Hamish Fletcher

Business reporter for the NZ Herald

Chorus shares lift on report release

Chorus chief executive Mark Ratcliffe.
Chorus chief executive Mark Ratcliffe.

Chorus share price jumped up this morning after an independent report said the embattled-lines company could reduce its funding gap for the ultra-fast broadband build from $1 billion to $200 million - $250 million.

Forsyth Barr senior equity analyst Blair Galpin said the $200 million figure reached by Ernst and Young was around what he expected.

Read the full EY report here

The company's shares were up 4.08 per cent to $1.53 around 11:30 this morning.

Chorus said last month that a Commerce Commission ruling to cut wholesale internet prices could lead to a $1.07 billion funding shortfall for its portion of the ultra-fast broadband scheme.

The Government then commissioned Ernst & Young (EY) Australia to investigate how the cuts would impact on Chorus' ability to deliver on its UFB Crown contracts.

This report, released on Saturday, said Chorus could reduce this $1.07 billion funding shortfall by introducing "cash-flow savings initiatives".

But the report said these initiatives carried potential risks. These included consumers receiving "lower service levels" and possible congestion on Chorus' copper-line network.

There could also be an increase in fault rates on Chorus' network and a reduction in businesses or consumers able to connect to it.

In responding to the EY report, Chorus chief executive Mark Ratcliffe said the introduction of any initiatives "must be weighed carefully" against the risk they posed for consumers.

"These initiatives must be weighed very carefully, as while they may save money that can then be invested into UFB, they also have the potential to negatively impact service levels and broadband services for consumers across New Zealand on the current network.

"The right balance must be struck to ensure New Zealand consumers continue to benefit from high quality infrastructure today and into the future," he said.

Galpin said this morning that he though Chorus had given a "reasoned response" to the EY report.

Asked if the Government supported initiatives that carried such risks for consumers, Communications Minister Amy Adams said: "The Commerce Commission has established a number of standards that Chorus must meet when providing regulated services and has processes in place for monitoring Chorus' performance.

"For example, the Commerce Commission requires Chorus to complete 90 per cent of orders for wholesale voice input within seven working days.

"Chorus has also advised me that it will seek to limit any reduction in quality of service that may result from any cost savings," she said.

"In many instances, Chorus currently performs above the standard required of it in terms of those regulated services (as determined by the Commerce Commission). Any drop in service level could only be down to the mandated performance levels," Adams told the Herald.

The report also said another $290 million of the funding gap could be reduced if Chorus made changes to its dividend policy, including a two- year "dividend holiday".

As well as this, changes to debt headroom could reduce the shortfall by $130 million, the report said.

Telecommunications Users Association chief executive Paul Brislen said rather than introducing something that would hurt consumers, changes to debt headroom and dividend policy should be pushed further.

"If you look at the dividend policy it's talking about a two year holiday. Why is it paying a dividend at all when it's rolling out this network? How about we have a seven-year dividend holiday ... with a seven- year holiday you would end up with the problem going away entirely," he said. "So that's what they need to look at. It's the debt, it's the dividend policy and where they can make savings in the UFB build.

"If they think they can make the money up by annoying [retail providers] and customers in the copper world and still expect to get a $900 million interest free loan off us for 30 years to build a fibre network ... well I think they've got another think coming," Brislen said.

Even if Chorus made the changes mentioned in the report, EY said there was still a risk Chorus might breach its bank covenants.

Chorus would also need to make up the remaining $200 to $250 million funding shortfall.

EY said the company could achieve this by making further revenue, operating cost and capital expenditure changes on top of what the report suggested; a further cut to dividends; capital raising; changing its contracts with Crown Fibre Holdings.

Chorus and CFH - the entity responsible for the taxpayers' $1.35 billion investment in UFB - have already begun the discussions about possible changes to UFB contracts to help close the funding gap.

Chorus is one of the Government's four private partners building the UFB network. The scheme aims to roll out fibre internet lines to 75 per cent of the country by 2020.

- NZ Herald

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