CNU - Chorus

[Snoopy]

Hey Snoopy

Per note 7 the total additional funding is $1,016m (close to what you derived) but I think you need to remove RBI & Others. I haven't read historical documents but I suspect RBI will be completely different to UFB1 contractually and financially. Note the value of $707m for UFB also includes UFB2 in the past 2 years per the notes.

I think you are right Ferg. I have the historical documents handy. So I have re-presented the table removing the 'Rural Broadband Initiative' and 'Other' funding from it. The amortisation section of the table I have likewise adjusted.

Crown Fibre Funding	FY2012	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018	FY2019	FY2020
Additional Crown Fibre Funding	$13m	$94m	$120m	$80m	$94m	$73m	$77m	$80m	$79m
sums to Cumulative Crown Fibre Funding {A}	$13m	$107m	$227m	$307m	$401m	$474m	$551m	$631m	$710m
Crown Funded Fibre Depreciation	$0m	$1m	$3m	$6m	$8m	$11m	$12m	$15m	$18m
sums to Cumulative Crown Funded Fibre Depreciation {B}	$0m	$1m	$4m	$10m	$18m	$29m	$41m	$56m	$74m
{A}-{B}	$13m	$106m	$223m	$297m	$383m	$445m	$510m	$515m	$636m

Note 7 of AR2020 says fair value on initial recognition of crown funding for the UFB roll out alone is $707m, close to the $710m that I derived, As you have pointed out, the last two years also include some UFB2 and UFB2+ funding. Yet if the total of $707m/$710m is correct, it falls well short of the $924m that has been handed out to Chorus for UFB1 funding alone (AR2020 p49). What gives?

SNOOPY

[Ferg]

Note 7 of AR2020 says fair value on initial recognition of crown funding for the UFB roll out alone is $707m, close to the $710m that I derived, As you have pointed out, the last two years also include some UFB2 and UFB2+ funding. Yet if the total of $707m/$710m is correct, it falls well short of the $924m that has been handed out to Chorus for UFB1 funding alone (AR2020 p49). What gives?

This would be 'case closed' on the disambiguation of the various categories of crown funding taken up by Chorus, except for one point. If the CIP funding is the crown contribution towards rolling out fibre broadband, then why does the 'other' crown funding also specifically include $707m of funding specifically allocated to rolling out UFB 'Ultra Fast Broadband

Bear with me but I will answer your post with quotes from the AR, a worked example and your own workings from post 2648.

What gives is that Crown funding received is $707m per Note 7 plus CNU also received CIP debt+equity funding of $360m per Note 6 giving total funding received of $1,013m for UFB1 + UFB2. Assuming the full $924m has been booked/received for UFB1, this implies UFB2 funding received is $89m. As has already noted (and I think we are now in agreement), the "Crown Funding" balance includes additional funding for RBI & Others. In fact your amended table deriving A-B of $636m in post 2688 has proved the first column in Note 7 where the total without rounding differences is $633m.

{Re my (Ferg's) statement that interest should be excluded} Are you sure about that? The 'CIP debt' is interest free until 2025 (AR2020 p50). [...snip...] Accordingly, I can't see why you say that the $461m on the Chorus Balance Sheet for FY2020, under the collective label of CIP securities, contains 'accrued interest'

Absolutely yes it should be excluded if we are seeking to understand the funding received to date. But that answer changes to No if we want to know how much CNU owes. "Notional interest" is a book entry which is inflating the CIP debt+equity balances to $461m . Per note 6 total notional interest accrued to date is $101m. The annual interest accrual is confirmed if you look at the "reconciliation of movements of liabilities" statement on page 39 as being a book entry that is inflating the amount owing on CIP debt+equity.

I see Note 6 p50 talks about 'notional interest'. I wish when I had a debt due where I could just pay 'notional interest'! This term suggests to me that 'notional interest' is some kind of accounting construct. I do not understand 'notional interest' and doubt that it represents any real payment. I say this because I don't see any 'real interest' as falling due.

Accounting construct? Yes. It's not a real payment? Correct...for now. It is however showing as "payable" by virtue of being included in the balance of $461m being a liability, and it will eventually have to be repaid as part of the debt repayments of half of the $924m.

Think of it like this:

• CNU receives debt funding of say $100m in 2021
• CNU must repay $100m in 2023 (i.e. no interest)
• IFRS accounting says that CNU did not receive $100m of principal, IFRS says CNU received $90m principal and $10m of notional interest (assuming a simplistic $5m p.a. interest)
• At 2020 year end the debt owing is recorded as $90m
• At 2021 year end the debt owing is recorded as $90m + $5m notional interest
• At the end of 2022 $100m is repaid which is the $95m for last year end plus another $5m notional interest for 2022
• So what happened to the other $10m that was banked in 2020? That is sitting in "Crown Funding" per the note I quoted on post 2687 ("The difference between funding received and the fair value of the securities is recognised as Crown funding" from AR2020 page 49).
• The notional interest is not tax deductible per page 27: "The accounting interest and depreciation credit recognised in the Income statement in relation to CIP securities are non-taxable". This confirms it is an accounting construct and not real.

Per a note I quoted earlier in post 2687, page 49 of the 2020 AR (I previously quoted this as being from page 51; 51 is the pdf page number, whereas 49 is the report page number) of the 2020 AR: "Over time, the CIP debt and equity securities increase to face value and the Crown funding is released against depreciation and reduces to nil."

This "face value" part is crucial. I expect this means that when these financial arrangements mature in 2025*, only then will we see the $924m. It is not currently showing as $924m because the balance is sitting in Crown Funding. As each year passes additional notional interest will be added to the balance, until in 2025 the total balance of CIP debt+equity will be $924m.*

*Amending thinking: with differing debt maturity profiles we may never see the $924m given some tranches mature on different dates (your post 2648 made me amend my thinking) - more on this in my table at the bottom of this post.

In another post you point me to post 2648 which shows the repayment schedule and the PV of the debt repayments (very helpful thank you). Notice you had a total PV of $316m based on a discount factor of 5.5%. So you had the overall answer at your finger tips all along! I was only joining the dots.

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p50 talks about 'fair value on initial recognition' of the 'CIP debt' and 'CIP equity' (preference share debt) facilities. This is the bit I am having trouble understanding. I thought a debt of $X was a debt of $X and couldn't be reduced in value on the balance sheet because it does not have to be paid back until some time in the future. But reading this page 50 (AR2020) suggests to me that I am wrong about this?

Yes the debt is reduced given it is "interest free" and not repayable for some years per my example of $100m above. Note your $316m PV on post 2648 is close to the "fair value" of $287m of CIP debt securities per the note on page 50 under the table of values. Note also page 50 talks about debt securities being split into senior and subordinated, and there are a range of discount rates smattered all over that page. Back-solving the $287m fair value into your debt repayment table per post 2648 implies an average discount rate of 5.88% (BTW I think the periodic divisors you used are short one period). 5.88% seems reasonable given the ranges presented on page 50 for the senior & subordinated debts. Note the splitting of the CIP debt into senior and subordinated further muddies the waters, but we have cut through that by using an average rate.

Below is a PV table using a discount factor of 5.88% and the debt repayment tranches you provided, to come up with the fair value of the CIP debt securities for each tranche and year (note this excludes the CIP equity component):

Avg. Disc. Rate =	5.88%
	Tranche:	2025	2030	2033	2036	TOTAL
	Amount:	$85.3	$104.7	$166.7	$210.2	566.9
Periods	FY	Fair Values:				TOTAL
	2020	$64.1	$59.1	$79.3	$84.3	$286.8
1	2021	$67.9	$62.6	$84.0	$89.2	$303.7
2	2022	$71.9	$66.3	$88.9	$94.5	$321.6
3	2023	$76.1	$70.2	$94.1	$100.0	$340.4
4	2024	$80.6	$74.3	$99.7	$105.9	$360.5
5	2025	$85.3	$78.7	$105.5	$112.1	$381.6
6	2026		$83.3	$111.7	$118.7	$313.7
7	2027		$88.2	$118.3	$125.7	$332.2
8	2028		$93.4	$125.3	$133.1	$351.8
9	2029		$98.9	$132.6	$140.9	$372.4
10	2030		$104.7	$140.4	$149.2	$394.3
11	2031			$148.7	$158.0	$306.7
12	2032			$157.4	$167.3	$324.7
13	2033			$166.7	$177.1	$343.8
14	2034				$187.5	$187.5
15	2035				$198.5	$198.5
16	2036				$210.2	$210.2

Can I say "case closed"?


Regards, Ferg

[Snoopy]

Yes the debt is reduced given it is "interest free" and not repayable for some years.

Back-solving the $287m fair value into your debt repayment table per post 2648 implies an average discount rate of 5.88% (BTW I think the periodic divisors you used are short one period). 5.88% seems reasonable given the ranges presented on page 50 for the senior & subordinated debts. Note the splitting of the CIP debt into senior and subordinated further muddies the waters, but we have cut through that by using an average rate.

Can I say "case closed"?

Regards, Ferg

Outstanding Ferg. You have connected the dots in a way that I can understand. Granted you and I are are probably the only two reading into this thread this deep! There are many readers for which tables of numbers 'don't do it'. Nevertheless I feel as though I am finally able to answer Aaron's question -which I realise you have just done. But I intend to use your work to answer his question in a 'non -numerical way' for those that have read this far and are still lost.

On another topic, you picked up that in my post 2648, which was discounting to a 'present value', maturing Chorus debts a long way into the future (up to 2036), that I was one discount period short. So I have gone back to that post and corrected it. However, given you have referenced that post as it was, before correction, I have left the old uncorrected calculations in there as well. Otherwise if someone read your post that referenced 2648, and went back to look at 2648, the numbers you have referenced would be missing, a potential source of confusion!

Thanks again.

SNOOPY