Chorus Limited (CNU) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for standing by, and welcome to the Chorus Regulatory Update Conference Call. [Operator Instructions] I must advise that this conference is being recorded today, Friday the 25th of March 2021. I would now like to hand the conference over to your speaker today are Mr. David Collins, Chief Financial Officer. Thank you, and please go ahead.

Thank you, James. Good morning, listeners. Thanks for joining us. This morning, I also got Brett Jackson with me here in Wellington. My intention this morning is to step through the slide deck that we've released to the exchange this morning. And we'll take some questions and answers at the end of the call. So starting on Slide 3. We have, this morning, or we will today submit to the Commerce Commission, an IAB model or Initial Asset Value model, which supports a RAB or initial asset value of $5.5 billion. The IAB model is compliant with the Commerce Commission's input methodologies requirements. We've audited it for accuracy and compliance. It's been certified by the executive within the company and approved by the Chorus Board. As we've done previously, we've used Analysis Mason based in the U.K. to support us in building and developing the model, and we believe that our submission should enable the Commerce Commission to move reasonably quickly through its price quality determination process, noting the time lines that we face in the coming year. We will also be submitting some alternative cost allocation approaches, which we believe reflect the full cost of Chorus's stand-alone participation in the fiber PPP, which support a range up to $6 billion, and I'll come back to that in a moment to give a little bit more color. In terms of maximum allowable revenue or MAR, the model at $5.5 billion supports an estimated MAR range of $715 million to $755 million per annum over the RP1 period. And to be specific, when I say a range, I mean that $715 million is the 2022 estimate, and $755 million is the 2024 estimate, and we'll come back to that in the chart a little later in the deck. The markets range supports or is consistent with our existing business plans and our forecast fiber revenues for RP1, but it does leave very little room for any unintended consequences. We believe that perverse incentives for Chorus and also poor outcomes for consumers would arise if we were capped by our revenue cap from pursuing our natural expected rate of growth. It's important to note that this my estimate is based on an estimated or current risk-free rate, and that will be finalized at 3 months ending the 1st of June. And we will also be providing our MAR model to the commission later in April, which will -- we expect will support the range that I've just quoted. In terms of the expenditure submission that was launched in December. As we noted at the time, we do need to update that submission to reflect the final allocation methodology within the IAB model. We are also planning and we'll do that today as part of this submission to the Commerce Commission. The adoption of the updated allocations has resulted in a reduction in the operating expenditure over the 3 year RP1 period from $625 million to $550 million nominal. There are non-material changes to the CapEx submission. And to be clear, the updated OpEx numbers I've just quoted, are reflected in the MAR estimated range that I mentioned a few minutes ago. Just to come back to the alternative cost allocation approaches to the IAB that I mentioned before, and to give a little color to what I'm talking about or what we're referring to here. The key impacted area is in corporate OpEx, and in particular, the impact on the level of the financial loss asset, which we'll be talking about a little bit later on. From our perspective, Chorus was established as a PPP to build a fiber network. As a result of that, a number of corporate functions were created, and therefore, duplicated from Spark for this purpose. Some examples would include our board cost and investor relations costs, our treasury function cost, our CFO cost, all of those corporate assumptions or cost centers. Our view is, therefore, that these costs should be directly allocated to fiber and not treated as a shared cost. This is a so-called stand-alone cost approach to cost allocation. Unfortunately, at the moment, such an approach is technically not compliant with the input methodologies, due to the way that the rules have been written, and we are required to submit a certified compliant model, and that's why we've submitted a model at $5.5 billion. However, we will be engaging with the Commission around the alternative approach to cost allocations to more of a stand-alone approach as we believe this should be considered as it reflects the full cost of structural separation required by the PPT. Moving on to Slide 4, a view of the initial asset value, 2 components to it, base RAB at $4 billion, which is comprised of UFB assets and shared assets, a financial loss value of $1.5 billion, giving a total of $5.5 million. And the gray shaded area at the top reflects the allocation alternatives that I've just spoken to. Financial loss asset itself, as required under the import methodologies has been calculated using a discounted cash flow methodology. And a reminder that the depreciation of the loss asset going forward into RP1, that depreciation will be based on a weighted average remaining life of UFB assets immediately before implementation date. The base rate itself, as a reminder, it excludes assets funded through capital contributions. The main examples of that greenfield expenditure, roadworks and installation charges. And it also excludes assets funded by government grants, the main one there is the Rural Broadband Initiative, or RBI, but we also have a current one, which is the West Coast fiber build. As we'll get to over the page, it also excludes approximately $1.3 billion of copper or shared assets and excludes non-Chorus UFB zone fiber assets. So that is LSC area, fiber assets, which totaled to $1.3 billion. Moving on to Slide 5. We're showing here a dissection of the balance sheet by category. Between the unallocated asset value and the proportion that's going into the price quality ramp. A couple of key important points to note here. The unallocated asset values. We have rounded these for ease and simplicity. They do represent the written down values per Chorus's statutory accounts at June 30, 2020, plus a forecast of CapEx for the 18 months to December 31 '21, and then less forecast depreciation for those 18 months. And as we've talked about previously, depreciation under the import methodologies follows accounting asset lives. In terms of the price quality fiber rad column itself. A reminder, again, these are net book values, and they are stated as at the 31st of December 2021 or alternatively 1st of January 2022. And and these are the allocations to the price quality RAB, and these are the -- or that price quality ramp is the basis for calculating or setting the maximum allowable revenue. Looking at the third column, the proportion allocated to the fiber RAB. As a reminder of how cost allocations work. When we have an item of expenditure, the first question is whether it can be directly allocated to fiber? And if the answer is yes, as an example, the UFB communal spend, than 100% of that asset or that spend is directly allocated to fiber. If the answer is no, it's shared, then there is a shared cost allocation to determine the proportion that goes into the price quality RAB. A couple of callouts. In terms of fiber cable, the reason that all fiber cable does not get into the price quality RAB is firstly, fiber or the main reason actually is fiber in LFC areas is not covered under price quality regulation. The other main component on the slide is DUCs manholes and poles. The component that's excluded, which is about 14%, relates mostly to copper assets across New Zealand. But also to the shared asset allocation to excluded fiber assets. So the assets within LSC areas that I mentioned a little bit earlier on. As I mentioned on the previous slide, the price quality RAB also excludes about $300 million of fiber assets that are funded either by capital contributions or by a government funding arrangement. Moving on to Slide 6. We thought it would be useful to give a summarized view of how the financial loss asset calculation works. There's been a lot of discussion on this over the last year or 2. So we're trying to give a simplistic view of what is a very complicated calculation process. We have followed the Commerce Commission template and this analysis has been prepared by Analysis Mason as our support contractor. It's also consistent with the input methodologies. I'll call out a couple of the details on the page. The post-tax average of the years across the loss asset, that is an annual calculation, and it's based on the details that are described on Slide #10. And you can see the decline in the WACC over the period, broadly reflecting the reduction in risk-free rates. The UFB asset closing value, which is the second line. That represents the buildup of the UFB asset over the loss period. So as asset or as CapEx is spent on the UFB, that is included. As shared assets are utilized for FFLAS services that is included in the asset, and you see the UFB balance build up over the 10 years. Important to call out that when you look at the total at 2022, and to be clear, that means the 1st of January 2022, the closing UFB asset for the purposes of the financial loss calculation is $3.8 billion. The reason that is less than the RAB for MAR purposes is that the financial loss calculation only includes contracted UFB spend. It therefore, excludes any spend on fiber in [indiscernible] areas, and excludes any noncontracted fiber spend in UFB areas. And an example of that might be infill type expenditure that's outside the contracted footprint but still within UFB areas. Looking at the calculation of the financial loss itself. It is a discounted cash flow approach as the commission noted in November of last year with their final decision on input methodologies. What we've shown on the slide here are the cash inflows, which is the UFB revenue and the cash outflows, which is Capex, OpEx and tax, and 1 minus the other gives the present value of annual net cash flows. So if you add up the PVs of annual net cash flows, you'll get to $5.7 billion, negative, which is the present value, or if you like, the future value at 1 January 2022 of the net cash flow on the UFB project. We've also shown just to help with modeling what the compounding factors are within each of those years. As a reminder, the cash flows each year are compounded up to the first of January of 2022. The dollar numbers shown on those 2 lines are present values as at 1st of January 2022. Coming down to the bottom of the slide. The way the calculation works is you have the total cash outflow, present value of $5.7 billion, deduct the value of the RAB at that point. Again, as a reminder, that's contracted UFB spend only at $3.8 billion and deducts the present value of the crown financing benefit, which is $400 million. As a reminder, on that calculation, that reflects the commission's treatment of avoided costs due to concessionary government funding for the UFB project. Another way of thinking about that is it effectively excludes a component of the assets that were funded by Crown funding when calculating the return on capital on those assets or the WACC on those assets. So that's a summary of the financial loss. So $1.5 billion is what we will be submitting today as the financial loss asset. Moving on to Slide 7. We thought it would be useful today to give a view of the implied mark that relates to the submitted IAB today of $5.5 billion. Summary is that the indicative MAR range is $715 million to $755 million. As I mentioned earlier in the call, $715 million is actually the 2022 number, $755 million is the 2024 number. So whilst we say a range, it's actually the beginning in '22 until the final year in '24. This is consistent with the existing Board approved business plan, which are the forecasts we're showing on the page, which are the blue boxes. The MAR reflects the current 3-year risk-free rate in New Zealand, which is when we measure this about a week or 2 ago, at 0.3%. The actual rate will be based on a 3-month average ending 31st of May. A reminder that in RP1, the MAR is constrained by carry forward tax losses, meaning that the tax building block within RP1 is 0. Reiterate again that the MAR excludes capital contributions. So greenfields in particular, and also any government grant income relating to rural broadband initiatives, and it also excludes fiber revenue in LSC areas. I talked a lot on the call for our half year results a few weeks back on our views of why it's important, and we believe it's appropriate that the MAR in RP1 should be above our forecast revenues. Firstly, it's important to note that as at the most recent results release, we are only 63% connected. So we don't believe it's appropriate to constrain Chorus's natural expected rate of growth. We think it's critical that we retain incentives to continue investing in better consumer outcomes. We believe we have a great product to sell, and we believe that growing fiber uptake and growing newer products, faster speed products are in the consumers' interest and lead to better consumer outcomes. And lastly, a stated government goal for this regime was to achieve a smooth transition for our consumers and investors and we believe above our forecast revenue is necessary to achieve that. I do note that we will be submitting a MAR model to the commission in late April, which we expect will be consistent with the change we've quoted today, subject to risk-free rate movements in the market. The last thing I would call out on this slide is that the MAR range we're showing does not include any depreciation profiling or tilting. It is the raw MAR number that falls off the back of the initial asset value at $5.5 billion. Moving on to Slide 8. As I mentioned earlier in the call, we have updated our OpEx expenditure submission, originally lodged in December. We've provided on the slide a view of the statutory P&L and an update of the proportion of the total statutory costs for each cost element that are included in FFLAS and a comparison to the view at December. The summary is that we estimate now that circa 47% of full year '20 total OpEx will relate to FFLAS and this is down from an estimate of 55% in December, which reflects the updated cost allocation assumptions. It's really important to note when we look at this slide, that that FFLAS proportion at 47% is expected to increase significantly as fiber uptake grows looking forward and as the copper network is retired. When you look at the slide, you can see labor is the key impacted area. And the reason that's the key impact of the area reflects back to my earlier discussion about a stand-alone approach to cost allocation, which is what we based our December expenditure submission on versus a shared approach, which is what underpins the $5.5 billion IAB model. To reiterate the comment I made earlier on, the updated OpEx building block numbers have been included in the quoted MAR range of $715 million to $755 million. Moving on to Slide 9. This is an update of the OpEx regulatory template. The format is the same as you saw in December. The categories are different for regulatory purposes. And in the December presentation, we provided definitions of what those categories are and also how they map to our statutory P&L. The headline here is that the OpEx, whilst the gross spend number is unchanged, the allocation to FFLAS OpEx has reduced from $625 million to just under $550 million. The main difference, as I noted previously, is around the treatment of OpEx labor, and the updated OpEx numbers have been reflected in the quoted MAR range within the pack. The remaining slides in the deck, I won't go through in detail because the ground that we have covered in some detail previously, but we have included because it's very relevant on Slide 10, the key parameters, coming from the input methodologies process, both for the lost asset on the left-hand side and then for RP1, the first regulatory period. And then on Slide 11, we've included the current regulatory timetable on the left-hand side, and some detail on how the RAB roll forward works on the right-hand side of the slide. In terms of the RAB timetable, the commissions published time line has a draft decision in the first half of this calendar year and the final decision in the second half of this calendar year. And that is, therefore, our expectations of the time line looking forward. So I will pause there, and thank you for joining with us. I'll now hand back to James, and we will go to questions and answers. Thank you.

[Operator Instructions] Our first question is from Arie Dekker.

I guess, first sort of question was just around, I guess, the comments you've made about your incentives with the mass sort of ending up where it is in that and kind of needing it to be above where your projected revenue. As -- in terms of your CapEx that you're forecasting and have sort of put forward and this that doesn't factor in any slowdown in your push to connect people onto fiber as you look to sort of get it embedded, particularly against competitors sort of in the future?

That's correct. Our CapEx submission and our OpEx submission is based on our Board approved business plan. And our business plan is based around achieving 1 million connections by 2022 and continuing to push better outcomes for consumers. So there is no adjustment for any slowdown in spend in any of our internal forecasts or in any of our expenditure forecasts to the commission. And it just reinforces our view that we should be able to grow into our MAR and retain the incentive to improve consumer outcomes.

Yes. And then as you've mentioned, you haven't applied any helping and what you've submitted here. So just in terms of on the basis, and I know there's going to be more detail on the MAR coming in April. But in terms of what you've applied to come up with that sort of made indicative Mar that you've outlined today, the asset base, I guess, at the end of RP1, where does that sit versus January 1, 2022?

Sure. So to check that I understand, you're asking net of CapEx and depreciation over RP1 for the $5.5 million to come at the end of our RP1?

Correct. Yes.

So that's a good question. I'll give you a response off the cut and I might try and give you something in a little more detail. Over the RP1 period, we've put a our CapEx proposal is approximately $1 billion for the 3 years. And if you look at what our depreciation is per annum, it's between $350 million and $400 mil per year. So at a broad level, those 2 will offset. But you have an indexation of the RAB that will occur each year, which is CPI. So I think if you add all of that up, I'd expect it to be a little higher at the end of RP1. But I might just come back to you, Arie, and double check that logic, but the broad parameters are, as I've described.

No, that's helpful, yes. So the depreciation in that indicative MAR is at around the $350 million to $400 million per year over that period?

Well, I haven't given what the actual building blocks are, but depreciation reflects within the regulatory model does reflect statutory depreciation. So when you look at our stat accounts, you can see what our stat depreciation is. So that is a good starting point. And then the thing to remember when you're estimating the depreciation building block RAB context, there's a deflation that's deducted off that for CPI given that the RAB is indexed.

Yes, sure. Okay. No, that's good. Just in terms of the revenue you're generating in non-Chorus UFB areas at the moment on that nonregulated fiber asset base can you just give a better context of how large they are and whether they're growing? And just broadly, what the value of those fiber assets are? Will that asset base in the non-U.S. areas?

Yes. I probably can't give that detail out at the moment, Arie. That's not something that we've published previously, and it's probably a little bit early in the process to give a specific on that at the moment.

Sure. And then just on, I guess, your cost base is around $300 million currently. You've talked about that coming down, I think, sort of slowly over time. I mean clearly, you've got a skinny and sort of shrinking revenue base on the nonregulated side. Is there like what can you do to better manage, I guess, cost down that you can't apportion to the non -- to the regulated? And like, is there a risk of you being -- because you've clearly got a very large asset base at book value on the nonregulated side. But is there a risk that you -- are you seeing a risk that you're going to be going negative cash flow in that nonregulated side in the next few years on the obligations you have with regards to continuing to provide copper?

Thanks, Arie. No, we don't expect to go negative cash flow in the next few years. A couple of points to note on our cost base. You're right, as I talk about that publicly, talked about consistent but gradual reduction in our total cost base, but then accelerating through the 3 to 5-year period. The biggest driver of our decreasing costs looking forward will be on the maintenance line, where most of it is reactive copper maintenance. So our job is to manage our fiber costs to within our regulatory allowance and then to ensure that our remaining copper business is optimized so that pay, it's profitable. And the key driver to that is that we manage our costs. So that's our job, and I don't expect to be negative cash flow in copper.

No. I mean that was probably put -- didn't put it quite the right way. But if you look at that $1.3 billion of assets that aren't in the PQ, do you think that you can make a return on capital over the RP1 and to RP2 on that book value?

Yes, I do. And a reminder that, that doesn't also include fiber in our areas, but yes, yes, we do.

Our next question is from Phil Campbell.

Just a couple for me. David, in terms of the RAB, obviously, split between the fiber RAB and the financial loss asset, should we really not worry too much about the allocation because they're going to be amortized at the same rate? Or do you think that will be amortized going forward at different rates?

Okay. Sure. No, I wouldn't be too worried about the fee difference in amortization rates between the 2. The fiber RAB in total is based on statutory accounting asset lives, whether it's the MAR for or the RAB to the purpose of the financial life asset, the asset life rules are the same. So I don't think you need to worry about the difference between the 2 of them in terms of asset lives or depreciation.

Yes, awesome. The second 1 was just, I suppose, in terms of the MA estimates that $715 million to $755 million, which is consistent with the kind of fiber revenues approved in the business plan. Obviously, I'm not sure when the business plan was approved. But obviously, in the meantime, we have seen some quite steep declines in wireless broadband prices. Now obviously, I appreciate that they only cater to a portion of the market. But does it does those lower wireless broadband prices, does it make it difficult in the next few years to be actually able to increase the ankle product at CPI, do you think?

We don't think that makes that challenging. We think when we look at our continuing growth in uptake levels. We've grown at at 7% per annum for 3 years in a row now. We're do to provide our next quarterly update in early April. We don't expect the CPI increase on the 100 meg to make have any noticeable impact at all. I would also note Sky guys entrance into the market in recent days, pushing a 1 gig product, which we think is an enormous positive for us in that context. So now I don't think this CPI issue is significant for us.

Okay. And then I'm not sure if it's in the pack. Just when you were doing the RAB estimate, do we know what the estimate of the shared assets was at the starting period?

Yes. We do -- there's a tiny little footnote at the bottom, so that the starting UFB at Slide 6, sorry, Phil, the starting UFB asset is circa $30 million at 2012. A couple of notes on that because we have had some questions on this. The reason that's low is that the commencement of the UFB build, the number of FFLAS services was 0. And then started to grow through year 1 in 2012, all the way up to 2022. The loss asset itself only relates to contracted UFB build so therefore, at the start of the period, there is none of that. And then that starts to grow. So hence, the pre-existing asset value is low at the start of the loss asset at $30 million for the lost asset period, but that grows to just over $200 million by the end of the loss period, and that's just a function of the proportion of those assets being used by UFB contracted services growing.

Our next question are from Brian Han. Brian? The next questions are from Brian from Morningstar.

It's Brian. David, my first question was, was there a regulatory template that you followed in allocating asset values to fiber? Or was the allocation done by your own methodology, which itself needs to be reviewed by comcom? I'm talking about the cost allocation?

Sure, Brian, no problem. The input methodologies outline what are acceptable cost allocation approaches and what are not. So what we've done with the help of Analysys Mason, and as you'd expect, we get a bunch of experts to assist with this is that we've built our cost allocation approach based on what is allowable under the input methodologies. So therefore, reflecting or referencing my earlier discussion about a full stand-alone cost approach to labor OpEx over the financial loss period, we have not submitted that basis in our IAB value, the $5.5 billion because it's technically not compliant with the but we believe it is appropriate and a real reflection of the reality of what happened. So yes, the import methodology is define the way cost allocations are required to work that's what we followed. The commission will review what we've done and make sure that we have done it appropriately because, of course, there's still a lot of judgment in that area.

Okay. You mentioned that a firm called Analysys Mason helped you develop the models you're presenting today. Is it possible for you to tell us some of the other overseas companies it has helped with this type of work? And whether they have been mostly telcos? Or have they done this type of things, mostly for traditional utilities?

Yes. What I can say is something general, Brian, on this front, they have helped international telcos previously. And they have helped done a lot of international work also. They have done -- what I can say is they've done work in Singapore, but I can't be any more specific than that. They also did extensive work for us in the copper review process over 2014 and 2015. So we refer to them as world-renowned experts in this area. That's not their marketing line. That's how we view them, and they do carry significant credibility, and they bring that to the table.

[Operator Instructions] Our next question is come from Ian Martin.

Just a couple of questions, if I could. You talked about the potential perverse incentives of having 2 type MAR on the regulated fiber revenue. So I just wonder how material the opportunity is beyond that. Obviously, you've got still got a big chunk of other revenue, which is mostly copper. But how much of it is fiber revenue outside of the regulated base? And is there a potential to grow that? And if you get disincentives in the regulated area, other incentives to expand it in LFC areas, and I think JB has talked about potential in services? That's my first question. The second question is, obviously, you would have seen Ofcom make announcements about the regulatory arrangements supply in the U.K. I just wonder if you can highlight some of the differences in the incentive arrangements in the U.K. versus New Zealand?

Sure. I can, that's fine, Ian, thank you for the question. In terms of non-reg revenue, we absolutely have the incentive to develop streams of on regulatory revenue. The way our business plan is structured at the moment is we view our first task as getting uptake levels up to the appropriate level, and we've defined that as 1 million connections by 2022 and then growing further past that whilst we haven't been specific on an uptake level. So that's our priority a little. And also in our business plan, we do contemplate nonregulatory streams of revenue, but they are, at the moment, not a material part of our business. In the longer term, we want to grow them into a more significant part of our business, and we've talked about some of the examples that we are pursuing. Your point is very valid if we're capped on the regulatory side by Mr. , then our incentive to look at nonregulatory sources of income grows significantly. And yes, that will be 1 of our reactions if we were constrained was, well, what else can we do to deliver value for our shareholders. So that's on the non-reg revenue. In terms of Ofcom. Yes. And we noted that in the announcement that they have allowed a lack of circa 6% in there. Recent decision. And within that, there's an asset beta of 0.62. And they take the view that assets are long term, so they match the risk-free rate turn to a longer period of time. When you contrast that with what happens in the New Zealand market, the risk-free rate is a spot rate, that set over a short period of time. And we're in that time now, 3 months up to the 1st of June. It's based on a 3-year government bond, which you've got to interpolate between the 2 and the 5-year. So it's a short term view, which is unhelpful. And then we look at the components of the WACC itself, the asset beta is 0.5 for -- under the info methodology I compare that to 0.62 in the U.K. So we do have differences of view with the commission over some of the outcomes from an import methodology process. The key 1 is ultimately the WACC. And you've just got to look across at what Ofcom have just done for a fiber asset in the U.K. and I think that's a really good example or comparison point.

[Operator Instructions] Our next questions are from Lance Reynolds.

Just a question on the non-RAB side. And just in terms of the OpEx out, we start introducing things from our concensus group EBITDA forecast. Just one comment. On that non-regulatory, does that business make kind of operating EBITDA of pre-IPOs basis make our operating EBITDA, excluding proper exits? Just trying to get a feel for how much the earnings is not seen at the top that is going away? It's on my numbers, it doesn't, definitely doesn't feel like it's a big number.

Sure. Yes, there's not much in that bucket, Lance. So we'd like that bucket to grow in the future, but we don't -- it's not a significant portion of our earnings at the moment. And I think referenced in my earlier comments, the priority in the next few years is to get the core asset uptake levels high, but we might start to change that priority if we are capped within the MAR itself. So there shouldn't be to try to be specific for you. There shouldn't be differences in our -- or material differences in our EBITDA margins on those products, but it is a very small part of the bucket at the moment. So it's probably a longer-term thing for us to us to contemplate.

Would it be unfair to say that the non-related business doesn't make EBITDA [indiscernible] because there'll be a fear of [indiscernible] at the moment?

Can I just try to understand a bit better Lance, when you say ex-copper access, what do you mean?

Well, just if the copper -- if the copper rate business part of the nonregulatory business?

Yes, okay. Yes. What I said? Yes. Okay. Yes. No, no, there's no reason to think the margins will be different in that part of the business. Yes. But again, it's a small number. It's not a material number.

So just on that, when you -- on your 5 cable assets, which is just quite exercise that $300 million of profit cable. Copper price has gone well for you. Is there an economic extraction value or does extraction value and time to export nullify. Is there a [indiscernible]?

Yes. Good question. And the copper prices is interesting. We've got a little bit of extraction in the past. The challenge is that the cost varies depending on where the copper is and how long it's been in the ground. Overall, it when we've looked at this, I probably haven't looked at this really recently, but it is marginal for us. The cost to it up and get it to market there's not a lot in it. But as you say, if the copper price goes -- continues to go up, that might change. But it's not as easy to do as we would like it to be. So there's not a lot of it going on at the moment.

On the nonregulated fiber cable value of circa $70 million, which is in the LFC zone, how much of your -- how much of those fiber [indiscernible]? Or how much of the value was actually a monopoly [indiscernible] competitor advantage?

Right, okay. So generally, the way we get fiber into LFC areas is in greenfield type developments or small patches that we're able to service, and we have to win that that piece of work over the LFC. So it's contestable to the point that it is another provider in the market. But when we win the job, then we've got the fiber in that area. So I hope if that helps a hug, but that's how it works in LFC area.

So yes, you haven't seen activities where you've got assets in the ground interestingly fiber asset [indiscernible] or is pretty rational?

It's pretty rational. We have a little bit of point-to-point in CBD in the LFC areas. But no, it's it's reasonably rational.

Our next question from the line are Phil Campbell.

David, just a couple of kind of clarification ones. I was just wondering if you could just go through a little bit more detail on the alternative kind of allocation method, just give us a little bit more detail on that? And then the other 1 was just -- I know you did explain it, but just wanted to understand the difference between the UFB closing asset value of $3.8 billion, and obviously, the $4 billion that's in the RAB calculations, I want to understand the different again?

Yes. That's absolutely fine, Phil. So if we start with the cost allocation approach. And the easiest way to talk through this is to give a specific example. So let's run with CFO cost, so let's run with myself and my function. When you look over the financial loss asset period 2012 to 2022, and to be specific, when we talk about an alternative cost allocation approach, what it impacts is the financial loss asset. The base RAB is not impacted. It's the financial loss asset that grows significantly with an alternative cost allocation approach. So for you, the example of the CFO cost, our view is when Chorus was established in 2012, and we were established for the purpose of building a fiber network, that's our reason for being. As a result of that, the CFO function, along with a number of other functions were created and therefore, duplicated for that purpose duplicated because they existed in Spark as it was at the time. Our view, therefore, is that those costs should be directly allocated to fiber. They are a stand-alone fiber business cost established for the purpose of building a fiber network. Our view is, therefore, it's not appropriate to treat those costs as a shared cost. The interesting thing is that the reason it's such a material number is you might think or how could corporate OpEx add up to another $500 million of value in the financial loss asset. The reason is because the cost is there in 2012 and then compound 10x. And then the 2013 cost compounds 9x. So it's quite a material impact. However, under the import methodologies, unfortunately, that stand-alone basis of approach is technically not compliant. And the reason it's technically not compliant is basically the way the commission's rules have been written within the input methodologies preclude us from taking that approach. We were required to submit a certified and compliant model. So therefore, we have not been able to follow that approach in our base IAB submission, the $5.5 billion. But we will be engaging with the commission around this view because we do believe it should be considered. And we do believe it reflects the full cost of structural separation required by the PPP back in 2012. So that's -- that is an example, the CFO cost that applies the Board cost or treasury costs or a long list of corporate type costs. Does that help, Phil, in terms of...

That's really -- that's a really good explanation next year. I suppose I just go and look at the Comcom consultation report they did in February, 12th of February. They do -- it's only 1 sentence comment, but they do say that they -- given the relative segments, of course, of the business in 2020, is, of course, reported, we clearly the allocation is it. So I suppose that's the only kind of feedback we've got from comcom so far that I suspect you will be engaging with them in more detail soon?

Sure. Yes. Yes, we absolutely will. And Phil, the second question was around the 2 RAB values. So Slide 6, where we've got a UFB asset as at the 1st of January '22 for the purposes of the financial loss cap. So that's $3.8 billion, whereas the RAB for the -- or the base RAB for the MAR calculation is $4 billion, which is on the previous slide. The reason for the difference is the financial loss asset under the input methodologies only relates to the contracted UFB spend. So any fiber spend that we undertake that's not within the USB contract. And the biggest example of that is fiber in RAB, but there are also examples within our UFB footprint an example is infill, where we have, for economic reasons, agreed or decided to spend CapEx to lay fiber, where that was not in the UFB contract. So it's just a function of the way the input methodologies are written, that the financial loss asset only relates to USB contracted spend, not total fiber spend.

Okay. Now that makes more sense now yet. So that's why you've used the $4 billion in the RAB calculation?

Yes. The $4 billion is what drives the MAR, but for the financial loss asset Co, there's a component that's excluded.

Our next question is from Ian Martin.

Just a question clarification around Slide 5, which looks at the balance sheet composition, particularly of the base asset value, $5.3 billion unallocated, $4 billion allocated. And you talked around the copper issues in a previous question. But there's quite a big difference in the allocated and unallocated value for ducts, manholes, poles, and property, is it fair to assume that once you get through this first regulatory period, those percentages are going to go up because we basically have the same asset base roughly, given what we said about CapEx in the appreciation.

Yes, it is.

Does that the percentages will be higher? Or is there an opportunity to rationalize, for instance, some of the property once you closed in copper?

Yes. Yes. So yes, to both, Ian, in terms of the percentages, the copper business will continue to decline. So it reaches a certain point where it will be stable. So as you look forward, that proportion that goes to copper will broadly reduce. So that's correct. And in terms of the property footprint, the reason that percentage is so low is because copper takes up more space to be simple about it, and there are a lot more older copper assets property assets that we have. We absolutely have an opportunity to consolidate and rationalize, and we have a plan that we're pursuing to do that. So again, as you look forward to future regulatory periods, that percentage that is allocated to the RAB should be higher.

We have a follow-up question from Lance Reynolds.

Sorry, Lance, we're struggling to hear you. Would you mind just coming a bit closer to the mic?

Yes. On the -- you've got me now? On the nonregulated property value of $200 million. Is the bulk of that -- of those assets stand-alone assets or they actually share and being split within a wider growth?

I would suggest most of them are shared. Most of them are shared. There will be some that are purely copper, but the bigger ones will be shared.

So okay , I mean on that math, as copper bleeds down and goes -- cooper is 0 tomorrow, you wouldn't get to realize $200 million of value. So with that property base?

Yes, I -- yes. So it's not linear. That's correct. It's not linear. That's correct. And I should also have called out the LFC copper assets will be in there as well. As I should have called out. But you're right, Lance, it's not linear.

Yes. Just 1 more question. As the -- sorry. The non proper excess EBITDA of the nonregulatory business doesn't make much earnings. And you've got a $500 million delta on your arguments around what corporate costs are, which I can buy into. Wouldn't it be value-adding just to actually sell that business? So the reality of your CapEx is your -- sorry, the reality of your corporate function, is your corporate function, so there'll be no argument at all by the regulator, and then at a later day, you can invest in your 2 business?

Sure, Lance. Just to be clear, the value-add to selling the business, do you mean the non Reg business or the copper business?

Yes. Yes. Just give the importance, if you've got lot of the entire non-regulatory business, the arguments on splitting the corporate cost would be a midpoint, and in summary, the core demand are uplift in U.S.?

Well, I mean that's -- as me, I haven't looked at it that way before, but I guess, yes, theoretically, that's something that we could consider. It's probably a little bit early for me to be running down that half, but I understand your point.

Yes, because it makes sense, given there's just real make much earnings. So that's cool.

We have no further questions at this time. I'd like to turn back to the presenters.

Okay. Thanks, James. Well, thank you all for joining us. I know there's a lot of information in those few slides. And I'm sure there'll be more questions as time goes by. Brett and I are always available to chat. But thank you for joining us. We appreciate your support, and we'll be back in touch again soon. Bye for now.

Ladies and gentlemen, that does conclude today's conference. Thank you for attending, and you may disconnect your lines.