Chorus to extend fibre to another 200,000 customers

Chorus Limited
Level 10, 1 Willis Street
P O Box 632
Wellington 6140
New Zealand
Email:
company.secretary@chorus.co.nz







STOCK EXCHANGE ANNOUNCEMENT

26 January 2017


Chorus to extend fibre to another 200,000 customers

Chorus today announced it has reached an agreement with Crown Fibre Holdings to
extend its ultra-fast broadband (UFB) rollout to a further 169 areas extending from
Taipa–Mangonui in Northland to Bluff in Southland. This will make fibre available to an
additional 200,000-plus homes and businesses beyond the 1.1 million customers in
Chorus’ existing UFB rollout areas.

Chorus CEO Mark Ratcliffe said Chorus was delighted to be working with the
Government to extend the reach of fibre broadband to so many new communities.
“Fibre is undoubtedly the future of broadband. In the five and a half years that we’ve
been building the UFB network and connecting homes and businesses to fibre we’ve
seen a huge upsurge in demand.

“We’re particularly pleased to see many of the towns and areas soon to benefit from
fibre are within the Government’s Regional Growth Programme, helping to increase
jobs, income and investment in regional New Zealand.

“We’re looking forward to working alongside local councils and lines companies as we
finalise our deployment plans and we will also endeavour to make recent earthquake
hit areas a priority”.

At the end of 2016, the uptake of fibre across Chorus’ current UFB deployment areas
was at 32%, with areas completed earlier in the programme seeing uptake surpassing
40%.

Monthly household internet data consumption has also burgeoned in the last five
years. In 2011, as the first phase of UFB was announced, the average household used
about 13 gigabytes of internet data a month. This has grown to more than 120
gigabytes a month today with nearly half of all broadband customers having made the
move to unlimited data plans.

“Fibre provides the broadband equivalent of an autobahn right to the door of homes
and businesses, it will future-proof these communities for the anticipated continued
growth in data consumption.

“With no signs of demand waning, we’re forecasting average monthly usage of 680
gigabytes by 2020 as people access more and more online content and switch on to
activities like video streaming,” said Mr Ratcliffe.

The second phase of the UFB rollout is expected to commence in July 2017 and finish
by December in 2024. A list of the Chorus towns and areas can be found at
chorus.co.nz/ufb2.

Chorus estimates the cost of the UFB2 communal network will be $370 million to $410
million. The cost to connect each of the 203,000 potential customers within this
footprint is estimated to average $1,500 to $1,700 (in 2017 dollars and including
layer 2, backbone costs for MDUs and rights of way with 10 or fewer premises).

Today’s agreement does not change Chorus’ FY17 capital expenditure guidance or
previous dividend guidance.

ENDS

For further information:

Nathan Beaumont
Media and PR Manager
Mobile: +64 (21) 243 8412
Email: Nathan.Beaumont@chorus.co.nz

Brett Jackson
Investor Relations Manager
Phone: +64 4 896 4039
Mobile: +64 (27) 488 7808
Email: brett.jackson@chorus.co.nz

Outline of UFB2 agreement key terms

The UFB2 agreement terms are materially similar to UFB1 and include:
 Pricing for services in UFB2 areas will be the same as for Chorus’ existing UFB
areas and subject to the prevailing regulatory regime from 2020. The UFB2
network includes backhaul from remote towns to UFB1 handover points.
 Until 1 January 2026, UFB2 residential customers will not be charged for
connections up to a distance of 200 metres.
 Chorus must connect services on the date agreed with RSPs or credit them a
month’s rental. Service level payments to Crown Fibre Holdings (CFH) are
triggered if less than 75% of agreed dates are met. There are a range of other
service levels that include payments to RSPs and CFH.
 Unbundling of the UFB2 network is not contractually required before 2026, but
in the event of a regulatory requirement to unbundle the UFB2 network earlier
there would be no compensation provided to Chorus.

 Chorus must complete each UFB2 area 12 months from the agreed start date,
but may start earlier provided the build takes no longer than 15 months.
Communal network must be built in rights of way with more than 10 premises
unless consent from affected persons is not granted.
 Overall, Chorus has greater control in UFB2 and the agreement is more
outcomes focused. For example, while the key network requirements are
described in the contract, CFH does not have an approval right over the
network architecture. There is a liquidated damages regime for delays, but it is
simpler than in UFB1. The risk of delays is reduced by the fact that the
schedule will be agreed upfront for the entire programme. Chorus and CFH can
agree changes to the schedule if something unexpected arises, for example
relating to Council consents or the discovery of archaeological features.

 Chorus expects to receive $291 million in CFH funding to build fibre past the
168,240 premises in UFB2 areas. There are three different funding rates –
$1,552 per premises for 112,433 premises to be passed by 2023, $2,000 for
38,620 premises in the latter half of the rollout and $2,300 for 17,187 other
premises throughout the rollout.
 In return for the CFH funding, CFH equity and debt securities will be issued on
very similar terms to UFB1. Chorus can elect the mix of securities to be issued
(up to a maximum of $189m equity securities) but expects to issue 65% equity
securities and 35% debt securities, with equity securities likely to be issued
first.
 Dividends are payable on the equity securities proportionately:
o 18.46% from 30 June 2030
o 55.38% from 30 June 2033
o 100% from 30 June 2036
 The debt securities are to be proportionately redeemed from 2030:
o 18.46% on 30 June 2030
o 36.92% on 30 June 2033
o 44.62% on 30 June 2036

 The CFH equity securities will not have any voting rights and will rank ahead of
ordinary shares on liquidation. They may be converted to ordinary shares in
certain circumstances, and Chorus may redeem them for cash or ordinary
shares. The CFH debt securities will comprise a senior and a subordinated
portion, on a similar basis as the existing CFH debt securities and may be
accelerated in the event of a material breach by Chorus or on insolvency or
cross-default.
 While CFH equity and debt securities are outstanding, Chorus cannot pay a
dividend to ordinary shareholders without CFH consent if it does not have an
investment grade rating.
 There are no CFH warrants or uptake targets.
 In order for CFH to provide funding: Chorus must not be in breach of the
financial covenants in its banking facilities; from 2020 (or earlier if it does not
have financial covenants in its bank facilities) Chorus must not have a sub-
investment grade rating from both S&P and Moody’s (or only one entity if that
is the only rating entity) for a continuous period of four months; and there
must not be a material breach of the UFB2 agreement or suspension of it for
health and safety reasons.

 Material breach events include where Chorus fails to complete a build milestone
within nine months, where Chorus fails to meet the same CFH service level for
three consecutive months and then fails to remedy that service level within a
further three months, Chorus becoming unable to fulfil its obligations or an
insolvency type event or cross default occurs. If the material breach relates to
build delays, CFH may elect to require Chorus to pay $50,000 liquidated
damages per day for up to 180 days and if the material breach is not remedied
in that time, CFH may contract a third party to undertake the build. There is no
management step in right.
 There is a suspension right following a death or serious injury or material
breach of health and safety legislation and CFH may terminate the agreement if
Chorus has been convicted of a serious offence under the Health and Safety at
Work Act 2017.
 Chorus and CFH have also entered a conditional agreement giving Chorus the
option to bring forward part of the CFH funding if Chorus’ credit rating is below
investment grade for a period of at least four months between 1 January 2020
and 31 December 2021. The funding is available on terms similar to those
agreed with CFH in July 2014. As with the 2014 agreement, if Chorus chooses
to use the facility, Chorus would be unable to pay a dividend on its ordinary
shares before completing the UFB2 build without CFH approval, unless Chorus
normalises the CFH funding profile.

The agreement is conditional on Chorus securing tax and ratings treatment consistent
with UFB1, as well as competition law authorisations which were provided for UFB1.

---

UFB2 –Taking Fibre Further
26 January 2017

UFB2 OVERVIEW
2
>Chorus will build UFB2 network in 169 areas
▪fibre to pass about 203,000homes and businesses (up to 168,240 “premises” under the UFB2 contract)
▪rollout expected to commence in July 2017 and finish by December 2024
▪service company discussions already well advanced
>UFB2 communal capex
▪to pass the ~168,000premises (including rights of way with more than 10 premises) requires estimated
gross capex of $370-$410m
▪implied average cost of $2,200-$2,440per premises passed reflects lower density and greater
boundary distances for UFB2 premises vs UFB1 areas, as well as UFB2 locations
Indicative
rollout
schedule
FY17FY18FY19FY20FY21FY22FY23FY24FY25Total
Premises to
be passed
05,00026,00033,00029,00023,00025,00021,0006,000168,000

UFB2 OVERVIEW
3
>UFB2 connection capex
▪~203,000potential connections within planned UFB2 footprint
▪estimated cost of $1,500-$1,700per connection (in 2017 dollars and including layer 2, backbone costs
for MDUs and rights of way with 10 or fewer premises)
Note: Chorus is currently considering the treatment of other fibre provisioning costs previously expensed and will provide an
update at its half year result.
▪consistent with current UFB1 practice, residential connections up to 200 metres will be free until 2026
>UFB2 product pricing
▪pricing for services in UFB2 areas will be the same as for UFB1 areas and subject to the prevailing regulatory
regime from 2020

4
>Increased per premises passed Crown funding
▪total expected funding of $291.3 million at an average per premises funding rate of $1,731 (UFB1:
$1,118 per premises passed)
Note: There are three different funding rates -$1,552 for 112,433 premises to be passed by 2023, $2,000 for 38,620
premises in the latter half of the rollout and $2,300 for 17,187other premises throughout the rollout
▪Chorus expects to split funding 65% CFH equity securities and 35% CFH debt securities (UFB1: 50%
debt, 50% equity) with CFH equity securities expected to be issued first as build is completed up to a
maximum of $189 million -see slide 11 for UFB2 debt securities repayment profile
>No change to dividend guidance
▪during the UFB build programme to 2020, the Board expects to be able to provide shareholders with
modest long term dividend growth from the base of 20 cents per share paid in FY16, subject to no
material adverse changes in circumstances or outlook
UFB2 OVERVIEW

5
CHORUS UFB2 ROLLOUT AREAS

0%
5%
10%
15%
20%
25%
30%
FY14 areaFY15 areaFY16 area
12 months in market24 months in market
WHY TAKE FIBRE FURTHER?
6
Demand profile (fibre orders received) based on time
UFB available in area
Demand –
% of fibre
available
addresses
>Demand for fibre clearly established
relative to UFB1 in 2011
32%uptake at 31 December 2016 -well ahead of
UFB1 contract target of 20% by 2020
fibre demand has accelerated materially since early
2015 –the “Netflix effect”
36% demand (fibre orders received) has already
been achieved in FY16 build areas (i.e. within 18
months of availability)
>Fibre is future-proofed
uncapped data plans and video streaming will drive
ongoing growth in bandwidth needs
123GBaverage monthly bandwidth usage in
December (fibre 197GB; copper 106GB)
forecasting 680GB average by 2020
maintains Chorus’ position as New Zealand’s leading
fixed communications infrastructure provider

7
SIGNIFICANT INCREASE IN PENT UP DEMAND
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
6 months12 months18 months24 months30 months36 months42 months
FY12 areasFY13 areasFY14 areasFY15 areasFY16 areas
build areas completed in FY16 had 11%
demand (fibre orders received) within
six months, vs 4% for FY15 areas
Demand –
orders as a %
of fibre
available
addresses
Time UFB
available

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0123456789101112131415161718192021
SKY TVDSL/BroadbandFibre
Sources: Statistics NZ Household Use of ICT survey 2009, 2012 (household dial-up/broadband uptake), ISCR estimates of DSL diffusion (DSL/broadband uptake), SKY
annual reports (Sky TV uptake), MBIE quarterly reporting (UFB fibre uptake)
Technology adoption in NZ (% of households)
Fibre uptake based on % addresses covered, given incremental build
DSL 80% (est)
SKY 51% (est)
Fibre uptake: 32% just
5.5 years after launch –
based on Chorus data
FIBRE DEMAND IS AHEAD OF EXPECTATIONS

Appendices

10
UFB1 + UFB2 SUMMARY
UFB1UFB2TOTAL
Premisesto be
passed
up to 830,900 (by
December 2019)
up to 168,200 (by
December 2024)
up to ~1 million
Estimated communal
capex to pass
premises
$1.75 to $1.80 billion$370 to $410 million
(includes rights of way
with more than 10
premises)
$2.12 to $2.21 billion
CFH funding
up to $929 millionup to$291millionup to $1.22 billion
Customers able to
connect by rollout
end
~1.1 million~203,000~1.3 million

250
677
400
785
86
86
129
164
19
38
45
0
100
200
300
400
500
600
700
800
900
20172018201920202021202220232024202520262027202820292030203120322033203420352036
Available bank linesGBP EMTNNZ BondEUR EMTNUFB1 CFH debt securitiesUFB2 CFH debt securities
DEBT MATURITY PROFILE
Calendar Year
11
$m

June 2013
UFB CONNECTION GROWTH
OVER TIME -AUCKLAND
indicates home or business
connected to fibre

June 2014

March 2015

Dec 2016