Chorus dials back copper spending to drive $400 mln of savings

Monday 24th February 2014 1 Comment

Chorus, the network operator spun out of Telecom in 2011, will clamp down on investing in its legacy copper lines to help drive some $400 million in savings over the next six years as it looks to fill a $1 billion funding hole to build a nationwide fibre network.

The Wellington-based company is rolling out several initiatives to mitigate the impact of looming Commerce Commission-enforced price cuts, which will see less re-investment in the copper lines, the introduction of new unregulated revenue streams, and operational cost cutting which will likely include job losses.

Chorus is targeting capital expenditure savings of between $300 million and $350 million up to and including the 2020 financial year, which will limit the amount of network spending outside the government sponsored ultrafast broadband and rural broadband initiative schemes, and reduce the amount of proactive maintenance.

The company also hopes to generate additional annual revenue of between $10 million and $15 million from providing non-regulated wholesale products, and achieve annual operational cost savings of between $20 million and $30 million.

As a consequence of the reduced capex, Chorus will forgo annual growth revenue of between $100 million and $150 million through the six-year period that would have been generated by the investment.

"We are managing for cash - if there are investment opportunities where we can secure something like full cost recovery up front, then we'll look at those," chief financial officer Andrew Carroll told analysts at a briefing. "In situations when managing for cash where payback is two or three years away, we just don't have that flexibility - it's a trade-off between value and cash."

Chorus today said it won't pay an interim dividend in response to the regulatory threat, which prompted auditor KPMG to tag the company's accounts as facing "significant uncertainties" that could impact on the value of its network.

Last year the Commerce Commission proposed cutting the network operator's pricing on its copper line services, which Chorus says has left a $1 billion hole in the funding to finance roll out of the government-sponsored ultrafast broadband network.

Chorus is in negotiations with Crown Fibre Holdings over building the network, but Communications Minister Amy Adams has indicated the government expects the company to fill most of the $1 billion funding hole it says has opened because of the impact of price cuts on its cash flow.

Chief executive Mark Ratcliffe said the company has discussed a number of potential initiatives with Crown Fibre Holdings, and hopes to announce the end to the first tranche of measures shortly.

Chorus is still mulling other capital management decisions, which it expects to make once there is more certainty around the outcome of the various initiatives and regulatory discussions.

The company's net profit fell to $78 million, or 17 cents per share, in the six months ended Dec. 31, from $84 million, or 21 cents, a year earlier, below First NZ Capital's forecast of $80.5 million. Earnings before interest, tax, depreciation and amortisation slipped 0.6 percent to $329 million on a 1.9 percent increase in revenue to $535 million.

Chorus's annual earnings will likely be at the top of its previous guidance range of flat to a low single digit decline in EBITDA, the company said.

Operational cash flow jumped 85 percent to $340 million from a year earlier, though still lagged the $355 million net cash spend on investing activities. Net debt was $1.84 billion, 2.8 times EBITDA and within Chorus's financial covenant of 3.75 times.

The company kept its capital spending guidance of between $660 million and $690 million this year, though increased forecast capex on fibre by $20 million to between $550 million and $570 million due to higher than budgeted demand and an increase in fully-funded school connection work.

The shares fell 1.1 percent to $1.42 in trading today. They have slumped 56 percent since their separate listing in late 2011.

BusinessDesk.co.nz

Comments from our readers

On 24 February 2014 at 9:13 pm Don Crump said:

The actions of Commerce Commission are outrageous. They have never justified their actions to shareholders. The constant meddling of the Commission undermines the market system that we operate in.