Chorus reports 'pleasing' half-year result

UPDATE: Company says UFB could cost an extra $300 million; CEO Mark Ratcliffe says company facing 'challenging headwinds'

Chorus has reported a net profit after tax of $84 million for the half-year ended December 31 2012.

Revenues were $525 million and earnings before interest, tax and depreciation (EBITDA) were $331 million.

Pro rata, this represents slightly lower earnings and profit than those for Chorus’s first seven months of operation, to June 30 2012., but Chorus says there is an underlying two percent increase in revenue over the six-month period to June 30, as compared to the latest half-year.

“While Chorus’s overall earnings performance was pleasing, particularly underlying growth in the number of fixed line connections and revenue, we face challenging headwinds in our efforts to build New Zealand’s fibre future,” says CEO Mark Ratcliffe. “These headwinds are in the form of the regulatory framework and the capital costs of our Ultra-Fast Broadband (UFB) deployment.”

Increasing UFB deployment costs have led the company to make a $300 million lift in estimates for the cost of building the “communal” UFB network, to between $1.7 and $1.9 billion.

Chorus acknowledges it has been using “sub-optimal deployment methods” in some of the most challenging areas. Delays in consent processes have also been an influence. Chorus has gained ground in most areas, Ratcliffe says, but a few “extreme outliers” like Ponsonby, Queenstown and central Wellington are pushing up the cost.

“There are many ways cost could be taken out of the programme and there are very good reasons to expect cost-per-premise passed to decline significantly,” Ratcliffe says. New techniques contemplated include aerial deployment and microtrenching – burying cable in a saw-cut in the road’s tar-seal. He concedes overhead lines will probably meet with public resistance but in theory the aerial technique could be used in up to 20 percent of areas.

Acknowledging very low uptake rates for UFB to date, he makes the point that only a few retail service providers are active in the UFB market. The rate will improve when Vodafone and Telecom come into that market, he says.

Chorus has around 70 percent of the UFB build. ICT Minister Amy Adams released an update yesterday which stated that only around 3800 houses have subscribed to fibre-based services.

On the regulatory front, not surprisingly, Ratcliffe references the Commerce Commission’s unbundled copper local loop and draft unbundled bitstream access decisions, as well as the government’s bringing forward wide-ranging reviews of the telecommunications market.

Chorus has applied for a “final pricing principle” review of the Commission’s UCLL decision. This entails a detailed economic analysis of Chorus’ costs. Ratcliffe questions the wisdom of implementing the Commission’s copper pricing determinations in view of the acceleration of the broader review. He accepts, however, that public opinion may carry the day; that many users and retail providers want to be able to access the lower pricing as soon as possible. .

“A key element of Chorus’ submission is the view that a clearer, more stable regulatory environment is required to deliver the right incentives to encourage the transition to our fibre network, and help New Zealand realise the productivity and economic benefits UFB and the Rural Broadband Initiative (RBI) can deliver,” says Chorus’s financial results statement.

The submission, it says “emphasised that getting the right balance between copper and fibre pricing is critical to fibre investment and uptake.”

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