Options for Chorus

December 15th, 2013 at 12:00 pm by David Farrar

The Herald reports:

could cut its funding shortfall for the ultra-fast broadband project from $1 billion to $200-250 million if the embattled-lines company introduced savings initiatives, changes to dividend policy and debt headroom, says an independent report released today.

Chorus said last month that a Commerce Commission ruling to cut wholesale internet prices could lead to a $1.07 billion funding shortfall for its portion of the ultra-fast broadband scheme.

It’s not a funding shortfall for UFB. It is a funding shortfall for Chorus. Chorus does more than UFB. They have signed a contract committing them to UFB in return for a subsidy by way of loan.

The Government then commissioned Ernst & Young (EY) Australia to investigate how the cuts would impact on Chorus’ ability to deliver on its UFB contracts with the Crown.

This report was released today and said Chorus could reduce this $1.07 billion funding shortfall to between $200 and $250 million by introducing “cash-flow savings initiatives”.

Possible revenue, operating expenditure and capital expenditure initiatives could reduce the funding gap by $400 to $450 million, the report said.

The report said that another $290 million of the funding gap could be reduced if Chorus made changes to its dividend policy.

The report suggested that if a two year “dividend holiday ” was introduced and then payouts made of 12.75c per share until 2020, the funding gap would come down by another $290 million.

As well as this, changes to debt headroom could reduce the shortfall by $130 million, the report said.

Even if these changes were made, EY said there was still a risk Chorus might breach its agreements with its banks.

The report is here. It is excellent. They note:

In FY13 Chorus’ return on equity was  29.7%, which is significantly higher than other infrastructure businesses which have average returns of 12.5% (New Zealand peers) and 11.2% (Australian peers).

Even with the Commerce Commission determination, Chorus remains a profitable company. They do run into problems around their debt ratios and these can be a serious issue for them.

Chorus and CFH have already begun the discussions about possible changes to UFB contracts to help close the funding gap.

In releasing the report today, Communications Minister Amy Adams said the Government expected Chorus to meet a “significant part” of the funding shortfall itself.

“The Government will be monitoring closely the progress of discussions between CFH and Chorus,” she said.

This is as it should be. I have said all along that government intervention should be the last resort, not the first.  Chorus needs to do internally what it can to stay within its debt agreements. If after that there is still a shortfall, then some tweaking to the UFB contracts (such as longer repayment times) may well be appropriate.

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11 Responses to “Options for Chorus”

  1. tvb (3,938 comments) says:

    The UFB project is still hugely expensive. They spent about 6 hours at my place for a fairly simple installation. I was only about 10m from the connection. All this is costing me a mere $10 extra a month for the basic plan. It does not add up to me, time will tell on this. Already the cross subsidy from copper has fallen apart. It is going to get ugly.

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  2. Anthony (736 comments) says:

    Yet Northpower can get it done in two hours.

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  3. Jack5 (4,216 comments) says:

    It’s a repeat of Cunliffe’s ripping off Telecom shareholders for billions by unbundling the copper network without compensation. Now the mob wants Chorus shareholders rorted. Why would anyone invest in NZ but communist Chinese billionaires looking for a possible bolt-hole? No wonder the asset sales programme is poorly supported internationally.

    Standard and Poor’s and Moody’s have Chorus on credit watch and review respectively. Chorus’s share price is down 48 per cent in four months.

    A quick look at the 2013 annual report shows Chorus ploughed into its network $264 million more cash than it earned. Government investment (in loans and semi-equity) met $198 million of this. Dividends took out $83 million.

    Ernst and Young’s company seems to suggest all can be solved by deferring dividends. Yet Chorus is being supported by taxpayer funding – the dividends are a side issue.

    Fibre-to-the-home itself is the problem. Competitors, the industry interest group, TUANZ, geeks, and others want the UFB fibre-to-the-door rollout to continue as projected despite low take-up being proof it is way, way ahead of demand.

    The whole user market has changed and is showing that fibre-to-the-home, instead of being somewhat ahead of demand is now wildly ahead of demand.

    As pointed out by posters on Kiwiblog a number of times, the change in demand has come from the consumer switch to smart phones and tablets. For consumers, laptops are following desktops from the mass market to niches. Smart phones and tablets can link to the internet by cellphone networks first, and second, through home WiFi to home broadband modems. The main thing, however, is that smart-phone users very seldom want to watch on the small screens data-heavy movies and such. If they link to the Internet through home WiFi, the wireless transmission reduces to a speed way, way, way below that of fibre.

    The speed and volume capacity of current ADSL copper are sufficient for the vast part of the present-day consumer market. There will be a hundred or two homes around the country where home businesses need the high upload speeds of fibre, and a few thousand couch potatoes who want it s they can download movie channels simultaneously. For most of us at present, however, fibre to the home is as unnecessary as a 320km/h car.

    It seems to me, that instead of rationally following changing consumer demand and at least slowing the fibre rollout, the industry and the geeks would have Chorus shareholders robbed and taxpayer billions continue to be sucked in.

    Consider the disregard of the change in demand for fibre to the home (as distinct from fibre to business demand) because of the sudden arrival of the Smart Phone Age. Contrast this with Telecom’s reaction when the advent of economic ADSL abruptly hanged the broadband market decades ago. Suddnely, copper had new potential and cable was an expensive option for TV addicts. Telecom under Roderick Deane stopped dead in its tracks the rollout of a cable network in Auckland to concentrate on ADSL.

    IMHO, the present mess is typical of what happens when Governments delve into industries and markets that free enterprise can service.

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  4. Jack5 (4,216 comments) says:

    Whoops edit…. “when the advent of economic ADSL changed the broadband market decades ago.

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  5. Ed Snack (1,535 comments) says:

    Interesting findings, if Chorus makes nearly 30% on equity and yet has serious problems funding itself then it is surely way over-geared ? Was that part of the split, or have they consistently paid excessive dividends to strip capital out of the company relying on inflated earnings to cover the interest charges. Because I can’t be arsed looking it up, anybody know what their gearing is like ?

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  6. OneTrack (1,957 comments) says:

    “Chorus does more than UFB”

    It appears many people don’t know that.

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  7. slijmbal (1,133 comments) says:

    Two words

    Moral Hazard

    ’nuff said

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  8. Jack5 (4,216 comments) says:

    Re Ed Snack’s 2.05 post:

    Tele-troughers make a lot out of Chorus’s low equity-to-total-assets ratio (net of Crown stuff, on a quick look it seems to be 29.4 per cent).

    However, they typically overlook a key reason it is low is the low value in Chorus’s books of the copper network. To my untrained eye, this is depreciated to $641 million from a historical cost of $2.39 billion.

    Historic cost valuation of assets caused much distortion and swallowing up of companies in the Brierley raiding era.

    What then should the current cost valuation be? Replacement? It would apparently cost around the same to create a national copper network as it would to build one of fibre, though as a layman I would expect (probably wrongly) the many overhead copper lines to be cheaper. The fibre network cost seemed to start at $1.35 billion, and like most big capital project costs will probably end up around at least $2 billion.

    Market price valuation? Who would buy a copper network? Yet if it stood alone and competed at lower cost with fibre in the streets, who is to say that it wouldn’t be quite adequate for smart phone and tablet users at a sharp but profitable retail prices.

    I reckon in that hypotethical case, with fibre a completely new commercial entity, some new Brierley would swoop in buy the for-sale national copper network, make a lot of cash and win heaps of smart-phone/tablet homes who would be happy with copper broadband and perhaps even line phones as back-ups. Sadly, however it would likely be foreign-owned Vodafone or similar that would sweep in and rake in our cash.

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  9. burt (7,085 comments) says:

    Sounds like the gummit ( the socialist National party ) is trying to say ‘too big to fail’ without needing to resort to that phrase… Keep wasting tax payers money trying to save face National … It’s not like you’ve had the balls to change anything else since taking over Labour’s economic direction ….

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  10. Ross Nixon (599 comments) says:

    How about FTTN (fibre to the node) instead of FTTH (fibre to the home) – for cost savings?
    The last 100-200m can use the new G.fast over existing copper; which is good for up to 1Gb/s

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  11. Nigel Kearney (747 comments) says:

    In the alternate universe some people seem to live in, Chorus shareholders should just shrug their shoulders and accept low or zero dividends for a few years and a dwindling share price.

    In reality there are two options for Chorus: increase prices for non-regulated items such as connection fees, or reduce maintenance on the copper network allowing it to fall into disrepair. Ideally the Commerce Commission would be the first to starting having technical problems with its phone and internet lines, though of course it would be wrong to do that deliberately.

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