Options for Chorus

The Herald reports:

Chorus could cut its funding shortfall for the ultra-fast broadband project from $1 billion to $200-250 million if the embattled-lines company introduced savings initiatives, changes to dividend policy and debt headroom, says an independent report released today.

Chorus said last month that a Commerce Commission ruling to cut wholesale internet prices could lead to a $1.07 billion funding shortfall for its portion of the ultra-fast broadband scheme.

It’s not a funding shortfall for UFB. It is a funding shortfall for Chorus. Chorus does more than UFB. They have signed a contract committing them to UFB in return for a subsidy by way of loan.

The Government then commissioned Ernst & Young (EY) Australia to investigate how the cuts would impact on Chorus’ ability to deliver on its UFB contracts with the Crown.

This report was released today and said Chorus could reduce this $1.07 billion funding shortfall to between $200 and $250 million by introducing “cash-flow savings initiatives”.

Possible revenue, operating expenditure and capital expenditure initiatives could reduce the funding gap by $400 to $450 million, the report said.

The report said that another $290 million of the funding gap could be reduced if Chorus made changes to its dividend policy.

The report suggested that if a two year “dividend holiday ” was introduced and then payouts made of 12.75c per share until 2020, the funding gap would come down by another $290 million.

As well as this, changes to debt headroom could reduce the shortfall by $130 million, the report said.

Even if these changes were made, EY said there was still a risk Chorus might breach its agreements with its banks.

The report is here. It is excellent. They note:

In FY13 Chorus’ return on equity was  29.7%, which is significantly higher than other infrastructure businesses which have average returns of 12.5% (New Zealand peers) and 11.2% (Australian peers).

Even with the Commerce Commission determination, Chorus remains a profitable company. They do run into problems around their debt ratios and these can be a serious issue for them.

Chorus and CFH have already begun the discussions about possible changes to UFB contracts to help close the funding gap.

In releasing the report today, Communications Minister Amy Adams said the Government expected Chorus to meet a “significant part” of the funding shortfall itself.

“The Government will be monitoring closely the progress of discussions between CFH and Chorus,” she said.

This is as it should be. I have said all along that government intervention should be the last resort, not the first.  Chorus needs to do internally what it can to stay within its debt agreements. If after that there is still a shortfall, then some tweaking to the UFB contracts (such as longer repayment times) may well be appropriate.