Broadband plan will cut Telecom profit by $168m

Photo / Dannevirke News

Telecom said the New Zealand government's plans to roll out high-speed broadband services to rural areas while overhauling how the phone company is compensated for uneconomic lines will slash earnings over the next three years.

The shares sank to a record low. The Cabinet has approved a $300 million plan to roll out high-speed broadband services to rural New Zealanders while amending the Telecommunications Service Obligation, under which other phone companies pay a levy to Telecom in compensation for maintaining rural services including free local calling.

The company won't receive additional compensation because the benefits of being nationwide supplier of the TSO will outweigh costs for the foreseeable future, Communications Minister Steven Joyce said in a statement today. The proposal approved by the Cabinet is little changed from the one outlined last September.

"Telecom NZ advised today that if these plans are enacted in their current form, Telecom's EBITDA guidance for each of the 2011, 2012 and 2013 financial years will be adversely impacted by up to $56 million," the company said in a brief two-paragraph statement to the NZX from spokesman Mark Watts.

Shares of Telecom fell 1.4 per cent to $2.18 on the NZX today and have declined 18 per cent in the past six months. Ongoing costs to comply with government regulations in a market where landline customers are migrating to mobile, where Telecom faces more rivalry, have helped toppled the company from its position as the largest company on the NZX50.

Under the proposal signed off by the Cabinet, broadband services of at least 5Mbps will be extended to 97 per cent of rural households, with the remainder getting at least 1Mbps, Communications Minister Steven Joyce said in a statement. Part of the initiative involves connecting 97 per cent of rural schools, and therefore 99.7 per cent of students living outside urban areas.

The cost will be met by a government grant of $48 million plus $252 million from the Telecommunications Development Levy, which replaces the TSO, at a rate of $42 million a year for six years.

Under the existing TSO, telecommunications companies pay a levy which is then paid to Telecom in compensation for maintaining rural services including free local calling. The government will put the project out for tender in April, with work to start in early 2011.