CNU - Chorus

[Snoopy]

Some fair comments, but I want to add:

...that I would be more than nervous of a NZ-domiciled company with 100% on-shore earnings, borrowing in a currency other than NZD. AFAIK there is no "natural hedge" available to CNU when borrowing in Euros. That makes zero sense to me and exposes CNU (and shareholders) to FX risk where none should exist.

I suspect the lure of EURO funding may be 'supply side initiated'. Getting 1.13% on your invested capital may not sound like a good deal to you in NZ. But if you are a Belgian dentist, who is staring down the barrel of a 'negative 1%' coupon rate on an investment bond, that dentist might think she is onto a good deal!

Of course, FX exposure at Chorus is managed. From AR2022 p41:
"Chorus holds cross currency interest rate swaps to hedge the foreign currency exposure to the European Medium Term Notes (EMTN). The cross currency interest rate swaps entitle Chorus to receive EUR principal and EUR fixed coupon payments for NZD principal and NZD floating interest payments (*)."

(*) This sentence doesn't read right to me. Chorus are receiving EUR principal to debt fund their business (I get that bit). But I would I assume they are making EUR fixed coupon (i.e. interest?) payments because of this, not receiving EUR fixed coupon payments. Either that quoted sentence is poorly worded, or I am just dumb, not really understanding how these interest rate swaps work (a possibility I do not rule out).

The slightly strange wording then continues.
"The EUR cross currency interest rate swaps (notional amount EUR 800 million) are partially hedged for NZD interest rate payments using interest rate swaps."

EUR 800 million is the actual amount of the euro debt. This quote is saying that an equivalent sized interest rate swap is - I think- brought into being to allow this money to be accessed as NZD, without capital exchange rate risk. But I am guessing that this cross currency interest rate swap, while cancelling itself out against the underlying loan at the end of the loan contract, must be valued in the intermediate years as a non-net zero (accounting rule priced) offset. Thus for annual account valuation purposes, it has an accounting value adjusted from EUR 800 million, even though the ultimate 'destination value' of this interest rate swap, once the EURO notes are due for repayment, remains at EUR 800m.

This is my best effort at explaining how this EURO funding at Chorus works. I am happy to be corrected if I have got it wrong.

SNOOPY

[Snoopy]

The actual FY2021 revenue figures have been published. So it is time to update my revenue forecasting table.

Chorus has been locked in a regulatory battle with the Commerce Commission on how much 'maximum allowable revenue' (MAR) their 'regulated asset base' of fibre broadband assets will be allowed to charge their downstream retail customers over FY2022 through to FY2024, otherwise known as the 'Price Quality (PQ) Period - First.' (PQP1)

1/ The initial Commerce Commission proposal on 26-03-2021 was a rising sum starting from $715m (FY2022) rising to $755m (FY2024).
2/ A revised proposal on 27-05-2021 reduced this to a range from $689m to $786m.
3/ A further comment on 19-08-2021 from the Commerce Commission stated.

"The Commission has noted in its draft RAB (Regulated Asset Base) decision today that “If all other aspects of our draft PQ decision remained unchanged, our indicative estimate of the combined impact of these decisions would lead to a 2%-2.5% reduction in allowable revenue over the PQP1 period. This figure also includes the impact of updated WACC values applied in the pre-implementation period.”

The market took this to mean that the revised downwards regulated revenue rates may yet be increased again by the time the final decision in December comes out. The case Chorus made to the Commerce Commission was for a regulated rate range between $720m to $820m. I am doubtful that the Commerce Commission will be that generous in their final regulated outcome figures. So for the purpose of this update I am going to assume that the Commerce Commission raises the allowable revenue figures back to the range of the 26-03-2021 proposal: $715m (FY2022) rising to $755m (FY2024) [Forecast fibre revenue from 26-03-2021 'Initial Asset Value' Presentation, slide 3. (FY2023 values interpolated).]

My table of forecast 'total change of revenue' over the period of interest is as follows.

	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021	FY2022F	FY2023F	FY2024F
Fibre Revenue	$133m	$202m	$276m	$368m	$466m	$545m	$715m	$735m	$755m
Fibre Revenue Increment		+$69m	+$74m	+$92m	+$98m	+$79m	+$170m	+$20m	+$20m
Fibre Revenue Increment Percentage		+51.9%	+36.6%	+33.3%	+26.6%	+17.0%	+31.2%	+2.8%	+2.7%
Non-Fibre Revenue	$875m	$838m	$714m	$602m	$493m	$402m	$332m	$272m	$222m
Non-Fibre Revenue Decrement		-$37m	-$124m	-$112m	-$109m	-$91m	-$70m	-$60m	-$50m
Non-Fibre Revenue Decrement Percentage		-4.3%	-14.8%	-15.7%	-18.1%	-18.5%	-17.4%	-18.1%	-18.4%
Total Revenue	$1,008m	$1,040m	$990m	$970m	$959m	$947m	$1,047m	$1,007m	$977m

Notes

1/ 'Non-fibre revenue' up until and including FY2021 has been calculated by subtracting 'Fibre revenue' from 'Total revenue'.

2/ Chorus have not provided any forecast as to where they expect their non-fibre revenue to go over the next few years. I have inspected the five year revenue trends for:

a/ 'copper connected revenue' and
b/ 'field services, value add network services and infrastructure'

as two groups. The latter group I am forecasting constant revenue of $120m over FY2022 to FY2024 inclusive (Actual figures were $118m over FY2020 and $119m over FY2021). The 'copper connected revenue', comprising 'copper based broadband', 'copper based voice' and 'data services copper' have taken an $91m decline over FY2021. So I am forecasting declining revenue to continue: down $70m over FY2022, $60m over FY2023 and $50m over FY2024. The 'diminishing decline rate' I am modelling to take account of a slowing trend as easy conversions to fibre have happened already.

--------------------

So what to make of this? IF you compare the actual fibre revenue over FY2021 of $545m with

a/ the forecast regulated fibre revenue for FY2021 (slide 24 PRHY2021) $620m (interpreted from graph), OR
b/ my linearly interpolated FY2021 fibre revenue of $592m (being the arithmetic average of the previous year's fibre revenue used figure of $468m and the prescribed first year of MAR $715m).


THEN that actual revenue represents $47m to $75m less revenue than forecast just six months ago. That seems to be an astonishing drop in projected annual fibre revenue in just six months, which has to call into question the forecasting ability of Chorus. Have I got that observation right?

Even if the company replaced their CIP debt with an equivalent quantum of commercial debt-, they would still be noticeably below this specific debt covenant ceiling. That's good. But it is all on the precept that net revenue remains at current levels. Is this likely?

The actual FY2022 revenue figures have been published as I write this. So it is time to update my revenue forecasting table.

From 1st January 2022, Chorus has been operating under the 'regulated utility model', that regulates how much Chorus will be allowed to charge their downstream wholesale fibre customers over CY2022 through to CY2024, otherwise known as the 'Price Quality (PQ) Period - First.' (PQP1).

The aggregate Maximum Allowable Revenue (MAR) for fibre for the 3 years is $2.2 billion, split up into $690.2m (CY2022), $747.4m (CY2023), and $789.5m (CY2024). Forecasts by Chorus themselves for CY2022 were for fibre revenues of $657m (AR2022 p10). Where actual revenues fall below the MAR cap, the difference is added to the MAR for the next period.

There is a six month gap between the end of the reporting year and the end of the calendar year. This means we can make an educated guess at the MAR revenue in the financial year by splitting the difference between forecasts for adjacent calendar years.

MAR Revenue for FY2022: ($545m+$690.2)/2= $617.6m
MAR Revenue for FY2023: ($690.2+$747.4)/2= $718.7m
MAR Revenue for FY2024: ($747.4+$789.5)/2= $768.5m

My table of historic and forecast 'total change of revenue' over the years of interest is now as follows.

	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021	FY2022	FY2023F	FY2024F
Fibre Revenue	$133m	$202m	$276m	$368m	$466m	$545m	$614m	$719m	$769m
Fibre Revenue Increment Percentage		+51.9%	+36.6%	+33.3%	+26.6%	+17.0%	+12.7%	+17.1%	+7.0%
Non-Fibre Revenue	$875m	$838m	$714m	$602m	$493m	$402m	$351m	$291m	$241m
Non-Fibre Revenue Decrement		-$37m	-$124m	-$112m	-$109m	-$91m	-$51m	-$60m	-$50m
Non-Fibre Revenue Decrement Percentage		-4.3%	-14.8%	-15.7%	-18.1%	-18.5%	-12.7%	-17.1%	-17.2%
Total Revenue	$1,008m	$1,040m	$990m	$970m	$959m	$947m	$965m	$1,010m	$1,010m

Notes

1/ 'Non-fibre revenue' up until and including FY2022 has been calculated by subtracting 'Fibre revenue' from 'Total revenue'.

2/ Chorus have not provided any forecast as to where they expect their non-fibre revenue to go over the next few years. I have inspected the five year revenue trends for:

a/ 'copper connected revenue' and
b/ 'field services, value add network services and infrastructure'

as two groups. The latter group I am forecasting constant revenue of $120m over FY2023 and FY2024. (Actual figures were $118m (FY2020), $118m (FY2021) and $128m over FY2022). The 'copper connected revenue', comprising 'copper based broadband', 'copper based voice' and 'data services copper' have taken an $91m decline over FY2021 and a further $69m over FY2022 So I am forecasting the decline of non-fibre revenue to continue: down $60m over FY2023 and $50m over FY2024. The 'diminishing decline rate' I am modelling to take account of a slowing trend, as 'easy conversions' to fibre have happened already.

'Total revenue' for the forecast years is calculated by adding the forecast fibre revenue to my own modelling of the non-fibre revenue as described above.

--------------------

So what to make of this? IF you compare the actual fibre revenue over FY2022 of $614m with

a/ the forecast regulated fibre revenue for FY2022 (slide 24 HYR2021, 22-02-2021) $680m (interpreted from graph), AND
b/ A more recent linearly interpolated FY2022 fibre revenue of $618m (being the arithmetic average of the previous year's fibre revenue used figure of $545m and the prescribed first year of MAR $690.2m).

THEN that actual revenue for FY2022 represents a $62m revenue drop, compared to the forecast just a year earlier. This seems very similar to FY2021 when a big jump in revenue was projected, However, when that big jump did not occur, the big jump forecast was pushed out into he subsequent year. Nevertheless even if revenue in FY2023 disappoints (as happened when forecasting 'next years' revenue over the previous two years), I don't see an FY2023 scenario where the revenue does not increase, at least a little. So it looks like from a revenue perspective, Chorus is on track to raise their dividend for FY2023. Yet ultimately we shareholders want to know about profit trends, as well as revenue trends. What is happening to ARPU (Average Revenue per User)?

SNOOPY

[Snoopy]

It looks like from a revenue perspective, Chorus is on track to raise their dividend for FY2023. Yet ultimately we shareholders want to know about profit trends, as well as revenue trends. What is happening to ARPU (Average Revenue per User)?

The following revenue figures for 'fibre broadband' and 'copper broadband' are largely taken from the 'Management Commentary' section of the respective annual reports. The 'In summary' table lists the number of connections, whereas the 'Revenue Commentary' lists the revenue attributable to each type of broadband.

Year	Broadband (GPON) Revenue	Broadband (GPON) Connections	ARPU (F)	Copper Broadband Revenue	Copper Broadband Connections	ARPU (C)
FY2015	$29m	75,000	$?	$268m	1,132,000	$?
FY2016	$60m	167,000	$37.19	$456m	1,059,000	$34.69
FY2017	$123m	292,000	$44.66	$501m	894,000	$42.75
FY2018	$198m	433,000	$45.52	$421m	754,000	$42.58
FY2019	$294m	599,000	$47.48	$344m	597,000	$42.44
FY2020	$393m	740,000	$48.92	$271m	466,000	$42.49
FY2021	$477m	860,000	$49.69	$203m	320,000	$43.04
FY2022	$548m	949,000	$50.49	$153m	240,000	$45.54

Notes

1/ Sample ARPU calculation for Fibre Broadband 'Gigabit Passive Optical Network' (GPON) for FY2022:

ARPU = 1/12 x ($548m/ (0.5x(0.949m + 0.860m)) = $50.49

2/ Fibre GPON customers for FY2016 = Fibre 'Mass market' Customers for FY2016
Fibre GPON Revenue for FY2016 and FY2015 taken from Appendix 3, Slide 36 , in PR2017.

3/ Fibre GPON customers for FY2015 estimated as: 88,000 - 13,000 = 75,000

4/ Copper broadband numbers for FY2016 and FY2015 are from Slide 5 of the Chorus PR2016.

5/ Copper broadband revenues for FY2016 and FY2015 are from Appendix 3, Slide 36, in PR2017

6/ Actual ARPU for FY2021 listed on slide 15 of PR2021 to be $49.87, a little higher than the $49.69 that I have calculated above. However Chorus has used a different calculation method
"ARPU is total GPON revenue for the June month, divided by the average of May and June connection."
I have used an average connection for the full year, not just May and June.


Discussion

Why is this table important? The first ARPU column is representative of the business being gained as fibre broadband is being rolled out across the country. The second ARPU column represents business being lost as copper broadband is gradually retired and replaced with fibre broadband. It is heartening to see the ARPU being gained is greater than the ARPU being lost, even if such a superficial statement does not tell the full story.

I talk of copper broadband as a 'legacy technology'. Yet it is surprising how recently the likes of copper VDSL was the latest in broadband technology and still in its growth phase (revenues sharply rose between FY2015 and FY2017). The calculated ARPU is consistent with the wholesale /Dial Up (remember that?)/ ADSL/VDSL/ bill being fairly steady over the time-frame of this table up to FY2022 at least. By contrast the ARPU for Fibre GPON is steadily rising. This is consistent with, on average, with allowable inflation adjustments and a higher number of higher specification Fibre Broadband plans being sold as the years go by.

SNOOPY

[Nor]

Snoopy
You reckon this is a hold or even a buy now?
I had the impression that you were negative earlier on.

[Snoopy]

Snoopy
You reckon this is a hold or even a buy now? I had the impression that you were negative earlier on.

It is a good question Nor. Looking back over the last year, I think it is true that I was looking to justify that Chorus was trading at a price where I should take my profits. You obviously picked up that vibe. But with another year of operating results out now, I am not so sure. The key post from the many I have made over the last few days is the one below

Dividends going forwards are based on 'free cashflow'. Note that 'based on free cashflow' does not mean paying out 100% of free cashflow as dividends!

Free cash flow = net cash flows from operating activities - sustaining capex = $570m-$161m = $405m

On a per share basis: $405m/446.512m = 92cps.

This more than covers the 14cps (or 14cps/0.72 = 19.4cps before tax) and 21cps unimputed dividend based on FY2022 free cashflows: 92cps - (19.4cps + 21cps) = 51.6cps 'cashflow left over'.

That cashflow also makes the 40cps dividend forecast for FY2023 and the 45cps dividend forecast for FY2024 look do-able (even if probably without imputation credits). Although I do note that projected increase in dividend over the year from 35c to 40c for 2023 will be entirely negated by the loss of imputation credits! At today's $7.83 closing share price, that means we are looking at a forecast gross yield of 5.1% for FY2023, rising to 5.7% for FY2024.

I don't want anyone to get too excited, because this isn't a get rich quick opportunity. However, I did roll over a one year bank term deposit at 4.5% the other day, a rate I thought 'quite good'. And with a prospective comparative yield of my Chorus shares sitting at 5.1%, possibly rising to 5.7% within two years I am thinking 'that looks a little better'.

Then I look across to my other utility type investments in Contact Energy and Mercury, which I believe have better growth prospects. But if Onslow gets the go ahead, then this could really take the shine off some of those electricity market trading opportunities that have boosted the gentailer profits in recent years. So all of a sudden my smallest NZX investment (my shares in Chorus) is looking relatively more attractive. The credit rating industry seems more comfortable with those high Chorus debt levels too, now that it is transforming from a 'growth' company into a 'utility' company, and they take heart from the CIP government funding backing too.

So to answer your question, I think I have moved from a slightly worried/negative headspace into a more neutral position. It wouldn't surprise me, once I finish my 2022 deep dive into Chorus, that I come out with the finding that 'Mr Market' has the share price about right. Some would say that means I have wasted a lot of time finding out what Mr Market could have told me by just looking at the CNU trading price. But my mission is to try and find out what is driving this value. I see that as the edge I need if I am to sleep well holding Chorus shares into the future. In the short term, I think that rising interest rates are the biggest threat to a rising CNU share price.

SNOOPY

[warthog]

... So to answer your question, I think I have moved from a slightly worried/negative headspace into a more neutral position. It wouldn't surprise me, once I finish my 2022 deep dive into Chorus, that I come out with the finding that 'Mr Market' has the share price about right. Some would say that means I have wasted a lot of time finding out what Mr Market could have told me by just looking at the CNU trading price. But my mission is to try and find out what is driving this value. I see that as the edge I need if I am to sleep well holding Chorus shares into the future. In the short term, I think that rising interest rates are the biggest threat to a rising CNU share price.

SNOOPY

Rising interest rates will reverse Q1 or Q2 2023.

The hog for one really appreciates the deep dives you've been doing all these years Snoopy. Take care and good fortunes.

[Snoopy]

Wholesale Broadband Operator	%ge Nationwide Connections	EOFY2021 Connections {A}	EOFY 2021 Premises Passed {B}	%ge Regional Take Up {A}/{B}
Chorus	73%	837,000	1,282,000	65%
Northpower	2%	21,000	33,000	64%
Ultrafast fibre	14%	161,000	240,000	67%
Enable	11%	132,000	200,000	66%
Total	100%	1,151,000	1,755,000	65.6%

Notes

1/ The end of the financial year is, for all four operators, on 30th June.
2/ Ultrfastfibre was in May 2020 sold to Sentier Investments based in Australia but no doubt for one of their global infrastructure funds .

The most important figure in the above table, for Chorus investors, is the one in bold. Chorus owns 100% of the legacy copper network. So as users progress to fibre, they will eventually lose all of their copper legacy network customers, but only retain around 73% of the replacement fibre network customers. This means that although transitioning from the copper network will overall mean a boost in funding for pure fibre network owners, the expected 'gain' in revenue at Chorus is a little different.

Weighted Average Fibre Monthly Revenue Gain Per User	73% x $49.69= $36.13
less Weighted Average Monthly Copper Revenue Lost Per User	100% x $43.04= $43.04
equals Weighted Average Overall Monthly Revenue Change Per User	-$6.91

Yes you did read that right. As the fibre transformation wave wafts over the country, Chorus can ultimately expect to lose on average $6.91 MRPU for every customer transitioned to fibre! In Australia they are forecasting around 70% of old copper network premises will eventually transition to fibre. The remainder will transition to fixed wireless or have no fixed line at all (relying instead on mobile communications not associated with any physical address).

If we use this 70 percent network transition target figure in an NZ context (an incremental 5% over where we are now), and assume we are sitting at at 65% take up rate right now, we can work out how much revenue Chorus can expect to lose from here on in, as 'NZ as a whole' transitions to fibre:

Forecast users transitioning in future: 0.7 x 1,282,000 - 837,000 = 60,400

$6.91 per month x 12 months x 60,400 users transitioning = -$5.0m over a year, but echoing down all future years as well, from the remaining copper users expecting to transition from copper to fibre.

Based on the FY2021 NPAT figure, that represents a permanent NPAT profit decline of (0.72 x $5.0m) / $47m = 7.7% ($3.6m in dollar terms).

This is in sharp contrast to the other broadband providers who are only making gains in the copper to fibre transition. To combat these impending ongoing revenue losses, Chorus will be under pressure to tackle their cost structure further.

It is heartening to see the ARPU being gained is greater than the ARPU being lost, even if such a superficial statement does not tell the full story.

Addressing my comment immediately above, 'the full story' must address the numbers of copper customers being lost, offset against the number of fibre customers being gained.

Wholesale Broadband Operator	%ge Nationwide Connections	EOFY2022 Connections {A}	EOFY 2022 Premises Passed {B}	%ge Regional Take Up {A}/{B}
Chorus	73%	919,000	1,324,000	69%
Northpower fibre	2%	22,624	33,000	69%
Tuatahi fast fibre	14%	173,000	240,000	72%
Enable	11%	143,331	193,000	74%
Total	100%	1,258,000	1,790,000	70.3%

Notes

1/ The end of the financial year is, for all four operators, on 30th June.
2/ Ultrafastfibre was in May 2020 sold to Sentier Investments based in Australia for one of their managed global infrastructure funds . Ultrafastfibre now trades under the name 'Tuatahi fast fibre' in New Zealand. The UFB2 and UFB2+ roll outs at Tuatahi were completed early in December 2019.

The most important figure in the above table, for Chorus investors, is the one in bold. Chorus owns 100% of the legacy copper network. So as users progress to fibre, they will eventually lose almost all of their copper legacy network customers, but only retain a maximum of around 73% of the nationwide replacement fibre network customers. This means that although transitioning from the copper network will overall mean a boost in customer receipts for pure fibre network owners, the expected 'gain' in revenue at Chorus is a little different.

Weighted Average Fibre Monthly Revenue Gain Per User	73% x $50.49= $36.86
less Weighted Average Monthly Copper Revenue Lost Per User	100% x $45.54= $45.54
equals Weighted Average Overall change in MRPU (Monthly Revenue Per User)	-$8.68

Yes you did read that right. As the fibre transformation wave wafted over the country in FY2022, Chorus has lost on average $8.68 MRPU for every customer that transitioned to fibre! In Australia they are forecasting around 70% of old copper network premises will eventually transition to fibre. In New Zealand we will now track above that 70% 'migration to fibre' figure, (because of our superior fibre broadband infrastructure compared to Oz, we are at 70% now). But as a counterpoint to that, we now have three 'fixed wireless' broadband retailers (Spark, Vodaphone and 2 degrees) marketing their internally owned alternatives to fibre broadband at good discounts to fibre (albeit at reduced peak time speed). At least Chorus will get a meaningful inflation adjustment from their staunch fibre customers that will strengthen their cashflows this year.

I estimate the total revenue lost to Chorus over the FY2022 financial year, as a result of copper to fibre transition, to be:

0.27(1,258,000 - 1.151,000) x ($8.91/month x 12months) = $11.4m

If you regard all of that 'decremental revenue loss' as profit forgone, then this migration has reduced Chorus profit for the year by:

0.28 x -$11.4m = -$3.2m

Actual normalised profit drop between FY2021 and FY2022 was: $48.3m - $52.3m = -$4m

I could make an argument from this that most of the 'normalised profit drop' at Chorus over FY2022 has occurred as a result of the success of NZ's transition to fibre over that time!

SNOOPY

[Snoopy]

Wholesale Broadband Operator	%ge Nationwide Connections	EOFY2022 Connections {A}	EOFY 2022 Premises Passed {B}	%ge Regional Take Up {A}/{B}
Chorus	73%	919,000	1,324,000	69%
Northpower fibre	2%	22,624	33,000	69%
Tuatahi fast fibre	14%	174,000	240,000	72%
Enable	11%	143,331	193,000	74%
Total	100%	1,258,000	1,790,000	70.3%

Notes

1/ The end of the financial year is, for all four operators, on 30th June.
2/ Ultrafastfibre was in May 2020 sold to Sentier Investments based in Australia for one of their managed global infrastructure funds . Ultrafastfibre now trades under the name 'Tuatahi fast fibre' in New Zealand. The UFB2 and UFB2+ roll outs at Tuatahi were completed early in December 2019.

I have been struggling to complete the above table in the previous post. So to avoid future angst, I thought it worth putting 'keyboard to the ether' to record for future reference how I solved the problem.

For the record, the above table was difficult to compile this year. The main problem was that Tuatahi, despite the native nomenclature, is now part of an unlisted company in 100% foreign hands. That means I couldn't find any reporting data as to the growth in network utilisation over FY2022. In the end it was 'Crown Infrastructure Partners' that came to my rescue. ('Crown Infrastructure Partners' is the government organisation that funded the whole UFB roll out ahead of consumer network demand.)

https://www.crowninfrastructure.govt.../publications/

Even then, the rather tardy release of the CIP FY2022 (ending 31st June 2022) annual report (4.5 months on and it isn't available) left me scratching around the site for information that I could use.

Method 1

The most recent 'quarterly connectivity update' in June 2022 told me that overall UFB uptake for the country was 70%. Given that

i/ The total incremental uptake was the sum of all the individual incremental uptakes AND
ii/ Given the total number of premises passed by fibre by Tuatahi had not significantly changed by EOCY2018

I could use the variables I did know to calculate the variable I didn't know. 'f' in the equation below is the fraction of premesis passed by fibre taken up by Tuatahi customers as at the 30th June 2022 reporting date.

0.69(1.324m) + 0.69(0.033m) + f(0.240m) + 0.74(0.193m) = 0.7(1.790m) => f=0.724 or 72.4%

Once I had calculated the utilisation rate at Tuatahi, and knowing the size of the network, that means I could calculate the number of Tuatahi fibre customers by EOFY2022. Furthermore, because I knew the number of customers from EOFY2021, the difference was the number of customers gained over FY2022.

Method 2

If I looked at each of the four CIP connectivity quarterly update reports relating to the full year ending 30th June 2022, the new UFB connections over the whole country add up as follows

30,056+28,797+25,061+24,518 = 108,074

If we look at the increase in connections over the same time period from the other three network owners we know about we get

Chorus	919,000	-	837,000	=	82,000
Northpowerfibre		-		=	1,624
Enable	143,331	-	132,000	=	11,331
Total					94,955

I am calling that total 95,000. If we subtract that number from the total number of new connections across all networks :

108,000 - 95,000 = 13,000

That 13,000 is the number of new fibre connections from from the one fibre market player we don't know about - Tuatahi. Because we know the number of customers at Tuatahi from the previous year, we can now work out the Tuatahi network utilisation:

(161,000 + 13,000) / 240,000 = 72.5%

Conclusion

Note that the result from method 2 is almost exactly the same as the result from method 1. When you come at the same problem from two different angles and come to the same result, this gives me confidence the result is right! It also makes sense that the market penetration at Tuatahi is closer to that of Enable than Chorus, because Chorus covers many more smaller rural towns that were further behind in their fibre network 'build to completion' program. To be conservative, I have rounded down the Tuatahi market penetration to 72% (instead of rounding it up to 73%).

SNOOPY

[Sideshow Bob]

https://www.nzx.com/announcements/406952

Key results
• Fibre connections increased by 38,000 to 997,000
• Fibre uptake 71% in completed UFB areas
• 24% of mass-market fibre connections on gigabit or higher plans
• Operating revenue $487m (HY22: $483m)• EBITDA $342m (HY22: $347m)
• FY23 EBITDA guidance increased to $675m to $690m
• Net profit after tax $9m (HY22: $42m)
• Unimputed interim dividend of 17 cents per share

[Snoopy]

.. what's happened that no tax credits are available from CNU to add to dividends ?

Past history suggests fully imputed dividends from Oct 12 through to April 22 then bang - Nada credits available ..

Nice concise explanation in the half yearly 2023 newsletter on page 2:
"Our dividends are expected to be unimputed for some time, because the substantial investment we have made in the fibre roll out has created a difference in timing between tax and accounting depreciation. This means tax payments are effectively deferred to the future and we do not have the imputation credits in the short term."

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And now for the long answer.....

While I am not disagreeing with the explanation above, there are other ways to spin this story. Page 1 of the newsletter gives us a good clue on what is happening:

"Net profit decreased .....

Part 1/ largely due to interest rate rises and the need to refinance a large tranche of debt due for repayment later in 2023(*). AND
Part 2/ The accelerated depreciation of the copper cables in areas where fibre is available also contributed to the reduction in net earnings."

(*) AR2022 shows Euro Medium Term Notes on the books at EOFY2022 valued at $NZ828m needing to be refinanced, making up 35.7% of Chorus long term debt as at EOFY2022. This debt was taken out over FY2017 and I quote from p31 of that Annual Report:
"On 18th October 2016, Chorus issued EUR 500m of Euro Medium Term Notes at a rate of 1.125%. They will mature in October 2023 and have been swapped back to $NZ785m using cross currency interest rate swaps."

Now, 1.125% of EUR 500m is EURO 6.25m.

The added capital cost of the loan to be repaid six years later is $828m-$785m= $43m, or $7.2m each year for six years. At that time $NZ1 = Euro 0.59. So the effective extra interest paid each year as a result of the interest rate swap was: $NZ7.2m x 0.59 = Euro 4.2m. This means the effective euro interest rate being paid on this debt is:

(6.25m+4.2m)/6.25m x 1.125% = 1.881%,

Refinancing of this bond happened at 3.625%
https://chapmantripp.com/about-us/ne...ful-refinance/

This means the 'interest payments due', to all of those friendly European Note Holders that are 'helping Chorus out' on what is now a 7 year bond has effectively doubled to: (3.625/1.881) x EUR10.45m/0.59 = $NZ34m per year.

Part 2 of the NPAT after tax is the success of broadband roll out undermining the success, and therefore value of the legacy copper network. The IRD have their rules own depreciation that presumably do not include slashing the value of the legacy copper network on Chorus's books at the request of management.

So in my view the explanation for the disappearance of imputation credits could be rewritten as follows:

"The real life of the copper network is dramatically shorter than we thought. But we have been continuing to pay low depreciation charges that do not reflect the reducing revenue that we still get from this network. So actually we are now making a substantial loss on copper, which combined with the significantly higher interest payments on our 'long terms loan portfolio' have wiped out the overall unadjusted Chorus profit -from the point of view of the IRD- to nothing (hence no imputation credits). IOW 'we no longer make any money at all', but -ah- we have free cashflow!"

I think that is an equally good explanation as to what has happened. It doesn't read as well as the paragraph written by Chorus that I opened this post with though!

SNOOPY