Chorus reports "solid operating" performance underpinned by cost focus and broadband growth

Chorus Limited has today reported a net profit after tax (NPAT) of $64 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $321 million for the six months ended 31 December 2014.

Operating revenue for the period was $527 million and operating expenses were $206 million while depreciation and amortisation for the period was $159 million, delivering earnings before interest and tax (EBIT) of $162m.

“This represents another period of solid operating performance by Chorus, underpinned by stable fixed line connection numbers, continuing broadband growth and the ongoing focus on initiatives to address the regulatory price cuts from 1 December 2014,” says Mark Ratcliffe, CEO, Chorus.

“A large number of revenue, operating cost and capital expenditure initiatives have now been implemented and Chorus will continue to limit discretionary spending.

“Chorus has invested more than $1.7 billion in fibre networks and capability since it was established in 2011, with about half a million end-users now within reach of better broadband through our UFB and RBI rollouts.”

Ratcliffe says Chorus has now agreed fixed price UFB deployment contracts with Visionstream and Downer covering about 90 percent of its rollout areas, providing Chorus with additional certainty on deployment costs through the remainder of the UFB deployment period.

Consequently, Ratcliffe says this has enabled Chorus to narrow its previous $1.70 to $1.90 billion guidance range for UFB communal costs to a new range of $1.75 to $1.80 billion.

Operating performance

According to figures, total lines increased by 5,000 during the period to 1,782,000, fibre connections increased by 55% to 65,000 and total broadband connections increased by 23,000 to 1,186,000.

Retail service providers are offering services more widely across the UFB footprint and this has fostered ongoing growth in fibre connections, although uptake varies widely from area to area.

Approximately 38 percent of Chorus’ UFB rollout is complete, meaning 421,000 end-users are now within reach of Chorus UFB, with Ratcliffe claiming the Rural Broadband Initiative has enabled better broadband for more than 81,000 rural fixed lines.

Increased fibre uptake is driving additional capital expenditure demands, with FY15 gross capital expenditure now expected to be $625 to $650 million, based on updated connection capital expenditure estimates.

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The standard cost to connect premises averaged approximately $1,350 for the period, in line with Chorus’ recent update to FY15 guidance of a range of $1,150 to $1,350 (excluding layer 2 and including standard installations and some non-standard single dwelling unit installations).

New commercial arrangements are expected to lower average costs in the second half of the financial year.

Regulation

On Friday last week, Chorus lodged its submission on the draft Final Pricing Principle (FPP) which included an extensive Analysys Mason review of the Commerce Commission’s TERA model.

While Chorus’ and TERA’s models are broadly aligned on first order methodology approaches and both support a significant rebalancing of the UCLL price, Analysys Mason’s review identified a number of omissions and oversights.

If these alone were corrected Chorus would expect the TSLRIC price to be at or above 2011 levels - this is a view that Chorus has consistently communicated over the last two years. Chorus’ submission will be made available on the Commerce Commission’s website.

The current uncertainty for long-term investment makes early clarity of the post-2020 regulatory framework crucial. In November 2014, the Ministry of Business, Innovation and Employment’s Briefing to the Incoming Minister for Communications noted that legislation will need to be in place during the current term of government if it is to take effect in 2020.

“Chorus looks forward to a framework that brings together price, quality and investment conversations if consumer demands for better services are to be realised,” Ratcliffe adds.

“Ongoing investment in open access networks is critical to fostering more of the innovation and competition we’re beginning to see in New Zealand.”

FY15 Guidance

• UFB communal guidance updated to $1.75 to $1.80 billion, with the bottom of the range reflecting fixed price plus a limited number of variations and the top of the range allowing for a greater range of build variations (mix of aerial, replacement of poles, access to Chorus infrastructure etc)

• FY15 EBITDA: $590 to $605 million range. No change

• FY15 UFB connections and layer 2 capital expenditure: Updated to $145 to $155 million range based on 50,000 connections and 6,400 backbone builds; FY15 backbone build mix anticipated to be more expensive than FY14

• FY15 Gross Capex: Updated to $625 to $650 million range based on updated connection capital expenditure estimates

• FY15 Fibre capital expenditure updated to $530 to $550 million range

• FY15 Copper capital expenditure updated to $60 to $75 million range

• FY15 Common capital expenditure updated to $30 to $40 million range

Interim Dividend

As part of its 25 July 2014 bank amendments, Chorus agreed that no dividends will be paid until the later of the conclusion of the Commerce Commission’s FPP review processes or 30 June 2015.

On 19 December 2014 the Commerce Commission advised of significant changes to the FPP timetable, including the final determination being delayed from April to September 2015.