected to occur at various dates during the next 36 months. Gains and losses recognised in the hedging reserve in equity (note 13) on forward exchange contracts as of 30 June 2016 are recognised in profit and loss in the period or periods during which the hedged forecast transaction affects profit and loss. Generally, the gain or loss is recognised as a basis price adjustment for the purchase of programme rights, and is written off to profit and loss over the rights’ period. Credit risk – derivative financial instruments The maximum exposure to credit risk on the derivative financial instruments is the value of the derivative assets’ receivable portion of $9,586,000 (2015: $57,230,000). SKY ANNUAL REPORT 2016 51 12. DeRiVatiVe Financial inStRUmentS (CONTINUED) Exposure to currency risk The Group’s exposure to foreign currency risk that has been covered by forward foreign exchange contracts is as follows: IN NZD 000 Foreign currency payables Dedesignated forward exchange contracts Net balance sheet exposure Forward exchange contracts (for forecasted transactions) 326,853 151,248 Total forward exchange contracts 361,104 172,054 2016 2015 USD AUD Other USD AUD Other (26,592) (24,542) 34,251 7,659 20,806 (3,736) – – – 677 677 (24,970) (21,653) 24,772 (198) 16,299 (5,354) 375,613 124,845 400,385 141,144 – – – 1,131 1,131 Sensitivity analysis A 10% strengthening or weakening of the NZD against the following currencies as at 30 June would have resulted in changes to equity (hedging reserve) and unrealised gain/losses (before tax) as shown below. Based on historical movements, a 10% increase or decrease in the NZD is considered to be a reasonable estimate. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for the prior year. IN NZD 000 gain/(loss) As at 30 June 2016 Foreign currency payables USD AUD Foreign exchange hedges USD AUD Other As at 30 June 2015 Foreign currency payables USD AUD Foreign exchange hedges USD AUD Other 10% rate increase 10% rate decrease Equity Profit or loss Equity Profit or loss – – (29,112) (13,018) (62) (42,192) – – (35,991) (11,579) (108) (47,678) 2,417 2,230 (2,812) (1,843) – (8) 1,968 2,270 (2,669) (1,525) – 44 – – (2,954) (2,726) 35,582 15,911 75 51,568 3,437 2,253 – 10 – – (2,413) (2,774) 43,989 14,153 132 58,274 3,262 1,864 – (61) 52 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 12. DeRiVatiVe Financial inStRUmentS (CONTINUED) Interest rates During the year ended 30 June 2016, interest rates on borrowings varied in the range of 3.2% to 6.5% (2015: 2.6% to 6.5%). The Group’s interest rate structure is as follows: IN NZD 000 Assets 2016 2015 Effective interest rate Notes Current Non-current Effective interest rate Current Non-current Cash and cash equivalents 2.02% 22,863 – 3.28% 17,895 – Liabilities Bank loans Bonds Lease liabilities Derivatives Floating to fixed interest rate swaps Fixed to floating interest rate swaps 11 11 11 6.19% 5.33% – – (49,468) (199,912) (98,705) – – – – 198,000 10,000 6.46% 5.40% 6.80% – – (49,424) (298,045) (3,294) – – – 188,000 – (177,049) 59,827 14,601 (159,469) Gains and losses recognised in the hedging reserve in equity (note 13) on interest rate hedges as at 30 June 2016 will be continuously released to profit and loss within finance cost until the repayment of the bank borrowings and bonds. It is anticipated that the revolving credit facility will be utilised to repay the bond due on 16th October 2016. The interest rate swaps currently designated to the bond will be redesignated to the floating rate debt. Sensitivity analysis for interest-bearing instruments A change of 100 basis points in interest rates on the reporting date, would have (increased)/decreased equity (hedging reserve) and profit or loss (before tax) by the amounts shown below. Based on historical movements a 100 basis point movement is considered to be a reasonably possible estimate. The analysis is performed on the same basis for the prior year. This analysis assumes that all other variables remain constant. IN NZD 000 gain/(loss) As at 30 June 2016 Expense/(income) Variable rate instruments – bank loans Interest rate hedges – cash flow As at 30 June 2015 Expense/(income) Variable rate instruments – bank loans Interest rate hedges – cash flow 100 BP increase 100 BP decrease Equity Profit and loss Equity Profit and loss – (3,507) (3,507) – (5,026) (5,026) 266 – 266 314 – 314 – 3,633 3,633 – 5,240 5,240 (266) – (266) (314) – (314) SKY ANNUAL REPORT 2016 53 12. DeRiVatiVe Financial inStRUmentS (CONTINUED) Derivative financial instruments are used to hedge the Group’s exposure to foreign exchange and interest rate risks. The Group does not hold or issue derivatives for trading purposes. However derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and are re-measured at their fair value at subsequent reporting dates. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. At inception the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The Group also documents its assessment, both at hedge inception and on an on-going basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Derivatives consist mainly of currency forwards and interest rate swaps. The fair value is recognised in the hedging reserve within equity until such time as the hedged item will affect profit and loss. The amounts accumulated in equity are either released to profit and loss or used to adjust the carrying value of assets purchased. For example, when hedging forecast purchases of programme rights in foreign currency, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the programme rights. The deferred amounts are ultimately recognised in programme rights’ expenses in profit and loss. Amounts accumulated in the hedging reserve in equity on interest rate swaps are recycled in profit and loss in the periods when the hedged item affects profit and loss (for example when the forecast interest payment that is hedged is made). The gain or loss relating to any ineffective portion is recognised in profit and loss as “interest rate swaps – fair value” in finance costs. The gain or loss relating to interest rate swaps which do not qualify for hedge accounting is recognised in profit and loss within the interest expense charge in “finance costs, net”. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit and loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to profit and loss. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in profit and loss. 54 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 13. EQUITY Share capital Shares on issue at 30 June 2016 and 30 June 2015 Number of shares (000) Ordinary shares (NZD 000) 389,140 577,403 Ordinary shares are fully paid and have no par value. The shares rank equally, carry voting rights and participate in distributions. Earnings per share Basic earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. Profit after tax attributable to equity holders of Parent (NZD 000) Weighted average number of ordinary shares on issue (thousands) Basic earnings per share (cents) Weighted average number of ordinary shares Issued ordinary shares at beginning of year Issued ordinary shares at end of year Weighted average number of ordinary shares Diluted earnings per share 2016 146,718 389,140 37.70 2015 171,581 389,140 44.09 Number Number 389,139,785 389,139,785 389,139,785 389,139,785 389,139,785 389,139,785 Diluted earnings per share is calculated by adjusting the weighted average of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. SKY had no dilutive potential ordinary shares during the current or prior period. Hedging reserve IN NZD 000 Balance at 1 July Cash flow hedges Unrealised gains/(losses) during the year Transfer to basis price adjustment programme rights inventory Transfer to operating expenses Deferred tax Balance at end of year Notes 5 2016 30,880 (44,681) (3,865) (1,443) 13,997 (35,992) (5,112) 2015 (10,141) 59,060 (131) (1,957) (15,951) 41,021 30,880 SKY ANNUAL REPORT 2016 55 14. Financial RiSK manaGement Financial risk management objectives The Group undertakes transactions in a range of financial instruments which include cash and cash deposits, receivables, payables, derivatives and various forms of borrowings including bonds and bank loans. These activities result in exposure to financial risks that include market risk (currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group seeks to minimise the effects of currency and interest rate risks by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the board of directors, which provides written principles on foreign exchange risk, interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The Corporate Treasury function reports monthly to the board of directors. The board has an audit and risk committee which is responsible for developing and monitoring the Group’s risk management policies. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Group buys and sells derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the board. Generally the Group seeks to apply hedge accounting in order to manage income statement volatility. a) Foreign exchange risk The Group is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Australian dollar and the United States dollar in relation to purchases of programme rights and the lease of transponders on the satellite. Foreign exchange risk arises when purchases are denominated in a currency that is not the entity’s functional currency. The net position in each foreign currency is managed by using forward currency contracts and foreign currency options and collars to limit the Group’s exposure to currency risk. The Group’s risk management policy is to hedge foreign capital expenditure (Capex) and foreign operating expenditure (Opex) in accordance with the following parameters. Approximately 90% of anticipated transactions in each major currency qualify as ‘highly probable’ forecast transactions for hedge accounting purposes. Capex Capex order greater than NZD $250,000 Opex Fixed commitments Opex Variable commitments Period Time of issuing order Up to 3 years > 3 years 0-12 months 13-24 months 25-26 months Minimum hedging 100% 100% 0% 85% 0% 0% Maximum hedging 100% 100% 100% 95% 50% 30% 56 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 14. Financial RiSK manaGement (CONTINUED) b) Cash flow and fair value interest rate risk The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain its borrowings in fixed rate instruments as follows: Variable rate borrowings Period 1-3 years 3-5 years 5-10 years Minimum hedging Maximum hedging 20% 20% 0% 80% 60% 30% The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. The Group also enters into fixed-to-floating interest rate swaps to hedge fair value interest rate risk arising where it has borrowed at fixed rates. c) Price risk The Group does not have any price risk exposure. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises from cash and cash equivalents, deposits with banks, derivative financial instruments and the Group’s receivables from customers. The Group has no significant concentrations of credit risk. Credit risk with respect to trade receivables is limited due to the large number of subscribers included in the Group’s subscriber base. In addition, receivables balances are monitored on an on-going basis with the result that the Group’s exposure to bad debts is not significant. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. The maximum exposure is the carrying amount as disclosed in note 6. Derivative counterparties and cash transactions are limited to high credit quality financial institutions. The Group has policies that limit the amount of credit exposure to any one financial institution. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Group aims to maintain flexibility in funding by keeping committed credit lines available. Management monitors the Group’s cash requirements on a daily basis against expected cash flows based on a rolling daily cash flow forecast for at least 90 days in advance. In addition the Group compares actual cash flow reserves against forecast and budget on a monthly basis. The Group had an undrawn facility balance of $300,000,000 (June 2015: $150,000,000) that can be drawn down to meet short-term working capital requirements as well as repayment of the bond on 16 October 2016. On 17 July 2015, there was an increase in the facility limit of $50,000,000 and on 28 June 2016 the facility limit was increased by another $100,000,000). SKY ANNUAL REPORT 2016 57 14. Financial RiSK manaGement (CONTINUED) The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period from the balance date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, including interest payments in respect of financial liabilities and the net settled interest rate derivatives that are in a loss position at balance date. Balances due within 12 months equal their carrying value as the impact of discounting is not significant. IN NZD 000 At 30 June 2016 Non derivative financial liabilities Secured bank loans Bonds Trade and other payables Derivative financial liabilities Forward exchange contracts used for hedging – net outflow/inflow (1) Interest rate swaps (1) At 30 June 2015 Non derivative financial liabilities Secured bank loans Lease liabilities Bonds Trade and other payables Derivative financial liabilities Forward exchange contracts used for hedging – net outflow/inflow (1) Interest rate swaps (1) Notes Carrying amount Contractual cash flows Less than one year 1-2 years 2-5 years > 5 years 11 11 10 12 12 11 11 11 10 12 12 49,468 (57,688) (1,900) 298,617 (333,068) (209,630) 134,642 (134,642) (134,642) (1,900) (6,250) – (53,888) (117,188) – 10,958 (11,159) (9,041) (1,440) (678) 9,663 (8,867) (4,325) (3,099) (1,443) – – – – – 503,348 (545,424) (359,538) (12,689) (173,197) – 49,424 3,294 (59,720) (3,294) (2,430) (3,294) (2,430) (54,860) – – – – 298,045 (347,448) (15,110) (208,896) (6,250) (117,192) 117,980 (117,980) (117,980) 983 (986) (986) – – – – 8,132 (6,260) (2,090) (2,077) (2,093) – – – 477,858 (535,688) (141,890) (213,403) (63,203) (117,192) (1) The table excludes the contractual cash flows of the interest rate swaps and forward exchange contracts which are included in assets. 58 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 14. Financial RiSK manaGement (CONTINUED) The table below analyses the Group’s foreign exchange derivative financial instruments which will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Inflows have been calculated using balance date spot rates. Contractual cash flows foreign exchange amount Exchange rate Contractual cash flows Less than one year 1-2 years 3-5 years (361,104) (172,054) (677) 354,994 166,577 678 (11,586) (400,384) (141,144) (1,131) 433,308 146,817 1,185 38,651 (163,481) (105,123) (677) 160,715 101,777 678 (6,111) (155,592) (96,437) (1,131) 177,038 99,607 1,185 24,670 (76,474) (47,279) – 75,180 45,774 – (121,149) (19,652) – 119,099 19,026 – (2,799) (2,676) (74,825) (44,707) – 79,851 47,210 – 7,529 (169,967) – – 176,419 – – 6,452 0.7091 0.9544 72.7466 251,727 158,981 49,329 0.6802 0.8864 83.2497 294,736 130,139 98,658 IN NZD 000 At 30 June 2016 Forward foreign exchange contracts Outflow (at FX hedge rate) USD AUD YEN Inflow (at year end market rate) USD AUD YEN At 30 June 2015 Forward foreign exchange contracts Outflow (at FX hedge rate) USD AUD YEN Inflow (at year end market rate) USD AUD YEN Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group’s overall strategy for capital risk management remains unchanged from 2015. The capital structure of the Group consists of debt which includes the borrowings disclosed in note 11, cash and cash equivalents and equity attributable to equity holders of the Parent comprising share capital, hedging reserve and retained earnings as disclosed in note 13. It is anticipated that the Group’s revolving credit facility will be utilised to repay the bond due for repayment on 16 October 2016. The board reviews the Group’s capital structure on a regular basis. The Group has a facility agreement in place with a syndicate of banks and a retail bond issue as described in note 11. 14. Financial RiSK manaGement (CONTINUED) The gearing ratio at the year-end was as follows: IN NZD 000 Debt Cash and cash equivalents Net debt Equity Net debt to equity ratio SKY ANNUAL REPORT 2016 59 Note 11 2016 348,085 (22,863) 325,222 1,330,923 2015 350,763 (17,895) 332,868 1,337,203 24% 25% The Group’s bank loan facility is subject to a number of covenants, including interest and debt cover ratios, calculated and reported quarterly, with which it has complied for the entire year reported (2015: complied). Fair value estimation The methods used to estimate the fair value of financial instruments are as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Level 3: Inputs for the asset or liability that are not based on observable market data (that is unobservable inputs), for example discounted cash flow. SKY’s financial assets and liabilities carried at fair value are valued on a level 2 basis other than the available for sale investment (refer note 1) that is valued on a level 3 basis. IN NZD 000 Assets measured at fair value Trading derivatives – dedesignated or not hedge accounted Derivatives used for hedging – cash flow hedges Available for sale investment Total assets Liabilities measured at fair value Trading derivatives – dedesignated or not hedge accounted Derivatives used for hedging – cash flow hedges Total liabilities Note 12 12 1 12 12 2016 105 9,481 4,832 14,418 (3,364) (17,257) (20,621) 2015 5,559 51,671 – 57,230 (4) (9,111) (9,115) The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. The Group uses a variety of methods and assumptions that are based on market conditions existing at each balance date. Techniques, such as estimated discounted cash flows, are used to determine the fair value of financial instruments. The fair value of forward exchange contracts is based on market forward foreign exchange rates at year end. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the reporting date, taking into account current interest rates, observable yield curves and the current creditworthiness of the swap counterparties. 60 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 14. Financial RiSK manaGement (CONTINUED) Fair value of financial instruments carried at amortised cost Financial assets Loans and receivables Cash and cash equivalents Trade and other receivables Total assets Financial liabilities held at amortised cost Bank loans Lease liabilities Bonds Trade and other payables Total liabilities 2016 2015 Notes Carrying Amount Fair Value Carrying Amount Fair Value 6 11 11 11 10 22,863 62,035 84,898 49,468 – 298,617 134,642 482,727 22,863 62,035 84,898 44,366 – 308,644 134,642 487,652 17,895 64,253 82,148 49,424 3,294 298,045 117,980 17,895 64,253 82,148 48,759 3,294 306,865 117,980 468,743 476,898 The fair values of financial assets and financial liabilities are determined as follows: Cash and short-term deposits, trade and other receivables carried at amortised cost, trade and other payables, and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments. The fair value of quoted notes and bonds is based on price quotations at the reporting date being a level 1 basis. The fair value of loans from banks and lease liabilities is estimated on a level 3 basis by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities. The fair value of related party receivables is estimated on a level 3 basis by discounting future cash flows using rates currently available for deposits on similar terms. Classification Financial assets are classified in the following categories: at fair value through profit or loss, or loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at each reporting date. All purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase the assets. Purchases or sales of financial assets are sales or purchases that require delivery of assets within the period generally established by regulation or convention in the marketplace. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are categorised as held for trading unless they are designated as hedges. Gains or losses arising from changes in the fair value of the “financial assets at fair value through profit or loss” category are recognised in profit and loss. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those assets with maturities greater than 12 months after the balance date when they are classified as non-current assets. The Group’s loans and receivables comprise trade and other receivables and cash and cash equivalents in the balance sheet. Gains or losses are recognised in profit or loss when the loans and receivables are derecognised or impaired as well as through the amortisation process. Impairment of financial assets The Group assesses at each balance date whether there is objective evidence, such as default or delinquency in payment, that a financial asset or group of financial assets is impaired. If there is objective evidence that an impairment loss on assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through use of an allowance account with the amount of the loss being recognised in profit or loss. 15. COMMITMENTS IN NZD 000 Operating leases – future minimum lease payments: Year 1 Year 2 Year 3 Year 4 Year 5 Later than five years Contracts for transmission services: Year 1 Year 2 Year 3 Year 4 Contracts for future programmes: Year 1 Year 2 Year 3 Year 4 Year 5 Later than five years Capital expenditure commitments: Property, plant and equipment Year 1 Year 2 Other services commitments: Year 1 Year 2 Year 3 Year 4 Year 5 SKY ANNUAL REPORT 2016 61 2016 2015 35,978 34,323 33,413 33,140 33,102 14,049 35,629 36,570 36,487 35,918 35,648 50,714 184,005 230,966 6,428 2,951 539 245 9,203 6,144 2,462 49 10,163 17,858 187,787 184,703 155,257 115,457 66,366 30,449 176,871 150,140 115,231 75,656 62,616 27,930 740,019 608,444 16,197 – 16,197 7,190 2,650 526 – – 73,538 34,259 107,797 10,017 1,141 493 43 – 10,366 11,694 The Group has entered into a contract with Optus Networks Pty Limited (Optus) to lease transponders on the D1 satellite which was launched in October 2006 and commissioned in November 2006. The contract is for a period of 15 years from the time of commissioning with monthly payments in Australian dollars. This contract is accounted for as an operating lease. Non-cancellable operating lease payments, including Optus lease payments, are included in operating leases above. SKY is currently utilising seven transponders, six of which are on a long-term lease. Access to the seventh transponder was negotiated, effective from 1 April 2011, to enable the launch of additional channels. The cost of leasing the seventh transponder for the first three years to 31 March 2014 is based on a revenue share of certain specified SKY channels. Payments thereafter are for a fixed amount. 62 SKY ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED Financial StatementS (CONTINUED) For the year ended 30 June 2016 16. CONTINGENT LIABILITIES The Group has undrawn letters of credit at 30 June 2016 of $650,000 (30 June 2015: $650,000), relating to Datacom Employer Services for SKY executive and Screen Enterprises Limited payroll liabilities in the current year. The Group is subject to litigation incidental to their business, none of which is expected to be material. No provision has been made in the Group’s financial statements in relation to any current litigation and the directors believe that such litigation will not have a significant effect on the Group’s financial position, results of operations or cash flows. 17. SUBSEQUENT EVENTS In July 2016 the facility limit was decreased to $300 million, from $350 million (refer note 11). Acquisition of Vodafone: At a special meeting on 6 July 2016 SKY shareholders voted to approve the acquisition of Vodafone NZ for a proposed transaction price of $3.44 billion, to approve the incurrence of new debt and to approve the issue of new shares to Vodafone Plc. Subject to regulatory approvals, which is expected to be by December 2016, SKY will acquire all of the shares in Vodafone NZ from Vodafone Europe B.V for a total purchase price of $3.44 billion, paid for through a mixture of cash and SKY shares. The issue of shares will result in Vodafone owning 51% of the total number of shares in SKY. The purchase price will consist of the issue of 405,023,041 shares at a price of $5.40 and a cash payment of $1.25 billion totalling approximately $3.44 billion. The transaction will be financed by new debt of up to $1.8 billion which has been negotiated at favourable terms with Vodafone Overseas Finance Limited. However SKY retains the right to renegotiate the revolving credit portion of this debt with one or more third parties. For further details relating to this transaction please refer to the Explanatory Memorandum on SKY’s website ww.skytv.co.nz/investor. On 25 August 2016 the Board of Directors announced that it will pay a fully imputed dividend of 15 cents per share with the record date being 9 September 2016. A supplementary dividend of 2.6471 cents per share will be paid to non-resident shareholders subject to the foreign investor tax credit regime. SKY ANNUAL REPORT 2016 63 INDEPENDENT AUDITORS’ REPORT To the shareholders of SKY Network Television Limited RePORt On tHe cOnSOliDateD Financial StatementS We have audited the consolidated financial statements of SKY Network Television Limited (“the Company”) on pages 32 to 62, which comprise the consolidated balance sheet as at 30 June 2016, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and the notes to the financial statements that include significant accounting policies and other explanatory information for the Group. The Group comprises the Company and the entities it controlled at 30 June 2016 or from time to time during the financial year. Directors’ Responsibility for the Consolidated Financial Statements The Directors are responsible on behalf of the Company for the preparation and fair presentation of these consolidated financial statements in accordance with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards and for such internal controls as the Directors determine are necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing. These standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. We are independent of the Group. Our firm carries out other services for the Group in the areas of assurance and advisory services. In addition, certain partners and employees of our firm may have dealt with the Group on normal terms within the ordinary course of the trading activities of the Group. The provision of these other services has not impaired our independence. Opinion In our opinion, the consolidated financial statements on pages 32 to 62 present fairly, in all material respects, the financial position of the Group as at 30 June 2016 and its financial performance and cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards. Restriction on Use of our Report This report is made solely to the Company’s shareholders, as a body, in accordance with the Companies Act 1993. Our audit work has been undertaken so that we might state those matters which we are required to state to them in an auditors’ 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 Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed. Chartered Accountants 25 August 2016 Auckland PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 (9) 355 8000, F: +64 (9) 355 8001, www.pwc.com/nz OTHER INFORMATION CORPORATE GOVERNANCE INTERESTS REGISTER COMPANY AND BONDHOLDER INFORMATION WAIVERS AND INFORMATION SHARE MARKET AND OTHER INFORMATION DIRECTORY 65 67 69 74 75 76 CORPORATE GOVERNANCE SKY ANNUAL REPORT 2016 65 This section includes a summary of SKY’s corporate governance practices, policies and procedures. SKY has a more detailed corporate governance statement available online at www.sky.co.nz/investor- relations, which provides the required disclosures and compliance statements under the ASX Corporate Governance Principles and Recommendations and the NZX Corporate Governance Best Practice Code as at 18 August 2016. That corporate governance statement has been approved by the board. independence policy to ensure that SKY’s relationship with its auditors is appropriate. The audit and risk committee charter is posted on SKY’s website at www.sky.co.nz/investor-relations. The audit and risk committee focuses on internal controls and risk management and particular areas of emphasis include: • adequacy, appropriateness and effectiveness of accounting and operating controls; BOARD OF DIRECTORS Membership SKY’s board is elected or appointed by the shareholders of SKY by ordinary resolution. SKY’s constitution provides for a minimum of three directors and a maximum of ten directors. The actual number of directors may be changed by resolution of the board. As at 30 June 2016, the board consisted of six directors whose relevant skills, experience and expertise are outlined in their biographies on pages 10 and 11 and in the detailed corporate governance statement on SKY’s website. Following completion of the intended acquisition of Vodafone New Zealand Limited, SKY’s board will be expanded to comprise nine directors, as explained further in the Notice of Meeting and Explanatory Memorandum. In relation to other appointments, the nomination and remuneration committee has a formal process by which it assesses the overall skills, experience and diversity required on the board and works with the board to ensure that diversity remains one of the key criteria when evaluating potential board candidates. The aim of the board is to have a mix of skills represented on the board that are relevant to SKY’s business. The board may appoint directors to fill casual vacancies that occur or add persons to the board up to the maximum number prescribed by the constitution. At each annual meeting all directors appointed by the board must retire and one third of the other directors must retire, although they can offer themselves for re-election if they wish. Directors’ fees are currently set at a maximum amount of $950,000 per annum. Independent and Executive Directors At 30 June 2016 all of the directors of SKY other than John Fellet were considered to be independent directors. John Fellet is currently the only executive director on the board. In determining independence, the board applies the materiality thresholds set out in the NZX and ASX Listing Rules. POLICIES, PRACTICES AND PROCESSES SKY has a number of policies, practices and processes that establish guidelines and practices to be followed in certain circumstances or in relation to certain matters. These policies, practices and processes are under regular review by management and the board. Further information is also set out in the corporate governance statement available online at www.sky.co.nz/investor-relations. Audit and Risk Committee Charter and Audit Independence Policy SKY has in place an audit and risk committee charter to govern the operation of the audit and risk committee as well as an audit • extent of compliance with SKY policies and procedures; • accuracy of, and security over, data and information; • accountability for SKY’s assets to safeguard against loss; • ensuring an effective internal control environment is fostered; and • economy and efficiency with which resources are employed. The audit independence policy is designed to ensure that there is no perception of conflict in the independent role of the external auditor. It restricts and monitors the types of services that the external auditor can provide to SKY, prohibits contingency-type fees and requires audit partner rotation every five years. Code of Conduct SKY has a code of conduct which outlines SKY’s policies in respect of conflicts of interest, corporate opportunities, confidentiality, insider trading and dealing with corporate assets, in addition to encouraging compliance with applicable laws and regulations. The code of conduct is posted on SKY’s website: www.sky.co.nz/investor-relations. Communication and Disclosure Policy SKY has a communication and disclosure policy designed to keep both the market and SKY’s shareholders properly informed. The policy is also designed to ensure compliance with SKY’s continuous disclosure obligations and includes posting press releases, annual reports and assessments, and other investor-focused material on its website. The policy is overseen by SKY’s Chief Executive and Company Secretary. A copy of this policy is available on SKY’s website at www.sky.co.nz/investor-relations. Diversity Policy Diversity of gender, skill, age, ethnicity, experience and beliefs are valued by SKY. SKY recognises the value of diversity and the organisational strength, problem solving ability and innovative approach that it brings. The provision of equal opportunities for all employees is fundamental to the way in which SKY functions as a business. SKY established a diversity policy during 2012 (updated in 2015) and has posted this on SKY’s website at www.sky.co.nz/investor-relations. The board acknowledges there is a lot of focus on gender diversity both on boards and within companies, and as noted in SKY’s diversity policy, this is one of the diversity characteristics that is considered when evaluating new director candidates. As at 30 June 2016, SKY’s board had two female directors and four male directors (compared to one female director and six male directors as at 30 June 2015). 66 SKY ANNUAL REPORT 2016 CORPORATE GOVERNANCE (CONTINUED) SKY takes a holistic approach to diversity. SKY’s measurable objectives for achieving diversity are that: • Each year, the board actively considers the composition of the board and any opportunities for new directors to join the board with diversity (including gender diversity) being one of the key criteria when considering new appointments. Three recent board appointments (Susan Paterson, Geraldine McBride and Derek Handley) demonstrate a commitment to these diversity objectives. • Each year the board compares the number of female and male employees at SKY to the previous financial year’s figures to ensure that SKY is maintaining a strong level of female participation at all levels of the organisation. • Each year the board considers the extent of age diversification at SKY by comparing the number of employees aged over and under 45 years to the previous financial year’s figures, in order to ensure SKY is benefiting from a mix of experience and new ways of thinking. For the year ended 30 June 2016, the board is satisfied that SKY achieved its gender diversity objectives and other measureable diversity objectives as follows: • The board considered opportunities for new directors to join the board with diversity (including gender diversity) in mind for new appointments. • There was almost equal representation of male and female employees across SKY (47% of staff are female as at 30 June 2016, compared to 47% at 30 June 2015). • SKY had good female participation at all levels of the organisation, including 28 female senior executives compared to 47 male senior executives as at 30 June 2016 (there were 25 female senior executives and 48 male senior executives at 30 June 2015)(1). • There was strong participation at senior levels of the organisation of employees under the age of 45 years (including 40% of senior executives as at 30 June 2016 compared to 28% at 30 June 2015), compared to employees over the age of 45 years (60% of senior executives as at 30 June 2016 compared to 72% at 30 June 2015). Health and Safety SKY has an occupational health and safety policies and procedures manual and a group health and safety management committee to ensure that SKY fully complies with its health and safety obligations. SKY’s strategic approach to health and safety is to: • provide a safe workplace for all; • fulfil all safety obligations within the business, in line with the strategic intent, corporate objectives and legislative requirements; and • share a vision and commitment to a safety culture that drives continual improvement and resilience at all levels within the company. Insider Trading Policy SKY has a formal policy in relation to insider trading which is posted on SKY’s website at www.sky.co.nz/investor-relations. The policy provides that directors, officers and employees of SKY may not buy or sell securities in SKY, nor may they tip others, while in the possession of inside information. SKY’s policy affirms the law relating to insider trading contained in the Financial Markets Conduct Act 2013 and complies with ASX Listing Rule 12.9. Investor Communications Policy SKY has posted an investor communications policy on its website at www.sky.co.nz/investor-relations. This policy explains how SKY facilitates effective two way communication with investors. Independent Advice SKY has a procedure for board members to seek independent legal advice at SKY’s expense. Remuneration Policy and Performance Monitoring SKY has policies in place to ensure that it remunerates fairly and responsibly. All executives and employees receive a portion of their salary based on individual and companywide performance. The executive incentive scheme is based on the concept of economic value added. In addition to their base salary, executives are remunerated for increasing the level of economic return on capital employed in the business. Bonuses are “banked”, with 33% of the bank being paid out each year at the discretion of the board. The scheme promotes employee loyalty while ensuring that the cost of the scheme is proportionate to SKY’s level of economic return. The performance of key executives is monitored on a continual basis by the board and Chief Executive but principally as part of annual salary reviews. Regulatory Policy SKY has policies and procedures in place to ensure compliance with relevant laws, regulations and the NZX and ASX Listing Rules. Treasury Policy SKY has a formalised treasury policy that establishes a framework for: • foreign exchange risk management; • interest rate risk management; • borrowing, liquidity and funding risk; • cash management; • counterparty credit risk; • operational risk and dealing procedures; and • reporting and performance management. The objective of the policy is to reduce, spread and smooth interest rate and foreign exchange risk impacts on financial results over a multi-year period, reduce volatility in financial performance and ensure appropriate debt and liquidity arrangements for the business. (1) ‘Senior executives’ are executives at one and two levels below the Chief Executive in terms of reporting lines. For the year ended 30 June 2016, 8 out of 21 senior executives one level below the Chief Executive were female and 20 out of 54 senior executives two levels below the Chief Executive were female. INTERESTS REGISTER SKY ANNUAL REPORT 2016 67 DISCLOSURES OF INTEREST – GENERAL NOTICES Directors have given general notices disclosing interests in various entities pursuant to section 140(2) of the Companies Act 1993. Those notices which remain current as at 30 June 2016 are as follows:(2) Director John Fellet Derek Handley Peter Macourt Geraldine McBride Susan Paterson ONZM John Waller ONZM Entity Media Finance Limited Outside Broadcasting Limited SKY Ventures Limited (formerly Cricket Max Limited) Igloo Limited Iliad Management Limited Aera Foundation Aera Limited Far East Associated Traders Limited Virtus Health Limited Prime Media Limited My Wave Holdings Limited My Wave Limited Fisher & Paykel Healthcare Corporation Limited National Australia Bank Limited Theta Systems Limited Les Mills Holdings Limited Airways Corporation of New Zealand Limited Airways International Limited Goodman Property Aggregated Limited Goodman (NZ) Limited Arvida Group Limited GMT Bond Issuer Limited GMT Wholesale Bond Issuer Limited The Electricity Authority Tertiary Education Commission The Home of Cycling Charitable Trust Institute of Directors Auckland Branch Housing Corporation New Zealand(3) Abano Healthcare Group Limited(3) Donaghys Limited Fonterra Co-Operative Group Limited(4) Haydn & Rollett Limited BNZ Investments Limited(4) Bank of New Zealand(4) National Australia Bank Limited(4) National Equities Limited(4) Property for Industry Limited and subsidiary GS Group Services Limited Hyundai Motors New Zealand Limited IFX Services Limited Sunrise Group NZ Limited Isuzu Utes New Zealand Limited New World Motors Limited Global Motors NZ Limited Relationship Director Director Director Director Director Trustee Director Director Director/Chair Director Director Director Director Director Chair/Shareholder Director Chair Director Director Director Director Director Director Board Member Commissioner Chair Member Director Director Director/Shareholder Director Director Director Director/Chair Director/Shareholder Director Director/Shareholder Director/Chair Director/Chair Director Director Director/Chair Director Director (2) Robert Bryden retired from the board on 21 October 2015. Mr Bryden had not disclosed any interests pursuant to section 140(2) of the Companies Act 1993. Humphry Rolleston retired from the Board on 21 October 2015. Mr Rolleston had disclosed interests arising as a director of Infratil Limited, Matrix Security Group Limited and Media Metro NZ Limited, and as director and shareholder of Asset Management Limited, Mercer Group Limited and various subsidiaries, Property for Industry Limited and its subsidiaries, and Murray & Company Limited. (3) On 30 September 2015 Susan Paterson resigned as director of Housing Corporation New Zealand and on 30 November 2015 she resigned as director of Abano Healthcare Group Limited. (4) On 31 July 2015 Mr Waller retired as Chairman of Bank of New Zealand and as a director of Bank of New Zealand, BNZ Investments Limited, National Australia Bank Limited and National Equities Limited. Mr Waller has also announced his retirement as director of Fonterra Co-operative Group Limited, effective 31 August 2016. 68 SKY ANNUAL REPORT 2016 INTERESTS REGISTER (CONTINUED) DISCLOSURES OF INTEREST – AUTHORISATION OF RemUneRatiOn anD OtHeR BeneFitS SKY’s board did not authorise any additional payments of annual directors’ fees during the year to 30 June 2016. SKY SUBSIDIARIES’ INTEREST REGISTERS The directors of SKY’s subsidiaries have given notices disclosing interests in the various entities pursuant to section 140 of the Companies Act 1993. Those notices which remain current as at 30 June 2016 are set out below: DISCLOSURES OF INTEREST – PARTICULAR TRANSACTIONS/USE OF COMPANY INFORMATION During the year to 30 June 2016, in relation to SKY: Screen Enterprises Limited: George McFarlane and Jason Hollingworth have each given a general notice disclosing interests arising from being employees of SKY. • no specific disclosures were made in the Interests Register under section 140(1) of the Companies Act 1993; and • no entries were made in the Interests Register as to the use of company information under section 145(3) of the Companies Act 1993. DISCLOSURES OF RELEVANT INTERESTS IN SECURITIES During the year to 30 June 2016, in relation to SKY’s directors, officers and senior managers, the following disclosures were made in the Interests Register as to dealing in SKY’s shares under section 148 of the Companies Act 1993 and section 297 of the Financial Markets Conduct Act 2013: • John Fellet made two ongoing disclosures in relation to the on-market acquisitions of 19,900 and 19,800 ordinary shares on 15 June 2016 and 21 June 2016 respectively; • Susan Paterson made an ongoing disclosure in relation to the on-market acquisition of 10,000 ordinary shares on 14 June 2016 by the S M Taylor Family Trust (of which Ms Paterson is a trustee); and Outside Broadcasting Limited: John Fellet and Jason Hollingworth have given notices disclosing interests arising from being employees of SKY and, in John Fellet’s case, a director of SKY. SKY DMX Music Limited: Martin Wrigley and Grant McKenzie have each given a general disclosure notice disclosing interests arising from being senior employees of SKY and, in Martin Wrigley’s case, a shareholder of SKY. Igloo Limited: John Fellet, Jason Hollingworth, Michael Watson, and Matthew Orange have given notices disclosing interests arising from being employees of SKY and, in John Fellet’s case, a director of SKY. Believe It Or Not Limited: Grant McKenzie and Eggherick Van Der Plank have given notices disclosing interests arising from being employees of SKY. Brendan Lochead has given a general notice disclosing his interest arising from being a shareholder of Believe It Or Not Limited and a director and shareholder of Mad If You Don’t Limited. Annabelle Lochead has given a general notice disclosing her interest arising from being the wife of Brendan Lochead (who is a shareholder of Believe It Or Not Limited) and a director and shareholder of Mad If You Don’t Limited. • John Waller made one ongoing disclosure in relation to the on-market acquisition of 5,000 ordinary shares on 14 June 2016 by the JAW No2 Trust (of which Mr Waller is a trustee). SKY Ventures Limited: John Fellet and Jason Hollingworth have given notices disclosing interests arising from being employees of SKY and, in John Fellet’s case, a director of SKY. INSURANCE AND INDEMNITIES SKY has in place directors’ and officers’ liability insurance to cover risks normally covered by such policies arising out of acts or omissions of SKY directors or employees in that capacity. This policy was replaced in June 2016 (and SKY’s interests register has been updated to reflect it). SKY has entered into a deed of indemnity pursuant to which it has agreed to indemnify directors, senior management and officers of SKY against liability incurred from acts or omissions of such directors, senior management or officers, subject to certain exceptions which are normal in such indemnities. This deed of indemnity was replaced in June 2016 (and SKY’s interests register has been updated to reflect it). SKY has also taken out prospectus liability insurance for the directors and officers of SKY relating to the merger of the businesses of SKY and Vodafone New Zealand Limited (and the transactions and documentation relating to that merger). Particulars of this insurance have been entered into SKY’s interests register. SKY ANNUAL REPORT 2016 69 COMPANY AND BONDHOLDER INFORMATION DiRectORS HOlDinG anD ceaSinG OFFice Robert Bryden (retired 21 October 2015) John Fellet Derek Handley Peter Macourt Geraldine McBride Susan Paterson, ONZM (appointed 20 August 2015) Humphry Rolleston (retired 21 October 2015) John Waller, ONZM DIRECTORS OF SUBSIDIARIES Subsidiary Director SKY DMX Music Limited Grant McKenzie Martin Wrigley Steven Hughes Claude Nahon (retired 24 February 2016) Kenneth Eissing Jr (appointed 24 March 2016) Screen Enterprises Limited Jason Hollingworth George McFarlane Outside Broadcasting Limited John Fellet SUBSIDIARIES At 30 June 2016, SKY had the following subsidiary companies: Igloo Limited Jason Hollingworth John Fellet Jason Hollingworth Michael Watson Mathew Orange SKY DMX Music Limited, Screen Enterprises Limited, Outside Broadcasting Limited, Igloo Limited, Believe it Or Not Limited, SKY Ventures Limited (previously Cricket Max Limited) and Media Finance Limited. During the year to 30 June 2016, SKY DMX Music Limited operated the SKY DMX music business, Screen Enterprises Limited operated the FATSO DVD and blu-ray rental business, Outside Broadcasting Limited provided mobile on-site broadcasting facilities and services, Igloo Limited delivered a low-cost pay television service over a digital terrestrial network and via broadband,(4) Believe it Or Not Limited provided quizzes for the hotel entertainment industry and Cricket Max Limited was renamed as SKY Ventures Limited and began providing investment and sponsorship in the field of information and broadcast technology, initially by making a 15.79% investment in 90 Seconds Pty Limited (a cloud video production company). Media Finance Limited did not trade during that year. Believe It or Not Limited Anabelle Lochead SKY Ventures Limited (previously Cricket Max Limited) Brendon Lochead Grant McKenzie Eggherick Van der Plank John Fellet Jason Hollingworth (appointed 3 February 2016) Media Finance Limited John Fellet The remuneration of SKY’s employees acting as directors of subsidiary companies is disclosed in the relevant banding for employee remuneration on page 73 or in the case of John Fellet, his remuneration is disclosed below under the heading of “Remuneration of Directors”. No director of any subsidiary company received directors’ fees or extra benefits by virtue of the fact that they are acting as directors of subsidiary companies. (4) SKY announced in July 2016 that the Igloo service will be closing down from around March 2017. 70 SKY ANNUAL REPORT 2016 COMPANY AND BONDHOLDER INFORMATION (CONTINUED) STATEMENT OF DIRECTORS’ INTERESTS For the purposes of NZX Listing Rule 10.4.5(c), the following table sets out the equity securities (shares in SKY) in which each director had a relevant interest as at 30 June 2016*: SUBSTANTIAL SECURITY HOLDERS According to notices given to SKY under the Securities Markets Act 1988 and the Financial Markets Conduct Act 2013 the following persons were substantial security holders in SKY as at 30 June 2016 and 12 August 2016 (as indicated below): Entity Perpetual Limited Lazard Asset Management Pacific Co BlackRock, Inc Commonwealth Bank of Australia Securities as at 30 June 2016 51,403,681 32,662,347 32,317,037 23,427,062 Entity Perpetual Limited BlackRock, Inc Securities as at 12 August 2016 51,403,681 36,222,477 The total number of issued voting securities of SKY as at 30 June 2016 and 12 August 2016 was 389,139,785. Relevant interests John Fellet Derek Handley Peter Macourt Geraldine McBride Susan Paterson John Waller Shares 156,300 4,000 - - 17,800 15,000 * Robert Bryden and Humphry Rolleston retired on 21 October 2015. REMUNERATION OF DIRECTORS Directors’ remuneration and value of other benefits received by directors of SKY during the year 1 July 2015 to 30 June 2016 were as follows: Name Robert Bryden (5) John Fellet (6) Derek Handley Peter Macourt Geraldine McBride Susan Paterson (7) Humphry Rolleston (8) John Waller Total remuneration $31,159 $2,003,250 $95,986 $161,000 $92,500 $97,940 $29,632 $117,500 (5) Robert Bryden retired on 21 October 2015. (6) John Fellet is also SKY’s Chief Executive and a director of Cricket Max Limited, Media Finance Limited, Outside Broadcasting Limited and Igloo Limited. He did not receive any directors’ fees during the above period. His remuneration, as specified above, comprises salary and performance based remuneration. (7) Susan Paterson was appointed on 20 August 2015. (8) Humphry Rolleston retired on 21 October 2015 TWENTY LARGEST SHAREHOLDERS AS AT 12 AUGUST 2016 Holder name HSBC Nominees (New Zealand) Limited RBC Investor Services Australia Nominees Pty Limited JP Morgan Chase Bank NA National Nominees New Zealand Limited Citibank Nominees (New Zealand) Limited JP Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited Accident Compensation Corporation BNP Paribas Nominees (NZ) Limited BNP Paribas Nominees Pty Ltd National Nominees Limited Guardian Nominees No 2 A/C Westpac W/S Enhanced Cash Trust HSBC Nominees A/C NZ Superannuation Fund Nominees Limited ANZ Wholesale Australasian Share Fund UBS Nominees Pty Limited FNZ Custodians Limited ANZ Custodial Services New Zealand Limited Tea Custodians Limited New Zealand Permanent Trustees Limited SKY ANNUAL REPORT 2016 71 Holding Percentage (to 2 d.p.) 104,185,494 26.77 28,632,199 27,493,562 27,371,401 21,857,135 20,752,460 16,896,114 15,879,576 15,218,038 12,664,211 9,281,158 9,077,407 5,593,123 5,490,177 5,437,157 5,011,637 4,135,436 3,280,493 3,122,756 2,766,683 7.36 7.07 7.03 5.62 5.33 4.34 4.08 3.91 3.25 2.39 2.33 1.44 1.41 1.40 1.29 1.06 0.84 0.80 0.71 DISTRIBUTION OF ORDINARY SHARES AND SHAREHOLDINGS AS 12 AUGUST 2016 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total No. of shareholders Percentage (to 2 d.p.) No. of shares Percentage (to 2 d.p.) 2,727 3,413 740 443 77 36.85 46.12 10.00 5.99 1.04 1,621,097 8,786,980 5,478,346 10,900,037 362,353,325 7,400 100.00 389,139,785 0.42 2.26 1.41 2.80 93.11 100.00 NON MARKETABLE PARCELS OF SHARES As at 12 August 2016, 232 shareholders in SKY had non-marketable parcels of shares for the purposes of ASX Listing Rule 4.10.8. OTHER INFORMATION For the purposes of ASX Listing Rules 4.10.14, 4.10.18 and 4.10.21, as at 12 August 2016: • SKY had no restricted securities or securities subject to voluntary escrow on issue; • there was no on-market buy back; and • SKY was not subject to s611 of the Corporations Act 2001. VOTING RIGHTS ATTACHED TO SHARES Each share entitles the holder to one vote. 72 SKY ANNUAL REPORT 2016 COMPANY AND BONDHOLDER INFORMATION (CONTINUED) DISTRIBUTION OF BONDS AND BONDHOLDINGS AS AT 12 AUGUST 2016 SKTFA Bonds 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over TOTAL SKTO20 Bonds 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over TOTAL No. of bondholders Percentage (to 2 d.p.) No. of bonds 875,000 4,177,500 50,965,500 8.19 20.46 64.14 7.21 143,982,000 Percentage (to 2 d.p.) 0.44 2.09 25.48 71.99 100.00 200,000,000 100.00 175 437 1,370 154 2,136 No. of bondholders Percentage (to 2 d.p.) No. of bonds Percentage (to 2 d.p.) 134 244 582 53 13.23 24.09 57.45 5.23 670,000 2,354,000 19,493,000 77,483,000 0.67 2.36 19.49 77.48 1,013 100.00 100,000,000 100.00 VOTING RIGHTS ATTACHED TO BONDS Each bondholder is entitled to one vote for every dollar of principal outstanding on their bonds at meetings of bondholders. Bondholders do not have the right to attend or vote at shareholders’ meetings. SKY ANNUAL REPORT 2016 73 EMPLOYEE REMUNERATION The number of employees or former employees of SKY and its subsidiaries (excluding directors of SKY but including employees of SKY holding office as directors of subsidiaries, other than the Chief Executive (9)) whose remuneration and benefits was within specified bands for the year to 30 June 2016 is as follows: Remuneration $ 100,000 – 110,000 110,001 – 120,000 120,001 – 130,000 130,001 – 140,000 140,001 – 150,000 150,001 – 160,000 160,001 – 170,000 170,001 – 180,000 180,001 – 190,000 190,001 – 200,000 200,001 – 210,000 210,001 – 220,000 220,001 – 230,000 230,001 – 240,000 240,001 – 250,000 250,001 – 260,000 270,001 – 280,000 280,001 – 290,000 300,001 – 310,000 310,001 – 320,000 410,001 – 420,000 420,001 – 430,000 500,001 – 510,000 510,001 – 520,000 520,001 – 530,000 550,001 – 560,000 780,001 – 790,000 No. of employees 55 55 32 19 13 7 12 9 4 5 2 1 1 1 3 1 3 2 1 2 4 1 1 1 1 2 1 DONATIONS During the year 1 July 2015 to 30 June 2016, SKY made cash donations totalling $366,000. SKY’s subsidiaries did not make any donations. AUDITORS The auditors of SKY and its subsidiaries were PricewaterhouseCoopers. The amount paid to PricewaterhouseCoopers by SKY and its subsidiaries in the year to 30 June 2016 for statutory audit services and for other assurance services was: IN NZD 000 SKY Statutory audit services Other services 264 48 SKY’s subsidiaries did not pay PricewaterhouseCoopers any fees. (9) The remuneration of SKY’s Chief Executive John Fellet is not included in the above table as he is also a director of SKY. His remuneration is disclosed under the heading “Remuneration of Directors” on page 70. 74 SKY ANNUAL REPORT 2016 WAIVERS AND INFORMATION CURRENT AND ONGOING WAIVERS The following is a summary of all waivers granted in favour of SKY which were relied upon by SKY in the 12-month period preceding the date two months before the date of publication of this report. These were: (a) A waiver from ASX listing rule 7.3.2 to the extent necessary to permit the notice of meeting seeking shareholder approval for the issue of shares representing 51% of the post-issue shares in SKY to Vodafone Europe B.V. not to state that those shares will be issued no later than 3 months after the date of the meeting (subject to certain conditions); (b) A waiver to permit SKY to lodge its half yearly and final reports in the form of an NZX Appendix 1 instead of an ASX Appendix 4D and ASX Appendix 4E, on the condition that SKY provides any additional information required by the ASX Appendices as an annexure to the NZX Appendix 1; (c) A waiver from ASX Listing Rule 6.10.3 to the extent necessary to permit SKY to set the “specified time” to determine whether a security holder is entitled to vote at a shareholders’ meeting in accordance with the requirements of relevant New Zealand legislation; (d) A waiver from ASX Listing Rule 15.7 to permit SKY to provide announcements simultaneously to both ASX and NZX; (e) A waiver from ASX Listing Rule 14.3 to the extent necessary to allow SKY to receive director nominations between the date three months and the date two months before the annual meeting; (f) Confirmation that the rights attaching to SKY shares set out in SKY‘s constitution are appropriate and equitable for the purpose of ASX Listing Rule 6.1 and comply with ASX Listing Rule 2.1; (g) Confirmation that ASX will accept financial accounts prepared in accordance with New Zealand GAAP and New Zealand Auditing Standards, and denominated in New Zealand dollars; and (h) Confirmation that SKY can provide substantial holder information provided to it under the New Zealand Securities Markets Act 1988. aDmiSSiOn tO tHe OFFicial liSt OF tHe AUSTRALIAN STOCK EXCHANGE In connection with SKY’s admission to the official list of the ASX, the following information is provided: 1. SKY is incorporated in New Zealand. 2. SKY is not subject to Chapters 6, 6A, 6B and 6C of the Australian Corporations Act 2001 dealing with the acquisition of shares (such as substantial holdings and takeovers). 3. Limitations on the acquisition of the securities imposed by New Zealand law are as follows: (a) In general, SKY securities are freely transferable and the only significant restrictions or limitations in relation to the acquisition of securities are those imposed by New Zealand laws relating to takeovers, overseas investment and competition. (b) The New Zealand Takeovers Code creates a general rule under which the acquisition of more than 20% of the voting rights in SKY or the increase of an existing holding of 20% or more of the voting rights in SKY can only occur in certain permitted ways. These include a full takeover offer in accordance with the Takeovers Code, a partial takeover offer in accordance with the Takeovers Code, an acquisition approved by an ordinary resolution, an allotment approved by an ordinary resolution, a creeping acquisition (in certain circumstances) or compulsory acquisition if a shareholder holds 90% or more of SKY shares. (c) The New Zealand Overseas Investment Act 2005 (and associated regulations) regulates certain investments in New Zealand by overseas persons. In general terms, the consent of the New Zealand Overseas Investment Office is likely to be required where an ‘overseas person’ acquires shares or an interest in shares in SKY that amount to more than 25% of the shares issued by SKY or, if the overseas person already holds 25% or more, the acquisition increases that holding. (d) The New Zealand Commerce Act 1986 is likely to prevent a person from acquiring SKY shares if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in a market. SKY ANNUAL REPORT 2016 75 SHARE MARKET AND OTHER INFORMATION NEW ZEALAND SKY’s ordinary shares are listed on the main board of the NZX and trade under the symbol SKT. SKY’s bonds are listed on the NZDX and trade under the symbols SKTFA and SKT020. SKY’s International Security Identification Number issued for the Company by the NZX is NZSKTE0001S6. ANNUAL MEETING The next annual meeting of Sky Network Television Limited will be held at the Pullman Hotel Auckland (Regatta Room D), corner Princes Street and Waterloo Quadrant, Auckland, on 20 October 2016, commencing at 2.00pm. NZX Limited Level 1, NZX Centre 11 Cable Street Wellington 6011, New Zealand Mailing address: PO Box 2959 Wellington 6140, New Zealand Tel: +64 4 472 7599 Fax: +64 4 496 2893 Website: nzx.com AUSTRALIA SKY’s ordinary shares are also listed on the ASX and trade under the symbol SKT. ASX Limited Exchange Centre 20 Bridge Street, Sydney NSW 2000, Australia Mailing address: PO Box H224 Australia Square, Sydney NSW 1215, Australia Tel: +61 2 9338 0000 Fax: +61 2 9227 0885 Website: asx.com.au 76 SKY ANNUAL REPORT 2016 DIRECTORY REGISTRARS Shareholders should address questions relating to share certificates, notify changes of address or address any administrative questions to SKY’s share registrar as follows: NEW ZEALAND ORDINARY SHARE REGISTRAR Computershare Investor Services Limited Level 2, 159 Hurstmere Road Takapuna, North Shore City 0622 New Zealand Mailing address: Private Bag 92119 Auckland Mail Centre Auckland 1142, New Zealand Tel: +64 9 488 8777 Fax: +64 9 488 8787 Email: enquiry@computershare.co.nz AUSTRALIAN BRANCH REGISTER Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford, VIC 3067 GPO Box 2975EE Melbourne VIC 3000, Australia Freephone: 1300 850 505 (within Australia) Tel: +61 3 9415 4000 Fax: +61 3 9473 2500 Email: enquiry@computershare.co.nz BONDHOLDER TRUSTEE The New Zealand Guardian Trust Company Limited Level 7, Vero Centre, 48 Shortland Street Auckland 1010, New Zealand Mailing address: PO Box 1934 Auckland 1140, New Zealand Tel: +64 9 377 7300 Fax: +64 9 377 7470 Email: web.corporatetrusts@nzgt.co.nz DIRECTORS Chief Executive John Fellet Derek Handley Peter Macourt Geraldine McBride Susan Paterson ONZM (Appointed 20 August 2015) John Waller ONZM Chairman EXECUTIVES John Fellet Jason Hollingworth Travis Dunbar Megan King Richard Last Cherie Lawrence Chris Major Rawinia Newton Cathryn Oliver Matthew Orange Michael Watson Tex Texeira Kirsty Way Julian Wheeler Martin Wrigley Director and Chief Executive Officer Chief Financial Officer Director of Entertainment Programming Director of Content: Strategy, Planning and Delivery Director of Sport General Counsel and Company Secretary Director of Government Relations Director of Advertising Sales Chief of Staff Director of Products and Ventures Director of Marketing Director of Broadcast and Media Director of Corporate Communications Director of Technology Director of Operations NEW ZEALAND REGISTERED OFFICE 10 Panorama Road, Mt Wellington, Auckland 1060, New Zealand Tel: +64 9 579 9999 Fax: +64 9 579 8324 Website: sky.co.nz AUSTRALIAN REGISTERED OFFICE c/- Allens Arthur Robinson Corporate Pty Limited Level 28, Deutsche Bank Place Corner Hunter and Philip Streets Sydney, NSW 2000, Australia Tel: +61 2 9230 4000 Fax: +61 2 9230 5333 AUDITORS TO SKY PricewaterhouseCoopers PricewaterhouseCoopers Tower, 188 Quay Street, Auckland 1010, New Zealand Tel: +64 9 355 8000 Fax: +64 9 355 8001 SOLICITORS TO SKY Buddle Findlay PricewaterhouseCoopers Tower, 188 Quay Street, Auckland 1010, New Zealand Tel: +64 9 358 2555 Fax: +64 9 358 2055 SKY NETWORK TELEVISION LIMITED PO Box 9059 Newmarket Auckland 1149 New Zealand 10 Panorama Road Mt Wellington Auckland 1060 New Zealand sky.co.nz 

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