Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 


Regulatory black hole puts Chorus funding at risk

MEDIA RELEASE

5 November 2013

Regulatory black hole puts Chorus funding at risk

The Commerce Commission has today released its final decision on the pricing for Chorus' copper broadband (UBA) service.

The Commission’s final benchmarked UBA price of $10.92 is around a 50% reduction from the current $21.46 monthly charge. This means that the $44.98 per month Chorus currently charges retail service providers for a copper line and copper broadband service would reduce to $34.44. 

Under current legislation this pricing will apply from 1 December 2014 and Chorus estimates that this will have around a $142 million annualised EBITDA impact, based on connection numbers at 30 September 2013.  This is in addition to the around annual $20m EBITDA reduction from the December 2012 UCLL benchmarked decision. Chorus’ NPAT for the year ended 30 June 2013 was $171 million.

The UBA price announced today would imply around a $1 billion funding shortfall by 2020, reflecting a combination of loss of operating cash flows, reduced borrowing capacity and increased interest and funding costs.

“Without the proposed Government intervention, the loss of these revenues would have two very negative consequences for Chorus’ funding ability,” said Mark Ratcliffe, Chorus CEO.  “We would have much less cash every year to invest and we simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB.”

“The ability to finance the business cases of both Chorus and other LFCs, which were agreed when the UFB contracts were awarded, is missing from today’s decision.  This decision also undermines the intention to incentivise an efficient transition onto that network by attractive entry level fibre pricing. There is no guarantee this proposed reduction in wholesale prices would be passed through to consumers.”

Consequences of today’s regulatory decision

At the time of the Commission’s draft UBA decision on 3 December 2012, Chorus said that it may need to fundamentally rethink its business model, capital structure and approach to dividends.
Following today’s final UBA decision, and absent timely intervention by the Government to realign the policy settings to support the investment in and transition to fibre, Chorus will need to do the following:

• ·         Discuss today’s decision with existing lenders as well as the rating agencies who analyse Chorus’ credit worthiness.  Chorus was placed on “outlook negative” by Moody’s in March this year following a review initiated when the draft UBA decision was released;
• ·         Notify its bank lenders that absent the anticipated Government intervention in Chorus’ view this price change is likely to have a material adverse effect on 1 December 2014 under the terms of Chorus’ borrowing arrangement. If this did occur lenders would be entitled to trigger an event of default;
•          Evaluate the appropriateness of Chorus’ business model and the nature of its existing commitments.  The combination of significantly reduced operating cash flows, reduced borrowing capacity and increased cost of capital fundamentally changes the business model envisaged prior to demerger; 
•          Discuss with the Crown whether Chorus is still a credible UFB partner in the way intended at demerger and how Chorus might deliver the balance of its programme despite the very material funding gap in Chorus’ business implied by this decision;
•          Review Chorus’ current capital management settings, including capital structure, dividend policy and the potential need for a large future equity raising; and
•          Conduct a detailed evaluation of other options to minimise financial downside for Chorus.

“We are intensely disappointed with today’s decision.  We are proud of our role as a cornerstone partner in delivering the Government’s vision to build a fibre future for New Zealand.  Chorus is ahead in its UFB build programme, is leading an industry transition to fibre and making other investment to improve broadband in New Zealand. But unless the Government intervenes, it is likely that the benefits for New Zealand will be significantly compromised,” Mr Ratcliffe said.

Today’s benchmarking decision is once again below the cost of providing the service, and Chorus is now set to take up its option to move to a full economic cost model for the UBA price.  Together with UCLL this process may take around two years, leading to ongoing uncertainty for the entire industry. There is a vast range of evidence that supports today’s aggregate price of $44.98.

ENDS

© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Must Sell 20 Petrol Stations: Z Cleared To Buy Caltex Assets

Z Energy is allowed to buy the Caltex and Challenge! petrol station chains but must sell 19 of its retail sites and one truck-stop, the Commerce Commission has ruled in a split decision that acknowledges possible retail price coordination between fuel retailers occurs in some regions. More>>

ALSO:

Huntly: Genesis Extends Life Of Coal-Fuelled Power Station To 2022

Genesis Energy will keep its two coal and gas-fired units at Huntly Power Station operating until 2022, having previously said they'd be closed by 2018, after wringing a high price from other electricity generators who wanted to keep them as back-up. More>>

ALSO:

Dammed If You Do: Ruataniwha Irrigation Scheme Hits Farmer Uptake Targets

Enough Hawke's Bay farmers have signed up for water from the proposed Ruataniwha Water Storage Scheme for it to go ahead as long as a cornerstone institutional capital investor can be found to back it, its regional council promoter announced. More>>

ALSO:

Reserve Bank: OCR Stays At 2.25%

Reserve Bank governor Graeme Wheeler kept the official cash rate at 2.25 percent, in a decision traders had said could go either way, while predicting inflation will pick up as the slump in oil prices washes out of the data and capacity pressures start to build in the economy. More>>

ALSO:

Export Values Down: NZ Posts Biggest Annual Trade Deficit In 7 Years

New Zealand has recorded its biggest annual trade deficit since April 2009, reflecting weaker prices of agricultural commodities such as dairy products, beef and lamb, and increased imports of vehicles and machinery. More>>

ALSO:

Currency Events: NZ's New $5 Note Wins International Banknote Award

New Zealand’s new Brighter Money $5 note has been named Banknote of the Year in a prestigious international competition. The $5 note was awarded the IBNS Banknote of the Year title at the International Bank Note Society’s annual meeting. More>>

ALSO:

Get More From Scoop

 
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news