UPDATE: Chorus, awaiting final pricing determination, reins in rollout costs

Monday 25th August 2014

Chorus, the telecommunications network operator, managed to rein in the costs of its ultra-fast broadband rollout last year but its outlook for earnings hangs on the regulator's final position on pricing of copper line network services.

Profit fell 14 percent to $148 million in the year ended June 30, meeting market expectations, as sales rose to $1.058 billion from $1.057 billion. But chief executive Mark Ratcliffe said the company's "solid" financial performance has been overshadowed by Chorus's need to slash costs in anticipation of regulated price cuts coming in December so that it can meet its obligations to build the UFB network.

"Chorus remains of the view that today’s regulatory framework is not appropriate for the new industry structure or the government’s policy objectives," Ratcliffe said.

He expects the Commerce Commission to have completed its final pricing principle for what Chorus can charge for its copper lines by April 2015, which will "ultimately determine if a fair rate of return will be achieved for network investment in the short to medium term." Investors are hopeful the pricing model the regulator is building will whittle back its initial findings, which were benchmarked off Scandinavian countries.

The outlook "is totally ComCom-dependent and on the findings of the final pricing principles," said Matt Goodson, who helps manage more than $700 million of equities at Salt Funds Management. "It is hard to imagine it could be worse."

Chorus cites the regulated price cuts and the costs of unbundled bitstream access initiatives, including the launch of the Boost product range that it hopes will fall outside the scope of regulated services, in forecasting earnings before interest, tax, depreciation and amortisation of $590 million to $605 million in 2015, down from Ebitda of $649 million in 2014.

Goodson says the outcome of the regulator's work is one of two "swing factors" for Chorus, the other being UFB rollout costs, which are becoming "under somewhat better control."

Chorus said today that it is about 31 percent through its UFB rollout, putting the services within reach of 353,000 end users. The average cost per premises passed of $2,948 was at the bottom end of the guidance range previously given of $2,900 to $3,200.

The company said it remains focused on reducing the cost of connection from the street to the customer, which averaged $1,680 per premise in the latest year. For multi-dwelling units costs are much higher at $6,500 per building in addition to standard connection costs, and Chorus said it will work with industry "to seek solutions that remove blockages in the current processes that drive cost and complexity."

The shares fell 0.6 percent to $1.72, having slumped 46 percent since the company was spun off from what is now called Spark New Zealand, formerly Telecom, in late 2011.

The company said shareholders have endured "a very difficult year" in the face of a weakening share price and the decision to stop paying dividends, and other costs, including for discretionary network investment, have been slashed.

The Commerce Commission’s initial pricing principle, delivered in November 2013, resulted in "a very material funding gap in Chorus’s business plan through to 2020, necessitating a fundamental review of the viability of Chorus’s business model and a huge effort to reshape Chorus’s business to secure a sustainable operating framework," the company said.

The full-year results show the decline in earnings included a 3.8 percent rise in operating expenses to $409 million, and a 12 percent increase in interest costs to $121 million. A breakdown of sales shows the changing profile of the company's services - sales of basic copper, its biggest business, fell 14 percent to $543 million while enhanced copper jumped 36 percent to $293 million. Revenue from fibre rose 25 percent to $75 million.

Labour made the biggest contribution to the gain in operating expenses, rising 18 percent to $79 million. Total capital spending fell to $679 million from $681 million, of which 83 percent related to fibre.

Total broadband connections rose by 51,000 to 1,163,000 in the latest year, as fibre broadband connections more than doubled to 42,000. Total lines remained "largely static," reducing by 3,000 during the period to 1,781,000, the company said.

BusinessDesk.co.nz

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