TELSTRA GROUP LIMITED — Call Transcript 2011

Jun 23, 2011

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24 June 2011

The Manager

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ELECTRONIC LODGEMENT

Dear Sir or Madam

NBN Briefing – CEO Analyst transcript

In accordance with the Listing Rules, I attach a copy of the transcript from Telstra’s CEO Analyst briefing held on Thursday 23 June 2011, for release to the market.

Regards

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Carmel Mulhern

Company Secretary

Telstra Corporation Limited ACN 051 775 556 ABN 33 051 775 556

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Telstra Corporation

23 June 2011

Transcript of Conference Call: Telstra signs Definitive Agreements

Ben Spincer: Good morning everyone. This is Ben Spincer from Telstra Investor Relations. I'd like to welcome you onto this call this morning, following the signing of definitive agreements with NBN Co and the Government.

In the room here I have with me David Thodey, the CEO of Telstra, John Stanhope, the CFO, Will Irving, Group General Counsel, and Tony Warren, the head of our NBN engagement team. I will hand over to David in a moment for some opening comments, then we will take some questions first from the analysts on the call, and then my colleague, Andrew Maiden, will facilitate some questions from the media on the call. So I'll hand over to David now. Thank you.

David Thodey: Thanks Ben. Today we have signed the definitive agreements with NBN Co and the Government to support Telstra's co-operation in the rollout of the national broadband network. I do want to stress - I know many of you have been waiting for this for a long time, as we have, and it is an important milestone.

As Ben said, I've got a few people in the room because I'm sure there will be a few questions and answers later on. John's here, and I do want to recognise that John has really been the lead in negotiating these contracts. He really has done an outstanding job.

I've also got Tony Warren, who led the NBN engagement team and, of course, Will Irving, our Group General Counsel, who has been working on these incredible agreements that, as I said in my press release, probably are some of the most complex, perhaps, agreements ever signed in corporate Australia's history because there was just so much we had to cover.

We've also lodged the slide presentation with ASX today, and I will talk to those summary charts. What I want to do is try and give you an overview of the key elements of the deal, and also to remind you that there are some important condition precedents that will still need to be fulfilled before we can put the proposed transactions to you, our shareholders, for approval.

Firstly, there is a disclaimer there I should just point you to, which I'm sure you're familiar with. Let's turn to slide 3, which really is trying to summarise what are the key takeaways from this announcement. As you would have seen, there's been a lot of material

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that would provides the market day on a way of issues; from a description of all the agreements through to some financial information.

To help you navigate these issues I want to highlight what we think really are the three key take-aways. Firstly, as we announced just about a year and two days ago, in the Financial Heads of Agreement, the value of the Definitive Agreements and the associated Government policy commitments remains approximately $11 billion in post-tax net present value.

Secondly, we believe we've secured strong protections for Telstra and our shareholders, in the event of any change of policy in the future. Thirdly, as I mentioned, the ACCC acceptance of our Structural Separation Undertaking is a significant outstanding condition precedent. Eighteen months ago we made the decision to negotiate structural separation under the NBN policy, rather than face the enforced functional separation.

Our Structural Separation Undertaking, or the SSU, will be the culmination of the path we took and I want to reiterate that commitment we made to shareholders in 2009 that we faced a choice of either functional or structural separation, but not both; a very important point.

Now I do want to say that we have begun our discussions with the ACCC around our Structural Separation Undertaking and a migration agreement as well.

As I said this morning, we are confident that this is the best alternative for our shareholders because these agreements deliver more certainty for this company and creates new opportunities for the company to grow in the future. That's what we must focus on as we go forward.

So let's now turn to slide 4, which is the prospective timeline. The signing of these agreements, as I said, concludes two years of complex negotiations between Telstra and NBN Co and the Government. They really have been very, very complex.

Subject to regulatory approvals and a number of other conditions being satisfied, the Telstra Board expects to recommend that shareholders vote in favour of Telstra’s participation in the NBN rollout. The decision to participate was made on the basis that the proposed transaction is expected to provide us with the ability to recover more value for the business than the available alternatives, given, obviously, the loss of value after the NBN policy announcements.

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In terms of timelines, we are targeting the 2011 AGM, which is currently scheduled for 18 October for this shareholder vote. Over the next few months we will be seeking ACCC acceptance of our structural separation undertaking and approval of migration plan. In addition, we need to finalise ATO tax determinations and a number of other issues.

It is important that you are aware of the work that is left to be done, particularly given it involves third parties and that this represents a risk, obviously, to our timeline. We are committed to getting it done. An independent expert has been engaged to assess and report on whether the proposed transaction is in the best interests of Telstra and its shareholders.

Finally, and probably most importantly, we will be providing our shareholders with a detailed Explanatory Memorandum, including the independent expert's report. This will be provided approximately one month in advance of the shareholder vote so that you really have enough time to properly assess the proposed transaction. So that's the timeline.

Now, if you look at slide 5, the decision tree, in terms of what will be in this Explanatory Memorandum, it is important to remember that the NBN is Government policy, and we will work within that policy framework. We are asking shareholders to vote on what we believe is best for Telstra within that policy framework, not on alternative Government policies.

We also want you to understand that shareholders are not being asked to vote specific on the approximately $11 billion post-tax NPV of the deal we have negotiated with NBN Co and the Government. That value is just one element, albeit a very important one.

We said in June 2010, when we announced the Financial Heads of Agreement, that the approximate $11 billion consideration was critical to ensuring that the Board could support a deal. That remains the case. However, we have also considered the cost of supporting the services we are supplying to NBN Co and a number of other indirect benefits. We also looked at the risks and business opportunities for the business, both in a corporate scenario and the best of our alternatives. So that was the decision tree.

Now let me turn to slide 6, the value of the deal. This chart summarises the key components of the deal and the value that Telstra currently ascribes to each element. It is important to note that these values remain approximate and are subject to a range of dependencies and assumptions.

As outlined in the chart, we anticipate the post-tax net present value of the deal remains approximately $11 billion, as per the Financial Heads of Agreement in June 2010. This

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value will not be in the form of an upfront payment, but is the present value of payments received over many years.

I also want to take a moment to clarify the NPV costs associated with supporting these agreements. There does seem to be a little bit of misunderstanding about that, so I really want to provide clarity to this right now. Telstra plans, on an ongoing basis, the costs associated with infrastructure works and customer migrations due to just normal technology change.

Telstra expects to incur the following cash expenditure on a post-tax NPV basis to support the arrangements over the life of these agreements, like any agreement we would do. Let me take you through the three of them and how we are handling each.

The first one, approximately $900 million for necessary work on infrastructure and customer migration expenditure. This will be offset through savings in legacy network product and IT investment, therefore enabling them to be covered within Telstra's existing 14% CapEx to sales target. That is something we have been saying for a number of years. The second one - approximately $600 million of necessary work on infrastructure and maintenance activities which are covered within existing operational expenses, as Telstra routinely projects such costs on an ongoing basis. In other words, they're within the plan.

Then, lastly, approximately $500 million incremental operational costs, but spread over 10 years for those customer migration costs and the necessary work on infrastructure. These would have been brought forward as a consequence of the NBN rollout, and therefore that's why they are incremental. These costs will be absorbed within existing expenditure profiles. So I want to be very clear. These are being within existing expenditure profiles. We are not making any forward looking commitments for the quantum of payments we expect to receive. I'm sure you'll understand why we must be careful about that, because they are commercially sensitive. I do want to help you get a broad feel for how the payments will evolve over time. John and I will try and give you some colour on that. In terms of the timing of payments from NBN Co, we expect the annual total of disconnection payments to increase up to 2014 as the NBN rollout really starts to gain momentum; then be relatively constant through the remainder of NBN Co's scheduled 10 year rollout.

Annual infrastructure payments are different because they are likely to increase over the scheduled 10 years, commensurate with increasing use by NBN Co of Telstra's

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infrastructure; then increase with CPI for the remainder of the infrastructure access period.

There are also a number of other components that comprise the Government's contribution. They include the transfer of the USO - Universal Service Obligation - to the Government's new Telecommunications Universal Service Management Agency - this is a thing called TUSMA - the transfer to NBN of responsibility for rollout of infrastructure in certain new housing estates, and also a contribution to support the retraining of Telstra staff and a number of other initiatives to support the transition to the NBN.

So there's a lot in that, in terms of the value of the deal. I think that will give you a broad perspective of how the deal is structured.

Now let me turn to slide 7, which really starts to give you the colour of the agreements and just how much work has been done.

The Definitive Agreement signed by Telstra, NBN Co and the Commonwealth are made up of eight separate, but independent, agreements. Together with Telstra's Structural Separation Undertaking and the Migration Plan, these create a framework for Telstra's participation in the rollout of the national broadband network.

Let me just take you through the two sets of contracts: firstly, the Definitive Agreements with NBN Co. I will just read these out. Firstly, there's the Implementation and Interpretation Deed. That covers the Conditions Precedent and various interim arrangements, and is effective immediately.

Secondly, a Subscriber Agreement that coves the disconnection by Telstra of copper based Customer Access network services and broadband services on the HFC cable network. Remember, that's not pay TV services on HFC. This is all as the NBN Co is rolled out.

Thirdly, an Infrastructure Services Agreement that covers the long term provision of access to infrastructure and related services by Telstra to NBN Co.

Then, fourthly, with all these sort of agreements, an Access Deed that documents the commitments made by NBN Co to Telstra in respect of the supply of a Basic Service Offering.

That's the ones with NBN Co. Let's just turn to the ones with the Commonwealth. There are four of these. There's the TUSMA Agreement which covers the terms on which Telstra will perform, and be paid for, certain public interest services.

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Secondly, a Retraining Funding Deed that details how the Commonwealth will provide funding to Telstra to enable it to retain or redeploy certain employees.

Thirdly, an Information Campaign and Migration Deed that outlines the key additional commitments to be met directly by the Commonwealth.

Then, lastly, a Commonwealth Guarantee in favour of Telstra to provide overarching protection to Telstra in relation to NBN Co's payment and performance obligations under the four NBN Co Definitive Agreements; very important.

So, one of the things we've been very conscious about is making sure there's adequate shareholder protection. So let me now turn to slide 8.

Another critical element of the deal is the protections that we have secured for shareholders and customers under a range of contingencies. Some of these contingencies are pretty obvious. Many of you have asked about them; such as what happens if the NBN rollout is delayed or cancelled; while others are more subtle; such as the possibility of NBN expanding its scope beyond that currently envisaged.

In addition, the impact of these events occurring in the long term will be very different to if they actually occurred in the short term. So we had a lot of considerations to think through as we negotiated these agreements.

However, throughout the negotiations we've been guided by the simple principle that Telstra must not be disadvantaged by any changes in policy or the NBN Co business plan. So we've attempted to get some independence.

The two contingencies that we have negotiated - and are probably most important - are as follows. Firstly, in the event that the NBN rollout ceases after NBN has passed more than 20% of its current coverage target of 93% of premises in Australia, Telstra will receive a payment of up to $500 million. In addition there is a contractual commitment from NBN Co that it will continue to use and pay for infrastructure in use for the remainder of the full contractual term.

As you will see from the summary of the Infrastructure Services Agreement, in the case of each dark fibre transit ring and the associated exchange space, that use is measured once each full fibre ring is completed. All these rings are to be completed by the end of December 2014; so a key component of the infrastructure agreement will be locked in relatively early in the rollout.

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There is a third very important point of protection that you must understand. There is a natural hedge, should the rollout slow down or be cancelled early; because we will retain the customers, revenues and profitability of our existing copper network customers and retain the flexibility of our HFC cable network. I can't stress enough how important that is.

So that was the shareholder protections. Slide nine, conditions precedent which we have been very consistent on right from day one. We've said from the start that approval by our shareholders will be the last approval point of this negotiation. There remain a number of conditions present that must be satisfied always before we will conduct that vote.

As enshrined in the binding Implementation and Interpretation Deed, these conditions precedent include - and let me go through them. ACCC acceptance of a Structural Separation Undertaking and approval of a Migration Plan. This ACCC acceptance is a critical step and subject to a lot of discussion, so I want to remind you how we got to this point. The legislation passed last year provided for the separation of Telstra’s wholesale and retail operations, through either structural separation or, if Telstra did not structurally separate, mandatory functional separation. That was the first one.

In negotiating toward the NBN agreements Telstra has chosen the Structural Separation path. So that was what we deemed was the best alternative. As the Government has stated, the roll-out of the NBN and the gradual closure of the copper network and the HFC cable broadband network within the fibre footprint will achieve the Government's objective of structural separation. Through the Ministerial consultation process it is now evident that our competitors are seeking to have Functional Separation imposed on Telstra for the transitional period to the NBN. The legislation does not provide for this double separation and Telstra will not consider it.

The TUSMA Agreement and Information Campaign and Migration Deed being entered into by Telstra and the Commonwealth in a form acceptable to NBN Co is another condition precedent. The third one is the Government amending legislation or establishing other arrangements to implement its new housing estates fibre provision policy. The next one was the Government introducing legislation to facilitate NBN Co's rollout. As I did mention, the ATO issuing private tax rulings that confirm a tax treatment of elements of the transaction.

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Second to last is agreement of initial plan for hand over of certain infrastructure under the Infrastructure Services Agreement and then lastly NBN Co confirming it has arrangements in place to ensure that cessation of supply of certain Telstra products occurred in a nondiscriminatory way.

Now of these nine conditions precedent or CPs, the TUSMA - it's not a good name, is it - the TUSMA and the Information Campaign and Migration Deed conditions and the Government's NBN Co legislation have already been satisfied. So that really covers the conditions precedent.

Now let's go to slide number 10, cash flows. Now as you would appreciate, I'm not here today to discuss the operating momentum of the business. But it is important that you understand that NBN remains just one component of our business and the company's strategy is in place to help us manage through the transition to NBN along with many other issues.

We have always said our strategy is not dependent on NBN but the greater certainty of Government policy and regulation helps us focus on driving the ongoing success of all our strategic initiatives. Also as I said in early May, operating momentum in the business remains strong and we are comfortable with our guidance for this year. It is also pleasing that our strategic initiatives to retain and grow our customer base continues to work. Across all major product categories, customer growth in the third quarter was significantly better than for the same period last year.

Operating momentum is good, but it is not lost on us that many of our shareholders are concerned with the sustainability of our cash flow. For a company with the investor base of Telstra, that concern is a significant issue so I want to share a simple high level view of how this proposed transaction can provide a lower risk and more certain long-term cash flow profile for this company. Now I am talking about our free-cash flow and it's over a decade as we benefit from payments received to both disconnect our copper network, which offsets any market share loss or margin erosionfrom the rollout of the NBN[1] .

So let me just say that again. You know, we are going to receive payments to disconnect our copper network which is offsetting any market share loss or margin erosion from the roll out of the NBN[1] .

1 Please note the payments to be received are to offset both any market share loss and any margin erosion in Telstra’s fixed line business. Please see page 21 for further discussion.

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While we may see some margin dilution in an NBN world, we are confident in our ability to continue to grow our revenues in mobiles, media and network applications and services and that growth plus payments received as part of the deal will offset any NBN-related retail and wholesale revenue losses. Now with a CapEx to sales ratio of around 14%, and that may prove conservative, the long-term outlook for cash flow is sustainable and more certain. As you will understand, we must be very wary of making forward looking statements at this time, but I am sure you can sense that we are confident in the outlook for cash flow.

Let me also remind you of what the Chairman said at last year’s AGM. The Board will consider capital management options upon completion of the NBN deal.

So before we go to Q&A let me just conclude. We really have tried to be as comprehensive as possible in our discussions today. But there are a number of approvals and conditions that are yet to be worked through, as you would expect. Further clarifications will be included in the Explanatory Memorandum that will be provided to shareholders prior to our AGM. That said, today represents another critical milestone for the company as we strive to emerge from years of regulatory and policy uncertainty.

With that, I will now be happy to answer your questions. I've got John, Will and Tony with me so we can really much take anything - any of your questions. So Ben, let me pass back to you.

Operator: Yes, thank you, sir. The first question is registered by Sameer Chopra from Merrill Lynch. Sameer, thank you, please go ahead.

Sameer Chopra: (Merrill Lynch, Analyst) Good morning. Congratulations on your deal with the Government. I have two questions. One is can we talk about the tax treatment for the disconnection fee? That's my first question. And the second one is on the very last slide, like 10, you talk about some incremental costs to support the agreements and I was wondering if you could talk about whether any of these costs relate to the migration plan?

David Thodey: Sameer, I'm going to get John to probably take the first one and do you want to handle the second …

John Stanhope: Sure. Hi, Sameer. Yes. Look, the payments made by NBN for the disconnection of customers, so the decomissioning of broadband and cable customers and the copper customers, is subject to a private ruling but we see it as a fairly simple matter

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of just assuring that those receipts are considered as assessable income. It's fundamentally the ruling we're looking for. I wouldn't see that's going to be a problem to the tax office but I'm sure they would like them to be assessable income.

But they have - and so why haven't we got those rulings yet? Of course, the tax office appropriately want to see the detail of the agreements and of course we couldn't show them then until after today. In terms of the incremental costs, let me explain what those sort of things are and this is why it's sort of 500 million over a period of 10 years.

We have these sort of costs anyway when technology changes and I'll give an example. So if we put IP telephony into the market, we've got to change out the customers' CPE, for example, because you need to get all the functionality of fibre, for example, you need a different kind of customer premises equipment, then those sort of costs are what we call the migration costs and we have those all the time, have had for a long time and whilst they are - we're bringing them forward a little obviously because fibre is coming earlier and so we're bringing them forward a little bit.

But we will be absorbing those costs in our plan as David said because we, you know, as always work on productivity improvements and time.

David Thodey: Right. So I hope that - great. Next question, please, operator.

Operator: Thank you. The next question is from Christian Guerra, Goldman Sachs. Please go ahead, Christian.

Christian Guerra: (Goldman Sachs, Analyst) Good morning and thanks for your time and thanks for providing all that detail that you have this morning. I have three questions for you. Firstly, can you maybe talk about whether NBN Co can start the roll out ex the first release sites or do they need to wait for the shareholder vote? Secondly, on the ISA, just trying to understand, David and John, more about what percentage of the five billion you'll realise, I guess relative to the household coverage. So for example, you know, if we do pass, you know, 10% of households and there's a change in policy, is it 10% of the five or is there, you know, additional services like dark fibre and transmission and that sort of thing?

And my third question, I guess, is more about what your options are if there was a change in scope, a change in project scope, do you have the option to purchase from NBN Co the various assets that have been built up over the life of the project?

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David Thodey: Okay. So with - I'll answer the first one. I'll get Will to answer the second and then options I'll give John. Will can sort of add - look, we will work with NBN Co now. We’ve got some arrangements in place. We’re going to have a sit down and have a bit of a working session. As you know, they've already used some of our infrastructure on an agreed basis, we set a price, but remember that everything is subject to final shareholder approval.

But we'll be able to get going with them and we already see some, you know, minor payments, it's not significant and they get to - get all access now to planning information so they can really get started on planning and designing from today onwards. Then obviously after the shareholder arrangement, they'll be in full swing.

As you'd imagine, Christian, you know, we didn't want to do too much before we got the agreements done.

John Stanhope: And we don't want too much before the shareholder vote either.

David Thodey: Well we don't want to stand in the way of good planning. So why don't we get Will to talk about the ISA and also the options. Are you okay, Will? Yes.

Will Irving: Yes. In terms of the rollout, there are really two components, if you like, that NBN Co are doing. There's their transit network. In other words, a series of fibre loops that connect up each of the areas that they're serving and that's the rollout that happens between now and December 2014. So that portion of the network, if you like, should be completed in the three and a half years or so. Then as you say, there's the customer access component which is percentages up from, you know, where they are today with our five first release sites through the second release, which will happen, you know, starting now and you heard announcements about that this morning through to the 93% level at some point, nine and a half or 10 years hence.

So in terms of payments, there's a chunk for that transit network that happens earlier and then we've got the progressive extensive rollout to cover individual premises. So I don't think - we've seen in more detail how that sort of breaks down between the different components including exactly how NBN rolls out in terms of their timeline. They will announce that, you know, at the appropriate time in terms of their scheduling.

In terms of the last part of the question around options, the agreements are planned as long term supply agreements. As David said in his comments, once we have delivered infrastructure, it is then committed for the term of the agreement which is a very long period on any view. In relation to that transit build, as each fibre loop is completed, and

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there are a significant number of fibre loops that we will be building, we hand those over and they're then locked in so that happens relatively early in the process.

In terms of what happens down the track, that will, you know, be a matter for NBN Co shareholders if, you know, for some reason it chooses to sell assets at some point in the future. So that's something which again you'd be best to ask them at the appropriate time.

David Thodey: All right. Christian, any other point there, like in any commercial agreement, we've sought to protect whatever investments we make in infrastructure and get the right returns and then on the other hand to remain flexible should there be any greater demand for our services that go forth.

David Thodey: Thanks. Can we have the next question, please?

Operator: Thank you. Next question is from Digby Gilmore from CLSA. Please go ahead, Digby.

Digby Gilmour: (CLSA, Analyst) Thanks very much, David and John and Will. Just one question really on the timing of the infrastructure payments. I'm just trying to reconcile, David, your comments that they will ramp up gradually over the 10 year build to the transit network clause within the ISA. So it's at page 12 in the media release where you're indicating that 60% of exchange spaces and data fibre will be made available within three and a half years. So I suppose what I'm asking in simple terms, what proportion of the $5 billion will be received within the three and a half years?

John Stanhope: Yes. It's John Stanhope here, Digby. Look, I'm not going to tell you the proportion but certainly as Will just said, the transit network will be built largely in the first three years and therefore the - and what is that, that backhaul, it's exchange rack space and so on. That's what's included in that. So there will be a significant amount of infrastructure payments in the first three years.

Of course, things like lead ins to houses, they will follow the rollout pattern and so on. So there is a ramp up in the first three years and then it will flatten out over the next seven or so years but I won't give you the proportion.

David Thodey: We plan to be busy.

Operator: Thank you. Next question is from Tony Wilson from Evans and Partners. Please go ahead, Tony.

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Tony Wilson: (Evans and Partners, Analyst) Afternoon. David, the NBN access costs are pretty fundamental to where the sustainable free cash flow ends up for this company going forward. Can you give us any indication of where you think those costs are going to be on a per customer basis and ultimately when you get the full decommissioning, what kind of cost that's going to be on an annual basis?

Second question, wireless broadband. I notice there was a comment in the release about not being able to market that you can substitute wireless broadband for fibre-based broadband. I don't think there's any restriction on you developing and marketing the service generally. I'm just trying to understand how that actually works.

David Thodey: Okay. Well, let me take both questions then some of the guys can contribute too. Firstly, look, the NBN [inaudible] yes, they're important. We've made assumptions on that but that's - NBN has got to, you know, determine that. But no matter where things lie, which is just the way life will be, whether we are there or not. But we've got fair indication, he's got the indications of what NBN Co has sort of publicly said and I think that's pretty much where it'll land but we've got, you know, they've got to confirm that prices going forward.

In terms of the wireless broadband, in the contract, its says that we will not - our preference is to sell to every home firstly fixed broadband, voice service and wireless broadband. That's what we're going to do. What we have agreed to do is not to actively promote wireless broadband as a direct substitution for fixed broadband. Now, that's obviously dependent on the competitive environment and what our competitors are doing so there's a - you know, we're not going to be competitively disadvantaged but we said no, we're not going to do that.

Now, we will continue to develop and push wireless. We believe it's a great technology and it will be, you known an exciting option for many people but in terms of this contract, we want to get as many people over on to the fibre as possible because we get paid for that. That's a good outcome and to, you know, take a wireless service. So that's what we've done and I don't know if the guys want to add any more comments?

Tony Warren: Just on the first question - it's Tony Warren here. I would take you to page 17 of the material and the access fee that we have with NBN and this goes to a couple of things. First of all, it goes to a commitment from NBN that they will seek from the regulator, and don't forget their prices are going to be regulated, but they will seek from

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the regulator permission to put out there a basic service offering of $24 and that there won't be ancillary charges that take that up materially.

So access charges are very important to us, as you rightly point out, and we've secured a number of commitments. They're commitments within NBN's strict equivalence requirements but for the first five years, we're getting some certainty around that key entry level product in the market and the pricing around that.

Operator: Thank you. The next question is from Ian Martin from Royal Bank of Scotland. Please go ahead, Ian.

Ian Martin: (Royal Bank of Scotland, Analyst) Thank you. Well done guys in getting this far. There still seems to be quite a while to go though. I notice on the bottom of the media release, David, you're saying the definitive agreement is subject to a number of conditions, including structure separation undertaking and then it says sufficient regulatory certainty over related matters which we know applies to, you know, getting fair value for the copper network over the interim period. A very important matter. You seem a long way apart on that and it doesn't seem to be a condition precedent.

John Stanhope: Well, look, Ian, yes, you're right, we've got to work through the SSU undertaking but, you know, you're referring to the IADs, in terms of the access determination? Look, the interim are out and we have made our submissions. It will be what it will be. You know, copper price and other [inaudible] matters, you know obviously they have been taken into consideration when we make the final decision, but you can’t do anything more than what we’ve got at the moment, but we’re not overly concerned at the moment.

Operator: The next question is from Laurent Horrut from JP Morgan. Please go ahead. Laurent Horrut: (JP Morgan, Analyst) Thank you. A couple of questions from me. Just want to clarify one thing - just on the threshold of the subscriber agreements, if say by 2013 just to pick a date, the NBN Co has reached 20% of its footprint and therefore this compensation, potential compensation kicks in, what sort of conditions on this

compensation are there on top of that? I’m just thinking it’s not necessarily a big amount in the scheme of things relative to the transaction of the deal, so just trying to get a sense of how did you think about this timing?

The second part I just want to clarify one thing is what is the run rate NBN Co is paying you at that point? You know whatever that number is - and I understand from John’s answer it’s going to be reasonably significant part of the $5 billion - do you - just to be

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clear, this is something you’re entitled to over 35 years and there’s no way out of it from the government point of view?

David Thodey: Laurent, let me get John to answer that, but I’ll just add one comment. I think the considerations are going to give us enough surety, but anyway John, over to you.

John Stanhope: Look, it’s not what year it is that’s important, it’s the 20% rollout that’s important and it’s at that 20% stage that the $500 million is payable.

Now for all the network that they’re using - so duct, backhaul, exchange space and so on, that is contracted for in that period, to get to the 20%, they have to pay for the 30, 40, whatever number of years - and by the way, it’s CPI. So it’s also going up in price by CPI each year, but they’re committed for the whole period, right, so it doesn’t stop if the whole thing is stopped, it’s ongoing payments.

The other thing of course - and David mentioned it when he went through - is that when this thing stops of course we still have our copper in the ground, we still have our ducts, we still have customers on our copper, so that’s the natural hedge as David called it that we also have.

So we took into account when we negotiated the $500 million the fact that we would have that natural hedge. So we think we’ve reached a very reasonable commercial position on the compensation for cessation.

David Thodey: So you know we think we’re in a fair commercial arrangement.

Operator: The next question is from Mark McDonald from BBY. Please go ahead Mark. Mark McDonald: (BBY, Analyst) Let me just ask about the the duct remediation costs. When you spoke David about the cost to be incurred you mentioned $900 million as infrastructure and customer migration to be funded out of existing CapEx program and a further $600 million for infrastructure and maintenance CapEx.

I assume from that the remediation costs that were such a sticking point in NBN Co’s negotiations with potential contractors are known and included in that budget. Is that correct or is there a risk around additional costs to Telstra in undertaking sub-terrain duct remediation?

John Stanhope: These are approximate numbers and we believe they’re reasonably conservative numbers, so we don’t believe there’s any risk in these numbers.

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As you probably can gather from what we are saying here that approximate $900 million is CapEx and the other is OpEx, and the CapEx is for things like fibre build and making ready exchanges, new air conditioning, because we have obligations to make those things fit for purpose for the equipment that goes into those exchanges and so it’s new and therefore is capital expenditure.

The other stuff is sort of remediating ducts and so on, so if there’s a crushed duct, you know, it will have to remediated. If it has to be replaced it might be in CapEx - capital. If we have to fix a pit or enlarge a pit, those sorts of things are operational expenses.

These are our best estimates of how much that we will have to spend to do those sorts of things and that’s why they’re approximates of course, because you know you can get some surprises, but as I say, we’ve been on the conservative side so we don’t expect to incur any more expense or expenditure than we’ve said here.

David Thodey: Mark, the other important thing which John mooted - within the 14% CapEx to sales and now we know we’ve got some remediation - because you know what it’s like with ducts, you don’t know what’s out there, we have a pretty good idea - but we can start doing that pretty much as business as usual, starting from now.

So that’s the way we’re going to handle that. So all this is just part of, really business as usual. We should render it and split it, just like when we sign a big contract with a large corporation, we have pull through CapEx and OpEx, which always is just put within our existing plan and this is the same for - so this is just the way we run the business. So I hope that gives you a bit of clarity on that.

Ben Spincer: Thanks David. We’ll take the next question. We want to get on soon to some of the media questions, so can I ask the last four analysts to just ask one question if possible? Thanks.

Operator: Next question is from Mark Blackwell from Morgan Stanley. Please go ahead. Mark Blackwell: (Morgan Stanley, Analyst) Hi guys. My one question is - just wonder if you had any comment on what you think the value you’ve got and relative to the value that Optus has announced this morning? So just on the back of an envelope - and I realise this is very rough - they’re saying $800 million of payment for the transfer of essentially 500,000 customers but you guys are getting sort of $4 billion for the transfer of, you know, I don’t know hat the number is, but say seven million customers, and it seems a bit cheap relative to the deal Optus has got.

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Have you got any comment or thought on that?

David Thodey: Look we don’t sort of compare ourselves to that deal. We have looked at the total package that we have over the period and you know we are, obviously look within that and make a decision. That’s all we do. I’m not really interested in what Optus has got or didn’t get.

Operator: Next question is from Andrew Anagnostellis from Deutsche Bank. Please go ahead Andrew.

Andrew Anagnostellis: (Deutsche Bank, Analyst) Thank you. Just wanted to clarify the payment that Telstra will receive from NBN - is that regardless of where the customer goes - basically once the copper is shut down Telstra gets a payment almost regardless of where the customer goes after that?

David Thodey: Yes.

John Stanhope: The customer - so it’s a wholesale or retail customer - if the customer takes up fixed line service or a wireless service that is not a Telstra wireless service, we get paid.

So decommissioning of the copper, you know, wherever that customer goes, with the exception of going to our wireless service, we get paid.

David Thodey: That’s solely wireless.

Operator: Next question is from Sachin Gupta from Nomura. Please go ahead.

Sachin Gupta: (Nomura, Analyst) Thanks very much. My question is, is it possible to get the break up of this $4 billion NPV? How much is disconnection and how much is sale of conduits? I guess also just wondering what happens to your existing fibre and the existing assets like the telephone exchanges as part of this agreement.

John Stanhope: Well you sort of mixed up a couple of things there Sachin. The $4 billion is the decommissioning. So that’s the whole amount for decommissioning and there is a $5 billion attached to infrastructure, and you know we’re not going to go into the detail of that, but it consists of backhaul, duct, conduits, exchange racks as I was talking about before, but we’re not going to split that up.

In terms of the assets - the assets, the copper remains with us and it even remains with us when it lies in the ground fully decommissioned, so that asset remains with us. The ducts and pipes, they remain with us also. The exchanges remain in our ownership also.

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Obviously into the future we’ll look at what we do with those. If we have some that are empty and so on and we have - so we’ll look at our options in the future, but right now asset ownership remains with us. The only assets to change hands is the lead into the house. So from the street, outside the street - so from the cable or the pit into the house - which we call lead ins - they, as they’re used or, sorry, as the house is served, that lead in passes ownership to NBN Co.

David Thodey: And that’s been a very important principle that John’s negotiated this deal, because it means the infrastructure stays under Telstra ownership and keep optionality going forward. So that was a very important part of our negotiation.

Operator: Next question is from Andrew Levy from Macquarie. Please go ahead Andrew. Andrew Levy: (Macquarie, Analyst) Thanks. Congratulations on getting the deal signed. Just a question on the USO or the TUSMA. The funding arrangement, the $0.7 billion, I assume that doesn’t incorporate or I’m not double counting if I’ve already got the payments that you receive under the USO currently? Is the $0.7 billion the incremental Commonwealth funding only?

John Stanhope: Yes, it’s a net number, so it’s what we are better off. In other words, levies are still paid and so on, and so it’s a net outcome for us Andrew - net positive outcome.

Ben Spincer: Okay thank you everyone. I will now hand over to Andrew Maiden who will take some questions from the media.

Andrew Maiden: Thanks Ben. We have some media questions lined up.

Operator: Next question is from Lucy Battersby from The Age newspaper. Lucy, thank you, please go ahead.

Lucy Battersby: (The Age, Journalist) Thank you. Good morning. My question is about the change of control of NBN Co which is on page seven, which says you can terminate the agreements if a retail provider controlling - buys more than 15% of NBN Co when it’s privatised. Does that include yourselves? Does that mean that you can never own more than 15% of NBN Co when it’s privatised?

Tony Warren: No retail service provider can do something. It would be sort of a bit nonsensical in a sense for us to be doing so. And giving the structural separation undertaking in any event. But as the Government’s clearly said, it has the policy that NBN Co is that wholesale provider. And it would not be consistent with our deal as a competing

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retail service provider to have another retailer in control of you know, a substantial - or a meaningful chunk of NBN Co. We don’t see that consistent with the logic of the structural separation undertaking or Government policy.

Andrew Maiden: The next question I think comes from Mitchell Bingemann from The Australian .

Operator: Thank you Mitchell, please go ahead.

Mitchell Bingemann: (The Australian, Journalist) I was wondering if you could please break down what the $4 billion in decommissioning payments and the $5 billion in infrastructure payments, how that translates into a pre-tax cash payment from NBN Co? David Thodey: John’s got his calculator out.

John Stanhope: Well I mean pre-tax you can add 30% back, that’s probably the simplest way to do it. So…

David Thodey: Post-tax NPV.

John Stanhope: … $4 billion, add 30% and you’ll get the pre-tax number. Andrew Maiden: Next question please I think from David Richards.

Operator: Thank you David, please go ahead. He’s from 4Square Media.

David Richards: (4Square Media, Journalist) Now to a question relative to your NextG network. If - you’ve obviously got a cost on your books for the infrastructure associated with the NextG network. If you are not promoting the NextG network to - as an alternative to the NBN customer, how are you going to handle the costs relative to the infrastructure and the ongoing capability of that network? And secondly, is it going to impact your revenue streams inside that area?

David Thodey: The answer to the second one, no. And the answer to the first question David, this will be a very small percentage of potential revenues going forward that we’ve excluded ourselves from. I mean most people - we’ll still have a lot of wireless broadband customers out there and be either, you know dongles, you know smart phones. It’s for the direct one for one replacement is where we’ve just said hey, we’re not going to directly promote - subject there to be a level competitive playing field. So that’s all we’ve done and it will have, you know absolutely you know, a minimal impact on our business, wireless business.

Andrew Maiden: The next question is from John Durie from The Australian .

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David Thodey: Morning John.

Operator: Thank you John, please go ahead.

John Durie: (The Australian. Journalist) Yeah sorry, hi John so very basic question. Just in round terms, like how much - what does this deal mean sort of per year? So can we expect you know X million in revenue coming to Telstra from this NBN deal?

John Stanhope: Yeah, look John the best - it’s not linear. And you know, the best I can say to you obviously, the decommissioning payments will follow the rollout plan right? So customers will be decommissioned from copper and the broadband as per the roll piloting. And I’ve already mentioned earlier that the infrastructure payments are front-end loaded to some degree in the first three years. And then they’ll start to flatten out over a 30 and 35, 40 year period with CPI adjustments.

David Thodey: So that pretty much says it all.

Andrew Maiden: The next question is from Malcolm Maiden from The Age .

David Thodey: Hi Malcolm.

Operator: Thank you Malcolm, please go ahead.

Malcolm Maiden: (The Age, Journalist) Hi. If I heard you right, you said that you might see some margin dilution in an NBN world, but you’re confident that growth in mobiles and other areas plus the payments you’re going to receive from this deal, are going to offset any NBN related resale risk per - retail and wholesale losses.

David Thodey: I actually said a little bit more than that.

Malcolm Maiden: (The Age, Journalist) Yes I know. David Thodey: I’ll let John…

Malcolm Maiden: (The Age, Journalist) My question is what is the mix? If you continue to grow the other parts of the business at the current rates, or at the rates that you’re targeting, will that be sufficient? Or do you need to accelerate the growth in those areas to maintain the sustainable cash flow outlook that you’ve got?

David Thodey: I’ll let John…

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John Stanhope: Yeah. Let me help people with this cash sustainability issue here. The - let’s take the $4 billion. It’s fundamentally as David said earlier, it’s their consideration to us for anticipated share and margin dilution in our fixed line business, alright in the fixed line business. You know that has been part of the negotiation from the start. David and I, Chairman have said right from the start if we’re going to enter into this with respect to any anticipated share loss, we’ve got to keep our shareholders whole. And that has been from the get-go and that’s what we’ve negotiated.

So put another way, that $4 billion is expected to replace any share loss in fixed line and any margin dilution. Why do we think there’ll be some share loss? Of course there is a disruptive event about to occur. Every home in Australia will, over 10 years, get a door knock that says have I got a deal, come with me, I’m a great retail service provider. So we’ve protected ourselves from that possibility.

The second thing with respect to cash flow sustainability is that the infrastructure cash flow, so the size, is new cash. And it’s us utilising some assets we’ve got. And of course, you know we’ve got to cost a good solid in preparing that and we’ve gone through that and how we’re handling that. That’s the 900, the 600 and the 500. We’ve gone through how we’re managing that in our plan.

So the combination of those two give us a whole lot of confidence about sustainability of our cash flow levels. Now to Malcolm your question, we also expect to grow other areas of our business that you know, give us further comfort, confidence about our cash flows going into the future.

David Thodey: Great. I think that’s a very clear way of saying it, so there’s three key elements.

Andrew Maiden: The next question is from Dominic White.

Operator: Thank you Dominic, please go ahead.

Dominic White: (Australian Financial Review, Journalist) Hi, I was just wondering firstly why have you set this deadline of 20 December to be done? It looks - forgive me if I’m wrong, but it looks like if all the conditions aren’t met by then the deal is void?

David Thodey: Look Dominic, what we’ve just done there is it just gives everyone a bit of a check point. But let me get Will to give you some of the - well the legal perspective on it.

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Will Irving: Yeah we just need - we needed a date and the parties can agree to amend the date if we need to. But we do not expect to, we expect to be at 18 October and have the last condition precedent met. And that’s what everyone is working to achieve.

David Thodey: Yeah and Dominic look it’s just we wanted to - we’re all I think of the mind to get this thing done. That’s us, the Government, the ACCC and NBN. So it was just really a way of saying hey look, let’s put that date there and then we’ll take a check point then.

Andrew Maiden: The next question is from Tracey Lee of The Australian . And then we have two more questions and then we’ll finish.

David Thodey: Okay, thank you.

Operator: Thank you Tracey, please go ahead.

Tracy Lee: (The Australian, Journalist) Thanks. Hi, just one very quick question and then one more. Just in terms of reading the agreement, the commencement date of the agreement. Can I take that to be as the post-shareholder vote, when the last condition precedent is met? Or is that actually from today?

David Thodey: No, when - shareholders need to approve it. So it’s - that’s the date. That’s the date, once shareholders approve it. Now did you - was that a one plus two? One plus one equals two questions?

Andrew Maiden: I don’t know whether Tracey is still on the line to ask her follow up. Tracey, are you?

Tracy Lee: (The Australian, Journalist) Yes I am.

David Thodey: Okay.

Tracy Lee: (The Australian, Journalist) Yeah just very quickly. David Thodey: [Inaudible].

Tracy Lee: (The Australian, Journalist) Thanks. Look you’ve stressed - in terms of the assets that we’re talking about, you stressed John earlier that you’d keep the copper network obviously and the ducts and pipes. These are what you’re being paid for under the ISA, that’s the $5 billion we talk about in terms of payments. This is important for the sustainability of cash flow I think you’ve mentioned earlier. But would you consider selling these assets down the track to a third party to realize further value?

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John Stanhope: Well what I’ve said was that that’s something for later. You know, it could be a consideration. But right now this deal is about payments for use. And we just want to keep that optionality there. And you know, we may keep that going the way it is or we may look at those assets in the future in terms of their future optionality. So you know, we don’t rule that out, but that’s not really the deal today.

Andrew Maiden: Great, the next question is from Josh Taylor of ZDNet. Sorry Josh. Operator: Thank you Josh, please go ahead.

Josh Taylor: (ZDNet, Journalist) I just had two questions. Firstly in regards to the Government portion, the $1 billion deal with the Government. I’m wondering if you could break down the specific costs of that. And also in the terms of the cost that Telstra is going to incur over the next sort of 10 years, is that - does that include exchange upgrades to make them NBN ready?

John Stanhope: The Government deal - well let me talk about the Government part of the deal first. And let me stress, its $2 billion of value to Telstra. So it doesn’t necessarily translate into the cost to the Government right. It’s value to us. And I’m not going to go into specifics of that, just to tell you that sort of the major components are the relief of - from parts of the obligations. So there’s been a lot of talk about payment to us for retraining people, that we’re not responsible anymore for greenfields, so new estates. They’re the sort of major components of that. So what was the last part of the question? Was it…

David Thodey: The second part was about the upgrade to the exchanges John, which is - that’s part of the infrastructure changes that we’ve had to make that we’ve pointed out in those numbers that David went through, the 900, 600 and 500.

Tony Warren: Yeah so it’s just included, that’s for the racks and things.

Andrew Maiden: And the last media question comes from James Hutchison of IT News. Operator: Thank you James, please go ahead now.

James Hutchison: (IT News, Journalist) Hi guys, sorry another two-parter. Just quickly, how many kilometres of dark fibre and how many telephone exchanges are you giving access to, to NBN Co under the agreement? And how many exchanges are involved in the interim access arrangements that you’ve outlined in the agreement?

David Thodey: Okay James, we’ve not made that information available. A large number.

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Andrew Maiden: Okay now to close the call I’d like to invite David Thodey just to say a few words.

David Thodey: Yeah thanks Andrew. And look thanks for your time today. Look I just want to come back to the key takeaways, because there was a lot of detail in these agreements. And of course Ben and Andrew and the team will be available for further questions. But you know, firstly just remember, you know it’s still retained the approximate $11 billion in post-tax net present value, number one. Second, we do think there’s good protections for Telstra shareholders in these agreements. And we’ve spent a lot of time in looking at that. And then thirdly, you know we’ve got more work to do and we’re off and running on that just to get everything sort of tidied up, get these conditions precedent done. But there’s still a lot of work to be done to get that done.

So thanks for your time. We’ll sign off now and Ben or Andrew are the key contacts for us going forward. Thanks very much.

End of Transcript