Chorus Initial Asset Value Model Overview

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

Email: company.secretary@chorus.co.nz

STOCK EXCHANGE ANNOUNCEMENT

26 March 2021

Chorus Initial Asset Value Model Overview

Chorus is submitting a comprehensive Initial Asset Value model to the Commerce
Commission today as required under the Price-Quality process. This model is compliant with
the Commission’s Input Methodologies requirements and supports a solid, but conservative,
starting Regulated Asset Base (RAB) of $5.5 billion for Chorus’ fixed line fibre access services
at 1 January 2022.

In addition, Chorus has provided an alternative cost allocation approach that supports
potential RAB outcomes between $5.5 billion and $6 billion. We believe the Commission
could consider this approach because it better reflects the full costs of structural separation
required by the public-private partnership with the Government.

Chorus CFO David Collins said it’s important that initial regulatory settings deliver on the
policy goal of a smooth transition for consumers and investors.
“The Commission has a number of mechanisms at its disposal to achieve this. The models
we’re submitting have required extensive work and were developed by international
experts Analysys Mason who have undertaken similar network analysis for regulators and
network operators overseas.
“This analysis should enable the Commission to move reasonably rapidly in progressing its
draft Price-Quality Determination due in the coming months and we look forward to
working constructively with them,” he said.
Based on Chorus’ indicative revenue modelling, the Initial Asset Value model of $5.5 billion
indicates an estimated maximum allowable revenue range of $715 million to $755 million
per annum in the first regulatory period from January 2022 to December 2024.
“While the preliminary estimated revenue range broadly aligns with Chorus’ forecast fibre
revenues for this initial period, it leaves no room for unintended consequences. Poor
outcomes for consumers and perverse incentives for Chorus could arise if the revenue cap
ends up constraining our natural expected rate of growth.
“Consumers are currently benefitting from strong network investment, incentives to
encourage fibre uptake and the ongoing development of new and higher-speed products.
Chorus would have limited incentives to keep growing and enhancing fibre services if the
cap is met when fibre uptake has only just reached 63%.

“The regulatory framework is being determined at a time when interest rates are at historic
lows and potential WACC outcomes for Chorus of around 4.4% are significantly below the
5.8% WACC announced by Ofcom in the UK just last week for fibre networks,” Mr Collins
said.
Following the finalisation of the initial asset value model, Chorus has applied consistent cost
allocations methodology to expenditure for the first three-year regulatory period. The
refinement of shared costs in the modelling means the allocation of operating expenditure
to regulated fibre services has reduced from $625 million to $550 million and this is
reflected in Chorus’ estimated maximum allowable revenue range.

A presentation overview of the Initial Asset Value model Chorus has submitted to the
Commerce Commission is attached. 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:
21814790#

• 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

---

Initial Asset Value Model
26 March 2021

26 March 2021
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.
INITIAL ASSET VALUE PRESENTATION
2

26 March 2021
INITIAL ASSET VALUE PRESENTATION
3
IAV model supports solid, conservative RAB of $5.5bn
Alternative cost allocation approaches that reflect the full costs of Chorus’
standalone participation in the fibre PPP support a range of $5.5 to $6 billion
>Initial Asset Value (IAV) model is compliant with the Commerce Commission’s Input Methodologies requirements
▪independently audited for accuracy and compliance, approved by the Chorus Board
▪extensive work by international experts AnalysysMason who supported Chorus’ copper services review in 2014/2015
▪should enable the Commission to move reasonably rapidly in progressing its draft Price-Quality Determination
>IAV model indicates an estimated maximum allowable revenue range of $715 million to $755 million p.a. for RP1
▪this range broadly aligns with Chorus’ forecast fibre revenues for RP1 but leaves little room for unintended consequences
▪poor outcomes for consumers and perverse incentives for Chorus could arise if the revenue cap constrains Chorus’ natural
expected rate of growth
▪MAR estimate is subject to finalisation of 3-year risk free rate
▪MAR model to be provided to Commerce Commission in April
>Expenditure views updated following finalisation of IAV model
▪consistent cost allocation methodology has been applied to expenditure for RP1 previously presented on 17 December
▪allocation of operating expenditure to regulated fibre services has reduced from $625 million to $550 million from December
▪the update results in non-material changes to capital expenditure

26 March 2021
INITIAL ASSET VALUE PRESENTATION
4
Base RAB of $4.0bn, plus Financial Loss Asset $1.5bn
Conservative base case RAB of $5.5 billion at 1 January 2022
0
1
2
3
4
5
6
$
billion
>Base RAB
▪excludes $300m fibre assets funded through
contributions (greenfields, roadworks, installation
charges and Rural Broadband Initiative)
▪excludes$1.3bn copper/shared and non-Chorus UFB
zone fibre assets
>Financial Loss Asset
▪discounted cash flow methodology
▪depreciated based on weighted average remaining life
of UFB assets immediately before implementation date
Financial Loss
Asset $1.5bn
Base RAB
$4.0bn
[UFB assets +
shared assets]
>Alternative cost allocations reflecting standalone PPP
requirements support RAB up to $6bn
Allocation choices

26 March 2021
INITIAL ASSET VALUE PRESENTATION
5
$5.5bn RAB composition: balance sheet view
Asset typeUnallocated Asset
Value*
Price-Quality
Fibre RAB*
Proportion allocated
to Fibre RAB
Copper cable$0.3bn$00%
Fibre cable$1.8bn$1.6bn90%
Ducts, manholes, poles$2.3bn$1.8bn86%
Property$0.3bn$0.1bn37%
Cabinets, Transport, Layer 2, IT and miscellaneous $0.6bn$0.5bn78%
Base Asset Value$5.3bn$4.0bn75%
AddFinancial Loss Asset$1.5bn$1.5bn100%
TOTAL ASSET VALUE$6.8bn$5.5bn**84%
*Gross asset values are rounded to nearest $100m and represent written down values per the statutory accounts as at 30 June 2020, plus
forecast capex to 31 December 2021, less forecast depreciation (straight-line depreciation as contemplated by Input Methodologies).
** Excludes $0.3bn of fibre assets part or wholly funded with capital contributions or government funding after allocation.

26 March 2021
INITIAL ASSET VALUE PRESENTATION
6
Financial Loss Asset calculation
Financial Year20122013201420152016201720182019202020212022
Post-tax WACC
6.66%6.10%7.05%6.55%6.02%5.86%5.54%5.35%4.73%4.29%4.61%
UFB closing asset
value*
$0.2bn$0.6bn$1bn$1.3bn$1.6bn$2bn$2.4bn$2.9bn$3.3bn$3.7bn$3.8bn
PV of UFB revenue
Compounding factor
(revenue date)
$-bn
1.87
$0.1bn
1.69
$0.1bn
1.71
$0.1bn
1.55
$0.1bn
1.41
$0.2bn
1.32
$0.3bn
1.23
$0.4bn
1.16
$0.5bn
1.09
$0.5bn
1.04
$0.3bn
1.01
PV of UFB capex,
opexand tax**
Compounding factor
(mid-year date)
$0.3bn
1.88
$0.9bn
1.70
$0.9bn
1.72
$0.9bn
1.56
$0.7bn
1.42
$0.8bn
1.33
$0.9bn
1.24
$1bn
1.17
$0.8bn
1.1
$0.8bn
1.04
$0.3bn
1.01
PV of annual net
cash flows
-$0.3bn-$0.8bn-$0.8bn-$0.8bn-$0.6bn-$0.6bn-$0.6bn-$0.6bn-$0.3bn-$0.3bn$0bn
PV of total net cash flows (1/1/2022)
-$5.7bn
PlusUFB loss asset base closing value (1/1/2022)$3.8bn
PlusPV of Crown Financing benefit***$0.4bn
TOTAL FINANCIAL LOSSES-$1.5bn
Note: table totals are rounded to nearest $100m
* Starting UFB asset of ~$30m with depreciation based on statutory accounting rates. Only includes assets in Chorus UFB areas.
** Tax payments assumed at 0 due to existing tax losses
*** Reflects the Commission’s treatment of avoided costs due to concessionary government funding for the UFB project.

26 March 2021
INITIAL ASSET VALUE PRESENTATION
7
MAR broadly in line with forecast fibre revenues
>Indicative MAR range of $715m-$755m per annum aligns
with revenue forecast and is based on conservative base
case RAB of $5.5 billion
▪consistent with current FY21-25 Board approved 5-year plan
▪reflects estimated 3-year risk-free rate of 0.30% at
beginning of March: actual rate will be set based on 3-
month average ending 31 May
▪constrained by carry forward tax losses in RP1 resulting in
zero tax building block
▪MAR excludes capital contributions (e.g.greenfields, Rural
Broadband Initiative) and FFLAS in LFC areas
>MAR in first regulatory period (RP1) should be above
forecast revenues to:
▪avoid constraining Chorus’ natural expected rate of growth
given uptake is only 63%
▪retain incentives for Chorus to continue investing in better
consumer outcomes (e.g.fibre uptake, new and higher-
speed products)
▪deliver on government policy goals of a smooth transition
for consumers and investors
0
200
400
600
800
1000
1200
0
200
400
600
800
1000
1200
Other Chorus revenue
Regulated fibre revenue (estimated)
Indicative MAR
$m
Note: Assessment of FFLAS revenue is based on final Input Methodologies. Subject to completion of Commerce Commission process.

26 March 2021
INITIAL ASSET VALUE PRESENTATION
UPDATE: indicative
FFLAS share of FY20
statutory opex
FY20
reported
$m
UPDATED:
FY20 –FFLAS
(indicative)
$m
Prior Dec 17
th
FFLAS estimate
(indicative)
$m
Labour 804773
Network
maintenance
641313
Other network
costs
2977
IT473029
Rent, rates and
property
maintenance
2588
Regulatory levies756
Electricity1544
Provisioning512
Consultants986
Insurance322
Other272120
Total311146170
8
We estimate FFLAS opexwas 47% of
FY20 total opex
>Reduction from 55% estimate in December
reflects updated cost allocations to align with
Initial Asset valuation Model
>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 $10m
▪excludes IFRS 16 finance leases (treated as
network fixed assets in FY20 statutory
reporting)

26 March 2021
INITIAL ASSET VALUE PRESENTATION
UPDATE: Opexregulatory template
Opex
categoriesSub-categories202220232024
Customer ▪Customer operations7.16.56.1
▪Product, Sales &
Marketing
23.924.525.0
Network▪Maintenance29.732.533.9
▪Network operations14.215.116.2
▪Operating costs18.220.022.2
Support▪Asset management13.313.313.7
▪Corporate52.950.650.8
▪Technology19.619.820.5
TOTAL ($m)178.9182.3188.4$549.6m
9
>This template:
▪includes IFRS 16 finance leases of ~$41m
(nominal) for presentational and comparative
purposes
▪excludes passthrough costs of ~$45m
(nominal)
▪includes regulatory inflation
Total proposed RP1 opexreduces from $625.5m to $549.6m

26 March 2021
INITIAL ASSET VALUE PRESENTATION
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
10

26 March 2021
INITIAL ASSET VALUE PRESENTATION
11
Regulatory timetable
Source: Commerce Commission