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Spark warns of price rises after copper decision pushes up costs; shares fall

By Pattrick Smellie, Tue 2 Dec 2014
FYI, this story is more than a year old

Spark New Zealand, formerly Telecom Corp, is reviewing its prices, saying today's Commerce Commission draft decision on wholesale copper line pricing threatens to push up the telecommunications company's costs. The shares fell.

Auckland-based Spark anticipates input costs will rise by an annual $60 million as a result of Telecommunications Commissioner Stephen Gale's proposal to raise the monthly total charge allowable for the unbundled copper local loop (UCLL) and for unbundled bitstream access (UBA) by $3.95 a month to $38.39, from the $34.44 monthly regulated price that came into effect on Dec. 1. If the draft decisions stands, that will materially lift Spark's costs and have a negative impact on its 2015 earnings, though the company said it's too early to adjust guidance for low single digit growth in adjusted earnings before interest tax, depreciation and amortisation from $936 million in the 2014 year.

As a result the company is reviewing its pricing across voice and broadband plans after intense competition and the prospect of cheaper wholesale costs had already led to lower prices.

"Today's announcement is unexpected and we are now facing costs substantially above the levels we previously anticipated," chief executive Simon Moutter said in a statement. "Given today's decision, we feel we have no choice but to undertake an urgent review of our current pricing across both fixed and broadband plans."

The statement contradicts the assertion by the chief executive of Chorus, Mark Ratcliffe, that the increase still leaves copper network access prices lower than the $44.95 that prevailed until yesterday and that "consumers should not expect to see any rise in retail pricing."

Chorus estimates a $70 million annual hit to operating earnings, compared with the $170 million it expected to lose on the prices initially determined by the commission, using an international benchmarks analysis.

Spark shares fell 2.6 percent to $3.04, and have gained 35 percent this year. The stock is rated an average 'hold' based on 10 recommendations compiled by Reuters, with a median price target of $2.83.

Chorus shares, however, are up 16 percent to $2.49 today, their highest since October last year.

In August, the head of Spark's home mobile and business division, Chris Quin, told analysts retail service providers had already cut prices in anticipation of a lower regulated price on the copper lines, and that there wouldn't be any further reductions for consumers.

Spark accounts for almost three-quarters of Chorus's annual revenue.

The draft decision of the regulator's final pricing principle - where the watchdog determines an economic cost model to find the true cost of the service rather than relying on international experience as a benchmark - is expected to knock $80 million from Chorus's annual earnings before interest, tax, depreciation and amortisation, lower than the $170 million dent that would have occurred under pricing derived from international benchmarks.

The new draft rate, which does not yet apply and is subject to further submissions from the industry, is still $6.49 per month lower than the $44.98 monthly rental for UCLL and UBA that had applied until yesterday.

The increase is composed of a rise in the UCLL monthly charge from $23.52, established in an international benchmarking exercise completed in 2012, to $28.22, and a small decrease in the monthly regulated charge for UBA of $10.17, compared with the $10.92 charge that has applied since yesterday. Both the newly applied rates will continue in place until the current consultations are concluded, with some prospect of backdating for the final decision on the UCLL price.

Spark's Moutter said the possibility of backdating the price meant the company "will need to take a conservative view now to hedge against any financial exposure from the final decisions."

The UCLL price has risen because the commission concluded New Zealand's copper network had a higher underlying cost of replacement because of the number of long lines connecting to small numbers of customers in remote rural areas, among other factors.

In July, Chorus cut a deal with Crown Fibre Holdings, the government body overseeing the ultrafast broadband rollout, to bring forward funding of $178 million though at a high interest rate and the expense of dividends. In March, Crown Fibre gave Chorus greater flexibility in building the network, provided it meets an agreed deadline. Chorus also gained more wiggle room under its banking covenants, allowing for weaker earnings relative to its borrowings.

A final pricing decision is scheduled for April next year, and will be made after the consultation process that will now occur, with the earliest date that the final UBA price could apply being Dec. 1 this year.

The commission is also seeking views on whether the commission should conduct a review of the standard terms determination for the UBA service and, if so, what it should examine.

Submissions are due by Jan. 23.

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