Chorus Price-Quality Expenditure Proposal Overview

Chorus Limited
Level 10, 1 Willis Street
P O Box 632
Wellington
New Zealand

Email: company.secretary@chorus.co.nz






STOCK EXCHANGE ANNOUNCEMENT

17 December 2020

Chorus Price-Quality Expenditure Proposal Overview

Attached is a presentation overview of the Price-Quality Expenditure Proposal Chorus has
submitted to the Commerce Commission for fibre fixed line access services.

An audio conference briefing to discuss the presentation will be held at 10am (NZ time) for
investors and analysts.

To join the audio conference, please use one of the following numbers and the pin code:
58354011#

• New Zealand: 0800 452 257
• Australia: 1800 093 431
• Other international: +612 8047 9393

Authorised by:

David Collins
Chief Financial Officer

ENDS

For further information:

Brett Jackson
Investor Relations Manager
Phone: +64 4 896 4039
Mobile: +64 (27) 488 7808
Email: Brett.Jackson@chorus.co.nz
Steve Pettigrew
Head of External Communications
Mobile: +64 27 258 6257
Email: steve.pettigrew@chorus.co.nz

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Price-Quality
Expenditure Proposal Overview
17 December 2020

17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
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Fibre has given New Zealand a gigabit headstart
Our expenditure proposal seeks to help NZ capitalise on this advantage
>COVID-19 confirmed broadband is an essential service and underlined the importance of continued investment in
new products like our multi-gigabit Hyperfibreservices.
>We expect the pace of change in consumer demand for bandwidth and data volume to accelerate, as fast fibre
availability proliferates in the developed world and enables new applications to emerge.
>Our proposal helps make New Zealand broadband better by leveraging the substantial investment we’ve already
made with incremental expenditure that:
▪completes and builds on our successful UFB deployment
▪maximises consumer value now and into the future by controlling costs, promoting fibre and investing in new
products and technologies
▪smoothly transitions through major changes in our operational focus, regulatory arrangements and service mix.
>Investments in automating and streamlining our systems and processes will help retail service providers enhance
their own service delivery, driving longer term reductions in our operational costs, and enabling much better
service to New Zealand consumers.
>Our in-market incentives for retailers and the education channels we support will promote greater awareness of
fibre and maintain a level playing field for more diverse and effective retail competition. This benefits consumers
through better retail offers and choice, and, as more consumers connect to fibre, secures the sustainability of the
fibre network.

17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Overview of Price-Quality expenditure proposal
>Chorus has submitted an operating and capital expenditure proposal to the Commerce Commission for
the January 2022 to December 2024 regulatory period (RP1).
>We’ve elected to release this overview of our proposal to assist investors in developing their
understanding of our regulatory proposal before the financial reporting season in February.
>The Commission is expected to release more detail of our proposals in Q3 for feedback from
stakeholders.
>Our proposal builds on our five-year business planning process with updates to reflect developments
since the end of FY20:
▪it represents Board and management’s best view of the operation and plans for our business in a
dynamic market.
▪this includes judgments as to allocation of costs, with final allocation principles to be decided by
the Commission.
▪Regulatory Period 1 (RP1) is calendar years 2022-2024 rather than financial years.
>The proposal has been subject to independent external review to determine whether our forecasts
reflect good telecommunications industry practice and are consistent with the efficient costs of a
prudent fibre operator.
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17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Translating our regulatory proposal
Our proposal differs from our financial reporting requirements
>the proposal covers the cost of fibre fixed line access
services (FFLAS) subject to Price-Quality regulation. It
excludes:
▪other fibre and copper related costs that will be incurred
in these future years
▪FFLAS costs in LFC areas
>regulatory cost categories are based on functional groupings
and do not reflect our current financial reporting categories.
>our regulatory forecasts are provided on a calendar year
basis rather than financial years.
>other adjustments include:
▪IFRS16 lease cashflows are included in the opexproposal –this is
for comparison with pre-IFRS16 period -but they will not be
included in the opexbuilding block
▪capital contributions (e.g.developer contributions for new
property developments) are netted off capex
▪passthrough costs (e.g.local body rates and regulatory levies) are
excluded from opex
INCLUDES:
▪fibre fixed line access
services only
▪IFRS16 lease cashflows
as opexfor
presentational purposes
▪regulatory inflation
allowance
EXCLUDES:
▪non-FFLAS services
costs (e.g. copper
services)
▪FFLAS costs in LFC
areas
▪capital contributions
▪passthrough costs
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17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Cost allocation parameters
Pre-December 2011 assets▪included to the extent assets are employed to provide fibre fixed line access
services under the UFB initiative.
▪valued as per Chorus financial accounts.
UFB costs from 1 December
2011 to 2022 (financial loss
asset)
▪shared costs are allocated using accounting-based allocation approach.
▪list of default allocators, with the Commission having the final decision:
number of customers, end-users, or premises (intact, connected or passed);
number of ports; revenue; central office space; peak traffic; average traffic;
used length of linear assets; power usage; and number of events.
▪cost allocation calculations to be updated annually.
▪cap limiting the allocation of re-used assets to that which cannot be avoided
in providing UFB.
▪cost allocations to be applied consistently across costs and between years.
Fibre costs post 2022▪cost allocators to remain consistent with initial RAB unless there is a
justifiable reason to change.
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To be determined through the price-quality and information disclosure process

>This total:
▪includes IFRS 16 finance leases of ~$41m (nominal) for presentational and comparative purposes
▪excludes passthrough costs of ~$45m (nominal)
▪includes regulatory inflation
17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Operating expenditure proposal
We model total FFLAS opex(nominal) of $625.5mfor RP1
Regulatory Period 1 (RP1)
202220232024TOTAL
$204.5m$207.5m$213.5m$625.5m
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17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Operating expenditure categories
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Regulatory
opex
categories
Sub-categoriesDescriptionFinancial reporting opex
categories
Customer ▪Customer operationsDemand driven activity (e.g. call centre and
projects)
Labour
▪Product, Sales &
Marketing
RSP relationships, activity to attract and retain
end users
Labour, Other
Network▪MaintenanceReactive, recoverable and preventative workNetwork maintenance
▪Network operationsNetwork operations centre and associated
support
Labour, IT, Other network costs
▪Operating costsLeases, electricity, security and building costsElectricity, Other network costs,
Property maintenance
Support▪Asset managementInvestment, programme, contract and
property management
Labour, Other
▪CorporateCorporate functional units, office expensesLabour, Insurance, Consultants, Other
▪TechnologyNon-capitalised business, customer and
network IT
Labour, IT, Other

17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Opexregulatory template
Opex
categoriesSub-categories202220232024
Customer ▪Customer operations5.64.94.4
▪Product, Sales &
Marketing
25.025.325.8
Network▪Maintenance30.133.134.8
▪Network operations20.120.821.7
▪Operating costs18.220.022.2
Support▪Asset management23.722.823.0
▪Corporate61.259.760.0
▪Technology20.620.921.6
TOTAL ($m)204.5207.5213.5$625.5m
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>This template:
▪includes IFRS 16 finance leases of ~$41m
(nominal) for presentational and comparative
purposes
▪excludes passthrough costs of ~$45m
(nominal)
▪includes regulatory inflation

17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Opex: indicative
FFLAS share of FY20
statutory opex
FY20
reported
$m
FY20 –FFLAS
(indicative)
$m
Labour 8073
Network maintenance6413
Other network costs297
IT4729
Rent, rates and property
maintenance
258
Regulatory levies76
Electricity154
Provisioning52
Consultants96
Insurance32
Other2720
Total311170
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We estimate FFLAS opexwas 55% of
FY20 total opex
>FFLAS proportion of opexis expected to increase
significantly as fibre uptake grows and the copper
network is retired
>FY20 –FFLAS (indicative):
▪includes passthrough costs of $11m
▪excludes IFRS 16 finance leases (treated as
network fixed assets in FY20 statutory
reporting)

>capex is net of capital contributions of approximately $56 million
>excludes FFLAS in LFC information disclosure areas
>includes regulatory inflation
>we’re proposing a wash-up mechanism for installation capex volumes
17 December 2020
Capital Expenditure proposal
PRICE-QUALITY EXPENDITURE PROPOSAL
Regulatory Period 1 (RP1)
202220232024TOTAL
$399.9m$333.2m$295.9m$1,029m
We estimate total FFLAS capex of $1,029m (nominal) for RP1
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17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Regulatory capex
categories
Sub-categoriesDescriptionFinancial reporting capex
categories
Extending the network
(communal infrastructure)
▪AugmentationInfill within existing footprint or extension to new communitiesOther fibre connections & growth
▪New property
development
New subdivisions, business parksOther fibre connections & growth
▪UFB communalUFB programme rolloutUFB communal
Installations (connecting
communal network to the
ONT, including provisioning
and incentive costs)
▪ComplexInstallations for specific business requirementsFibre connections & layer 2
▪StandardMost installation work, including backbone for multi-dwelling
units and rights of way
Fibre connections & layer 2,
customer retention costs
IT & Support (IT and
corporate capex)
▪Business ITSupporting business activities Common -IT
▪CorporateSundry investment and product developmentCommon -Other
▪Network &
customer
Supporting network or customer activitiesCommon –IT, Fibre products &
systems
Network capacity (ongoing
investment in network
electronics and systems to
optimise for capacity growth
and lifecycle needs)
▪AccessEnabling connections to fibreFibre connections & layer 2
▪AggregationLink access networks to RSP points of interconnectionFibre connections & layer 2
▪TransportOptical transport network to carry data medium/long distancesFibre connections & layer 2, Other
fibre connections & growth
Network sustain &
enhance (investment in
physical network assets)
▪Field sustainAssets outside of network sites (e.g. poles, fibre, terminators)Other fibre connections & growth
▪RelocationsRoading authority, undergrounding programmes and 3
rd
party
requests
Other fibre connections & growth
▪ResilienceDiversity, robustness or contingency investment to keep the
network running
Other fibre connections & growth
▪Site sustainInvestment in network buildings, including power and cooling.Common –building & engineering
services

Capex
Categories Sub-categories202220232024
Extending the
network
▪Augmentation2.93.94.0
▪New property developments6.57.48.0
▪UFB communal40.9--
Installations▪Complex11.810.29.2
▪Standard176.9136.9107.6
IT and support▪Business IT9.412.9
11.5
▪Corporate13.815.0
15.5
▪Network & Customer26.025.6
27.4
Network capacity▪Access22.029.823.6
▪Aggregation12.721.116.8
▪Transport12.517.219.9
Network sustain
& enhance
▪Field sustain20.921.722.7
▪Relocations
4.64.64.7
▪Resilience
23.214.114.8
▪Site sustain
15.812.810.2
TOTAL ($m)
399.9333.2295.9
Capex regulatory
template
>The regulatory categories generally
reflect our FY20 results definition of
sustaining vs non-sustaining capex
▪FFLAS non-sustainingcapex*
of $526m in RP1
*includes some provisioning related
customer retention costs that would be
treated as sustaining and assumes <10k
of complex, ~165k of standard and ~20k
of backbone installations in RP1
▪FFLAS sustainingcapexof
$503m in RP1
>The total RP1 proposed capex
spend of $1,029m:
▪is net of capital contributions
▪excludes FFLAS in LFC
information disclosure areas
▪includes regulatory inflation
NSC
SC
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17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Appendix A: Copper Withdrawal Code finalised
The Commerce Commission has determined:
>Chorus must provide end users with 6 months’ notice of copper withdrawal
>notices can be sent to end users from 1 March 2021 onwards
▪three notices are required in advanceof withdrawal: 6 months, 3 months and 20 working days
▪Chorus must provide notices direct to end users, rather than via their RSP
▪notices should include information on fibre services, not fibre marketing
>copper cannotbe withdrawn at the end of the notice period if the end user wishes to have fibre installed but:
▪it is still in the process of being installed, or
▪it cannot be installed due to circumstances outside the end user’s control, and they have taken all reasonable
steps to address these circumstances
>fibre installations are free for aerial connections
>the workability of the Code will be reviewed in late 2021
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17 December 2020
Appendix B: RAB implementation
PRICE-QUALITY EXPENDITURE PROPOSAL
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Source: Commerce Commission

17 December 2020
PRICE-QUALITY EXPENDITURE PROPOSAL
Appendix C: Input methodologies key parameters
Pre January 2022 period (financial loss
asset)
First regulatory period
Risk free rate5-year rate, 1 month average, calculated as at
middle of year, or mid each part year for 2012
and 2021
3-year rate, 3 months average,
calculated as at 1 June 2021
TAMRP7% until Oct 2020 then 7.5%7.5%
Debt risk premiumBBB, 7-year term, 1 month averageBBB, 5-year term, 5-year trailing
average
Leverage29%29%
Debt issuance cost0.14%0.33%
Asset beta0.50.5
WACC upliftnone –50
th
percentilenone –50
th
percentile
Asymmetric stranding riskno allowance10 basis points
Crown financingFinancing rate reflecting Chorus’ actual senior
debt/subordinated debt/equity mix
Financing rate reflecting Chorus’
actual senior debt/subordinated
debt/equity mix
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Disclaimer
This presentation:
• Is provided for general information purposes and does not constitute investment advice or an offer of or invitation to purchase Chorus
securities.
• Includes forward-looking statements. These statements are not guarantees or predictions of future performance. They involve known
and unknown risks, uncertainties and other factors, many of which are beyond Chorus’ control, and which may cause actual resultsto
differ materially from those contained in this presentation.
• Includes statements relating to past performance which should not be regarded as reliable indicators of future performance.
• Is current at the date of this presentation, unless otherwise stated. Except as required by law or the NZX Main Board and ASX listing
rules, Chorus is not under any obligation to update this presentation, whether as a result of new information, future events or otherwise.
• Should be read in conjunction with Chorus’ audited consolidated financial statements for the year to 30 June 2020 and NZX and ASX
market releases.
• Includes non-GAAP financial measures such as "EBITDA”. These measures do not have a standardised meaning prescribed by GAAP and
therefore may not be comparable to similar financial information presented by other entities. They should not be used in substitution for,
or isolation of, Chorus' audited consolidated financial statements. We monitor EBITDA as a key performance indicator and we believe it
assists investors in assessing the performance of the core operations of our business.
• Has been prepared with due care and attention. However, Chorus and its directors and employees accept no liability for any errors or
omissions.
• Contains information from third parties Chorus believes reliable. However, no representations or warranties (express or implied) are
made as to the accuracy or completeness of such information.
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