CNU - Chorus

[BlackPeter]

The copper network is immediately written down from $300m to zero. The phasing out of the copper network is not an unexpected thing to happen. But if Chorus need to write it down to zero, does this mean the remaining copper will be ripped up as soon as possible? If Chorus is 'revenue constrained', I think what they are saying is that they will no longer be able to afford any expenditure on the copper network. Ironically, the network being written down to zero will correspond with price controls being taken off copper. So are Chorus saying that there is no level of price access that will make copper viable, even in a phase out transition sense? IOW Chorus will be disbanding their 'fix-it' crews and allowing the copper network to fall apart?

Even the replacement fibre network is potentially being hit with a $200m write down for the glass wires alone. All in all it seems that regulatory pricing has a flow on effect to Chorus's assets that may particularly effect Chorus's copper customers going forwards. Have I got that right?

SNOOPY

It is my understanding that Chorus is obliged to maintain their copper network for any customer who does not have access to fibre, i.e. as long as the fibre rollout is not completed there will be parts of the copper network Chorus must maintain - and I suppose that these remaining parts of the copper network will as well generate revenue.

I assume as well that any price control is only taken off from copper for customers who have the option to go fibre ...

However - if & when the fibre roll out is completed and every customer had a chance to swap over to fibre than yes, I think your assessment is correct.

[LaserEyeKiwi]

Interesting the way you phrased your question mikelee. You write as though 5G is a goal in itself, rather than a tool to achieve a task. I think that Chorus sees any task that requires 5G can equally well be matched in speed and local portability by Wi Fi capable terminals installed in homes and businesses, in a way that retailers no longer need put their own routers in a physical location to grab the end line customers' business. IOW Chorus are offering a locally portable service like 5G ('anything they can do we can do better') with superior peak time capacity and latency. Take that 5G providers!

As to where 5G itself is in the market, you may find the following comments from Chorus's AR2020 p9 of interest:

"Vodaphone NZ announced an intention to invest in 5G capability. 5G coverage was switched on in parts of Auckland, Wellington, Christchurch and Queenstown in December 2019. Vodaphone has said it hopes 25% of its broadband customers will migrate to its fixed wireless network and it will provide 5G fixed wireless services later in 2020. Using its 4G network, it offers fixed wireless plans in datacap tiers up to 600GB in major cities and urban regional centres,"

"Spark launched 5G in five provincial townships in late 2019. with fixed wireless broadband plans sold in three datacap tiers.: 'up to 60GB', 60GB to 120GB and 'more than 120GB'. In Auckland, Spark offers plans of up to 600GB on its 4G network. Spark announced the launch of 5G mobile and fixed wireless services in Palmerston North in July 2020, with four more centres to follow."

I don't know if Spark will look to emulate Vodaphone and get 25% of their customers onto '5G fixed mobile', but I don't see why they wouldn't want that. If one quarter of NZ's broadband business migrates to mobile, this surely will have a big effect in Chorus - but even that scenario wouldn't be terminal. Even mobile data services use Chorus for the back-haul part of any messages communication journey. Exactly how much Chorus charges for these back-haul services, on a per customer basis, I would love to know!

The likes of Spark and Vodaphone will surely benefit from the saving of any wholesale fees they don't have to pay to Chorus. But I guess there will be a point when the number of customers on one 'fixed wireless broadband' node will degrade the service so much that many end line customers will consider moving back to Chorus. Where that point is, I guess, will depend on the usage patterns of those end line customers. The problem for the likes of Spark and Vodaphone is that what 5G level of service is regarded as 'acceptable' will very likely be a moving target.

SNOOPY

What exactly do you mean by rolling out wifi6? My understanding is that wifi 6 is a router technology that improves wifi speeds within a household or business, but is still being served by a fibre connection. In that regards it is not competing with fixed wireless broadband at all, which also offers a wifi router for a household or business (but bypasses a Chrous supplied fibre connection).

[Snoopy]

What exactly do you mean by rolling out wifi6? My understanding is that wifi 6 is a router technology that improves wifi speeds within a household or business, but is still being served by a fibre connection.

I think your understanding is correct LEK. But if I may turn into a Chorus parrot for a moment, From p7 of AR2020

"With our new Wi-Fi capable fibre terminals installed in a growing number of homes and businesses, we've taken a new approach and co-developed a Wi-Fi service based on the detailed input from our retailers. The proposed new service will remove the need for retailers to dispatch their own routers to customers and enable customers to get their broadband up and running almost straight away. This could in turn reduce the retail cost of broadband for short term customer connections, because retailers would no longer need to recover the cost of a router over a short time-frame."

"We're taking a close interest in the release of the new Wi Fi standard Wi Fi 6. Wi Fi 6 capable devices , like routers and mobile phones , are now available and can deliver a big step up in WiFi performance with enhanced speed and reduced latency. As well as enabling better home broadband performance, Wi Fi 6 is being seen as a potent alternative to 5G in enterprise and other private environments, where cost effective capacity and support for a large number of devices is important. We're exploring the different roles Wi Fi 6 might play in complementing the unlimited capacity provided by our fibre access products."

I imagine the kind of thing Chorus are talking about here might be if you have a large organisation like a hospital, and staff are here and there attending to different patients, Chorus offers the ability to link to a series of individuals mobile phones, wherever they might be in a scrambling megalopolis of hospital buildings. Likewise the medical staff member has in effect a mobile internet connection to the medical scanning department, blood analysis department and specialist consultant all at once, with those on 'the other end of the line' spread somewhere else throughout the hospital complex at their fingertips. No mobile phone backhaul technology is used, but our medical person still has the convenience of their own mobile phone interface.

In that regards it is not competing with fixed wireless broadband at all, which also offers a wifi router for a household or business (but bypasses a Chrous supplied fibre connection).

The Chorus quote would suggest the wi fi router is built into the Chorus on site circuits (unlike fixed wireless broadband). However, Chorus aren't talking about competing with fixed broadband here with WiFi. Instead Chorus is looking to compete with the mobile side of the mobile business by offering a faster service between mobile phones with less latency, albeit within a limited geographical area. That's how I read what Chorus is saying about Wi Fi 6.

SNOOPY

[Zaphod]

My interpretation of that statement is that they are integrating their ONT with their own Wi-Fi 6 capable router, instead of relying upon the RSP supplying the router. Phones would still primarily use cellular connections outside of the office/home, but use Wi-Fi 6 back in the office/home instead of relying purely on 5G (but let's face it, who would use 5G 100% of the time anyway? Most homes/offices provide Wi-FI).

Mobile providers could in theory use VoWiFi for calls if they support it (e.g. 2DM). Although most hospitals & businesses provide their own distributed & fiinely tuned Wi-Fi network whose design is vastly superior to anything that would be provisioned by an integrated ONT/Router in a single location.

In summary, this doesn't appear to be anything different from what is already used, just Chorus providing the Wi-Fi router instead of the RSP.

[Snoopy]

My interpretation of that statement is that they are integrating their ONT with their own Wi-Fi 6 capable router, instead of relying upon the RSP supplying the router. Phones would still primarily use cellular connections outside of the office/home, but use Wi-Fi 6 back in the office/home instead of relying purely on 5G (but let's face it, who would use 5G 100% of the time anyway? Most homes/offices provide Wi-FI).

Mobile providers could in theory use VoWiFi for calls if they support it (e.g. 2DM). Although most hospitals & businesses provide their own distributed & fiinely tuned Wi-Fi network whose design is vastly superior to anything that would be provisioned by an integrated ONT/Router in a single location.

In summary, this doesn't appear to be anything different from what is already used, just Chorus providing the Wi-Fi router instead of the RSP.

I think the important qualifying comment is:

"where cost effective capacity and support for a large number of devices is important."

Wi Fi 6 is not offering anything that 5G Mobile cannot do. Chorus are just hinting that there is a limitation of 5G, and that is it is relatively capital intensive when you want a large number of connections,or a smaller number of connections sharing huge amounts of data. Chorus are saying that in these circumstances Wi Fi 6 will be faster than 5G and provide a two way signal with superior latency to 5G.

I don't know if a hospital is a good example to use. I imagined that scans could be data intensive and there would be many personnel on one site, but distributed around that site, which is why I chose it as an example. You may be right and that the typical hospital have already designed their own superior on site communication network that is just as good as Wi Fi 6. However, even if I am wrong with my particular example, the underlying Wi Fi 6 advantages are still there. I am sure you can imagine workplaces where Wi Fi 6 would offer real advantages over 5G.

The counterpoint big disadvantage is as you mentioned: no service outside the greater confines of 'the office'.

SNOOPY

[Snoopy]

My interpretation of that statement is that they are integrating their ONT with their own Wi-Fi 6 capable router, instead of relying upon the RSP supplying the router. the RSP.

There are quire a few buzzwords in this industry that makes it hard for outsiders to read through the tech talk.

For those that don't know, and I admit I didn't, ONT stands for 'Optical Network Terminal'. This device connects the fibre that has been wired to the outside of your house, to your modem. The ONT is a small white plastic box (180mm x50mm x 120mm) that will be placed on your internal wall.

RSP stands for 'Retail Service Provider' (I did know that one).

A couple of other phrases that keep coming up in the Chorus reports that I was a little vague about are 'Layer 1' and 'Layer 2' equipment. These are not explained in the Glossary at the back of the Annual Report. So for those that came in late:

Network Layer 1: Passive fibre optic network infrastructure – the physical fibre network assets which are essentially the unlit pipeline or pathway that the electronics use to transmit, otherwise known as dark fibre. These assets include ducting and optical fibre. Projected equipment life for depreciation purposes: 20 – 50 years

Network Layer 2: The electronics necessary to light the optical fibre or the means by which communication occurs down the Layer 1 pathway. These assets are located in central offices, points of interconnect and in the premises of end users. Projected equipment life for depreciation purposes: 5 – 12 years

SNOOPY

[zspoon]

There was a shock to the CNU share price on Friday as it fell from $7.49 to $7.30, a drop of 2.5%. I thought this might be connected with going ex a 10.5 dividend but no, that happened on 15th March. What did happen on Friday was this:

http://nzx-prod-s7fsd7f98s.s3-websit...756/343108.pdf

I have to admit I find the flow on effects of these regulatory decisions, or potential regulatory decisions difficult to comprehend.

I think what this report is saying is that Chorus Assets have an underlying value of $5.5b to $6b. But due to proposed price controls, the value of the network will be reduced to only $4b because of regulatory constrained earnings. The report represents this as the company potentially having a $1.5b 'financial loss asset' on the books. If Chorus has to declare a $1.5 billion dollar loss because of rgulatory price controls on teh fibre network assets, it won't put the company at risk because it is "non cash". Nevertheless, such a loss will have to be shown 'on the books', and the interesting thing is how it flows through (Slide 5 of the presentation).

The copper network is immediately written down from $300m to zero. The phasing out of the copper network is not an unexpected thing to happen. But if Chorus need to write it down to zero, does this mean the remaining copper will be ripped up as soon as possible? If Chorus is 'revenue constrained', I think what they are saying is that they will no longer be able to afford any expenditure on the copper network. Ironically, the network being written down to zero will correspond with price controls being taken off copper. So are Chorus saying that there is no level of price access that will make copper viable, even in a phase out transition sense? IOW Chorus will be disbanding their 'fix-it' crews and allowing the copper network to fall apart?

Even the replacement fibre network is potentially being hit with a $200m write down for the glass wires alone. All in all it seems that regulatory pricing has a flow on effect to Chorus's assets that may particularly effect Chorus's copper customers going forwards. Have I got that right?

SNOOPY

You’re quite off the mark on a lot of this Snoopy. Key aspect being confusing accounting books from the regulatory price setting process.

The financial loss asset represents an attempt to place a value on what Chorus has theoretically ‘unrecovered’ losses from building and operating the UFB network before demand/supply were more stable. The loss asset calculated becomes part of the RAB, which Chorus are able to make a return on (refer to the building blocks aka BBM methodology structure down the bottom).

Copper network has nil value in the PQ RAB because the PQ RAB is based on the concept of a regulated fibre service. Wholly copper assets do not flow into the RAB, because they are not calculating regulated allowable revenue on them as part of this process. Similarly, elements of the fibre network not presented in the RAB represent the fact that some ‘fibre’ assets support copper assets.

Any amounts not flowing in the RAB do not represent items that will be written down in the financial statements.

Would recommend looking at other NZ BBM regulated utilities to understand the structure of how the regulated return under BBM works - but recognise there are some concepts that are Chorus-unique, and for these you might need to sift back through previous announcements and commentary to better understand.

Edit: Also worth having a read through ComCom material on fibre regulation (warning: very dense material).

[Snoopy]

Would recommend looking at other NZ BBM regulated utilities to understand the structure of how the regulated return under BBM works - but recognise there are some concepts that are Chorus-unique, and for these you might need to sift back through previous announcements and commentary to better understand.

Edit: Also worth having a read through ComCom material on fibre regulation (warning: very dense material).

I have ferreted out the reference below:

https://comcom.govt.nz/__data/assets...ember-2020.PDF

You’re quite off the mark on a lot of this Snoopy. Key aspect being confusing accounting books from the regulatory price setting process.

The financial loss asset represents an attempt to place a value on what Chorus has theoretically ‘unrecovered’ losses from building and operating the UFB network before demand/supply were more stable. The loss asset calculated becomes part of the RAB, which Chorus are able to make a return on (refer to the building blocks aka BBM methodology structure down the bottom).

p20 of my above referenced paper confirms you are correct:

"The initial PQ RAB (Price Quality Regulated Asset Base) will reflect the historical costs of investments incurred in providing FFLAS (Fixed Fibre Local Access Services), as well as a financial loss asset reflecting the value of ‘accumulated unrecovered returns’ in providing UFB FFLAS for the period starting on 1 December 2011 and ending on the close of the day immediately before the implementation date (the pre-implementation period)."

I do find this rather startling though. Chorus knew they were getting into a long term project. They knew it would be initially unviable in the sense that the infrastructure had to be rolled out before the demand caught up with it. In recognition of this the government in effect provided a very large interest free loan in the form of CIP debt and CIP preference shares for which no repayments of any kind were required until 15 years after the fibre roll out started. Granted this loan only covered about half the real cost of the roll out. But countering this was that Chorus were allowed to keep all income earned on the fibre network they only half paid for along the way. They also got to keep the profits from the legacy copper network, which will ultimately be superseded by fibre.

Effectively Chorus have an indefinite license to operate their fixed broadband network into the future, when it is at its most profitable.. And now we find they are to be further compensated for losses incurred in the establishment phase when they were fully aware of the kinds of risks they were taking at the beginning? That doesn't seem right.

Copper network has nil value in the PQ RAB because the PQ RAB is based on the concept of a regulated fibre service. Wholly copper assets do not flow into the RAB, because they are not calculating regulated allowable revenue on them as part of this process. Similarly, elements of the fibre network not presented in the RAB represent the fact that some ‘fibre’ assets support copper assets.

Any amounts not flowing in the RAB do not represent items that will be written down in the financial statements.

What you are saying is that the earnings capability of the Regulated Asset Base are a separate thing to the value of those assets in the financial statements. I am not sure I can accept that as true. For example, are you aware that 'Enable' - who have the job of doing what Chorus has done for much of the country - in Christchurch, regularly evaluate the value of its broadband network book value based on future earnings capacity? See Enable AR2020 Note 3 on Property Plant & Equipment:

"The UFB network Layer 1 and 2 assets, together with the Central Offices (collectively described as UFB network assets) were revalued to fair value as at 30 June 2020 based on a range provided by independent valuers Deloitte. Deloitte are considered to have the appropriate qualifications and experience in the fair value measurement of such assets. Deloitte considered that the discounted cash flow (DCF) methodology was the most appropriate method of valuation,"

Over FY2020, the underlying net profit at Enable of $11.320m, was boosted by $66.424m net of tax because of that (See Statement of Comprehensive Income). And yes that extra equity found its way onto the Enable balance sheet.

SNOOPY

[zspoon]

I have ferreted out the reference below:

https://comcom.govt.nz/__data/assets...ember-2020.PDF

p20 of my above referenced paper confirms you are correct:

"The initial PQ RAB (Price Quality Regulated Asset Base) will reflect the historical costs of investments incurred in providing FFLAS (Fixed Fibre Local Access Services), as well as a financial loss asset reflecting the value of ‘accumulated unrecovered returns’ in providing UFB FFLAS for the period starting on 1 December 2011 and ending on the close of the day immediately before the implementation date (the pre-implementation period)."

I do find this rather startling though. Chorus knew they were getting into a long term project. They knew it would be initially unviable in the sense that the infrastructure had to be rolled out before the demand caught up with it. In recognition of this the government in effect provided a vey large interest free loan in the form of CIP debt and CIP preference shares for which no repayments of any kind were required until 15 years after the fibre roll out started. Granted this loan only covered about half the real cost of the roll out. But countering this was that Chorus were allowed to keep all income earned on the network they only half paid for along the way. They also got to keep the profits from the legacy copper network, which will ultimately be superseeded by fibre.

Effectively Chorus have an indefinite license to operate their fixed broadband network into the future, when it is at its most profitable.. And now we find they are to be further compensated for losses incurred in the establishment phase when they aware fully aware of the kinds of risks they were taking at the beginning? That doesn't seem right.

What you are saying is that the earnings capability of the Regulated Asset Base are a separate thing to the value of those assets in the financial statements. I am not sure I can accept that as true. For example, are you aware that 'Enable' - who have the job of doing what Chorus has done for much of the country - in Christchurch regularly evaluate the value of its broadband network book value based on future earnings capacity? See Enable AR2020 Note 3 on Property Plant & Equipment:

"The UFB network Layer 1 and 2 assets, together with the Central Offices (collectively described as UFB network assets) were revalued to fair value as at 30 June 2020 based on a range provided by independent valuers Deloitte. Deloitte are considered to have the appropriate qualifications and experience in the fair value measurement of such assets. Deloitte considered that the discounted cash flow (DCF) methodology was the most appropriate method of valuation,"

Over FY2020, the underlying net profit at Enable of $11.320m, was boosted by $66.424m net of tax because of that (See Statement of Comprehensive Income'. And yes that extra equity found its way onto the Enable balance sheet.

SNOOPY

The factors you referred to are all valid - it’s also worth noting it is not just Chorus with a financial loss asset as part of their RAB. Ultimately the ComCom will determine what a ‘fair’ return is for the other LFCs and Chorus - and they are able to consider all of the points above in making this determination. They ultimately could have said ‘sorry buddies, tough luck for you, no loss assets for any of the network builders’.

In terms of financial statement carrying amounts, you need to realise that Chorus carry their assets at cost. They could move to fair value, and would be able to revalue on a similar basis to Enable, thought noting there would be a range of different valuation techniques that an infrastructure provider could use to determine fair value and a DCF is just one of these options.

But what you need to understand is that Chorus is more complicated than Enable in that they provide a range of copper services (both broadband and voice), in addition to the fibre services.

The RAB does not represent Chorus’ entire asset base - just the assets that support their regulated services (or FFLAS as you identified above), hence it being the Regulated Asset Base. As part of any exercise to revalue the entirety of the asset base, assets not supporting fibre services (for example wholly copper services) would not be nil at fair value because they will, at least for the moment, continue to generate revenue. But this revenue is not subject to PQ regulation - this is the reason why these items are zero in the RAB.

It’s speculation as to what Chorus shifting to fair value would do to the carrying value of their whole asset base - but in any event it’s key to understand that Chorus’ fibre RAB represents a subset of their total asset base.

[Snoopy]

In terms of financial statement carrying amounts, you need to realise that Chorus carry their assets at cost. They could move to fair value, and would be able to revalue on a similar basis to Enable, though noting there would be a range of different valuation techniques that an infrastructure provider could use to determine fair value and a DCF is just one of these options.

But what you need to understand is that Chorus is more complicated than Enable in that they provide a range of copper services (both broadband and voice), in addition to the fibre services.

It’s speculation as to what Chorus shifting to fair value would do to the carrying value of their whole asset base - but in any event it’s key to understand that Chorus’ fibre RAB represents a subset of their total asset base.

I find it interesting that in a regulated industries, such as power and broadband delivery, there are perfectly acceptable alternative accounting methods for reporting how these businesses run. On the one hand we have the likes of 'Mercury Energy' and 'Enable Networks' who have a policy of revaluing their networks annually. OTOH we have 'Contact Energy' and 'Chorus' that both use historical cost. While acknowledging that even in their respective industry groups, neither pair is precisely comparable, there is enough common ground to make me wonder why the respective boards of directors have ended up taking such different reporting paths.

In the energy sector, the practical effect of the difference is startling. Mercury has been able to build new power stations without resorting to shareholders for more capital. Contact has green lighted two new power stations in the last ten years and has required a capital raise for each. Mercury is able to offer fully imputed dividends for shareholders. Contact Energy is not.

In fibre network operations, Chorus has been able to offer fully imputed dividends so far,. But given the new cashflow based dividend policy, this won't be able to continue for much longer. In the case of Enable, it has been loss making until just two years ago. So the dividend policy (bearing in mind that all dividends go to CCHL the fully owned commercial arm of the Christchurch City Council) hasn't been a forefront of the mind issue.

Superficially though, it would appear the revaluing of assets annually (provided they keep going up in value), produces far superior results than keeping assets on the books at cost. I would argue that by not revaluing asserts, both Contact and Chorus offer 'hidden value' that is not apparent in the accounts. If these businesses were sold, this hidden value would be converted into cash. However, given it is highly unlikely that either Contact or Chorus will ever divest their core assets (and why would they?) this hidden value looks to be locked up forever.

Nevertheless in an old 'value hunting hound' way, I currently feel like I am buying more value in purchasing either Chorus or Contact at todays market prices rather than the alternatives (and yes I do realise that a stake in Enable for a private individual is not for sale - but I do own a house in Christchurch so think of myself as an Enable shareholder).

SNOOPY