Chorus Limited

Level 10, 1 Willis Street

P O Box 632

Wellington 6140

New Zealand

Email:

company.secretary@chorus.co.nz

STOCK EXCHANGE ANNOUNCEMENT 4 December 2014

Analysys Mason presentation Attached is the presentation to accompany a briefing today by Chorus’ consultants,

Analysys Mason, on the total service long run incremental cost (TSLRIC) UCLL and UBA models submitted as part of the Commerce Commission’s final pricing principle

processes. The session is a technical briefing on the TSLRIC models to help interested parties

who intend to review the Analysys Mason models understand how the model works. The briefing is not part of the submission process.

The briefing is from 10am – 12pm today and is available via webcast at www.chorus.co.nz/webcast.

ENDS

For further information:

Brett Jackson Investor Relations Manager

Mobile: +64 (27) 488 7808 Email: brett.jackson@chorus.co.nz

For

per

sona

l use

onl

y

38598-494

Chorus UCLL and UBA models briefing

4 December 2014 • James Allen

For

per

sona

l use

onl

y

38598-494

UCLL model

UBA model

Contents

2F

or p

erso

nal u

se o

nly

38598-494

UCLL model

Operator parameters

Technology

Services

Implementation

Result

Contents

3UCLLF

or p

erso

nal u

se o

nly

38598-494

UCLL model

Overall approach: use techniques of bottom up LRIC modelling,

but based on an adjusted version of the existing set of assets

Adjustments applied are for:

Increased use of aerial

Optimisation of route length

Use of network sharing

Lower expected peak demand for copper pairs

Scope of model: access network; excludes transaction costs

4UCLLF

or p

erso

nal u

se o

nly

38598-494

Operator parameters

Type of operator: hypothetical

Network footprint: Current national network coverage

offering NC-UCLL and SLU to existing premises covered

Scale: demand similar to Chorus

5UCLLF

or p

erso

nal u

se o

nly

38598-494

Technology

Technology – copper to the home

those existing customers served with wireless links are not

relevant to NC-UCLL costs

Cabinets are used where cabinets are currently used

Scorched node: Chorus MDFs and cabinets are retained

Geo-typing – national model

asset counts gathered and unit costs applied at the level of

the eleven service company areas (CSA), as the costs

vary across these areas due to various cost drivers (e.g.

regional variations in labour rates)

6UCLLF

or p

erso

nal u

se o

nly

38598-494

Services

Products modelled: services using the copper access

network including SLU, NC-UCLL, UCLFS, HSNS, etc) –

but not UFB

The model uses “technical services": non-overlapping

services that map to specific network assets

This may include for example route, cabling, joints, duct,

manholes and poles that are in a particular part of the

network.

Future demand volumes: held constant for modelling, taking

account of the Commission's position (although we believe

that it would be correct to allow for a decline due to non-

Chorus UFB)

7UCLLF

or p

erso

nal u

se o

nly

38598-494

Implementation

Tool – Excel; one workbook; no macros

Model is in real terms

Key results are provided in nominal terms

Time period

Multi-year model

Depreciation method chosen only requires a single year

calculation;

Determining a unit cost that is constant in nominal terms

for 5 years requires 5 years to be calculated

8UCLLF

or p

erso

nal u

se o

nly

38598-494

Increment and common cost markups

Increment – all modelled services on access network

Mark-ups for common costs are available, but not used

(business overhead costs are included within the

incremental cost, allocated via an EPMU)

9F

or p

erso

nal u

se o

nly

38598-494

Total costs

Asset counts come from NetMap, a Chorus GIS

As noted above we have adjusted these in a number of

ways (e.g. more aerial)

Unit costs – based on costs faced by Chorus for modern

asset type

Trenching costs based on costs recently incurred and

planned for the UFB deployment, with predicted costs for

areas where Chorus has not deployed UFB taking into

account the impact of cost drivers such as density, terrain

and traffic.

Opex approach – based on Chorus operating costs with

bottom up modelling of selected cost categories including

property and electricity costs

10UCLLF

or p

erso

nal u

se o

nly

38598-494

Allocation approach

Services sharing trench/duct/cable/UUB are allocated costs

based on the number of subscribers

Opex is grouped into various categories, each treated

distinctly

some allocated based on drivers; some EPMU

11UCLLF

or p

erso

nal u

se o

nly

38598-494

Annualisation

Modified Tilted Annuity is used

Flat demand makes this equivalent to tilted annuity

Tilt for each asset from asset price trend

WACC – 8.1% post-tax nominal

Lifetimes from Chorus fixed asset register (FAR)

Asset annual unit costs -> technical service annual unit

costs -> service annual unit costs + markup =TSLRIC

12UCLLF

or p

erso

nal u

se o

nly

38598-494

Versions

Confidential version

Restricted version

certain information has been overwritten

Public version

much information has been overwritten

All versions function in the same way – only the data differs

Some outputs in the full model differ slightly as a result of

the anonymisation of data (which includes some rounding)

13UCLLF

or p

erso

nal u

se o

nly

38598-494

Result

The replacement cost of the modelled network (excluding costs

reported in the UBA model) is NZD 14 B in 2013 real terms

14Result

Service Unit cost (NZD/ month)

NC-UCLL 74.10

SLU 81.43

UCLFS 84.87

For

per

sona

l use

onl

y

38598-494

UBA model

Operator parameters

Technology

Services

Implementation

Result

Contents

15UBAF

or p

erso

nal u

se o

nly

38598-494

UBA model

Overall approach:

use bottom up approach for electronics;

use existing locations and existing passive assets for

connections between: cabinet / exchange, and exchange /

Ethernet Aggregation Switch sites

Adjustments are made for optimisation of route length

Scope of model: network between the DSLAM and the first

switch; excludes transaction costs

16UBAF

or p

erso

nal u

se o

nly

38598-494

Operator parameters

Type of operator: hypothetical

Network footprint: Current Chorus DSL network coverage

offering UBA to existing premises covered

Scale: demand similar to Chorus UBA

17UBAF

or p

erso

nal u

se o

nly

38598-494

Technology

Technology – DSL on copper

Scorched node:

Cabinet DSLAMs are deployed where they are currently

located

DSLAMs also deployed at customer sites and exchanges,

as per current locations

Chorus MDF and EAS locations also retained

Geo-typing

Divides DSLAM locations into: MDFs, cabinets, user sites

Each has 5 different "geotypes" (different sizes)

EAS locations are modelled individually

18F

or p

erso

nal u

se o

nly

38598-494

Services

Products modelled: all services using the Chorus network

between the DSLAM and the switch including UBA, HSNS

etc

The model uses “technical services": non-overlapping

services that map to specific network assets

Future demand volume: forecast demand growth for

subscribers and traffic

19UBAF

or p

erso

nal u

se o

nly

38598-494

Implementation

Tool – Excel; one workbook; no macros

Model is in real terms

Key results are provided in nominal terms

Time period

Multi-year model

depreciation method chosen only requires a single year

calculation;

determining a unit cost that is constant in nominal terms for

5 years requires 5 years to be calculated

20UBAF

or p

erso

nal u

se o

nly

38598-494

Increment and common cost markups

Increment – all services offered on Chorus network between

the DSLAM and first switch

Mark-ups for common costs are available, but not used

(business overhead costs are included within the

incremental cost, allocated via an EPMU)

21UBAF

or p

erso

nal u

se o

nly

38598-494

Total costs

Asset counts come from

Bottom up calculation for electronics

Existing feeder routes to cabinets (from UCLL model)

Existing inter-exchange links (from Chorus data)

Unit costs – based on costs faced by Chorus for modern asset type

Modern equivalent asset chosen for each type of electronics

Trenching costs based on costs recently incurred and planned for the

UFB deployment, with predicted costs for areas where Chorus has not

deployed UFB taking into account the impact of cost drivers such as

density, terrain and traffic management costs.

Opex approach – based on Chorus operating costs with bottom up

modelling of selected cost categories including property and electricity

costs

22UBAF

or p

erso

nal u

se o

nly

38598-494

Allocation approach

Access network: services sharing trench/duct/cable/UUB

are allocated costs based on the number of subscribers

Core network: costs divided between UBA and other core

network services (such as HSNS) on the basis of traffic

Opex is grouped into various categories, each treated

distinctly

some allocated based on drivers; some EPMU

23UBAF

or p

erso

nal u

se o

nly

38598-494

Annualisation

Modified Tilted Annuity is used (UBA demand is forecast to

change over time)

Tilt for each asset from asset price trend and demand

WACC – 8.1% post-tax nominal

Lifetimes from Chorus fixed asset register (FAR)

Asset annual unit costs -> technical service annual unit

costs -> service annual unit costs + markup =TSLRIC

24UBAF

or p

erso

nal u

se o

nly

38598-494

Versions

Confidential version

Restricted version – certain information has been

overwritten

Public version – much information has been overwritten

All versions function in the same way – only the data differs

25F

or p

erso

nal u

se o

nly

38598-494

Result

The replacement cost of the modelled network is NZD 2 B in

2013 real terms

26UBA

Service Unit cost (NZD/ month)

EUBA0 16.57

For

per

sona

l use

onl

y