Chorus announces new deal with Crown Fibre over UFB installations

The investment comprises of 1.9 million non-voting shares, which convert to ordinary shares after 2025. Photo / NZ Herald

Chorus, the telecommunications network operator, will continue to provide free non-standard residential ultrafast broadband installations until 2019, under an agreement with Crown Fibre Holdings which could see its debt repayments to the government entity delayed.

The Wellington-based company won the lion's share of the government's programme to build a fibre telecommunications network to 75 per cent of the country, a target which has since been extended to 80 per cent.

Chorus has previously estimated the fibre network will cost between $1.75 billion and $1.8 billion to build, and forecast capital expenditure of between $580 million and $630 million in 2016. It has been providing funding for residential non-standard installations since late 2012, initially funding $20 million, which it increased to $28 million in 2014.

The Crown's investment in Chorus comprises 1.9 million non-voting shares, which convert to ordinary shares after 2025, allowing the government to receive dividends and debt securities that don't bear interest. Under the 2012 agreement, Chorus had to redeem those in tranches from 2025 to 2036 at the latest.

The deal doesn't require any more funding from Crown Fibre, Chorus' chief financial officer Andrew Carroll said, and recognises that the government's pending review of the 15-year-old Telecommunications Act includes the proposal to put copper and fibre under a "building block" pricing regime similar to that used by electricity distribution utilities.

"As such, its finalisation and implementation should ultimately provide a long-term sustainable solution for funding these costs, but this is not yet currently certain," Carroll said.

"We've therefore taken the pragmatic approach that a building block model is likely to include the cost of residential non-standard installations in a regulated asset base, thereby allowing a regulated return on this investment."

If that hasn't happened by the end of 2020, or not all of Chorus' UFB non-standard installation costs are included in the asset base, the dates on which Chorus must redeem or provide dividends on the Crown Fibre debt and equity securities will be postponed, he said.

The security postponement would range from a few months, if 80 percent of non-standard installation costs were included in the asset base, to two years if no costs were included, Carroll said.

At the most, postponing Chorus' repayment of the debt and equity would add about $60 million to the non-standard installation costs incurred from 2017 to the end of 2019.

The shares last traded at $3.59, and have dropped 4.7 per cent this year.