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Chorus Limited Level 10, 1 Willis Street P O Box 632 Wellington 6140 New Zealand

STOCK EXCHANGE ANNOUNCEMENT

29 August 2016

Chorus 2016 full year result & annual report

The following are attached in relation to Chorus’ FY16 full year result and annual report:

Media Release
Investor Presentation (including FY17 guidance)
Annual Report (including audited financial statements)
NZX Appendix 1
NZX Appendix 7
Corporate Governance Statement
Letter to investors (including section 209 Notice)

Chief Executive Officer Mark Ratcliffe, and Chief Financial Officer Andrew Carroll, will discuss the FY16 full year result by webcast at 10.00am New Zealand time today. The webcast will be available at www.chorus.co.nz/webcast.

ENDS

For further information:

Nathan Beaumont Media and PR Manager Phone: +64 4 896 4352 Mobile: +64 (21) 243 8412 Email: [email protected]

Brett Jackson Investor Relations Manager Phone: +64 4 896 4039 Mobile: +64 (27) 488 7808 Email: [email protected]

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Chorus Limited Level 10, 1 Willis Street P O Box 632 Wellington 6140 New Zealand

Email: [email protected]

MEDIA RELEASE

29 August 2016

Chorus full year result for FY16

Return to managing for long term value as operating context improves

Net profit after tax $91m (FY15: $91m)
EBITDA $594m (FY15: $602m)
Operating revenue of $1,008m (FY15: $1,006m)
Final dividend of 12 cents per share
Ultra-Fast Broadband (UFB) rollout 57% complete, and Rural Broadband Initiative (RBI) 100% complete
Better broadband made available to about 900,000 customers since 2011
Total fixed lines decreased by 67,000 to 1,727,000 and broadband connections increased by 19,000 to 1,226,000

Chorus has today reported a net profit after tax (NPAT) of $91m (FY15: $91m) and earnings before interest, tax, depreciation and amortisation (EBITDA) of $594m (FY15: $602m) for the year ended 30 June 2016.

Operating revenue for the period was $1,008m (FY15: $1,006m) and operating expenses were $414m (FY14: $404m).

Depreciation and amortisation for the period was $327m (FY15: $324m), delivering earnings before interest and tax (EBIT) of $267m (FY15: $278m).

While the Commerce Commission’s review of regulated pricing for Chorus’ key copper services, completed in December 2015, provided a better pricing path to 2020 than the initial benchmarked pricing, Chorus’ financial result for FY16 was impacted by five and a half months of the lower pricing.

"The combination of greater regulatory clarity and operating momentum has allowed Chorus to return to managing its business for long term shareholder value,” said Mark Ratcliffe, Chorus CEO.

“EBITDA of $594 million is in the top half of guidance, reflecting continued good cost management across the business, and dividends were resumed in February 2016.

“Substantial network investment through our ongoing UFB rollout, the now completed RBI rollout and enhancements to our VDSL service has made better broadband available to about 900,000 customers since we were established in 2011.

“In that time we’ve invested about $2.9 billion in capital expenditure, with $593 million of that during FY16 alone.

“While the final copper pricing outcome was an improvement on the benchmarked pricing, it has not restored our financial position to demerger levels, and the regulatory framework that may apply from 2020 remains far from clear. We are therefore continuing to take a measured approach to ongoing investment.

“A regulatory framework that recognises broadband as an essential utility is necessary if New Zealand is to encourage ongoing improvement and extension of its broadband capability. We welcome the Government’s current review of the regulatory framework for communications services and believe it is an opportunity to align and deliver on the interests of customers and investors.

“A stable transition in pricing at 2020 is central to this and could help New Zealand achieve better broadband coverage well beyond the Government’s current goals,” he said.

Service company partnerships

During the financial year Chorus worked closely with its service company partners to almost double the number of fibre field crews from 275 to 524. As a result of this and process improvements, the company lifted the number of connections completed in a month from about 6,000 in July 2015 to 12,000 in June 2016.

In all, Chorus processed more than 110,000 connections during the year and is currently looking to recruit another 250 technicians and support staff by the end of 2016.

“Much more remains to be done to improve the experience we provide to our customers, particularly balancing the growing demand for fibre connections with our requirements to maintain the existing network,” said Mark Ratcliffe.

“We are continuing to review our service company partnerships to ensure we have the right partners and resourcing to be able to deliver a consistently high quality customer experience across both the copper and fibre networks.”

As part of the ongoing discussions with its partners, Downer has confirmed that it does not intend to re-tender for ongoing fibre installation work, preferring to concentrate on the copper network and communal UFB build.

Downer currently provides fibre installation services primarily in the lower South Island, and is contracted to continue to provide this service until February 2017.

Chorus expects to make further announcements regarding its service company arrangements in the near future.

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“No matter which partner we choose, this will be a managed transition and we will be adding overall to the technician and field support workforce, so we expect the number of roles relating to fibre installation to continue to grow,” said Mark Ratcliffe.

Dividend

Chorus will pay a final dividend of 12 cents per share, fully imputed, on 7 October 2016 to all shareholders registered at 5pm on 23 September 2016. A supplementary dividend will be paid to non-resident shareholders. A dividend reinvestment plan will apply for the final dividend at a discount rate of 3%. Applications to participate must be received by 5pm (NZ time) on 26 September 2016.

FY17 guidance

EBITDA: $625 - $645 million Capital expenditure: $610 - $650 million Dividend: 21 cents per share, subject to no material adverse changes in circumstances or outlook.

ENDS

Chorus Chief Executive, Mark Ratcliffe, and Chief Financial Officer, Andrew Carroll, will discuss the final result at a briefing in Wellington from 10.00am (NZ time). The webcast will be available at www.chorus.co.nz/webcast.

For further information:

Nathan Beaumont Stakeholder Communications Manager Phone: +64 4 896 4352 Mobile: +64 (21) 243 8412 Email: [email protected]

Brett Jackson Investor Relations Manager Phone: +64 4 896 4039 Mobile: +64 (27) 488 7808 Email: [email protected]

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FY16 Full Year Result

29 August 2016

Disclaimer

This presentation may contain forward-looking statements regarding future events and the future financial performance of Chorus, including forward looking statements regarding industry trends, regulation and the regulatory environment, strategies, capital expenditure, the construction of the UFB network, possible business initiatives, credit ratings and future financial and operational performance. These forward-looking statements are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond Chorus’ control, and which may cause actual results to differ materially from those expressed in the statements contained in this presentation. No representation, warranty or undertaking, express or implied, is made as to the fairness, accuracy or completeness of the information contained, referred to or reflected in this presentation, or any information provided orally or in writing in connection with it. Please read this presentation in the wider context of material published by Chorus and released through the NZX and ASX.
Except as required by law or the NZX Main Board and ASX listing rules, Chorus is not under any obligation to update this presentation at any time after its release, whether as a result of new information, future events or otherwise.
The information in this presentation should be read in conjunction with Chorus’ audited consolidated financial statements for the year ended 30 June 2016. This presentation includes a number of non-GAAP financial measures, including "EBITDA”. These measures may differ from similarly titled measures used by other companies because they are not defined by GAAP or IFRS. Although Chorus considers those measures provide useful information they should not be used in substitution for, or isolation of, Chorus' audited financial statements. Refer to the presentation appendices for further detail relating to EBITDA measures.
This presentation does not constitute investment advice or a securities recommendation and has not taken into account any particular investor’s investment objectives or other circumstances. Investors are encouraged to make an independent assessment of Chorus.

Mark Ratcliffe, Chief Executive Officer

Agenda

Mark Ratcliffe, CEO

>	Connections and trends	5-7
>	Rollouts, uptake and bandwidth	8-10
Andrew Carroll, CFO
>	Financial results	12-13
>	Capex	14-17
>	FY17 guidance summary	18
>	Capital management, FY17 dividend, debt	19-20
Mark Ratcliffe, CEO
>	Fibre connections	22-24
>	Promoting broadband	25-26
>	Regulation	27
>	FY17: Customer focused	28
Appendices		29-35
		FY16 RESULT PRESENTATION

OVERVIEW

Net Profit After Tax : $91m Revenue : $1,008m EBITDA : $594m

Fixed line connections 67,000

Other Local Fibre Co. (LFC) networks now past ~340,000 and ~85,000 connected (FY15:~250,000 passed and ~35,000 connected)

Broadband connections

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19,000

Fixed line connections	30 June 2016	31 Dec 2015	30 June 2015
Baseband copper	1,221,000	1,320,000	1,408,000
Naked copper(UBA/VDSL)	197,000	180,000	159,000
UCLL	108,000	116000	123,000
		,
SLU/SLES	2,000	3,000	3,000
Baseband IP	9,000	6,000	NM
Data services over copper	10,000	11,000	13,000
Fibre(mass market+premium business)	180,000	125,000	88,000
Total fixed line connections	1,727,000	1,761,000	1,794,000

Broadband connections	30 June 2016	31 Dec 2015	30 June 2015
UBA(Basic + Enhanced +Naked)	900,000	972,000	1,016,000
VDSL(including naked)	159,000	139,000	116,000
Fibre(mass market)	167,000	112,000	75,000
Total broadband connections	1,226,000	1,223,000	1,207,000

FY16 RESULT PRESENTATION

CONNECTIONS TRENDS

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2,000,000
1,800,000
1,600,000 LFC uptake
RSP dual line cleanup
Number of 1,400,000
Chorus 1,200,000
connections
1,000,000
800,000
600,000
Rural broadband footprint growth and uptake
400,000
Increasing positive net permanent and long-term migration
200,000 UCLL to UFB
0
FY12 FY13 FY14 FY15 FY16
Broadband connections Line only
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FY16: H1 vs H2

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40
20
0
H1 15 H2 15 H1 16 H2 16
-20
-40
Fixed lines Broadband
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Fixed line loss consistent across H1 and H2 as fibre demand increased and LFCs gain share
Tailwind from growing rural broadband coverage abating as RBI rollout ends and wireless grows
Broadband demand supported by net migration and dwelling increases, particularly in Auckland
Net effect is broadband connections held flat for last few months, despite line loss to other networks

FY16 RESULT PRESENTATION

Intensifying retail competition Unlimited data as entry level Promoting best available technology (ADSL/VDSL/Fibre) Bundling electricity/content 2 year contract split pricing Non-UFB areas RBI upgrade complete Rural wireless Chorus UFB areas Vodafone cable Urban wireless Local Fibre Company areas Vodafone cable Urban wireless H2 FY16 Chorus broadband connections change +1,000 -18,000 +20,000	Intensifying retail competition Unlimited data as entry level Promoting best available technology (ADSL/VDSL/Fibre) Bundling electricity/content 2 year contract split pricing Non-UFB areas RBI upgrade complete Rural wireless Chorus UFB areas Vodafone cable Urban wireless Local Fibre Company areas Vodafone cable Urban wireless H2 FY16 Chorus broadband connections change +1,000 -18,000 +20,000	Intensifying retail competition Unlimited data as entry level Promoting best available technology (ADSL/VDSL/Fibre) Bundling electricity/content 2 year contract split pricing Non-UFB areas RBI upgrade complete Rural wireless Chorus UFB areas Vodafone cable Urban wireless Local Fibre Company areas Vodafone cable Urban wireless H2 FY16 Chorus broadband connections change +1,000 -18,000 +20,000	Intensifying retail competition Unlimited data as entry level Promoting best available technology (ADSL/VDSL/Fibre) Bundling electricity/content 2 year contract split pricing Non-UFB areas RBI upgrade complete Rural wireless Chorus UFB areas Vodafone cable Urban wireless Local Fibre Company areas Vodafone cable Urban wireless H2 FY16 Chorus broadband connections change +1,000 -18,000 +20,000
	Non-UFB areas RBI upgrade complete Rural wireless	Chorus UFB areas Vodafone cable Urban wireless Local Fibre Company areas Vodafone cable Urban wireless
		Local Fibre Company areas Vodafone cable Urban wireless
			Chorus UFB areas Vodafone cable Urban wireless
H2 FY16 Chorus broadband connections change			+20,000
	+1,000	-18,000

FY16 RESULT PRESENTATION

RURAL ROLLOUT – A GREAT SUCCESS

Rural Broadband Initiative rollout completed for $282 million at lower end of expected cost range
delivered above Government contracted target with enhanced or extended fixed line coverage to
~110,000 homes and businesses
open access for multiple RSPs has helped achieve uptake of 88%
21% of rural customers now able to access 50Mbps+
technology developments continue to extend potential reach and capability of copper broadband (e.g. vectoring, dynamic line management, miniDSLAMs)
awaiting RBI2 details from Government

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Rural Broadband Initiative: Urewera fibre deployment

FY16 RESULT PRESENTATION

FIBRE ROLLOUT & UPTAKE

Rollout 57% complete with 474,000 premises passed
640,000 customers able to connect

Chorus UFB uptake by area – June 2016

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24% uptake with 156,000 connections within UFB deployed footprint (68,000 at 30 June 2015)
In Q4, 90% of net adds were on 100Mbps plans or higher
54% of mass market fibre plans now >100Mbps

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% of Total mass market fibre uptake by plan type
plans
100
80
100/20Mbps
60 now $42/month
40
30/10Mbps now
20 $39.50/month
0
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16
30Mbps 100Mbps 200Mbps
Gigatown Education Business 100Mbps+
FY16 RESULT PRESENTATION 9
% of build completed (premises)
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BANDWIDTH DEMAND ISN’T SLOWING

Average connection speed on network 30Mbps (2011:10Mbps)

Monthly average bandwidth demand on Chorus network

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Average throughput per user 670kbps+ (FY15: 440kbps)
2 hours streaming a day is global average for Netflix subscribers – 1 hour of HD video uses 2GB to 3GB
June average monthly household data usage was 89GB on our copper network and 186GB on fibre = average of 103GB across our network
NBN (Australia) reported 131GB
Our historical data and fibre vs copper usage suggests ~170GB average by FY18 and ~680GB by 2020

FY16 RESULT PRESENTATION

Andrew Carroll, Chief Financial Officer

FY16 RESULT PRESENTATION

INCOME STATEMENT

	FY16 $m	FY15 $m
Operatingrevenue	1,008	1,006
Operatingexpenses	(414)	(404)
Earnings before interest, tax, depreciation and amortisation(EBITDA)	594	602
Depreciation and amortisation	(327)	(324)
Earnings before interest and income tax	267	278
Net interest expense	(140)	(151)
Net earnings before income tax	127	127
Income tax expense	(36)	(36)
Net earnings for theperiod	91	91

FY16 EBITDA impacted by five and a half months of initial benchmark pricing

FY16 RESULT PRESENTATION

Revenue

	FY16	FY15
	$m	$m
Basic copper	489*	491
Enhanced copper	242*	268
Fibre	133	98
Value Added	35	36
Network Services
Field Services	83*	84
Infrastructure	20	21
Other	6	8
Total	1,008	1,006

includes ~6 months of the final copper pricing determination

Expenses

	FY16 $m	FY15 $m
Labour costs	78	73
Provisioning	60	58
Network maintenance	89	91
Other network costs	34	34
IT costs	65	65
Rents, rates and property maintenance	28	25
Regulatory levies	13	15
Electricity	14	14
Consultants	4	3
Insurance	3	4
Other	26	22
Total	414	404

FY16 RESULT PRESENTATION

CAPEX SUMMARY

Total capex of $593m at lower end of $580m - $630m guidance range (FY15: $597m)
high fibre demand is bringing connection capex forward, including for backbone to rights of way and multi-dwelling units
UFB communal includes $9m for splitter demand in prior built areas
post-FPP discretionary investment has focused on copper layer 2 and restart of IT separation programmes
Fibre connections & layer 2 capex includes premium business fibre capex previously included in Other fibre connections & growth . FY15 categories adjusted for comparative purposes.

Fibre capex	FY16	FY15
UFB communal	194	236
Fibre connections & layer 2	205	169*
Fibre products & systems	18	26
Other fibre connections & growth	47	34*
RBI	22	39
Subtotal	486	504
Copper capex Network sustain Copper connections Copper layer 2 Product Subtotal
	29	34
	7	11
	27	11
	4	4
	67	60
Common capex
Information technology	25	19
Building & engineering services	13	13
Other	2	1
Subtotal	40	14 33
TOTAL GROSS CAPEX	$593m	$597m

UFB COSTS

Cost per premises passed (CPPP): $1,689 vs $1,700 - $1,770 guidance
$48m work in progress (FY15 $44m)

Chorus FTTP average cost per premises

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5000
4000
3000
2000
$m
1000
0
FY13 FY14 FY15 FY16
Cost per premises connected
Cost per premises passed
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$NZ

> Cost per premises connected (CPPC) of $1,009* vs $1,050 - $1,250 guidance

excludes layer 2 and includes standard installations and some non-standard single dwellings
Connections capex now greater than communal (incl premium fibre)

Fibre capex FY13-FY16

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400
FY13 FY14 FY15 FY16
350
300
250
200
150
100
50
0
UFB communal Fibre connections + layer 2 (includes business
premium connections)
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FY16 RESULT PRESENTATION

FIBRE CONNECTIONS CAPEX

Fibre connections and related capex continue to grow significantly

Fibre connections & layer 2 capex	No. of connections (vs FY16 estimate)	FY16 $205m	FY15 $169m
Layer 2 (long run programme average of $100 per connection)	N/A	$19m	$16m
Premium business fibre connections	2,500 completed (FY16 estimate: 3,500)	$21m	$29m
Single dwelling units and apartments connections	93,000 completed (FY16 estimate: 85- 95,000)	$97m	$61m
Backbone build: multi-dwelling units and rights of way	8,100 completed (FY16 estimate: 8,750)	$68m	$63m

Non-standard fibre connections

Chorus and CFH have made good progress in exploring options to extend Chorus’ current non standard installation arrangements beyond 2016. An announcement in relation to this is expected shortly

FY16 RESULT PRESENTATION

INVESTING IN BETTER BROADBAND

FY16 vs FY17 illustrative capex profile

Common Copper Fibre

> FY17 GUIDANCE : $610 - $650m gross capex

fibre : growing demand continues to bring connections investment forward
copper : some additional rural investment and further bandwidth/layer 2
common : IT separation resumes to reduce reliance on Spark systems

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$610-650m
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$593m
486 480-520
60-85
67
50-65
40
FY16 FY17 GUIDANCE
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FY16 RESULT PRESENTATION

Guidance summary

	FY17guidance	FY16 result
Cost Per Premises Passed (CPPP)	$1,550 - $1,650	$1,689
Cost Per Premises Connected (CPPC)	$950 - $1,100(excluding layer 2 and including standard installations and some non-standard single dwellings)	$1,009
Fibre connections & layer 2 capex	$250 – $280m(based on mass market 150,000 fibre connections, 10,000 backbone builds and 2,500 premium business fibre connections)	$205m
FY17 Gross capex	$610 – $650m	$593m
FY17 EBITDA	$625-$645m	$594m

FY16 RESULT PRESENTATION

CAPITAL MANAGEMENT & FY17 DIVIDEND

The Chorus Board considers that a ‘BBB’ credit rating from S&P or equivalent credit rating is appropriate for a company such as Chorus. It intends to maintain capital management policies and financial policies consistent with these credit ratings
During the UFB build programme to 2020, the Board expects to be able to provide shareholders with modest long term dividend growth from a base of 20cps per annum, subject to no material adverse changes in circumstances or outlook.
FY16 final dividend of 12 cps , fully imputed
- supplementary dividend of 2.12cps payable to non-resident shareholders
record date : 23 September 2016
payment date : 7 October 2016
Dividend Reinvestment Plan applies with 3% discount to prevailing market price; open to New Zealand and Australian resident shareholders
FY17 dividend guidance of 21cps, subject to no material adverse changes in circumstances or outlook.

FY16 RESULT PRESENTATION

DEBT

	As at 30 June 2016 $m	As at 30 June 2016 $m
Borrowings	1,742
+ PV of CFH debt securities(senior)		76
+ Net Finance leases		132
Sub total	1,950
- Cash	(102)
Total net debt	1,848
Net debt/EBITDA	3.1 times

Financial covenants require senior debt ratio to be no greater than 4.0 times

At 30 June, debt of $1,742m comprised:

$665m long term bank facilities
$400m NZ bond
$677m (NZ$ equivalent at hedged rates) Euro Medium Term Note

Term debt profile

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1000
Drawn Bank Facility
800 Available Bank Facility
NZ
RCF $250m
$M
600 GBP EMTN
Face Value of CFH Debt Securities Issued
400
CFH Debt Securities Available
NZ Bond
200
70
55
0 - - 37 49 37 49 74 94
Calendar Years
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FY16 RESULT PRESENTATION

Mark Ratcliffe, Chief Executive Officer

FY16 RESULT PRESENTATION

IMPROVING THE FIBRE CONNECTION EXPERIENCE

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updating
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FY16 RESULT PRESENTATION

MEASURING PROGRESS

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----- Start of picture text -----

February July
30% RESCHEDULES 25%
FIELD CREWS 530
399
14 days LEAD TIME 16 days
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BALANCING WORKFORCE DEMANDS

Chorus fibre connection activity - all NZ

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20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
Connections built and activated Additional connections completed
----- End of picture text -----

> connection productivity doubled

530 crews in July 16 vs 275 June 15
service company changes in some areas
now averaging ~600 connections a day
work in progress stable at ~32k with ~20% requiring consent

> ensuring a sustainable workforce

need to balance fibre connection demand with other network needs
seeking 250 more technicians and support staff through job fairs and other initiatives
15,000 monthly connection capacity by end of FY17

Orders (net of cancellations and rejections in the month)

FY16 RESULT PRESENTATION

DRIVING BROADBAND AWARENESS

~60% of broadband customers could get faster broadband
Chorus online broadband capability checker
VDSL promotion for RSPs outside our UFB areas
fibre promotion in areas with technician capacity
broadband price comparison websites raising awareness

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FY16 RESULT PRESENTATION

REMOVING DATA CONSTRAINTS

Sustained peak capacity is the key to broadband experience
targeted Layer 2 investment to keep ahead of bandwidth growth
regional transport product assisting RSPs with backhaul
new data centre ‘in-a-box’ in Auckland to facilitate cloud access

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Source : TrueNet June 2016 urban broadband report, VDSL file download speed by time of day

FY16 RESULT PRESENTATION

SEEKING REGULATORY CLARITY SOONER

Government has confirmed preference for utility-style building blocks methodology for fixed line copper and fibre services from 2020, but it is still unclear how key parameters might be implemented

Source : Telecommunications Act Review: Options Paper, July 2016

FY16 RESULT PRESENTATION

FY17: CUSTOMER FOCUSED

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> We expect continued high demand for fibre

FY17 build is in high demand areas
we’re focused on building a skilled, safe and sustainable workforce
we’re reviewing how we build, provision and manage orders to make connection easier
we’ll publish installation lead times online

> Customers want quality (peak time) broadband

we’re letting people know what’s already available
we’re focused on enabling speed and capacity

> Regulatory clarity is key to ongoing investment

requires a stable transition to building block model
UFB2 and RBI2 decisions expected this year

FY16 RESULT PRESENTATION

Appendices

Appendix A : Non statutory measure – adjusted EBITDA

This appendix provides a high level summary of Chorus’ adjusted EBITDA. It has been prepared on the basis of the final pricing principle (FPP) determinations effective 16 December 2015.

				
	Statutory results $m	Add: UBA and UCLL price change $m	Less: transaction charge price change $m	Adjusted $m
H2 FY16 operating revenue	529	-	-	529
H1 FY16 operating revenue	479	65	(6)	538
H2 FY15 operating revenue	479	67	(6)	540
H1 FY15 operating revenue	527	8	(2)	533

FY16 RESULT PRESENTATION

Appendix B : Illustrative Chorus pre-financing adjusted cash flows

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----- Start of picture text -----

1200
1000
800
$m
600
Rural Broadband rollout ended FY16.
UFB1 communal rollout ends Dec 2019.
400
Fibre connection capex subject to demand.
200
Other fibre, copper, common
0
FY16 FY16 Estimated Estimated Estimated FY16 Capex
Adjusted Operating interest taxation dividend
Note : Capex implications of Government’s future
revenue expenses (excludes @20c per
(includes full ineffectiveness) proposed UFB2 and RBI2 rollouts are unknown.
(does not include share
year of FPP
depreciation and
pricing)
amortisation as
non-cash) FY16 RESULT PRESENTATION 31
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Appendix C : Chorus mass market copper + fibre pricing

	Benchmark	Pricing effective 16			Mass market fibre product pricing	Mass market fibre product pricing
	pricing	December 2015	$70.00
UCLL and UCLFS	$23.52	Year 1 - $29.75
		Year 2 - $30.22 Year 3 - $30.70	$65.00		Accelerate: 200/200Mbps
		Year 4 - $31.19
		Year 5 - $31.68	$60.00		Accelerate: 200/100Mbps
Basic UBA uplift	$10.92	Year 1 - $11.44
		Year 2 - $11.22 Year 3 - $11.01	$55.00		Accelerate: 200/20Mbps
		Year 4 - $10.83		$53	Evolve 4: 100/50Mbps
UCLL + UBA = aggregate Basic UBA price	$34.44	Year 5-$10.67 Year 1 - $41.19 Year 2 - $41.44 Year 3 - $41.71 Year 4 - $42.02	$45.00 $50.00	$47	Accelerate: 100/20Mbps Accelerate: 100/50Mbps Accelerate: 100/100Mbps
SLU	$14.21	Year 5-$42.35 Year 1 - $15.52	$40.00	$39.50 $42		Evolve 1: 30/10Mbps
		Year 2 - $15.70
		Year 3 - $15.89 Year 4 - $16.07	$35.00		Note:Evolve products shown are the core UFB contracted products introduced in 2012. Accelerate products are commercial products introduced by Chorus in mid 2014.
		Year 5-$16.26	$30.00	Jul-16		Jul-17	Jul-18	Jul-19
					FY16 RESULT PRESENTATION		32

Appendix D : NZ fixed line market

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Vocus
2 [o]
MyRepublic
NOW $49 intro plan
Local Fibre Companies
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Appendix E : UFB overview

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34
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Appendix F :Broadband connection speed

0 5 10 15 20 25 30 35 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 Connection Speed ADSL ADSL2+ VDSL2 GPON Average Connection Speed Connections Broadband connections 30 June 2016 30 June 2015 Basic UBA (including naked) 55,000 106,000 Enhanced UBA (including naked) 845,000 910,000 VDSL (including naked) 159,000 116,000 Fibre (mass market) 167,000 75,000 Total broadband connections 1,226,000 1,207,000 Speed (Mbps)	0 5 10 15 20 25 30 35 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 Connection Speed ADSL ADSL2+ VDSL2 GPON Average Connection Speed Connections Broadband connections 30 June 2016 30 June 2015 Basic UBA (including naked) 55,000 106,000 Enhanced UBA (including naked) 845,000 910,000 VDSL (including naked) 159,000 116,000 Fibre (mass market) 167,000 75,000 Total broadband connections 1,226,000 1,207,000 Speed (Mbps)	0 5 10 15 20 25 30 35 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 Connection Speed ADSL ADSL2+ VDSL2 GPON Average Connection Speed Connections Broadband connections 30 June 2016 30 June 2015 Basic UBA (including naked) 55,000 106,000 Enhanced UBA (including naked) 845,000 910,000 VDSL (including naked) 159,000 116,000 Fibre (mass market) 167,000 75,000 Total broadband connections 1,226,000 1,207,000 Speed (Mbps)
Broadband connections	30 June 2016	30 June 2015
Basic UBA (including naked)	55,000	106,000
Enhanced UBA (including naked)	845,000	910,000
VDSL (including naked)	159,000	116,000
Fibre (mass market)	167,000	75,000
Total broadband connections	1,226,000	1,207,000

FY16 RESULT PRESENTATION

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Chorus

Annual Re ort 2016 p

Chorus Board and management overview	1
Management commentary	13
Financial statements	27
Governance and disclosures	59
Glossary	73

Annual Report

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EBITDA NET PROFIT TOTAL SHAREHOLDER
AFTER TAX RETURN
1%
$594m $602m $91m $91m 50% 68%
FY16 FY15 FY16 FY15 FY16 FY15
FIXED LINE BROADBAND UFB
CONNECTIONS CONNECTIONS ROLLOUT
4% 2% 13%
1,727,000 1,794,000 1,226,000 1,207,000 57% 44%
FY16 FY15 FY16 FY15 FY16 FY15
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Highlights

Challenges

Our Ultra-Fast Broadband (UFB) rollout has now passed 57% of planned premises and we’ve finished the Rural Broadband Initiative (RBI). Together with enhancements to our Very High Speed Digital Subscriber Line (VDSL) broadband service, these initiatives have made better broadband available to about 900,000 customers since we started in 2011.

Despite doubling our workforce in the last 5 years, rapidly growing fibre demand means many customers are experiencing wait times to connect to fibre, while others have recently had to wait too long for faults on our copper network to be repaired. We’re continuing to make process improvements across the industry, while also recruiting and training more people to provide a better experience for customers.

Fibre connections on our network have exceeded 180,000 and continue to grow rapidly with about 12,000 connections completed in June 2016. Fibre uptake increased from 14% to 24% in our UFB areas and more than 50% of mass market connections are on a 100Mbps service or better.

Total fixed line connections are declining as other fibre networks benefit from customer demand and mobile network operators promote wireless broadband options.

We resumed dividend payments to shareholders after the Commerce Commission (the Commission) set copper pricing through to 2020 with the conclusion of its final pricing process. The Government has since announced high level policy decisions that include moving to a utility-style building block methodology for regulating fixed line copper and fibre services from 2020.

Lack of regulatory certainty post 2020 makes it commercially challenging for us to make significant new investments, including additional UFB and RBI investment.

Earnings before interest, income tax, depreciation and amortisation (EBITDA) is a non-GAAP profit measure. We monitor this as a key performance indicator and we believe it assists investors in assessing the performance of the core operations of the business.

Annual Report

Chorus Board and management overview

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Patrick Strange Chairman

Mark Ratcliffe Managing Director and CEO

This report is dated 29 August 2016 and is signed on behalf of the Board of Chorus Limited.

Dear Shareholders

This time last year we were managing the business to preserve cash and dividends had been suspended since late 2013. Fast-forward to today and it is a much improved operating context. The Commerce Commission’s final copper pricing decision in December 2015 provided a better pricing path to 2020 than indicated by their earlier benchmarking and draft decisions. This enabled us to begin investing again to strengthen our network and service capability for customers. However, much more remains to be done to improve the customer experience, particularly as we need to balance the growing demand for fibre connections with our workforce requirements to maintain the existing network.

Substantial network investment through our ongoing UFB rollout, the now completed RBI rollout and enhancements to our VDSL service have made better broadband available to about 900,000 customers since we were established in 2011. These network upgrades are coinciding with a dramatic surge in broadband traffic. Broadband as the emerging fourth utility clearly sits at the heart of the home and is playing a pivotal role in New Zealanders’ day-to-day lives.

Our financial metrics for the period were still affected by the five and a half months under which benchmarked copper prices applied to our key copper services.

However, EBITDA of $594 million was at the top end of the guidance we provided for FY16, reflecting continued good cost management across the business. Importantly, we were able to start managing the business for long-term shareholder value.

In February we announced the resumption of dividends and our expectation of providing shareholders with modest long term dividend growth during the UFB build programme to 2020. The greater regulatory clarity meant we could diversify our bank debt funding, in place since 2011, through a $400 million bond issue and refinance our existing bank debt to deliver material cost savings.

Together, the restoration of some clarity to our regulatory environment and the operating momentum within the business helped our share price appreciate 46% during the period. Our market capitalisation has increased from about $1.1 billion to $1.8 billion and we’ve recently been readmitted to the S&P/NZX 20 Index. It’s a positive turnaround, but the copper pricing outcome has not restored our financial position to demerger levels and the regulatory framework that may apply from 2020 remains far from clear. We are therefore continuing to take a measured approach to ongoing investment.

P. 1

Annual Report

Bringing New Zealand better broadband

There’s no question that broadband has become an essential utility – much like electricity, water and gas. We recognise we need to provide the best network and service possible if we’re to continue to grow broadband connections on our network.

About 640,000 customers are now within reach of our UFB network and we’re now 57% of the way through the rollout. Uptake rose to 24%, up from 14% at the start of the financial year. We built fibre to the boundary of 106,000 more premises during the period.

This included finishing the rollout in Greymouth, Masterton, Queenstown, Rotorua and Waiuku.

Rural areas also benefitted during the year with the final phase of the RBI extending fibre to our upgraded broadband cabinets and new Vodafone tower sites. The five-year rollout was completed at the lower end of our initial capital expenditure guidance range of $280-$295 million and we delivered more coverage than originally contracted by Government.

Figure 1: Progress by Chorus UFB Area as at 30 June 2016

NORTH ISLAND

AUCKLAND FEILDING (inc. Waiheke , Waiuku, Pukekohe) 5,600 premises 50% complete 372,000 premises 53% complete PALMERSTON NORTH WHAKATANE 27,900 premises 71% complete 5,500 premises 83% complete MASTERTON ROTORUA 8,500 premises 100% complete 20,900 premises 100% complete LEVIN TAUPO 7,100 premises 59% complete 9,900 premises 100% complete KAPITI GISBORNE 16,400 premises 48% complete 12,300 premises 50% complete WELLINGTON NAPIER/HASTINGS 126,200 premises 48% complete48% complete 40,900 premises 58% complete

WELLINGTON 126,200 premises 48% complete48% complete

SOUTH ISLAND

NELSON OAMARU 23,500 premises 78% complete 5,800 premises 100% complete

BLENHEIM 11,100 premises 100% complete

DUNEDIN 44,500 premises 67% complete QUEENSTOWN 4,900 premises 100% complete

GREYMOUTH 3,500 premises 100% complete

ASHBURTON INVERCARGILL 8,100 premises 100% complete 19,700 premises 75% complete

TIMARU 12,800 premises 100% complete

PREMISES = TOTAL UFB PREMISES IN AREA, EXCLUDING GREENFIELDS

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P. 2

Annual Report

We deployed about 3,500 kilometres of fibre to rural schools and hospitals and enhanced our broadband coverage to approximately 110,000 rural homes and businesses.

About 50% of rural customers should now be able to access broadband speeds on our network of 10Mbps or better, with about 20% able to access speeds in excess of 50Mbps (see Figure 2). The benefits of retail competition across our wholesale network footprint are also evident with uptake within our RBI areas reaching about 88%.

During the year, a change in the frequencies used to transmit VDSL broadband saw average peak speeds on VDSL rise from 35Mbps to 50Mbps. It also enabled us to increase our VDSL footprint by an estimated 175,000 customers. The combination of UFB, RBI and VDSL upgrades means we now have high-speed broadband available via fibre or copper-based VDSL technology across 85% of our broadband capable lines. By 2020, our fibre footprint will have increased from about a third of broadband capable connections to 60%.

Figure 2: The Chorus Network: bringing better broadband

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FIBRE BACKHAUL
FIBRE CABLE
COPPER CABLE
OUR RURAL COVERAGE OUR URBAN COVERAGE DEMAND FOR DATA IS GROWING RAPIDLY
25% 31% 21% 640,000 24% 57% 53%
<10Mbps 10-50Mbps >50Mbps of online customers
Rural fixed line homes and of homes and of homes and streaming TV or movies
broadband enhanced businesses within businesses businesses able (Nielsen)
to urban quality reach of Chorus connected to access ≥50Mbps
fibre at June 2016 to fibre via fibre or VDSL Broadband is fast emerging as the fourth utility after 50%
OUR NATIONAL COVERAGE – CHORUS WHOLESALE FIBRE ACCESS NETWORK electricity, water and gas. increase in bandwidth
demand in FY16.
Average throughput
98% 80% per user: 660kbps
~ 1.72 ~ 1.22 ADSL VDSL ~100GB
MILLION MILLION of homes and of homes and consumption in June 2016. Average household data 54%
Fixed line Broadband businesses are businesses are Fibre Households used of fibre customers taking
connections connections able to connect to able to connect to ~190GB ≥100Mbps service
nationally ADSL broadband VDSL broadband
International cable
URBAN (towns of 500+ lines)
CABINET
RURAL
EXCHANGE URBAN
EXCHANGE
RETAIL SERVICE
PROVIDER
~100 Chorus retail customers
RURAL (~280k lines)
RETAIL SERVICE PROVIDERS
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P. 3

Annual Report

Market overview

Figure 3: The New Zealand fixed line market

Rationalisation, new entrants and new business models are disrupting the NZ market

ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon	ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon	ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon	ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon	ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon	ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon	ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon	ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon	ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon	ELECTRICITY SECTOR BBC iPlayer Apple TV Google Play Netf ix YouTube Hulu Amazon
Deploying IP set-top boxes Sky TV LOCAL MEDIA (BROADCAS	Lightbox T) D)				TVNZ		TV3
LOCAL MEDIA (ON DEMAN	D)	Lightbox		OnDemand 3Now	OnDemand		3Now
Neon
RETAIL SERVICE PROVIDER		Spark	Vocus			2degrees	e.g. MyRepublic NOW Others	Trustp	ower
Vodafone
MOBILE NETWORK		Skinny
FIXED LINE ACCESS NETW	OR	Chorus K Nationwide network access wholesaled to ~100 retail service providers.					Local Fibre Companies Fibre past ~340k homes and businesses; ~85,000 connections at 30 June 2016 Enable Northpower Ultrafast Fibre
HFC cable: Wellington + Christchurch ~60k consumers

The New Zealand retail market has been through a period of significant consolidation, particularly amongst second tier providers. In February 2016 Vocus finalised its merger with M2 which had bought the Callplus group in April 2015. In July 2016 Sky TV shareholders approved a proposal to merge with Vodafone New Zealand and this is now subject to final Commission approval.

For the most part, retailers are now focused on growing their relative shares of the broadband market and this has spurred significant price-based competition with some providers offering high-speed plans at much reduced prices for the initial year of a two-year contract.

Another market dynamic in the last year is the shift in retail focus from the 30Mbps entry level fibre service to the 100Mbps service. Most retailers now promote the 100Mbps service as their default fibre product and have encouraged existing fibre customers to upgrade their service with special offers. As a result, by the end of the period we had 54% of mass market fibre customers on plans of 100Mbps or higher, up from 32% at the end of FY15.

The proliferation of easy to access online video content, particularly Netflix and YouTube, has continued to drive an upsurge in the amount of bandwidth consumed over our network. In January 2012 the average household monthly bandwidth demand across our network was 13 gigabytes (GB). By January 2015 it had increased to 50GB and by June 2016 it had doubled to 100GB (see Figure 4).

Figure 4: Average household bandwidth demand on our network

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200
150
100
50
0
COPPER FIBRE
Jan 2012 Jan 2015 June 2016 June 2016 June 2016
Bandwidth demand (GB per month)
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P. 4

Annual Report

Three factors are driving this data tsunami. First, the broadband pipe is no longer connected just to a computer desktop. The average New Zealand home now has about four smart devices routinely connecting to the internet. When we install a fibre connection it is typically behind a smart TV and everyone in the home may be online at any time.

Second, the floodgates have been opened by retail service providers. In 2012 the typical datacap was 20GB a month. Now it’s estimated that about half of households have chosen unlimited data plans. Most providers now offer 80GB as a minimum datacap.

The third and most significant factor, is the content itself. A Nielsen survey earlier this year suggested 53% of online customers in New Zealand are streaming TV or movies. Roy Morgan research suggests more than 900,000 Kiwis now use a Netflix, Lightbox (Spark) or Neon (Sky TV) subscription streaming service. It’s estimated that video content now typically accounts for up to three quarters of a retail provider’s broadband traffic.

Bandwidth consumption is expected to grow as video streaming becomes more mainstream and uptake of high-speed broadband increases. Streaming an hour of high definition (HD) video uses between 2GB to 3GB of data. We’re already seeing households with fibre connections use an average of about 190GB a month. That’s double the average for households on our copper network. The adoption of Ultra HD 4K TV and future 8K TV devices will only increase this. Vodafone is already multicasting Sky TV programming over our fibre network and Sky TV is currently upgrading all its digital decoders to enable on-demand viewing of its content.

The surge in bandwidth demand is good news for fixed line networks such as ours. We’re able to provision capacity across much of our network to ensure sustained capacity is available to each customer during peak night time viewing hours. This is a key competitive advantage for fixed line networks relative to current wireless network technologies which must share capacity amongst each additional customer. If customers don’t have a good peak speed service and sustained network capacity to match, they may be frustrated by things like screen freezes during their favourite programmes.

Connecting customers

Our number one operational priority has been improving the fibre connection experience for customers. We made good progress, with a substantial number of changes made to the way we work with our retail service provider customers and interact with customers. However, we know we’re still not providing a good experience for too many customers and our focus on this continues.

Our initiatives included setting up a team to contact customers and reconfirm scheduled visits. This helped ensure correct details are in our systems and reduced wasted technician visits. We also proposed taking on more responsibility and managing all customer interaction for our retail service provider customers, from when they receive a customer’s fibre order through to activation of the service. Our proposal included covering the cost of this additional support through to the end of December 2016. Not all providers have opted to use our support function, with some focused on automating their own provisioning processes instead. For providers using our support function, we launched an online order tracker in April so customers can easily access up to date information about our progress with their fibre connection.

During the financial year we worked closely with our service company partners to almost double the number of fibre field crews from 275 to 524. As a result of this and process improvements, we lifted the number of connections completed in a month from about 6,000 in July 2015 to 12,000 in June 2016. In all, we processed more than 110,000 connections during the year. This is a significant achievement when you consider that it appears to be about twice the connection volume of Sky TV’s busiest ever year. They had a much less extensive or intrusive installation process and are the closest parallel for a large scale deployment.

However, the rapid increase in our workforce saw the quality of some installations fall below our expected standards and we’re continuing to address this. In July 2016 we apologised to customers who’d been waiting too long for faults on our copper network to be repaired, following wet winter weather and major cable cuts by third parties. This reflected the challenge of balancing growing workforce demands between our new fibre network and the existing copper network. We’re currently looking to recruit another 250 technicians and support staff by the end of 2016.

At the same time as we’ve been refining our connection processes, demand for fibre has increased dramatically. During FY16 monthly fibre order volumes grew by 60%. Our biggest challenge is hiring people quickly enough to deal with this volume of demand. It takes between three to six months to train up a new fibre technician, as it requires a wide range of skills, including customer service, hard physical work and sometimes quite technical installations inside the property.

P. 5

Annual Report

Network competition

As expected since the start of the UFB and RBI rollouts, we’re beginning to see some line loss to other fibre and wireless networks. This is reflected in the reduction in our total fixed line count from 1,794,000 in FY15 to 1,727,000 at the end of this period.

The Government’s other UFB partners – Northpower, Ultra-fast Fibre and Enable – had passed an estimated 340,000 homes and businesses by the end of the period. They too are experiencing strong fibre uptake and have connected an estimated 85,000 customers, up from approximately 35,000 at the end of FY15.

We also compete with Vodafone’s cable network in the Wellington area where we are building the UFB network and in Christchurch where we have our existing network. Vodafone has announced it intends to upgrade its cable network and offer 1Gbps services in 2016.

We’ve begun to see some line loss to wireless networks, particularly in rural areas where our network currently has limited backhaul capacity. This has been expected given Vodafone’s rural broadband contract with the Government to provide wireless broadband coverage to 80% of rural households. Wireless competition is expected to grow now that Spark has launched fixed wireless broadband services in rural and urban areas. The technical constraints of fixed wireless networks means these services have datacap limits, while unlimited data plans are now typically promoted by retailers for fixed line services.

Figure 5: Building a fibre to the premises network

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AUCKLAND
WELLINGTON
CHRISTCHURCH
UFB % of
AREAS UFB
NORTHPOWER 1 1.6
WEL NETWORKS 6 13.7
ENABLE 2 15.3
CHORUS 24 69.4
SOURCE: CROWN FIBRE HOLDINGS
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Ultra-Fast Broadband partnerships with the Crown cover 33 areas.

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75% ~ 1.1
MILLION ~400k
of New Zealand homes and homes and
population by businesses within businesses in other
end of 2019 Chorus’ 24 UFB areas UFB network areas
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CHORUS UFB BUILD METRICS

$1.75 – $1.8 billion $929 million Estimated cost of Chorus funding contribution from communal network to pass the Crown equates to

$1,118 per premises passed

830,900 premises

Chorus issues debt and equity securities to the Crown in return. Debt to be redeemed in tranches from 2025 to 2036. Increasing portion of the Crown equity attracts dividend payments from 2025 onwards.

57% of Chorus rollout complete at 30 June 2016

Connections from the street boundary to the premises are completed on demand. Estimated cost of $900 – $1,100 (in 2011 dollars) average cost to connect standard residential premises.

P. 6

Annual Report

Health and safety

Keeping people healthy and safe is a priority. No business objective will be prioritised over the health and safety of any person in our work environments. We’re focused on maturing to a resilient culture in our health and safety systems and practices. We’re heading in the right direction but have a lot more work to do. We have a strong and visible commitment to an open reporting culture and one of continuous improvement.

Our nationwide presence and the significant investment happening in broadband infrastructure means we’re uniquely placed to provide leadership in the health and safety of our employees and with our contracted partners. Key risks in the field include working at heights and in confined spaces, driving, asbestos, and striking other networks and electrocution.

We’re committed to taking all reasonably practicable steps to ensure a safe and secure environment for our people (including employees and contractors) and anyone who is in, or in the vicinity of, our workplaces. We’re concerned that there was a significant injury from a ladder fall in the reporting period and another one shortly after. Either could’ve been fatalities.

We have a significant programme of work which continues to improve our health and safety practices and we continue to work closely with our contractors on reducing the risk of work related injuries. We regularly carry out audits of field work and will shut down sites where our health and safety standards aren’t being met. During the 10.7 million hours worked in FY16 we, including our five service companies, recorded the following rates (based on one million hours worked):

Our health and safety focus over the last year includes:

Active engagement with our contractors, our industry and other infrastructure industries at strategic and operational levels.
Screening 1,500 of our contractors and suppliers to ensure their systems and procedures meet our health and safety expectations.
Developing and putting all service company technicians (around 2,500) through a work training competency programme for field work. The programme is now endorsed by the New Zealand Qualifications Authority and all technicians must complete the programme before they can work on our network.
Replacement of our vehicle fleet with 5-Star New Car Assessment Programme rated vehicles and GPS tracking.
Increased driver awareness activities with refreshment of driving policies and increased training.
Continuously improving our health and safety management system, policies and practices.
Reviewing and improving reporting practices.
Reviewing our risk and control awareness and assessments.
Ongoing asbestos and earthquake prone building assessments.
Staff engagement surveys showing a positive reflection on embracing health and safety as part of “how we do things around here”.
Implementing a company-wide wellbeing programme centred around four components of physical, emotional, career and wider world.
Working towards a higher level of ACC accreditation.
Total Recorded Injury Frequency Rate of 5.77 (this is lost time injuries + medical treatment injuries + restricted work injuries divided by total work hours x 1,000,000. This is a global standard that we can use to benchmark ourselves).
The Board commissioning an independent external review to objectively assess our current state and support our maturity, programme of work and future resourcing requirements.
Lost Time Injury Frequency Rate of 1.86 (this is the number of lost time injuries divided by total work hours x 1,000,000. Again, this is a global measure).

Governance and corporate sustainability

The Chorus Board is committed to good governance practices and more detail on these is available in the Governance and Disclosures section, as well as a separate Corporate Governance statement available on our website. The Board has overall responsibility for strategy, culture, health and safety and governance. Dr Patrick Strange was appointed chairman from 1 September 2015 and Jon Hartley, who had been interim chairman since April 2015, became deputy chairman. Murray Jordan also joined the Board from 1 September 2015.

We continue to demonstrate excellence in employee engagement, leadership effectiveness and a high-performance culture. For the fifth consecutive year we received best employer accreditation with

an employee engagement score of 83%, a slight increase on 82% in 2015 when we also became the first New Zealand company to win the Best of the Best supreme award in the Aon Hewitt Best Employer Awards.

We’re active in local communities through our cabinet art and volunteer day initiatives. We funded more than 90 local artists to paint murals on almost 100 of our broadband cabinets during the year, helping reduce the impact of graffiti on our network and raise community engagement through art. In selecting artists we look for designs that fit the local environment and reflect the local community.

P. 7

Annual Report

Governance and corporate sustainability (cont.)

About 350 of our people helped their local communities through the use of their sponsored volunteer day with activities such as tree planting, helping out in local hospices and other community projects. Employees also used our payroll giving programme to donate to local charities.

We’ve continued to work closely with GigCity Dunedin to make the most of our sponsored gigabit broadband services being rolled out across the city after they won our Gigatown competition in late 2014. As well as bringing forward the timeframe to complete the fibre rollout in Dunedin by two years, we helped launch a public access Wi-Fi service in the central business area and have so far contributed about $140,000 to a community fund for innovators exploring the use of fibre to enhance the development, experimentation and implementation of community, learning and workforce opportunities in Dunedin.

At a national level, our support for innovation includes the New Zealand Innovation Partnership; the Health and Science category sponsor of the New Zealand Innovators Awards and

CO.STARTERS, a programme that helps create a strong support network for business start-ups.

Our investment in better broadband networks is helping establish a platform for low-carbon communities by extending the availability of new and emerging communications functionality and applications. Our own commitment to a sustainable operating model includes annual carbon reporting to CDP, an organisation that has gathered the largest global collection of self-reported companies’ environmental information. Network electricity consumption and our field service vehicle fleet account for more than 90% of our greenhouse gas emissions.

Our data shows we’ve reduced our annual emissions by 25% since our FY12 base year, with a 5% reduction in FY16. We’ve achieved this by reducing our own direct emissions, limiting growth in our consumption of electricity and working with our third party service providers to manage vehicle fleet emissions. We also have a waste management strategy and are continuing to remove ozone depleting substances from our network.

Regulatory developments

Government review of telecommunications regulatory framework

The Government is currently consulting on how communications services should be regulated after 2020 with the goal of establishing “…a durable and flexible framework that supports competition, innovation, and efficient investment for consumers.”

On 14 April 2016 the Government announced a series of high-level policy decisions on its review, including:

Moving to a utility-style building block methodology for regulating both fixed line copper and fibre wholesale services;
The utility-style model could include anchor products for basic voice and basic broadband with reference to entry level prices in the market; and
Retaining the current unbundling requirements on the UFB network from 2020.

Further consultation on detailed design and implementation issues was announced on 12 July 2016 with the Government’s release of an options paper seeking submissions by 2 September. The paper indicates that a more fit for purpose regime can be put in place by 2020, with legislation to be passed in 2017.

Final Pricing Principle (FPP) determination

Copper and fibre price relativity was restored when the Commission released its final pricing determinations on 15 December 2015. The Commission announced aggregate copper pricing that starts at $41.19 a month and reaches $42.35 in 2020. These prices improved on the initial benchmark pricing, but are still below the $45.92 aggregate price that applied in 2011 when Chorus was established. This appears to be a function of the Commission’s use of trenching costs well below our actual costs and the exclusion of portions of our existing network footprint. The weighted average cost of capital also declined substantively due to methodology changes and process delays coinciding with reductions in market risk free rates.

When combined with a reduction of about 25% on transaction charges we incur for service company activity, the effect is a reduction of around $50 million per annum in our EBITDA from 2011 levels. We elected not to appeal the decision, despite disagreeing with some key elements, because we believed the best long-term value for shareholders would be achieved by removing any ongoing legal uncertainty.

For a more detailed overview of our regulatory environment, please see the Regulation, legislation and litigation section in the management commentary.

P. 8

Annual Report

Outlook

We’re placing renewed focus on Chorus’ place within New Zealand’s broadband ecosystem and our goal of bringing New Zealand better broadband. We recognise that to achieve this we need to become a more customer-oriented broadband company. We know we have a quality product and we need the customer service experience to match that for all customers, not just most.

We’ve already made a start with our efforts to improve the fibre connection process for customers, but much remains to be done. Consistently meeting demand and delivering a high-quality connection experience remains our number one operational priority. We’ll continue streamlining processes and driving the recruitment of more technicians.

You’ll also see us continue taking a more active role in promoting the broadband options already available to New Zealanders. We’ve begun by revamping our website to be more customer focused. You can now enter your address to learn your current broadband speed on our network and whether better options are available. We know that about 60% of households could already get faster broadband than they currently have by subscribing to, for example, VDSL or a 100Mbps fibre plan. Some retailers are already offering the best available technology – be it ADSL, VDSL or fibre – at the same retail price.

In line with our customer focus, we’re investing more to ensure that our broadband network enables increasing bandwidth consumption and performs as expected. We believe fixed line networks can provide the best broadband experience for customers, particularly with sustained speeds needed at peak demand times for optimal video streaming. A recent Cisco report predicts internet traffic in New Zealand is likely to double by 2020 when it will reach the equivalent of more than 72,000 DVDs per hour. Our own forecast is that monthly household data usage will grow from the current average of 100GB to 170GB by June 2017.

The merger of Sky TV and Vodafone could increase bandwidth demand further again. Part of the reported rationale for the merger is an intention to drive the increased penetration of subscription television by making content available as widely as possible and across more delivery platforms. This includes the opportunity to

reduce satellite capacity over the medium to long-term with a shift to fibre.

We do face growing network competition from local fibre companies and expect our overall connections to continue to reduce as their UFB networks gain more market share. However, we continue to operate and promote our high-speed VDSL and business fibre networks in these areas. The pace of line loss will be partially offset by ongoing population and housing growth elsewhere, particularly in the Auckland region. Vertically integrated mobile network providers are also promoting wireless broadband as a fixed line broadband alternative. The extent of this competition remains to be seen given the limited datacaps provided, the rise of video streaming and the strong retail competition promoting the increasing capability of our fibre and copper broadband network.

The Government is seeking to extend the UFB network beyond the current planned footprint to at least another 5% of New Zealanders by the end of 2022 and extend investment in rural broadband by another $100 million. Updates on both initiatives are expected this financial year. The challenge is that the details of the proposed new regulatory framework are still to be decided. This makes it difficult to assess what returns are likely on any new investment. As we’ve said previously, we’re interested and willing to participate in these initiatives if a fair return can be earned on our investment and there is long-term value for shareholders.

We’ve invested about $2.9 billion in capital expenditure since our business was established in 2011, with $593 million of that during FY16 alone. A regulatory framework that recognises broadband as an essential utility is necessary if New Zealand is to encourage ongoing improvement and extension of its broadband capability. As we saw during the copper pricing process, uncertainty dampens investment and leads to poorer customer outcomes.

We welcome the Government’s current review of the regulatory framework for communications services and believe it is an opportunity to align and deliver on the interests of customers and investors. A stable transition in pricing at 2020 is central to this and could help New Zealand achieve better broadband coverage well beyond the Government’s current goals.

Figure 6: Check the Chorus broadband options at your address

www.chorus.co.nz/broadband-checker

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CURRENT SPEED POTENTIAL SPEED
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UP TO UP TO
17 200
Mbps Mbps
FIBRE B FIBRE B
SL SL
A A
D D
SE SE
V V
D D
F F
R R
I I
E ON E ON
B B
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OLOGY OLOGY
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UPGRADE OPTIONS

Our Broadband checker shows the speed at which you are connecting to the Chorus broadband network. Your Internet speed and performance may be affected by a range of factors.

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TIME FOR BETTER BROADBAND?
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P. 9

Directors

Annual Report

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Patrick Strange

BE (Hons), PhD

Chairman

Independent Director since 6 April 2015 Chairman of Nominations and Corporate Governance Committee Member of Audit and Risk Management Committee

Dr Patrick Strange has spent 30 years working as a senior executive and director in both private and listed companies, including for more than six years as Chief Executive of Transpower where he oversaw Transpower’s $3.8 billion of essential investment in the National Grid. Patrick is currently a director of Mercury NZ, Auckland International Airport, NZX Limited and the boards of Ausgrid, Endeavour Energy and Essential Energy, Australia.

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Anne Urlwin

BCom, CA, F InstD, FNZIM, ACIS

Independent Director since 1 December 2011 Chairman of Audit and Risk Management Committee

Anne is chairman of Naylor Love Enterprises and a director of Southern Response Earthquake Services, Steel & Tube Holdings, OnePath Life (NZ) and Summerset Group. Anne is also the independent chairman of the Ngai Tahu Te Runanga Audit and Risk Committee. Her previous directorship experience encompasses many sectors, including energy, health, construction, regulatory services, internet infrastructure, research, banking, forestry and the primary sector, as well as education, sports administration and the arts. She is the former chairman of Lakes Environmental, the New Zealand Blood Service, the New Zealand Domain Name Registry and a former director of Meridian Energy.

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Jon Hartley

BA Econ Accounting (Hons), Fellow ICA (England & Wales), Associate ICA (Australia), Fellow AICD

Deputy Chairman Independent Director since 1 December 2011 Member of Nominations and Corporate Governance Committee Member of Audit and Risk Management Committee

Jon is a Chartered Accountant and Fellow of the Australian Institute of Company Directors. He has held senior roles across a diverse range of commercial and not for profit organisations in several countries, including as chairman of SkyCity, director of Mighty River Power, CEO of Brierley New Zealand and Solid Energy, and CFO of Lend Lease in Australia. Jon is currently deputy chairman of ASB Bank and Sovereign Assurance Company, chairman of VisionFund International and the Wellington City Mission and a trustee of World Vision New Zealand.

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Clayton Wakefield

BSc (Computer Science), GradDip Mgmt, CMInstD Independent Director since 1 December 2011 Member of Human Resources and Compensation Committee

Clayton has over 30 years’ experience in the banking, financial services, telecommunications and technology industries and is a Chartered Member of the Institute of Directors. Clayton is a director of The Co-operative Bank, a former director of Endace and Fisher & Paykel Finance and its subsidiaries, a former chairman of Electronic Transactions Services and Visa New Zealand, and a former executive director and owner of Techspace. From 2001 to 2007 Clayton was Head of Technology and Operations at ASB Bank.

P. 10

Annual Report

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Keith Turner BE (Hons), ME, PhD DistFIPENZ

Independent Director since 1 December 2011 Member of Human Resources and Compensation Committee Member of UFB Steering Committee

Dr Keith Turner was CEO of New Zealand electricity generator and retailer Meridian Energy for nine years from its establishment in 1999. He is currently chairman of Fisher & Paykel Appliances and a director of Spark Infrastructure, an Australian listed company. Keith was formerly chairman of Emirates Team New Zealand and deputy chairman of Auckland International Airport. Keith has had an extensive career in electricity, taking part in much of its reform, including the separation of Transpower from Electricity Corporation of New Zealand (ECNZ) in 1992, the separation of Contact Energy from ECNZ in 1996 and the eventual break up of ECNZ into three companies in 1999.

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Murray Jordan MProp

Independent Director since 1 September 2015 Member of Human Resources and Compensation Committee

Murray has extensive experience in the management of highly customer focused organisations and in navigating extremely complex stakeholder environments, including, until recently, as Managing Director of Foodstuffs North Island, one of New Zealand largest companies. Murray has also previously held various general manager positions at Foodstuffs and management roles in the property investment and development sectors. He is a director of Stevenson Group and Metcash Limited, an ASX listed company, and a Board Trustee of Starship Foundation.

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Mark Ratcliffe

BA Accounting

Non-Independent Managing Director since 9 December 2011

Mark has been our CEO since our establishment in 2007 as an operationally separate business unit within Telecom and was appointed as our first CEO when we became a separately listed entity in 2011. In a 20 year career with Telecom, Mark held finance, marketing, product development, product management and IT roles. Mark was promoted to the executive team in 1999 where he was CIO (including a period as joint CEO of AAPT in Australia) and then COO Technology and Wholesale before becoming our CEO. From May 2010, he led the team that secured our participation in the Government’s UFB initiative and our demerger from Telecom.

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Prue Flacks

LLB, LLM

Independent Director since 1 December 2011 Chairman of Human Resources and Compensation Committee Member of Nominations and Corporate Governance Committee

Prue is a director of Bank of New Zealand and Mercury NZ. She is a barrister and solicitor with extensive experience in commercial law and, in particular, banking, finance and securities law. Her areas of expertise include corporate and regulatory matters, corporate finance, capital markets, securitisation and business restructuring. Prue is a consultant to Russell McVeagh, where she was previously a partner for 20 years.

P. 11

Executive Team

Annual Report

Mark Ratcliffe

Chief Executive Officer

See previous page.

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Andrew Carroll, MCA (Hons) Chief Financial Officer

Andrew joined us after nine years with Telecom where he was involved in a range of corporate finance and M&A activity, including the Gen-i acquisition and the sale of Yellow Pages. He also worked on the UFB negotiations with Crown Fibre Holdings and the demerger process. Prior to joining Telecom he worked in investment banking for a decade.

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Ian Bonnar General Manager, Corporate Relations

Ian was appointed General Manager Corporate Relations in October 2014 with overall responsibility for protecting and enhancing our reputation with our stakeholders. Before joining us in 2013 he held a range of positions at Telecom, including Head of Communications, and was communications lead on the UFB negotiations and the demerger process.

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Tim Harris, LLB, MBA Chief Commercial Officer

Tim joined us in October 2014 as Chief Commercial Officer with responsibility for leading our Marketing, Sales and Corporate Strategy functions. Tim has held a number of senior roles, most recently as Managing Director of BT Global Services South-East Asia. Tim has an MBA from the UK-based Cranfield School of Management.

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Ed Beattie

General Manager, Infrastructure

Ed has more than 30 years’ experience in building and maintaining fixed line and mobile telecommunications networks in New Zealand. He managed the delivery of the successful Fibre to the Node programme from 2008 to 2011 and played a lead role in the Christchurch earthquake response and restoration activities. As General Manager Infrastructure, Ed has primary responsibility for the UFB and RBI network rollouts.

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Nick Woodward

General Manager, Customer Service

Nick’s career combines a wide range of IT, sales, customer and project management experience in the financial and telecommunications industries. His roles have seen him work across the United States and Europe for Hutchison 3G UK and Household Bank in the United Kingdom.

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Vanessa Oakley, LLB (Hons) General Counsel & Company Secretary

Vanessa has extensive experience in law, governance and policy and its interaction with commercial operations. She joined us after playing a key role in the UFB contract, legislative and demerger processes. She previously held roles in the public and private sectors, including as a key adviser to United Kingdom and New Zealand regulators and across the Telecom group.

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Ewen Powell, BE

Chief Technology Officer

Ewen has over 20 years’ experience in managing the technology, services and partnerships that operate a national communications network. He has spent time in both the supplier and operator communities with much of his career spent at Telecom. Ewen’s focus is on deploying core enterprise systems to run the business and develop technology capabilities to provision and manage the new fibre network.

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Paula Earl-Peacock

General Manager, Human Resources

Paula joined us in November 2014, and has over 20 years’ experience in generalist human resources roles in New Zealand and Australia. Her most recent role was in consumer goods with Mars Petcare in Australia. She has also worked in the financial services, consulting and retail sectors. Paula’s focus is on the development of high performance organisations through constructive leadership, and the development of people, culture and teams.

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Irene Lovejoy Executive Assistant

Irene has worked with CEO Mark Ratcliffe for more than 15 years, bringing a unique insight that adds value to the development of our executive team. Before joining us, Irene spent 22 years with Telecom where she held roles in the marketing, technology and corporate teams.

P. 12

Annual Report

Management Commentary

In summary	14
Revenue commentary	15
Expenditure commentary	17
Capital expenditure commentary	20
Long term capital management	22
Regulation, legislation and litigation	23
Appendix one	25
Appendix two	26

P. 13

Annual Report

Management commentary

Management commentary
	2016 $M 2015 $M
Operating revenue	1,008 1,006
Operating expenses	(414) (404)
Earnings before interest, income tax, depreciation and amortisation	594 602
Depreciation and amortisation	(327) (324)
Earnings before interest and income tax	267 278
Net interest expense	(140) (151)
Net earnings before income tax	127 127
Income tax expense	(36) (36)
Net earnings for the year	91 91

In summary

We report earnings before interest, income tax, depreciation and amortisation (EBITDA) of $594 million for the year ending 30 June 2016, a decrease of $8 million on the prior year. Net earnings have remained unchanged year on year.

Results for the year ending 30 June 2016 (FY16) were affected by the benchmarked Unbundled Bitstream Access (UBA) pricing for about five and a half months of the year and the final aggregate copper pricing determined by the Commission for about six and a half months of the year. Following confirmation that this decision wouldn’t be appealed, we progressively reoriented discretionary activity from ‘manage for cash’ toward ‘managing for longer term value’.

Capital expenditure for FY16 was $593 million. This was at the lower end of the FY16 guidance range of $580 million to $630 million and reflects ongoing reductions in communal deployment costs, lower cost to connect and less than estimated demand for ‘backbone’ fibre connections spend in rights of way premises. About 82% of our capital spend was fibre related, mainly for the UFB and RBI programmes.

We will pay a final dividend of 12 cents per share on 7 October 2016. The dividend reinvestment plan will be available. We expect to pay a dividend of 21 cents per share for FY17, subject to no material adverse changes in circumstance or outlook.

P. 14

Annual Report

Revenue commentary

Revenue commentary
	2016 $M 2015 $M
Basic copper	489 491
Enhanced copper	242 268
Fibre	133 98
Value added network services	35 36
Infrastructure	20 21
Field services	83 84
Other	6 8
Total revenue	1,008 1,006

Revenue overview

Our product portfolio encompasses a broad range of broadband, data and voice wholesale services. It includes a mix of regulated and commercial products. Revenue increased compared to the prior period broadly reflecting the net effect of:

Changes in regulated copper pricing between the Commission’s benchmarking and final pricing review decisions (see the

Regulation, legislation and litigation section for more detail);

A reduction of 67,000 total fixed line connections (from 1,794,000 to 1,727,000); and
A small increase in broadband connection numbers (from 1,207,000 to 1,226,000).

A summary of our pricing for key copper products is on page 26.

CONNECTIONS	CONNECTIONS	CONNECTIONS
30 JUN 2016	31 DEC 2015	30 JUN 2015
Total fixed line connections 1,727,000	1,761,000	1,794,000
Baseband copper 1,221,000	1,320,000	1,408,000
UCLL 108,000	116,000	123,000
SLU/SLES 2,000	3,000	3,000
Naked copper (UBA / VDSL) 197,000	180,000	159,000
Baseband IP 9,000	6,000	NM
Data services over copper 10,000	11,000	13,000
Fibre (mass market + premium business) 180,000	125,000	88,000
Total broadband connections 1,226,000	1,223,000	1,207,000
Copper UBA (includes naked UBA) 900,000	972,000	1,016,000
VDSL (includes naked VDSL) 159,000	139,000	116,000
Fibre (mass market) 167,000	112,000	75,000

Copper

The basic copper category incorporates core regulated products founded on earlier technology and product variants that are being superseded by enhanced copper and fibre-based services. It includes most of Chorus’ layer 1 network products such as the copper voice input Unbundled Copper Low Frequency Service (UCLFS), Unbundled Copper Local Loop (UCLL), Sub Loop Unbundling (SLU), Sub Loop Extension Service (SLES) and Basic Unbundled Bitstream Access (Basic UBA) (including broadband only naked Basic UBA connections). Basic copper revenues are declining as customers migrate to these alternative product types.

Enhanced copper includes copper based next generation regulated and commercial products that deliver higher speed capability, a better customer experience and can assist the transition to fibre. It includes Enhanced UBA, VDSL, the Baseband IP voice input service

and High Speed Network Service (HSNS) Lite for business data on copper.

At 30 June 2016, there were approximately 1,221,000 baseband copper lines, a decrease of 187,000 lines from 30 June 2015. This reduction was partially offset by the migration of connections to our other fixed line connection products such as ‘naked copper’ connections. The number of unbundled lines declined to 110,000. The total comprised 108,000 UCLL lines and 2,000 SLU lines (offered in conjunction with our commercial Sub Loop Extension Service).

Uptake of VDSL continued to grow, up from 116,000 at 30 June 2015 to 159,000 by 30 June 2016 as technology changes expanded the VDSL footprint from 60% to 80% of lines nationwide. ‘Data service over copper’ connections continued to decline as retail service providers opted for cheaper inputs. Baseband IP connections grew as some retail service providers used the service to deliver their own voice over internet protocol service over copper.

P. 15

Annual Report

Revenue commentary (cont.)

Fibre

Fibre revenues are earned from our business fibre products (such as HSNS Premium) and UFB residential and business fibre services. This includes UFB backhaul and Direct Fibre Access Services, which provide point to point networking solutions and can be used to deliver backhaul connections to mobile sites.

Nationwide fibre connections more than doubled during the year, increasing from 88,000 to 180,000 lines. This was driven by the growing demand for fibre services and the ongoing expansion of the UFB footprint. We had approximately 156,000 fibre connections within the areas where we had deployed UFB communal network at 30 June 2016, up from 68,000 connections at 30 June 2015.

About 167,000 of our fibre connections were to mass market customers (which includes UFB Bitstream 2 and 3 and education connections). Premium fibre connections remained unchanged.

During FY16 there was a marked change in customer uptake with our retail service provider customers promoting 100Mbps plans more heavily than the entry level 30Mbps plan. By 30 June 2016 approximately 54% of mass market fibre connections were on plans of 100Mbps or greater, compared to 32% at the start of the period.

Direct Fibre Access Service connections were about 4,000 of total fibre connections at 30 June 2016. Bandwidth Fibre Access Service and HSNS Premium fibre connections (also referred to as Bitstream 4) accounted for about 7,000 fibre connections. The remaining premium business fibre connections are largely backhaul connections, which are slowly declining over time as network connections are rationalised.

	CONNECTIONS	CONNECTIONS	CONNECTIONS
	30 JUN 2016	31 DEC 2015	30 JUN 2015
Total fibre connections	180,000	125,000	88,000
Mass market	167,000	112,000	75,000
Premium business	13,000	13,000	13,000

Value added network services

The main revenue driver for this category is national data transport services, which provide network connectivity across backhaul links as well as aggregation handover links. Overall value added network services is declining as customers move from legacy backhaul arrangements to new cost effective solutions. There has also been some reduction in backhaul demand due to retail service provider mergers and network consolidation.

Infrastructure

Infrastructure revenue relates to services that provide access to our network assets, such as renting exchange space. This product revenue is largely flat as declining revenue from larger retail service provider customers investing in their own infrastructure rather than renting ours has offset increased revenue from smaller customers.

Field services

Field services revenues includes work performed by service company technicians providing new services, chargeable cable location services, maintaining retail service provider networks and relocating our network on request. As we utilise service companies to perform field services work, there is a direct cost associated with all field services revenues recognised in the network maintenance expense category.

We receive provisioning revenues when technicians install services and the revenue is dependent on the number and nature of orders, and the type of work required. Maintenance revenues are generated when faults are on retail service provider’s network rather than ours, and depend on the number of reported faults. It is difficult to establish specific trends in this revenue category because it is dependent on third party demand or damages to our network by third parties.

Field Services revenues have remained flat year on year as we are recovering a greater proportion of our costs for greenfields and infill subdivisions, but offsetting this increase are lower regulated transaction charges effective from 16 December 2015.

Other

Other income largely consists of revenue generated from the provision of billing and network management services to Spark, dividends received from electricity trusts that supply us with electricity and any other minor income.

P. 16

Annual Report

Expenditure commentary

Operating expenses

Operating expenses
	2016 $M 2015 $M
Labour costs	78 73
Provisioning	60 58
Network maintenance	89 91
Other network costs	34 34
Information technology costs	65 65
Rent and rates	16 14
Property maintenance	12 11
Electricity	14 14
Insurance	3 4
Consultants	4 3
Regulatory levies	13 15
Other	26 22
Total operating expenses	414 404

Operating expenditure has increased by 2.5% relative to FY15.

The second half of FY16 has seen a progressive move from ‘manage for cash’ to ‘manage for value’. The focus on a better customer experience has resulted in additional people being employed in the customer services team to more closely manage fibre orders including undertaking activity previously performed by retail service providers. Rent and rates are increasing as our additional network is being incorporated into the local Council rating processes and some property maintenance which had been deferred on our buildings has been completed. Areas of significant change include:

Labour costs of $78 million for the year represent staff costs that are not capitalised. At 30 June 2016 we had 944 permanent and fixed term employees, up from 842 employees at 30 June 2015. We employed 73 more people in the customer services team reflecting the growth in fibre volumes and additional activity we are undertaking to improve the customer experience. These processes are progressively being automated, but are still currently relatively manual and time consuming. The number of people throughout the rest of the business has remained stable throughout the year.

Provisioning costs are incurred where we provide new or changed service to our customers. The total provisioning cost is driven by the volume of orders, the type of work required to fulfil them, technician labour, material and overhead costs. Field provisioning costs have declined as fibre uptake increases and fewer truck rolls are required for copper services. The lower truck roll volume is offset by a more expensive unit cost per truck roll as more customers choose VDSL which has historically had a higher cost to provision because it typically required a technician to visit customer premises. In addition, outsourcing costs were incurred for a trial installation support service to manage the customer ordering experience.

Network maintenance costs relate to fixing network faults and any operational expenditure arising from the proactive maintenance programme. Where faults are on a retail service provider’s network (rather than our network), we will charge the retail service provider for this service. Network maintenance costs are driven by the number of reported faults, the type of work required to fix the faults and the extent of our proactive maintenance programme.

The costs associated with our network reactive faults have fallen by approximately $2 million with a slight decrease in the both the number of faults and cost per fault. The decrease in faults was partly due to us having lower copper connections and a higher proportion of fibre lines, which have a lower fault rate than copper lines. Partly offsetting this were poorer weather conditions compared to FY15. The average cost per fault has reduced because of a slightly lower proportion of more expensive below ground faults in FY16 compared to FY15.

In addition to the reduction in our network reactive faults there has been a small increase in maintenance on our customers’ networks which has been offset by a small reduction in proactive maintenance costs.

Other network costs relate to costs associated with service partner contract costs, engineering services, project costs unable to be capitalised and the cost of network spares. Any costs that have been incurred for fibre orders that are subsequently cancelled are included in other network costs. In FY16 there were small increases in the costs of cancelled fibre orders and enhancing fibre network record quality which were offset by reductions in project and service partner contract costs.

P. 17

Annual Report

Expenditure commentary (cont.)

Information technology costs of $65 million have remained flat and represent costs paid directly by us to third party vendors for maintenance and support, as well as the operating expenditure component of systems which are shared with Spark. During FY16 we continued work on separating IT systems from Spark which resulted in an increase in expenditure. However, there has been a resulting decrease in systems no longer required, which meant overall costs have remained unchanged from the previous year.

Rent and rates costs relate to the operation of our network estate (for example, exchanges, radio sites and roadside cabinets). Rates are levied on network assets both above and below ground. Rent and rates costs have increased during the period as the aerial deployment of fibre has resulted in increased pole rental costs and the assets deployed as part of the UFB rollout being progressively included in the rating calculations of local bodies.

Property maintenance costs have increased this year as some maintenance which had been deferred as a result of the initiatives has now been completed.

Electricity is used to operate the network electronics and this is dependent on the number of sites, electricity consumption and

electricity prices. Electricity costs have remained largely flat despite increased line charges and additional network related consumption as electricity prices were lower in FY16 than FY15. About 50% of our requirements have been hedged, with a rolling three year horizon.

Consultant costs have increased during the current year as projects that had been deferred in the previous year were restarted. In addition we continued to have a significant amount of regulatory work through FY16.

Regulatory levy reflects the amount paid for the Telecommunications Development Levy and the

Telecommunications Regulation Levy. The expense for the current year reflects the estimated liability for FY16. The FY15 balance reflected the accrual for FY15 as well as a catch up for the difference between the FY13 and FY14 accruals and the final actual costs as these years were finalised during FY15.

‘Other’ includes expenditure on general costs such as advertising, telecommunications, travel, training and legal fees. Overall these costs returned to more typical levels after the tight cost control on discretionary spend since H2 FY15 was eased.

Depreciation and amortisation

Depreciation and amortisation
	2016 $M 2015 $M ESTIMATED USEFUL LIFE (YEARS) WEIGHTED AVERAGE USEFUL LIFE (YEARS)
Depreciation
Copper cables	56 58 10–30 21
Fibre cables	60 50 20 20
Ducts and manholes	35 31 50 48
Cabinets	41 36 5–14 9
Property	18 17 5–50 25
Network electronics	68 78 2–15 8
Other	- 1 2–10 6
_Less:_Crown funding	(15) (12)
Total depreciation Amortisation	263 259
Software	64 65 2–8 5
Other intangibles	- - 6–20 20
Total amortisation	64 65

P. 18

Annual Report

The weighted average useful life represents the useful life in each category weighted by the net book value of the assets.

During the year ended 30 June 2016 $593 million of expenditure on network assets and software were capitalised. The ‘UFB communal’ and ‘Fibre connections and fibre layer 2’ included in ‘fibre’ capital expenditure was largely capitalised against the network assets categories of fibre cables (46%) and ducts and manholes (30%). The average depreciation rate for UFB communal infrastructure spend is currently 38 years, reflecting the very high proportion of long life assets being constructed, with ducts and manholes having a depreciation rate of 50 years.

Software and other intangibles largely consist of the software components of billing, provisioning and operational systems, including spend on Spark-owned systems. A total of $44 million of software was capitalised during the year, which will be amortised over an average of five years.

Our depreciation profile is expected to continue to change, reflecting the greater mix of longer dated assets for the UFB and RBI rollouts. The offset of Crown funding against depreciation is expected to continue to increase over time as the amount of funding received from the Crown accumulates, with the associated amortisation to depreciation increasing accordingly.

Net finance expense

Net fnance expense
	2016 $M 2015 $M
Finance income	(7) (8)
Finance expense
Interest on syndicated bank facility	60 68
Interest on EMTN	53 53
Interest on fixed rate NZD bonds	3 -
Ineffective portion of change in fair value of cash flow hedge	9 19
Other interest expense	17 19
Capitalised interest	(5) (6)
Total finance expenses excluding Crown funding	137 153
CFH securities (notional interest)	10 6
Total finance expense	147 159

Interest costs decreased in FY16 largely reflecting the decreased weighted effective interest rate on debt (6.6% in FY16 compared to 6.9% in FY15) as a result of Moody’s Investor Services rating upgrade in February 2016 and the impact of lower prevailing market interest rates on floating rate debt. There was also a smaller amount of ineffectiveness arising from change in fair value of cash flow hedge.

We have restructured our debt in the last year, with $450 million of syndicated bank facility debt being repaid as it came due and replaced with $400 million of lower cost New Zealand dollar bonds. The NZD bonds were issued on 6 May 2016 with a fixed interest rate of 4.12% and maturity date 6 May 2021. Over time there will be a shift in interest expense from syndicated bank facility to fixed rate NZD bond.

The Euro Medium Term Notes (EMTN) hedging relationship was reset with a fair value of $49 million on 9 December 2013 following the close out of the interest rate swaps relating to the EMTN. During the current year, ineffectiveness of $9 million (30 June 2015: $19 million) flowed through interest expense. A further $21 million remains in the hedge reserve and will flow as ineffectiveness to interest expense in the income statement at some time over the life of the derivatives. It will be a non-cash charge. Neither the direction, nor the rate of the impact on the income statement can be predicted.

Other interest expense includes finance lease interest of $13 million (30 June 2015: $13 million), $1 million of costs relating to the financing tax payments through Tax Management New Zealand and $3 million amortisation (30 June 2015: $3 million) arising from the difference between fair value and proceeds realised from the interest rate swap reset.

At a minimum, we aim to maintain 50% of our debt obligations at a fixed rate of interest. We have fully hedged the foreign exchange exposure on the EMTN with cross currency interest rate swaps. The floating interest on these derivatives has been hedged using interest rate swap instruments. The exposure to floating rate interest on the syndicated bank facility has been reduced using interest rate swaps.

As at 30 June 2016, approximately 88% (30 June 2015: 51%) of the outstanding debt obligation was fixed through derivative or fixed rate debt arrangements.

Taxation

The 2016 effective tax rate of 28% equates to the statutory rate of 28%. There are no material permanent differences between net earnings before income tax and what is, or will be, taxable for the year to 30 June 2016.

P. 19

Annual Report

Capital expenditure commentary

Capital expenditure commentary
	2016 $M 2015 $M
Fibre	486 504
Copper	67 60
Common	40 33
Gross capital expenditure	593 597

Gross capital expenditure for the year to 30 June 2016 was $593 million. This was at the lower end of the FY16 guidance range of $580 million to $630 million and reflects ongoing reduction in

communal deployment costs as expected, average connection costs below guidance and less than forecast demand for construction of ‘backbone’ infrastructure to enable connections in rights of way.

Fibre capital expenditure

Fibre capital expenditure
	2016 $M 2015 $M
UFB communal	194 236
Fibre connections and fibre layer 21	205 169
Fibre products and systems	18 26
Other fibre connections and growth1	47 34
RBI	22 39
Total fibre capital expenditure	486 504

Fibre capital expenditure includes spend specifically focussed on fibre assets (layer 0 and layer 1 UFB network assets), spend to support the fibre network (IT delivering fibre products) and programmes largely focussed on fibre (UFB and RBI). Fibre capital expenditure represents about 82% of our FY16 gross capital expenditure spend, mainly for the UFB and RBI programmes.

UFB communal network deployment continued to gain momentum with build work completed for about 474,000 premises at 30 June 2016 out of the contractual target of 830,900 premises by the end of 2019. Build work was completed for 106,000 premises during the year.

The cost of the deployment of UFB communal network for the year was $194 million. This included $48 million spent on work in progress for communal network scheduled to be completed in the following year, lower than the $236 million in the previous year.

The average cost per premises passed during the year was $1,689. This was below FY16 guidance of an average cost of $1,700 to $1,770 for the year.

Fibre connections and layer 2 spend was $205 million as the volume of fibre connections continued to grow in line with our expanding UFB footprint and increasing uptake. Layer 2 equipment, such as Gigabit capable passive optical network ports, was installed ahead of demand as the UFB footprint grew. Demand for higher cost premium business fibre connections was below forecast (2,500 versus 3,500 connections).

The average cost per premises connected for standard residential premises and some non-standard single dwelling unit installations, was $1,009, excluding the long run average cost of layer 2 equipment. This was below the expected range of $1,050 to $1,250, reflecting cheaper actual mix of connection types.

A significant proportion of the fibre connections spend was incurred in providing ‘backbone’ network to enable the connection of customers located along rights of way or in multi dwelling units. This spend represents upfront investment as it ultimately enables multiple customers in a building, or along a right of way, to connect to UFB. We are able to recover a small proportion of connection costs for particular classes of ‘non-standard’ connections as defined by the UFB contract with Crown Fibre Holdings (CFH).

Fibre products and systems spend reduced to $18 million. Key areas of spend included the platform for retail service providers to integrate their fibre ordering with our fibre system, fibre test tools for retail service providers and the online order tracker for customers.

Capital expenditure of $47 million on other fibre connections and growth reflected new ‘greenfield’ fibre subdivisions, fibre lifecycle investment and regional backhaul connections for retail service provider data traffic. Transport investment has increased to support broadband capacity and growth and regional transport services on our network.

1 To disclose all connection capex in the same place, premium business fibre capex has been moved to fibre connections and layer 2 capex, previously it was in other fibre connections and growth. FY15 categories have been adjusted for comparative purposes.

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Annual Report

The RBI rollout was completed in FY16 with spend of $22 million, meaning a total cost of $282 million for the five year programme. This was at the lower end of the initial $280 – $295 million range

and we received approximately $233 million in Government grant funding for the rollout (see the Contributions to capital expenditure section below).

Copper capital expenditure

Copper capital expenditure
	2016 $M 2015 $M
Network sustain	29 34
Copper connections	7 11
Copper layer 2	27 11
Product fixed	4 4
Total copper capital expenditure	67 60

Copper capital expenditure was $67 million for the year, with the increase reflecting further investment in broadband capacity and growth to provide better broadband on our network.

Network sustain expenditure refers to capital expenditure where the network is being upgraded or network elements such as poles, cabinets and cables are replaced. This is typically where there is risk of network failure or degraded service for customers and network replacement is deemed more cost effective than reactive maintenance. As noted during the copper pricing process, proactive maintenance was put on hold and takes time to restart.

Capital expenditure on copper connections occurs where there is demand for copper connections for residential or business customers, such as infill housing or new buildings. Demand for copper connections continues to decrease as demand shifts to the UFB network and a contribution for new connections is required.

Copper layer 2 reflects investment in network electronics and equipment as a consequence of demand for broadband capacity and growth. This increased significantly as growing bandwidth demand, driven by online video consumption, required investment in network capacity at some locations.

Requests to shift network for roadworks purposes continued to increase but the cost is largely recovered in ‘Crown Funding – other’.

Common capital expenditure

Common capital expenditure
	2016 $M 2015 $M
Information technology	25 19
Building and engineering services	13 13
Other	2 1
Total common capital expenditure	40 33

Common capital expenditure was $40 million. Information technology spend increased to $25 million as we resumed longer term investment following the conclusion of the copper pricing review.

Building and engineering services reflects the capital spent on growth and plant replacement (e.g. power and air conditioning) at our exchanges, buildings and remote sites.

‘Other’ includes items such as office accommodation and equipment.

Contributions to capital expenditure

We receive significant financing and contributions towards our gross capital expenditure each year. During the year to 30 June 2016, we received contributions from the following sources:

i) RBI funding: The Crown contributed grant funding of about $233 million (excluding school lead-in contributions) towards our layer 0 and layer 1 capital spend over the five years of RBI. For the year ended 30 June 2016 $22 million was recognised.
ii) Other: We are able to recover the cost of other capital spend in certain circumstances. This includes replacing network damaged by third parties, or instances where central or local government authorities ask us to relocate or rebuild existing network. A total of $6 million was recognised in the current year and is included as part of Crown funding given its modest size.

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Long term capital management

We will pay a final dividend of 12 cents per share on 7 October 2016 to all holders registered at 5.00pm 23 September 2016. The shares will be quoted on an ex-dividend basis from 22 September 2016. The dividends paid will be fully imputed, at a ratio of 28/72, in line with the corporate income tax rate. In addition, a supplementary dividend of 2.12 cents per share will be payable to shareholders who are not resident in New Zealand.

The dividend reinvestment plan will remain in place for the final dividend at a discount rate of 3%. Shareholders who have previously elected to participate in the dividend reinvestment plan do not need to take any further action. For those shareholders who wish to participate, election notices to participate must be received by 5.00pm (NZ time) on 26 September 2016.

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.

For FY17, Chorus will pay a dividend of 21.0 cents per share, with an interim dividend of 8.5 cents per share to be paid in April. A final dividend of 12.5 cents per share will be declared in August, subject to no material adverse changes in circumstance or outlook. The dividend reinvestment plan will remain in place for the interim dividend at a discount rate of 3 per cent.

The Board considers that a ‘BBB’ or equivalent credit rating is appropriate for a company like Chorus. It intends to maintain capital management policies and financial policies consistent with these credit ratings. At 30 June 2016, we had a long term credit rating of BBB/stable outlook by Standard & Poor’s and Baa2/stable by Moody’s Investors Service.

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Regulation, legislation and litigation

Significant developments in our regulatory environment are set out below. This should be read in conjunction with previous disclosures which are available online at: www.chorus.co.nz/investor-centre.

Chorus Open Access Deeds of Undertaking

We are bound by three open access deeds of undertaking (Deeds). The Copper, Fibre and Rural Broadband Initiative Deeds represent a series of legally binding obligations focused around the provision of services on a non-discriminatory or equivalent basis.

We submitted a transition plan to the Minister for Communications in late 2012 relating to the actions required to move to ending the sharing arrangements between Spark and Chorus, as required by the Deeds. We provide annual updates to the plan, with the most recent update provided in late 2015.

Telecommunications Services Obligations (TSO) and Levies

The TSO is the regulatory mechanism by which universal service obligations for residential, local access and calling services are imposed and administered. We are required to maintain lines and coverage obligations, and provide a voice input service. On 9 July 2013, the Government issued a discussion document on the TSO, as part of a scheduled review and we made submissions. The timing for a formal update on the review from Government is unknown and there is no guarantee or certainty of the outcome.

The Telecommunications Development Levy (TDL) is an industry levy of $50 million per year from FY10 and initially scheduled to reduce to $10 million each year from FY16. In May 2015, the Government extended the TDL so that the levy will continue to be $50 million per year until FY19, reducing to $10 million each year thereafter, as part of its RBI extension policy. In December 2015, the Commission determined that we were liable for $11.1 million of the TDL for FY15.

We are also required to contribute towards the Commission’s costs through a Telecommunications Regulatory Levy (TRL). We were liable for $1.3 million of the TRL for FY15. We may also be required to contribute to the costs of the Commission’s regulatory proceedings.

UCLL and SLU pricing

We applied to the Commission to review the UCLL price, using a final pricing principle of Total Service Long Run Incremental Cost (TSLRIC). On 15 December 2015, the Commission released a final determination, which proposed a glide path for pricing over a five-year period, the price for the twelve month period from 16 December 2015 is $29.75 for UCLL and $15.52 for SLU. In the pending regulatory reviews (refer Regulatory framework review below) the Government is consulting on whether UCLL should remain available after 2020.

Unbundled Copper Low Frequency Service

To meet our TSO requirements, we have made a technology neutral voice input service, Baseband, available on a commercial basis. The pricing of a subset of this service, UCLFS (a voice input service offered over the copper access network), is set at the averaged UCLL price as determined by the Commission. Because the UCLFS price is linked to the UCLL price, the same UCLL monthly pricing applied to UCLFS from 16 December 2015. The UCLFS price flows contractually to the baseband price.

UBA pricing

The terms, including price, for UBA are currently regulated by the Commission. The UBA price comprises the UCLL price plus an uplift for UBA. On 5 November 2013, the Commission issued an initial benchmarked decision on the UBA uplift pricing reducing the UBA uplift from $21.46 to $10.92 per month based on benchmarking of pricing in two countries. The Commission’s initial benchmarked UBA uplift of $10.92 applied from 1 December 2014.

We applied to the Commission to review the UBA price, using a final pricing principle of TSLRIC. In December 2015, the Commission issued a final determination, with a glide path for the UBA uplift over a five-year period, the price for the 12 month period from 16 December 2015 is $11.44.

UBA non-price terms review

The Commission is considering possible changes to the general terms and service description (i.e. regarding the technical characteristics) of the UBA service. A final decision on any changes is expected in late 2016.

The terms, including price, for UCLL and SLU are currently regulated by the Commission. In December 2012, the Commission issued a final decision on its benchmarking review of the price we can charge for UCLL. The final averaged UCLL price of $23.52 represented a 3.8% drop. The UCLL price is linked to a number of our other services, meaning that the UCLFS and SLU prices, and some UBA prices, were impacted by the decision.

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Regulation, legislation and litigation (cont.)

Regulatory framework review

Under amendments made to the Telecommunications Act to facilitate Chorus’ demerger, the Government was required to commence a review of the regulatory framework by 2016, with a particular focus on the framework to apply once the UFB build is complete in 2020.

On 8 September 2015, the Government released a discussion document that stated: “A predictable, proportionate and flexible regulatory framework for communications will enable competition, innovation, investment, and growth across the economy which ultimately is better for consumers.” The discussion document acknowledged that structural separation means wholesale-only fixed line providers including Chorus appear more like electricity lines businesses, which are subject to “utility-style” regulation.

The document’s “preliminary view” was that a building block model (BBM) is the most appropriate framework for regulating UFB services because: “BBM will promote the legitimate commercial interests of access providers and access seekers and should provide a suitable basis for robust retail competition over the UFB network. BBM will limit the ability of UFB suppliers to generate excess profits, while also providing the stability and incentives needed to encourage efficient investment post-2020.” Chorus and other industry participants provided submissions on the discussion document in late October 2015.

On 14 April 2016 the Government announced a series of high-level policy decisions that included:

Moving to a utility-style model for regulating both fixed line copper and fibre wholesale services;
The utility-style model could include anchor products for basic voice and basic broadband with reference to entry level prices in the market; and
Retaining the current fibre unbundling requirements on the UFB network from 2020.

This was followed by the release of a second discussion document in July 2016. The options paper confirms a need for change and supports utilities regulation using a BBM for Chorus’ copper and fibre access services and for other UFB fixed line network providers.

The options paper seeks feedback on a proposed BBM design that includes:

a revenue cap approach;
two categories of regulated services (anchor products for voice, entry level and basic broadband that have price and quality determined, and commercial services set by a UFB provider subject to minimum requirements); and

Other proposals include reinforcement of a consumer led migration to UFB services and discussion regarding price and revenue transition risks and options.

Legislation is proposed to be passed in 2017 followed by substantial regulatory processes to implement the framework akin to the regulatory processes for other utilities in New Zealand.

Consenting requirements

The Telecommunications (Property Access and Other Matters) Bill was introduced to Parliament on 29 June 2016. The Bill proposes to introduce streamlined consenting processes to make it easier for Chorus to install fibre where the consent of more than one party is required. The Bill received multiparty support at its first reading. The timing and outcome of any consequential law changes is not known.

Other legislation

Chorus is subject to other legislative requirements such as the requirements of the Commerce Act 1986, Fair Trading Act 1986, as well as telecommunications codes.

Chorus is also subject to the Telecommunications (Interception Capability and Security) Act 2013 (TICSA), which replaces the Telecommunications (Interception Capability) Act 2004. The TICSA has reduced Chorus’ obligations to provide lawful interception capability as Chorus is no longer required to pre-invest in lawful interception solutions for wholesale network services and infrastructure level services.

However, the TICSA introduced new obligations on network operators to prevent, sufficiently mitigate or remove network security risks arising from public telecommunications networks. Chorus, like other network operators, is obliged to engage with the Government Communications Security Bureau where it might affect New Zealand’s national security and this has the potential to drive significant compliance costs.

Litigation

We have ongoing claims, investigations and inquiries, none of which are currently expected to have significant effect on our financial position or profitability.

We cannot reasonably estimate the adverse effect, if any, of the outstanding matters are ultimately resolved against our interest. There can be no assurance that such cases will not have a significant effect on our business, financial position, and results of operations or profitability.

the continuation of nationally averaged pricing.

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Appendix one

Non statutory measure: adjusted EBITDA

This appendix provides a high level summary of Chorus’ adjusted EBITDA. It has been prepared on the basis of the final pricing principle (FPP) determinations effective 16 December 2015.

For comparative purposes this flows the pricing through both FY15 and FY16 as though the pricing had changed on 1 July 2014.

Summary

Summary
	ADJUSTED 2016 $M ADJUSTED 2015 $M %
Adjusted operating revenue	1,067 1,073 (0.6)
Operating expenses	(414) (404) (2.5)
Adjusted EBITDA	653 669 (2.4)

Adjusted operating revenue

				ADD:	LESS:
				UBA AND	TRANSACTION
			STATUTORY	UCLL PRICE	CHARGE PRICE
			RESULTS	CHANGE	CHANGE	ADJUSTED
			$M	$M	$M	$M
H2	FY16	operating revenue	529	-	-	529
H1	FY16	operating revenue	479	65	(6)	538
H2	FY15	operating revenue	479	67	(6)	540
H1	FY15	operating revenue	527	8	(2)	533

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Appendix two

Copper price paths

Copper price paths
Copper pricing
BENCHMARK PRICING	PRICING EFFECTIVE 16 DECEMBER 2015
UCLL and UCLFS $23.52	Year 1 – $29.75
	Year 2 – $30.22
	Year 3 – $30.70
	Year 4 – $31.19
	Year 5 – $31.68
Basic UBA uplift $10.92	Year 1 – $11.44
	Year 2 – $11.22
	Year 3 – $11.01
	Year 4 – $10.83
	Year 5 – $10.67
UCLL + UBA = aggregate Basic UBA price $34.44	Year 1 – $41.19
	Year 2 – $41.44
	Year 3 – $41.71
	Year 4 – $42.02
	Year 5 – $42.35
SLU $14.21	Year 1 – $15.52
	Year 2 – $15.70
	Year 3 – $15.89
	Year 4 – $16.07
	Year 5 – $16.26

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Financial Statements

Independent auditor’s report	28
Income statement	31
Statement of comprehensive income	31
Statement of financial position	32
Statement of changes in equity	33
Statement of cash flows	34
Notes to the financial statements	36

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Annual Report

Independent auditor’s report

To the shareholders of Chorus Limited

Report on the audit of the Consolidated Financial Statements

Opinion

We have audited the consolidated financial statements of Chorus Limited (the Company) and its subsidiary (the Group), which comprise the consolidated statement of financial position as at 30 June 2016, the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 30 June 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and International Financial Reporting Standards (IFRS).

This report is made solely to the shareholders as a body. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in the auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company’s shareholders as a body, for our audit work, this report or any of the opinions we have formed.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs (NZ)). Our responsibilities under those standards are further described in the Auditor’s Responsibilities section of our report. We are independent of the Group in accordance with the Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Our firm has also provided regulatory audit services, other assurance services, tax compliance services and sponsorship services to the Company and Group. Subject to certain restrictions, partners and employees of our Firm may also deal with the Group on normal terms within the ordinary course of trading activities of the business of the Group. These matters have not impaired our independence as auditor of the Group. The firm has no other relationship with, or interest in, the Group.

Audit materiality

The scope of our audit was influenced by our application of materiality. Materiality helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the consolidated financial statements as a whole. The materiality for the consolidated financial statements as a whole was set at $8,680,000, determined with reference to a benchmark of Group profit before tax as disclosed in the consolidated income statement. We chose profit before tax on the basis that we believe it is the benchmark against which the performance of the Group is commonly measured. Materiality represents 5% of the benchmark.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements in the current period. We summarise below those matters, our key audit procedures to address those matters and our findings from those procedures in order that the Group’s shareholders as a body may better understand the process by which we arrived at our audit opinion. Our findings are the result of procedures undertaken in the context of and solely for the purpose of our statutory audit opinion on the consolidated financial statements as a whole and we do not express discrete opinions on separate elements of the consolidated financial statements.

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KEY AUDIT MATTER	OUR PROCEDURES TO ADDRESS THE KEY AUDIT MATTER AND FINDINGS
Capitalisation and asset lives	Our procedures included:
As disclosed in note 1 of the fnancial statements,	• Examining the operating effectiveness of controls around the settlement of capital
the Group has network assets of $3,656 million	projects into the fixed asset register and the approval of the asset life annual review.
(30 June 2015: $3,406 million).	• Assessing the nature of costs incurred in capital projects by checking a sample of
Capitalisation of costs and useful lives assigned	costs to invoice to determine whether the description of the expenditure met the
to these assets are a key audit matter due to the	capitalisation criteria.
signifcance of assets to the Group’s consolidated	• Evaluating a sample of assets under construction in which no costs had been
statement of fnancial position, and due to the	incurred in the final three months of the financial reporting period. We challenged
judgement involved in the:	the status of those assets under construction to determine whether they remained
• decision to capitalise or expense costs;	appropriately capitalised.
• estimation of the stage of completion of assets	• Assessing, on a sample basis, whether the accruals recorded for assets under
under construction; and	construction were calculated in accordance with the progress of construction and
	the arrangements with external suppliers.
• estimation of the useful life of the asset once
the costs are capitalised.	• Assessing the useful economic lives of the assets, by comparing to industry
	benchmarks and our knowledge of the business and its operations.
CFH securities and derivative fnancial instruments	Our procedures included:
As disclosed in notes 3, 4, 5 and 18 of the fnancial	• Assessing the valuation of the interest rate derivatives. Our financial instrument
statements, the Group has external loans of $1,540	specialists re-valued all interest rate derivatives using valuation models and inputs
million (30 June 2015: $1,663 million), crown funding	independent from those utilised by management.
of $639 million (30 June 2015: $523 million) and derivative fnancial instruments of $214 million (30 June 2015: $56 million).	• Evaluating the hedge effectiveness of the interest rate derivatives hedging the Euro Medium Term Notes. Our financial instrument specialists assessed the effectiveness of these hedges by independently modelling the future changes in the value of these
The CFH securities and interest rate derivatives	instruments to assess whether the underlying interest rate derivatives were effective.
are a key audit matter due to their signifcance to	• Assessing the accounting treatment of the CFH securities. We read the underlying
the Group’s consolidated statement of fnancial	loan agreement and analysed the various features of the loan agreement to
position. There is complexity and judgement involved	determine whether the CFH securities were a debt or equity instrument.
in determining the appropriate valuation and
accounting treatment for the interest rate derivatives	• Evaluating the valuation of the CFH securities. Our valuation specialists assessed the
and the CFH securities.	methodology used by management for determining the amounts allocated to debt
	and government grant.
	• Assessing the inputs used in the valuation of the CFH securities. On a sample
	basis we compared interest rates and credit spreads to independent sources of
	information to determine an acceptable range of valuation inputs.
Accuracy of revenue	Our procedures included:
As disclosed in note 7 of the consolidated fnancial	• Evaluating the Group’s recognition of revenue by assessing any revenue disputes
statements, the Group has revenue of $1,008 million	recorded in the industry’s dispute reporting tool by Chorus customers. We compared
(30 June 2015: $1,006 million).	the disputes raised by Chorus customers to the revenue recorded by Chorus and
Accuracy of revenue is considered to be a key audit	checked a sample of settled disputes to the final settlement agreements.
matter due to the nature of the underlying billing	• Independently confirming the accuracy of a sample of outstanding debtor balances
processes that existed following the Chorus demerger	with Chorus customers.
from Spark New Zealand in 2011.	• Agreeing a sample of revenue adjustments recorded during the year to authorised
There are certain legacy products where the billing	credit notes.
is based on network consumption which cannot
be easily linked to a physical end user connection.
There is a risk that revenue billed on this basis may be
disputed by Chorus’ customers who have a diferent
view of their consumption of the Chorus network. Due
to the legacy nature of these products, the volumes
are decreasing each year and are approximately 20%
of revenue in the current fnancial year.

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Information other than the Consolidated Financial Statements and Auditor’s Report

The directors are responsible for all other information included in an entity’s Annual Report. Other information may include the Chairman’s report, CEO’s Report, disclosures relating to corporate governance and statutory information. Our opinion on the consolidated financial statements does not cover any other information and we will not express any form of audit opinion or assurance conclusion thereon.

In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Directors’ Responsibilities for the Consolidated Financial Statements

The directors are responsible on behalf of the entity for the preparation and fair presentation of the consolidated financial statements in accordance with NZ IFRS, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (NZ) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

A detailed description of the auditors’ responsibilities including those related to assessment of risk of material misstatement, evaluation of appropriateness of going concern assumptions and determining key audit matters are available on the External Reporting Board website: https://www.xrb.govt.nz/Site/Auditing_Assurance_Standards/Current_Standards/Page1.aspx

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Brent Manning Partner

For and on behalf of KPMG, Wellington 29 August 2016

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Income statement

FOR THE YE AR ENDED 30 JUNE 2016

FOR THE YE AR ENDED 30 JUNE 2016
(DOLLARS IN MILLIONS) NOTES	2016 $M 2015 $M
Operating revenue 7	1,008 1,006
Operating expenses 8	(414) (404)
Earnings before interest, income tax, depreciation and amortisation	594 602
Depreciation 1	(263) (259)
Amortisation 2	(64) (65)
Earnings before interest and income tax	267 278
Finance income	7 8
Finance expense 3	(147) (159)
Net earnings before income tax	127 127
Income tax expense 12	(36) (36)
Net earnings for the year Earningsper share	91 91

Basic earnings per share (dollars) 16	0.23 0.23
Diluted earnings per share (dollars) 16	0.19 0.19

Statement of comprehensive income

FOR THE YE AR ENDED 30 JUNE 2016

FOR THE YE AR ENDED 30 JUNE 2016
(DOLLARS IN MILLIONS) NOTE	2016 $M 2015 $M
Net earnings for the year	91 91
Other comprehensive income
Items that will be reclassified subsequently to income statement when specific conditions are met
Ineffective portion of changes in fair value of cash flow hedges 15	7 14
Effective portion of changes in fair value of cash flow hedges 15	(29) (16)
Amortisation of de-designated cash flow hedges transferred to income statement 15	(1) (1)
Other comprehensive income net of tax	(23) (3)
Total comprehensive income for the year net of tax	68 88

The accompanying notes are an integral part of these financial statements

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Statement of financial position

A S AT 30 JUNE 2016

A S AT 30 JUNE 2016
(DOLLARS IN MILLIONS) NOTES	2016 $M 2015 $M
Current assets Cash and call deposits 13	102 80
Income tax receivable 12	3 -
Trade and other receivables 9	158 165
Derivative financial instruments 18	1 3
Finance lease receivable 14	4 3
Total current assets	268 251
Non-current assets Derivative financial instruments 18	- 14
Trade and other receivables 9	10 11
Software and other intangibles 2	160 159
Network assets 1	3,656 3,406
Total non-current assets	3,826 3,590
Total assets Current liabilities Trade and other payables 10	4,094 3,841
	347 315
Income tax payable 12	- 12
Derivative financial instruments 18	24 12
Total current liabilities excluding Crown funding	371 339
Current portion of Crown funding 5	17 13
Total current liabilities	388 352
Non-current liabilities Derivative financial instruments 18	191 61
Finance lease payable 14	136 130
Debt 3	1,540 1,663
Deferred tax payable 12	194 199
Total non-current liabilities excluding CFH securities and Crown funding	2,061 2,053
CFH securities 4	152 107
Crown funding 5	622 510
Total non-current liabilities	2,835 2,670
Total liabilities Equity	3,223 3,022

Share capital 15	481 465
Reserves 15	(26) (3)
Retained earnings	416 357
Total equity	871 819
Total liabilities and equity	4,094 3,841

The accompanying notes are an integral part of these financial statements

On behalf of the Board

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Patrick Strange, Chairman Mark Ratcliffe, Managing Director Authorised for issue on 29 August 2016

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Statement of changes in equity

FOR THE YE AR ENDED 30 JUNE 2016

FOR THE YE AR ENDED 30 JUNE 2016
(DOLLARS IN MILLIONS) NOTE	SHARE CAPITAL $M RETAINED EARNINGS $M CASH FLOW HEDGE RESERVE $M TOTAL $M
Balance at 1 July 2014 Comprehensive income Net earnings for the year	465 266 - 731
	- 91 - 91
Other comprehensive income Ineffective portion of changes in fair value of cash flow hedges 15	- - 14 14
Effective portion of changes in fair value of cash flow hedges 15	- - (16) (16)
Amortisation of de-designated cash flow hedges transferred to income statement 15	- - (1) (1)
Total comprehensive income	- 91 (3) 88
Balance at 30 June 2015 Comprehensive income Net earnings for the year	465 357 (3) 819

	- 91 - 91
Other comprehensive income Ineffective portion of changes in fair value of cash flow hedges 15
	- - 7 7
Effective portion of changes in fair value of cash flow hedges 15	- - (29) (29)
Amortisation of de-designated cash flow hedges transferred to income statement 15	- - (1) (1)
Total comprehensive income	- 91 (23) 68
Contributions by and (distributions to) owners: Dividends 15
	- (32) - (32)
Supplementary dividends	- 3 - 3
Tax credit on supplementary dividends	- (3) - (3)
Dividend reinvestment plan 15	17 - - 17
Employee share plan 15	(1) - - (1)
Total transactions with owners	16 (32) - (16)
Balance at 30 June 2016	481 416 (26) 871

The accompanying notes are an integral part of these financial statements

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Statement of cash flows

FOR THE YE AR ENDED 30 JUNE 2016

FOR THE YE AR ENDED 30 JUNE 2016
(DOLLARS IN MILLIONS) NOTES	2016 $M 2015 $M
Cash flows from operating activities Cash was provided from/(applied to):
Cash received from customers	1,003 1,006
Finance income	3 4
Payment to suppliers and employees	(404) (414)
Taxation paid 12	(47) (48)
Interest paid	(120) (132)
Net cash flows from operating activities Cash flows applied to investing activities Cash was applied to:	435 416

Purchase of network assets and software and intangible assets	(569) (589)
Capitalised interest paid	(5) (6)
Net cash flows applied to investing activities Cash flows from financing activities Cash was provided from/(applied to):	(574) (595)

Net proceeds from finance leases	5 3
Crown funding (including CFH securities)	179 155
Proceeds from debt	585 63
Repayment of debt	(593) (138)
Dividends paid	(15) -
Net cash flows from financing activities Net cash flow	161 83
	22 (96)
Cash at the beginning of the year	80 176
Cash at the end of the year 13	102 80

The accompanying notes are an integral part of these financial statements

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Annual Report

Statement of cash flows (cont.)

RECONCILIATION OF NE T E ARNINGS TO NE T CA SH FLOWS FROM OPER ATING AC TIVITIES

(DOLLARS IN MILLIONS)	2016 $M 2015 $M
Net earnings for the year	91 91
Adjustment for:
Depreciation charged on network assets	278 271
Amortisation of Crown funding	(15) (12)
Amortisation of software and other intangible assets	64 65
Deferred income tax	4 8
Ineffective portion of changes in fair value of cash flow hedges (pre-tax)	9 19
Other	11 2
Change in current assets and liabilities:	442 444

Change in trade and other receivables	(11) (16)
Change in trade and other payables	19 8
Change in income tax receivable	(15) (20)
	(7) (28)
Net cash flows from operating activities	435 416

The accompanying notes are an integral part of these financial statements

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Annual Report

Notes to the financial statements

Chorus includes Chorus Limited together with its subsidiaries.

Chorus is New Zealand’s largest fixed line communications infrastructure services provider, it maintains and builds a network predominantly made up of local telephone exchanges, cabinets, copper and fibre cables.

Chorus Limited is a profit-orientated company registered in New Zealand under the Companies Act 1993 and a FMC Reporting Entity for the purposes of the Financial Markets Conduct Act 2013. Chorus Limited was established as a standalone, publicly listed entity on 1 December 2011, upon its demerger from Telecom Corporation of New Zealand Limited (Telecom), now known as Spark New Zealand Limited (Spark). The demerger was a condition of an agreement with CFH to enable Chorus Limited to be the Crown’s UFB provider in 24 regions, representing approximately 70% of the UFB coverage area. Chorus Limited is listed and its ordinary shares quoted on the NZX main board equity security market (NZX Main Board) and on the Australian Stock Exchange (ASX) and has bonds quoted on the NZX debt market. American Depositary Shares, each representing five ordinary shares (and evidenced by American Depositary Receipts), are not listed but are traded on the over-thecounter market in the United States.

These financial statements have been prepared in accordance with generally accepted accounting practice in New Zealand (NZ GAAP) and the Financial Reporting Act 2013. They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) as appropriate for profit-oriented entities, and with International Financial Reporting Standards.

These financial statements are expressed in New Zealand dollars. All financial information has been rounded to the nearest million, unless otherwise stated.

The measurement basis adopted in the preparation of these financial statements is historical cost, modified by the revaluation of financial instruments as identified in the specific accounting policies below and the accompanying notes.

Accounting policies and standards

Accounting policies that summarise the measurement basis used and are relevant to the understanding of the financial statements are provided throughout the accompanying notes.

The accounting policies adopted have been applied consistently throughout the periods presented in these financial statements. Certain comparative information has been reclassified to conform with the current year’s presentation.

There are no new standards, amendments or interpretations that have been issued and effective, that are expected to have a significant impact.

Accounting estimates and judgements

In preparing the financial statements management has made estimates and assumptions about the future that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.

Estimates and assumptions are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The principal areas of judgement in preparing these financial statements are set out below.

Network assets (note 1)

Assessing the appropriateness of useful life and residual value estimates of network assets requires a number of factors to be considered such as the physical condition of the asset, expected period of use of the asset, technological advances, regulation and expected disposal proceeds from the future sale of the asset.

CFH securities (note 4)

Determining the fair value of the CFH securities requires assumptions on expected future cash flows and discount rates based on future long dated swap curves.

Crown funding (note 5)

Exercising judgement when recognising Crown funding to determine if conditions of the funding contract have been satisfied. This judgement will be based on the facts and circumstances that are evident for each contract at the time of preparing the financial statements.

Leases (note 14)

Determining whether a lease agreement is a finance lease or operating lease requires judgement as to whether the agreement transfers substantially all the risks and rewards of ownership to Chorus.

Financial risk management (note 19)

Credit valuations adjusting to reflect credit risk as required by NZ IFRS 13: Fair Value Measurement. The effect of credit risk is quantified using an expected future exposure methodology where credit default swap prices are used to represent the probability of default.

Note 1 – Network assets

In the statement of financial position, network assets are stated at cost less accumulated depreciation and any accumulated impairment losses. The cost of additions to network assets and work in progress constructed by Chorus includes the cost of all materials used in construction, direct labour costs specifically associated with construction, interest costs that are attributable to the asset, resource management consent costs and attributable overheads.

Repairs and maintenance costs are recognised in the income statement as incurred.

Estimating useful lives and residual values of network assets

The determination of the appropriate useful life for a particular asset requires management to make judgements about, amongst other factors, the expected period of service potential of the asset, the likelihood of the asset becoming obsolete as a result of technological advances, the likelihood of us ceasing to use the asset in our business operations and the effect of government regulation.

Where an item of network assets comprises major components having different useful lives, the components are accounted for as separate items of network assets.

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Annual Report

Note 1 – Network assets (cont.)

Where the remaining useful lives or recoverable values have diminished due to technological, regulatory or market condition changes, depreciation is accelerated. The asset’s residual values, useful lives, and methods of depreciation are reviewed annually and adjusted prospectively, if appropriate.

Depreciation is charged on a straight-line basis to write down the cost of network assets to its estimated residual value over its estimated useful life. Estimated useful lives are as follows:

==> picture [243 x 100] intentionally omitted <==

----- Start of picture text -----

Copper cables 10-30 years
Fibre cables 20 years
Ducts and manholes 50 years
Cabinets 5-14 years
Property 5-50 years
Network electronics 2-15 years
Other 2-10 years
----- End of picture text -----

Other network assets include motor vehicles, network management and administration systems and radio infrastructure.

Any future adverse impacts arising when assessing the carrying value or lives of network assets could lead to future impairment losses or increases in depreciation charges that could affect future earnings.

An item of network assets and any significant part is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Where network assets are disposed of, the profit or loss recognised in the income statement is calculated as the difference between the sale price and the carrying value of the asset.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.

Land and work in progress are not depreciated.

AS AT 30 JUNE 2016	COPPER CABLES $M FIBRE CABLES $M DUCTS AND MANHOLES $M CABINETS $M PROPERTY $M NETWORK ELECTRONICS $M OTHER $M WORK IN PROGRESS $M TOTAL $M
Cost Balance as at 1 July 2015
	2,333 1,136 1,690 485 521 1,559 4 87 7,815
Additions	- - - - - - - 528 528
Disposals	- - - - - - (1) - (1)
Transfers from work in progress	20 200 145 52 19 79 1 (516) -
Balance as at 30 June 2016 Accumulated depreciation Balance as at 1 July 2015	2,353 1,336 1,835 537 540 1,638 4 99 8,342

	(1,774) (328) (441) (270) (232) (1,361) (3) - (4,409)
Depreciation	(56) (60) (35) (41) (18) (68) - - (278)
Disposals	- - - - - - 1 - 1
Balance as at 30 June 2016 Net carrying amount	(1,830) (388) (476) (311) (250) (1,429) (2) - (4,686)
	523 948 1,359 226 290 209 2 99 3,656

AS AT 30 JUNE 2015	COPPER CABLES $M FIBRE CABLES $M DUCTS AND MANHOLES $M CABINETS $M PROPERTY $M NETWORK ELECTRONICS $M OTHER $M WORK IN PROGRESS $M TOTAL $M
Cost Balance as at 1 July 2014	2,307 956 1,427 444 507 1,519 4 103 7,267
Additions	- - - - - - - 547 547
Other	- - - - - - - 2 2
Disposals	- - - - - (1) - - (1)
Transfers from work in progress	26 180 263 41 14 41 - (565) -
Balance as at 30 June 2015 Accumulated depreciation Balance as at 1 July 2014	2,333 1,136 1,690 485 521 1,559 4 87 7,815
	(1,716) (278) (410) (234) (215) (1,284) (2) - (4,139)
Depreciation	(58) (50) (31) (36) (17) (78) (1) - (271)
Disposals	- - - - - 1 - - 1
Balance as at 30 June 2015 Net carrying amount	(1,774) (328) (441) (270) (232) (1,361) (3) - (4,409)
	559 808 1,249 215 289 198 1 87 3,406

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Annual Report

Note 1 – Network assets (cont.)

There are no restrictions on our network assets or any network assets pledged as securities for liabilities. At 30 June 2016 the contractual commitment for acquisition and construction of network assets was $341 million (30 June 2015: $448 million).

Depreciation

	2016 $M 2015 $M
Depreciation charged on network assets	278 271
Less: Crown funding – Ultra-Fast Broadband	(8) (6)
Crown funding – Rural Broadband Initiative	(6) (4)
Crown funding – Other	(1) (2)
Total depreciation	263 259

Chorus receives funding from the Crown to finance the capital expenditure associated with the development of the UFB network, rural broadband services and other services. Funding is offset against depreciation over the life of the assets the funding is used to construct.

Refer to note 5 for information on Crown funding.

Property exchanges

Chorus has leased property exchange space owned by Spark subject to finance lease arrangements. These have been included in network assets under the property category. As at 30 June 2016 the property exchange assets capitalised under a finance lease had a cost of $162 million (30 June 2015: $157 million) together with accumulated depreciation of $21 million (30 June 2015: $16 million).

Impairment

The carrying amounts of non-financial assets including network assets, software and other intangibles are reviewed at the end of each reporting period for any indicators of impairment. If any such indication exists, the recoverable amount of the asset is estimated. An impairment loss is recognised in earnings whenever the carrying amount of an asset exceeds its estimated recoverable amount. Should the conditions that gave rise to the impairment loss no longer exist, and the assets are no longer considered to be impaired, a reversal of an impairment loss would be recognised immediately in earnings.

The recoverable amount is the greater of an asset’s value in use and fair value less costs to sell. Chorus’ assets do not generate independent cash flows and are therefore assessed from a single cash-generating unit perspective. In assessing the recoverable amount, the estimates of future cash flows are discounted to their net present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the business.

During the year ended 30 June 2016 there was no impairment loss on the network assets or software and other intangibles (30 June 2015: nil).

Capitalised interest

Finance costs are capitalised on qualifying items of network assets and software assets at an annualised rate of 6.50% (30 June 2015: 6.50%). Interest is capitalised over the period required to complete the assets and prepare them for their intended use. In the current year finance costs totalling $5 million (30 June 2015: $6 million) have been capitalised against network assets and software assets.

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Annual Report

Note 2 – Software and other intangibles

Software and other intangible assets are initially measured at cost. The direct costs associated with the development of network and business software for internal use are capitalised where project success is probable and the capitalisation criteria is met. Following initial recognition, software and other intangible assets are stated at cost less accumulated amortisation and impairment losses. Software and other intangible assets with a finite life are amortised from the date the asset is ready for use on a straight-line basis over its estimated useful life which is as follows:

==> picture [243 x 29] intentionally omitted <==

----- Start of picture text -----

Software 2-8 years
Other intangibles 6-20 years
----- End of picture text -----

At each reporting date, Chorus reviews the carrying amounts of its software and other intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. For impairment policy and process refer to note 1.

Where estimated useful lives or recoverable values have diminished due to technological change or market conditions, amortisation is accelerated.

There are no restrictions on software and other intangible assets or any software and other intangible assets pledged as securities for liabilities. At 30 June 2016 the contractual commitment for acquisition of software and other intangible assets was $6 million (30 June 2015: $4 million).

Other intangibles mainly consist of land easements.

AS AT 30 JUNE 2016	SOFTWARE $M OTHER INTANGIBLES $M WORK IN PROGRESS $M TOTAL $M
Cost Balance as at 1 July 2015
	553 6 10 569
Additions	- - 65 65
Transfers from work in progress	44 - (44) -
Balance as at 30 June 2016 Accumulated amortisation Balance as at 1 July 2015	597 6 31 634

	(409) (1) - (410)
Amortisation	(64) - - (64)
Balance as at 30 June 2016 Net carrying amount	(473) (1) - (474)
	124 5 31 160

AS AT 30 JUNE 2015	SOFTWARE $M OTHER INTANGIBLES $M WORK IN PROGRESS $M TOTAL $M
Cost Balance as at 1 July 2014	467 6 46 519
Additions	- - 50 50
Transfers from work in progress	86 - (86) -
Balance as at 30 June 2015 Accumulated amortisation Balance as at 1 July 2014	553 6 10 569
	(344) (1) - (345)
Amortisation	(65) - - (65)
Balance as at 30 June 2015 Net carrying amount	(409) (1) - (410)
	144 5 10 159

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Annual Report

Note 3 – Debt

Debt is included as non-current liabilities except for those with maturities less than 12 months from the reporting date, which are classified as current liabilities.

Debt is initially measured at fair value, less any transaction costs that are directly attributable to the issue of the instruments.

Debt is subsequently measured at amortised cost using the effective interest method. The weighted effective interest rate on debt including the effect of derivative financial instruments was 6.63% (30 June 2015: 6.90%).

DUE DATE	2016 $M 2015 $M
Syndicated bank facility A	- 450
Syndicated bank facility B Apr 2019	415 365
Syndicated bank facility May 2019	250 250
Euro medium term notes Apr 2020	485 603
Fixed rate NZD Bonds May 2021	400 -
Less: facility fees	(10) (5)
	1,540 1,663
Current	- -
Non-current	1,540 1,663

Syndicated bank facilities

As at 30 June 2016 Chorus had in place $925 million committed syndicated bank facilities on market standard terms and conditions (30 June 2015: $1,500 million). The amount of undrawn syndicated bank facilities that is available for future operating activities is $260 million (30 June 2015: $435 million).

In April 2016 the maturity of syndicated bank facility B was extended from November 2017 to April 2019. In May 2016 syndicated facility A was repaid and cancelled.

The syndicated bank facilities are held with bank and institutional counterparties rated -A to AAA, based on rating agency Standard & Poor’s ratings.

Chorus utilises hedging instruments to manage the interest rate risk associated with the syndicated bank facilities. Interest rate exposure is managed within Board approved parameters set out in the treasury policy.

The carrying value of syndicated bank facilities approximates their fair value.

Euro Medium Term Notes (EMTN)

FACE VALUE	INTEREST RATE 2016 $M 2015 $M
GBP 260 million	6.75% 485 603

Chorus has in place cross currency interest rate swaps to hedge the foreign currency exposure to the EMTN. The cross currency interest rate swaps entitle us to receive GBP principal and GBP fixed coupon payments for NZD principal and NZD floating interest payments. The floating interest rate exposure on the NZD interest payments have been hedged using interest rate swaps.

The following table reconciles EMTN at hedged rates to EMTN at spot rates as reported under IFRS. EMTN at hedged rates is a non-GAAP measure and is not defined by NZ IFRS.

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Annual Report

Note 3 – Debt (cont.)

Note 3 – Debt (cont.)
	2016 $M 2015 $M
EMTN	485 603
Impact of hedged rates used	192 74
EMTN at hedged rates 677 677 The fair value of EMTN, calculated based on the present value of future principal and interest cash fows, discounted at market interest rates at balance date, was $566 million (30 June 2015: $690 million) compared to a carrying value of $485 million (30 June 2015: $603 million). This fair value has been determined using Level 2 of the fair value hierarchy as described in note 19.	677 677

Fixed rate NZD Bonds

	INTEREST RATE 2016 $M 2015 $M
Fixed rate NZD Bonds	4.12% 400 -

On 6 May 2016 $400 million of unsecured, unsubordinated debt securities were issued at a fixed rate of 4.12%. The maturity date is May 2021.

Schedule of maturities

	2016 $M 2015 $M
Current	- -
Due 1 to 2 years	- 450
Due 2 to 3 years	665 365
Due 3 to 4 years	485 250
Due 4 to 5 years	400 603
Due over 5 years	- -
Total due after one year	1,550 1,668
Less: facility fees	(10) (5)
	1,540 1,663

No debt has been secured against assets. However, there are financial covenants and event of default triggers, as defined in the various debt agreements. During the current year Chorus fully

complied with the requirements set out in its financing agreements (30 June 2015: full compliance).

Refer to note 19 for information on financial risk management.

Finance expense

	2016 $M 2015 $M
Interest on syndicated bank facility	60 68
Interest on EMTN	53 53
Interest on fixed rate NZD bonds	3 -
Ineffective portion of changes in fair value of cash flow hedges (pre-tax)	9 19
Other interest expense	17 19
Capitalised interest	(5) (6)
Total finance expense excluding CFH securities	137 153
CFH securities (notional interest)	10 6
Total finance expense	147 159

Other interest expense includes $13 million finance lease interest expense (30 June 2015: $13 million), $1 million of costs relating to the financing of tax payments through Tax Management New Zealand (30 June 2015: $2 million) and $3 million

of amortisation arising from the difference between fair value and proceeds realised from the swaps reset (30 June 2015: $3 million) (refer to note 18).

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Note 3 – Debt (cont.)

The EMTN hedging relationship was reset with a fair value of $49 million on 9 December 2013 following the close out of the interest rate swaps relating to the EMTN. During the current year ineffectiveness of $9 million (30 June 2015: $19 million) flowed through interest expense. A further $21 million remains in the hedge

reserve and will flow as ineffectiveness to interest expense in the income statement at some time over the life of the derivatives. It will be a non-cash charge. Neither the direction, nor the rate of the impact on the income statement can be predicted.

Note 4 – CFH securities

Chorus receives funding from the Crown to finance construction costs associated with the development of the UFB network. Chorus receives funding at a rate of $1,118 for every premises passed (as certified by CFH). In return we issue CFH equity securities, CFH debt securities and CFH warrants. The equity and debt securities have an issue price of $1 and are issued on a 50:50 basis. For each premises passed, $559 of equity securities and $559 of debt securities are issued and we receive $1,118 funding in return. CFH warrants are issued for nil value. The total committed funding available for Chorus over the period of UFB network construction is expected to be $929 million.

The CFH equity and debt securities are recognised initially at fair value plus any directly attributable transaction costs. Subsequently they are measured at amortised cost using the effective interest method. The fair value is derived by discounting the $559 of equity securities and $559 of debt securities per premises passed by the effective interest rate based on market rates. The difference between funding received ($1,118 per premises passed) and the fair value of the securities is recognised as Crown funding. Over time, the CFH debt and equity securities increase to face value and the Crown funding is released against depreciation and reduces to nil.

CFH equity securities

CFH equity securities are a class of non-interest bearing security that carry no right to vote at meetings of holders of Chorus ordinary shares, but entitle the holder to a preferential right to repayment on liquidation and additional rights that relate to Chorus’ performance under its construction contract with CFH.

Dividends will become payable on a portion of the CFH equity securities from 2025 onwards, with the portion of CFH equity securities that attract dividends increasing over time. A greater portion of CFH equity securities attract dividends if the proportion of premises with a fibre connection within Chorus’ coverage area at 30 June 2020 does not exceed 20%. The dividend rate will be equal to the New Zealand 180-day bank bill rate plus a margin of 6%. CFH equity instruments can be settled by issuing Chorus shares valued at a 5% discount to the 20-day volume weighted average price for Chorus shares traded in ordinary trading on the NZX Main Board.

The CFH equity securities are treated as a compound financial instrument with a Crown funding component due to the instrument including an interest free loan from a government entity.

On initial recognition, the fair value of the liability component of the compound instrument is calculated using market inputs with no residual amounts allocated to equity. Until the liability component of the compound instrument expires the CFH equity securities are required to be disclosed as a liability. The difference between the face value of the CFH equity securities and the fair value of the liability component is then recorded as Crown funding.

After this, the liability component is measured at amortised cost using the effective interest method and the Crown funding is amortised to depreciation on a systematic basis over the useful lives of the relevant UFB assets.

CFH debt securities

CFH debt securities are unsecured, non-interest bearing and carry no voting rights at meetings of holders of Chorus ordinary shares. Chorus is required to redeem the CFH debt securities in tranches from 2025 to 2036 (at the latest) by repaying the face value to CFH. An accelerated repayment schedule applies if the proportion of premises with a fibre connection within Chorus’ coverage area at 30 June 2020 does not exceed 20%.

The CFH debt securities are treated as a financial liability with a Crown funding component due to the instrument including an interest free loan from a government entity. On initial recognition the difference between the face value of the CFH debt securities and their fair value (calculated using market inputs) is recorded as Crown funding. After this the liability component is measured at amortised cost using the effective interest method and the Crown funding is amortised to depreciation on a systematic basis over the useful lives of the relevant UFB assets.

The principal amount of CFH debt securities consists of a senior portion and a subordinated portion. The senior portion ranks equally with all other unsecured, unsubordinated creditors of Chorus, and has the benefit of any negative pledge covenant that may be contained in any of Chorus’ debt arrangements. The subordinated portion ranks above ordinary shares of Chorus. The initial value of the senior portion is the present value (using a discount rate of 8.5%) of the sum repayable on the CFH debt securities, and the initial subordinated portion will be the difference between the issue price of the CFH debt security and the value of the senior portion.

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Note 4 – CFH securities (cont.)

CFH warrants

Chorus issues CFH warrants to CFH for nil consideration along with each tranche of CFH equity securities. Each CFH warrant gives CFH the right, on a specified exercise date, to purchase at a set strike price a Chorus share to be issued by Chorus. A CFH warrant will therefore be ‘in the money’ to the extent that the price that CFH can realise for the Chorus share exceeds the price paid to exercise the CFH warrant. The strike price for a CFH warrant is based on a total shareholder return of 16% per annum on Chorus shares over the period December 2011 to June 2036. Therefore, a holder of a CFH warrant is only likely to exercise the CFH warrant if total shareholder return on Chorus shares has exceeded 16% per annum over the issue date period from June 2025 to June 2036.

At balance date Chorus had issued in total 15,502,118 warrants which had a fair value and carrying value that approximated zero (30 June 2015: 10,987,036 warrants issued). The number of fibre connections made by 30 June 2020 impacts the number of warrants that could be exercised. Should fibre connections at 30 June 2020 exceed 20% then the number of warrants that would be able to be exercised is 6,658,739 (30 June 2015: 4,722,349).

At balance date the component parts of debt and equity instruments including notional interest were:

	2016 2015
	CFH DEBT SECURITIES $M CFH EQUITY SECURITIES $M TOTAL CFH SECURITIES $M CFH DEBT SECURITIES $M CFH EQUITY SECURITIES $M TOTAL CFH SECURITIES $M
Fair value on initial recognition
Balance as at 1 July	60 37 97 43 26 69
Additional securities recognised at fair value	21 14 35 17 11 28
Balance as at 30 June Accumulated notional interest	81 51 132 60 37 97

Balance as at 1 July	6 4 10 3 1 4
Notional interest	5 5 10 3 3 6
Balance as at 30 June Total CFH securities	11 9 20 6 4 10
	92 60 152 66 41 107

The fair value of CFH debt securities at balance date was $97 million (30 June 2015: $63 million) compared to a carrying value of $92 million (30 June 2015: $66 million). The fair value of CFH equity securities at balance date was $65 million (30 June 2015: $41 million) compared to a carrying value of $60 million (30 June 2015: $41 million). The fair value has been calculated using discount rates from market rates at balance date and using Level 2 of the fair value hierarchy as described in note 19.

Key assumptions

Although we believe the estimate of the liability components of the CFH securities on initial recognition is appropriate, the use of different methodologies or assumptions could lead to different measurements of these component parts. The liability components of the CFH securities have been calculated using expected cash flows discounted at risk-adjusted discount rates. As the number of CFH securities expected to be issued increases over time the potential impact of alternative methodologies and assumptions will become increasingly material. Key inputs and assumptions used in these calculations on initial recognition include:

Discount rate

On initial recognition, the discount rate between 8.46% to 12.05% (30 June 2015: 8.86% to 11.61%) for the CFH equity securities and 5.91% to 8.57% (30 June 2015: 5.98% to 8.14%) for the CFH debt securities used to discount the expected cash flows is based on long dated NZ swap curves. The swap rates were adjusted for Chorus specific credit spreads (based on market observed credit spreads for debt issued with similar credit ratings and tenure). The discount rate on the CFH equity securities is capped at Chorus’ estimated cost of (ordinary) equity.

Expected cash flows

Timing of principal repayments and dividend cash flows has been based on forecasts that reflect economically rational outcomes given the terms of the CFH debt and equity securities.

Repayment dates have been based on an estimate that the proportion of premises with a fibre connection within Chorus’ coverage area will exceed 20% at 30 June 2020.

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Annual Report

Note 5 – Crown funding

Funding from the Crown is recognised at fair value where there is reasonable assurance that the funding is receivable and all attached conditions will be complied with. Crown funding is then

recognised in earnings as a reduction to depreciation expense on a systematic basis over the useful life of the asset the funding was used to construct.

	2016 2015
	UFB $M RBI $M OTHER $M TOTAL $M UFB $M RBI $M OTHER $M TOTAL $M
Fair value on initial recognition
Balance as at 1 July	304 211 33 548 224 189 28 441
Additional funding recognised at fair value	94 31 6 131 80 22 5 107
Balance as at 30 June Accumulated amortisation of funding	398 242 39 679 304 211 33 548

Balance as at 1 July	(10) (8) (7) (25) (4) (4) (5) (13)
Amortisation	(8) (6) (1) (15) (6) (4) (2) (12)
Balance as at 30 June Total Crown funding	(18) (14) (8) (40) (10) (8) (7) (25)
	380 228 31 639 294 203 26 523
Current	17 13
Non-current	622 510

Ultra-Fast Broadband

Chorus receives funding from the Crown to finance construction costs associated with the development of the UFB network. During the year, Chorus has recognised funding for 121,253 premises passed (30 June 2015: 92,189) where user acceptance testing was complete at 30 June 2016. This brings the total premises passed at 30 June 2016 to approximately 474,000 (30 June 2015: 353,000).

Continued recognition of the full amount of the Crown funding is contingent on certain material performance targets being met. The most significant of these material performance targets relate to the number of premises passed by fibre optic cables by key dates and compliance with certain specifications under user acceptance testing by CFH. Performance targets to date have been met.

Note 6 – Segmental reporting

An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses and for which operating results are regularly reviewed by the entity’s chief operating decision maker and for which discrete financial information is available.

Chorus’ Chief Executive Officer has been identified as the chief operating decision maker for the purpose of segmental reporting.

Chorus has determined that it operates in one segment providing nationwide fixed line access network infrastructure. The determination is based on the reports reviewed by the Chief Executive Officer in assessing performance, allocating resources and making strategic decisions.

All of Chorus’ operations are provided in New Zealand, therefore no geographic information is provided.

Three Chorus customers met the reporting threshold of 10% of Chorus’ operating revenue in the year to 30 June 2016. The total revenue for the year ending 30 June 2016 from these customers was $570 million (30 June 2015: $641 million), $204 million (30 June 2015: $164 million) and $113 million (30 June 2015: $102 million).

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Note 7 – Operating revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to Chorus and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable.

Chorus recognises revenue as it provides services to its customers. Billings are generally made on a monthly basis. Unbilled revenues from the billing cycle date to the end of each month are recognised as revenue during the month the service is provided. Revenue is deferred in respect of the portion of fixed monthly charges that have been billed in advance. Revenue from installations and connections is recognised upon completion of the installation or connection.

	2016 $M 2015 $M
Basic copper	489 491
Enhanced copper	242 268
Fibre	133 98
Value added network services	35 36
Infrastructure	20 21
Field services	83 84
Other	6 8
Total operating revenue	1,008 1,006

Note 8 – Operating expenses

Note 8 – Operating expenses
	2016 $M 2015 $M
Labour costs	78 73
Provisioning	60 58
Network maintenance	89 91
Other network costs	34 34
Information technology costs	65 65
Rent and rates	16 14
Property maintenance	12 11
Electricity	14 14
Insurance	3 4
Consultants	4 3
Regulatory levies	13 15
Other	26 22
Total operating expenses	414 404

Labour costs

Labour costs of $78 million (30 June 2015: $73 million) represents employee costs related to non-capital expenditure.

Pension contributions

Included in labour costs are payments to the New Zealand Government Superannuation Fund of $364,000 (30 June 2015: $357,000) and contributions to KiwiSaver of $2,980,000 (30 June 2015: $2,180,000). At 30 June 2016 there were 22 employees in New Zealand Government Superannuation Fund (30 June 2015: 25 employees) and 849 employees in KiwiSaver (30 June 2015: 720 employees). We have no other obligations to provide pension benefits in respect of employees.

Charitable and political donations

Other costs include charitable donations of $500 to the Wellington City Mission and $2,000 to the Equal Employment Opportunities Trust (30 June 2015: $3,000 to Active Minds Aotearoa). Chorus has not made any political donations (30 June 2015: nil).

Operating leases

Rent and rates costs include leasing and rental expenditure of $7 million for property, network infrastructure and items of equipment (30 June 2015: $5 million).

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Note 8 – Operating expenses (cont.)

Auditor remuneration

Included in other expenses are fees paid to auditors:

	2016 $000’s 2015 $000’s
Audit and review of statutory financial statements	483 504

Regulatory audit and assurance work1	317 397
Tax compliance services	6 3
Other assurance services2	4 3
Other services3	47 –
Total other services	374 403
Total fees paid to the auditor	857 907

1 Includes the TSO and TDL.
2 Relates to attendance at the Annual Shareholders Meeting (ASM).

3 Other services includes preparation and presentation of hedge accounting training, review of the fibre programme model and sponsorship of an award category at the New Zealand Innovation Awards, run by the New Zealand Innovation Council, which is owned by KPMG.

Note 9 – Trade and other receivables

Trade and other receivables are initially recognised at the fair value of the amounts to be received, plus transaction costs (if any). They are subsequently measured at amortised cost (using the effective interest method) less impairment losses.

	2016 $M 2015 $M
Trade receivables	126 120
Other receivables	20 35
Prepayments	146 155
	22 21
Trade and other receivables	168 176
Current Non-current	158 165
	10 11

Trade receivables are non-interest bearing and are generally on terms of 20 working days or less.

Chorus maintains a provision for impairment losses when there is objective evidence of its customers being unable to make required payments and makes provision for doubtful debt where debt is more

than 90 days overdue. There have been no significant individual impairment amounts recognised as an expense. Trade receivables are net of allowances for disputed balances with customers.

The ageing profile of trade receivables is as follows:

	2016 $M 2015 $M
Not past due	105 106
Past due 1-30 days	18 10
Past due 31-60 days	3 4
Past due 61-90 days	- -
Past due over 90 days	- -
	126 120

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Note 9 – Trade and other receivables (cont.)

Chorus has a concentrated customer base consisting predominantly of a small number of retail service providers. The concentrated customer base heightens the risk that a dispute with a customer, or a customer’s failure to pay for services, will have a material adverse effect on the collectability of receivables.

Any disputes arising that may affect the relationship between the parties will be raised by relationship managers and follow a dispute resolution process. Chorus has $21 million of accounts receivable that are past due but not impaired (30 June 2015: $14 million). The carrying value of trade and other receivables approximate the fair value. The maximum credit exposure is limited to the carrying value of trade and other receivables.

Note 10 – Trade and other payables

Trade and other payables are initially recognised at fair value less transaction costs (if any). They are subsequently measured at amortised cost using the effective interest method.

	2016 $M 2015 $M
Trade payables	98 104
Joint arrangements	- 1
Accruals	176 143
Personnel accrual	19 22
Revenue billed in advance	54 45
Trade and other payables	347 315
Current	347 315
Non-current	- -

Trade and other payables are non-interest bearing and normally settled within 30 day terms. The carrying value of trade and other payables approximate their fair values.

Note 11 – Commitments

Network infrastructure project agreement

Chorus is committed to deploying infrastructure for premises in the UFB candidate areas awarded to Chorus, to be built according to annual build milestones and to be complete by no later than 31 December 2019. In total it is expected that the communal infrastructure will pass an estimated 830,900 premises. Chorus has estimated that it will cost $1.75 – $1.8 billion to build the communal UFB network by the end of 2019.

Capital expenditure

Refer to note 1 and note 2 for details of capital expenditure commitments.

Lease commitments

Chorus has buildings, car parks and site licenses under operating lease arrangements. The future non-cancellable minimum operating lease commitment as at 30 June 2016 was $42 million (30 June 2015: $21 million). Refer to note 14 for further information on leases.

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Note 12 – Taxation

Tax expense comprises current and deferred tax, calculated using the tax rate enacted or substantively enacted at balance date and any adjustments to tax payable in respect of prior years. Tax expense is recognised in the income statement except when it relates to items recognised directly in the statement of comprehensive income, in which case the tax expense is recognised in the statement of comprehensive income.

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities in the financial statements and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent it is probable it will be utilised.

Current tax expense

	2016 $M 2015 $M
Recognised in income statement Net earnings before tax	127 127
Tax at 28%	(36) (36)
Tax effect of adjustments
Other non taxable items	– (1)
Adjustments in respect of prior periods	– 1
Tax expense reported in income statement Comprising:	(36) (36)

Current tax expense	(32) (28)
Deferred tax expense	(4) (8)
Recognised in other comprehensive income	(36) (36)

Net movement in cash flow hedge reserve (pre-tax)	32 4
Tax at 28%	9 1
Tax expense reported in other comprehensive income Comprising:	9 1

Current tax expense	– –
Deferred tax expense	9 1
	9 1

Current tax (receivable)/payable

	2016 $M 2015 $M
Balance as at 1 July	12 32
Tax liability for the year	32 28
Tax paid	(47) (48)
Balance as at 30 June	(3) 12

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Note 12 – Taxation (cont.)

Deferred tax

Deferred tax
(ASSETS)/LIABILITIES	FAIR VALUE PORTION OF DERIVATIVES $M EMTN DEBT SECURITIES $M CHANGES IN FAIR VALUE OF CASH FLOW HEDGES $M NETWORK ASSETS, SOFTWARE AND OTHER INTANGIBLES $M FINANCE LEASES $M OTHER $M TOTAL $M
Balance at 1 July 2014	(6) 16 1 221 (35) (5) 192
Recognised in the income statement	– – – 6 – 2 8
Recognised in other comprehensive income	– – (1) – – – (1)
Balance as at 30 June 2015 Recognised in the income statement	(6) 16 – 227 (35) (3) 199
	1 (9) – 11 (2) 3 4
Recognised in other comprehensive income	– – (9) – – – (9)
Balance as at 30 June 2016	(5) 7 (9) 238 (37) – 194

Imputation credits

There are $138 million (30 June 2015: $120 million) of imputation credits available for subsequent reporting periods. The imputation

credit balance represents the balance of the imputation credit account at the end of the reporting year, adjusted for imputation credits that will arise from the payment of provisional tax relating to the year ended 30 June 2016.

Note 13 – Cash and call deposits

Cash and call deposits are held with bank and financial institutions counterparties rated at a minimum of A+, based on rating agency Standard & Poor’s ratings. Interest earned on call deposits is based on the daily deposit rate.

There are no cash or call deposit balances held that are not available for use.

The carrying values of cash and call deposits approximate their fair values. The maximum credit exposure is limited to the carrying value of cash and call deposits.

Cash flow

Cash flows from derivatives in cash flow and fair value hedge relationships are recognised in the cash flow statement in the same category as the hedged item.

For the purposes of the statement of cash flows, cash is considered to be cash on hand, in banks and cash equivalents, including bank overdrafts and highly liquid investments that are readily convertible to known amounts of cash which are subject to an insignificant risk of changes in values.

Cash and call deposits denominated in foreign currencies are retranslated into New Zealand dollars at the spot rate of exchange at the reporting date. All differences arising on settlement or translation of monetary items are taken to the income statement.

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Note 14 – Leases

Chorus is a lessee of certain network assets under both operating and finance lease arrangements. Lease costs relating to operating leases are recognised on a straight-line basis over the life of the lease. Finance leases, which effectively transfer substantially all the risks and benefits of ownership of the leased assets, are capitalised at the lower of the leased asset’s fair value or the present value of the minimum lease payments at inception of the lease. The leased assets and corresponding liabilities are recognised, and the leased assets are depreciated over their estimated useful lives.

Determining whether a lease agreement is a finance lease or an operating lease requires judgement as to whether the agreement transfers substantially all the risks and rewards of ownership to

Chorus. Judgement is required on various aspects that include, but are not limited to, the fair value of the leased asset, the economic life of the leased asset, whether or not to include renewal options in the lease term, and determining an appropriate discount rate to calculate the present value of the minimum lease payments.

Classification as a finance lease means the asset is recognised in the statement of financial position as network assets whereas for an operating lease no such asset is recognised.

Chorus has exercised its judgement on the appropriate classification of network asset leases, and has determined a number of lease arrangements are finance leases.

Finance leases

	2016 $M 2015 $M
Assets/(liabilities) Expected future lease payments:
Less than one year	(8) (8)
Between one and five years	(35) (31)
More than five years	(369) (372)
Total expected future lease payments Less: future finance charges	(412) (411)
	280 284
Present value of expected future lease payments Present value of expected future lease payments payable:	(132) (127)

Less than one year	4 3
Between one and five years	15 16
More than five years	(151) (146)
Total present value of expected future lease payments Classified as:	(132) (127)

Current asset – finance lease receivable	4 3
Non-current liability – finance lease payable	(136) (130)
Total	(132) (127)

The carrying value of the finance leases approximates their fair value.

Property exchanges

Chorus has leased exchange space and commercial co-location space owned by Spark which is subject to finance lease arrangements. Chorus in turn leases exchange space and commercial co-location space to Spark under a finance lease arrangement. The term of the leases vary from three years to ten years and include rights of renewal.

The full term has been used in the calculation of finance lease payables and receivables as it is likely due to the specialised nature of the buildings that the leases will be renewed to the maximum term. The payable and receivable under these finance lease arrangements are net settled in cash. The finance lease arrangement above reflects the net finance lease receivable and payable position.

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Note 14 – Leases (cont.)

Operating leases

	2016 $M 2015 $M
Non-cancellable operating lease rentals are payable as follows:
Less than one year	6 5
Between one and five years	14 11
More than five years	22 5
Total	42 21

We have entered into leasing arrangements for properties, network infrastructure and other items of equipment which are classified as operating leases. Certain leases are able to be renewed or extended based on terms that would then be agreed with the lessor. There are no other significant lease terms that relate to contingent rents, purchase options or other restrictions on Chorus.

Note 15 – Equity

Share capital

Movements in Chorus Limited’s issued ordinary shares were as follows:

NUMBER OF SHARES (MILLIONS)	2016 M 2015 M
Balance 1 July	396 396
Dividend reinvestment plan	5 -
Balance at 30 June	401 396

Chorus Limited has 400,799,739 fully paid ordinary shares (30 June 2015: 396,369,767 fully paid ordinary shares). The issued shares have no par value. The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of Chorus Limited. Under Chorus Limited’s constitution, Crown approval is required if a shareholder wishes to have a holding of 10% or more of Chorus Limited’s ordinary shares, or if a shareholder who is not a New Zealand national wishes to have a holding of 49.9% or more of ordinary shares.

On 5 April 2016 a fully imputed interim dividend of 8 cents per share, $32 million, was paid to shareholders (30 June 2015: no dividends were paid).

The dividend reinvestment plan was resumed for this dividend. Eligible shareholders (those resident in New Zealand or Australia) can choose to have Chorus Limited reinvest all or part of their dividends in additional Chorus Limited shares. For the year ended 30 June 2016, 4,429,972 shares (2015: nil) with a total value of $17 million (30 June 2015: nil) were issued in lieu of dividends.

Chorus Limited issues securities to CFH based on the number of premises passed. CFH securities are a class of security that carry no right to vote at meetings of holders of Chorus Limited ordinary shares but carry a preference on liquidation. Refer to note 4 for additional information on CFH securities.

Should Chorus Limited return capital to shareholders, any return of capital that arose on demerger is expected to be taxable as Chorus Limited had zero available subscribed capital on demerger.

Employee share plans

Employee equity building scheme

Chorus operates an employee equity building scheme to provide employees the opportunity to become familiar with the shareholder experience. Chorus and eligible employees contribute together to purchase shares on market. The shares are then held by the Trustee (Trustees Executors Limited) and vest to participating employees after a three year period.

A total of 638 employees (30 June 2015: 652 employees) participated in the scheme, 125,290 shares (30 June 2015: 185,168 shares) were purchased at an average price of $2.67 per share (30 June 2015: $1.76 per share). At 30 June 2016 the scheme holds 370,259 shares on behalf of 696 employees.

Long-term performance share scheme

Chorus operates a long-term performance share scheme (the LTI scheme) for selected key management personnel (participants). The LTI scheme commenced in August 2015 and featured two grants. The shares relating to the first grant have a vesting date of two years from 30 June 2015 (2 year grant), and the shares relating to the second grant have a vesting date of three years from 30 June 2015 (3 year grant). Each grant is made up of two tranches, the first with a relative performance hurdle (Chorus’ actual Total Shareholder Return (TSR) compared to other members of the NZX50) and the second with an absolute performance hurdle (Chorus’ actual TSR being greater than 10.8% per annum compounding).

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Note 15 – Equity (cont.)

The shares are held by a nominee (Chorus LTI Trustee Limited) on behalf of the participants, until after the shares vest when the nominee is directed to transfer or sell the shares. Or if the shares do not vest they may be held or sold by the nominee. The shares carry the same rights as all other shares.

Participants have been provided with interest-free limited recourse loans to fund the 446,016 shares purchased under the LTI scheme (30 June 2015: nil). The shares were purchased on market at an average price of $2.69. No shares have been sold or vested during the current period.

The LTI scheme is an equity settled scheme and treated as an option plan for accounting purposes. Each tranche of each grant was valued separately. The tranche with a relative performance hurdle was valued using a Monte Carlo simulation while the tranche with the absolute performance hurdle was valued using the Black Scholes valuation model. The combined option cost for the year ended 30 June 2016 of $218,000 has been recognised in the income statement (30 June 2015: nil).

Significant assumptions used in the valuation models are:

Reserves

Cash flow hedge reserve

The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet affected earnings.

For cash flow hedges, the effective portion of gains or losses from remeasuring the fair value of the hedging instrument is recognised in other comprehensive income and accumulated in the cash flow hedge reserve. Accumulated gains or losses are subsequently transferred to the income statement when the hedged item affects the income statement, or when the hedged item is a forecast transaction that is no longer expected to occur. Alternatively, when the hedged item results in a non-financial asset or liability, the accumulated gains and losses are included in the initial measurement of the cost of the asset or liability.

The remeasurement gain or loss on the ineffective portion of a cash flow hedge is recognised immediately in the income statement.

A reconciliation of movements in the cash flow hedge reserve follows:

a volatility of the Chorus share price in relation to both grants of 36%;
that dividends will be paid over the term of the scheme; and
an absolute TSR performance threshold of 10.8%.

	2016 $M 2015 $M
Opening balance	3 –
Ineffective portion of changes in fair value of cash flow hedges	(7) (14)
Effective portion of changes in fair value of cash flow hedges	29 16
Amortisation of de-designated cash flow hedges transferred to income statement	1 1
Closing balance	26 3

The periods in which the cash flows associated with cash flow hedges are expected to impact earnings are as follows:

AS AT 30 JUNE 2016	WITHIN 1 YEAR $M 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M GREATER THAN 5 YEARS $M
Cross currency interest rate swaps	- - - (6) - -
Interest rate swaps	1 - 7 45 - -
Forward exchange contracts	3 1 - - - -
Electricity contracts	- - - - - -
AS AT 30 JUNE 2015	4 1 7 39 - -

	WITHIN 1 YEAR $M 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M GREATER THAN 5 YEARS $M
Cross currency interest rate swaps	- - - - (13) -
Interest rate swaps	- 1 - 3 32 -
Forward exchange contracts	- - - - - -
Electricity contracts	1 - - - - -
	1 1 - 3 19 -

As at 30 June 2016 the cash flow reserve contained $25 million of non-cash amounts (30 June 2015: $21 million) and these have been excluded from the table above.

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Note 15 – Equity (cont.)

Fair value hedges

Gains or losses from remeasuring the fair value of the hedging instrument are recognised in the income statement together with any changes in the fair value of the hedged asset or liability.

Chorus did not have any hedging arrangements designated as a fair value hedge in the current year (30 June 2015: nil).

Note 16 – Earnings per share

The calculation of basic earnings per share at 30 June 2016 is based on the net earnings for the year of $91 million (30 June 2015: $91 million), and a weighted average number of ordinary shares outstanding during the period of 397 million (30 June 2015: 396 million), calculated as follows:

	2016 2015
Basic earnings per share Net earnings attributable to ordinary shareholders ($ millions)	91 91
Denominator – weighted average number of ordinary shares (millions)	397 396
Basic earnings per share (dollars) Diluted earnings per share Net earnings attributable to ordinary shareholders ($ millions)	0.23 0.23
	91 91

Weighted average number of ordinary shares (millions)	397 396
Ordinary shares required to settle CFH equity securities (millions)	69 68
Ordinary shares required to settle CFH warrants (millions)	7 5
Denominator – diluted weighted average number of shares (millions)	473 469
Diluted earnings per share (dollars)	0.19 0.19

The number of ordinary shares that would have been required to settle all CFH equity securities and CFH warrants on issue at 30 June has been used for the purposes of the diluted earnings per share calculation.

Note 17 – Related party transactions

Transactions with related parties

Certain Chorus directors have relevant interests in a number of companies that we have transactions with in the normal course of business. A number of directors are also non-executive directors of other companies. Any transactions undertaken with these entities are in the ordinary course of business.

Chorus has loans to employees and nominees receivable at 30 June 2016 of $1.2 million (30 June 2015: nil) as outlined in the employee share plan section of note 15. All loans outstanding are interest-free limited recourse loans.

Key management personnel compensation

	2016 $000’s 2015 $000’s
Short term employee benefits	7,197 6,389
Post employment benefits	– –
Termination benefits	– –
Other long term benefits	872 331
Share based payments	218 –
	8,287 6,720

This table above includes remuneration of $1,012,000 (30 June 2015: $887,474) paid to directors for the year.

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Note 18 – Derivative financial instruments

Chorus uses derivative financial instruments to reduce its exposure to fluctuations in foreign currency exchange rates, interest rates and the spot price of electricity. The use of hedging instruments is governed by the treasury policy approved by the Board. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to fair value with an adjustment made for credit risk in accordance with NZ IFRS 13: Fair Value Measurement. The fair values are estimated on the basis of the quoted market prices for similar instruments in an active market or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.

The method of recognising the resulting remeasurement gain or loss depends on whether the derivative is designated as a hedging instrument. If the derivative is not designated as a hedging instrument, the remeasurement gain or loss is recognised immediately in the income statement.

During the year ended 30 June 2014 interest rate swaps with a face value of $676 million and fair value of $31 million were reset at the prevailing market interest rates. These transactions realised

$30 million of cash and resulted in an $11 million gain being recorded in the cash flow hedge reserve to be amortised over the period to 2020. During the year ended 30 June 2016 amortisation of $4 million was recognised in finance income (30 June 2015: $4 million) and $3 million was recognised in finance expense (30 June 2015: $3 million). New swaps that hedge the same underlying exposure and risk profile were entered into on the same date, but at a higher effective borrowing cost (4.89% compared to 3.99% prior to the transaction).

Finance expense includes any ineffectiveness arising from the EMTN hedge relationship. Following the close out of the interest rate swaps relating to the EMTN the hedge relationship was reset on 9 December 2013 with a fair value of $49 million. As long as the hedge remains effective any future gains or losses will be processed though the hedge reserve, however the $49 million will flow as ineffectiveness to interest expense in the income statement at some time over the life of the derivatives. It will be a non-cash charge. Neither the direction, nor the rate of impact on the income statement can be predicted. For the year ended 30 June 2016 ineffectiveness of $9 million was recognised in the income statement (30 June 2015: $19 million).

	2016 $M 2015 $M
Current derivative assets Cross currency interest rate swaps	1 3
Non-current derivative assets Cross currency interest rate swaps	1 3
	– 14
Current derivative liabilities Interest rate swaps	– 14
	18 11
Cross currency interest rate swaps	2 –
Forward exchange rate contracts	4 –
Electricity contracts	– 1
Non-current derivative liabilities Interest rate swaps	24 12
	57 39
Cross currency interest rate swaps	133 22
Forward exchange rate contracts	1 –
	191 61

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Note 18 – Derivative financial instruments (cont.)

The notional values of contract amounts outstanding are as follows:

CURRENCY MATURITY	2016 $M 2015 $M
Interest rate swaps NZD 2016-2020	1,141 1,141
Cross currency interest rate swaps NZD:GBP 2020	677 677
Forward exchange rate contracts NZD:AUD 2016	1 –
NZD:EUR 2016-2017	1 1
NZD:USD 2016-2018	52 1
NZD:SEK 2016-2018	19 –
Electricity contracts NZD 2016-2018	6 8
	1,897 1,828

Credit risk associated with derivative financial instruments is managed by ensuring that transactions are executed with counterparties with high quality credit ratings along with credit

exposure limits for different credit classes. The counterparty credit risk is monitored and reviewed by the Board on a regular basis.

Note 19 – Financial risk management

Financial risk management

Chorus’ financial instruments consist of cash, short-term deposits, trade and other receivables (excluding prepayments), investments and advances, trade payables and certain other payables, syndicated bank facilities, EMTN, fixed rate NZD bonds, derivative financial instruments and CFH securities. Financial risk management for currency and interest rate risk is carried out by the treasury function under policies approved by the Board. Chorus’ risk management policy approved by the Board, provides the basis for overall financial risk management.

Chorus does not hold or issue derivative financial instruments for trading purposes. All contracts have been entered into with major creditworthy financial institutions. The risk associated with these transactions is the cost of replacing these agreements at the current market rates in the event of default by a counterparty.

Currency risk

Chorus’ exposure to foreign currency fluctuations predominantly arise from the foreign currency debt and future commitment to purchase foreign currency denominated assets. The primary objective in managing foreign currency risk is to protect against the risk that Chorus assets, liabilities and financial performance will fluctuate due to changes in foreign currency exchange rates. Chorus enters into foreign exchange contracts, foreign currency options and cross currency interest rate swaps to manage the foreign exchange exposure.

Chorus has issued GBP 260 million foreign currency debt in the form of EMTN. Chorus has in place cross currency interest rate swaps under which Chorus receives GBP 260 million principal and GBP fixed coupon payments for $677 million principal and floating NZD interest payments. The exchange gain or loss resulting from the translation of EMTN denominated in foreign currency to

New Zealand dollars is recognised in the income statement. The movement is offset by the translation of the principal value of the related cross currency interest rate swap.

As at 30 June 2016, Chorus did not have any significant unhedged exposure to currency risk (30 June 2015: no significant unhedged exposure to currency risk). A 10% increase or decrease in the exchange rate, with all other variables held constant, has minimal impact on profit and equity reserves of Chorus.

Price risk

In the normal course of business, Chorus is exposed to a variety of financial risks which include the volatility in electricity prices. Chorus has entered into electricity swap contracts to reduce the exposure to electricity spot price movements. Chorus has designated the electricity contracts as cash flow hedge relationships.

A 10% increase or decrease in the spot price of electricity, with all other variables held constant, has minimal impact on profit and equity reserves of Chorus.

Interest rate risk

Chorus has interest rate risk arising from the cross currency interest rate swap converting the foreign debt into a floating rate New Zealand dollar obligation and the floating rate on the drawn down portion of the syndicated bank facilities. Chorus aims to reduce the uncertainty of changes in interest rates by entering into interest rate swaps to fix the effective interest rate to minimise the cost of net debt and manage the impact of interest rate volatility on earnings. The interest rate risk on the cross currency interest rate swaps has been hedged using interest rate swaps. The interest rate exposure on the syndicated banking facilities has been hedged up to $465 million with the remaining paying floating interest (30 June 2015: $215 million).

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Note 19 – Financial risk management (cont.)

Interest rate repricing analysis

AS AT 30 JUNE 2016	WITHIN 1 YEAR $M 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M GREATER THAN 5 YEARS $M TOTAL $M
Floating rate Cash and deposits
	102 - - - - - 102
Debt	- - 200 - - - 200
Fixed rate Debt (after hedging)
	- - 465 677 400 - 1,542
CFH securities	- - - - - 152 152
Finance lease (net settled)	(4) (4) (5) (4) (1) 150 132
AS AT 30 JUNE 2015	98 (4) 660 673 399 302 2,128

	WITHIN 1 YEAR $M 1-2 YEARS $M 2-3 YEARS $M 3-4 YEARS $M 4-5 YEARS $M GREATER THAN 5 YEARS $M TOTAL $M
Floating rate Cash and deposits	80 - - - - - 80
Debt	850 - - - - - 850
Fixed rate Debt (after hedging)	- 215 - - 677 - 892
CFH securities	- - - - - 107 107
Finance lease (net settled)	(3) (4) (4) (4) (4) 146 127
	927 211 (4) (4) 673 253 2,056

Sensitivity analysis

A change of 100 basis points in interest rates with all other variables held constant, would increase/(decrease) equity (after hedging) and earnings after tax by the amounts shown below:

		2016	2016	2015	2015
		PROFIT OR (LOSS)	EQUITY	PROFIT OR (LOSS)	EQUITY
		$M	$M	$M	$M
100	basis point increase	(4)	1	(5)	(6)
100	basis point decrease	4	(2)	5	5

Credit risk

In the normal course of business, we incur counterparty credit risk from financial instruments, including cash, trade and other receivables, finance lease receivables and derivative financial instruments.

Chorus has certain derivative transactions that are subject to bilateral credit support agreements that require us or the counterparty to post collateral to support the value of certain derivatives. As at 30 June 2016 no collateral was posted.

The maximum exposure to credit risk at the reporting date was as follows:

NOTES	2016 $M 2015 $M
Cash and call deposits 13	102 80
Trade and other receivables 9	146 155
Derivative financial instruments 18	1 17
Finance lease receivable 14	4 3
Maximum exposure to credit risk	253 255

Refer to individual notes for additional information on credit risk.

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Note 19 – Financial risk management (cont.)

Liquidity risk

Liquidity risk is the risk that we will encounter difficulty raising liquid funds to meet commitments as they fall due or foregoing investment opportunities, resulting in defaults or excessive debt costs. Prudent

liquidity risk management implies maintaining sufficient cash and the ability to meet its financial obligations. Our exposure to liquidity risk based on contractual cash flows relating to financial liabilities is summarised below:

	CARRYING	CONTRACTUAL	LESS THAN
	AMOUNT	CASH FLOW	1 YEAR	1-2 YEARS	2-3 YEARS	3-4 YEARS	4-5 YEARS	5+ YEARS
AS AT 30 JUNE 2016	$M	$M	$M	$M	$M	$M	$M	$M
Non derivative financial liabilities Trade and other payables	274	274	274	–	–	–	–	–
Finance lease (net settled)	132	412	8	8	7	9	12	368
Debt	1,540	1,841	76	76	739	534	416	–
CFH securities	152	265	–	–	–	–	–	265
Derivative financial liabilities Interest rate swaps	75	82	22	22	21	17	–	–
Cross currency interest rate swaps
Inflows	–	(617)	(33)	(33)	(33)	(518)	–	–
Outflows	135	817	35	34	35	713	–	–
Electricity contracts	–	5	3	2	–	–	–	–
Forward exchange contracts
Inflows	–	(67)	(50)	(17)	–	–	–	–
Outflows	5	73	54	19	–	–	–	–

	CARRYING	CONTRACTUAL	LESS THAN
	AMOUNT	CASH FLOW	1 YEAR	1-2 YEARS	2-3 YEARS	3-4 YEARS	4-5 YEARS	5+ YEARS
AS AT 30 JUNE 2015	$M	$M	$M	$M	$M	$M	$M	$M
Non derivative financial
liabilities
Trade and other payables	248	248	248	–	–	–	–	–
Finance lease (net settled)	127	411	8	8	8	8	8	371
Debt	1,663	1,989	539	75	427	304	644	–
CFH securities	107	200	–	–	–	–	–	200
Derivative financial liabilities
Interest rate swaps	50	54	14	15	11	8	6	–
Cross currency interest
rate swaps
Inflows	–	(318)	(16)	(16)	(16)	(16)	(254)	–
Outflows	22	375	18	18	18	19	302	–
Electricity contracts	1	6	3	2	1	–	–	–
Forward exchange contracts
Inflows	–	(2)	(2)	–	–	–	–	–
Outflows	–	2	2	–	–	–	–	–

The gross (inflows)/outflows of derivative financial liabilities disclosed in the previous table represent the contractual undiscounted cash flows relating to derivative financial liabilities held for risk management purposes and which are usually not closed out prior to contractual maturity. The disclosure shows net cash flow amounts for derivatives that are net cash settled and gross cash inflow and outflow amounts for derivatives that have simultaneous gross cash settlement (for example forward exchange contracts).

Chorus manages liquidity risk by ensuring sufficient access to committed facilities, continuous cash flow monitoring and maintaining prudent levels of short term debt maturities.

At balance date, we have available $260 million under the syndicated bank facilities (30 June 2015: $435 million).

Capital risk management

Chorus manages its capital considering shareholders’ interests, the value of our assets and credit ratings. The capital Chorus manages consists of cash and debt balances.

The Chorus Board’s broader capital management objectives include maintaining an investment grade credit rating with headroom. In the longer term, the Board continues to consider a ‘BBB’ rating appropriate for a business like ours.

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Note 19 – Financial risk management (cont.)

Hedge accounting

Chorus designates and documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. At hedge inception (and on an ongoing basis), hedges are assessed to establish if they are effective in offsetting changes in fair values or cash flows of hedged items. Hedge accounting is discontinued if (a) the hedging instrument expires or is sold, terminated, or exercised; (b) the hedge no longer meets the criteria for hedge accounting; or (c) the hedge designation is revoked.

Hedges are classified into two primary types: cash flow hedges and fair value hedges. Refer to note 15 for additional information on cash flow and fair value hedge reserves.

Fair value

Financial instruments are either carried at amortised cost, less any provision for impairment losses, or fair value. The only significant variances between instruments held at amortised cost and their fair value relates to the EMTN.

For those instruments, recognised at fair value in the statement of financial position, fair values are determined as follows:

Level 1: Quoted market prices – financial instruments with quoted prices for identical instruments in active markets.

Level 2: Valuation techniques using observable inputs – financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.

Level 3: Valuation techniques with significant non-observable inputs – financial instruments valued using models where one or more significant inputs are not observable.

The relevant financial assets and financial liabilities and their respective fair values are outlined in note 18 and are all Level 2 (30 June 2015: Level 2).

Cross currency interest rate swaps and interest rate swaps

Fair value is estimated by using a valuation model involving discounted future cash flows of the derivative using the applicable forward price curve (for the relevant interest rate and foreign exchange rate) and discount rate.

Electricity swaps

Fair value is estimated on the ASX forward price curve that relates to the derivative.

The carrying amounts of financial assets and liabilities are as follows:

CARRIED AT COST		CARRIED AT COST
OR AMORTISED	CARRIED AT	OR AMORTISED	CARRIED AT
COST	FAIR VALUE	COST	FAIR VALUE
2016	2016	2015	2015
$M	$M	$M	$M
Loans and receivables Cash and call deposits 102	–	80	-
Trade receivables 126	–	120	-
Other receivables 20	–	35	-
Designated in a hedging relationship Derivative financial assets –	1	-	17
Derivative financial liabilities –	(215)	-	(73)
Other financial liabilities Trade accounts payable (98)	–	(104)	-
Joint arrangements –	–	(1)	-
Accruals (176)	–	(143)	-
Finance lease (net settled) (132)	–	(127)	-
Debt (1,540)	–	(1,663)	-
CFH securities (152)	–	(107)	-

Note 20 – Post balance date events

Dividends

On 29 August 2016 Chorus declared a dividend in respect of year ended 30 June 2016. The total amount of the dividend is $48.1 million, which represents a fully imputed dividend of 12 cents per ordinary share.

Commitments

On 8 July 2016 Chorus signed a $13 million contract with Nokia to upgrade the existing network electronics software for the Copper Provisioning system. Final delivery of the upgrades is September 2017.

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Governance and Disclosures

Governance and disclosures	60
The Chorus Board	60
Diversity at Chorus	62
Remuneration and performance	63
Disclosures	69

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Governance and disclosures

Chorus’ Board and management are committed to ensuring that our people act ethically, with integrity and in accordance with our policies and values.

Corporate governance framework

Chorus is incorporated in New Zealand and its shares quoted on the New Zealand and Australian stock exchanges.

Our governance practices and policies reflect, and are consistent with, the:

NZX Main Board Listing Rules and NZX Corporate Governance Best Practice Code; and
Financial Markets Authority’s Corporate Governance Principles and Guidelines (FMA Corporate Governance Code).

Chorus became an ASX foreign exempt listed issuer in March 2016. Although our governance practices and policies are, as a consequence, no longer required to reflect the ASX listing rules and the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, we continue to take these into account.

The Board regularly reviews and assesses Chorus’ governance policies, processes and practices to identify opportunities for enhancement and to ensure they reflect our operations and culture.

The Chorus Board

Role of the Board and delegation of authority

The Board is appointed by Chorus’ shareholders and has overall responsibility for Chorus’ strategy, culture, health and safety, governance and performance.

The Board’s roles and responsibilities are set out in its Charter.

The Board has delegated its authority, in part, to the CEO. The CEO may, in turn, sub-delegate authority to other Chorus people. Formal policies and procedures govern the parameters and operation of these delegations.

The Board has established three standing Board committees to assist it in carrying out its responsibilities. The Board has delegated some of its responsibilities, powers and authorities to those committees. The Board may also establish other ad-hoc Board sub-committees or standing committees and delegate specific responsibilities, powers and authorities to those committees and to particular directors.

Board committees

Board committees assist the Board by focusing on specific responsibilities in greater detail than is possible for the Board as a whole. Each standing Board committee has a Board approved charter and chairman. All standing Board committee members are independent directors.

Audit and Risk Management Committee (ARMC)

The ARMC assists the Board in ensuring oversight of all matters relating to Chorus’ risk management, financial management and controls and financial accounting, audit and reporting.

Members: Anne Urlwin (chairman), Patrick Strange and Jon Hartley.

Human Resources and Compensation Committee (HRCC)

The HRCC assists the Board in overseeing people policies and strategies, including:

Chorus’ remuneration frameworks; and

The Board and Board committee charters, and other key governance documents, are available on our website at www.chorus.co.nz/governance.

Board membership

The Board seeks to ensure that through its skills mix and composition it is positioned to add value to Chorus.

The Board currently has eight directors (seven independent directors and a managing director) with a broad range of managerial, financial, accounting and industry experience. See pages 10 and 11 for more information on the skills and experience of Chorus’ directors.

For a director to be considered independent, the Board must affirmatively determine he or she does not have a disqualifying relationship as set out in the Board Charter.

Reviewing candidates for, and the performance and remuneration of, the CEO.

Members: Prue Flacks (chairman), Clayton Wakefield, Keith Turner and Murray Jordan.

Nominations and Corporate Governance Committee (NCGC)

The NCGC assists the Board in promoting and overseeing continuous improvement of good corporate governance. The NCGC’s role includes:

Identifying and recommending suitable candidates for nomination as directors and members of Board committees; and
Establishing, developing and overseeing a process for the Board to annually review and evaluate the performance of the Board, its committees and individual directors.

Members: Patrick Strange (chairman), Jon Hartley and Prue Flacks.

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Board and Board Committee meeting attendance in the year ended 30 June 2016

	REGULAR	OTHER
	BOARD	BOARD
	MEETINGS	MEETINGS1	ARMC	HRCC	NCGC	DDC2
Total number of meetings held	8	10	4	4	3	5
Patrick Strange	8	10	4		23	5
Jon Hartley	8	9	3		3
Anne Urlwin	8	10	4			5
Clayton Wakefield	8	10		4
Keith Turner	7	8		4	14
Mark Ratcliffe	8	10				5
Murray Jordan5	7	7		3
Prue Flacks	8	9		4	2	5

1 Includes dedicated Board health and safety, and strategy and business planning, meetings. In addition, each director also has at least one health and safety site visit each year and Board education sessions are held.
2 A due diligence ad-hoc Board sub-committee was established to oversee Chorus’ NZX bond issue.
3 Patrick Strange joined the NCGC on 1 September 2015 and attended all NCGC meetings after that date.
4 Keith Turner was a member of the NCGC until 1 September 2015 and attended the meeting held before that date.
5 Murray Jordan joined the Board and HRCC on 1 September 2015 and attended all regular Board, all HRCC, and 7 out of 8 other Board meetings from that date.

Mark Ratcliffe is not a member of any Board Committees but attends all Board Committee meetings as CEO and as an observer, and may be asked to leave at any time.

Managing risk

We have a Managing Risk Policy to:

Ensure the Board sets the risk appetite and reviews principal risks annually;
Integrate risk management in line with the Board’s risk appetite into structures, policies, processes and procedures; and
Deliver regular principal risk reviews and monitoring.

The Board sets, and annually reviews our risk management framework.

As part of its role, the ARMC is responsible for overseeing and monitoring risk and ensuring compliance with our risk management framework. The ARMC receives regular reporting on risk management, including the management of material business risks and the effectiveness of our internal controls.

Codes of ethics

We expect our directors and employees to conduct themselves in accordance with the highest ethical standards. We have codes of ethics for our directors and employees that set the expected standards for their professional conduct. These codes are intended to facilitate decisions that are consistent with our values, business goals and legal and policy obligations.

Trading in Chorus securities

We have an insider trading policy under which:

Directors must obtain consent from the chairman (or in the chairman’s case, the chair of the ARMC) before dealing in Chorus securities; and
Chorus’ “Restricted Persons” must obtain consent from the General Counsel & Company Secretary (or in the General Counsel & Company Secretary’s case, the chairman) before dealing in Chorus securities.

Directors and other Chorus people are also prohibited from dealing in Chorus securities while in possession of inside information under the Financial Markets Conduct Act 2013 and the Australian Corporations Act 2001.

Director induction and education

We have a director induction programme to ensure new directors are appropriately introduced to management and our business.

All directors are expected to continuously educate themselves to ensure they have appropriate expertise to effectively perform their duties. Visits to our operations, briefings from key management, industry experts and key advisers, together with educational and stakeholder visits, briefings and meetings are also arranged for the Board.

Independent advice

A director may, with the chairman’s prior approval (or in the chairman’s case the deputy chairman’s approval), take independent professional advice (including legal advice) and request the attendance of such advisers at Board and Board committee meetings.

Review and evaluation of Board performance

The chairman meets with directors to discuss individual performance. The Board has carried out, in the reporting period, a review of the Board’s performance, that of individual directors and standing Board committees using the Board evaluation process developed and overseen by the NCGC.

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Market disclosures

We are committed to providing timely, consistent and credible information to promote orderly market behaviour and investor confidence. We believe disclosure should be evenly balanced during good times and bad and that all parties in the investment community have fair access to this information.

Compliance with corporate governance codes

We consider that during the year ended 30 June 2016:

The corporate governance principles we adopted and followed did not materially differ from NZX’s Corporate Governance Best Practice Code; and
We met the principles set out in the FMA Corporate Governance Code.

Corporate Governance Statement

More information on our corporate governance is available in our Corporate Governance Statement available at www.chorus.co.nz/governance.

Diversity at Chorus

Diversity and inclusiveness at Chorus

We have a Board approved Diversity and Inclusiveness Policy.

We believe that having a team of individuals working together who offer different backgrounds, experiences and perspectives, strengthens our ability to perform as a business.

We define diversity as the characteristics that make one individual similar to, or different from, another and inclusiveness as embracing a variety of people and their views in everyday work, both of which ultimately lead to increased customer and shareholder value.

The focus of our policy is to value differences as a business advantage through attraction and development practices. We aim to develop our people leaders to behave constructively and in an inclusive way as a core capability, while at the same time recognising and differentiating individual performance.

The HRCC recommends measurable diversity objectives to the Board that are set and assessed annually.

Diversity metrics as at 30 June 2016

The Board has set the following measurable objectives for achieving greater diversity at Chorus:

==> picture [495 x 297] intentionally omitted <==

----- Start of picture text -----

MEASURE DESCRIPTION AS AT 30 JUNE 2016 AS AT 30 JUNE 2015 BENCHMARK
Age profiles Median age 42.2 years 41.7 years 42 years. Statistics
New Zealand
National Labour
Force Projections
updated August
2012
Employee Response to the 85% 86% 85% Aon Hewitt
satisfaction diversity question Best Employer
“This organisation values
differences in education,
experience, ideas, work
styles and perspectives”
Ethnicity Organisational Total People Total People People leader
by role [1] groupings by ethnicity pop’n Leaders pop’n Leaders population
Africa 1% 1% Africa 1% 0% distribution =
Asia 17% 3% Asia 17% 3% total company
Australia 1% 0% Australia 1% 0% population
Europe 8% 12% Europe 8% 13% distribution
Maori 3% 3% Maori 3% 3%
New Zealand 64% 79% New Zealand 63% 79%
Pacific Island 5% 1% Pacific Island 5% 1%
South America 0% 1% South America 0% 1%
Unknown/not disclosed 1% 0% Unknown/not disclosed 2% 0%
Flexible Percentage of the n/a [2] . 4% working part-time hours No benchmark
working population utilising determined at
arrangements flexible working this stage
arrangements
----- End of picture text -----

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----- Start of picture text -----

MEASURE DESCRIPTION AS AT 30 JUNE 2016 AS AT 30 JUNE 2015 BENCHMARK
Gender Organisational People leader
by role groupings by gender 39% 61% All 38% 62% All population
distribution =
34% 66% People Leaders [3] 34% 66% People Leaders [3]
22% 78% Officers/Senior Executives [4 ] 22% 78% Officers/Senior Executives [4 ] total company
29% 71% Board [5] 29% 71% Board [5] population
distribution
33% 67% Non-executive Board [6] 33% 67% Non-executive Board [6]
Rookie ratio The previous year’s Average age 37.3 years Average age 35.9 years No measure –
intake by age, Gender 43% 57% Gender 44% 56% for information
ethnicity and gender Africa 2% Africa 2%
Asia 19% Asia 25%
Australia 7% Australia 1%
Europe 15% Europe 10%
Maori 1% Maori 1%
New Zealand 54% New Zealand 51%
Pacific Island 2% Pacific Island 4%
Unknown/not disclosed 0% Unknown/not disclosed 6%
Internal The previous year’s 47% of all appointments have 47% of all appointments have 66% of roles
hire rate appointments identifying been internal. been internal. in layers 1-3
internal vs external 13% of roles in layers 1-3 were 60% of roles in layers 1-3 were
hire rate appointed from internal candidates [7] appointed from internal candidates
----- End of picture text -----

1 Ethnicity is self-reported.

2 A survey was done in 2015 to capture flexible working arrangements as well as part time working. This was a one-off measure collated manually and has not been repeated.

3 People Leaders have management and leadership roles within Chorus and other Chorus people formally reporting to them.

4 Chorus’ Officers/Senior Executives are its CEO and those directly reporting to the CEO other than the Executive Assistant. As at 30 June 2016: Chorus had 2 female and 7 male Officers/Senior Executives (30 June 2015: 2 female, 7 male).

5 As at 30 June 2016: Chorus had 2 female and 6 male directors (30 June 2015: 2 female, 5 male).

6 As at 30 June 2016: Chorus had 2 female and 5 male non-executive directors (30 June 2015: 2 female, 4 male).

7 Layers 1-3 means the CEO, those reporting to the CEO, and those reporting to them. Eight total hires were made at layers 1-3, one was an internal appointment.

Based on the annual review of effectiveness of Chorus’ Diversity and Inclusiveness Policy and our measurable diversity objectives, the Board considers that overall we are making good progress towards achieving our diversity and inclusiveness objectives and have performed well against the policy generally. We do not yet have the balance of diversity we aspire to in all areas and are focused on improving. We have carried out an independent diversity and inclusiveness review and established a Diversity Council and diversity and inclusiveness Executive Steering Group. These set a platform for leveraging further diversity and inclusiveness initiatives into our highly engaged team.

The chairman and CEO are part of the Champions for Change initiative in New Zealand.

Remuneration and performance

Remuneration model

Our remuneration model is designed to align employee and shareholder interests and to be simple, clear and fair. It aims to attract, retain and motivate high-calibre employees to all levels of the Company, at the same time driving performance, customer focus and personal development. The Board regularly reviews our remuneration design.

All employees have fixed remuneration, targeted at the market median and the potential to earn a Short Term Incentive (STI). The CEO and members of the executive leadership team have the potential to earn a Long Term Incentive (LTI). Both STI and

LTI are variable elements of remuneration and are only paid if both Company and individual performance goals have been met.

We have expanded our disclosure this year, including CEO remuneration.

Fixed remuneration

Fixed remuneration is adjusted each year based on data from independent remuneration specialists. Employees’ fixed remuneration is based on a matrix of their own performance and their current position when compared to the market.

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Short term incentive

STI values are set as a percentage of fixed remuneration, from 5% to 33% based on the complexity of the role. The CEO has an STI as a percentage of fixed remuneration as set out later in this report. STI payments are determined following a review of Company and individual performance and paid out at a multiplier of between 0x and 1.75x for the CEO and executive leadership team, and between 0x and 2.8x for all other employees. (Prior to the year ended 30 June 2016, the CEO and executive leadership team values were also 0x and 2.8x). This model is based on clear goals, differentiating performance and rewarding delivery.

Company performance goals are set and reviewed annually by the Board to align with shareholder value. If Company goals are not met, including a preliminary “gateway” goal, no STI is payable. In the year ended 30 June 2016, the Company goals were:

50% based on EBITDA performance against budget;
30% based on achieving fibre connection capex budgets and service level performance targets; and
20% based on achieving certain strategic initiatives.

Individual performance goals for all employees are tailored to their role, with 70% of the goals based on ‘what’ they achieve and 30% based on ‘how’ they perform their role, which includes a health and safety component for all people leaders.

As an example of how STI is calculated, an employee with fixed remuneration of $80,000 and an STI element of 10% may receive between $0 and $22,400 (0x to 2.8x their STI percentage) depending on the level of Company performance and their individual performance.

Short term incentive extension programme

This was a temporary programme put in place in December 2013 based on specific performance criteria to reward and retain key executives through a period of change and uncertainty. For the CEO the value was a maximum of 66.6% of base salary across a two year period, with payment weighted 1/3 for the first year and 2/3 for the second year. The scheme has now ended.

Long term incentives

We offer long term incentives to incentivise and retain key executives, align the interests of executives and shareholders and encourage longer term decision making. In August 2015, a new LTI share scheme was established to apply for the first time in the year ended 30 June 2016 (described in more detail in Note 15 of the financial statements). This replaced the previous LTI and STI Extension programmes which were established following demerger.

Employee equity building scheme

We implemented an employee equity building scheme in 2013 to encourage employees to think and act as shareholders of the Company. The Shares under the scheme are held by a trustee and vest to eligible employees after a three year period. For more details, refer to Note 15 of the financial statements.

CEO remuneration

The CEO’s remuneration consists of fixed remuneration, an STI and an LTI. This is reviewed annually by the HRCC and Board after reviewing Chorus’ performance, the CEO’s individual performance and advice from external remuneration specialists.

CEO remuneration for performance periods ending 30 June 2016 and 30 June 2015

	FIXED REMUNERATION	PAY FOR PERFORMANCE	TOTAL REMUNERATION
	SALARY NON-TAXABLE BENEFITS1 SUBTOTAL	STI STI EXTENSION4 LTI SUBTOTAL
FY16	895,868 20,800 916,668	772,2002 371,029 189,3795 1,332,608	2,249,276
FY15	831,355 20,800 852,155	739,9083 185,515 99,5656 1,024,988	1,877,143

Five Year Remuneration Summary

				% STI EXTENSION	SPAN OF LTI
	TOTAL	% STI AWARDED	% LTI AWARDED	AWARDED AGAINST	PERFORMANCE
	REMUNERATION	AGAINST MAXIMUM	AGAINST MAXIMUM	MAXIMUM	PERIOD
FY16	2,249,276	75%	70%	100%	FY13 – FY15
FY15	1,877,143	57%	69%	100%	FY12 – FY14
FY14	1,696,507	40%	107%	-	FY11 – FY13
FY13	1,227,419	34%	-	-	-
FY127	1,094,351	56%	-	-	-

1 Accommodation allowance in place of hotel/meal costs in Auckland (CEO Wellington based).

2 STI for FY16 performance period (paid FY17)

3 STI for FY15 performance period (paid FY16)

4 STI Extension for performance period FY14 to FY16 in place of LTI (scheme has now ended)

5 LTI for performance period FY13 to FY15 (vested FY16)

6 LTI for performance period FY12 to FY14 (vested FY15)

7 Seven months ended 30 June 2012 Other benefits Company KiwiSaver contributions: FY16: $65,806 (FY15: $49,055) Medical insurance: FY16: $7,064 (FY15: $6,877)

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Five Year Summary – Total Shareholder Return (TSR) Performance

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----- Start of picture text -----

120.00
100.00
80.00
60.00
40.00
20.00
–
-20.00
-40.00
-60.00
-80.00
30 June 30 June 30 June 30 June 30 June
2012 2013 2014 2015 2016
NZX50 Chorus
Percentage return
----- End of picture text -----

The TSR summary above shows the performance of Chorus’ shares against the NZX50 between 30 June 2012 and 30 June 2016.

Description of CEO STI, STI extension and LTI schemes for performance period ending 30 June 2016

			PERCENTAGE OF
SCHEME	DESCRIPTION	PERFORMANCE MEASURES	MAXIMUM AWARDED
STI	Set at 65% of base remuneration for FY16	Company performance measures:	75%
	on-plan performance, up to a maximum of 1.75x or 114% of base remuneration where the highest levels of both company	• 50% on EBITDA performance against operating plan.	$772,200 Paid in August 2016.
	and individual performance measures	• 30% on fibre connection capex and
	are achieved.	service level performance targets.
		• 20% on strategic initiatives.
		Individual performance measures:
		• 25% on operating plan goals.
		• 20% on Chorus reputation.
		• 25% on management of regulatory issues.
		• 30% on fibre connections and
		customer experience.
STI extension	A temporary scheme put in place in	• CEO employed by Chorus at time of payment.	100%
	December 2013 in place of a LTI to incentivise and retain key executives through a period of change and uncertainty.	• STI company performance measures for prior year achieved.	$371,029 Vested March 2016.
	A maximum of 66.6% of base salary for the	• Mid-year results on track to operating plan
	performance period FY14 to FY16,	for current year.
	with payment weighted1/3in FY15 and2/3
	in FY16. The scheme has now ended.
LTI	Cash grant of $349,779 (gross) for	• 90% on achieving UFB programme targets	70%
	performance period FY13-FY15 (3 years).	including build and connection measures.	$189,379
	This converted to Equity Equivalent Units (EEU’s) by dividing the target value by the volume weighted average price of Chorus	• 10% on achieving a range of RBI programme targets.	Vested September 2015.
	shares for a defined 20 day trading period.
	This equated to a maximum of 104,853 EEU’s.
	These were converted back to a cash value,
	based on share price performance at the
	time of vesting in FY16.

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Grants made under the LTI scheme to the CEO in the year ending 30 June 2016

SCHEME	DESCRIPTION	MEASURES	VESTING
Shares	Two-year grant made 1 July 2015,	Tranche 1:	Due to vest in FY18
	equivalent to 33% of base remuneration	Relative TSR performance against NZX50
	on entry ($278,272), divided into two	(fixed at date of grant) with 50% vesting
	tranches of $139,136 each.	at 50th percentile and 100% vesting
		at 75th percentile (pro-rata in between).
		Tranche 2:
		TSR performance over vesting period
		must exceed 10.8% on an annualised
		basis, compounding.
Shares	Three-year grant made 1 July 2015,	Tranche 1:	Due to vest in FY19
	equivalent to 33% of base remuneration	Relative TSR performance against NZX50
	on entry ($278,272), divided into two	(fixed at date of grant) with 50% vesting
	tranches of $139,136 each.	at 50th percentile and 100% vesting
		at 75th percentile (pro-rata in between).
		Tranche 2:
		TSR performance over vesting period
		must exceed 10.8% on an annualised
		basis, compounding.

CEO remuneration performance pay

The scenario chart below demonstrates the elements of CEO remuneration design in the year ended 30 June 2016. For onplan performance, the STI element pays out at 65% of base salary and the LTI element pays out at 33% of base salary. At maximum performance, the STI element pays out at 114% of base salary, the LTI element remains at 33%.

==> picture [242 x 172] intentionally omitted <==

----- Start of picture text -----

2500
2000 13%
17%
1500
46%
33%
1000
500
100% 50% 41%
0
Fixed On-plan Maximum
Base Annual variable Long-term incentives
Thousands
----- End of picture text -----

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Employee remuneration range during the year ended 30 June 2016

The table below shows the number of employees and former employees who received remuneration and other benefits in excess of $100,000 during the year ended 30 June 2016.

During the year, certain employees participated in Chorus’ employee equity building scheme, received contributions towards membership of the Marram Trust (a community healthcare and holiday accommodation provider), received contributions toward their Government Superannuation Fund (a legacy benefit provided to a small number of employees) and, if a member, received contributions of 3% of gross earnings towards their KiwiSaver accounts. These amounts are not included in these remuneration figures. Any benefits received by employees that do not have an attributable value are also excluded.

The remuneration paid to, and other benefits received by, Mark Ratcliffe in his capacity as CEO during the year ended 30 June 2016 are detailed on pages 64 to 66, and are excluded from the table below.

REMUNERATION RANGE	NUMBER OF EMPLOYEES IN THE YEAR ENDED
$ (GROSS)	30 JUNE 2016 (BASED ON ACTUAL PAYMENTS)
950,001-960,000	1
660,001-670,000	2
610,001-620,001	1
590,001-600,000	1
520,001-530,000	1
410,001-420,000	1
380,001-390,000	1
350,001-360,000	1
330,001-340,000	1
320,001-330,000	2
300,001-310,000	2
280,001-290,000	3
270,001-280,000	2
260,001-270,000	3
250,001-260,000	4
240,001-250,000	6
230,001-240,000	5
220,001-230,000	11
210,001-220,000	11
200,001-210,000	5
190,001-200,000	15
180,001-190,000	14
170,001-180,000	15
160,001-170,000	22
150,001-160,000	30
140,001-150,000	40
130,001-140,000	39
120,001-130,000	45
110,001-120,000	47
100,000-110,000	53

Pay gap

The pay gap represents the number of times greater the CEO remuneration is to an employee paid at the median of all Chorus employees. At 30 June 2016, the CEO’s base salary at $895,868 was 10.33 times that of the median employee at $86,700 per annum. The CEO's total remuneration, including STI, STI extension and LTI was $2,249,276 which was 22.43 times the total remuneration of the median employee (including STI) at $100,272.

Director remuneration

The Board has adopted the fee structure below. The Board appointed a deputy chairman from 1 September 2015 with a fee reflecting the additional work that role entails. Total remuneration available to non-executive directors in the year ended 30 June 2016 was fixed at our 2014 annual shareholders’ meeting at $1,100,000.

The HRCC reviews the remuneration of directors annually based on criteria developed by that Committee.

	YEAR ENDED
ANNUAL	30 JUNE 2016
FEE STRUCTURE	$
Base fees:
Chairman of the Board	214,000
Deputy chairman	160,500
Non-executive director	107,000
Board Committee fees:
Audit and Risk Management Committee
Chairman	32,000
Member	16,000
Human Resources and Compensation
Committee
Chairman	21,500
Member	11,000
Nominations and Corporate Governance
Committee
Chairman	16,000
Member	8,500
UFB Steering Committee
Member	32,000

Standing Board committee and UFB Steering Committee fees are paid to directors, except the chairman and deputy chairman of the Board, in addition to base fees. Directors (except the CEO) do not participate in a bonus or profit-sharing plan, do not receive compensation in share options, and do not have superannuation or any other scheme entitlements or retirement benefits.

Directors may be paid an additional daily rate of $2,400 for additional work as determined and approved by the chairman and where the payment is within the total fee pool available. No such fees were paid in the year ended 30 June 2016.

P. 67

Annual Report

Remuneration paid to directors (in their capacity as such) in the year ended 30 June 2016:

	TOTAL FEES
DIRECTOR	$
Patrick Strange (chairman)1	198,833
Jon Hartley (deputy chairman)2	169,417
Anne Urlwin	139,000
Clayton Wakefield	124,578
Keith Turner	151,417
Mark Ratcliffe	-
Murray Jordan3	98,333
Prue Flacks	130,422
Total	1,012,000

1 Patrick Strange became chairman on 1 September 2015.
2 Jon Hartley was interim chairman until 1 September 2015, and became deputy chairman from that date.
3 Murray Jordan joined the Chorus Board on 1 September 2015.

Notes:

Amounts are gross and exclude GST (where applicable). Mark Ratcliffe, as CEO, does not receive any remuneration in his capacity as a director.

Directors (other than the CEO) did not receive any other benefits.

In addition Directors are entitled to be reimbursed for any travel or incidental expenses incurred in performance of their duties as director.

P. 68

Annual Report

Disclosures

Directors

Directors during the year ended 30 June 2016

No directors resigned during the year ended 30 June 2016.

Patrick Strange was appointed chairman and Jon Hartley deputy chairman on 1 September 2015. Murray Jordan was appointed director also on 1 September 2015.

Indemnities and insurance

We have entered into deeds of indemnity with each director for potential liabilities or costs they may incur for their acts or omissions as directors.

Deeds of indemnity have also been entered into with certain senior employees for potential liabilities and costs they may incur for their acts or omissions as employees, directors of Chorus subsidiaries or as directors of non-Chorus companies in which Chorus holds interests.

We have a directors’ and officers’ liability insurance policy in place covering directors and employees for liability arising from their acts or omissions in their capacity as directors or employees. The policy does not cover dishonest, fraudulent, malicious or wilful acts or omissions.

Director interests in Chorus shares

As at 30 June 2016, directors had a relevant interest (as defined in the Financial Markets Conduct Act 2013) in approximately 0.086% of Chorus’ shares as follows:

	AS	AT 30 JUNE 2016	TRANSACTIONS DURING THE REPORTING PERIOD
DIRECTOR	SHARES	INTEREST	NUMBER OF SHARES NATURE OF TRANSACTION CONSIDERATION DATE
Patrick Strange	10,000	Beneficial interest	10,000 On-market acquisition $25,700.00 25 August 2015
Anne Urlwin	10,192	Director and shareholder of registered holder	192 Acquisition under Chorus’ dividend reinvestment plan $742.75 5 April 2016
Clayton Wakefield1	21,110	Beneficial interest	398 Acquisition under Chorus’ dividend reinvestment plan $1,539.66 5 April 2016
Keith Turner	6,109	Legal and beneficial interest	115 Acquisition under Chorus’ dividend reinvestment plan $444.88 5 April 2016
Mark Ratcliffe	147,967	Beneficial interest	2,794 Acquisition under Chorus’ dividend reinvestment plan $10,808.59 5 April 2016
			145,173 Off-market transfers to family trust Nil 16 December 2015
			39,840 On-market acquisition $99,161.90 7 September 2015
	138,654	Beneficial interest (under Chorus’ long term incentive plan)	138,6542 On-market purchase of shares granted under Chorus’ long term incentive plan $372,882.20 29 September – 1 October 2015
Prue Flacks	10,582	Registered holder and beneficial owner	200 Acquisition under Chorus’ dividend reinvestment plan $773.70 5 April 2016
			5,240 Off-market transfer on distribution of estate and family trust Nil 4 February 2016
Total	344,614

1 Clayton Wakefield also acquired a beneficial interest in 76,000 Chorus bonds quoted on the NZX on their issue on 6 May 2016.

2 Shares held by trustee and vest subject to certain performance targets being met over the periods ending 30 June 2017 and 30 June 2018.

P. 69

Annual Report

Changes in director interests

Patrick Strange	Became a director of Auckland International Airport Limited and New Zealand Clearing and Depository
	Corporation Limited (a subsidiary of NZX Limited).
	Ceased as director of WorkSafe New Zealand.
Jon Hartley	Ceased as a trustee of Yorkshire Trust.
Clayton Wakefield1	Became Chairman of the Auckland Branch, and a National Council Member, of the Institute of Directors.
	Ceased as a director of Equipment Finance Limited.
Keith Turner	Became a director of TransGrid (the operator and manager of the New South Wales high voltage
	transmission network).
Mark Ratcliffe	Became a director of The New Zealand Initiative Limited; Gas Services NZ Limited; First Gas Topco Limited
	(and its subsidiaries First Gas Holdings Limited, First Gas Limited, First Gas Midco Limited).
Murray Jordan2	Became a trustee of The Starship Foundation and a director of Metcash Limited and Real Clarity Limited.

1 Became a director of The Co-operative Bank Limited on 25 August 2016 and ceased as a director of: Fisher & Paykel Finance Limited; Fisher & Paykel Finance Holdings Limited; Fisher & Paykel Financial Services Limited; Consumer Finance Limited; Consumer Insurance Services Limited; Columbus Financial Services Limited and Retail Financial Services Limited on 17 July 2016.

2 Became a director of Stevenson Group Limited on 14 July 2016.

Director restrictions

Under our constitution, no person who is an ‘associated person’ of a telecommunications services provider in New Zealand may be appointed or hold office as a director. NZX has granted Chorus a waiver to allow our constitution to include this restriction.

External audit

The non-audit related fees paid to the auditor during the financial period (as detailed in Note 8 to the Financial Statements) were permitted non-audit services under our External Auditor Independence Policy.

Securities and security holders

Stock exchange listings and American Depositary Receipts

Chorus’ shares are quoted on the NZX Main Board and on the ASX. Chorus changed to an ASX foreign exempt listing on the ASX on 1 March 2016.

Chorus trades under the ticker ‘CNU’.

American Depositary Shares, each representing five ordinary shares and evidenced by American Depositary Receipts, are not listed but are traded on the over-the-counter market in the United States under the ticker ‘CHRYY’. Our depositary is the Bank of New York Mellon.

We issued NZD400 million of bonds on 6 May 2016 which are quoted on the NZX debt market (the NZDX).

We have also issued GBP260 million foreign currency debt in the form of European medium term notes (EMTNs). Chorus is listed, and the EMTNs quoted, on the Luxembourg Stock Exchange.

NZX waivers

A summary of all waivers granted and published by NZX in the 12 months ending on 30 June 2016 and relied on by Chorus is available on Chorus’ website at www.chorus.co.nz/investor-centre.

ASX disclosures

Chorus’ place of incorporation is New Zealand.
Chorus is not subject to Chapters 6, 6A, 6B and 6C of the Australian Corporations Act 2001 dealing with the acquisition of shares (including substantial shareholdings and takeovers).
Chorus’ constitution contains limitations on the acquisition of securities, as described below.
For the purposes of ASX listing rule 1.15.3 Chorus confirms that it continues to comply with the NZX listing rules.

Registration as a foreign company

Chorus has registered with the Australian Securities and Investments Commission as a foreign company. Chorus has been issued an Australian Registered Body Number (ARBN) of 152 485 848.

Quoted shares

As at 30 June 2016 there were 400,799,739 ordinary shares on issue.

Each ordinary share confers on its holder the right to attend and vote at a shareholder meeting (including the right to cast one vote on a poll on any resolution).

Non-standard designation

NZX has attached a ‘non-standard’ designation to Chorus because of the ownership restrictions in our constitution (described below).

Chorus’ constitutional ownership restrictions

Our constitution includes ownership restrictions that prohibit any person:

From having a relevant interest in 10% or more of Chorus’ shares, unless the prior written consent of the New Zealand Government is obtained; or
Other than a New Zealand national, from having a relevant interest in more than 49.9% of Chorus’ shares, unless the prior written consent of the New Zealand Government is obtained.

P. 70

Annual Report

If the Board or the New Zealand Government determines there are reasonable grounds for believing that a person has a relevant interest in voting shares in excess of the ownership restrictions, the Board may, after following certain procedures, prohibit the exercise of voting rights (in which case the voting rights shall vest in the chairman) and may force the sale of shares. The Board may also decline to register a transfer of shares if it reasonably believes the transfer would breach the ownership restrictions.

NZX has granted Chorus waivers allowing our constitution to include the power of forfeiture, the restrictions on transferability of Chorus shares and the Board’s power to prohibit the exercise of voting rights relating to these ownership restrictions.

We have been advised by the Crown that AMP Capital Holdings Ltd and its related companies have been granted approval, should they choose to exercise it in future, to acquire a relevant interest in 10% or more (but not exceeding 15%) of Chorus shares.

Unquoted securities

	NUMBER OF SECURITIES	TOTAL NUMBER OF
	ISSUED IN YEAR ENDED	SECURITIES ON ISSUE AS AT		PERCENTAGE
SECURITY	30 JUNE 2016	29 JULY 2016	HOLDER	HELD
CFH Equity Securities	71,380,402	265,204,693	Crown Fibre Holdings Ltd	100%
CFH Debt Securities	71,380,402	265,204,693	Crown Fibre Holdings Ltd	100%
CFH Warrants	4,515,082	15,502,118	Crown Fibre Holdings Ltd	100%

CFH equity securities are a unique class of security that carry no right to vote at meetings of holders of ordinary shares but entitle the holder to a right to a repayment preference on liquidation. Dividends become payable on a portion of CFH equity securities from 2025, with the portion increasing over time. A greater portion of CFH equity securities attract dividends if a 20% fibre up-take threshold is not met by 30 June 2020. CFH equity securities can be redeemed by Chorus at any time by payment of the issue price or issue of new ordinary shares (at a 5% discount to the 20-day volume weighted average price) to the holder. In limited circumstances CFH equity securities may be converted by the holder into voting preference or ordinary shares.

CFH debt securities are unsecured, non-interest bearing and carry no voting rights at meetings of holders of ordinary shares. Chorus is required to redeem the CFH debt securities in tranches from 2025 to 2036 (at the latest) by repaying the issue price to the holder. An accelerated repayment schedule applies if a 20% fibre up-take threshold is not met by 30 June 2020. CFH warrants are an option to acquire ordinary shares on a specified exercise date at a set strike price and have been issued in two series, with different repayment schedules. On 30 June 2020 one series will be cancelled depending on whether a 20% fibre up-take threshold is met.

The terms of issue for the CFH equity securities, CFH debt securities and CFH warrants are set out in the subscription agreement with CFH and summarised on Chorus’ website at www.chorus.co.nz/financial-results.

Shareholder distribution as at 29 July 2016

	NUMBER OF	% OF TOTAL	TOTAL NUMBER OF	% OF ORDINARY
SHAREHOLDING	HOLDERS	HOLDERS	SHARES HELD	SHARES ISSUED
1 to 1,000	16,213	64.20%	5,918,274	1.48%
1,001 to 5,000	6,029	23.88%	14,851,815	3.71%
5,001 to 10,000	1,647	6.52%	11,978,481	2.99%
10,001 to 100,000	1,281	5.07%	29,098,663	7.26%
100,001 and over	82	0.32%	338,952,506	84.57%
Total	25,252	100%	400,799,739	100%

Substantial holders

We have received notice of substantial product/security holders as follows:

	AS AT 30 JUNE 2016	AS AT 29 JULY 2016
	NUMBER ORDINARY	NUMBER ORDINARY
	SHARES HELD	SHARES HELD
Paradice Investment Management Pty Ltd	20,282,796	20,282,796
Accident Compensation Corporation	28,293,763	28,293,763

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Annual Report

Twenty largest shareholders as at 29 July 2016

RANK 1.	HOLDER NAME New Zealand Central Securities Depository Limited*	HOLDING 143,596,777	% 35.82
2.	JP Morgan Nominees	46,758,832	11.66
	Australia Limited
3.	National Nominees Limited	32,266,133	8.05
4.	Citicorp Nominees Pty Limited	22,678,364	5.65
5. 6.	HSBC Custody Nominees (Australia) Limited RBC Investor Services Australia Nominees Pty Limited	21,189,535 12,159,939	5.28 3.03

7.	FNZ Custodians Limited	7,443,787	1.85
8.	Ronald James Woodrow	5,075,834	1.26
9.	HSBC Custody Nominees	4,897,169	1.22
	(Australia) Limited
10.	Bond Street Custodians Limited	4,061,597	1.01

11. 12.	HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited	3,201,745 2,237,012	0.79 0.55
13.	Custodial Services Limited	2,133,807	0.53
14.	BNP Paribas Noms Pty Ltd	1,975,843	0.49
15.	New Zealand Depository Nominee	1,959,785	0.48
	Limited < A/C 1> Cash Account
16.	Investment Custodial Services	1,736,987	0.43
	Limited
17.	Forsyth Barr Custodians Limited	1,685,901	0.42
	<1-Custody>
18.	NZPT Custodians (Grosvenor) Limited	1,668,519	0.41
19.	Bond Street Custodians Limited	1,144,704	0.28

20.	Custodial Services Limited	1,126,914	0.28

New Zealand Central Securities Depository Ltd provides a custodial depository service which allows electronic trading of securities by its members.

Net tangible assets per security

As at 30 June 2016, consolidated net tangible assets per share was $1.77 (30 June 2015: $1.62). Net tangible assets per share is a non-GAAP financial measure and is not prepared in accordance with NZIFRS.

Revenue from ordinary activities and net profit

In the year ended 30 June 2016 our:

Revenue from ordinary activities increased 0.2% to $1,008 million; and
Profit from ordinary activities after tax, and net profit, attributable to shareholders did not change at $91 million.

Subsidiaries

Chorus New Zealand Ltd

Directors: Mark Ratcliffe (chairman), Andrew Carroll, Nick Woodward, Vanessa Oakley and Lucy Riddiford (as alternate director for Vanessa Oakley).

No Chorus New Zealand Ltd directors resigned in the year ended 30 June 2016.

Director remuneration

The directors of Chorus New Zealand Ltd are all employees and do not receive any remuneration in their capacity as directors.

Changes in director interests

Mark Ratcliffe: Acquired a beneficial interest in 138,654 Chorus Ltd shares under Chorus’ Long Term Incentive plan and became a director of The New Zealand Initiative Limited; Gas Services NZ Limited; First Gas Topco Limited (and its subsidiaries First Gas Holdings Limited, First Gas Limited, First Gas Midco Limited).

Chorus LTI Trustee Ltd

Chorus LTI Trustee Ltd was incorporated on 11 December 2014 as trustee for Chorus’ longterm incentive plan.

Directors: Clayton Wakefield, Keith Turner and Prue Flacks.

No Chorus LTI Trustee Ltd directors resigned in the year ended 30 June 2016.

Director remuneration

The directors of Chorus LTI Trustee Ltd are all directors of Chorus Ltd and do not receive any remuneration in their capacity as directors of Chorus LTI Trustee Ltd.

Other subsidiaries

Chorus has no other subsidiaries.

Bondholder distribution as at 29 July 2016

	NUMBER OF	% OF TOTAL	TOTAL NUMBER	% OF BONDS
HOLDING	HOLDERS	HOLDERS	OF BONDS HELD	ISSUED
1,001 to 5,000	222	7.95%	1,110,000	0.28%
5,001 to 10,000	519	18.60%	4,984,000	1.25%
10,001 to 100,000	1,860	66.64%	66,036,000	16.51%
100,001 and over	190	6.81%	327,870,000	81.97%
Total	2,791	100%	400,000,000	100%

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Annual Report

Glossary

Backbone	Fibre cabling and other shared network elements required	IT	Information Technology.
network	either in the common areas of multi-dwelling units to connect individual apartments/ofces, or to serve	Layer 0, 1, 2	Refers to the layers within the Open Systems
	premises located along rights of way.		Interconnection model. Layer 0 is ducts and manholes.
			Layer 1 is the physical cables and co-location space. Layer
Backhaul	Is the portion of the network that links local exchanges		2 is the data link layer including broadband electronics.
	to other exchanges or retail service provider networks.
		LFCs	Local Fibre Companies – refers to the three other
Bandwidth	A fbre service that provides dedicated bandwidth (up to		organisations the Government has contracted with for
fbre access	10Gbps download speed) between customers and their		the UFB rollout in non-Chorus areas.
	retail service provider’s equipment in the local exchange.
		Mbps	Megabits per second – a measure of the average rate
Baseband	A technology neutral voice input service that can be		of data transfer.
	bundled with a broadband product or provided on
	a standalone basis.	Naked broad-	Broadband only connections, where the customer does
		band/UBA	not also take an analogue voice service.
Baseband IP	Used by retail service providers to provide a copper
	voice service from their exchange equipment via Chorus	RBI	Rural Broadband Initiative – refers to the Government
	equipment in cabinets or exchanges.		programme to improve and enhance broadband
Bitstream	Refers to services defned under the UFB contract.		coverage in rural areas between 2011 and 2016.
2,3,4	Bitstream 2 and 3 are mass market services (between	share	Means an ordinary share in Chorus.
	30Mbps and 100Mbps downstream speeds). Bitstream 4 is a premium fbre service, which is the equivalent of HSNS fbre for corporate and UFB priority customers.	SLES	Sub Loop Extension Service – enables retail service providers to connect a sub loop UCLL line from a cabinet to the exchange.
Building block model	Refers to a methodology used for regulating monopoly utilities. Under BBM a regulated supplier’s allowed revenue is equal to the sum of the underlying components or ‘building blocks’, consisting of the return on capital,	SLU	Sub Loop Unbundling – where retail service providers use the regulated copper line service available between the premises and cabinet.
	depreciation, operating expenditure and various other	TDL	Telecommunications Development Levy – a $50 million
	components such as tax.		annual levy on telecommunications companies, including
CFH	Crown Fibre Holdings Limited, the Government organisation that manages New Zealand’s rollout		Chorus, introduced by Government in FY10 to fund rural broadband. Scheduled to reduce to $10 million from FY20.
	of Ultra-Fast Broadband infrastructure.	TRL	Telecommunications Regulatory Levy – an annual levy
Chorus	Chorus Limited and subsidiaries.		on telecommunications companies, including Chorus, to fund the Commission’s costs.
Commission	Commerce Commission – the independent Crown Entity whose responsibilities include overseeing the regulation of the telecommunications sector.	TSLRIC	Total Service Long Run Incremental Cost – a forward- looking cost based methodology used by the Commission in its fnal price review process.
Direct fbre access	Also known as ‘dark’ fbre, a fbre service that provides a point to point fbre connection and can be used to deliver backhaul connections to mobile sites.	TSO	Telecommunications Services Obligation – a universal service obligation under which Chorus must maintain certain coverage and service on the copper network.
EBITDA	Earnings before interest, income tax, depreciation and amortisation.	UBA	Unbundled Bitstream Access – regulated service that enables retail service providers to use Chorus equipment
EMTN	European Medium Term Note.		to deliver broadband to customers.
FY	Financial year – twelve months ended 30 June.	UCLFS	Unbundled Copper Low Frequency Service – a subset
	e.g. FY16 is from 1 July 2015 to 30 June 2016.		of the baseband voice input service ofered over copper,
			with pricing set at the averaged UCLL price.
Gigabit	The equivalent of 1 billion bits. Gigabit Ethernet provides
	data transfer rates of about 1 gigabit per second.	UCLL	Unbundled Copper Local Loop – a regulated service
			enabling retail service providers to ofer voice and
Gbps	Gigabits per second. A measure of the average rate of		broadband services on copper lines using their own
	data transfer.		electronic equipment in the exchange.
HSNS	High Speed Network Service – a high speed Layer 2	UFB	Ultra-Fast Broadband – refers to the Government
	service with dedicated bandwidth on either copper		programme to build a fbre to the premises network
	or fbre.		to 75% of New Zealanders by 2020.
IFRS	International Financial Reporting Standards – the rules	VDSL	Very High Speed Digital Subscriber Line – a copper-based
	that the fnancial statements have to be prepared by.		technology that provides data transmission up
IP	Internet Protocol.		to about 100Mbps downstream and 50Mbps upstream.

P. 73

Registered Offices

New Zealand Level 10 1 Willis Street Wellington New Zealand Phone: +64 4 896 4004

Australia

C/- Allens Corporate Services Pty Limited Level 5, Deutsche Bank Place 126 Phillip Street Sydney NSW 2000 Australia Phone: +61 2 9230 4000

ARBN 152 485 848

Registrars

New Zealand Computershare Investor Services Limited Private Bag 92119 Auckland 1142 New Zealand Phone: +64 9 488 8777 Fax: +64 9 488 8787 Email: [email protected] www.investorcentre.com/nz

Australia

Computershare Investor Services Pty Limited GPO Box 3329 Melbourne 3001 Australia Freephone: 1 800 501 366 Fax: +61 3 9473 2500 Email: [email protected] www.investorcentre.com/nz

ADR Depository

BNY Mellon Shareowner Services C/- Computershare Investor Services P.O. Box 43078 Providence, RI 02940-3078 United States of America Phone: +1 201 680 6825 Email: [email protected] www.bnymellon.com/shareowner

Forward looking statements and disclaimer

This annual report may contain forward looking statements regarding future events and the future financial performance of Chorus, including forward looking statements regarding industry trends, regulation and the regulatory environment, strategies, capital expenditure, the construction of the UFB network, credit ratings and future financial and operational performance. These forward looking statements are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond Chorus’ control, and which may cause actual results to differ materially from those expressed in the statements

contained in this annual report. No representation, warranty or undertaking, express or implied, is made as to the fairness, accuracy or completeness of the information contained, referred to or reflected in this annual report, or any information provided orally or in writing in connection with it. Please read this annual report in the wider context of material previously published by Chorus and released through the NZX and ASX.

Except as required by law or the listing rules of the NZX and ASX, Chorus is not under any obligation to update this annual report at any time after its release, whether as a result of new information, future events or otherwise.

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Chorus Limited Results for announcement to the market

Reporting Period	Year ended 30 June 2016
Previous Reporting Period	Year ended 30 June 2015

	Amount (000s)	Percentage change
Revenue from ordinary activities	$1,008,000	Up 0.2%
Profit (loss) from ordinary activities after tax attributable to security holders.	$91,000	No change
Net profit (loss) attributable to security holders.	$91,000	No change

Interim/Final Dividend	Amount per security	Imputed amount per security
Final dividend	12.0 cps	4.67 cps

Record Date	23 September 2016
Dividend Payment Date	7 October 2016

Comments:	This announcement should be read in conjunction with the attached annual report, financial statements for the year ended 30 June 2016 contained in that report, media release and investor presentation.

Dividends

A fully imputed final dividend for the 2016 financial year of 12.0 cents per ordinary share will be paid on 7 October 2016. The total dividend will be $48,095,969.

Dividend Reinvestment Plan

Chorus’ dividend reinvestment plan will operate for the dividend payable on 7 October 2016.

Under the Plan eligible shareholders can choose to reinvest all or part of their dividend entitlements in additional Chorus shares (rather than receiving cash payments). There are no charges for participation in the Plan.

The price of the shares to be issued under the Plan will be the volume weighted average sale price of Chorus shares calculated on all price setting

trades taking place through the NZX over a period of five trading days commencing on the ex-dividend date less a 3% discount.

Shares issued under the Plan will rank equally with Chorus’ existing ordinary shares.

Election notices to participate in the Plan (for the dividend due for payment on 7 October 2016), must be received by 5pm (NZ time) 26 September 2016.

Net tangible assets per security

There are $1.77 net tangible assets per security (30 June 2015: $1.62).

Audit

This report is based on financial statements which have been audited. Chorus’ auditors have issued an unqualified audit opinion. A copy of the audit report is included in the attached annual report.

Accounting policies

There have been no changes in accounting policies. All policies have been consistently applied throughout the period.

APPENDIX 7 – NZSX Listing Rules

EMAIL: [email protected]

Notice of event affecting securities

NZSX Listing Rule 7.12.2. For rights, NZSX Listing Rules 7.10.9 and 7.10.10. For change to allotment, NZSX Listing Rule 7.12.1, a separate advice is required.

Number of pages including this one (Please provide any other relevant 1 details on additional pages)

Full name of Issuer Name of officer make this notic Contact phone number	Full name of Issuer Name of officer make this notic Contact phone number	CHORUS LIMITED	CHORUS LIMITED	CHORUS LIMITED	CHORUS LIMITED
		authori e	sed to							Authority for e.g. Director				event, s' resolution Dat	e
							ANDREW CARROLL									DIRECTORS' RESOLUTION
								Contact fax number
			(04)	896 4003						(04) 471 0013							29 8			2016

Nature of event Tick as appropriate				Bonus Issue Rights Issue			If ticked, state whether: Capital Ca	Taxable ll Dividend		/ Non Taxable Con If ticked, state F				version ull			Rights Issue Interest Renouncable


				non-renouncable			change			whether: Interim Y				ear √	Special

EXISTING securitie Description of the class of securities			s affec	ted by this				If more than one security is affected by the event, use a se						parate form. ISIN
				ORDINARY		SHARE												NZCNUE0001S2
																		If	unknown, contact NZX
Details of securitie			s issue	d pursuant to	th	is event		If more than one class of security is to be iss						ued, use a sep ISIN	arate for			m for e	ach class.
Description of the class of securities Number of Securities to be issued following eve			nt

													Minimum Entitlement					If R	unknown, contact NZX atio, e.g 1 for 2 for


Conversion, Maturity, Call Payable or Exercise Date Strike price per security for an Strike Price available.				y issue in lieu or	da								Treatment of Fractions provide an OR explanation of the ranking
						te Enter N/A if not applicable


M	*onies Associated with E*			*vent* In dollars	an	Dividen d cents		d payable, Call payable, Exercise price, Convers Source of Payment					ion price, Redemption price, Application mone						y.

													RETAINED						EARNINGS

	Amount per security (does not include any ex			cluded income)	$0.120
	Excluded income per security (only applicable to listed PIEs)


	Currency Total monies				NZD						Supplementary Amount per security dividend in dollars and cents details - NZSX Listing Rule 7.12.7 *Date Payable*								$0.021200

					$48,095,969														7 October, 2016

T In is	*axation* the case of a taxable bonus sue state strike price										Amountper Security in Dollars and cents to six dec								imalplaces
									Resident Withholding Tax		Imputation Credits (Give details) $0.008300
							$				$0.008300								$0.046700
									Foreign Withholding Tax		FWP Credits (Give details) $


*Timing* (Refer Appendix 8 in th *Record Date 5pm* For calculation of entitlements - *Notice Date* Entitlement letters, call notices,					e NZ		SX Listing Rules)				*Application Date* Also, Call Payable, Dividend / Interest Payable, Exercise Date, Conversion Date. In the case of applications this must be the last business day of the week. *Allotment Date* For the issue of new securities.
							23 September, 2016								7 October, 2016

conversion notices mailed												Must be within 5 business days of application closing date.			7 October, 2016

OFFICE USE ONLY

Ex Date: Commence Quoting Rights: Security Code: Cease Quoting Rights 5pm: Commence Quoting New Securities: Security Code: Cease Quoting Old Security 5pm:

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Corporate Governance Statement

This statement outlines the key aspects of Chorus’ corporate governance framework and was approved by the Chorus Board on 29 August 2016.

The Board regularly reviews and assesses Chorus’ governance policies, processes and practices to identify opportunities for enhancement and to ensure they reflect Chorus’ operations and culture.

The Chorus Board

The Board is appointed by shareholders and has overall responsibility for Chorus’ strategy, culture, health and safety, governance and performance.

Role of the Board and management

The Board’s roles and responsibilities are set out in its charter available at www.chorus.co.nz/governance. Those roles and responsibilities include:

Setting the strategy, culture and expectations in relation to health and safety at Chorus working with and through the CEO.
Approving, and monitoring performance against, Chorus’ strategy,
business plan and budget.
Approving major capital expenditure and business activities outside the limits delegated to management.
Ensuring an appropriate risk management framework has been established, setting Chorus’ risk appetite, regularly reviewing principal risks and overseeing the management of material business risks.
Monitoring the integrity of, and where appropriate approving, Chorus’ financial and corporate reporting (including external audit).
Overseeing Chorus’ corporate governance, including reviewing its key governance documents at least annually.
Reviewing and evaluating the performance of the Board, Board Committees and individual directors.
Reviewing and approving Chorus’ remuneration and people strategies, structures and policies.
Assessing the measurable objectives set for, and Chorus’ progress towards achieving, its diversity and inclusiveness goals.
Appointing and removing the CEO, CFO and General Counsel & Company Secretary.
Monitoring compliance with Chorus’ continuous disclosure obligations.
Appointing members to Board Committees.
Carrying out the functions specifically reserved to the Board and its Committees under Board approved policies and Committee charters.

Delegation of authority

The Board has delegated authority, in part, to the CEO through the Delegated Authority (DA) Policy to allow for Chorus’ effective day to day management and leadership, including the implementation of its strategic objectives, within the risk appetite set by the Board.

In accordance with the DA Policy, the CEO has sub-delegated authority to other members of management, and certain other Chorus people, within specified financial and non-financial limits.

The Board reviews Chorus’ DA Policy at least annually.

The Board has also appointed three standing Board Committees to assist it in carrying out its responsibilities and has delegated some of its responsibilities, powers and authorities to those Committees. More information on those Committees is set out below.

The Board may establish other ad-hoc Board sub-committees or standing committees and delegate specific responsibilities, powers and authorities to those committees and to particular directors.

Chorus’ management are responsible for providing accurate, timely and clear information to the Board to enable it to discharge its obligations and responsibilities.

Health and safety

Keeping people healthy and in a safe and secure workplace is a priority for Chorus. Chorus has a strong and visible commitment to an open reporting culture and is focussed on maturing to a resilient culture of zero tolerance for major injuries or fatalities.

The Board has set a Board terms of reference setting out its roles and responsibilities in relation to health and safety at Chorus. The terms of reference is reviewed at least once a year.

The Board ensures appropriate policies and procedures are adopted and implemented and reviews the monitoring, identification, reporting and management of significant risks.

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Corporate Governance Statement

Health and safety is discussed at all Board meetings with the Board receiving reports from management containing comprehensive summaries of health and safety activity and outcomes, including data on all actual health and safety incidents, near misses, breaches, subsequent investigations (including assessment of root causes) and remedial actions.

The Board also holds dedicated health and safety Board meetings with health and safety as the sole agenda item and all Directors carry out health and safety site visits at least once a year.

Board membership

Chorus’ constitution provides for a minimum of five, and maximum of 12, directors.

The Board currently has eight directors (seven independent directors and a managing director) with a broad range of skills and experience. More information on the skills and experience of Chorus’ directors is set out below, in Chorus’ annual report and on its website at www.chorus.co.nz/governance.

No person who is an ‘associated person’ of a telecommunication services provider in New Zealand may be appointed or hold office as a director.

Chairman

Chorus’ chairman is an independent director.

The chairman’s role is to provide leadership and manage the Board effectively. The chairman and CEO must have a strong and effective working relationship as it facilitates effective working relationships between the Board and management.

Chorus’ CEO cannot also be chairman.

Should this ever occur, the Board must consider this nomination in good faith, but the appointment (and removal) of any such person as a director is to be made by Chorus’ shareholders in the same way as other directors.

Appropriate checks are undertaken before a candidate is appointed by the Board or recommended for election as a director, including as to the person’s character, experience, education, criminal record and bankruptcy history.

Chorus has a written agreement with each director setting out the terms of their appointment, including obligations and responsibilities, compliance with Chorus policies (including codes of ethics and securities trading), continuing education, and commitment.

Chorus also has written agreements with each of its senior executives setting out the terms and conditions of their employment.

Term and tenure

Chorus directors are not appointed for specified terms. However, Chorus’ constitution and the NZX Listing Rules require at least one third of Chorus’ directors to retire at each annual shareholders’ meeting (ASM) (those holding office the longest since last standing for election/re-election being those required to retire).[1]

Mark Ratcliffe, as managing director, is exempt from the above requirements but must stand for re-election at least once every five years.

A director appointed by the Board as an additional Board member, or to fill a casual vacancy, must stand for election at the following ASM.

Chorus includes, in its notices of meeting for each ASM, all material information in its possession relevant to a decision on whether or not to elect or re-elect a director.

Deputy chairman

The Board has appointed an independent deputy chairman to assist the chairman and undertake other duties required by the Board (including leading the annual review of the chairman’s performance).

Appointment

Subject to the limits on Board size noted above, the Board may appoint additional directors to the Board or to fill a casual vacancy.

Candidates are recommended by the Nominations and Corporate Governance Committee (NCGC) based on a range of factors including the independence, qualification, skills and experience needs of the Board at the time.

To be eligible for selection, candidates must demonstrate appropriate qualities and satisfy the Board that they will commit the time needed to be fully effective in their role.

The Board reviews the skills and competency needs of Chorus and those of existing Board members before appointing a new director.

External advisors are also engaged to identify potential candidates.

Shareholders may also nominate candidates for appointment to the Board. In addition, under the agreement entered into with Crown Fibre Holdings (CFH) relating to Chorus’ UFB fibre network, CFH is entitled to nominate one person as an independent director.

DIRECTOR	APPOINTED	LAST ELECTED AT ASM
Patrick Strange	2015	2015
Jon Hartley	2011	2015
Prue Flacks	2011	2015
Murray Jordan	2015	2015
Mark Ratcliffe	2011	2012
Clayton Wakefield	2011	2013
Anne Urlwin	2011	2014
Keith Turner	2011	2014

Director induction and education

Chorus’ induction programme for new directors is designed to introduce management and the Chorus business, acquaint directors with relevant industry knowledge and familiarise them with key governance documents and stakeholder relationships.

All directors are expected to continuously educate themselves to ensure they maintain appropriate expertise to effectively perform their duties.

In addition, visits to Chorus operations, briefings from key management, industry experts and key advisers to Chorus, together with educational and stakeholder visits, briefings and meetings are arranged for the Board.

1 Retiring directors may stand for re-election.

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Corporate Governance Statement

Director skills and experience

The skills, experience and qualifications of current directors are set out in Chorus’ annual report and on its website at www.chorus.co.nz/governance.

The directors have a broad range of accounting, finance, engineering, construction, technology, legal and governance skills and experience with primary skills in each of the following areas;

Accounting
Audit
CEO experience
Customer
Engineering
Finance
Governance (including non-executive director experience on other listed entities)
Health and safety
Infrastructure build, operations and investment
Innovation and partnering
Legal and regulation
Regulated infrastructure utilities and their economics
Risk management
Securities and capital markets
Service excellence
Strategy
Stakeholder relations
Technology
Telecommunications.

In a number of areas skills and experience is across Australasia.

Board performance

The chairman meets with directors to discuss individual performance.

The Board has carried out, in the reporting period, a review of the Board’s performance, that of individual directors and of standing Board Committees utilising evaluation processes developed and overseen by the NCGC.

The Board also formally engages in annual:

Reviews of the chairman and deputy chairman of the Board, and chairmen of standing Board Committees;
Confirmations of the Board chairman and deputy chairman, and chairmen of all standing Board Committees; and
Performance discussions of individual directors standing for re-election each year.

The Board has used either externally facilitated or internally facilitated performance processes and will continue to evolve its approach over time utilising annual Board evaluation processes overseen by the NCGC.

In addition to Board performance reviews, the Board also takes a forward focussed approach to future Board capability, composition and the potential contribution of each existing director.

Independence

To be considered independent, the Board must affirmatively determine that a director does not have a disqualifying relationship as set out in the Board Charter (other than solely as a consequence of being a director).

The Board has not set financial materiality thresholds for determining independence but considers the materiality basis of all relationships having regard to the materiality to Chorus, the director and the relevant person or organisation (e.g. customer, supplier or adviser) with which the director is related. Materiality is assessed in the context of each relationship and from the perspective of both parties to that relationship.

Independent advice

A director may, with the chairman’s prior approval (or in the chairman’s case the deputy chairman’s prior approval), take independent professional advice (including legal advice) and request the attendance of such an adviser at a Board or Board Committee meeting where this is necessary to fulfil their role and responsibilities for Chorus. The costs of any such adviser is paid for by Chorus.

Managing performance

Chorus’ performance management approach is based on fostering and rewarding valuable business outcomes.

All Chorus people have performance and development plans, which are regularly reviewed with their people leaders.

Performance plans are developed by individuals after participating in ‘Line of Sight’ sessions, which enable them to link Chorus’ strategy with their functional plans and individual roles. Performance plans include outcome based objectives, behavioural measures and an individual development plan.

Formal performance reviews are undertaken annually for all Chorus people. As part of this, people leaders seek feedback and participate in peer review and calibration sessions, resulting in an overall performance rating and remuneration recommendation that determines an individual’s total pay (fixed remuneration and variable).

A similar process is undertaken each year for the executive team, with the CEO making recommendations to the Human Resources and Compensation Committee (HRCC) for executive team members, and the HRCC chairman leading the performance review of the CEO, making recommendations to the Board. These processes are consistent with those set out in the HRCC Charter, allow the Board to provide input into individual performance outcomes, total reward approvals (fixed and variable) and development plans and were undertaken in the year ended 30 June 2016.

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Corporate Governance Statement

Board committees

Each standing Board Committee has a Board approved charter and chairman. Board Committees assist the Board by focusing on specific responsibilities in greater detail than is possible for the Board as a whole. Committee recommendations are reported to the Board by Committee chairmen. Committee members are appointed by the Board.

Audit and Risk Management Committee (ARMC)

Role	The ARMC assists the Board in ensuring oversight of all matters relating to risk management, financial management
	and controls and Chorus’ financial accounting, audit and reporting.
Members	Anne Urlwin (chairman), Patrick Strange, Jon Hartley.
Independence	All Committee members are independent directors.
Responsibilities	• Overseeing the quality and integrity of Chorus’ external financial reporting.
	• Considering the adequacy of Chorus’ internal controls.
	• Regularly reviewing Chorus’ principal risks and risk, compliance and fraud reporting.
	• Recommending to the Board the appointment, and if necessary removal, of the external auditor.
	• Assessing the adequacy of the external audit and independence of the external auditor.
	• Reviewing and monitoring the internal audit plan and reporting.
	• Overseeing the independence and objectivity of the internal audit function.
	• Reviewing Chorus’ compliance with applicable laws, regulations and standards.

Human Resources and Compensation Committee (HRCC)

Role	The HRCC assists the Board in overseeing people policies and strategies, including Chorus’ remuneration and
	performance frameworks.
Members	Prue Flacks (chairman), Clayton Wakefield, Keith Turner, Murray Jordan.
Independence	All Committee members are independent directors.
Responsibilities	• Reviewing Chorus’ remuneration and human resources strategy, structure and policies.
	• Approving annual remuneration increase guides and budgets.
	• Approving the employment terms of the CEO’s executive direct reports.
	• Approving, on the recommendation of the CEO, the appointment of the CEO’s executive direct reports
	(except the CFO and General Counsel & Company Secretary whose appointment is approved by the Board).
	• Reviewing candidates for, and the performance and remuneration of, the CEO.
	• Developing and annually reviewing and assessing diversity within Chorus and its reporting.
	• Reviewing the CEO’s performance evaluation of the CEO’s executive direct reports.
	• Overseeing recruitment, retention and termination policies and procedures for senior management.
	• Making recommendations (including proposing amendments) to the Board with respect to senior executive
	(including CEO) incentive remuneration plans.

Nominations and Corporate Governance Committee (NCGC)

Role	The NCGC assists the Board in promoting and overseeing continuous improvement of good corporate governance.
Members	Patrick Strange (chairman), Jon Hartley, Prue Flacks.
Independence	All Committee members are independent directors.
Responsibilities	• Identifying and recommending suitable candidates for appointment to the Board and Board Committees.
	• Considering the size, skills mix and composition of the Board.
	• Developing, reviewing and making recommendations to the Board on corporate governance principles.
	• Establishing, developing and overseeing a process for the annual review and evaluation of Board, Board Committee,
	and individual director performance.
	• Developing and reviewing Board succession planning (including for the chairman).
	• Monitoring compliance with Chorus’ codes of ethics.
	• Reviewing and overseeing the induction of new directors and the continuous education of the Board.

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Corporate Governance Statement

Managing risk

Chorus has a Managing Risk Policy that mandates one framework for the management of risk in Chorus to:

Ensure the Board sets the risk appetite and reviews principal risks annually;
Integrate risk management in line with the Board’s risk appetite into structures, policies, processes and procedures; and
Deliver regular principal risk reviews and monitoring.

A copy of Chorus’ Managing Risk Policy is available at www.chorus.co.nz/governance.

The Board also sets, and annually reviews, Chorus’ risk management framework. The Board undertook such a review in the year to 30 June 2016.

As part of its role, the ARMC is responsible for overseeing and monitoring risk and ensuring compliance with Chorus’ risk management framework. The ARMC receives regular reporting on risk management, including the management of material business risks and the effectiveness of Chorus’ internal controls.

Before it approves Chorus’ financial statements, the Board requires the CEO and CFO to provide a certificate as to the appropriateness of Chorus’ financial statements.

Internal audit

Chorus operates a co-sourced internal audit model with a Manager Risk & Business Assurance supported by external advisors (principally PricewaterhouseCoopers) to provide additional resource and specialist expertise as required.

The responsibilities of Chorus’ internal audit function include:

Assisting the ARMC and Board in their assessment of Chorus’ internal controls and risk management;
Developing an audit plan for review and approval by the ARMC each year;

External auditor

The Board and ARMC monitor the ongoing independence and quality of Chorus’ external auditor. The ARMC also meets with the external auditor without management present prior to Chorus’ half year and annual financial statements being finalised.

Chorus’ ARMC Charter and External Auditor Independence Policy amongst other things:

Prohibit the provision of certain non-audit services by the external auditor;
Require ARMC pre-approval of all audit and permitted non-audit services;
Require the external auditor lead/engagement partner to be rotated every five years (with a five year cooling off period) and other audit partners to be rotated every seven years (with a two year cooling off period);
Require the ARMC to review the external auditor’s fees half yearly (including the ratio of fees for audit vs. non-audit services); and
Impose restrictions on the employment of former external audit personnel.

The non-audit services undertaken by Chorus’ external auditor KPMG in the year to 30 June 2016 are set out in Chorus’ annual report. Those services were provided in accordance with Chorus’ ARMC Charter and External Auditor Independence Policy and did not affect KPMG’s independence, including because:

They were approved only where Chorus was satisfied they would not have a material bearing on KPMG’s external audit procedures;
They did not involve KPMG acting in a managerial or decisionmaking capacity; and
KPMG confirm their independence to Chorus via independence declarations every six months.

Chorus’ external auditors attend its ASM each year.

Undertaking the plan and reporting progress against it, significant changes, results and issues identified; and
Escalating issues as appropriate (including to the ARMC and/or Board chairmen).

Chorus’ Manager Risk & Business Assurance has a management reporting line to the General Counsel & Company Secretary and a direct reporting line to the ARMC. The ARMC reviews the remuneration and incentive arrangements of the Manager Risk & Business Assurance each year.

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Corporate Governance Statement

Economic, environmental and social sustainability risks

Set out below are the economic, environmental and social sustainability risks Chorus considers it has material exposure to at the date of this Corporate Governance Statement. Those risks should be viewed in that context and do not purport to identify all risks relevant to, or investment in, Chorus.

Regulatory environment

Around 70% of Chorus’ revenues currently come from copper services regulated by the Commerce Commission (Commission). The prices set by the Commission for those services apply until 2020.

Fibre services are not currently regulated. However, around 13% of Chorus’ revenues currently comes from fibre services which have their terms set under the UFB Contract[2] . Those terms apply until 2020.

There is no certainty regarding the price and non-price terms of Chorus’ key copper and fibre services from 2020.

The Government is carrying out a review of the telecommunications regulatory framework for post 2020. That review is expected to establish the framework under which copper and fibre services will be regulated from 2020.

The Government indicated publicly in April and July 2016 documents that it proposes a building block model regulatory framework be put in place for copper and fibre services.

The review is ongoing and outcomes are not known at this point. There are risks that:

Prices set under that framework are lower than current prices and/or at levels which reduce Chorus’ revenues and/or do not provide it with an adequate return on its investment;
Chorus is required to invest in its network in ways which do not provide it with a return on investment or enable it to recover its costs.

The Commission can also recommend to the Minister that services not currently regulated be regulated and vice versa. For example, the Commission is currently engaged in a review of the existing services capable of regulation.

More information on Chorus’ regulatory environment is set out in its annual reports and market announcements.

Other reviews underway

Chorus is subject to a universal telecommunications service obligation (TSO) requiring it to maintain lines and provide voice input services in residential and local access areas across New Zealand. The Government commenced a review of the TSO in 2013. The outcome of that review or potential future changes are not known.

The Commission has also commenced a review of the regulated terms (including service specifications) of Chorus’ UBA service. The Commission’s draft decision is expected 31 August 2016.

There is a risk that the outcomes of either or both of those reviews could require Chorus to invest in its network in ways which do not provide it with a return on investment or enable it to recover its costs.

Chorus actively engages in Government policy reviews and regulatory implementation proceedings.

Ultra-Fast Broadband (UFB) initiative

Chorus is a cornerstone partner in the New Zealand Government’s UFB initiative building a fibre to the home network in approximately 70% of the Government’s first stage programme to 75% of New Zealanders. This is a substantial eight-year infrastructure project. Although the project is on target, it is subject to a number of risks typical to large scale, long duration infrastructure and construction projects, including unforeseen costs, and delay.

There are also remedies available to CFH under the UFB Contract if Chorus breaches its design, build, delivery or operational obligations, including:

Default payments;
Financial penalties;
Liquidated damages; and
Management step in and termination rights.

More information on these risks is available in the product disclosure statement relating to Chorus’ NZX bond issue available on Chorus’ website at www.chorus.co.nz/investor-centre.

UFB2 and RBI2

The Government has released a tender process for a second UFB programme to extend the build of fibre from 75% to around 80% of New Zealand (UFB2) and has indicated a second rural broadband tender programme (RBI2) yet to be released. Chorus has submitted confidential and conditional proposals to participate in UFB2. If Chorus participates in UFB2 and/or RBI2 material additional capital investment may be required.

2 The contract Chorus has with CFH relating to the Government’s first stage UFB initiative.

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Corporate Governance Statement

Fibre demand and network substitution

Fibre demand

The number of customers choosing Chorus’ fibre network continues to grow. Chorus is continuing to increase its capability to meet this demand. However, failure by Chorus to manage demand may result in reputational damage or lead to breaches of the UFB Contract. Increasing demand may also result in the acceleration of operating and capital expenditure and funding requirements for Chorus.

Managing this demand and improving customer experience is a key priority for Chorus.

Network substitution

A range of network operators compete with Chorus’ fixed line network across different areas around New Zealand including other ‘local fibre companies’ (LFCs) building fibre networks in the other 30% of the Government’s first stage UFB programme. Third parties may also build competing services under the UFB2 and/or RBI2 programmes in areas in which Chorus does not participate or is not awarded. This will expose Chorus to increased competition in those areas as LFCs or third parties seek to migrate customers from Chorus’ copper lines to competing networks (fixed, mobile or satellite).

These substitution risks could adversely impact Chorus’ revenues and profitability, as could customers shifting to lower cost Chorus services.

These risks could be increased if Chorus fails to deliver adequate performance and an appropriate customer experience to its customers.

To manage these risks Chorus continues to invest in its copper and fibre services and networks, as well as work with retail service provider customers to better understand likely future connection demand and improve its customer experience.

Third party contractors

Chorus engages a number of external suppliers to build, operate and maintain its networks and to supply services, equipment and materials. Failure by these parties to perform at acceptable levels could impact Chorus’ ability to meet its obligations and deliver an unacceptable customer experience. For example, a failure by a service provider could result in Chorus breaching its obligations under the UFB Contract. While agreements with the third parties generally contain binding service level requirements, and provide for remedies for failure, those remedies may not adequately compensate Chorus.

Network assets and IT

Rapid growth in network traffic could constrain parts of Chorus’ network necessitating further investment to provide additional capacity.

Chorus’ network infrastructure is vulnerable to damage or interruption from a range of risks, including equipment failure, cable cuts, power failures, weather, earthquake, fire and intentional damage. Damage or interruption to Chorus’ network could result in lost revenue, capital expenditure, higher operating costs, reputational damage and liability to retail service provider customers.

Chorus’ own IT systems, and those third party systems on which it relies, are also subject to failure and cyber threats. Chorus has incident, continuity and emergency management capability to address business disruption events and mitigate associated risks. Chorus also has security controls in place to counter known threats and improve data protection. Those controls are reviewed to ensure they remain appropriate. Chorus also has internal security policies in place covering use of its systems by employees.

The carrying value of Chorus’ network assets are subject to uncertainty in relation to regulatory, legal and political outcomes.

Financing risk

Chorus has large funding requirements related to its UFB build. Chorus’ ability to maintain an appropriate capital structure for its financial profile, either by refinancing debt on favourable terms or by raising new debt, may be adversely affected if it experiences a decline in its operating performance or revenues, there is a material and unexpected increase in capital expenditure, if financial market conditions are volatile or if it is unable to maintain its credit rating.

Credit rating

Chorus currently has an investment grade credit rating. If Chorus’ rating falls below investment grade it will be unable to pay a dividend on its ordinary shares without CFH approval.

A rating downgrade will increase Chorus’ borrowing costs.

People

Chorus may lose experienced and skilled people and institutional knowledge, and/or be unable to attract and retain sufficient experienced and qualified people.

Either or both of these may impact Chorus’ ability to perform effectively and meet its own customer experience expectations and those of its customers.

Chorus is continuing to invest in recruitment and development programmes designed to create a diverse and inclusive, safe, transparent and rewarding workplace.

Chorus’ people remain highly engaged with Chorus being recognised as a ‘Best Employer’ in the Aon Hewitt Best Employer accreditation for each of the years 2012-2016.

Other risks

Other risks are noted in Chorus’ annual report.

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Corporate Governance Statement

Acting ethically and responsibly

Codes of ethics

Chorus expects its directors and employees to conduct themselves in accordance with the highest ethical standards. Chorus has codes of ethics for its directors and employees that set the expected standards for their professional conduct. These codes are intended to facilitate decisions that are consistent with Chorus’ values, business goals and legal and policy obligations, setting out the standards required in respect of:

Conflicts of interest;

Trading in Chorus securities

All non-executive directors are encouraged to hold Chorus shares.

Directors and Chorus employees are subject to limitations on their ability to deal in Chorus shares and other relevant Chorus securities (Chorus Securities) by Chorus’ Insider Trading Policy, the New Zealand Financial Markets Conduct Act 2013 and the Australian Corporations Act 2001.

These limitations prohibit directors and employees from dealing in Chorus Securities while in possession of inside information.

Acceptance of gifts and personal benefits;
Use of Chorus’ property and corporate opportunities;
Confidentiality;
Compliance with laws and policies; and
Reporting unethical behaviour.

Chorus’ director Code of Ethics is available at www.chorus.co.nz/governance.

Chorus has communicated its codes of ethics to directors and employees and has provided training to its employees. Chorus encourages its people to report any unethical behaviour through a compliance function that investigates any such reports.

A whistle blowing policy allows for confidential reporting of serious misconduct or wrongdoing and a fraud policy for the reporting of suspected fraud or corruption. Chorus did not receive any reports of serious instances of unethical behaviour in the year to 30 June 2016.

All trading in Chorus Securities must be in accordance with Chorus’ Insider Trading Policy which requires, amongst other things:

Directors to notify, and obtain consent from, the chairman (or in the chairman’s case, the chair of the ARMC) before dealing in Chorus Securities; and
Employees Chorus has identified as coming across, or potentially coming across, information which may be market sensitive, to obtain consent from the General Counsel & Company Secretary (or in the General Counsel & Company Secretary’s case, the Board chairman) before dealing in Chorus Securities.

All changes in interests in Chorus shares held by directors are required to be disclosed to the Board, NZX and ASX. All changes in interests by Chorus’ ‘senior managers’ are required to be disclosed to the NZX.

Chorus’ codes of ethics are reviewed at least annually.

Timely and balanced disclosures

Chorus is committed to providing timely, consistent and credible information to promote orderly market behaviour and investor confidence. Chorus believes it is imperative that disclosure be evenly balanced during good times and bad and that all parties in the investment community have fair access to this information.

Chorus has a Board approved Disclosure Policy which is reviewed at least annually and which is available on Chorus’ website at www.chorus.co.nz/governance.

Chorus also has a CEO approved Market Disclosure Policy setting out its disclosure responsibilities and processes in more detail.

Chorus’ market disclosure policies are designed to ensure:

The roles of directors, executives and employees are clearly set out.
Appropriate reporting and escalation mechanisms are established to ensure potentially material matters are escalated appropriately.
There are robust and documented confidentiality protocols in place where appropriate.
Only authorised spokespersons comment publicly, within the bounds of information which is either already publicly known or non-material.
Only publicly available or non-material information is disclosed in analyst briefings and in response to investor questions.

Chorus’ Disclosure Officer is responsible for authorising the release of information to the market, monitoring Chorus’ share register, price and media and promoting awareness of Chorus’ disclosure obligations.

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Corporate Governance Statement

Shareholder communications and meetings

Chorus is committed to fostering constructive relationships with shareholders that encourage them to engage with Chorus, including by:

Communicating clearly and effectively with them;
Giving ready access to balanced and understandable information about Chorus;
Making it easy for shareholders to participate in Chorus’ general meetings; and
Maintaining an up to date website providing information about Chorus, its business and affairs.

Chorus’ investor relations programme is designed to further facilitate two-way communication with shareholders, provide them and other market participants with an understanding of Chorus’ business, governance and performance and an opportunity to express their views. As part of this programme Chorus enables investors and other interested parties to ask questions and obtain information, meets with investors and analysts and undertakes formal investor presentations.

Chorus’ annual meetings are held in main centres and webcast to enable shareholders to view and hear proceedings online. Chorus’ annual and half year results presentations are also webcast.

Chorus enables shareholders to vote by proxy ahead of meetings without having to physically attend or participate in those meetings.

Shareholders are also, prior to and at, annual meetings, able to ask questions of, and express their views in respect of, the Board, management and Chorus’ auditors (including via appointed proxies).

Chorus encourages shareholders to communicate with it and its share registrar electronically, including by providing email communication channels and online contact details and instructions on its website.

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ARBN 152 485 848

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Chorus Limited
Level 10, 1 Willis Street
P O Box 632
Wellington 6140
New Zealand
29 August 2016
Email: [email protected]
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Dear investor

We've recently announced our financial results for the financial year to 30 June 2016. This time last year we were managing the business to preserve cash and dividends had been suspended since late 2013. Fast-forward to today and it is a much improved operating context. Together, the restoration of some clarity to our regulatory environment and the operating momentum within the business helped our share price appreciate 46% during the period.

We announced net profit after tax of $91 million and will pay a fully imputed final dividend of 12 cents per share on 7 October 2016 to all holders registered at 5.00pm on 23 September 2016. That takes our total dividend for FY16 to 20 cents per share. We expect to pay a dividend of 21 cents per share for FY17, subject to no material adverse changes in circumstance or outlook.

Our Ultra-Fast Broadband rollout has now passed 57% of planned premises and we’ve finished the Rural Broadband Initiative. Together with enhancements to our Very High Speed DSL broadband service, these initiatives have made better broadband available to about 900,000 customers since we started in 2011.

Earnings before interest, income tax, depreciation and amortisation (EBITDA) is a non-GAAP profit measure. We monitor this as a key performance indicator and we believe it assists investors in assessing the performance of the core operations of the business.

If you'd like more detail, our annual report and a recorded webcast of our results briefing are available on our website at www.chorus.co.nz/financial-results

Dividend reinvestment plan for shareholders

A dividend reinvestment plan is available to our Australian and New Zealand resident shareholders with a discount rate of 3% for the 7 October 2016 dividend payment. If you haven’t previously registered to participate and wish to do so, you'll need to have registered your participation by 5:00pm (NZ time) on 26 September 2016 .

You can register by logging into your Computershare profile at www.investorcentre.com/nz or downloading the Participation Notice at www.chorus.co.nz/dividends and returning it to Computershare.

The full terms of the reinvestment plan can be read in our Offer Document dated February 2016 at www.chorus.co.nz/dividends, or you can request a copy free of charge. Our audited financial statements, and auditor’s report, are included in our annual report.

A third of our investors are now keeping in touch by email

We think it's a win-win for investors because it helps our bottom line (with less printing and postage) and we can get information like this letter, dividend statements, and annual meeting notices to you a whole lot faster. Reducing the amount of paper we generate each year is good for the environment too.

All you need to do is log into your Computershare profile on www.investorcentre.com/nz and select the email options for Chorus. Your Computershare profile also keeps records of past transaction statements, so it's easy to look up information such as dividend payments whenever you need it.

If you currently receive your payments by cheque, please also consider updating your payment details at the same time. Direct credits mean we pay you straight away without the delay of printing, posting and processing a cheque.

Section 209 notice

As noted above, our complete 2016 annual report has been published on our website. If you’d prefer to receive a printed 2016 annual report (free of charge) please contact Computershare at the details above. If you’ve requested a printed copy in previous years you don’t need to send another request. Alternatively, if you no longer wish to receive printed copies, please let Computershare know or update your investor profile details online. As in previous years, we’ve opted not to also prepare a concise annual report.

Thank you for your support of Chorus.

Kind regards

==> picture [98 x 71] intentionally omitted <==

Patrick Strange Chairman

AI assistant

CHORUS LIMITED — Annual Report 2016

64680_rns_2016-08-28_1559271c-00d3-4a9e-b6ec-99536abff0af.pdf

STOCK EXCHANGE ANNOUNCEMENT

Chorus 2016 full year result & annual report

ENDS

MEDIA RELEASE

Chorus full year result for FY16

Return to managing for long term value as operating context improves

Service company partnerships

Dividend

FY17 guidance

ENDS

29 August 2016

Disclaimer

Agenda

Mark Ratcliffe, CEO

OVERVIEW

Broadband connections

CONNECTIONS TRENDS

FY16: H1 vs H2

RURAL ROLLOUT – A GREAT SUCCESS

FIBRE ROLLOUT & UPTAKE

Chorus UFB uptake by area – June 2016

BANDWIDTH DEMAND ISN’T SLOWING

Monthly average bandwidth demand on Chorus network

INCOME STATEMENT

Revenue

Expenses

CAPEX SUMMARY

UFB COSTS

Chorus FTTP average cost per premises

$NZ

> Cost per premises connected (CPPC) of $1,009* vs $1,050 - $1,250 guidance

Fibre capex FY13-FY16

FIBRE CONNECTIONS CAPEX

Non-standard fibre connections

INVESTING IN BETTER BROADBAND

FY16 vs FY17 illustrative capex profile

> FY17 GUIDANCE : $610 - $650m gross capex

Guidance summary

CAPITAL MANAGEMENT & FY17 DIVIDEND

DEBT

Term debt profile

IMPROVING THE FIBRE CONNECTION EXPERIENCE

MEASURING PROGRESS

BALANCING WORKFORCE DEMANDS

> connection productivity doubled

> ensuring a sustainable workforce

DRIVING BROADBAND AWARENESS

REMOVING DATA CONSTRAINTS

SEEKING REGULATORY CLARITY SOONER

FY17: CUSTOMER FOCUSED

> We expect continued high demand for fibre

> Customers want quality (peak time) broadband

> Regulatory clarity is key to ongoing investment

Appendices

Appendix A : Non statutory measure – adjusted EBITDA

Appendix B : Illustrative Chorus pre-financing adjusted cash flows

Appendix C : Chorus mass market copper + fibre pricing

Appendix D : NZ fixed line market

Appendix E : UFB overview

Appendix F :Broadband connection speed

Chorus

Annual Re ort 2016 p

Highlights

Challenges

Chorus Board and management overview

Dear Shareholders

Bringing New Zealand better broadband

NORTH ISLAND

SOUTH ISLAND

Market overview

Figure 3: The New Zealand fixed line market

Connecting customers

Network competition

CHORUS UFB BUILD METRICS

Health and safety

Governance and corporate sustainability

Governance and corporate sustainability (cont.)

CHORUS LIMITED Annual Report 2016