CHORUS LIMITED — Investor Presentation 2017

Jun 28, 2017

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

STOCK EXCHANGE ANNOUNCEMENT

29 June 2017

Chorus investor presentation – 29 June

Chorus is delivering the attached presentation to various investors today.

It notes that:

Total fixed line connections decline continued at broadly the same rate in April-May, while broadband decline slowed modestly

• Ask for better broadband advertising campaign achieving strong awareness

• new record for fibre orders and connection activity in May

• completing a fibre connection every minute of working day

Shift to utility regulatory framework confirmed by Government announcement on 1 June

Chorus UFB uptake at 35% at end of May

• 264,000 UFB customers with 756,000 able to connect

• May fibre orders were up 33% from same time last year

• UFB2 rollout has commenced in Hokitika

Online video continues to drive significant increases in data traffic

• 1,052Gbps average network throughput at 9pm in May 2017, up 46% from May 2016

• 147GB average monthly household data usage in May (125GB average on copper; 217GB on fibre)

ENDS

For further information:

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

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Investor Presentation 29 June 2017

OVERVIEW

> Total fixed line connections decline continued at broadly the same rate in April-May, while broadband decline slowed modestly

• Ask for better broadband advertising campaign achieving strong awareness

• new record for fibre orders and connection activity in May

• completing a fibre connection every minute of working day

> Shift to utility regulatory framework confirmed by Government announcement on 1 June

> Chorus UFB uptake at 35% at end of May

• 264,000 UFB customers with 756,000 able to connect

• May fibre orders were up 33% from same time last year

• UFB2 rollout has commenced in Hokitika

> Online video continues to drive significant increases in data traffic

• 1,052Gbps average network throughput at 9pm in May 2017, up 46% from May 2016

• 147GB average monthly household data usage in May (125GB average on copper; 217GB on fibre)

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INVESTOR PRESENTATION 29 JUNE 2017

REGULATION: MOVING TO A UTILITY MODEL

> Final regulatory framework policy decisions announced by Government on 1 June

Fibre – post 2020 utility framework

• Regulated asset base (RAB) to be set by Commerce Commission: o depreciated historic cost for pre 2011 assets

• depreciated actual cost for post 2011 assets and

• increased by unrecovered losses incurred pre 2020

• no retrospective efficiency review

• Revenue cap with commercial geographically averaged pricing except for:

• two anchor products (voice only + entry level broadband - 100/20Mbps fibre) at 2019 prices + CPI

• similar price cap for direct fibre access

• after 2023 the Commission can review the revenue cap model, as well as the anchor products subject to specified conditions & statutory criteria

Copper – post 2020 legacy framework

Where fibre is available:

• Copper network to be deregulated and Telecommunications Service Obligation (TSO) removed

• Chorus can withdraw copper service, subject to minimum consumer protection requirements

Where fibre is not available:

• Copper remains regulated and TSO applies

• Copper pricing capped at 2019 levels with CPI adjustments

• Commission required to review pricing framework no later than 2025

Legislation to be introduced in second half of 2017 (NB. General Election 23 September 2017)

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INVESTOR PRESENTATION 29 JUNE 2017

REGULATION: BUILDING BLOCK MODEL (BBM)

• A regulatory framework that supports efficient private sector investment to meet network upgrades and increasing consumer demands through ongoing incentives to innovate, invest and improve efficiency for the long term benefit of consumers.

• Legacy focus on promotion of infrastructure competition no longer a Government priority for fixed line access regulation.

• Government says the Commission should allow UFB providers the opportunity to earn normal returns over the lifetime of their investments (financial capital maintenance concept). An investment grade credit rating is a pre-requisite to receive UFB funding and to support ongoing investment.

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Opex
ANNUAL MAXIMUM
Initial RAB
ALLOWABLE
value
Regulatory Return on REVENUE
WACC capital
RAB Anchor and price
capped products:
Depreciation Return of  voice
capital  100/20Mbps fibre
Capex  direct fibre
NB. Symmetrical wash-
Regulatory
up for unders or overs
Asset lives tax allowance
Building block 4
cost stack
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REGULATION: BBM DETAILS

The Commission will set the upfront input methodologies to provide a transparent and predictable guide to how regulated assets will be treated under the new framework ▪ draft legislation may provide further clarity on BBM details that are not yet prescribed Chorus view

	Chorus view
Assets	Total Chorus assets less copper specific assets and less a % of shared assets (backhaul). Post 2011 investment including shared infrastructure driven by fibre upgrade.
Opening asset valuation	Commission to determine asset valuation methodologies consistent with legislative direction on fundamental points: use of DHC (book value) for pre 2011 assets, DAC for post 2011 assets. Initial RAB must include all costs to meet UFB obligations, standard and non standard UFB installation costs, and unrecovered UFB losses. No retrospective efficiency.
Regulatory WACC	5.56% mid point for Dec 2015 copper decisions. Higher WACC justifiable in a BBM.
Opex	Total Chorus opex less copper specific spend.
Revenue cap (and price caps)	Form of control prescribed for 2020. Revenue cap to be sufficient to cover all costs and allow a reasonable return. Consistent with other utilities in NZ with a symmetrical wash up. Commercial flexibility on non-anchor products and demand mix as between anchor/non-anchor products is critical to enable a fair chance to reach the revenue cap and the aims of BBM regulation of critical infrastructure.
Funding	RAB reflects actual costs of the assets regardless of how financed. CFH funding was part of commercial construct. Substantial private sector risk taken on to support accelerated build and take up including performance hurdles and potential penalties with no guarantees on success or regulatory and market risks.

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INVESTOR PRESENTATION 29 JUNE 2017

CHORUS CONNECTION TRENDS

Chorus connections trends

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1800000
1600000
1400000
1200000
1000000
800000
600000
400000
200000
0
Dec 2015 March 2016 June 2016 Sept 2016 Dec 2016 March 2017
Data services (copper) Fibre premium (P2P)
Fibre broadband (GPON) VDSL
Copper UBA Unbundled copper (no broadband)
Baseband copper (no broadband)
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> Chorus connections declining as:

• voice only lines diminish either through migration to broadband and/or mobile/wireless

• other Crown fibre partners grow broadband share (~125k connections at 31 March)

• fixed (mobile) wireless operators encourage existing customers onto their own networks

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INVESTOR PRESENTATION 29 JUNE 2017

NZ BROADBAND MARKET – BY TECHNOLOGY

IDC NZ broadband market by technology

1,800,000 1,600,000 1,400,000 1,200,000 1,000,000

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1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
-
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017
Chorus xDSL Chorus mass market fibre
Chorus premium fibre Local fibre companies (UFB)
Non-UFB fibre networks Other xDSL
Vodafone cable Fixed (mobile) wireless
Source: IDC
Legacy fixed wireless, satellite
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> Demand for broadband continues to grow

• broadband penetration still increasing

• continued premises growth as result of New Zealand’s migration/population inflows

• Network competition has increased

>

• other local fibre companies expanding footprint to ~430k premises

• fixed (mobile) wireless operators expanding rural and urban footprint

• consolidation of legacy wireless/satellite market

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INVESTOR PRESENTATION 29 JUNE 2017

NZ BROADBAND MARKET – BY RETAILER

– IDC NZ broadband market share by retailer

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-
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017
Spark Vodafone Orcon Vocus 2degrees Trustpower Rest of Market
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1,600,000

• 1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

Fibre rollout is a churn event

• smaller retailers have been growing their share of overall market

• intense retail competition focused on unlimited data and 100Mbps fibre as entry level plan

• retail plans increasingly bundle content (e.g. Netflix, Sky TV) and/or electricity (e.g. Trustpower, Vocus)

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INVESTOR PRESENTATION 29 JUNE 2017

BETTER BROADBAND CAMPAIGN

• Campaign to upgrade customers to fibre, or VDSL as a stepping stone to fibre, commenced in May

• strong response to above the line campaign

  • 80,000 unique visitors to askforbetter.co.nz

  • 29,000 address checks: 9k could upgrade to VDSL and 10k could upgrade to fibre

• Chorus is supporting RSPs with contributions to modem costs for qualifying connections upgraded to fibre or VDSL:

• $150 per connection for ADSL to fibre (100Mbps+) upgrades

• or $100 per connection for ADSL to VDSL upgrades

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INVESTOR PRESENTATION 29 JUNE 2017

FOCUS ON FIBRE CONNECTIONS

What we achieved	Dec 2015 Jul 2016 April 2017
A better customer experience than ever before	Lead times 20 days 16 days 11 days
	Customer satisfaction 6.6 6.8 7.3
	Customer escalations 6% 8% 5%
Better performance in the field	Technician reschedules 14% 10% 4%
	Doing more jobs than ever 421/day 537/day 550/day
	Meeting customer commitments 85% 80% 90%
	Meeting business customer commitments 58% 65% 95%
MDU connection improvements	More apartments connected to fibre than ever 8400 completed in the first five years 5400 completed in the last six months
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FIBRE ROLLOUT AND UPTAKE

Chorus fibre connection activity - all NZ

• Fibre orders increased significantly in May

• Ask for better campaign and retail incentives stimulating demand

• release of new fibre ready addresses increases at end of build year:

  • 756,000 customers able to connect at 31 May (vs 708k at 31 March)

  • 264,000 customers connected within UFB footprint

• weighted average lead time for fibre connection increased to 18 days

• 30k work in progress connections (up from 23k in March), including orders requiring consent

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25000 25000
May 2017 orders increased 33% vs May 2016
20000 20000
15000 15000
10000 10000
5000 5000
0 0
Connections built and activated Additional connections completed
Orders (net of cancellations and rejections in the month)
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17
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INVESTOR PRESENTATION 29 JUNE 2017

FIBRE DEMAND KEEPS GROWING

• 35% of potential customers have connected to fibre

• demand continues to accelerate in newly completed areas

• fibre uptake spans all ages, incomes and family types

• fibre has 100% awareness and highest satisfaction, loyalty and likelihood to

  • recommend (source: Colmar Brunton Broadband Market Monitor Survey, March 2017 )

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> UFB2 build underway

• Hokitika first UFB2 area: trialling “batch” approach to connections at time of build

• build complete target of 5,000 premises in FY18, with build work also starting in FY18 for FY19 premises.

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INVESTOR PRESENTATION 29 JUNE 2017

DATA DEMAND KEEPS GROWING

> Online viewing is driving data demand

• Our network traffic peaks between 8:30pm and 9:30pm each day and has grown almost 50% in the last year

• 147GB average monthly household data usage on our network in May 2017 (103GB in May 2016)

  • 125GB average on copper

  • 217GB on fibre

• TVNZ has begun livestreaming all channels online

• 6 out of 10 households now on unlimited data plans

Average Monthly Data Usage (GB) per Broadband Connection

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250
200
150 147
123
100 103
84
71
50
-
May-15 Dec-15 May-16 Dec-16 May-17
Copper Fibre Average
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*Source: Nielsen CMI – Household Shopper, use internet at home and know their data plan

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INVESTOR PRESENTATION 29 JUNE 2017

PEAK HOUR – AN EVER GROWING MOUNTAIN OF DATA

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9PM
9PM
6PM
6PM
3PM
3PM
6AM
6AM
Time of day Time of day
Note: data represents average of traffic across all days in May, excluding corporate traffic. 14
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INVESTOR PRESENTATION 29 JUNE 2017

FIXED LINE DELIVERS CONSISTENT PERFORMANCE

> Customers value reliability and consistency of service

• our network is designed to support peak demand: ADSL, VDSL and fibre perform within ~97% peak speed band

• fluctuations in fixed line performance typically reflect retailer network constraints

• wireless and cable networks share capacity and are more prone to congestion at peak times

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Source: TrueNet

Source: TrueNet

INVESTOR PRESENTATION 29 JUNE 2017

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WIRELESS PERFORMANCE HIGHLY VARIABLE

> Buffering has increased significantly on wireless in the last month

• Truenet data shows buffering events as a percentage of all measurements increased to 25% in May

Buffering Average vs Peak Hours (8-9pm)

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30
25.8%
25
20
% April May
15
11.1%
10
5
0
Fibre VDSL ADSL Wireless
(mobile)
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Source data: TrueNet Urban Broadband Report – April, May 2017

Source: TrueNet

INVESTOR PRESENTATION 29 JUNE 2017

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COPPER NETWORK PERFORMANCE

> Copper broadband performance increasing steadily

• new Dynamic Line Management (DLM) technology deployed in April resulted in increase in average download speeds of:

• 18% on ADSL connections

• 8% on VDSL connections

• now looking at options for vectoring deployment in selected areas

> Focus on copper fault performance

• our fault restoration time is averaging ~24 hours despite very challenging weather in April-May

• on average, a copper broadband fault on our network occurs just once every five years

Average Copper Connection Speed

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25
20
15
DLM
10 change
VDSL
bandplan
5
change
0
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DLM automatically optimises ethernet-based ADSL and VDSL line settings for speed and stability

• we’ve identified ~20k customers in higher fault areas who could benefit from shift to fibre

INVESTOR PRESENTATION 29 JUNE 2017

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WHAT WE’RE FOCUSED ON

• Better broadband • Driving broadband uptake and retention • Providing customers with a network that is fast, reliable and congestion free Transforming customer experience and cost • Optimising the fibre/VDSL connection experience for customers • Implementing new models for fibre connection

• Delivering the future broadband network • Delivering our UFB rollout on time and on budget • Underpinned by a regulatory framework that supports ongoing investment Creating opportunities to grow • Identifying new open access business opportunities, including the role of fibre in future uses cases such as non-broadband access points and the Internet of Things

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INVESTOR PRESENTATION 29 JUNE 2017
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LEVERAGING THE UTILITY OF OUR NETWORK

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NZ premises growth:
~400,000 new homes
expected in Auckland
by 2040
Urban fibre footprint
enabling new non-
broadband connections
(e.g. CCTV, micro cells)
National network
footprint enables HD
online TV to 95%+ of Data growth driving Exchange diversity
premises demand for regional and network
and mobile backhaul proximity an asset
for data centre usage
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INVESTOR PRESENTATION 29 JUNE 2017

Appendices

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UNDERSTANDING OUR BUSINESS

> Our revenues are largely from copper (mostly regulated) and fibre (largely contracted) connections

	Voice Broadband	Fixed line connections	31 March 2017	31 Dec 2016	30 Sept 2016	30 June 2016	31 March 2016	31 Dec 2015
		Unbundled Copper(including SLU/SLES)	90,000	99,000	105,000	110,000	114,000	119,000
		Baseband copper (no broadband)	328,000	343,000	354,000	368,000	~~Re-check~~ 381,000	395,000
		Fibre broadband (GPON)	259,000	231,000	203,000	167,000	136,000	112,000
		VDSL (includes naked)	224,000	199,000	179,000	159,000	~~category~~ 148,000	139,000
		Copper ADSL (includes naked)	716,000	784,000	847,000	900,000	names, a 944,000	dd 972,000
		Data services (copper)	9,000	9,000	10,000	10,000	Sept? 11,000	11,000
		Fibre premium (P2P)	13,000	13,000	13,000	13,000	13,000	13,000
		Total fixed line connections	1,639,000	1,678,000	1,711,000	1,727,000	1,747,000	1,761,000

> We now think of connections across three ‘zones’

	Non-UFB areas (~15% population)	Chorus UFB areas	Local Fibre Company UFB areas	TOTAL
Indicative No. of Chorus	67,000 voice only	267,000 voice only	84,000 voice only	418,000
connections by zone at 31 March	174,000 broadband	854,000 broadband	171,000 broadband	1,199,000
TOTAL (N.B. excludes data services	241,000	1,121,000	255,000	1,617,000
and fibre premium connections)

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INVESTOR PRESENTATION 29 JUNE 2017

NZ FIXED LINE MARKET

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Vocus
2 [o]
MyRepublic
NOW $49 intro plan
Local Fibre Companies
22
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Indicative NZ broadband coverage

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100 No fixed line broadband coverage
Government target (2025)
Rural Broadband Initiative (RBI) 2011-2017
wireless access to 275k homes + businesses. Last 1% to access 10Mbps
110k able to access Chorus fixed broadband: 99% to access 50Mbps
90
57% get 5Mbps+; 50% 10Mbps+; 34% 20Mbps+
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	No fixed line broadband coverage Last 1% to access 10Mbp 99% to access 50Mbps Rural Broadband Initiative (RBI) 2011-2017 wireless access to 275k homes + businesses. 110k able to access Chorus fixed broadband: Government target (2025	No fixed line broadband coverage Last 1% to access 10Mbp 99% to access 50Mbps Rural Broadband Initiative (RBI) 2011-2017 wireless access to 275k homes + businesses. 110k able to access Chorus fixed broadband: Government target (2025	No fixed line broadband coverage Last 1% to access 10Mbp 99% to access 50Mbps Rural Broadband Initiative (RBI) 2011-2017 wireless access to 275k homes + businesses. 110k able to access Chorus fixed broadband: Government target (2025	No fixed line broadband coverage Last 1% to access 10Mbp 99% to access 50Mbps Rural Broadband Initiative (RBI) 2011-2017 wireless access to 275k homes + businesses. 110k able to access Chorus fixed broadband: Government target (2025	No fixed line broadband coverage Last 1% to access 10Mbp 99% to access 50Mbps Rural Broadband Initiative (RBI) 2011-2017 wireless access to 275k homes + businesses. 110k able to access Chorus fixed broadband: Government target (2025
	57% get 5Mbps+; 50% 10Mbps+; 34% 20Mbps+
0 10 20 30 40 50 60 70 80 2011 2017 UFB1 Population within reach (%) Chorus Ultra Fast Fibre (central North Island, lines co.) Enable (Christchurch, council owned) Northpower (Whangarei, lines co.) Fibre to the Node (FTTN) (ADSL2+/VDSL)
					UFB2
	Fibre to the Node (FTTN) (ADSL2+/VDSL)
			Non-UFB population: UFB2 population: UFB1 population:		777,776 423,226 3,746,069
			TOTAL		4,947,061
	Ch
	orus Ultra Fast Fibre (central		,, , premses; . m connections (~70% of UFB1) premses; connections (~85% of UFB2) 460,000 195k premises 23k premises; 12
	UFB1 North Island, lines co.) Enable (Christchurch, council owned)		towns/areas 433,000 ~180k premises 500 premises
	Northpower (Whangarei, lines co.)

UFB UPTAKE BY REGION – March 2017

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100% BUILD 100% COMPLETE
90%
80%
70%
60%
50%
40%
% uptake relative
to capable 30%
addresses
20%
10%
0%
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34% UPTAKE

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Jun-16 Sep-16 Dec-16 Mar-17 % of build complete 31 March
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INVESTOR PRESENTATION 29 JUNE 2017

Disclaimer

This presentation:

• Is provided for general information purposes and does not constitute investment advice or an offer or invitation to purchase Chorus securities.

• Includes forward-looking statements. These statements are not guarantees or predictions of future performance. They involve known and unknown risks, uncertainties and other factors, many of which are beyond Chorus’ control, and which may cause actual results to differ materially from those contained in this presentation.

• Includes statements relating to past performance which should not be regarded as a reliable indicators of future performance.

• Is current at the date of this presentation, unless otherwise stated. Except as required by law or the NZX Main Board and ASX listing rules, Chorus is not under any obligation to update this presentation at any time after its release, whether as a result of new information, future events or otherwise.

• Should be read in conjunction with, and is subject to, Chorus’ audited consolidated financial statements for the year to 30 June 2016, consolidated interim financial report for the six months ended 31 December 2016, and NZX and ASX market releases.

• Contains information from third parties Chorus believes reliable. However, no representations or warranties are made as to the accuracy or completeness of such information.

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