Preliminary EY verdict on Chorus: UFB at risk

An independent report by EY Australia has backed up the government’s theory that Commerce Commission copper price cuts would hurt Chorus’ [NZX: CNU] finances to the degree that the UFB rollout would be put at risk.

Ms Adams, who received a verbal briefing from EY this morning, says the government must act within the $1.35 billion fiscal envelope of taxpayer funds ear-marked for the 10-year rollout ($929 million of which is allocated to Chorus).

Chorus says the Commerce Commission-mandated price-cuts will blow a billion hole in its revenue between December 2014 (when they kick in) and 2020, and imperil its ability to borrow to fund further UFB work (Chorus expects to spend $1.7 billion to $1.9 billion on UFB work).

Ms Adams did not specify financial impact in a statement this morning, but did say, “The government expects Chorus to meet a significant part of the shortfall.”

The minister statement suggests more pain for Chorus shareholders – which could come in the form of canceled dividends, or another party taking on some of Chorus’ leg of the UFB rollout, and perhaps a slice of future profits in the process. Ms Adams was not specific about how the rest of the shortfall would be made up – especially given the government has apparently ruled out putting any more money into the rollout.

“While the quantum of the shortfall is still being finalised and will be outlined in its final report, Ernst & Young has indicated it is unlikely to alter the high-level findings, and that the Government can act with confidence on the information Ernst & Young has supplied,” Ms Adams says.

“As a result of this information, and because the Government remains strongly committed to the UFB roll-out, the government expects that the next step will be for Chorus to approach Crown Fibre Holdings (CFH) to discuss specific provisions within the UFB contract.”

“The Government supports CFH entering into discussions with Chorus to help manage this issue,” Ms Adams says.

“The Government expects to know the outcome of the discussions between CFH and Chorus in a few months’ time.”

A spokeswoman for the Coalition for Fair Internet Pricing, Sue Chetwin, also chief executive of Consumer NZ, said the coalition would make a detailed response later in the day. But she told NBR that “transparency in this matter is going to be vital to get the best outcome for Kiwi families and businesses, and we urge the minister to commit up the highest standards of transparency. The UFB is too important to get wrong”.

ISP CallPlus is a retail customer of Chorus, and a member of the coalition.

CallPlus CEO Mark Callander told NBR, “The timeframe of a few months is concerning, but hopefully the details of the report are disclosed in a transparent manner to all relevant parties.

“The government needs to focus on other options to ensure the delivery of the UFB network and move away from the proposed copper tax and the options outlined in their Discussion Document.

“Chorus was always facing the prospect of managing the business with lower copper margins than they have today, but that is clearly not reflected in their current business plans. Chorus and the Government need to find a solution to deliver UFB that does not artificially raise prices for consumers.”

Orcon boss Greg McAlister says, “It’s disappointing that the UFB project could be mismanaged to this extent. At the end of the day, this is taxpayer money being spent, and suggestions that the project could be in jeopardy are very worrying.

“Also, for ISPs such as ourselves, we need certainty around what is happening in the market – whether this is wholesale pricing or roll-out schedules.

“Surely the winning Chorus bid should have been able to stand on it’s own merits, without cross-subsidy from other parts of the business. That’s what other bidders for that contract needed to contend with.

“Serious questions need to be asked as to why CFH and Chorus have found themselves in this position.”