2013 Chorus Annual Report HIGHLIGHTS NPAT $171m Net profit after tax EBITDA $663m Earnings before interest, income tax, depreciation and amortisation ANNUAL DIVIDEND 25.5 Cents per share (see page 7 for details) FIXED LINE CONNECTIONS 1,784,000 UFB PROGRAMME 18% UFB completion P2 A good operating result Chorus accepted in FTSE4Good Index P4 Management Commentary (Corporate Sustainability, page 4) P18 Financial Statements For a second year, Chorus received P42 Governance & Disclosures Aon Hewitt Employers Accreditation A good operating result Ultra-fast broadband build on track but regulatory headwinds and capital expenditure demands remain Report from chairman Sue Sheldon and CEO Mark Ratcliffe Dear shareholder paper suggests a potential decrease of While Chorus is undertaking one of the largest plans, using a technology known as VDSL. Chorus’ pricing within a range of $2.48 infrastructure upgrades in New Zealand’s This delivers higher quality broadband The financial year ended 30 June 2013 to $7.48 per broadband connection per history, it has been an ongoing concern that to retail service providers at the same was Chorus’ first full year of operation month. Based on 30 June 2013 connection the telecommunications industry faces regulated price as the standard copper as New Zealand’s largest wholesale volumes, Chorus anticipates this could significant regulatory uncertainty. broadband product. Retail service providers only fixed line communications imply a reduction in annual EBITDA in the then take this product and develop their infrastructure company. range of $20 million to $100 million. In a move to address this uncertainty, a wide own plans and pricing for end-users. ranging review of the regulation that applies Revenue was $1,057m for the full financial Overall fixed line connections remained to the telecommunications sector was Faster copper-based technology forms an year, and our operational costs have stable for the period, at about 1.8 million announced in February and a consultation important stepping stone to fibre. Like any continued to increase as expected to lines, and the number of those copper document was released in early August. technology upgrade, the move to fibre will $394m. This resulted in earnings before connections that provide broadband be a long term transition, and VDSL has an interest, depreciation, tax and amortisation When announcing the review, Minister Amy services grew by more than 64,000 to important role in the interim and in areas (EBITDA) of $663m and net profit after tax Adams said “The options we are canvassing a total of 1.112 million lines. where UFB is not being rolled out. (NPAT) of $171m for the period. Prior period give us an opportunity to provide clarity comparisons are challenging as this was By the end of June we had built fibre past and certainty during a period when Chorus now employs 763 permanent the first full year of operation for Chorus 153,000 premises, surpassing the 149,000 large investments are being made in a and fixed term employees directly, along and a normalised comparison is included targeted. This means we are now 18% once-in-a-many-generation upgrade with a further 4,434 people who are either to assist shareholders. of the way through the UFB rollout and, of our telecommunications infrastructure employed directly by our service company that will deliver significant benefits for partners or are sub-contracted by the Chorus has declared dividends totalling through UFB and other initiatives, have New Zealanders well into the future.” service companies. This means the overall 25.5 cents per share for the financial year. added more than 3,000km of new fibre infrastructure during the year. workforce has doubled since Chorus’ We welcome the review and the This has been a good operating result, demerger from Telecom. Alongside Crown funding, Chorus is opportunity now exists for the industry with both the Ultra-Fast Broadband (UFB) We have been recognised for a second year investing a significant amount of its own to engage in the establishment of a and Rural Broadband Initiative (RBI) as one of the best employers in Australasia, capital. In February we provided updated forward looking, coherent and stable policy programmes slightly ahead of target, our people have retained a high level of guidance to the market that the total environment that ensures a sustainable a small increase in the number of access engagement with our business and our estimated cost to build the communal and efficient transition to fibre for the lines and a 6% increase in copper culture promotes diversity and inclusiveness. infrastructure for the network has increased years ahead. broadband connections. Health and safety will continue to be from $1.4 - $1.6 billion to $1.7 -$1.9 billion. Despite the twin challenges of regulatory On the downside, capital expenditure a key focus for the company. At this stage we are around 18% of the way uncertainty and increased capital demands, demands continue to be significant and We have this year been accepted into a through the communal build programme we are pleased with the progress Chorus regulatory headwinds remain. We are globally recognised corporate sustainability but have incurred over 25% of the estimated has made over the last 12 months. pleased with the principled approach the index and, in partnership with Downer, won cost of the programme for build completed. Crown is taking to the regulatory review. New Zealand now has one of the fastest a Ministry for the Environment green award. To achieve a total programme cost within However, we note that while the outcome growing rates of broadband penetration of the Government’s regulatory review is this guidance range, we have put in place a in the OECD. Chorus’ operational performance is good uncertain, all potential options contained range of initiatives to drive cost savings and and we will continue to work hard on your within the discussion paper imply reduced efficiencies. We also expect less challenging In May we announced new pricing and behalf to address the challenges in the future earnings for Chorus. The discussion build in the second half of the programme. specifications for very high speed copper year ahead. This report is dated 29 August 2013 and is signed on behalf of the Board of Chorus Limited: Sue Sheldon, Chairman Mark Ratcliffe, Director and CEO A simple business Fundamentally, Chorus is a simple About 7,000 cabinets provide interconnection Fibre-fed broadband cabinets provide broadband of at least Chorus Network Overview business. The core of the business is the points for around 50% of the lines in the 10Mbps to 80 percent of New Zealand wide network of fibre optic Chorus network. A large number of these New Zealanders KEY Fibre and copper cables that connect homes cabinets are like mini telephone exchanges Copper and businesses to each other. and have electronic broadband equipment installed in them. The fibre network continues to grow rapidly Fibre to the premises and Chorus now has about 32,000km In some cases, retail service providers enables ultra-fast of fibre and 130,000km of copper cabling. have chosen to install their own broadband services These cables typically connect back to local broadband equipment in an telephone exchanges, of which Chorus exchange and pay Chorus has about 600 nationwide. Chorus fibre just for the rental of the also connects many mobile phone towers access line. This is called owned by mobile service providers, so even ‘unbundling’ and about km mobile phone calls generally connect via 7% of Chorus’ lines 32,000 fibre the Chorus network at some point. have been unbundled. Chorus has about 1.8 million connections Fibre backhaul links Mobile service on the fixed line network, with about 1.1 local exchanges to other provider exchanges or retail service cell tower million of these using a broadband service provider networks The access network connects a provided by Chorus’ broadband equipment. 602 home, business or structure to the local exchanges telecommunications equipment – often a local exchange 2 Sue Sheldon CNZM, BCom, FCA Anne Urlwin, BCom, CA, F InstD, Clayton Wakefield, BSc Chairman; director since 1 July 2011; independent FNZIM, ACIS (Computer Science), GradDip Mgmt DIRECTORS Director since 1 December 2011; independent Director since 1 December 2011; independent Sue is a professional company director. She is chairman of Freightways and Paymark, deputy Anne has more than 20 years’ directorship Clayton has over 30 years’ experience in the chairman of the Reserve Bank of New Zealand experience across many sectors, including banking, financial services, telecommunications and a director of FibreTech Holdings and Contact energy, health, construction, regulatory services, and technology industries. He is an executive Energy. Sue is a former director of Telecom, internet infrastructure, research, banking, forestry director and owner of Techspace, a leading Smiths City Group and Meridian Energy, among and the primary sector, as well as education, New Zealand independent IT advisory company others. She has extensive experience as both sports administration and the arts. She is a working with New Zealand’s major corporates. a chairman and member of audit and risk director of Southern Response Earthquake From 2001 to 2007 he was Head of Technology committees and is a former president of the Services Ltd, Steel & Tube Holdings Ltd and and Operations at ASB Bank. He was previously New Zealand Institute of Chartered Accountants. OnePath Life (NZ) Ltd. She is chairman of a director and chairman of Electronic Transaction Sue was made a Companion of the New Zealand Naylor Love Enterprises Ltd and an independent Services and of Visa New Zealand and Order of Merit for services to business in 2007. chairman of Ngai Tahu Te Runanga Audit & Risk also previously an independent director Committee. Anne is a former chairman of Lakes of Endace Ltd.