Annual Report 2013

Overview

Facts & Figures

Our Annual Report

This is the web version of the Chorus Annual Report 2013. We have made small changes to improve readbility in an online environment.

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Section 209 Notice

Management Commentary

Highlights & challenges

Chorus reports earnings before interest, income tax, depreciation and amortisation (EBITDA) of $663 million for the year ending 30 June 2013. After adjusting for $1 million of insurance proceeds from the Canterbury earthquakes, underlying EBITDA is $662 million. Chief Executive Officer Mark Ratcliffe describes this as “a good operating result particularly with both the UFB and RBI programmes slightly ahead of target, a small increase in the number of access lines and a 6% increase in copper broadband connections. On the downside, capital expenditure demands continue to be significant and regulatory headwinds remain. However, management is pleased with the principled approach the Crown is taking to the regulatory review.”

Highlights

  • Chorus achieved modest  underlying growth in EBITDA for the year ending 30 June 2013 when compared to the normalised, annualised FY12 results.
  • The Government announced that it is bringing forward its review of the telecommunications framework, alongside the already scheduled review of the Telecommunications Service Obligations (TSO).
  • Ultra-Fast Broadband (UFB) build is progressing ahead of schedule with 153,000 premises passed and 205,500 end-users within reach at 30 June 2013.
  • Total fixed line connections are stable at 1,784,000 and demand for fixed broadband connections continued to grow steadily with about 64,000 copper broadband connections added over the last twelve months.
  • Fibre fixed line connections nearly doubled, with fibre revenue now 5.7% of total revenue.
  • Chorus will pay a dividend for the six months ending 30 June 2013 of 15.5 cents per share (25.5 cents per share annual dividend).

Challenges

  • Ongoing uncertainty with the regulatory framework that Chorus operates in (the Telecommunications Act 2001) and the alignment of the framework with the Government’s UFB initiative.
  • Gross capital expenditure for the year was $681 million, with specific challenges on UFB programme deployment costs.
  • Achieving ongoing efficiency in the cost of the UFB network rollout and ensuring UFB connections are made on a time and cost efficient basis.
  • Start of major IT spend and migration from Telecom systems

 

  • Retail service provider focus on residential fibre is still developing, meaning uptake continues to grow incrementally.
  • Industry changes are driving ongoing retail service provider cost focus, including greater focus on mobile substitution.

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Notes to financials

Notes to the financial statements

Reporting entity and statutory base

Chorus Limited is registered in New Zealand under the Companies Act 1993 and is an issuer for the purposes of the Financial Reporting Act 1993. Chorus Limited was established as a standalone, publicly listed entity on 1 December 2011, upon its demerger from Telecom Corporation of New Zealand Limited (Telecom). The demerger was a condition of an agreement with Crown Fibre Holdings Limited (CFH) to enable Chorus Limited to be the Crown’s Ultra-Fast Broadband (UFB) provider in 24 regions, representing approximately 70% of the UFB coverage area. Chorus Limited is listed and its ordinary shares quoted on the NZX

main board equity security market (NZX Main Board) and on the Australian Stock Exchange (ASX). American Depositary Shares (ADSs), each representing five ordinary shares (and evidenced by American Depositary Receipts (ADRs)), are not listed but are traded on the over-the-counter (OTC) market in the United States.

The financial statements presented are those of Chorus Limited (the Company, Parent or the Parent Company) together with its subsidiary (the Chorus Group, Group or Chorus).

Nature of operations

Chorus is New Zealand’s largest fixed line communications infrastructure service provider. Chorus maintains and builds a network predominantly made up of local telephone exchanges, cabinets, copper and fibre cables. Chorus has approximately 1.8 million fixed line

connections. There are around 130,000 kilometres of copper cable and about 32,000 kilometres of fibre cable connecting homes and businesses to local exchanges, and roadside cabinets throughout the country.

Basis of preparation

These financial statements have been prepared in accordance with generally accepted accounting practice in New Zealand and the Financial Reporting Act 1993. They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) as appropriate for profit-oriented entities. They also comply with International Financial Reporting Standards.

These financial statements are expressed in New Zealand dollars, which is Chorus’ functional currency. References in these financial statements to ‘$’,‘NZ$’ and ‘NZD’ are to New Zealand dollars, references to ‘USD’ are to US dollars, references to ‘AUD’ are to Australian dollars, references to ‘EUR’ are to Euros and references to ‘GBP’ are to pounds sterling. All financial information has been rounded to the nearest million, unless otherwise stated.

Measurement basis

The measurement basis adopted in the preparation of these financial statements is historical cost, modified by the revaluation of financial

instruments as identified in the specific accounting policies below and the accompanying notes.

Specific accounting policies

Chorus was established as a standalone publicly listed entity on 1 December 2011. The accounting policies adopted have been applied consistently throughout the periods presented in these

financial statements. Certain comparative information has been reclassified to conform with the current year’s presentation.

Basis of consolidation

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiary are prepared for the same reporting period as the Parent Company, using consistent accounting policies.

All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. Subsidiaries are recorded at cost less any impairment losses in the Parent Company financial statements.

Critical accounting estimates and assumptions

In preparing the financial statements management has made estimates and assumptions about the future that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The principal areas of judgement in preparing these financial statements are set out below.

Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the following notes:

Crown funding (note 5)
Chorus must exercise judgement when recognising Crown funding to determine if conditions of the funding contract have been satisfied. This judgement will be based on the facts and circumstances that are evident for each contract at the time of preparing the financial statements.

Leases (note 15)
Determining whether a lease agreement is a finance lease or operating lease requires judgement as to whether the agreement transfers substantially all the risks and rewards of ownership to Chorus.

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes:

Network assets (note 1)
Assessing the appropriateness of useful life and residual value estimates of network assets requires a number of factors to be considered such as the physical condition of the asset, expected period of use of the asset by Chorus, technological advances, regulation and expected disposal proceeds from the future sale of the asset.

CFH securities (note 4)
Determining the fair value of the CFH securities requires assumptions on expected future cash flow and discount rate based on future long dated swap curves.

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Financial Statements

Theses notes to the financial statements are an integral part of the financial statements. View the financial statements:

 

Governance & Disclosure

Governance & Disclosures

Governance at Chorus

Chorus’ Board and management are committed to ensuring that our people act ethically, with integrity and in accordance with our policies and values.

Framework

Chorus is incorporated in New Zealand and listed on the New Zealand and Australian stock exchanges.

The governance practices and policies we have adopted therefore reflect, and are consistent with, the:

  • NZX Listing Rules and Corporate Governance Best Practice Code;
  • New Zealand Securities Commission’s (now Financial Markets Authority (FMA)) ‘Corporate Governance in New Zealand Principles and Guidelines’; and
  • ASX Listing Rules and the ASX Corporate Governance Council’s Principles and Recommendations.

The Board regularly reviews and assesses Chorus’ governance policies, processes and practices to identify opportunities for enhancement and to ensure they reflect Chorus' operations and culture.

Compliance with corporate governance codes, principles and recommendations

Chorus considers that during the reporting period:

  • the corporate governance principles adopted and followed by it did not materially differ from NZX’s Corporate Governance Best Practice Code; and
  • it followed each of the recommendations set by the ASX Corporate Governance Council.

Managing risk

Chorus has a Managing Risk Policy that mandates one framework for the management of risk in Chorus to:

  • ensure the Board sets the risk appetite and reviews principal risks annually;
  • integrate risk management in line with the Board’s risk appetite into structures, policies, processes and procedures; and
  • deliver regular principal risk reviews and monitoring.

A copy of Chorus’ Managing Risk Policy is available at http://www.chorus.co.nz/governance.

As part of its role, the Audit and Risk Management Committee (ARMC) is responsible for
assisting the Board to ensure that a risk management framework has been established and for monitoring compliance with that framework. The ARMC and the Board regularly receive reports on risk management and the effectiveness of Chorus’ management of its material business risks.

Chorus requires its CEO and CFO to make an annual declaration in relation to Chorus’
financial statements relating to the matters set out

in s295A of the Australian Corporations Act 2001, namely that in their opinion:

  • the financial records of Chorus have been properly maintained;
  • the financial statements of Chorus and accompanying notes set out in this annual report comply with generally accepted accounting practice in New Zealand and International Financial Reporting Standards; and
  • the financial statements of Chorus and accompanying notes set out in this annual report give a true and fair view of the financial position and performance of Chorus.

The CEO and CFO also provide the Board with an assurance that the above declaration
is founded on a sound system of risk management and internal control and that system
is operating effectively in all material respects in relation to financial reporting risks.

The non-audit related fees paid to the auditor during the financial period (as detailed in Note 8 to the Financial Statements) were permitted non-audit services under Chorus’ External Auditor Independence Policy.

Code of ethics

Chorus expects its directors and employees to conduct themselves in accordance with the highest ethical standards. Chorus has Codes of Ethics for its directors and employees that set the expected standards for their professional conduct. These codes are intended to facilitate decisions that are consistent with Chorus’ values, business goals and legal and policy obligations. The director Code of Ethics is available at www.chorus.co.nz/governance.

Chorus has communicated the Codes of Ethics to directors and employees and has provided

training to its employees. Chorus encourages its people to report any unethical behaviour through a compliance function that investigates any such reports.

A whistle blowing policy allows for confidential reporting of serious misconduct or wrongdoing and a fraud policy for the reporting of suspected fraud or corruption.

Chorus has not received any reports of serious instances of unethical behaviour during the financial period.

The Chorus Board

Role of the Board and delegation of authority

The Board is appointed by Chorus’ shareholders and has statutory responsibility for the business and affairs of Chorus. The Board has overall responsibility for the strategy, culture, governance and performance of Chorus working with, and through, the CEO.

As described in the Board Charter, to allow for the effective day-to-day management and leadership of Chorus, the Board has delegated its authority, in part, to the CEO. The CEO may, in turn, sub-delegate authority to other Chorus people. Formal policies and procedures govern the parameters and operation of these delegations.

The Board has also appointed three standing Board

Committees to assist it in carrying out its responsibilities and has delegated some of its responsibilities, powers and authorities to those Board Committees. Those Committees are described below. The Board may also establish other ad-hoc or standing committees and delegate specific responsibilities, powers and authorities to those committees and to particular directors.

The Board and Board Committee Charters and other key governance documents are available on Chorus’ website at www.chorus.co.nz/governance. The annex to the Board Charter contains a diagram that illustrates the key governance documents and the roles and responsibilities of the Board and Board Committees.

Board Membership

The Board seeks to ensure that through its skills mix and composition it is positioned to add value to Chorus, as outlined in the Board Charter.

The Board currently has seven directors (six independent directors and an executive director) with a broad range of managerial, financial, accounting and industry experience. See The Chorus Board for more information on the skills and experience of the directors.

The independence status of each director is noted in their biographies. For a director to be considered independent, the Board must affirmatively

determine that the director does not have a disqualifying relationship (other than solely as a consequence of being a director). The disqualifying relationships are set out in the Board Charter. While the Board has not set financial materiality thresholds for determining independence, it considers the materiality basis of all relationships having regard to the materiality to Chorus, the director and the relevant person or organisation (eg customer, supplier or adviser) with which the director is related. Materiality is assessed in the context of each relationship and from the perspective of both parties to that relationship.

Board Committees

Each standing Board Committee has a Board approved Charter and a chairman. The Board Committees assist the Board by focusing on specific responsibilities in greater detail than is possible for the Board as a whole.

Audit and Risk Management Committee

The ARMC assists the Board in ensuring oversight of all matters relating to risk management, financial management and controls and the financial accounting, audit and reporting of Chorus.

All Committee members are non-executive directors.

For information on Committee members’ qualifications, see The Chorus Board.

Members: Anne Urlwin (chairman), Jon Hartley and Sue Sheldon.

Human Resources and Compensation Committee

The Human Resources and Compensation Committee (HRCC) assists the Board in overseeing people policies and strategies, including:

  • Chorus’ remuneration frameworks; and
  • reviewing candidates for, and the performance and remuneration of, the CEO.

Members: Clayton Wakefield (chairman), Prue Flacks and Keith Turner.

Nominations and Corporate Governance Committee

The Nominations and Corporate Governance Committee (NCGC) assists the Board in promoting and overseeing continuous improvement of good corporate governance. The NCGC’s role includes identifying and recommending suitable candidates for nomination to be members of the Board and Board Committees, and establishing, developing

and overseeing a process for the Board to annually review and evaluate the performance of the Board, its Committees and individual directors.

Members: Sue Sheldon (chairman), Prue Flacks and Jon Hartley.

Director restrictions

The Chorus Constitution provides that no person who is an ‘associated person’ of a person that provides telecommunications services in New Zealand (other than the services provided by

Chorus) shall be appointed or hold office as a director. NZX has granted Chorus a waiver to allow the Chorus Constitution to include this restriction on the persons who may hold office as director.

Board and Board Committee meeting attendance

The table below sets out attendance at the Board and Board Committee meetings in the year ended 30 June 2013.

Trading in Chorus shares

All non-executive directors are encouraged to hold Chorus ordinary shares (Chorus Shares).

Directors are subject to limitations on their ability to deal in Chorus Shares and other relevant Chorus securities (Chorus Securities) by Chorus’ Insider Trading Policy, the New Zealand Securities Market Act 1988 and the Australian Corporations Act 2001. These limitations prohibit directors from dealing in Chorus Securities while in possession of inside information.

As a matter of policy, Chorus also requires that directors, prior to dealing in Chorus Securities, notify and obtain consent from the chairman and that trading may only occur in accordance with Chorus’ Insider Trading Policy.

All changes in any interests in Chorus Securities held by directors are required to be reported to the Board, the NZX and the ASX.

Director induction and education

The Board seeks to ensure new directors are appropriately introduced to management and the Chorus business, that all directors are acquainted with relevant industry knowledge and economics and that they receive a copy of the Board and Board Committee Charters and the key governance documents.

It is expected that all directors continuously

educate themselves to ensure they have appropriate expertise to effectively perform their duties.

In addition, visits to Chorus operations, briefings from key management, industry experts and key advisers to Chorus, together with educational and stakeholder visits, briefings or meetings are arranged for the Board.

Independent advice

A director may, with the chairman’s prior approval, take independent professional advice (including legal advice). A director may request the attendance of such an adviser at a Board or Board

Committee meeting where this is necessary to fulfil their role and responsibilities for Chorus. The costs of any such adviser is paid for by Chorus.

Review and evaluation of Board performance

The chairman meets regularly with directors to discuss individual performance.

The Board has carried out, in the reporting period, an annual review of the Board’s performance, that of

individual directors and Board Committees utilising the Board evaluation process developed and overseen by the NCGC.

Market disclosures

Chorus is committed to providing timely, orderly, consistent and credible information consistent with legal and regulatory requirements, to enable orderly behaviour in the market and to promote investor confidence.

Chorus believes it is imperative that disclosure be evenly balanced during good times and bad and that all parties in the investment community have fair access to this information.

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