Telecom Corporation of New Zealand Limited Annual Report For the year ended 30 June 2009 INTRODUCTION OUR COMPANY PERFORmanCE GOVERNANCE DISCLOSURES One Telecom: Telecom’s structure reflects our focus on customers; it allows us to respond to their needs AAPT Gen-i quickly and effectively. Retail Chorus nternational I Wholesale & Technology & Shared Services Corporate Centre OUR PERFORMANCE | NZ$5,599m Operating revenues and other gains | NZ$400m Net earnings for the year | 22¢ Earnings per share | 24¢ Dividends per share OUR COMPANY | 835,000 fixed broadband connections in New Zealand | 780 FTTN cabinets installed | XT Mobile Network launched on 29 May 2009 | 64 exchanges unbundled in New Zealand | over 8,500 employees | 5 external customers consuming UCLL-based services CONTENTS FINANCIAL CALENDAR 2009-2010 Introduction Governance October 2009 May 2010 02 Key facts and figures 113 Governance at Telecom Annual Meeting in Auckland Third quarter result announced 03 Overview 123 Remuneration at Telecom November 2009 June 2010 First quarter result announced Third quarter dividend paid 04 Chairman’s report Disclosures 05 CEO’s report December 2009 30 June 2010 133 Interests’ disclosures First quarter dividend paid Financial year end Our company 135 Shareholder and exchange February 2010 August 2010 disclosures 07 Board of directors Half-year result announced Annual result announced 09 Executive team 139 Additional shareholder information March 2010 12 Business operations 148 Forward-looking statements Second quarter dividend paid 28 Company review 150 Glossary Performance 152 Shareholder inquiries / This report is dated 20 August 2009 and is signed on behalf of the board of 44 Business review contact details Telecom Corporation of New Zealand Limited by Wayne Boyd, Chairman, and Paul Reynolds, Chief Executive Officer. 63 Auditors’ reports 65 Financial statements 69 Notes to the financial statements Wayne Boyd Paul Reynolds Chairman Chief Executive Officer ARBN 050 611 277 INTRODUCTION OUR COMPANY PERFORmanCE GOVERNANCE DISCLOSURES INTRODUCTION Overview This annual report will be filed with the US Securities and Exchange Commission on Form 20-F and is divided into five sections: Introduction | The introduction comes from Telecom’s All references to the years 2010, 2009, 2008 and 2007, in Chairman, Wayne Boyd, and CEO, Paul Reynolds. It gives a this annual report are to the years ended 30 June 2010, brief overview of Telecom’s activities for 2009 and a signal of 30 June 2009, 30 June 2008 and 30 June 2007 respectively. what we expect is to come. Any references to a calendar year will be stated as such. Our company | Our company provides an overview of the Certain information required by the Form 20-F requirements operating units of Telecom, the regulatory environment is contained in Telecom’s consolidated financial statements and other aspects of Telecom – resources, our people, for the year ended 30 June 2009, which are included in this community and environment. annual report. Information required to be stated as at the most Performance | Performance gives an overview of Telecom’s recent practicable date, is stated as at 10 August 2009 unless financial results, as well as the results of the business units expressly stated otherwise. References to notes are references and their key risks. It also contains the financial statements to notes to the consolidated financial statements. for the year ended 30 June 2009. References to US$ or US dollars are to United States dollars, Governance | Governance looks at Telecom’s best references to A$ are to Australian dollars, and references to NZ$ practice corporate governance and provides remuneration and NZ dollars are to New Zealand dollars. information. Any references to documents and information included on Disclosures | Disclosures provides additional information external websites, including our website, are provided for required by New Zealand company law, the NZX, ASX convenience alone, and none of the documents or other and NYSE listing rules, and the US SEC Form 20-F annual information on those websites is incorporated by reference reporting requirements (Form 20-F). in this annual report. When used in this annual report, references to the ‘company’ Reference to legislation is to New Zealand legislation and are references to Telecom Corporation of New Zealand Limited. the Government is to the New Zealand Government, unless References to ‘Telecom’ are to Telecom Corporation of New specifically stated otherwise. See Glossary for other definitions. Zealand Limited, together with its subsidiaries and its interests in associates. annualreport.telecom.co.nz/2009 3 Chairman’s report Wayne Boyd, Chairman Your company has achieved a lot in 2009. Backed by one of the largest private sector investment programmes in New Zealand, the customer-focused turnaround we talked about last year is now well in train. Our management team under Paul Reynolds’ leadership is We say farewell to Patsy Reddy and Michael Tyler, both of whom focused on our mission to be number one in New Zealand in have given many years of service to Telecom’s board at a time broadband, mobile and ICT, and meet the many milestones when the company has changed virtually beyond recognition. that come with operational separation. I thank Pasty and Michael for their efforts and contribution. Our investment for growth has encompassed our people, On the executive team, Paul Reynolds completed his line-up systems and technology and our products and services. in the past year, with the arrival of Alan Gourdie as CEO of Our new XT Mobile Network was launched on 29 May 2009 Telecom Retail, and more recently Wayne Peat has joined us and consumer uptake to date has exceeded our expectations. as Group Director of Human Resources. It is testament to the While delivering 3G mobile coverage to 97% of the places New attractiveness of the Telecom story right now that Alan and Zealanders live and work, the XT Mobile Network also delivers Wayne have returned home to take jobs at our company after voice and data roaming services to more than 210 countries, long periods working for major corporations overseas. significantly strengthening our mobile proposition. After a year of achievements on many fronts, challenges remain. Our fibre-to-the-node programme (FTTN), helping to bring The world economic outlook is uncertain and we are seeing faster broadband to New Zealanders, is well under way. signs of rising unemployment and falling confidence here in New Zealand. That uncertainty only underscores the need for And now Telecom wants to go further, in partnership with Telecom to stay focused on its strategy and the disciplines that central government, in helping New Zealanders to realise the come with it. potential of ultra-fast broadband. That’s why we are supporting the Government’s policy of delivering fibre to 75% of premises We aim to maintain our quarterly dividend stream of 6 cents within the next ten years. Through our Chorus business, per share for 2010. Telecom already has the capacity, expertise and track-record to Thank you for your ongoing support of Telecom. help deliver this vision, and we look forward to participating. There have been changes at our board table too, another reflection of the fast-paced environment we are in and the need to maintain an appropriate blend of skills and experience in the era of operational separation. Both of the new arrivals to the board, Kevin Roberts and Dr Sachio Semmoto, have global Wayne Boyd reputations in their respective fields of endeavour. Chairman 4 Telecom Annual Report 2009 INTRODUCTION OUR COMPANY PERFORmanCE GOVERNANCE DISCLOSURES CEO’s report Paul Reynolds, Chief Executive Officer It has been a big year for Telecom. A year of far-reaching change and building for the future at New Zealand’s largest listed company. We are well positioned to compete and return to growth. By putting customers at our heart, we aim to be number one Commerce Commission show that broadband performance has in New Zealand for broadband, mobile and ICT. In each of improved across the country over the past year. these areas, Telecom made strong progress in 2009, driven by Telecom is also supporting the Government’s fibre-to-the- the renewed energy of Telecom people and one of the largest premises (FTTP) policy. We have submitted two exciting, rapid private sector infrastructure investment programmes seen in and efficient options to the Government, the first of which New Zealand. promises to connect every school and hospital to fibre within What has been delivered? two years. That is a real investment in New Zealand’s digital future, using the expertise, resources and relationships of our Operational separation Chorus business to deliver it. We now have nearly 18 months experience of operational Mobile separation and Telecom’s separate business units are increasingly building trust, as the cornerstone of New Zealand’s Another highlight of the past year was the launch of Telecom’s telecommunications landscape. Work continues apace on the new XT Mobile Network. The launch was the culmination of enormous task of separating and re-building our IT systems more than two years of outstanding effort by engineering, to provide equivalent access to all providers and to meet the technical, planning and marketing teams across our business. milestones required by the terms of the Undertakings. The first The new network delivers fast 3G speeds comparable with the test IP (internet protocol) voice call was made successfully in best in the world. The XT Mobile Network supports a wide array March. This gives a glimpse into a future where the existing of exciting devices and new mobile services, beyond voice and telephone network (PSTN) will be replaced and telephony and text, with coverage to 97% of the places New Zealanders live other services for New Zealanders will be delivered over IP. and work. It also offers our customers international roaming in the vast majority of countries they may travel to.