Wednesday 16th December 2015
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Chorus, split off from Telecom in 2012 as a low-risk, low-return network company, has instead been one of the most volatile stocks on the NZX, thanks to a prolonged and shambolic regulatory process on what it can charge customers to access its copper wires.
The stock soared 24 percent to a record $3.84 on the NZX yesterday, adding $290 million to Chorus's market value, after the Commerce Commission said the company can charge an average $41.69 a month for access to wholesale broadband and phone services, up from the $38.43 signalled in its last determination. It slipped back to $3.765 today, having listed at $2.94 in 2011 as a reliable, dividend-paying utility. Instead, the stock sank as low as $1.275 in 2013 as the government struggled with a legislative response to telecommunications commissioner Stephen Gale's proposal to regulate price cuts.
"From a capital markets point of view it is a regulatory debacle, a shambles," said Paul Glass, executive chairman at Devon Funds Management. The regulator "almost broke the company and now they are almost over-rewarding Chorus. It almost makes regulated assets uninvestable."
"We need a more mature approach to regulation that reflects the fact that these sorts of violent swings raise the overall cost of capital of regulated businesses," he said.
The government had awarded Chorus the contract to roll out a nationwide fibre-optic network capable of delivering ultrafast broadband, only to have the company find itself starved of capital and cash flow and unable to complete the job. It challenged the regulator in the High Court, halted dividend payments and targeted $400 million of cost cuts to help fill what it called a $1 billion hole in funding for the rollout.
Telecommunications commissioner Gale told a briefing in Wellington yesterday that the increase in pricing for copper access was largely due to the regulator missing out a key trenching component in its July draft determination, something the industry rapidly pointed out during the final round of submissions.
"It's unfortunate that the error wasn't picked up in July," Gale said. "The parties that have been involved have had now two complete shots to make suggestions as to where the model needs to be adjusted, so I think that gives you confidence that the analysis has converged, and in this final step, as you'd expect, the model has been subjected to a very close scrutiny."
As Chorus's biggest customer, Spark New Zealand will bear the brunt of the charges, and it said customers will lose out as a result of the decision. The Auckland-based company expects the higher copper wholesale price will increase its costs by $21 million in 2016 and $36 million on an annualised basis, while the unbundled bitstream access price will rise by $1 million in 2016 and $2 million on an annual basis.
Vodafone New Zealand, Chorus's second-biggest customer, said it was disappointed with the decision, and would probably pass that on to the consumer. Industry lobby Internet New Zealand said the "extreme nature" of the price hikes might lead to a judicial review of the decision.
"This has been a long, drawn-out process," said Rickey Ward, New Zealand equity manager at JBWere New Zealand. The surge in Chorus's shares yesterday reflects "more certainty about the company's longer-term cash flows" although the revised guidance isn't too far above what the market was expecting.
Ward said he had "never seen a share price rally so hard" on a regulator's deliberations. New Zealand was a small economy, where the biggest "competitor" to companies with monopoly positions was the regulator itself.
"When it was first separated Chorus was really sold to international investors hunting for income in a post-GFC world as a reliable dividend payer," Ward said. "Regulation came along and they were not certain of their dividends and the overseas investors walked away."
For Chorus's part, it "won a contract to roll out broadband on metrics that proved to be challenging."
The network operator anticipates 2016 earnings before interest, tax, depreciation and amortisation of between $580 million and $600 million as a result of the decision, upgrading guidance from a previous forecast for a "modest decline" from the $546 million in 2015. Spark said it would raise its own prices to avoid cutting its earnings guidance.
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