Chorus Limited · NZX:CNU
Chorus — Investor Presentation (October 2014)
46 slides from Chorus's investor presentation, Oct 7, 2014
Slide 1: Chorus Institutional Investor Briefing
Chorus Institutional Investor Briefing 7 October 2014 // PAGE PAGE 1 1
Slide 2: Disclaimer
Disclaimer Forward-Looking Statements > This presentation may contain forward-looking statements regarding future events and the future financial performance of Chorus, including forward looking statements regarding industry trends, regulation and the regulatory environment, strategies, capital expe
Slide 3: Mark Ratcliffe, Chorus CEO
Mark Ratcliffe Chorus CEO // PAGE PAGE 3 3
Slide 4: Agenda
Agenda >Introduction >Connections and market update >Understanding TSLRIC steps and parameters ▪ note: this presentation is a summary of Chorus’ views to date >Chorus scenarios and comparisons >Regulatory framework and new Government initiatives >Q and A / PAGE 4
Slide 5: Fixed line connections
Fixed line connections Fixed line connections 30 September 2014 30 June 2014 Baseband copper 1,455,000 1,471,000 UCLL 129,000 127,000 SLU/SLES 3,000 4,000 Naked Basic/Enhanced UBA and Naked VDSL 128,000 117,000 Data services over copper 15,000 16,000 Fibre 53,000 42,000 Total fixed line connections
Slide 6: Continuing broadband growth
Continuing broadband growth Broadband connections 30 September 2014 30 June 2014 Basic UBA 156,000 164,000 Naked Basic UBA 10,000 9,000 Enhanced UBA 792,000 802,000 Naked Enhanced UBA 99,000 93,000 VDSL 61,000 49,000 Naked VDSL 19,000 15,000 Fibre (mass market) 41,000 31,000 Total broadband connecti
Slide 7: Steady migration to broadband, data & fibre
Steady migration to broadband, data & fibre Sept 14 June 14 March 14 Dec 13 Sept 13 June 13 Baseband copper 1,455,000 1,471,000 1,485,000 1,495,000 1,507,000 1,519,000 / PAGE 7
Slide 8: Demand for high speed broadband is growing
Demand for high speed broadband is growing 16,000 (mass market) / PAGE 8
Slide 9: Changing product mix
Changing product mix Steady migration away from basic UBA to EUBA, VDSL and Fibre Voice/dial-up lines are steadily declining, but still represent a quarter of our connections / PAGE 9
Slide 10: Deployment programmes update
Deployment programmes update > Rural Broadband Initiative ▪ 75,000 lines within reach of better broadband (72,100 at 30 June) ▪ Uptake ~80% ▪ East Cape 220km fibre lay complete > UFB 400,000 UFB rollout progress ▪ rollout 34% complete 350,000 386,000 end users now within reach of 300,000 Chorus pr
Slide 11: Broadband provisioning mix
Broadband provisioning mix > Q1 shows slowdown in provisioning activity, in line with reduced RSP marketing Number of truck rolls / PAGE 11
Slide 12: Significant investment in broadband is delivering results
Significant investment in broadband is delivering results Connection speed and connection volume Note: UFB % is based on household passed while VDSL, >5mbps, and basic broadband is based on lines. / PAGE 12
Slide 13: Average connection speed has increased steadily
Average connection speed has increased steadily Average connection speed within Chorus’ network, reflecting: network capability enhanced through fibre to the node (ADSL2+, VDSL) and fibre rollouts customer uptake of VDSL and mass market fibre reduction in number of legacy modems 01.09.2014 1
Slide 14: NZ is outperforming Australia on speed, not uptake
NZ is outperforming Australia on speed, not uptake % uptake of premises passed Fibre uptake - NZ vs Australia 45 151,000 connections 40 35 30 25 20 15 39,500 10 connections 5 0 June 2011 June 2012 June 2013 June 2013 NBN uptake UFB uptake Source: Ookla, TrueNet / PAGE 14
Slide 15: Sustained HD video impacts throughput
Sustained HD video impacts throughput • Low concurrent usage is what enables a good (but not perfect) experience today • Significant increases in concurrent use will drive network challenges, as traffic is aggregated through the network 18 Web browsing (2 people) 16 Netflix 14 Lightbox using Lightbo
Slide 16: Moving forward – latest product proposals
Moving forward – latest product proposals Boost VDSL > Proposing to launch 1 December 10 Mbps throughput commitment over 15mins ▪ $44.99 price until 31 December 2015 including applicable install charges Basic VDSL > Existing basic VDSL to continue to be available from 1 Dec 99% probability of 32kbps
Slide 17: Regulatory update
Section break Regulatory update Anna Moodie DOCUMENT TITLE / V 1.0 / XX DAY 2012 / PAGE 17
Slide 18: Total Service Long Run Incremental Cost (TSLRIC)
Total Service Long Run Incremental Cost (TSLRIC) The service: Step 1 > Can be unbundled What is the > Has the full functionality of UCLL/UBA (network built for STD, voice, TSO service? etc) Step 2 MEA Options: What MEA can deliver >Copper – orthodox, real world data that service? >GPON fibre and fix
Slide 19: Step 1 The UCLL & SLU services
Step 1 The UCLL & SLU services UCLL MPF SLES SLU MPF The service: >Can be unbundled (so precludes fixed wireless) >Has the full functionality of UCLL (network built for STD, voice, TSO etc) >Expect average TSLRIC of non-cabinetised UCLL lines approximately equals average TSLRIC of SLU lines >Note: U
Slide 20: Step 1 Understanding Chorus' network reach
Step 1 Understanding Chorus’ network reach > Chorus is required by TSO to connect 100% of end-users within its 2001 footprint > approximately 1.8m address points nationwide > 97% xDSL broadband coverage today and wholesaled to RSPs Fibre to the node (FTTN) zones summary Zone 1 High density areas of
Slide 21: Step 1 Zone 4 is a large and geographically challenging area
Step 1 Zone 4 is a large and geographically challenging area = Zones 1 to 3 (~80% of lines) > Rural Broadband Initiative mandated fibre connectivity to communities, schools, hospitals and towers throughout Zone 4 ▪ Chorus upgrading and extending 5Mbps broadband to 57% of Zone 4 homes ▪ Fibre also co
Slide 22: Step 1 This is the UBA service
Step 1 This is the UBA service First data switch* > An RSP wanting to replicate the UBA service would: ▪ Purchase UCLL on non-cabinetised lines, and invest in DSLAMS in the exchange; ▪ Purchase SLU on cabinetised lines, invest in DSLAMS in the cabinet, and purchase backhaul to the exchange; ▪ Also i
Slide 23: Step 2 The Modern Equivalent Asset (MEA)
Step 2 The Modern Equivalent Asset (MEA) Commerce Commission views to date Chorus views July: a TSLRIC model to determine the costs incurred by a A forward looking TSLRIC modelling approach should reflect MEA hypothetical operator using the most efficient means to the efficient cost of providing reg
Slide 24: Step 2 Civil costs are common across MEA choices
Step 2 Civil costs are common across MEA choices > 70 to 80% of network costs are in the civil works required to deploy cable whether it is copper or fibre > TERA’s 2013 analysis for the Danish regulator showed copper network can be cheaper than fibre (note: TERA did not model wireless) Source: MEA
Slide 25: Step 2 Achieving 100% coverage
Step 2 Achieving 100% coverage ▪ Map shows Chorus ‘multi-access’ and ‘country set’ radio connection paths for most remote ~7,000 end-users 25 / PAGE 25
Slide 26: Step 3 Key parameters
Step 3 Key parameters Commerce Commission views to date Chorus views Asset July: Optimised replacement cost (ORC), irrespective of Agree with the Commission’s position. Optimisation must be whether Chorus’ existing assets could be re-used. Scorched valuation node. reasonable, realistic and achievabl
Slide 27: Step 3 Key parameters
Step 3 Key parameters Commerce Commission views to date Chorus views Opportunities for sharing on third party assets should be considered but only if they are realistic given current NZ Asset sharing July: Model will allow for asset sharing with third parties – circumstances. such as use of electric
Slide 28: Step 3 Real world costs vary from area to area
Step 3 Real world costs vary from area to area > As Chorus has found with its UFB deployment, costs vary widely from area to area reflecting: ▪ council and other authority conditions (e.g. aerial consent, reinstatement, conservation access) ▪ local geography (e.g. volcanic rock in Auckland) ▪ availa
Slide 29: Step 3 Other key parameters and key considerations
Step 3 Other key parameters and key considerations > Opex – Chorus’ view is actual opex should be taken into account > Demand – Chorus’ view is that migration off copper (e.g. to other LFCs) should be accounted for > Cost allocation – Chorus’ view is that capacity based method is appropriate > Trans
Slide 30: Valuation overview
Valuation overview Andrew Carroll Section break DOCUMENT TITLE / V 1.0 / XX DAY 2012 / PAGE 30
Slide 31: Step 4 What is the TSLRIC price?
Step 4 What is the TSLRIC price? > Commission due to report draft prices 1 December ▪ recent Commission letter anticipated completing FPP by April 2015 ▪ modelling being conducted for Commission by TERA (recently completed Danish modelling) ▪ participants required to submit own models to Commission
Slide 32: Chorus scenarios overview
Chorus scenarios overview Current network > this reflects replacement cost of the existing copper-based replacement cost UCLL and UBA network with some optimisation assumed > reflects potential adjustments to the current network Scenario A replacement cost ▪ doubles the adjustment for optimisation a
Slide 33: Chorus network valuation scenarios: hybrid copper MEA
Chorus network valuation scenarios: hybrid copper MEA Parameter Current network Scenario A $45 case Comment replacement cost assumptions assumptions Optimisation 10% 20% 50% TSLRIC modelling may optimise network relative to current route Misc adjustment 0% 10% 23% Miscellaneous other downward adjust
Slide 34: Chorus TSLRIC illustrative scenario outputs
Chorus TSLRIC illustrative scenario outputs Current network $45 case* Scenario A replacement cost Network valuation Network valuation Network valuation ~$16bn ~$13bn ~$8bn ~$83 per month $69 per month $45 per month UCLL ~$67 UCLL ~$55 UCLL ~$33 UBA ~$16^ UBA ~$14^ UBA ~$12^ Note: Amounts above are n
Slide 35: Network valuation sense check
Valuation Network valuation sense check sense checks Current network $45 case replacement cost Scenario A Chorus analysis Telecom op sep Lines companies (RAB) Telstra comparison 6 7 8 9 10 11 12 13 14 15 16 $ billion Chorus analysis Telecom op sep Lines companies Telstra comparison Replacement cos
Slide 36: FTTP rollouts as a proxy for TSLRIC
Valuation sense checks FTTP rollouts as a proxy for TSLRIC > General rule of thumb that rural rollouts cost same amount again as urban Treasury FTTP cost study (2009) estimated rollout to 75% at ~$5b-$8.6b Nordic state comparison (favoured by NBN) suggests NZ 100% rollout of NZ$8b-$13b European
Slide 37: Telecom 2010 accounting separation valuation
Valuation sense checks Telecom 2010 accounting separation valuation > Commission’s “high level” bottom-up review (2011) of Telecom’s $14 billion passive network valuation: ▪ recognised multiple trenches are common and justified in CBDs ▪ said Telecom route distances were “consistent with a modern co
Slide 38: UCLL/UCLFS pricing out of step
Pricing sense UCLL/UCLFS pricing out of step checks > Spark Homeline charges and Monthly charge comparison (2007-2013) average electricity lines distribution $60.00 charges* have increased significantly from 2007-2013 $50.00 > Chorus regulated line charges have declined over same period despite $40.
Slide 39: UFB pricing was set relative to copper
Pricing sense checks UFB pricing was set relative to copper Contracted UFB prices vs copper $60.00 $55.00 $49.90 $50.00 $45.92 $44.98 $45.00 $42.50 $40.00 $40.50 $41.50 $39.50 $38.50 $35.00 $30.00 July-12 July-13 July-14 July-15 July-16 July-17 July-18 July-19 Source: Graham Mitchell, CEO of Crown F
Slide 40: Looking ahead
Section break Looking ahead DOCUMENT TITLE / V 1.0 / XX DAY 2012 / PAGE 40
Slide 41: Regulatory calendar
Regulatory calendar Boost and UBA process Final pricing principle process Proposed UBA changes – Submissions on service transaction 29 October 9 October draft report charges Cross-submissions on service 16 October Submissions on draft report 11 November transaction charges Draft determination due an
Slide 42: New Government initiatives
New Government initiatives UFB RBI Pre-election announcement: Pre-election announcement: Expand UFB from 75% to $100m additional funding 80% of population from Telecommunications Crown funding of $152m to Development Levy $210m Contestable funding available Competitive bid process to June
Slide 43: Delivering better broadband, faster
Delivering better broadband, faster > [ Consents Post 2020 framework TSO review / PAGE 43
Slide 44: Any questions?
Any questions? / PAGE 44
Slide 45: Bay of Plenty
Bay of Plenty = Zones 1 to 3 / PAGE 45
Slide 46: Lower South Island
Lower South Island = Zones 1 to 3 / PAGE 46