By Bernard Hickey
Prime Minister John Key has said the Government is considering all its options in response to Chorus' warning it may default on its debt and restrict its rollout of the Government's Ultra Fast Broadband (UFB) network after the Commerce Commission ruled it must cut its wholesale copper broadband price by 23%.
Key agreed those options included Government intervention to over-rule the Commerce Commission decision, a government loan to Chorus or the Government taking an equity stake in Chorus. He said some were more palatable than others and the Government would now consider its options.
Key told a news briefing after National Party's weekly Parliamentary caucus meeting that New Zealand needed the UFB project to continue unimpeded and no investors or analysts had predicted the heavy impact of the Commerce Commission decision on Chorus' financial position.
Meanwhile, the Green and Labour parties and the Coalition for Fair Internet Pricing all called on the Government to let the Commerce Commission's decision stand, describing the Government's August 7 proposal for a cut of just 5.5% to 16.6% as the imposition of a 'Copper Tax'.
The Commission ruled that Chorus could only charge NZ$34.44 per copper broadband line from December 1 next year, down 23% from the current price of NZ$44.98/month and only slightly higher than its December 3, 2012 draft ruling for a NZ$32.45 price. The Government proposed on August 7 a range for copper broadband that was the same as the cost of fibre of between NZ$37.50 and NZ$42.50.
Chorus said in a statement titled "Regulatory black hole puts Chorus funding at risk" that the decision would reduce its EBITDA by NZ$142 million, wiping out most of the NZ$171 million in EBITDA net profit it made last financial year. It warned that without Government intervention its lenders would be able trigger a default on its debt, which stood at around NZ$1.7 billion at the end of June. That debt includes NZ$1.195 billion of unsecured debt to a syndicate of unidentified banks and 260 million pounds of bonds. Also see David Hargreaves' story; Chorus gives dire warning.
Chorus also warned it may not be able to complete the UFB rollout, saying it would have to "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."
Chorus' share price fell 7% this morning and is down more than 20% in the last year since the Commission's draft ruling in December last year.
'Range of options'
Key agreed with Chorus it was not guaranteed the lower wholesale price ruled by the Commerce Commission would be passed on by Retail Service Providers (RSPs) to customers.
"It's not true the government has no options. The Government has a range of options. Some are more palatable than others. What is true is the Government cares passionately about Ultra Fast Broadband and it certainly had in Chorus a good partner and nobody predicted the Commerce Commission would come up with this final pricing," Key said.
"What this does is effectively test the cashflow and the likes of Chorus," he said.
Key said Chorus' warnings of a potential default were in line with his own recent comments that Chorus could go broke.
"If everything follows through, Chorus will earn a lot less revenue and that will give them a lot less options in terms of fulfilling its UFB contract, because the money it would have received would have been poured into building the UFB that we want New Zealanders to be connected to, and New Zealanders will want to be connected to," he said.
He said the Government would now get some advice on what its options would be.
"Our interests are ultimately the consumers of New Zealand, and ensuring they have access to Ultra Fast Broadband. We believe that is a piece of infrastructure that will have the capacity to turn and change the dial when it comes to New Zealanders' ability to compete in the world," he said.
"At one level, some consumers might be saying they'll be paying a little bit less because of this decision, and that's not guaranteed, but if New Zealand gets left behind in the Internet race and New Zealanders don't have access to Ultra Fast Broadband that will have very significant long term implications for this country."
'Don't over-rule it'
The 'Axe the copper tax' Coalition for Fair Internet pricing said the Commission's decision should be allowed to stand.
It said New Zealand households and businesses would pay NZ$104 million a year less for copper broadband and voice services from December 2014 if the decision was allowed to stand and total benefits would be NZ$522 million by 2019. It pointed out the Commission's decision was made under rules legislated in 2011 when Steven Joyce was minister.
“This is a fantastic early Christmas present from the Commerce Commission, which, from next November, will give Kiwi households and businesses over $100 million a year more to be pumped back into the economy through everything from new school shoes for the kids to new technologies to help companies become more productive,” said Coalition spokesman Paul Brislen, who is also chief executive of the Telecommunications Users Association of New Zealand (TUANZ).
“Any price the government might now propose above NZ$34.44 per month would represent an obvious tax on Kiwi households and businesses in order to subsidise Chorus, an already highly profitable monopolist. Even NZ$35.50 would transfer over a million dollars a month from Kiwi households and businesses to Chorus shareholders, to no benefit to anyone else," Brislen said.
Brislen said any suggestion the decision would hurt the UFB rollout was “plain wrong”. “The government has contracts with Chorus and others to build the new world-class fibre broadband network. Ministers should tell them to just get on and do it," he said.
A Covec study for the coalition, which has been peer reviewed by Network Strategies, concluded that the government’s proposed pricing (August 7) would cost Kiwi households and businesses between NZ$390 million and NZ$449 million between 1 January 2015 and 31 December 2019 over the price for copper broadband and voice services that Commerce Commission had ruled. More recent demands by Chorus would take this cost to Kiwi households and businesses to NZ$979 million, the Coalition said.
'Crying wolf'
The 'Axe the Copper Tax' Coalition said Chorus was "crying wolf" with its "extraordinary" press statement this morning.
“Chorus is a strongly profitable company that cannot possibly be at any risk as a result of this morning’s determination,” Brislen said.
The NZ$104 million impact compared with its revenue of NZ$1.06 billion last year, its NZ$663 million EBITDA, the NZ$681 million it spent on capex, its net profit after tax of NZ$171 million, the NZ$95 million it paid in dividends to its largely foreign shareholders and its NZ$3.3 billion in total assets, the Coalition said, adding Chorus had known about the review since 2011 and the draft since November last year.
"The suggestion it could default on its debt as a result of not planning for a long-signalled regulatory change beggars belief coming from a chief executive earning $1.8 million a year," Brislen said.
“It almost appears to be a case of the company talking down its own share price, to put pressure on the government to intervene in the market and over-ride the independent Commerce Commission in order to boost its profits," he said.
“Chorus is crying wolf, and the government should simply tell it to accept this morning’s decision, make whatever minor adjustments are needed to respond to it, and get on with meeting its contact it build UFB for the 30% of New Zealanders who are believed to want it by 2020, and the 75% of New Zealanders who will eventually have access to it.”
Cunliffe reacts
Labour Leader and Telecommunications Spokesman David Cunliffe rejected Key's suggestion the Government could invest in a stake in Chorus and said the Commerce Commission decision should be allowed to stand.
"Renationalising Chorus is an extreme response which I suspect the PM is only putting out there as cover for other steps, but we will see," Cunliffe told reporters after Labour's Parliamentary Caucus meeting.
"When we were breaking up the Telecom monopoly when I was the minsiter of ICT everybody said if we regulated it would be the end of the world, hell would freeze over, no-one would invest in broadband, so we created a more competive market and investment levels doubled. I think we need a very sober assessment of the situation before people buy into the PM's panic."
“New Zealand families should not be forced to pay $100 a year more than the regulator says is needed for broadband just because the Government negotiated a bad contract.
“Nor should National bail out its corporate mates and force the taxpayer to pick up the tab. This is a ridiculous situation and is totally of the Government’s own making.
“The underlying problem is the slow uptake of UFB. If Chorus is truly struggling to stay solvent then it is the uptake rate by customers of UFB that is the problem, not the actions of the independent regulator. The National Government’s unwillingness to stimulate a compelling, multi-provider online content environment has made the UFB uptake problem worse."
Cunliffe said a reshuffle or ministerial resignation should now be contemplated.
Green reaction
Green Telecommunications Spokesman Gareth Hughes said a cheaper copper price would not necessarily slow fibre uptake.
“Consumers can currently access the internet for as little as $5 per month on dial-up, but very few choose this cheaper option," Hughes said.
“It’s not the first time National have used legislation to transfer public wealth to large corporations,” he said.
“National’s Sky City legislation and NZ$30 million cash pay-out to Rio Tinto’s Tiwai Point paint a picture of a Government beholden corporate lobbying rather than protecting the interests of consumers and tax payers."
(Updated with more reaction from Key, the Coalition for Fair Internet Pricing, David Cunliffe, Gareth Hughs, background)
31 Comments
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.” Read more
Ratcliffe shouting "Fire" has hardly caused Chorus shareholders to dash to cash.
A game of bluff is being played in public. Let's hope it doesn't lead to a bank crisis if Chorus is really in trouble.
The guys laying the cable in my street said they had done other suburbs where take up was not much greater than nil.
Am not sure $5 a month more or less for copper will make that much difference; the current set up seems unlikely to work based on my one survey of one cable layer.
And yet it would seem much better for NZ if the cable is rolled out. Who should pay for such infrastructure in those circumstances? It's hard to go past the government having a significant role, albeit with some return for them over the long term, as fibre eventually becomes the norm.
That debt includes NZ$1.195 billion of unsecured debt to a syndicate of unidentified banks and 260 million pounds of bonds
Wonder whose calling the shots and determining policy in Wellington. Too big to fail? Stuff all the SME's that might benefit from cheaper broadband. All the start ups that might be viable because of it. That other National Party favourite, Sky TV will be happy.
Ditto the housing market. John "Nobody wants to see house prices fall" Key. It's not the over mortgaged he's worrying about. It's the guys loaning them the money.
Ditto the housing market. John "Nobody wants to see house prices fall" Key. It's not the over mortgaged he's worrying about. It's the guys loaning them the money.
LOL - and it's just the local depositors and unsecured bank lenders with the majority of skin in that game in a post insolvency RBNZ ordained OBR bailout. Depositors need to think carefully what their risks are - because they are not being rewarded for equity type participation.
They'll get a bail out of some description. The banks and big foreign shareholders will demand it. Rod Oram was talking about it on National Radio this morning, giving Key especially a big serve. Probably take the form of a subsidy or renegotiating the contract upwards. Perhaps Chorus should stop any dividends until their debt position is better
Workers are disposable, the objective is business efficiency and productivity. New Zealanders can't complain when they've consistently supported political parties who are wedded to the idea that even State owned business must be struuctured on profitmaking lines. As technology advances fewer people are needed to do the same amount of work. Its the fundamental trend shaping labour markets since the mid 1980s and only accelerated since the GFC. The opportunities that remain have higher and higher job requirements. Those at the bottom are being pushed out of the work force as their routine jobs are being automated and they're faced with high barriers to entry into the jobs market due to the high demands of education and cognitive demands of the booming industry.
The first to suffer should be Chorus shareholders. On the basis that their shares become worthless and it is not for the Government to protect them from that. The company got into the activity with a vew to making profits and I am sure that if profits had ensured Chorus would not be donating those back to the Government and taxpayer.
If we need government to ensure continued rollout of UFB, then the restructed remains of Chorus could be utilised.
Users should not be made to cover the owners from Chorus management mistakes.
Agreed. Don't do what was done with Air NZ and Tranz Rail, buying them out at a high price before a receivorship to save big shareholders and creditors a big loss. Both could have been bought back the day after receivorship for a lot less and minimal disruption to services. Stuff any temporary "market" disruption. Privatising profits and socialising losses is not the free market capitalism National and Labour advocate for SME's.
There is something missing from this discussion.
The cost of building the ultra fast broadband network is being met by the Government, not by Chorus. The asset is being paid for by the tax payer not the shareholders of Chorus, who are in the fortunate of position of being the operator of a paid asset. If Chrous cannot operate in that environment I am certain someone else is ready to put their hand up to do that job. Perhaps Telecom.
I am sure you are right, but the contract the government entered into with Chorus along with the attendant state financing was an obligation to undertake a nationwide civil engineering project. I suspect the old Telecom management that understood such endeavours have long been driven out in favour of ill equipped, never mind prepared, accountants and lawyers.
It just proves the bankruptcy of the joint stock corporate model of utility infrastructure development in our counrty with its small widely dispersed population and large landmass. There's a reason the State had to fund and manage the construction of the railways and road network, the electricity network, telegraph and telephone network, and even our ports, because it wasn't economic for the private sector. What would the quality of service delivery be for the rural regions be for electricity and telecommunictions be without the strict terms of the government regulations which the successful bidders of the 1990s priviatisation binge had to agree to?
Hmmm.... who or what is owed such a big financial favour from the state purse?
New Zealand Contractors Federation chief executive Jeremy Sole said it was "exciting" that the Gully project would be done as an "Availability PPP" whereby the road wasn't paid for through tolls.
"That'll never work in New Zealand because the patronage isn't there.
"So they are basically getting paid on the amount of time the road is 100 per cent available.
"That will get factored into the design to make sure they can maximise their revenue.
"That will change the paradigm around building roads in New Zealand."
Currently roads were built with a "flexible pavement" which meant more money would be spent on maintenance in the future, he said.
"But they [Transmission Gully road builder/operator] will be saying ‘how can I build this once and . . . maintain it as little as possible'.
"I think that will make a difference to the way the Government and the industry looks at roads [in the future]."
Green Party transport spokeswoman said taxpayers would have to stump up $125 million a year over 25 years if the PPP model was used for Transmission Gully.
The road has been costed at $1.3 billion. But the Greens maintain that over 25 years it will cost the Government $3 billion, which includes all payments including road maintenance.
"National is locking future taxpayers into paying $125 million a year for Transmission Gully for a quarter of a century even though the traffic volumes don't justify building it," Genter said.
This state directed project starts at the bottom of the economic cliff - hard to see how it can claw it's way up to become a cost effective utilty for the nation. As the edtor from the same publishing stable noted in respect of the energy sell off - an act of economic vandalism.
Auckland Airport is allowed very very high returns on equity from it's existing runways and plans to build a massive new compex costing billions yet as a pure monopoly provider is not subject to Commerce Commission constraints.
Can someone of greater intelligence please explain why this monopoly is unregulated yet Chorus has been constrained from earnings on it's existing assets ?
I struggle to see the difference. Monopoly utilities should all be regulated.
Vector's lines business is regulated - again can someone please explain the difference.
Auckland Airport is allowed very very high returns on equity from it's existing runways and plans to build a massive new compex costing billions yet as a pure monopoly provider is not subject to Commerce Commission constraints.
Are you sure?:
As for how much Wellington Airport should be allowed to make from April 2012 to March 2017, go figure. To read the transcript of the Commerce Commission's regulatory conference on the matter last August is to be reminded of a bevy of bishops arguing over how many angels can dance on a pinhead.
In the end, Archbishop Sue Begg of the commission announced this month that Wellington Airport would make $38 million to $69m in "excessive profits" during the next five years.
This amount is basically how much extra the commission thinks is being sucked out of customers by the airport because of its monopoly position.
Extracting excess profits is of course what monopolies do if they can get away with it, just as cats will catch birds - it's in their nature.
The tricky bit for the commission is not figuring out whether we're being screwed, but how much we're being screwed. Chalkie reckons the regulator has given this a good go, but looking at the fiendish complexity of the calculations it's obvious they are open to challenge.
In its press statement, the commission said a reasonable return for the airport was 7.1-8 per cent, whereas the airport was making 12.3 per cent to 15.2 per cent.
Per cent of what? The reference here is to internal rate of return, which is the percentage rate required to produce a net present value of project cashflows equal to the investment at the outset required to earn them. Read more
Stephen, AKL was floated at $ 2.80 from memeory - now about $ 35 after 10:1.
Investors can sure sniff out a monopoly. Interesting to compare the returns from Air NZ which required a near billion $ bailout vs AKL yet is their largest customer.
Maybe it was superior management - or maybe it was industry structure ? You choose.
*/
Sorry I must be missing something.
From the above article the Commerce Commission will lower the companies income by close to double what it is paying out in dividends? If this is so there is a lot of belt tightening required on the copper line side of the business. Is there not a danger of a massive uptake in fiber connections when the copper stops working do they have to maintain it properly?
Here's a press release on Chorus from a group called the Coalition for Fair Internet Pricing.
Chorus at No Risk of Financial Distress6 November 2013
Chorus at No Risk of Financial Distress
Copper lines monopolist Chorus may have misled Prime Minister John Key, the public and the financial markets when it said yesterday it was at risk of defaulting on its debt, the Coalition for Fair Internet Pricing said today.
The coalition was releasing an independent analysis of Chorus’s accounts by Professor Jerry Bowman, a former chair in finance and now emeritus professor of finance at the University of Auckland.
The coalition commissioned the analysis to inform its recent submission to Communications and IT Minister Amy Adams’ purported review of the Telecommunications Act.
Professor Bowman was asked to assume a cut in the price of copper broadband and voice services, from the current $44.98 to $32.45 per line per month. This is a bigger price cut than the Commerce Commission finally determined yesterday.
Professor Bowman concluded such a cut, of 28%, would reduce Chorus’s EBITDA by $100 million but that this would not destablisise the company nor put it in financial distress.
He wrote:
‘In my judgement, there is no reason to conclude that a decision from the Government’s regulatory review that reduces the EBITDA of Chorus by $100 million should put the company in financial distress or destabilise the company. In my opinion, given the information discussed above and the strong market position of Chorus, it would be able to sustain even higher reductions. However, I do note that the more adverse the review conclusions, the more negatively it will impact upon the Chorus share price.’
This aligns with Chorus’s market disclosure on 3 December 2012, which made no mention of a debt-default or insolvency risk, and subsequent media comments in September by Chorus chief executive Mark Ratcliffe, including to TV3’s The Nation.
Yesterday, the Commerce Commission determined that copper prices should be cut by only 23%, to $34.44, nearly $2 in Chorus’s favour compared with the assumption on which Professor Bowman based his analysis.
In response, Chorus claimed, for the first time, that this would cost it $1 billion and put it at risk of defaulting on its debt, statements which the Prime Minister has relied upon in his public comments.
The market, however, appears not to believe there is any risk of a debt default, with Chorus shares currently trading at the same price as mid October and higher than in June.
A spokesman for the coalition, Paul Brislen, also chief executive of the Telecommunications Users Association of New Zealand (TUANZ) said Chorus owed the Prime Minister an apology.
“Bluntly, we don’t believe Chorus’s so-called disclosure yesterday and it appears nor does the market,” he said. “We think it was issued for political reasons, to pressure the government to take the extraordinary step of legislating to override the Commerce Commission to boost its profits at the expense of Kiwi households and businesses. This is a company, after all, that paid dividends of $95 million last year and it is impossible to believe it would have done so had it faced the slightest risk of debt default under a new pricing regime that has been signalled since 2011. It should apologise to the Prime Minister, the public and the financial markets for what is at best hyperbole and at worst an apparent attempt to mislead its own shareholders about the financial and regulatory risks it faces.”
Click here for Professor Bowman’s analysis.
And here's Standard & Poor's:
MELBOURNE (Standard & Poor's) Nov. 6, 2013—Standard & Poor’s Ratings Services today said that it had placed its 'BBB' long-term rating on New Zealand telecommunication company Chorus Ltd. on CreditWatch with negative implications.
The CreditWatch placement follows the New Zealand (NZ) Commerce Commission’s release of its final determination on copper broadband Unbundled Bitstream Access (UBA) pricing. Chorus has indicated that the UBA determination would result in a reduction in annualized EBITDA of about NZ$142 million from December 2014.
"Our forecasts indicate that the determination, if implemented without amendment, will result in Chorus' financial metrics falling outside expectations for the current rating from fiscal year ending June 30, 2015. Furthermore, without offsetting credit-supportive actions, the group will likely also breach covenants under its debt facilities from fiscal 2015," said Standard & Poor's credit analyst Paul Draffin.
If the determination is implemented without amendment, and Chorus does not undertake material offsetting credit-supportive actions, it is likely that the credit rating on the group will be lowered by at least one notch. Importantly however, the determination is still to be fully assessed by various key stakeholders, including the NZ government, and can be appealed by Chorus. Accordingly, the determination may be subject to change between now and the time it is scheduled to commence in December 2014.
Mr. Draffin added: "We expect to resolve the CreditWatch within the next three months, by which time we expect greater clarity on the NZ government’s reaction to the decision and any response, as well as Chorus’ strategies to mitigate the expected credit impact. In the event that these issues cannot be resolved during this period, we will update the CreditWatch at that time."
Interesting......CFFIP and Professor Jerry Bowman......what if Chorus is correct down the track?......would the reputations of those involved in CFFIP and the Prof come under scrutiny?
What happens to Chorus when you have 4G which I understand doesn't need all the lines Chorus is putting in?
Subsidised cheaper prices vs shareholder interests. Socialising the costs is taking on a brand new direction......It looks like the Socialists are looking for direct subsidies from Shareholders.......Very good for business investment in NZ isn't it.......yep NZ is ripe for picking........ clear warning to all listed companies in NZ......
Chorus Shareholders I hope you are reading this and taking notes......
By the way Gareth - this group the Coalition for Fairer Internet Prices......can we get some names and membership details, are they University Staff etc?
Here's some detail on 'em:
The Coalition for Fair Internet Pricingwas founded by Consumer NZ, Internet NZ, and the Telecommunications Users Association of New Zealand (TUANZ). It is supported by the following organisations: CallPlus and Slingshot Federation of Maori Authorities Greypower Hautaki Trust KiwiBlog KLR Holdings National Urban Maori Authorities New Zealand Union of Students’ Associations Orcon Rural Women Te Huarahi Tika TrustUnite Union
And here's a recent submission they made to MBIE - http://www.med.govt.nz/sectors-industries/technology-communication/comm…
Say Chorus was not a public listed corporation with powerful shareholders and instead was a SME owned by New Zealand family. What would they be doing? Probably not screamng armageddon. The CEO/owner would be slashing their salary and looking at getting rid of some middle management. They would be halting dividends to the family trust until they had paid down some debt and were in a stronger financial position. They would be facing the reality that they took a commercial risk knowing full well that new regulations were on the horizon and in business nothing is guaranteed, especially profits. They would be talking to their lawyer to see if they could get out of their contract. They would be reconsidering their multiple levels of contracting out and whether all these layers had increased costs but reduced control.
For a libertarian free market disciple you sure do like guaranteed corporate welfare. If only all the kiwi owned SME's were so lucky with their profits and dividends. Why should listed corporations with foreign shareholders be treated diferently? Time for Chorus to depart for that 4G spectrum in the sky and let all those contractors finish the job without the parasite in the middle.
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