Telesat-Licence 8 Application Non Confidential.Pdf

ATTACHMENT 1 - BENEFITS OF SPECTRUM AGGREGATION INTRODUCTION AND SUMMARY

In the Call for Applications to License Satellite Orbital Positions (“Call”), Notice No. DGRB-001-06 dated July 7, 2006, Industry Canada is offering 29 licences for satellite spectrum covering four frequency bands (extended Ku-band FSS, Ka-band FSS, 12 GHz BSS and 17 GHz BSS) spread over 16 orbital positions. Telesat already has operating satellites at six of these orbital positions.

Telesat is applying for 10 of the 29 licences to expand its satellite fleet and to build a platform for continued growth and innovation through the next decade and beyond. Nine of the 10 licences for which Telesat is applying are for satellites at orbital locations at which Telesat already operates. Telesat’s business rationale for each application is based on detailed discussions with its customer and user groups in Canada, each of which has identified needs and growth plans of their own. Moreover, Telesat is seeking to maintain the ability to compete effectively in both Canadian and North American satellite service markets and to compete for critical investment funds in an increasingly satellite-sophisticated financial community.

In this context, Telesat would like to raise a fundamental issue for consideration by Industry Canada, one that is critical to the Canadian satellite industry as a whole, and to the customers of Canadian satellite services. As discussed below, Telesat urges Industry Canada to maximize that number of frequency bands that are assigned to an operator at any given orbital location. This approach is consistent with the orbital/frequency assignment policies of the U.S. and European countries. To have a different orbital assignment policy would, in Telesat’s view, disadvantage Canadian-licensed satellite systems vis-à-vis satellite systems licensed in the U.S. and Europe, for example. Moreover, permitting Canadian satellite operators to aggregate frequencies at assigned orbital locations will facilitate the development of new satellite “neighbourhoods” and the expansion of existing ones, for the benefit of Canadian consumers and Canadian industry.

Thus, Telesat urges Industry Canada to adopt as a guiding principle the notion that licences subject to this Call be awarded to applicants in a manner that allows spectrum aggregation ( i.e ., the use of multiple frequency bands) at the assigned orbital positions, if so requested by applicants.

This orbital assignment principle is well-recognized by regulators in the United States and Europe. Applying it in Canada will:

• facilitate the use of hybrid satellites, thus lowering the cost of satellite services and generating multiple efficiencies, thereby enhancing competition;

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• provide incentives to create innovative services and proliferate two- way broadband service for all Canadians, particularly those in rural areas;

• increase satellite backup and redundancy to increase the stability and survivability of satellite-based services;

• permit Canadian satellite operators to maximize flexibility in satellite design and fleet deployment/replacement strategies;

• minimize the risk of interference to those dependent on satellite services;

• avoid costly and complex inter-satellite coordination with other satellite operators and government administrations;

• preserve and enhance Canadian spectrum and orbital resources by making it easier to bring frequency assignments into use expeditiously; and

• harmonize Canada’s orbital assignment policies with those of other countries, thereby levelling the playing field between Canadian satellite operators and those licensed elsewhere.

In short, adoption of this orbital assignment principle will enable Industry Canada to achieve the objectives outlined in Section 6.1.1 of the Call, of “fostering the future introduction of new and innovative … services,“ “enhanc[ing] competitiveness … of Canadian telecommunications,” enabling “Canadian satellite operators and satellite service providers to advance their service offerings in the domestic market … and … compete in the larger market for the Americas,” “recognizing the importance of delivering reliable and affordable telecommunications and broadcasting services,” “achiev[ing] greater economies and operational flexibility,” and ensuring that “satellites authorized as a result of this licensing process … [are] deployed in a timely manner.”

Finally, adoption of such a policy will disadvantage no applicant, since there are sufficient frequencies and orbital positions available to permit other satellite operators to aggregate frequencies and derive the benefits discussed in this paper, if they so choose.

DISCUSSION

Spectrum Aggregation Fosters Efficiencies and Leads to Lower Cost Services

Maximizing the number of frequency bands that are assigned to the same satellite operator at any given orbital location permits operators to use hybrid – or multi-band – satellites, which are more efficient and cost effective than individual satellites each using

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one frequency band and, often, a smaller amount of spectrum. If a satellite operator can employ hybrid satellites, it will unlock these efficiencies and lower costs. In a competitive market, consumers benefit when service providers’ costs are reduced. Lower costs generate downward pressure on prices and enhance benefits to the consumer.

The cost of placing satellite capacity in orbit has a fixed component (satellite frame or bus, launch, insurance, etc.) and a component that varies with the amount of capacity (transponders, power, etc.). As Table 1 illustrates, the cost per unit of capacity decreases as fixed costs are shared across more frequency bands.

Satellite A B C D E Transponders 24 24 36 24 Frequency Band X Transponders 32 32 48 32 Frequency Band Y Transponders 80 Frequency Band Z Total Transponders 24 32 56 84 136

Relative satellite Cost 1 1.15 1.43 1.67 2.16

Relative cost per 0.042 0.036 0.026 0.020 0.016 Transponder

Table 1 - Satellite and Transponder Costs

Since any satellite operator will need to recover its costs plus margin in pricing services, the lower the cost of a unit of capacity in orbit, the lower the prices a satellite operator is able to charge while earning a fair return. As satellite, launch, and insurance costs continue to climb, Canadian satellite operators need the ability to adjust their satellite designs by adding frequencies and building large satellites in order to offer attractive rates to customers and, indeed, to ensure that they remain competitive.

Making available the efficiencies of multi-band satellites also will enable Canadian satellite operators to compete in increasingly sophisticated capital markets for the debt and equity funding needed to support satellite construction and operation. The capital markets are global in scope and sources of capital look for the highest return they can find. Investors obviously are more attracted to satellite companies with lower per unit costs and with more opportunity to offer “one-stop-shopping” to satellite customers.

Higher capacity satellites are possible only if there is enough RF spectrum to make use of at each orbital position. As shown in Table 1, if different operators were licensed for

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frequency bands X and Y, 56 transponders could be made available in these bands on satellites A and B at a total cost of 2.15 units. However, if one operator were licensed for both bands X and Y, that operator could use satellite C at a total cost of 1.43 units – a one-third reduction in cost per transponder. Even greater economies can be achieved for triple-band satellites.

The relationship between capacity and cost has been understood for many years. The evolution of the Canadian satellite fleet provides only one example. The Anik C (16 transponders) and Anik D (24 transponders) generations operated in only one frequency band. Introducing the Anik E satellites (40 transponders) with hybrid C-band and Ku- band capability reduced the cost per unit of capacity. Similarly, the Anik F generation saw capacity grow relative to the Anik E generation through the introduction of additional coverage areas, in the case of Anik F1 (84 transponders), and the addition of additional payloads in other bands, in the case of Anik F1R and Anik F2 (94 transponders).

By responding to Industry Canada’s Call, Telesat is hoping to improve upon these efficiencies. Five of Telesat’s six applications are for satellites at orbital locations that already have frequency bands assigned to Telesat. If these applications are granted, over time Telesat will be able to deploy satellites incorporating additional frequency bands, thereby generating further economies of scale.

Multiple frequency band satellites also create efficiencies for consumers. When frequency bands are assigned to different satellite operators at the same orbital location, the satellite operators must separate their spacecraft to facilitate station-keeping. As a result, customers may have to use multiple, or more technically complex and costly, dishes to access multiple frequency bands at the orbital location. If the frequency bands are assigned to a single operator that can launch a hybrid satellite, on the other hand, then the customers can use a single dish to access the frequency bands. In the case of consumer services such as direct-to-home services involving wide scale deployment of ground stations, the satellite customer cost savings that are generated by hybrid satellite efficiencies can be substantial.

Spectrum Aggregation Preserves and Enhances Canadian Orbital Resources

Allowing satellite operators to aggregate spectrum at each orbital location creates incentives for bringing frequency assignments into use expeditiously, which obviously is in Canada’s interest. Since the International Telecommunications Union establishes strict time limits for bringing satellite frequencies into use, Canada risks losing its priority for an orbital position if an operator is unable to bring a given frequency band into use within the allotted time. Moreover, as a matter of public interest, consumers are better served by frequencies that are in use than by frequencies that lie fallow.

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Satellite operators have a greater economic incentive to initiate service if they are authorized to operate on multiple frequency bands at the same location. A strong business case can be made for constructing and launching capacity having a lower cost per unit of capacity in orbit. 1 Given that, for reasons discussed above, hybrid satellites have a lower cost per unit of capacity in orbit, it follows that aggregating frequency band assignments will facilitate and encourage satellite operators to bring frequencies into use in a timely fashion.

Spectrum Aggregation Fosters Creation of Innovative Services Including Two-Way Broadband

Satellite developments over the past three decades show that newer frequencies bands are laboratories for innovation. At the dawn of the communications satellite era, C-band was king. Then as satellite operators began to make use of the Ku-band, it became possible to offer services such as VSAT services that require smaller, less expensive dishes. Ku-band technology also revolutionized the newsgathering business. In time, satellite operators began to exploit the BSS band to provide direct-to-home services and now are looking to use expansion BSS frequencies to support their high definition television spectrum requirements. Also, satellite operators look to Ka-band frequencies as a home for two-way broadband services.

Telesat is a long time innovator and the policies of Industry Canada helped establish the conditions in which Telesat’s innovations could flourish. Telesat launched the world’s first domestic geostationary communications satellite. It launched the first commercial Ku-band satellite. And it launched the first satellite platform used for two-way broadband services using Ka-band frequencies.

The same business imperatives that give satellite operators with multiple frequency bands an incentive to initiate service promptly also make them more likely to innovate than licensees of single-band satellites. Services in new frequency bands are more expensive to provide, because they have not benefited from the lower equipment costs that mass production makes possible. Services in new frequency bands generate less revenue, because they take time to be perfected and gain acceptance by consumers and other users.

In short, it is easier for satellite operators to take the business risk to offer innovative - but low margin - services in new bands if they can combine new-band payloads with payloads for mature bands on a single spacecraft. This would be of particular benefit to

1 It may be impossible in some circumstances to make a business case for satellites incorporating individual frequency bands. For example, extended Ku-band frequencies may be valuable for expansion capacity purposes to satellite operators making use of standard Ku-band frequencies, but may have insufficient value to satellite operators lacking a standard Ku-band customer base to support the cost of constructing and launching a satellite.

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rural Canadians who do not always have the same choice of services. The incremental cost of adding a new-band payload would be much lower than the cost of constructing and launching a single-band satellite with the new band, which might well be the deciding factor in determining whether or not to offer an innovative new service.

The development of the Ka-band is a perfect case in point. Since wide-scale deployment of Ka-band equipment had not occurred, Telesat could not have taken the risk of launching a Ka-band only satellite for provision of broadband services to members of the public living beyond the reach of terrestrial broadband networks. Telesat, however, was able to take a more manageable risk and add a Ka-band payload to its Anik F2 satellite. Telesat’s pioneering Ka-band effort was a first for the entire satellite industry and allowed for the introduction of innovative Ka-band services that, but for the efficiencies of a shared satellite payload, could not have been introduced in a timely fashion.

Spectrum Aggregation Increases Stability and Survivability of Satellite Services and Minimizes the Risk of Interference

The more redundancy a satellite operator can call upon, the better equipped the operator will be to maintain continuity of service if there are satellite failures. There are multiple ways to build redundancy into a satellite system. In-orbit spare satellites can back up multiple satellites. Spare TWTAs or SSPAs can be installed for back up redundancy on a single satellite. Back-up spacecraft control processors can be incorporated into satellite design.

Hybrid satellites provide an element of redundancy. If a satellite experiences a partial failure that causes power degradation issues, the operator of the satellite will be better equipped to accommodate its in-orbit requirements if the failed satellite is a larger, more powerful hybrid satellite. It may be able to shift its remaining power supporting one frequency band to another band to satisfy customer requirements that are most important from a public interest standpoint.

Maintaining the integrity of an orbital location for each satellite operator also will minimize the risk of interference to those who are dependent on satellite services, since it enables a single operator to manage the interference environment at that orbital location, which is particularly important when small dish, consumer service is being provided.

Spectrum Aggregation Will Harmonize Canada’s Orbital Assignment Policies Internationally and Level The Playing Field Among Satellite Operators

U.S.-licensed satellite operators are permitted to provide service in Canada and compete with Telesat. Multiple U.S.-licensed satellites are on the List of Satellites Approved to Provide Fixed-satellite Services in Canada administered by Industry Canada. Multiple

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Canadian-licensed satellites are on the Permitted Space Station List administered by the U.S. Federal Communications Commission (“FCC”).

In this environment, any competitive disadvantage for customers and capital experienced by a Canadian satellite operator could prove serious. Telesat’s U.S. and European competitors benefit from their administrations’ policies that encourage the aggregation of spectrum resources at an operator’s orbital location. Over time, U.S.- licensed operators will continue to build larger, more frequency-capable satellites, including those with developmental payloads.2 If Canadian-licensed operators do not have comparable abilities, we will be at a competitive disadvantage. Customers seeking lower prices or more innovative services could migrate from a Canadian-licensed system (including those of Telesat) to U.S. and European-licensed systems over time. Investors seeking higher returns could follow. It is essential, therefore, that Telesat also be able to aggregate frequency bands at its orbital positions.

Policies in the United States . In the United States, the FCC’s policies long have favored hybrid satellites, and virtually every orbital location in the core portion of the U.S. arc is occupied by a hybrid satellite. As the FCC has recognized repeatedly, “operating a state-of-the-art hybrid satellite at a particular orbital location may be more efficient than operating two single-band satellites at that location.” Hughes Communications Galaxy, Inc. , 6 FCC Rcd 72 at n. 7 (1991). The FCC has found that “hybrid satellites can provide cost savings to operators and customers with no decrease in technical performance.” Hughes Communications Galaxy, Inc. , 5 FCC Rcd 3423, ¶ 8 (1990). See also GE American Communications, Inc. , 11 FCC Rcd 15030, 15034 (1996) (“the FCC has long recognized the cost efficiencies inherent in hybrid satellites”). 3

The efficiencies of hybrid satellites have been a key consideration in the FCC’s orbital assignment policies. For example, “in developing the 1988 Orbital Assignment Plan, the [Federal Communications] Commission attempted, when possible, to assign operators to corresponding C-band and Ku-band orbital locations.” Hughes Communications Galaxy, Inc. , 5 FCC Rcd 3423 at ¶ 8 (1990). This plan “was designed to provide operators the opportunity to construct and launch hybrid satellites in current or future generations.” Id. By virtue of the importance of hybrid satellite efficiencies, moreover, the FCC waived its “expansion capacity” rule, which limited the assignment of new orbital

2 SES operations at, or near, 105° W offer perhaps the most dramatic example of aggregation. SES and related companies will have access to C, Ku, Ka, extended Ku-band, and the 17 GHz BSS, as well as a proposal to operate in the 12 GHz BSS band. 3 Because of the technical and spectrum efficiencies that can be realized from the use of hybrid C/Ku-band satellites, the FCC has permitted operators to consolidate two single-band satellites by launching a single hybrid replacement satellite. See Hughes Communications Galaxy, Inc. , 6 FCC Rcd 72 (1991) (single-band satellites at 91° W.L. consolidated into a single hybrid); Hughes Communications Galaxy, Inc. , 5 FCC Rcd 3423 (1990) (single-band satellites at 99° W.L. consolidated into a single hybrid).

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locations in a frequency band until existing assignments were filled, so that single band satellites could be replaced with hybrid satellites. See, e.g., Hughes Communications Galaxy, Inc. , 11 FCC Rcd 16425 (1996) (Hughes authorized to replace the Ku-band SBS-5 with Galaxy X, a C-/Ku-band hybrid satellite; expansion capacity rule waived); GE American Communications, Inc. , 11 FCC Rcd at 15034 (GE Americom authorized to replace Satcom C-5, a C-band satellite, with GE-3, a C-/Ku-band hybrid satellite; expansion capacity rule waived). 4

Several years ago, the FCC shifted from assigning orbital locations in processing rounds to assigning them on a first come, first served basis. See Amendment of the Commission's Space Station Licensing Rules and Policies; Mitigation of Orbital Debris , First Report and Order and Further Notice of Proposed Rulemaking, 18 FCC Rcd 10760 (2003). This change was a logical outgrowth of the FCC’s policies favouring hybrid satellites. At the time the FCC put its new policy into effect, U.S.-licensed operators already had secured hybrid C-band/Ku-band authority for the most critical orbital locations. A first come, first served policy enables these operators to apply on an as needed basis, without having to wait for a processing round to be completed, for authority to use frequency bands whose principal value is as expansion capacity for operators already making use of other frequency bands at the same orbital location.

It also should be noted that the trilateral arrangement Canada, the United States, and Mexico entered into in 1988 reflects an implicit recognition at the international level of the value of hybrid satellites. Subject to a few exceptions, the trilateral arrangement provides that, at each of the orbital positions in the arc between 107.3° W.L. and 118.7° W.L., only one of the three administrations will license operations on standard C-band and Ku-band frequencies. By making a single administration responsible for licensing multiple frequency bands, the trilateral agreement preserves the option of hybrid licensing.

Policies in Europe. The high-capacity model also has been successfully adopted in Europe, where it is industry practice for one operator to occupy an orbital position with satellites operating in multiple bands. Eutelsat and SES are routinely successful in tapping the capital markets due in no small part to their ability to aggregate frequencies and achieve scale advantages to fund expansion not only in Europe but worldwide.

Figure 1 is a graphic representation of the Ku-band spectrum fully exploited at two primary European slots occupied by Eutelsat and SES, each of which has satellites with transponders spanning 2 GHz of available Ku-band spectrum. The operators also have Ka-band on some satellites at these positions and are expected to add incremental Ka-

4 The FCC’s policies have encouraged operators serving the United States market to establish satellite neighbourhoods with multiple frequency band payloads. Examples include Intelsat operations in the C, Ku-and extended Ku-bands at 91° W and in the C, Ku and Ka-bands at 89° W, and, as noted above, SES operations at, or near, 105° W.

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band capacity. Moreover, Eutelsat recently announced its plans to add S-band payloads. This design philosophy is feasible only because one operator is licensed at each orbital position.

Figure 1: Ku-band Spectrum Exploited by SES and Eutelsat at orbital positions in Europe

Spectrum Aggregation Minimizes the Need for Costly And Complex Inter-Satellite Coordination and Discourages Regulatory Gamesmanship

A policy favoring aggregation of frequencies at a single orbital location simplifies the time-consuming and complex task of inter-satellite coordination among operators and national administrations. It also will ease Industry Canada’s task of assigning orbital locations to multiple applicants, since it can be difficult to articulate a basis for determining which applicants should be assigned the rights to particular frequency bands at particular orbital locations.

In addition, in the absence of a policy favouring aggregation of frequency bands by individual satellite operators, there is a risk that applicants will apply for the right to expansion frequencies at orbital locations that already are occupied not because the applicants intend to use the expansion frequencies, but because they hope to obstruct the plans of a competitor or because they see an opportunity for “greenmail” profits. The best way to prevent such regulatory gamesmanship is to announce unequivocally that orbital assignments will be made based on hybrid satellite principles.

CONCLUSION

This proceeding presents Industry Canada with an unparalled opportunity to shape satellite technologies to meet the considerable challenges of delivering high-quality, affordable, innovative telecommunications services to all Canadians no matter where they reside, even off the terrestrial telecommunications “grid.”

As demonstrated above, adoption of an orbital assignment policy that will allow Canadian satellite operators and satellite service providers to maximize the number of frequency bands at any given assigned orbital location will not only match assignment policies in the U.S. and Europe but, more importantly, will level the regulatory playing field so that Canadian operators and service providers can develop the same economies of scale as their foreign competitors are permitted. Moreover, the adoption of this

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guiding principle will help applicants achieve the objectives outlined in Section 6.1.1 of the Call; namely:

• “fostering the future introduction of new and innovative … services,“

• “enhanc[ing] competitiveness … of Canadian telecommunications,” enabling “Canadian satellite operators and satellite service providers to advance their service offerings in the domestic market … and … compete in the larger market for the Americas,”

• “recognizing the importance of delivering reliable and affordable telecommunications and broadcasting services,”

• “achiev[ing] greater economies and operational flexibility,” and

• ensuring that “satellites authorized as a result of this licensing process … [are] deployed in a timely manner.”

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Attachment 2 - Overview of Telesat Canada’s Applications for Orbital Spectrum Licences

Telesat Canada is Canada’s premier satellite service provider, and has built its business on the basis of serving the needs of Canadians first. Telesat’s future is equally being planned with a continuing commitment to serve the Canadian market first.

Today, Telesat is filing six applications, representing 10 licences being made available in Industry Canada’s Call for Applications to License Satellite Orbital Positions , Notice No. DGRB-001-06 dated July 7, 2006. The Department’s decisions in the award process will have a far-reaching impact on the capacity available for the Canadian market for years to come. Indeed, most of the spectrum which Canada has available for development for the next decade could be allocated in this process.

Telesat is mindful of this, and has structured its applications with a view to securing spectrum to safeguard as Canadian in the near term and retain its long-term availability for meeting the demand of Telesat’s core market of Canadian users.

Structure of Applications

What follows is an overview of Telesat’s applications outlining for Industry Canada the Company’s strategy for accomplishing this objective. Telesat’s applications are divided into three groups: the Broadband market, the Star Choice system, and the Bell ExpressVu system.

Each of these three groups represents an important Canadian satellite user group whose businesses are integrally tied to the orbital platform they occupy. Within each of those groups, the applications are listed in order of priority, ranked beginning with the satellite project which has the most immediate demand and which is the major driver of Telesat’s and our customer’s future growth.

Broadband Market Application Ka/BSS1: 118.7º W position, Ka-band and 17 GHz BSS band (Licence Nos. 23 and 24) The first application is for broadband and multimedia spectrum at the 118.7º W orbital position. Telesat has an immediate need for Ka-band spectrum to serve a growing market which Telesat has seeded with its world-pioneering Anik F2. It is critical to Telesat’s Canadian anchor customer Barrett Xplore that it maintain its market momentum and continue to have the ability to capitalize on its early entry into this risky new market. In addition, this satellite is also being designed with coverage of the U.S. in

2-1 order to provide capacity to a U.S. service provider, thus defraying costs to Canadian users.

Telesat will also add a payload in the 17 GHz BSS band with North American coverage in order to enable the early adoption of IPTV (Internet protocol television) and interactive television applications working in conjunction with the Ka-band broadband service. The development of this innovative application in this new frequency band could help to provide long-term sustainability of a Canadian entertainment delivery industry utilizing new technologies. The continued growth of the Ka service will benefit from innovation and overlaying one-way services is important to its future development.

Application Ka/BSS2: 91º W position, Ka-band and 17 GHz BSS band (Licence Nos. 8 and 9) Telesat’s anchor Canadian broadband customer Barrett Xplore requires a significant amount of capacity in order to capitalize on its momentum in rolling out service to an underserved high-speed Internet market. It would be ideal for Barrett to have its capacity spread between the satellites at 118.7º W and 91º W, in part because the rollout of available capacity will be staged consistent with the ramp-up in customer demand, and also because the anticipated demand in the most populated areas of Canada will better be met with frequency reuse based on orbital separation than in trying to utilize smaller spot beams from the same satellite. Users will also benefit from the in-orbit redundancy and multiple backup plan which this proposal offers.

This satellite platform at 91º W will also present an opportunity for the broadcasting community to participate in the development of multimedia applications using the 17 GHz BSS spectrum..

The affordability of these services benefits from the aggregation of frequency bands on large satellites, and in this particular case, is an opportunity for Telesat to secure and maintain Canada’s rights to this orbital spectrum in both bands.

Star Choice System Application XKu/BSS: 107.3º W 17 GHz BSS band and 111.1º W Extended Ku-band and 17 GHz BSS band (Licence Nos. 14, 17 and 18) This application proposes to augment the conventional Canadian broadcast industry’s access to much needed capacity at the 107.3º W and 111.1º W positions, both in the short and long terms. Telesat’s long-standing Canadian customer Star Choice has built its business at these two orbital positions and requires capacity to ensure its ability to deliver on its mandate as a Canadian broadcasting undertaking and DTH service provider. In securing a major amount of capacity on both Anik F1R and Anik F2, this customer has committed not only to serving the Canadian industry’s growth but also to doing so in a manner which protects the underlying business through backup

2-2 redundancy. This philosophy continues as this customer strives to serve the broadcast industry’s evolution with new broadcast technologies such as high definition television (HDTV).

Telesat is proposing to develop a twin-satellite procurement to meet the near-term needs of this customer with an Extended Ku-band capacity payload, each accompanied by a small payload in the 17 GHz BSS band which will secure it for the Canadian industry’s developing requirements. As Telesat already holds the approval for Extended Ku-band at 107.3º W, awarding the same band at the 111.1º W location will ensure full backup for this customer.

The Company has consulted extensively with the Canadian broadcasting industry regarding its capacity needs. Conventional broadcasters are simply not ready to commit to significant amounts of new satellite capacity at this time. Telesat’s customer at these two locations is both a DTH provider and an SRDU and has a clear and well-defined preference at this time for Extended Ku-band, but recognizes that the 17 GHz BSS band is the growth spectrum of the future. Telesat is particularly concerned that if Industry Canada were to award the 17 GHz BSS band at these two orbital locations for full payloads, the capacity would be committed for the long term to a non-Canadian market and would likely not be available when Canadian demand materializes. Telesat’s plan, however, provides a mechanism to secure it for Canadian use. Furthermore, should the capacity be split between two operators, the economies of scale achievable through multi-frequency satellites could not be realized. The ability to build replacement satellites for Anik F1, F1R, and F2 that include the Extended Ku and 17 GHz BSS bands requested in this application will enable per unit pricing to be significantly below single or even dual frequency band satellites.

Bell ExpressVu System Application BSS1: 86.5º W 17 GHz BSS band (Licence No. 6) This is the first of three applications to develop the future growth capacity for Telesat’s customer Bell ExpressVu. This customer has an existing base of 12 GHz BSS capacity at two orbital locations and is making a commitment at a third position. However, this broadcasting entity expects that additional capacity will be required in the future, and the most suitable solution is the 17 GHz BSS band. The technical characteristics of this frequency are compatible with those of the existing DTH service, and moving to a new band is necessary to build on the existing neighbourhood of its Canadian positions.

The 86.5º W position is in a prime location for this customer’s DTH service neighbourhood, and consistent with the configuration of its existing services, it is the customer’s preference that its first expansion into the new frequency band begin here.

2-3 The 17 GHz BSS satellites which Telesat is planning for the 86.5º W, 82º W and 72.5º W positions will have beam coverage switchable between the Canadian or U.S. footprint, on a transponder-by-transponder basis. This design will provide the maximum flexibility for Telesat to provide service on any of these satellites to one or more U.S. customers should there be capacity available which is surplus to the needs of our Canadian customer or other Canadian users.

Application BSS2: 82º W 17 GHz BSS band (Licence No. 5) As was outlined above with respect to Application BSS1, Telesat’s customer Bell ExpressVu is pursuing the 17 GHz BSS band in order to expand its business for the future. While 86.5º W is the first location of this service, the 82º W position will provide capacity for future expansion in order to meet demand. This position is part of this customer’s core neighbourhood and development of new spectrum at this location is vital to its efficient use of spectrum for the long term.

Application BSS3: 72.5º W 17 GHz BSS band (Licence No. 2) As described above for Applications BSS1 and BSS2, Telesat’s customer at the 12 GHz BSS band is planning its future capacity needs and considers the 17 GHz BSS band to be the growth spectrum of the future. This customer has recently committed to the capacity on Nimiq 5, Telesat’s 12 GHz satellite to be built and launched into the 72.7º W orbital position. Development of this position is therefore desirable for future expansion plans and to be able to maximize the efficient use of spectrum resources within this broadcasting neighbourhood.

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cover

Application 91°WL KA/BSS

This is an abridged document intended for public disclosure.

Application 91°WL KA/BSS (IC Licence Nos. 8 and 9) ABRIDGED

TABLE OF CONTENTS PAGE

1.0 EXECUTIVE SUMMARY ...... 1 2.0 ELIGIBILITY ...... 3 2.1 CANADIAN OWNERSHIP AND CONTROL ...... 3 2.2 CANADIAN DIRECTION AND CONTROL OF SPACECRAFT ...... 4 3.0 EVALUATION CRITERIA...... 5 3.1 BENEFITS TO CANADIANS ...... 5 3.1.1 Canadian Satellite Capacity Requirements...... 5 A Satisfying Canadian Requirements for Ka-band Satellite Capacity and Services..7 A1 Consumer Sector and Ka-Band Demand...... 8 A2 SME / SOHO Sector and Ka-Band Demand ...... 9 A3 Other Ka-band Demand ...... 10 A4 Delivering Ka-band Capacity in Canada ...... 10 A5 Description of Ka-band Payload...... 11 A6 Telesat’s Long Term Ka-Band Capacity Plan ...... 13 B Satisfying Canadian 17 GHz BSS Capacity Requirements ...... 15 B1 Canadian 17 GHz BSS Demand...... 15 B2 Delivering 17 GHz BSS Capacity...... 16 B3 Description of 17 GHz BSS Payload...... 16 3.1.2 Securing Canadian Access to Orbital Resources ...... 17 3.1.2.1 Ka-band at 91°WL...... 17 3.1.2.2 17 GHz BSS at 91°WL...... 18 3.1.3 Other Benefits to Canadians ...... 20 3.1.4 Satisfying Canadian Satellite Policy Objectives & Requirements ...... 24 3.1.4.1 General Satellite Policy Objectives ...... 24 3.1.4.2 General Canadian Requirements...... 28 3.2 FINANCIAL PLAN...... 31 3.2.1 Financial Qualifications...... 31 3.2.2 Financing ...... 31 3.3 TECHNICAL PLAN ...... 35 3.3.1 Introduction...... 35 3.3.2 Satellite Description...... 35 3.3.2.1 Overview ...... 35 3.3.2.2 Ka-band Payload...... 36 3.3.2.2.1 Design Philosophy ...... 36 3.3.2.2.2 Payload Features...... 37 3.3.2.2.2.3 TWTA Requirements and Beam EIRP...... 40 3.3.2.2.2.4 Gain/Noise Temperature (G/T) ...... 41 3.3.2.2.3 Spectrum Requirements ...... 41 3.3.2.2.4 Network and Service Considerations...... 42 3.3.2.3 17 GHz BSS Payload...... 49 3.3.2.3.1 Payload Rationale...... 49 3.3.2.3.2 Coverage ...... 50 3.3.2.3.3 Spectrum Requirements ...... 51 3.3.2.3.4 Network Requirements ...... 51 3.3.2.3.5 Link Budget...... 51 3.3.3 SATELLITE DESIGN...... 53 3.3.3.1 Payload Overview ...... 53 3.3.3.2 Functional Description of Payloads ...... 53 3.3.3.2.1 Ka-band Payload ...... 53 3.3.3.2.2 17 GHz BSS Payload...... 55

Telesat Canada Proprietary - ii - November 15, 2006 Use or disclosure of the information on this page is subject to the restrictions on the cover page. Application 91°WL KA/BSS (IC Licence Nos. 8 and 9) ABRIDGED

TABLE OF CONTENTS PAGE

3.3.3.3 Bus and Launch Vehicle Compatibility ...... 55 3.3.4 SATELLITE PROGRAM...... 58 3.3.4.1 Overview ...... 58 3.3.4.2 RFP Preparation Stage ...... 58 3.3.4.3 Proposal Evaluation and Negotiations Stage ...... 59 3.3.4.3.1 General Requirements...... 59 3.3.4.3.2 Contract Provisions to Enforce Schedule and Quality ...... 60 3.3.4.4 Procurement Stage ...... 61 3.3.4.4.1 Schedule...... 61 3.3.4.4.2 Program Management ...... 62 3.3.4.4.3 Design Assurance...... 62 3.3.4.4.4 Assembly, Integration and Test ...... 62 3.3.4.5 Launch and Mission Stage...... 63 3.3.4.5.1 Launch Operations ...... 63 3.3.4.5.2 Mission Support ...... 63 3.3.4.5.3 In-Orbit Test (IOT) ...... 63 3.4 TELESAT’S COMPETENCIES ...... 64 3.4.1 Overview of Telesat’s Record – A History of Commitment and Achievements ...... 64 3.4.2 Technical Competency...... 76 3.4.2.1 Satellite Procurement and Launch Services Expertise...... 76 3.4.2.2 Satellite Control Expertise...... 81 3.4.2.3 Frequency Coordination Expertise...... 84 3.4.3 Operational Competency...... 85 3.4.3.1 Staff Resources & Qualifications...... 85 3.4.3.2 Business Management...... 90 3.4.3.3 Marketing and Sales ...... 93 3.4.4 Institutional Competency ...... 94 3.4.4.1 Customer Relationships ...... 94 3.4.4.2 Vendor Relationships ...... 95 3.4.4.3 R&D Partner Relationships ...... 97 3.4.4.4 Financial Community Relationships ...... 100 4.0 BUSINESS PLAN AND AGREEMENTS...... 101 4.1 KA BROADBAND BUSINESS PLAN...... 101 4.1.1 Broadband Market Assessment ...... 102 4.1.1.1 Consumer Sector ...... 103 4.1.1.2 Small/ Medium Business (SME)/ Small Office Home Office (SOHO) Sector ...... 104 4.1.1.3 Large Enterprise Sector ...... 105 4.1.1.4 Tools in Assessing Demand...... 106 4.1.2 Target Market – Ka-band...... 108 4.1.2.1 Satellite Broadband Demand - Consumer Sector ...... 109 4.1.2.2 Satellite Broadband Demand - SME / SOHO Sector...... 111 4.1.2.3 Ka-Band Demand Projections...... 112 4.1.2.4 Delivering Ka-band Capacity and Services ...... 114 4.1.2.4.1 Barrett Xplore...... 116 4.1.2.4.2 WildBlue...... 117 4.1.2.5 Service Offerings...... 118 4.1.2.6 Competition in the Broadband Market...... 119 4.2 17 GHZ BSS BUSINESS PLAN...... 121 4.2.1 Market Assessment -17 GHz BSS ...... 122 4.2.2 Target Market -17 GHz BSS...... 124 4.2.2.1 Delivering 17 GHz BSS Capacity and Services ...... 124 4.2.2.2 Service Offerings -17 GHz BSS ...... 126

Telesat Canada Proprietary - iii - November 15, 2006 Use or disclosure of the information on this page is subject to the restrictions on the cover page. Application 91°WL KA/BSS (IC Licence Nos. 8 and 9) ABRIDGED

TABLE OF CONTENTS PAGE

4.2.3 17 GHz Competitive Landscape...... 127 4.3 PARTNERSHIPS AND AGREEMENTS ...... 127 4.4 KA/BSS2 SATELLITE PROJECTED REVENUES & EXPENSES...... 127 5.0 APPENDICES...... 129

APPENDICES

Appendix 1 Declaration of Ownership and Control

Appendix 2 Canadian Satellite Capacity and Services Plan

Appendix 3 Letters of Support

Appendix 4 Financial Statements Telesat Canada 2003-2005

Appendix 5 Financial Statements BCE Inc. 2003-2005

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TABLE OF CONTENTS PAGE

FIGURES

Figure 3.1.1-1 KA/BSS2 Ka-band Canadian and U.S. Coverage...... 12 Figure 3.1.1-2 KA/BSS2 17 GHz BSS Payload Canadian Coverage...... 17 Figure 3.3.2-1 User Beam Coverage ...... 38 Figure 3.3.2-2 North American Population Distribution ...... 39 Figure 3.3.2-3 Ka-band Spectrum Allocations ...... 42 Figure 3.3.2-4 17 GHz BSS Payload Transmit Coverage ...... 50 Figure 3.3.2-5 17 GHz BSS Payload Receive Coverage ...... 50 Figure 3.3.3-1 KA/BSS2 Ka-band Functional Block Diagram...... 54 Figure 3.3.3-2 KA/BSS2 17 GHz BSS Payload Functional Block Diagram...... 55 Figure 3.3.3-4 Spacecraft DC Power Capability Comparison...... 56 Figure 3.3.3-5 Active Transponders Accommodation Comparison ...... 57 Figure 3.3.4-1 KA/BSS2 Project Milestones ...... 61 Figure 3.4.1-1 Telesat’s Service Expansion in Canada 1973-2006 ...... 65 Figure 3.4.1-2 Scope of Telesat’s Business Operations...... 66 Figure 3.4.2-1 Consulting Experience...... 78 Figure 3.4.2-2 Telesat’s Current Satellite Fleet ...... 82 Figure 4.1.1-1 Anik F2 Ka-band Terminal Distribution May 2006...... 107 Figure 4.1.1-2 Anik F2 Ka-band Terminal Distribution May 2006 - Eastern Canada View ...... 108 Figure 4.2.2-1 IPTV Specialty Channel Subscription Service...... 126

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TABLE OF CONTENTS PAGE

TABLES

Table 3.1.1-1 Canadian Households Without Broadband ...... 8 Table 3.1.1-2 Rural SMEs ...... 9 Table 3.1.1-3 Canadian Ka-Band Capacity ...... 15 Table 3.1.2-1 Ka-Band Networks Filed within 2° of 91°WL Orbital Position ...... 18 Table 3.1.2-2 17 GHz BSS Networks Files within 4° of 91°WL Orbital Position ...... 19 Table 3.2.2-1 Five Year Financial Forecast ($ millions) ...... 33 Table 3.3.2-1 Key Features of Proposed Satellite...... 36 Table 3.3.2-2 User Beam Bandwidth Allocation ...... 40 Table 3.3.2-3 Number and Size of Active TWTAs...... 41 Table 3.3.2-4 Forward Link Budget ...... 47 Table 3.3.2-5 Return Link Budget...... 48 Table 3.3.2-6 DVB-S2 Modem Performance (90 MSps) ...... 49 Table 3.3.2-7 17 GHz BSS Link Budget ...... 52 Table 3.3.3-1 Spacecraft Mass and Power Budget ...... 56 Table 3.3.3-2 Launch Vehicle Compatibility ...... 57 Table 3.4.1-1 Application Development...... 67 Table 3.4.1-2 Telesat Satellite Builds To Date ...... 71 Table 3.4.2-1 Recent Telesat Procurement Projects (2000 to Present)...... 79 Table 3.4.2-2 Recent Telesat Construction Monitoring Projects (2000 to Present) ...... 80 Table 3.4.2-3 Recent Telesat Construction Monitoring Projects (2000 to Present) ...... 81 Table 3.4.3-1 Select Telesat Work Force Statistics...... 86 Table 3.4.3-2 Telesat’s Executive Officers ...... 87 Table 3.4.3-3 Telesat Business Segment Revenues ...... 92 Table 4.1.1-1 Total Internet Subscribers (millions)...... 103 Table 4.1.1-2 Broadband Subscribers 2005 – Canada and U.S...... 103 Table 4.1.1-3 Canadian Households Without Broadband ...... 104 Table 4.1.1-4 Rural SMEs ...... 105 Table 4.1.2-1 Anik F2 Ka-Band Service Statistics...... 109 Table 4.1.2-2 Projected Canadian Ka-band Nominal Subscribers...... 110 Table 4.1.2-3 Demand Estimate of Consumer and SME/SOHO Market in Canada (Households)112 Table 4.1.2-4 Ka-Band Authorizations in North American Orbital Arc...... 120 Table 4.1.2-5 DSL and Cable Broadband Penetration (% subscribers of total population) ...... 121 Table 4.4-1 Projected Revenues and Expenses KA/BSS2 : 91º WL - $ Millions (CDN)...... 128

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1.0 EXECUTIVE SUMMARY

In this application, Telesat seeks the Department’s approval to build on its existing orbital platform at the 91°WL position using Ka-band and 17 GHz BSS spectrum. The KA/BSS2 satellite is part of Telesat’s long term Ka-band capacity plan which overlays broadband capabilities to its existing orbital neighbourhoods. At the 91°WL position today Telesat operates its BSS satellite (Nimiq-1) and with KA/BSS2, Telesat plans to resume use of the Ka-band service as a Canadian spectrum resource which initially was begun with Nimiq-2 at the 91°WL position.

Leveraging existing satellite facilities to expand orbital (service) platforms is of significant benefit:

• For Telesat, increasing the scope and scale of its business is an essential component of Telesat’s growth strategy as it meets the challenges of its enormous satellite competitors in the Americas.

• For Canadian satellite users, the ability to seamlessly access multiple frequency bands on co-located satellites at a single orbital platform provides expansion capabilities, back-up options and diversity in the types of applications that can be accessed by an end user.

The KA/BSS2 satellite program as proposed in this application builds on the enormous business success of Anik F2 Ka-band broadband in both Canada and in the U.S. It also brings new satellite capacity to the emerging 17 GHz BSS market which has yet to be commercially developed.

The KA/BSS2 satellite program has received the valued endorsements of Barrett Xplore, Canada’s largest satellite broadband service provider, and of Telesat’s American Anik F2 broadband partner, WildBlue. Both companies support Telesat’s applications to bring new Ka-band capacity to North America at the 91°WL and 118.7°WL orbital locations.

Telesat’s KA/BSS2 satellite program is a Canadian designed satellite with full Canadian coverage, delivering new satellite capacity to Canadian users for the benefit of all Canadians.

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The key elements of this application are:

• The KA/BSS2 satellite will follow-on from Anik F2, F3 and the proposed KA/BSS1 satellites which are all part of Telesat’s comprehensive long-term Ka-band capacity plan. This innovative plan responds to the needs of Canadian satellite broadband service providers by phasing in new Ka-band capacity to coincide with their business growth. The plan brings in excess of 25 Gbps of Ka-band capacity for Canadian use over two new satellites, firstly with KA/BSS1 to be located at the 118.7°WL position, followed by KA/BSS2 at 91°WL.

• This proposal delivers the lowest cost per unit for Ka-band capacity to Canadian satellite broadband providers by exploiting the economies of scale achieved by having North American satellite coverage and a U.S. anchor tenant for the U.S. capacity.

• 17 GHz BSS payload ‘piggybacks’ on the much larger Ka-band payload to bring into use a Canadian network, likely prior to the bringing in to use of 17 GHz networks filed by other administrations. This payload will provide an affordable ‘test-bed’ for multi- media application development by Canadian broadcasters and service providers and, offers an alternative transmission vehicle to increasingly congested terrestrial networks and traditional Ku-band for new services.

• Telesat’s leadership over the last decade has developed Ka-band satellite broadband applications, made substantial investments in the technology and fostered its tremendous business success in the North America marketplace. Telesat has earned the opportunity to further develop and grow its Ka-band business.

• KA/BSS2 continues Telesat’s leadership in satellite excellence, over 35 years of experience and world renowned expertise in satellite operations, consulting and technology/ application development.

• This application also reiterates Telesat’s strong commitment to Canada-first, working with Canadian partners to achieve superior services by Canadians, for Canadians.

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2.0 ELIGIBILITY

2.1 CANADIAN OWNERSHIP AND CONTROL

Telesat Canada was incorporated on September 1, 1969 by the Telesat Canada Act, a special act of the Parliament of Canada. Since May 1998, Bell Canada Enterprises (“BCE”) has indirectly owned 100 percent of the voting shares of the Company. More specifically, 100 percent of the voting shares of the Company are owned by Alouette Telecommunications Inc. (“Alouette”). In turn, 100 percent of the voting shares of Alouette are held directly by BCE. BCE is publicly traded on both the Toronto and New York Stock Exchanges.

The principal and head offices of Telesat and Alouette are located at 1601 Telesat Court, Ottawa, Ontario, K1B 5P4.

Telesat as an established radiocommunications carrier is currently bound by, and is fully compliant with, its statutory obligations of the Radiocommunication Regulations, including Section 10(2)(d). Telesat will continue to abide by current and any future regulations as established by Industry Canada. All of its directors are Canadian citizens, except for Mr. Robert C. Pozen and all of Telesat’s officers are Canadian citizens with the exception of Mr. Daniel S. Goldberg, President and Chief Executive Officer, and Ms. Patricia A. Olah, Corporate Secretary; 100 percent of its voting shares are Canadian owned and Telesat is not in any way subject to foreign control. Telesat is also fully compliant with its obligations as a Canadian owned and controlled telecommunications common carrier pursuant to the Telecommunications Act.

A signed attestation declaring Telesat’s eligibility and Canadian ownership and control required in the Call for Applications is provided in Appendix 1, herein.

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2.2 CANADIAN DIRECTION AND CONTROL OF SPACECRAFT

The proposed KA/BSS2 satellite will be operated at the 91°WL orbital position by Telesat from its Satellite Control Centre (SCC) located at its headquarters in Ottawa, Ontario and in conjunction with Telesat’s Telemetry, Tracking and Command (TTT&C) and back-up SCC facilities in Allan Park, Ontario. Full backup TT&C facilities are available in Edmonton, Alberta for use in the event of a problem or failure at Allan Park.

Telesat commits to ensuring that it will operate the proposed KA/BSS2 satellite in compliance with transmission power level limits, co-ordination agreements, orbital debris mitigation requirements and orbital placement specifications. The proposed satellite will at all times be operated in compliance with all conditions imposed by Industry Canada, the requirements of the Radiocommunication Act and specifically Section 3(3)(b) of the Act, the ITU Radio Regulations and all other applicable laws and regulations.

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3.0 EVALUATION CRITERIA

3.1 BENEFITS TO CANADIANS

The first criterion listed in the Call on which the Department will assess applications is Benefits to Canadians. As indicated in the Call, these benefits are expected to include, in order of importance, satisfying Canadian requirements for satellite capacity and services, securing Canadian access to the orbital resources, and any other benefits attributable to the project. It is also strongly encouraged in the Call that Applicants address satellite policy objectives and requirements in the most complete manner possible. Included are the telecommunications policy objectives set out in Section 7 of the Telecommunications Act, Canadian coverage requirements, compliance with ITU Radio Regulations, and satellite capacity or other benefits for underserved communities.

As detailed below, Telesat’s comprehensive plan for the development of the Ka-band and 17 GHz BSS frequencies associated with the 91ºWL position will maximize the potential of this orbital location for the benefit of all Canadians, and strongly support and promote Canadian satellite policy objectives and requirements.

3.1.1 Canadian Satellite Capacity Requirements

With the KA/BSS2 satellite, Telesat proposes to develop a satellite broadband platform at the 91°WL position using the Ka-band and 17 GHz BSS payloads. The KA/BSS2 satellite is part of Telesat’s long term Ka-band capacity plan which overlays broadband capabilities to its existing orbital neighbourhoods. At the nominal 91°WL1 position Telesat operates today its BSS satellite (Nimiq-1). With KA/BSS2, Telesat plans to resume use of the Ka-band service as a Canadian spectrum band which initially was begun with Nimiq-2 at the 91°WL.

The KA/BSS2 will have identical Ka-band and 17 GHz BSS capacity to Telesat’s other broadband proposal for the KA/BSS1 satellite to be located at 118.7°WL. Both of these satellites will deliver the essential Ka-band capacity that is required by Canadian and U.S. satellite broadband service providers in the medium to long term.

1 Nimiq-1 is actually located at the 91.1°WL position in accordance with the ITU R2 12 GHz BSS Plan

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The tremendous success of Anik F2 Ka-band services has precipitated a strong demand for Ka-band capacity from Telesat’s satellite broadband partners. This demand cannot be met by Anik F2 and Anik F3, the latter to be launched in 2007. Not only will KA/BSS2 add valuable capacity to the Canadian and U.S. markets it will also, in tandem with the KA/BSS1 satellite at 118.7°WL, permit back up and restoral of the services on each of these satellites by the other in the event of a failure.

Meeting Canadian satellite users’ requirements, however, means more than bringing in new capacity; it also means delivering that capacity at the lowest cost per unit. Telesat is confident the KA/BSS2 satellite program will satisfy these requirements in several ways.

Leveraging a Ka-band satellite program to include a 17 GHz BSS ‘piggyback’ payload will not only deliver much needed Ka-band capacity to the Canadian market, but will also give Canadian broadcasters and other service providers a relatively low-cost 17 GHz BSS vehicle to encourage the development of new multi-media applications and ultimately, new commercial service offerings in Canada using this yet untested technology.

In terms of the Ka-band, Telesat has expanded KA/BSS2 Ka-band capacity to have North American coverage. With this approach Telesat achieves the improved economies of scale necessary for the KA/BSS2 satellite, through shared payloads and a serving area that goes beyond Canada. For Canadian service providers in particular this approach translates into significantly lower cost per unit of capacity, which ultimately benefits Canadian end users through attractive service pricing and brings to market emerging new technology platforms and new service offerings.

In the remaining portion of this Section 3.1.1, Telesat provides the Canadian Satellite Capacity and Services Plan for the KA/BSS2 satellite pursuant to Canada Gazette Notice DGRB-001-06, at the 91°WL orbital location. In accordance with the Call, this information has been reproduced as a stand-alone document and appears as Appendix 2 to this application.

Consultations

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Discussions were held with all the Canadian satellite users registered with the Department for this Call, including members of the Canadian Satellite Users Association (CSUA) who had not registered individually on the Department’s list.

Telesat also had consultations with its national broadband partners in Canada and in the U.S., Barrett Xplore (Barrett) and WildBlue, respectively, to determine their future Ka-band demand following on from Anik F2, F3 and KA/BSS1. Preliminary discussions are also ongoing with Telesat’s regional Canadian Ka-band resellers concerning current capacity use and the prospects for introducing new Ka-band capacity to the Canadian market.

Telesat is pleased with the understandings in principle for capacity it has with Barrett and WildBlue and the confidence expressed in Telesat as they develop their Ka-band requirements. This demonstrated support is an affirmation of the successful working relationship established by Telesat as the first to bring Ka-band services to the Canadian market and the confidence that Telesat is their satellite operator of choice with a comprehensive Ka-band strategy and the means to execute it.

As Telesat’s KA/BSS2 satellite proposes a dual payload, Telesat’s Canadian Satellite Capacity and Services Plan for this satellite at the 91°WL orbital location is broken out into two distinct subsections:

• Satisfying Canadian Ka-band Capacity Requirements

• Satisfying Canadian 17 GHz BSS Capacity Requirements

A Satisfying Canadian Requirements for Ka-band Satellite Capacity and Services

In Telesat’s assessment the Canadian broadband market consists of two principal sectors: consumer and small/ medium sized business/home office (SME/SOHO).

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A1 Consumer Sector and Ka-Band Demand

Since 2002, the estimated number of Canadian households not served by some form of broadband has trended downward yet remains significant; Table 3.1.1-1 below provides estimates issued annually from Industry Canada’s Broadband Community Service Status database of the number of communities and households without some form of broadband access.

Table 3.1.1-1 Canadian Households Without Broadband

Year Issued Estimated Households w/out BB (000’s)2

2002 2,040

2003 1,910

2004 1,800

2005 1,100

2006 698

According to the Industry Canada data issued in 2006, as many as 697,709 Canadian households did not have access to any kind of broadband service. Telesat believes this is a conservative measure, as the Department’s data assumes that if broadband access is available in a community then all households are being served. This data does not address the many households that are classified as being located in towns and cities with broadband access but who in fact, live beyond the service’s reach. To reinforce this point, of Anik F2’s existing Ka-band subscribers, 70 percent reside in towns and cities where Industry Canada’s data indicates broadband access is available.

Prospects for future satellite broadband growth in Canada appear positive too; Canadian national reseller Barrett is forecasting that increases in subscriber bandwidth requirements will drive DSL and cable to focus more on urban areas, leaving more urban fringe and rural territory for satellite. These views are echoed by Telesat’s smaller regional satellite broadband service resellers across Canada.

2 Industry Canada: Information Management Team – Broadband National Office. Broadband Community Service Status. April 2006

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By targeting these consumer households in urban fringe as well as potential subscribers in remote and rural areas that do not have a broadband solution, Telesat expects that the number of households without broadband access today is greater than that estimated by the Department’s data.

A2 SME / SOHO Sector and Ka-Band Demand

Broadband access is an essential tool for SME/ SOHO commercial operations.

According to Statistics Canada there are one million employer businesses in Canada (defined as businesses that maintain at least one person on payroll), of which approximately 75 percent (or 750,000) are small businesses with 1 – 9 employees. 3 Based on figures from Canada Post, approximately 208,000 4 of the total of all businesses are operating in Canada’s rural postal areas; accordingly, of the total rural businesses operating in Canada, we can estimate approximately 155,500 are SME’s. Using provincial distributions from Statistics Canada, Table 3.1.1-2 below breaks down their distribution by province:

Table 3.1.1-2 Rural SMEs

SMEs NL 2,531 PE 970 NS 4,513 NB 3,893 QC 35,390 ON 51,715 MB 5,267 SK 5,835 AB 21,057 BC 23,776 YT 235 NT 257 NU 93 TOTAL 155,532

3 Key Small Business Statistics. Industry Canada, January 2006 4 www.canadapost.ca, Householder counts

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A3 Other Ka-band Demand

Telesat believes that other new Ka-band capacity demand will materialize as the satellite broadband market matures. This demand could come from new satellite broadband service providers including from Canadian broadcast distribution undertakings. Specifically one of Telesat’s largest customers, Bell ExpressVu, has confirmed its exclusive support for Telesat’s application at the 91°WL orbital position.

Another layer to consider in future Ka-band demand is the pending situation regarding Ka-band capacity on Anik F2. Because the number of subscribers in the Canadian satellite broadband market is growing exponentially, it is clear that over the medium-term, demand will outstrip the capacity available on Anik F2 and Anik F3. The overall capacity of Anik F2 is estimated at 150,414 nominal subscribers. It is expected that by the end of 2008, demand will exceed supply in some markets and this imbalance will grow by 2011. Moreover, these estimates do not account for the increased amounts of bandwidth needed for the service offering being demanded by subscribers today and in the future.

Telesat has developed a demand forecast for broadband services by the Canadian consumer and SMEs /SOHO sectors based on several assumptions. The assumptions that form the basis of this demand forecast depend on several variables as well as existing and future market conditions. Considering these variables, Telesat has estimated a business opportunity in the range of 500,000 to 1 million subscribers. The combined Anik F2/F3 Ka-band capacity will satisfy only a fraction of this demand.

A4 Delivering Ka-band Capacity in Canada

Telesat’s longstanding “Canada-first” approach to delivering capacity will continue with the KA/BSS2 satellite. Telesat will seek upfront commitments from one or more future customers to act as anchor tenants for the satellite program. To that end, Barrett Xplore has indicated its requirement for Ka-band capacity at the 118.7°WL and 91°WL orbital locations.

As with the KA/BSS1 satellite, Barrett will deliver satellite broadband service offerings using KA/BSS2 on a retail basis in the Canadian market. Based on the considerable successes that Barrett has realized using Anik F2, Telesat has complete confidence in its partner’s commitment and ability to deliver today, and in the future, among the most advanced broadband satellite services to Canadians everywhere.

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The Canadian Ka-band capacity on KA/BSS2 not contracted by Barrett will be made available to Telesat’s network of Canadian resellers and new entrants, on a wholesale basis. Finally, as it has done in the past and most recently with Anik F3 C and Ku-band capacity, Telesat will solicit interest for Ka-band and 17 GHz BSS capacity on the KA/BSS2 satellite from the Canadian broadband and broadcast markets. Telesat will seek contractual commitments for the new satellite capacity on a wholesale basis from interested Canadian entities.

A5 Description of Ka-band Payload

The Ka-band payload of the KA/BSS2 satellite is designed with all Canada and U.S. coverage. The satellite will be equipped with 124 spot beams; 46 of those beams will serve Canada. These user beams will be grouped based on their homing gateway; locations for these gateways have will be determined in the design phase. However, the Ka-band payload is designed to operate with a total of 20 gateways, 9 of which are for Canadian user beams. The Canadian portion of the Ka-band payload on KA/BSS2 will have a throughput of 12.6 Gbps in the forward direction and 12.3 Gbps for the return direction.

Following an award of licence for the KA/BSS2 satellite expected in mid-2007, Telesat will work with the prospective anchor tenants for the KA/BSS2 satellite to determine the optimal time for bringing the satellite into service. This is consistent with Telesat’s long term Ka-band capacity plan which intends to deliver Ka-band capacity on an incremental basis as needed. However at the same time, Telesat will also respect its obligations to ensure that Canada retains its ITU priority at both the Ka-band and the 17 GHz BSS frequency band for the 91°WL position.

Telesat anticipates the satellite procurement, construction, launch and in-orbit testing of KA/BSS2 will take approximately 42- 45 months from the time a satellite procurement contract is signed.

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Figure 3.1.1-1 KA/BSS2 Ka-band Canadian and U.S. Coverage

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A6 Telesat’s Long Term Ka-Band Capacity Plan

Telesat’s discussions with Canadian Ka-band service providers resulted in four key findings concerning future Ka-band satellite capacity. First, the Canadian satellite broadband services market is still in its infancy and satellite capacity requirements will grow in parallel with that of the service providers’ business. The second finding indicates that over time, significant amounts of Ka-band capacity will be needed to fulfill the market potential for these services, primarily in rural and underserved areas across Canada. Third, the ability to restore broadband services quickly is essential to the future growth of these services and to the future of satellite broadband businesses in Canada. Thus it is also essential to have sufficient Ka-band capacity on more than one satellite in order to provide back-up and restoral capabilities for Canadian satellite broadband service providers. The fourth conclusion was that the cost of any new capacity to service providers must be kept as low as possible to ensure that services are priced competitively in the marketplace.

In response to these findings, Telesat has developed a long term Ka-band capacity plan (detailed below) which includes the KA/BSS2 satellite as an important expansion and back up vehicle for broadband, multi-media services.

Telesat’s Ka-band plan strives to bring to market new, affordable Ka-band capacity over time to optimally match the growing business requirements for capacity by Canadian service providers.

Canada’s satellite broadband service providers are in the early stages of their business lives and their service growth. Immediately taking on the financial costs for all the Ka-band capacity that they might need over the next 15 years may not be an option that is financially sustainable to their businesses.

Expanding on the successful emergence of Anik F2 Ka-band broadband services, Telesat’s long term Ka-band capacity plan proposes the following Ka-band capacity additions:

• Anik F3 - small Ka-band, Canada-only payload at 118.7°WL

• KA/BSS1 – large North American Ka-band payload at 118.7°WL

• KA/ BSS2 – large North American Ka- band payload at 91°WL

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i. Anik F3

Telesat’s Anik F3 satellite, scheduled to commence service in mid-2007, does have a small Ka-band payload in addition to its primary C and Ku-band capacity. Because Telesat holds only a temporary Ka-band authorization from the Department, Anik F3’s Ka-band payload was designed with limited capacity.

Telesat also incorporated a spot-beam on Anik F3 that covers the area of Canada with the highest demand for satellite broadband services. Anik F3 will be used to complement Anik F2 and deliver services to customers that would otherwise have to be denied service in the short term.

ii. KA/BSS1

Telesat’s proposed KA/BSS1 satellite at the 118.7°WL position is the second step of the long-term Ka-band capacity plan which uses an incremental approach to bring new Ka-band capacity to the Canadian market. With an identical Ka-band payload to KA/BSS2, KA/BSS1 will be in-service by 2012 and will be followed by KA/BSS2. Both satellites will overlay broadband capabilities on the existing and future services offered by Telesat at the 118.7°WL and 91°WL orbital platforms using spectrum in other frequency bands.

A comprehensive application seeking authorization for the KA/BSS1 hybrid Ka-band and 17 GHz BSS satellite at the 118.7°WL orbital location is included separately as part of Telesat’s response to the Department’s Call.

iii. KA/BSS2

Building on Telesat’s existing 12 GHz BSS satellite platform at the 91°WL position, the KA/BSS2 satellite will be the third step of Telesat’s long term Ka-band capacity plan. This satellite will be identical in Ka-band capacity and design to KA/BSS1 and enter service in 2013.

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also provide additional Ka-band capacity to Canadian broadcasters, Canadian satellite broadband resellers as well as to WildBlue, for the U.S. market.

Finally, with identical Ka-band payloads at the 91°WL and 118.7°WL locations, Telesat will achieve satellite diversity and redundancy by being able to offer mutual back-up and restoration of Ka-band services to customers at these orbital locations.

Table 3.1.1-3 Canadian Ka-Band Capacity

Canadian Ka-band Capacity (Gbps) (Forward Direction) Anik F3 .090 KA/BSS1 12.6 KA/BSS2 12.6 Total > 25 Gbps

B Satisfying Canadian 17 GHz BSS Capacity Requirements

Telesat plans to augment its Ka-band payload at the 91°WL position by using KA/BSS2 to also bring 17 GHz BSS spectrum to the Canadian market.

B1 Canadian 17 GHz BSS Demand

From its discussions with Canadian broadcasters and Canadian satellite broadband service providers, Telesat received interest but no firm commitments at this early stage to using this new 17 GHz BSS spectrum at the 91°WL position. However as with its KA/BSS1 broadband/broadcast service platform at the 118.7°WL location, Telesat remains confident that the long term advantages of 500 MHz of dedicated spectrum to Canadian satellite users at the 91°WL position will stimulate demand. As demonstrated with Telesat’s introduction of commercial Ku-band in the early 1980’s and most recently with the introduction of Ka- band, it takes vision and strong leadership to ‘jump-start’ and open up new market opportunities. For Canada, it is important to bring into use the 17 GHz BSS spectrum in the relative near term, in order to establish ITU priority rights for Canadian use of this spectrum well into the future.

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will the need for broadening underlying transmission capability. This is true particularly in the case where more traditional transmission spectrum, such as Ku capacity becomes more congested.

B2 Delivering 17 GHz BSS Capacity

Telesat is proposing a 17 GHz BSS payload to piggyback on to the KA/BSS2 satellite. This 17 GHz BSS payload is intended initially as a test-bed for Canadian content and service providers to investigate and develop the means to deliver the next generation of multimedia content to the Canadian marketplace. The 17 GHz BSS frequency band cannot enter commercial use prior to April 1, 2007 – though the FCC has announced a proceeding to allocate this spectrum in the near future.

Telesat will offer the 17 GHz BSS capacity on a first-come, first-served basis in Canada and will work jointly with Canadian satellite users to develop innovative multi-media applications and commercial services for the Canadian market using this new spectrum.

B3 Description of 17 GHz BSS Payload

The 17 GHz BSS payload on the KA/BSS2 satellite will consist of 6 channels, each having 72 MHz of bandwidth. The payload will have Canada coverage with an option for switchable U.S. coverage.

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45 SATSOFT 9.00

51 50 52

8.00 45

52 51 51 54 50 7.00 45 52

50 Theta*sin(phi) in in Degrees Theta*sin(phi) 6.00 45

5.00

4.00 -4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00 Theta*cos(phi) in Degrees Figure 3.1.1-2 KA/BSS2 17 GHz BSS Payload Canadian Coverage

Telesat is confident that the KA/BSS2 satellite platform will augment existing services and stimulate new applications because of the innovative combination of frequency payloads.

3.1.2 Securing Canadian Access to Orbital Resources

3.1.2.1 Ka-band at 91°WL

The Canadian satellite filing CANSAT KA-2 established the international rights for Canada at the 91°WL orbital position in the bands 19.7-20.2 GHz in the space-to-Earth direction and 29.5-30.0 GHz in the Earth-to-space direction. Canada had priority over all the other Ka-band networks filed within 2° of the 91°WL position (see Table 3.1.2-1). The CANSAT KA-2 network was brought into use using the Nimiq-2 satellite early in 2003. However, Nimiq-2 was relocated to 82°WL shortly thereafter and the CANSAT KA-2 network has not been operational since first quarter 2003. In accordance with provision 11.49 of the Radio Regulations, CANSAT KA-2 has lost its international standing, and would likely be cancelled if and when challenged.

The Canadian satellite filing CANSAT-30 establishes the international rights to the bands 18.3-18.8 GHz and 19.7-20.2 GHz in the space-to-Earth direction and 28.35-28.6 GHz and

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29.25-30.0 GHz in the Earth-to-space direction for Canada at the 91°WL orbital position. The expiry date of the CANSAT-30 filing is 3 December 2011. The Australian filing of PAS-ENDEAVOUR-91WKA at the 91°WL position, filed on behalf of Intelsat, has priority over the CANSAT-30 filing (see Table 3.1.2-1). This network expires on 28 November 2009. It should be noted that Intelsat owns and operates other satellites at the 91°WL position, providing services in the C, Ku and Extended Ku-bands.

Table 3.1.2-1 Ka-Band Networks Filed within 2° of 91°WL Orbital Position

Administration ITU Network Name Sat. Name or Operator Orbit Slot Priority Date [1] Expiry Date RES49 Due Date United Kingdom ICO-G ICO 93.0 6-Jul-2005 29-Jun-2012 29-Jun-2012

Papua New Guinea NEW DAWN 3 Intelsat 93.0 28-Oct-2005 28-Apr-2012 28-Apr-2012

UAE EMARSAT-5Z 92.0 - 7-Jun-2007 - EMARSAT-6Z 92.0 - 30-Jul-2008 -

Australia PAS-ENDEAVOUR-91WKA Intelsat 91.0 28-May-2003 28-Nov-2009 28-Nov-2009

Canada CANSAT KA-2 91.0 20-Oct-1995 Suspended 1Q03 Submitted CANSAT-30 91.0 17-Jun-2005 3-Dec-2011 3-Dec-2011

Netherlands NSS-45 SES-NSS 90.0 - 16-Nov-2007 - NSS-KA31 SES-NSS 90.0 - 3-Sep-2006 -

Luxembourg LUX-G4-61 SES 89.8 - 8-Feb-2007 - LUX-G5-61 SES 89.8 - 9-Jun-2008 -

Malaysia MEASAT-89.5W 89.5 31-Dec-2004 11-Jun-2011 11-Jun-2011 MEASAT-LA1-89.5W 89.5 16-Dec-2004 11-Jun-2011 11-Jun-2011

United Kingdom IOMSAT-7 Loral 89.0 27-Mar-2002 27-Sep-2008 27-Sep-2008

Papua New Guinea NEW DAWN 2 Intelsat 89.0 28-Oct-2005 28-Apr-2012 28-Apr-2012

Netherlands NSS-KA9 SES-NSS 89.0 13-Jan-2001 13-Jan-2007 13-Jan-2007

USA USASAT-31S Intelsat IA-8 89.0 17-May-1996 Notified (in backlog) Submitted USASAT-76B 89.0 - 25-May-2008 -

Telesat notes that there is a risk that Canada will not have ITU priority for the Ka-band frequencies at the 91°WL position. As the successful applicant for the Ka-band frequencies at the 91ºWL position, Telesat would expect to use the Canadian satellite network filing CANSAT-30 to establish international protection for its satellite network.

3.1.2.2 17 GHz BSS at 91°WL

The Broadcasting Satellite Service (BSS) band 17.3-17.8 GHz (space-to-Earth), commonly referred to as 17 GHz BSS, is paired with the band 24.75-25.25 GHz (Earth-to-space) which provides associated feeder link services. In accordance with ITU Radio Regulations

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footnote No. 5.517, allocation of this band to the BSS shall become effective in Region 2 of the ITU on April 1, 2007. Thus currently, there are no existing BSS satellites operating in these bands over North America, nor to the best of Telesat’s knowledge is such a satellite currently licensed or under construction. Nevertheless, there are many satellite network filings that have been submitted to the ITU Bureau of Radiocommunications since April 1, 2002 for the provision of broadcasting services in these bands to Region 2 territories.

Table 3.1.2-2 shows all the networks filed in these bands with the ITU within 4 degrees of the 91°WL position. The Canadian satellite filing CAN-BSS-91.0 and the USA satellite filing USABSN-4 share the same ITU priority date for operation in the 17 GHz BSS band in the vicinity of the 91°WL position. Telesat believes that it would be extremely difficult for either of these two network filings to be brought into use before their expiry date of April 1, 2009. The next filing in the queue is MEASAT-89.5W with a priority date of December 31, 2004. Intelsat’s filing INTELSAT KAEXT 89W with a priority date of September 14, 2005 is next. CAN-BSS10 with a later priority date of November 18, 2005 and a network expiry date of May 18, 2012 comes after these two networks. The Canadian licensee for 17 GHz BSS at 91°WL must assess carefully the likelihood of any one of these USA and Malaysian filings being implemented ahead of the Canadian network. It should be noted that Intelsat owns and operates other satellites at the 91°WL position.

Table 3.1.2-2 17 GHz BSS Networks Files within 4° of 91°WL Orbital Position

Administration ITU Network Name Sat. Name or Operator Orbit Slot Priority Date [1] Expiry Date RES49 Due Date Canada CAN-BSS-95.0 95.0 1-Oct-2002 1-Apr-2009 1-Apr-2009

Luxembourg LUX-G4-60 SES 94.3 - 8-Feb-2007 - LUX-G5-60 SES 94.3 - 9-Jun-2008 -

USABSN-4 Pegasus 91.0 1-Oct-2002 1-Apr-2009 1-Apr-2009

Canada CAN-BSS-91.0 91.0 1-Oct-2002 1-Apr-2009 1-Apr-2009 CAN-BSS10 91.0 18-Nov-2005 18-May-2012 18-May-2012

Luxembourg LUX-G4-61 SES 89.8 - 8-Feb-2007 - LUX-G5-61 SES 89.8 - 9-Jun-2008 -

Malaysia MEASAT-89.5W 89.5 31-Dec-2004 11-Jun-2011 11-Jun-2011

USA INTELSAT KAEXT 89W 89.0 14-Sep-2005 14-Mar-2012 14-Mar-2012

Due to the existing operation of Nimiq satellites at the 91.1°WL position, which receive in the 17.3-17.8 GHz band, it would not be possible to co-locate a 17 GHz BSS satellite

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which transmits in the 17.3-17.8 GHz band. ITU-R studies have shown a technical requirement to have a minimum separation of approximately 0.2° between two satellites operating in the opposite directions in this range of frequencies in order to avoid harmful interference. As a consequence, there is a requirement to slightly modify the 91°WL orbit location of the 17 GHz BSS satellite filing with the ITU. This issue is not dealt with any further in this application, but will be an important matter for the Department and Telesat to address subsequent to the award of licence.

Telesat notes that there is a risk that Canada will not have ITU priority at the time the 17 GHz BSS satellite near 91°WL is brought in to use. As the successful applicant for the 17 GHz BSS and feeder link frequencies at the 91°WL position, Telesat would expect to use both Canadian satellite network filings of CAN-BSS-91.0 and CAN-BSS10 to establish international protection for its satellite service.

3.1.3 Other Benefits to Canadians

As with Telesat’s KA/BSS1 satellite, KA/BSS2 will continue to offer a unique opportunity to benefit Canadian satellite broadband providers, Canadian broadcasters and other new Canadian broadband/ multi-media service providers. With KA/BSS2 at the 91°WL location, the following significant benefits can be realized by Canadians:

a) More Choice and Improved Service – for existing Canadian satellite broadband service providers and subscribers. The KA/BSS1 and KA/BSS2 satellites will allow Canadian broadband service providers to expand on their role as ‘access providers’ and become ‘applications providers’, giving Canadian consumers and businesses more options and the ability to use bandwidth rich applications not available today due to capacity limitations. Moreover these existing subscribers will see improved service performance as the additional Ka-band capacity prevents congestion at the same time that more and more subscribers are added.

b) Reduced Risk of Service Interruptions – with the additional capacity of KA/BSS1 followed by the KA/BSS2 satellite, Canadian satellite broadband subscribers will have finally gained an essential service component which to date has eluded them - service backup. The additional capacity will provide the much needed back-up capacity necessary to be able to restore their consumer and business services quickly.

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c) Mitigating Business Risk – for Canadian satellite broadband service providers the addition of the KA/BSS1 and KA/BSS2 satellites will offer a huge relief to their day- to-day business operations. With back-up Ka-band satellite capacity readily available in the event of a transponder or satellite failure, service providers can confidently assume that a satellite failure will not threaten their fledgling business. Moreover the attractiveness of their services in the marketplace is enhanced with this backup/ restoral capability and improves their competitive position.

d) Connecting All Canadians –Because Telesat’s Canadian broadband partners are focused on rural, underserved and fringe urban areas in Canada, introducing more Ka-band capacity over time as they grow their businesses will go a long way to bringing all Canadians onto the broadband service highway. Satellite’s ubiquitous coverage allows all of Canada to be served with broadband services, including most importantly, areas in Canada either underserved or not served at all today by alternative technologies. It is essential that capacity shortage not limit this capability.

e) Opening New Markets in Canada – the addition of the KA/BSS2 and the KA/BSS1 satellites brings new Ka-band capacity to Canadian broadband service providers who want to further exploit the broadband market opportunity in Canada. They will use the new capacity not only to increase the number of served households and businesses across Canada but also to enable them to increase the scope of service offerings to meet the ever-changing demands of the marketplace. For example, Barrett, Telesat’s national broadband partner, believes that the greatest growth potential for their business is in new applications, such as VOIP and other content rich applications. Barrett sees services moving beyond current voice and data communications to include entertainment, home management, remote health and distance learning.

Clearly, the scope and depth of this broadband/ multi-media service expansion, enabled by the proposed KA/BSS2 satellite at 91°WL and KA/BSS1 at 118.7°WL, will reach well beyond Telesat, its broadband service providers and existing subscribers. The potential of new Canadian businesses and Canadian jobs is enormous as a direct result of having multiple satellite broadband platforms available with extensive bandwidth spread across several orbital positions.

Telesat is convinced, based on its Ku and Ka-band experiences, that as other frequency bands become more congested and unavailable for use by new applications,

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the 17 GHz BSS bandwith be adopted by Canadian program and service providers. With the objective of facilitating the opening up of this new market and ensuring Canada retains the international rights to use this spectrum at the 91°WL location, Telesat proposes to add a 17 GHz BSS piggyback payload to its Ka-band satellite at the 91°WL orbital position.

f) Retaining Canadian ITU Priority –Telesat has been vigilant and proactive to consistently ensure that Canada retains its ITU priorities. With the grant of licence for the KA/BSS2 satellite, Telesat will work diligently to establish international protection for Canada at the Ka-band and the 17 GHz BSS spectrum at the 91°WL position.

g) Industrial Benefits – the KA/BSS2 satellite will extend Telesat’s long established tradition of delivering Canadian industrial benefits. Those industrial benefits focus on promoting Canadian manufacturers, designers, and suppliers of telecommunications components in the construction of Telesat’s satellites and associated earth station equipment. Specifically, in its satellite procurement process Telesat requires that non- Canadian manufacturers of its satellites demonstrate to what extent they intend to enter into agreements with Canadian equipment suppliers to provide satellite components or related earth station equipment. To maximize these benefits to Canadian manufacturers, these offset commitments are not limited to components directly associated with the Telesat satellite in question, but can also include commitments for other satellite or ground segment builds.

For example, as Telesat has reported to the Department in its annual Compliance Reports, in the Nimiq program, EMS Technologies entered into offset agreements totaling US$53 million (approximately Cdn$80 million at then prevailing exchange rates) with the satellite manufacturer Lockheed Martin as a direct result of this construction program. This also added approximately 50 new jobs for high-skilled workers at EMS’ Ste. Anne de Bellevue, Quebec facility over the term of those agreements.

The Canadian satellite manufacturing sector has similarly benefited from the Anik F satellite procurement program. For example, in the Anik F1R construction program, Telesat obtained commitments from EADS Astrium, the European prime contractor for the satellite, to enter into contracts valued at $10 million or more with Canadian subcontractors for the procurement of equipment for use on the Anik F1R satellite

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(Direct Canadian Content), and to place orders with Canadian manufacturers over the next five years in the amount of $65 million in other satellite builds (Indirect Canadian Content). These combined Canadian content commitments totalling $75 million were exceeded through contracts with COMDEV Canada and EMS Canada – i.e., $17 million in Direct Canadian Content and a further $68.7 million in Indirect Canadian Content, for a combined total of $85.7 million.

Telesat’s Anik F3 procurement has yielded similar economic benefits for Canadian equipment manufacturers. After making an initial commitment to negotiate offset contracts valued at $10 million or more for Canadian content on this satellite and a further $15 million for Canadian content on other satellite projects, Astrium actually awarded contracts totalling more than $20 million for Canadian content on this satellite and another $20.8 million for Canadian content on other satellite contract builds. The total value of the Astrium contracts with Canadian subcontractors associated with the Anik F3 and F1R satellite builds therefore exceeded $100 million.

With its KA/BSS2 satellite, Telesat will again commit to making all reasonable efforts to promote Canadian manufacturers in the satellite procurement process, and fully expects that it will be successful in this endeavour to secure similar, significant industrial benefits for this important sector of Canada’s satellite industry. By being one of the first, if not the first, to make use of the 17 GHz BSS band, Telesat KA/BSS1 and KA/BSS2 satellite procurements will position Canadian contractors at the leading edge in developing components for these bands. Telesat has received letters of support from Canadian manufacturers COMDEV and MacDonald, Dettwiler and Associates Inc which appear in Appendix 3 of this application.

h) Other Canadian Spillover Benefits - Telesat is the only FSS/BSS satellite operator that has a significant physical presence in Canada. This includes almost all of Telesat’s 500-plus employees, its headquarters and R&D lab, its main satellite and ground segment monitoring and control facilities, its equipment repair operations, and most of its teleports and regional sales offices. Telesat is therefore a major employer in Canada’s high-tech sector, a generator of significant Canadian tax revenues, and a contributor to the local economy of every centre and region in which it has offices or facilities.

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Award of the Ka-band/17 GHz BSS spectrum at the 91°WL position to Telesat is therefore an investment in a truly Canadian company and will serve to augment and expand upon these benefits given back to Canada through Telesat’s satellite procurements.

i) Enhanced Broadband Service Competition – is being demonstrated on Anik F2 today. While Telesat’s broadband service partners are specifically targeting rural, remote and underserved areas in Canada, a surprising development has been the strong demand emerging for satellite-based broadband services from fringe urban areas. With the increased bandwidth available through the addition of Telesat’s KA/BSS1 and KA/BSS2 Ka-band capacity, Canadian satellite broadband service providers will have the tools they need to inject more robust competition into the broadband services market.

j) Addition of U.S. Payload - benefits Canadians. The long-term viability of Canadian Ka broadband services will require a phased introduction of new capacity into the Canadian marketplace to match the expected ramp-up in demand for these services. Optimization of new Ka-band capacity over the entire North American marketplace is a necessary ingredient to roll-out capacity that reflects the relatively small demand of the Canadian market and at the same time, to generate growth of economically sustainable Ka-band broadband services in Canada.

A significant portion of the costs for the construction, launch and operation of the new satellite can be recovered from one or more prospective U.S. customers. Telesat’s KA/BSS1 and KA/BSS2 satellites each incorporate a U.S. Ka-band payload. Canadian users will again benefit from lower cost per unit of satellite capacity made possible by spreading the cost of the satellite over a much broader customer base.

3.1.4 Satisfying Canadian Satellite Policy Objectives & Requirements

3.1.4.1 General Satellite Policy Objectives

As indicated in Section 6.1.1 of the Call, Industry Canada is guided in this process by the Canadian telecommunications policy objectives set out in Section 7 of the Telecommunications Act. These objectives are wide ranging in scope, but most of them are directly relevant to the award of the Ka-band and 17 GHz BSS frequency band at the

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91ºWL position, and can be grouped as follows: orderly and user-responsive development of the resources (Section 7(a) & (h)), the rendering of reliable and affordable services to all parts of Canada (Section 7(b)), enhanced efficiency and competitiveness of Canadian telecommunications (Section 7(c) & (f)), promotion of Canadian control over and use of these resources (Section 7(d) & (e)), and the stimulation of R&D and innovation in Canada (Section 7(g)).

As demonstrated below, each of these sets of objectives is addressed and promoted through Telesat’s KA/BSS2 satellite program and under its strategic long term capacity plan to bring much needed Ka-band capacity to the 91°WL and 118.7°WL locations. The objectives below are also satisfied by Telesat’s innovative piggyback 17 GHz BSS payload it proposes to include on its KA/BSS2 satellite.

• Orderly and User-Responsive Development (7(a) & (h)): In terms of the Ka-band spectrum, Telesat’s plan for the orderly development of these resources in Canada recognizes that the long-term viability of Canadian Ka-band services will require a phased introduction of new capacity to match the expected ramp-up in demand. The relatively small size of the Canadian marketplace also makes optimization of new Ka- band capacity over the entire North American marketplace a necessary ingredient for the development of an economically sustainable Ka-band service in Canada.

Telesat’s long term Ka-band capacity plan for the Canadian market is built on these considerations. Anik F2 introduced an affordably-priced, commercial Ka-band service to all of North America, including Canada’s North. This service has been very well received both in Canada and in the U.S. and the available bandwidth associated with certain of the spot-beams on the satellite is approaching full utilization in both countries. Telesat’s Anik F3, scheduled for launch in early 2007 is equipped with a small Ka-band payload, that will address the near-term requirement for additional Ka-band capacity in the two Canadian spot-beams which are nearly full, while the launch of WildBlue 1, scheduled for later this year and also under Telesat’s control, will address the near-term requirement for additional capacity in the much larger U.S. marketplace.

Under Telesat’s long term Ka-band capacity plan, substantial new Canadian Ka-band capacity will be needed over the medium to long term, to coincide with the business expansion of Telesat’s Ka-band broadband partners as well as provide capacity for new Canadian interests, including broadcasters. Telesat’s existing Canadian Ka-band reseller customers also need diverse Ka-band capacity as backup to be able to restore services in the event of satellite failure. KA/BSS2 will meet these immediate and developing demand requirements at the 91°WL orbital location. The Ka-band payloads

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will be designed for Canada and U.S. coverage, to provide additional capacity in Canada to meet growth in demand, while at the same time sharing the cost of the construction, launch and operation of the new satellite with a U.S. broadband service provider, such as WildBlue, and potentially others. The new satellite will also provide important satellite diversity capability.

Telesat’s long term Ka-band capacity plan will therefore contribute significantly to the orderly development of this important telecommunications market and is fully responsive to the requirements of Canadian Ka-band service providers and end users.

In terms of the proposed KA/BSS2’s 17 GHz payload, Telesat is aware that this new spectrum is largely untested in the Canadian marketplace. However, as new multi- media, Internet-driven applications such as IPTV multiply, Telesat anticipates that Canadian broadcasters and other service providers will want to augment their existing service portfolios. Telesat also anticipates that a lack of available FSS or BSS capacity in the traditional frequency bands could be a limiting factor for these businesses. Telesat is confident that the new 17 GHz BSS platform will be able to satisfy this expected demand and provide seamless delivery of new broadcast programs and multi- media services to the Canadian market.

• Reliable and Affordable Service in All Regions (7(b)): All of Telesat’s satellites have coverage of all regions of Canada, including the North, and the proposed KA/BSS2 will not be an exception. Indeed, in combination with the all-Canada coverage of the Ka-band service on KA/BSS1, KA/BSS2’s all-Canada coverage means that all of Telesat’s customers will have the capability of satellite redundancy, no matter where they may be situated in Canada.

Telesat’s KA/BSS2 business plan is also based on the premise that the price and performance of Ka-band satellite services must be comparable to high-speed Internet services provided using terrestrial technologies in urban Canadian centres. Market studies confirm this price and performance sensitivity of Ka-band satellite service users.

• Enhanced Efficiency and Competitiveness (7(c) & (f)): As indicated in the Call, with the implementation of WTO obligations, many countries, including Canada, have liberalized access to their markets for the use of foreign satellites. This liberalization in Canada extends to Ka-band satellites and a number of foreign satellites are already on Industry Canada’s authorized FSS list to provide Ka-band service in Canada (e.g., Spaceway 3). Terrestrial as well as wireless alternatives of high-speed broadband services are now also increasingly expanding into rural areas of the country. Competitive market forces and the market disciplining effects these forces are expected to promote (e.g., increased efficiency, expanded choice and functionality, etc.) are therefore already much in existence and having their desired effect in Canada.

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As also stated in the Call, while recognizing the importance of delivering reliable and affordable telecommunications and broadcasting services in all regions of Canada, including the North, the licensing process should foster the development of a Canadian satellite infrastructure which allows Canadian satellite operators and service providers to advance their service offerings in the domestic market, and to compete in the larger market in the Americas.

By providing the expansion (Ka-band) and new, innovative capacity (17 GHz BSS) on both the KA/BSS1 and KA/BSS2 satellites to Canadian broadband service providers, Canadian broadcasters and others, Telesat is fostering the growth of these Canadian companies and in so doing, strengthening their competitive position in Canada and North America.

In terms of Telesat’s own competitiveness, Telesat strives to advance its service offerings in the domestic marketplace to the benefit of Canadian satellite service users, and to compete in the much larger North American marketplace. However, Telesat is a relatively small operator in the North American marketplace, and most of the competitors it is facing are several times larger both in terms of revenues and satellite resources. To compete against these global satellite giants, Telesat must grow or it will be marginalized as a small Canadian operator, if it can survive at all.

Telesat’s current vulnerability is clearly shown in the case of Ka-band resources. With Anik F2, Telesat was first in the world to commercialize Ka-band satellite services and these services have been extremely well received in the marketplace. However, Anik F2 is the only full-capacity Ka-band satellite that Telesat is currently authorized to operate. What’s more, the capacity on a number of the spot beams on this satellite will be fully utilized in the next few years, and Telesat cannot currently offer satellite diversity or emergency back-up for these popular services. Despite its success in bringing this service to the Canadian and North American marketplace, Telesat will be effectively stopped dead in its tracks in this service market if it cannot gain access to additional spectrum.

This award process is therefore vitally important to Telesat’s strategic growth and to Canada’s ability to retain a competitively strong, innovative and independent Canadian satellite operator.

• Promotion of Canadian Control and Facilities Use (7(d) & (e)): Telesat is the only FSS/BSS satellite operator in the world that has a substantial physical presence in Canada. This includes the vast majority of its 500+ employees, its headquarters and R&D lab, the bulk of its satellite network monitoring and control facilities and teleports, its major inventory and repair depot and almost all of its sales offices. Telesat’s operations are spread across Canada. All major decisions concerning

Telesat Canada Proprietary - 27 - November 15, 2006 Use or disclosure of the information on this page is subject to the restrictions on the cover page. Application 91°WL KA/BSS (IC Licence Nos. 8 and 9) ABRIDGED

Telesat’s satellites are made in Canada and all of its satellites are flown by satellite controllers located in Canada. Canada has always been Telesat’s core market focus.

• Stimulation of R&D and Innovation in Canada (7(g)): Telesat has an exceptional record in introducing innovative new satellite technologies and services, and has built and staffed a world-class R&D facility at its headquarters. Over the past several years this facility has largely focused on the development and testing of new satellite broadband services, and Ka-band services in particular. Indeed, with the launch of Anik F2, Telesat was the first operator in the world to commercialize Ka-band services, and this has had the effect of making high-speed broadband Internet services accessible to all Canadians, no matter where they may work or reside in this country. Much of the credit for this achievement must be given to Telesat’s Ka-band research efforts.

Telesat’s research and development initiatives in broadcasting have been impressive and span decades of work. Telesat has played a leadership role in developing: Ku-band commercial applications; a direct-to-home satellite model; an advanced television mobile facility, choices for Canadian broadcasters move to digital compression and more recently, being selected by the World Broadcasting Union’s International Satellite Operations Group to conduct tests for ensuring global interconnectivity of codecs in HDTV video transmissions.

The strong North American competition Telesat faces from other satellite operators provides a strong incentive for Telesat to continue this research work to distinguish its services and remain at the leading edge with respect to new Ka-band and 17 GHz BSS services and applications. However, while this research work has generated enormous public benefits, it is commercially driven. New market opportunities for Telesat, made possible as a result from the award of new spectrum resources such as the Ka-band and 17 GHz BSS frequencies at 91°WL, are therefore important to Telesat and also have the effect of sustaining Telesat’s innovative research efforts in this field.

In the same tradition that Telesat led the way in introducing Ku-band and Ka-band technologies to the Canadian and North American marketplace, Telesat proposes to bring the new 17 GHz BSS frequency band into use in Canada. With the award of licence, Telesat will collaborate with Canadian broadcasters, telcos and other interested service providers in the research necessary to exploit this spectrum for the development of new applications, such as IPTV, which use Internet-based multi-media to deliver programming and services to Canadian consumers.

3.1.4.2 General Canadian Requirements

• Canadian Coverage

Telesat’s Ka-band payload on the KA/BSS2 satellite deployed at 91ºWL will be designed to have coverage of all areas of Canada.

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To achieve an efficient design, Telesat must match the capacity of the individual spot beams with widely varying population densities across Canada, and so larger beam diameters will be used for coverage of the northern low-population density areas.

However, consumer terminal antenna size would be the same as what would be used in southern areas of Canada and there would be no difference across Canada in service performance. Figure 3.1.1-1 in Section 3.1.1 of this application illustrates KA/BSS2’s Ka-band Canadian coverage.

KA/BSS2’s 17 GHz BSS payload with Canadian coverage is shown in Figure 3.1.1-2 of Section 3.1.1 of this application.

• ITU Radio Regulations

As stipulated in Section 6.2.1 of the Call, all proposed new and interim satellite networks must comply with the operational and technical provisions contained in the ITU Radio Regulations. With more than 35 years experience in satellite operation, Telesat is extremely knowledgeable of all aspects of these Radio Regulations as they pertain to satellites and has operated its seven generations of Anik and Nimiq satellites in full compliance with these Radio Regulations and all other pertinent international agreements to which Canada is a party. The proposed KA/BSS2 satellite at the 91°WL position will also be designed and operated in full compliance with the operational and technical provisions contained in the ITU Radio Regulations.

The design of the Ka-band payload to be located at the 91°WL orbital position has been carefully considered to ensure full compliance with the ITU Radio Regulations, and in particular with Articles 21 and 22, and with the domestic regulations.

The design of the 17 GHz BSS payload on the KA/BSS2 satellite to be located at the 91°WL orbital position has been carefully considered to ensure full compliance with the ITU Radio Regulations, and in particular with Article 22, and with the domestic regulations. The feeder link stations operating in the FSS frequency band (24.75-25.25 GHz) will operate in compliance with footnote No. 5.535 of the ITU Radio Regulations and footnote C44 of the Canadian Table of Frequency Allocations (May 2005).

Telesat is confident that based on the network design described in this application, it will be possible to reach coordination agreements in both the Ka and 17 GHz BSS bands with the other satellite operators and administrations, as required.

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The gateways and other earth stations associated with the KA/BSS2 satellite at the 91°WL orbital position will be frequency coordinated in accordance with Industry Canada’s Procedure for the Submission of Applications to License Fixed Earth Stations and to Approve the use of Foreign Fixed Satellite Service (FSS) Satellites in Canada (CPC-2-6-01).

• Benefits for Underserved Communities

As stated in Section 6.2.2 of the Call, one of the key components of Canada’s commitment to connecting Canadians is the development and use of broadband and communications technologies in all communities across Canada. It is further stated that Canadian satellites are considered an essential element in advancing the goal of broadband access to all Canadians. To this end, successful applicants will be required to direct a minimum of two percent of the revenues resulting from the operation of the satellite toward special initiatives aimed at supporting the development of broadband access in, or providing other benefits to, underserved communities, as to be determined in consultation with the Department. Telesat will meet this requirement.

Telesat has demonstrated strong leadership and vision in bringing Ka broadband satellite capacity to Canadians and in developing unique satellite solutions for the delivery of advanced communications services. Telesat’s efforts and resources have primarily been focused on rural areas and communities unserved by terrestrial technologies. Section 3.4 of this application details many of the initiatives Telesat has taken, or participated in, to the benefit of underserved communities in Canada. Telesat remains committed to bringing broadband services to every part of Canada and it intends to continue these efforts with its KA/BSS2 satellite.

• Other Anticipated Licence Conditions

Telesat has reviewed the list of conditions of licence set out in Section 7.5 of the Call. These conditions are very similar to the ones contained in other Telesat orbital resource authorizations issued by the Department. Telesat has consistently met all of these conditions in the operation of its other satellites and will commit to satisfactorily fulfilling the conditions associated with its KA/BSS2 satellite.

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3.2 FINANCIAL PLAN

3.2.1 Financial Qualifications

Telesat is well experienced in undertaking satellite construction programs and managing the demands these activities place on a company’s financial resources. Telesat has demonstrated through the procurement of 18 satellites to date (16 of which have been placed into orbit and two of which are under construction) that it has the financial strength and flexibility, the support of the financial community around the world, and the management expertise required to effectively implement substantial capital expenditure programs. Telesat has also paid close attention to protecting itself and its stakeholders against undue financial risk. As a result of its unique expertise and proven technical success, Telesat is well regarded in the insurance community. Such demonstrated financial strength and stability is essential to successfully procure and launch new satellites as outlined in this application as well as the concurrent applications Telesat is filing.

3.2.2 Financing

Telesat has substantial assets (in excess of $1.6 billion) and an established revenue base. Furthermore, Telesat’s existing capital structure is well diversified. Telesat’s capital structure has included private and public debt, preferred shares, and common shares. Other sources of financing include its customers, through prepayment arrangements for satellite capacity, and satellite and launch services vendors, through deferred milestone payment programs.

Telesat’s common shares are indirectly 100% owned by BCE Inc. BCE, together with its subsidiaries and associated companies, is Canada’s largest telecommunications company. In February 2006, BCE announced its intention to conduct an initial public offering (IPO) for a portion of the Telesat’s shares. Although it is unclear at this time what changes, if any, will be made to Telesat’s capital structure, the fiscal prudence and financial management principles are expected to remain an integral function of Telesat’s ongoing operations.

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Telesat has earned a BBB- corporate credit rating from Dominion Bond Rating Service Limited (DBRS) and Standard & Poor’s (S&P) Ratings Group, a division of McGraw Hill Inc. Companies with a credit rating of BBB- or better qualify as investment grade credits, and benefit from lower borrowing rates and greater market accessibility than non-investment-grade companies. Telesat is a public debt reporting issuer.

Telesat has a $165 million revolving credit facility, with an “accordion” feature step-up to $250 million, placed with a syndicate of foreign and Canadian chartered banks. The facility is unsecured and ranks pari passu with its other unsecured debt. This facility expires in June 2009.

Telesat has shown it is resourceful and creative in its approach to financing. For example through customer prepayments and supplier financing, Telesat has decreased its overall financing requirements and reduced its exposure to risk.

While leverage and other financial ratios are important in evaluating the credit worthiness of a company, the credibility of senior management within the financial community is also a key determinant. Telesat is recognized as a world leader in the satellite communications and systems management industry. This leadership has been recognized by the financial community and is reflected in Telesat’s dealings with financial markets, rating agencies, insurance underwriters and the banking community.

Over the past five years, Telesat has invested over $1.5 billion in capital programs while retaining a strong financial position. Currently, Telesat has sufficient cash flow, customer prepayment commitments, and existing credit facilities to complete the launch of Anik F3 and the construction of Nimiq-4, and subject to Board approval, the construction of the Nimiq-5 satellite.

Telesat’s estimated capital investment requirement for the KA/BSS2 satellite is $438 million. There are a number of options available for the financing of this satellite project. The satellite broadband service growth plans of Barrett and WildBlue indicate a substantial Ka-band demand in addition to the available KA/BSS1 capacity. Having both of these companies as anchor tenants on KA/BSS2 is one financing option Telesat will pursue. Telesat expects to obtain a substantial revenue prepayment from both, thereby securing commitments in excess of $60 million.

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Appendix 3 contains letters of support from Barrett Xplore and WildBlue Inc respectively. As Telesat has not yet entered into any written agreement with either Barrett or WildBlue for Ka-band capacity on the KA/BSS2 satellite, financial statements for these companies have not been included in this application. It should also be noted that both companies are privately held and therefore financial statements are not in the public domain.

Table 4.4-1 in Section 4.4 provides the Projected Revenues and Expenses for the KA/BSS2 satellite project over the life of the satellite.

Over $300 million of cash revenue is already contracted in each of 2007, 2008, 2009, 2010 and 2011. Further, Telesat is currently generating strong and predictable cashflows of approximately $200 to $250 million per year which is available for reinvestment. Typically, Telesat will acquire a modest amount of debt financing during the construction program of a satellite and repay this debt during the early years after the satellite enters service. Incremental debt financing should be available, since Telesat’s debt-to- capitalization ratio has averaged 17% over 2004 and 2005, in an industry where it is not uncommon for this ratio to approach 70%.

Until August 2006, Telesat maintained a series of preferred shares which were valued at $50 million. These were recently repurchased and there are no preferred shares existing at this time.

The five year forecast of Telesat’s revenues, operating expenses, and cost of equipment sales is shown below in Table 3.2.2-1. Telesat does not produce a forecast for periods exceeding five years. This forecast reflects Telesat as it currently stands, and includes the launch of Anik F3 and the construction of the Nimiq 4 and Nimiq 5 satellites. Satellites to be built as a result of authorizations awarded pursuant to this Call for Applications are not included in this forecast.

Table 3.2.2-1 Five Year Financial Forecast ($ millions)

2006 2007 2008 2009 2010 2011 Revenues $468 $558 $637 $680 $768 $765 Operating Expenses $168 $190 $213 $216 $230 $243 Cost of Eqpt. Sales $29 $36 $43 $48 $37 $37 EBITDA $271 $332 $381 $416 $501 $485

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Telesat’s business proposal for this KA/BSS2 satellite project is built on its extensive knowledge of the satellite business, its intimate knowledge of Canadian satellite users’ needs, and its track record of over 35 years of Canadian operational experience. This familiarity and understanding of the Canadian market is unmatched by any other company, and Telesat is fully confident of its ability to implement this proposal.

The Department has requested Financial Statements for the Applicant, partners, investors and/ or parent organizations for the past three years. Appendix 4 and Appendix 5 provide this information for Telesat and its parent company, BCE, Inc. for the years 2003 to 2005.

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3.3 TECHNICAL PLAN

3.3.1 Introduction

Telesat’s application features a complex, high-capacity Ka-band FSS payload designed to supplement the existing Anik F2 and proposed KA/BSS1 platforms for delivery of affordable two-way broadband multimedia services directly to the user, as well as a piggyback 17 GHz BSS payload to provide needed expansion capacity for existing and new broadcast services.

KA/BSS2’s Ka-band payload is designed to serve the expected growth in demand for two- way satellite broadband services, while also ensuring a restoration capability and continuity of service for broadband customers. As such, it will provide full coverage of Canada and the U.S. using multiple small, high-power spot beams for high system capacity. As outlined in a separate licence application, Telesat also plans to provide additional broadband capacity from the 118.7°WL orbital slot to meet the expected North American demand.

The 17 GHz BSS payload will bring this frequency band into use in Canada with channels that can be used for any type of, or combination of, broadcast/multicast applications, e.g., cable distribution, multicast downloads to complement the Ka-band interactive payload, IPTV, and/or any other similar applications.

3.3.2 ellite Description

3.3.2.1 erview

The key features of the proposed multi-band satellite are summarized in Table 3.3.2-1 below.

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Table 3.3.2-1 Key Features of Proposed Satellite

Orbital Position 91°WL

Payloads 1. Ka-band payload, with 124 spot beams covering North America

2. 17 GHz BSS payload, with 6 transponders covering Canada or the U.S.

In-Service Date 42-45 months after Agreement to Proceed (ATP)

3.3.2.2 -band Payload

3.3.2.2.1 gn Philosophy

Telesat introduced Ka-band spot beam technologies to Canada with the launch of the Anik F2 satellite in July 2004. The Anik F2 Ka-band payload is currently being used to provide high-speed Internet access throughout Canada and CONUS, operating between 6 Internet-connected gateway earth stations and thousands of user terminals located in the payload’s 45 spot beams.

The affordability of the Anik F2 broadband service is derived from the small spot beams that are possible at Ka-band frequencies, compared to C-band and Ku-band, with a reasonable spacecraft antenna size. Small beams facilitate high levels of spatial reuse of the available spectrum across the coverage area, resulting in high system bandwidth. Additionally, spot beam satellites provide high performance G/T and EIRP that can be used to support small, low cost user terminals for affordable 2-way broadband services.

All of this comes at a cost of bigger satellites with more TWTAs, as well as the challenge of inter-beam interference arising from the reuse of frequencies. However, the overall cost per unit of capacity can be dramatically reduced by ensuring that the high capacity and reduced ground segment costs more than compensate for the incremental satellite capital costs and the impact of self-interference.

The proposed Ka-band payload for 91°WL is designed to provide the high capacity needed to satisfy the expected continued growth in demand for broadband services, and to provide backup and continuity of services for existing Anik F2 and KA/BSS1 customers. To this end, the design pushes practical limits in terms of beam size and tube count.

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In support of the payload design, Telesat has undertaken extensive investigations to fully understand, characterize and trade off the factors affecting the technical, capacity and cost limits of beam size reduction and increased frequency reuse. Key issues include the manufacturing constraints on the design of the larger satellite antennas necessary for the generation of smaller beams, spacecraft bus limits on the number and size of TWTAs, and the increased self-interference resulting from higher levels of frequency reuse.

To provide the required high capacity, the payload will utilize even smaller spot beams and a higher degree of frequency reuse than Anik F2, and will be the primary platform on the spacecraft, as opposed to the configuration used for Anik F2 which also carries full C and Ku-band payloads. At the same time, the cost per unit of capacity will also be reduced by allocating the payload’s bandwidth and power resources on a beam-by-beam basis so as to provide capacity geographically matched to the anticipated demand. This traffic-conscious resources-to-beam allocation approach is aimed at achieving effective use of the scarce Ka-band spectrum, while also reducing the spacecraft capital costs.

Telesat believes that this comprehensive analysis has led to a responsible and practical design based on an effective compromise between practical spot beam size, level of frequency reuse, overall system capacity, capacity matching factor, and capital costs. As such, it represents an excellent platform to utilize the available Ka-band spectrum at the 91ºWL orbital location, and to meet Canada’s requirements for broadband services going forward.

3.3.2.2.2 yload Features

The proposed payload is designed to support broadband services across Canada and the U.S., similar to the system currently in operation utilizing Anik F2’s Ka-band payload. As such, it will be the centerpiece of a large network of several separate star sub-networks, each of which is served by a group of beams and a gateway earth station. The payload will transmit to and receive from the gateways via Gateway Beams at Ka-band frequencies, and will transmit to and receive from the users via User Beams, also at Ka-band frequencies.

The following subsections provide further details on the payload’s features and capabilities.

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3.3.2.2.2.1 erage

Figure 3.3.2-1 illustrates the geographical coverage of the proposed payload in terms of User Beams. It consists of 124 spot beams covering Canada and the U.S., including Hawaii and Alaska. Canadian coverage is provided by 42 beams of approximately 0.4o in beamwidth (compared to 0.85o for Anik F2), plus 4 larger beams (2 o x 1.0 o elliptical) covering less densely populated areas in the North.

U.S. coverage consists of the remaining 76 small beams of approximately 0.5o, with 2 additional elliptical beams covering Alaska.

LONGITUDE = 91.0W

Figure 3.3.2-1 User Beam Coverage

The User Beams will be grouped based on their homing gateway, the locations of which will be determined during the detailed design phase. Based on the bandwidth requirements and frequency reuse factors described below, the payload will provide 20 Gateway Beams, 9 for Canadian User Beams and 11 for U.S. User Beams.

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3.3.2.2.2.2 eam Bandwidths

In order to achieve a high matching factor between capacity deployment and demand, the design incorporates a scheme which assigns bandwidth to the User Beams of Figure 3.3.2-1 based on the North American population density distribution of Figure 3.3.2-2.

Figure 3.3.2-2 North American Population Distribution

Table 3.3.2-2 summarizes the User Beam bandwidth allocations. Three levels of bandwidth are used; Low-62.5 MHz, Medium-125 MHz and High-250 MHz. Bandwidth allocation to each User Beam is the same in each direction. When considered along with the TWTA power allocations (Section 3.3.2.2.2.3), the scheme results in an improved capacity matching factor compared to Anik F2 which has uniform bandwidth allocation across the beams.

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As shown, the total required bandwidth is 20 GHz in each direction.

Table 3.3.2-2 User Beam Bandwidth Allocation

High Medium Low Total

(250 MHz) (125 MHz) (62.5 MHz) (GHz)

Canadian Beams 28 14 4 9.0

U.S. Beams 12 62 4 11.0

Total Beams 40 76 8 20.0

3.3.2.2.2.3 A Requirements and Beam EIRP

Whereas the capacity of the return link (user-to-gateway) depends primarily on the terminal uplink power capabilities, the capacity of the forward link (gateway-to-user) is closely linked to the available satellite EIRP. The challenge of the design is to provide maximum forward link EIRP within the constraints of regulations governing power flux density at the earth’s surface, as well as the DC power and mass limits of the spacecraft bus. In order to achieve good control over the TWTA count, a scheme for sharing TWTAs between beams is used, as shown in Table 3.3.2-3, resulting in 41 active forward tubes, which is very manageable within the design constraints. A single TWTA size was used in the forward direction in order to simplify the design and reduce capital costs. The choice of 110W per TWTA produces the maximum possible capacity per beam under these sharing arrangements into the assumed 67 cm user antennas, within practical TWTA count and DC power requirements, as well as meeting flux density limits. The typical expected EIRP at each beam’s edge of coverage (EOC) is shown in Table 3.3.2-3.

EIRP in the return direction is not a major issue as far as capacity is concerned, as the gateway will have a large antenna. The modest 30W TWTAs provide the required EIRP for the return links to match the forward capacity. Each return transponder will handle a full 500 MHz consisting of multiple small TDMA carriers (1-2 MSps) from a group of beams.

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Table 3.3.2-3 Number and Size of Active TWTAs

EOC EIRP (dBW) No. of No. of TWTA Type of Beam Beams/TWTA Beams TWTAs (W) CAN U.S. North

Forward 250 MHz 40 2 20 110 64.5 62.5 -

Forward 125 MHz 76 4 19 110 61.5 59.5 -

Forward 62.5 MHz 8 4 2 110 61.5 59.5 51.5

Return 500 MHz 20 As required for 20 30 62.0 60.0 - 500 MHz bandwidth

3.3.2.2.2.4 /Noise Temperature (G/T)

For the resulting beam contours from the 91ºWL orbital location, the expected EOC G/T, including thermal noise due to the earth at 290K, will be ~ 19-20 dB/K for Canadian beams, ~17-18 dB/K for U.S. beams and ~10dB/K for the 6 Northern beams.

3.3.2.2.3 ectrum Requirements

The available raw Ka-band spectrum consists of 1 GHz of Right Hand Circular Polarization (RHCP) spectrum and of Left Hand Circular Polarization (RHCP) spectrum, in both the forward direction and the return direction. Figure 3.3.2-3 illustrates the raw spectrum assignment for Earth-to-Space and Space-to-Earth transmissions. In the forward direction, each gateway will uplink within the two frequency bands 28.35 GHz – 28.60 GHz and 29.25 GHz-29.50 GHz, using both RHCP and LHCP. Downlinks to the users will also utilize both polarizations in the band 19.7 GHz – 20.2 GHz. For the return uplinks, users will uplink within 29.50 GHz-30.00 GHz, with downlinks to their gateways within 18.30 GHz-18.80 GHz.

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GHz 28.35 28.60 29.25 29.50 30.00 U P RHCP FWD FWD RTN L K LHCP FWD FWD RTN GHz 18.30 18.80 19.70 20.20 D RHCP RTN FWD N L K LHCP RTN FWD

Figure 3.3.2-3 Ka-band Spectrum Allocations

Given the largest beam bandwidth requirement of 250 MHz, the system’s frequency reuse is based on a “four-colour” pattern in which the available 1 GHz of spectrum (500 MHz LHCP spectrum + 500 MHz RHCP spectrum) on each leg of each link is sub-divided into 250 MHz chunks. Within each reuse, bandwidth is assigned as full 250 MHz chunks, 125 MHz half-chunks and 62.5 MHz quarter-chunks, for a total of 1 GHz. The beam frequencies are assigned to beams across the coverage area so that identical chunks are at least 1 beam apart.

The total requirement of 20 GHz therefore implies a spatial frequency reuse factor of 20, which in turn implies 20 gateways each uplinking a total of 1 GHz (500 MHz LHCP spectrum + 500 MHz RHCP spectrum). The bandwidth requirement for return links into each gateway is identical.

3.3.2.2.4 ork and Service Considerations

3.3.2.2.4.1 ork Configuration

As mentioned, the required ground network configuration will be similar to that used with Anik F2, consisting of several independent star networks each serving a group of beams with a large gateway earth station. As noted in Section 3.3.2.2.3, the system will require 20 gateways. Specific gateway locations will be identified during the satellite construction program.

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3.3.2.2.4.2 eways

Each gateway will be an independent hub for its region of user beams. The gateways will be interconnected and will also be the interface points between the satellite network and the terrestrial voice and data networks.

A gateway consists of facilities and communication systems. The facilities system includes the land, building, foundation, fibre access, power and environmental subsystems, and antenna de-icing. The communication system includes the antenna, Radio Frequency (RF) transmitters, RF converters, and baseband subsystems (satellite modems, conditional access, encryption, quality of service and dynamic bandwidth management elements). In addition, all of the subsystems are connected to an advanced network management system that provides monitoring and control functions, automatic redundancy control, uplink power control, and alarm notifications. The gateway monitor and control system will also be linked to Telesat’s Network Operations Centre to ensure the highest possible levels of service availability.

Telesat proposes to design, construct and operate the nine Canadian gateways, and will therefore be in an excellent position to ensure the high system availability and performance demanded by our customers. It is expected that some of these gateways will be co-located with the existing three Anik F2 gateways as well as Telesat’s other teleports across the country. If required, new points of presence will be constructed. As is the case with Anik F2, the U.S. gateways will be the responsibility of our American customer(s).

3.3.2.2.4.3 ser Terminals

The proposed system will result in low cost per unit of space segment capacity, due to the extensive frequency reuse and corresponding high capacity. Equally important, it will enable very attractive user terminals. The proposed design will permit very small terminals, typically 67 cm antennas with 2.5W SSPAs, to be used throughout the coverage, even in remote areas of the North. Users will be able to receive data rates as high as 90 Mbps from forward links and transmit at 2 Mbps or more on the return links. Produced in high volume, the user terminals will cost only hundreds of dollars. Such an attractive system will provide a complete range of high speed Internet applications into every household and public institution.

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Similar terminals are currently in use with Anik F2. Telesat expects even higher performance and lower prices, based on technology improvements and higher volume production.

3.3.2.2.4.4 dulation and Coding

The availability of emerging advanced modulation and coding techniques, such as the next generation of DVB-S2 and S-DOCSIS ground systems, which already offer bandwidth utilization efficiencies approaching Shannon’s limit, will be used to provide additional and significant improvements in the achievable capacity per unit bandwidth. These emerging ground systems maximize throughput by operating with high-order modulation and minimal coding overhead during clear sky conditions, with dynamic adjustments to lower modulation/coding (MODCOD) to maintain links during rain fades.

3.3.2.2.4.5 ain Fade Countermeasures

Effective rain fade countermeasures are important considerations for Ka-band satellite systems. The proposed system will incorporate mitigation schemes in the payload as well as on the ground, as follows:

1. Automatic level control (ALC) will be used in the forward links to maintain constant downlink levels to the small user antennas over a wide range of uplink fade conditions.

2. Both gateways and user terminals will incorporate Uplink Power Control (UPC) capability.

3. Adaptive Coding and Modulation (ACM) will provide the capability for the system to automatically change MODCODs to in response to fade-induced link performance degradations.

Schemes (1) and (2) are well established techniques for rain fade mitigation, and are used together on Anik F2 to provide greater than 20 dB of uplink rain attenuation protection on the forward link. UPC is also employed by the user terminals in the return link.

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ACM is a state-of-the-art rain fade mitigation scheme, and will be employed on both the forward link and the return link in the proposed system. A key feature of ACM systems is the ability to make adjustments on a user-by-user basis. Each carrier consists of frames dedicated to each user served by the carrier. Under clear sky conditions, each frame will operate at a higher order MODCOD. Each user’s clear sky MODCOD can be optimized based on the local EIRP, antenna size, service requirements, etc.

In the event of fading at a given user location, the system will automatically switch the affected transmission to a lower MODCOD based on the reduced link margin. Link outage for the affected user will occur only when heavy fade conditions sever the link while operating at the lowest code point. The entire system operates under the control of the gateway which monitors each user’s link performance and directs the MODCOD changes.

Telesat has been testing forward link ACM for some time and plans to implement it in the Anik F2 DOCSIS network in the very near future. Telesat has also been carrying out extensive R&D activities on DVB-S2 ACM technologies, with the support of the CSA.

3.3.2.2.4.6 k Budgets

Typical link budgets are provided in Tables 3.3.2-4 and 3.3.2-5 for the forward link and return link, respectively. The links are for a user located at the edge of coverage of a 250 MHz Canadian beam. The results indicate that the system emissions will conform to current regulatory and coordination limits.

3.3.2.2.4.7 Availability and Throughput

Link availability and throughput are determined from the clear sky link budgets, rain fade statistics for the locations under consideration, and the modem performance characteristics. As an example, these system performance parameters are computed below for the forward link budget of Table 3.3.2-4, rain fade data from the ITU-R P618-8 rain model for Toronto area transmit and receive locations, and DVB-S2 modem performance as shown in Table 3.3.2-6 for a 90 MSps carrier. A similar method may be used for the return link carriers.

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1. Link Availability

As mentioned earlier, the ACM system will switch the modem to lower MODCODs in response to increasing fade attenuation (after all of the UPC and ALC capabilities are exhausted). The availability of the link is therefore determined by the link margin available to the lowest operational MODCOD, which is selectable at the discretion of the system operator.

For example, if the minimum operational MODCOD is #3 (QPSK R2/5) in Table 3.3.2-6, the link availability based on the assumed link end points is determined as follows:

Threshold C/No for MODCOD 3 80.0 dB-Hz (from Table 3.3.2-5) Uplink Fade Margin to MODCOD 3 20.0 dB (with UPC/ALC, downlink unfaded) Uplink Availability ≥99.95% Downlink Fade Margin to MODCOD 3 8.6 dB (uplink unfaded) Downlink Availability ≥99.90%

Total Link Availability ≥99.85%

2. Throughput

As the carrier consists of multiple MODCODs for each user, the effective carrier throughput essentially depends on the characteristics of the user population, such as their locations relative to the maximum EIRP in the beam, rain statistics and service requirements. However, the minimum available clear sky throughput for the beam can be determined from the highest operational MODCOD for an edge of coverage defined by the most remote user assigned to the beam. For example, allowing for an ACM operational margin of 1.5 dB, Table 3.3.2-5 shows that the forward link can be operated as high as MODCOD 12 (8PSK R3/5) at the EOC. This represents a gross clear sky information rate of 161 Mbps. In practice, this would be discounted by about 15% to account for framing, etc., leaving a minimum useable forward link information rate of more than 135 Mbps for this carrier.

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Table 3.3.2-4 Forward Link Budget

KA/BSS at 91.0 deg WL

1) Satellite Parameters Beam Bandwidth 250.0 MHz Number of beams per TWTA 2 Bandwidth per TWTA 500.0 MHz TWTA power 110.0 W Saturated EIRP per TWTA referenced to EOC 67.4 dBW "Saturated" EIRP per Beam at EOC 64.4 dBW Satellite G/T at U/L 21.5 dB/K ~2dB from EOC

2) Carrier Parameters Carrier Symbol Rate 90.0 MSps Occupied Bandwidth per Carrier 108.0 MHz Number of carriers per beam 2 Occupied Bandwidth per Beam 216.0 MHz (excludes guard bands) Number of carriers per TWTA 4

3) Uplink Parameters Gateway HPA 400 W Gateway Antenna 4.5 m Transmit centre frequency 29.5 GHz Uplink Free Space Path Loss 213.5 dB Uplink Atmospheric Absorption 1.0 dB Pointing Error (with tracking) 0.5 dB Available Gateway EIRP 79.7 dBW (7dB allowance for backoof, losses etc) Maximum Allowable EIRP Density at Flange -56.5 dBW/Hz Corresponding Maximum EIRP per Carrier 84.5 dBW ALC operating range 17.0 dB Required EIRP per carrier for ALC operating point 64.7 dBW Off -axis EIRP Density Margin 19.8 dBW # of transponders served per HPA 4 Available UPC 3.0 dB

4) Downlink Parameters Transponder downlink frequency 20.00 GHz Antenna diameter 0.67 m Antenna Noise Temperature 100.0 K LNB Noise Figure 1.4 dB Other losses 0.5 dB System Noise Temperature 231.0 K Receive G/T 16.9 dB/K Transponder Total OPBO 2.0 dB Carrier OPBO 8.0 dB EIRP (per carrier, at EOC) 59.4 dBW PFD limits Maximum allowable PFD (all agreements) -118.0 dBW/m 2 /MHz Location dBW/m2/MHz Corresponding Maximum Peak Carrier EIRP (at COB) 65.0 dBW 87.0 -118.0 COB to EOC rolloff 3.5 dB 89.0 -118.0 Equivalent Maximum EIRP per carrier at EOC 61.5 dBW 93.0 -118.0 PFD margin 2.2 dB 95.0 -118.0

5) Uplink Budget Uplink Thermal C/No 99.8 dB-Hz Interbeam (Co-Pol) 102.5 dB-Hz C/I = 23 dB for gateway beams Adjacent Channel 1000.0 dB-Hz Adjacent Satellite 116.1 dB-Hz Similar traffic, four satellites Cross Polarization 109.5 dB-Hz C/I =30 dB Intermodulation 106.5 dB-Hz HPA Intermod C/I =26 dB Net Uplink Interference 100.4 dB-Hz Net Clear Sky Uplink C/No (per carrier) 97.1 dB-Hz

6) Downlink Budget Atmospheric Absorption 0.5 dB Rx Earth Station Pointing Loss 1.0 dB Rx Earth Station Equipment Variations 0.0 dB Rx Earth Station Reflector Wetting loss 1.0 dB Downlink Thermal C/No per carrier 92.3 dB-Hz Interbeam, C/Io 97.5 dB-Hz C/I = 18 dB for user beams Adjacent Channel 1000.0 dB-Hz Adjacent Satellite 96.5 dB-Hz Similar traffic, four satellites Cross Polarization, C/Io 109.5 dB-Hz C/I =30 dB Intermodulation, C/Io 97.0 dB-Hz TWTA Intermod floor Io=-105 dB-Hz Net Downlink Interference 92.1 dB-Hz Net Clear Sky Downlink C/No (per Carrier) 89.2 dB-Hz 7) Total C/No (per Carrier) 88.5 dB-Hz

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Table 3.3.2-5 Return Link Budget

KA/BSS at 91.0 deg WL

1) Satellite Configuration Bandwidth per TWTA 500.0 MHz TWTA Power 30.0 W Saturated EIRP (per TWTA, at EOC) 61.8 dBW Satellite G/T at EOC 19.5 dB/K SFD -89.5 dBW/m2 Total transponder IPBO 5.0 dB

2) User Terminal Parameters User Antenna 0.66 m Transmit frequency 30.0 GHz Pointing Error 1.0 dB Antenna Wetting 0.5 dB SSPA 2.5 W SSPA Back-off 0.0 dB Losses 1.0 dB Available Terminal EIRP 47.4 m Maximum Allowable EIRP Density at Flange -56.5 dBW/m2 Allowable Tx EIRP 48.9 dB

3) Carrier Parameters and Requirements Carrier Symbol Rate 1.0 MSps Occupied BW/carrier 1.25 MHz Max Occupied Transponder Bandwidth (10% guardband) 450.0 MHz Max. Number of Carriers (BW limit) per Gateway 360 Assumed BW Fill 100% Required Carrier IPBO at given TIPBO 30.6 dB Required Uplink Flux Density -120.1 dBW/m2 Required EIRP per carrier 45.1 dBW \ Available UPC 2.3 dB

4) Downlink Parameters Transponder downlink frequency (centre) 20.0 GHz EOC to Gateway rolloff 1.5 dB Saturated EIRP at Gateway 63.3 dB Transponder Operating TOPBO 3.5 dB Carrier Operating OPBO 29.1 dB Carrier Operating downlink EIRP 34.2 dBW PFD limits Gateway Antenna diameter 4.5 m 87.0 -118.0 Atmospheric Absorption 1.0 dB 89.0 -118.0 Pointing Loss 1.0 dB 93.0 -118.0 Antenna Wetting 0.5 dB 95.0 -118.0 Maximum Allowable PFD (all agreements, anywhere) -118.0 dBW/m2/MHz Gateway to COB rolloff 2.0 dBW Maximum Allowable Carrier EIRP (at Gateway) 43.7 dBW PFD Margin 9.4 dB

5) Carrier Parameters and Requirements Uplink Thermal C/No 77.1 dB-Hz Interbeam (Co-Pol) 78.0 dB-Hz C/I = 18 dB for gateway beams Adjacent Satellite 80.2 dB-Hz Similar traffic, four satellites Cross Polarization 90.0 dB-Hz C/I =30 dB Net Uplink Interference 75.8 dB-Hz Net Clear Sky Uplink C/No (per carrier) 73.4 dB-Hz

6) Carrier Parameters and Requirements Downlink Thermal C/No 83.0 dB-Hz Interbeam, C/Io 83.0 dB-Hz C/I = 23 dB for user beams Adjacent Satellite 92.2 dB-Hz Similar traffic, four satellites Cross Polarization, C/Io 90.0 dB-Hz C/I =30 dB Intermodulation, C/Io 75.9 dB-Hz TWTA Intermod floor Io=-105 dB-Hz Net Downlink Interference 74.9 dB-Hz Net Clear Sky Downlink C/No (per Carrier) 74.3 dB-Hz

7) Total Clear Sky C/No (per Carrier) 70.8 dB-Hz

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Table 3.3.2-6 DVB-S2 Modem Performance (90 MSps)

System DVB-S2 Symbol Rate 90.0 Msps DVB-S2 Coding BCH + LDPC Excess Bandwidth (α) 1.20 Occupied BW/carrier 108.0 MHz

Coding Bandwidth Transmission Information Threshold Implt'n Threshold MODCOD Modulation (ETSI EN 302 307) Efficiency Rate Rate Es/No* Margin C/No No. BCH LDPC Total (bps/Hz) (Mbps) (Mbps) (dB-Hz) (dB) (dB-Hz) 1 QPSK 0.988 0.250 0.247 0.494 180.0 44.5 -2.35 0.8 78.0 2 QPSK 0.991 0.333 0.330 0.661 180.0 59.5 -1.24 0.8 79.1 3 QPSK 0.993 0.400 0.397 0.794 180.0 71.5 -0.30 0.8 80.0 4 QPSK 0.994 0.500 0.497 0.994 180.0 89.5 1.00 0.8 81.3 5 QPSK 0.995 0.600 0.597 1.194 180.0 107.5 2.23 0.8 82.6 6 QPSK 0.996 0.667 0.664 1.328 180.0 119.6 3.10 0.8 83.4 7 QPSK 0.996 0.750 0.747 1.494 180.0 134.5 4.03 0.8 84.4 8 QPSK 0.996 0.800 0.797 1.594 180.0 143.5 4.68 0.8 85.0 9 QPSK 0.997 0.833 0.831 1.662 180.0 149.6 5.18 0.8 85.5 10 QPSK 0.998 0.889 0.887 1.774 180.0 159.6 6.20 0.8 86.5 11 QPSK 0.998 0.900 0.898 1.796 180.0 161.6 6.42 0.8 86.8 12 8PSK 0.996 0.600 0.598 1.793 270.0 161.4 5.50 1.0 86.0 13 8PSK 0.996 0.667 0.664 1.992 270.0 179.3 6.62 1.0 87.2 14 8PSK 0.996 0.750 0.747 2.242 270.0 201.8 7.91 1.0 88.5 15 8PSK 0.997 0.833 0.831 2.493 270.0 224.3 9.35 1.0 89.9 16 8PSK 0.998 0.889 0.887 2.661 270.0 239.5 10.69 1.0 91.2 17 8PSK 0.998 0.900 0.898 2.694 270.0 242.5 10.98 1.0 91.5 18 16APSK 0.996 0.667 0.664 2.656 360.0 239.1 8.97 1.5 90.0 19 16APSK 0.996 0.750 0.747 2.989 360.0 269.0 10.21 1.5 91.3 20 16APSK 0.996 0.800 0.797 3.188 360.0 286.9 11.03 1.5 92.1 21 16APSK 0.997 0.833 0.831 3.323 360.0 299.1 11.61 1.5 92.7 22 16APSK 0.998 0.889 0.887 3.548 360.0 319.3 12.89 1.5 93.9 23 16APSK 0.998 0.900 0.898 3.592 360.0 323.3 13.13 1.5 94.2 24 32APSK 0.996 0.750 0.747 3.735 450.0 336.2 12.73 2.0 94.3 25 32APSK 0.996 0.800 0.797 3.985 450.0 358.7 13.64 2.0 95.2 26 32APSK 0.997 0.833 0.831 4.154 450.0 373.9 14.28 2.0 95.8 27 32APSK 0.998 0.889 0.887 4.435 450.0 399.1 15.69 2.0 97.2 28 32APSK 0.998 0.900 0.898 4.490 450.0 404.1 16.05 2.0 97.6 * Excludes implementation margin

3.3.2.3 Hz BSS Payload

3.3.2.3.1 ad Rationale

The availability of 17 GHz BSS spectrum at 91ºWL offers an excellent opportunity to introduce and develop this frequency band, along with a number of emerging broadcast/multicasting applications, such as IPTV. By piggybacking a small payload with the much larger Ka-band platform, this “test-bed” can be deployed very cost-effectively. At the same time, the co-location with the Ka-band system, together with the promising development of a wideband receiving system that would cover both bands, will allow users to have broadband Internet access as well as the new services using a common antenna.

The service concept would include a number of content delivery mechanisms, including TV broadcasting, multicasting, and interactive content delivery using the Ka-band return links for requests to be delivered via the 17 GHz BSS payload.

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3.3.2.3.2 verage

The proposed 17 GHz payload provides of 6 channels of 72 MHz, providing full coverage of Canada. Each channel has a 120W TWTA, resulting in the EIRP contours shown in Figure 3.3.2-4. The payload’s G/T contours are shown in Figure 3.3.2.5.

45 SATSOFT 9.00

51 50 52

8.00 45

52 51 51 54 50 7.00 45 52

50 T h et a*s in(p hi in ) Degr ees 6.00 45

5.00

4.00 -4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00 Theta*cos(phi) in Degrees Figure 3.3.2-4 17 GHz BSS Payload Transmit Coverage

SATSOFT -2 9.00

8.00

5 3 7 -2 7.00 -2

5 3 T het a*s in(p hi) i n Degrees 6.00

5.00

4.00 -4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00 Theta*cos(phi) in Degrees

Figure 3.3.2-5 17 GHz BSS Payload Receive Coverage

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3.3.2.3.3 trum Requirements

The 17 GHz BSS payload will utilize the 24.75 GHz to 25.25 GHz spectrum on the uplink and the 17.3 GHz to 17.8 GHz on the downlink.

3.3.2.3.4 equirements

The basic network configuration consists of at least one large hub station which delivers the broadband content or television channels direct to users. The hub may be co-located with a Ka-band gateway. The signal would be very high speed (several 10s of MSps) and utilize high MODCODs similar to the Ka-band system. However, as this is a broadcast (one-way) configuration, ACM would not be required, but multiple non-adaptive MODCODs could be used to tailor links to each user’s conditions and requirements.

The co-location of the Ka-band and 17 GHz BSS payloads at the same orbital location provides the opportunity to use an integrated terminal for the services offered in the two frequency bands. In this regard, Telesat has already initiated very positive discussions with manufacturers for the design and supply of the required wideband (to cover the 17 GHz and Ka-band downlink frequencies) antenna systems in the 67 cm class.

3.3.2.3.5 k Budget

Table 3.3.2-7 presents an example of the link budget for a user terminal with a 67 cm antenna as used for the Ka-band service. The link is for a Toronto location which is within the 54 dBW contour. Assuming DVB-S2 transmission characteristics for 50 MSps in the 72 MHz transponder, a throughput of 50 Mbps can be achieved with MODCOD 3 (QPSK R1/2), with a link availability of 99.8%. A higher throughput of 75 Mbps can be achieved with a higher MODCOD (QPSK R3/4), but with a reduced link availability of 99.6%.

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Table 3.3.2-7 17 GHz BSS Link Budget

KA/BSS at 91.0 deg WL

1) Satellite Configuration 72 MHz Bandwidth per TWTA 72.0 MHz Saturated EIRP per TWTA referenced to selected location 54.0 dBW Satellite G/T at U/L 5.0 dB/K

2) Carrier Parameters Carrier Symbol Rate 50.0 MSps Occupied Bandwidth per Carrier 60.0 MHz Number of carriers per TWTA 1

3) Gateway Parameters Gateway HPA 250 W Gateway Antenna 4.5 m Transmit centre frequency 25.0 GHz Uplink Atmospheric Absorption 1.0 dB Pointing Error (with tracking) 0.5 dB Maximum Allowable EIRP Density at Flange -56.5 dBW/Hz Corresponding Maximum EIRP per Carrier 80.5 dBW Required transponder ALC operating point 5.0 dB Required EIRP per carrier for ALC operating point 75.2 dBW Off -axis EIRP Density Margin 5.3 dBW Available UPC 1.0 dB

4) Downlink Parameters Transponder downlink frequency (centre) 17.0 GHz Antenna diameter 0.67 m Antenna Noise Temperature 100.0 K LNB Noise Figure 1.4 dB Other losses 0.5 dB System Noise Temperature 231.0 K Receive G/T 15.5 dB/K Transponder Total OPBO 0.0 dB Carrier OPBO 0.0 dB EIRP (per carrier) 54.0 dBW 2 Maximum allowable PFD (all agreements) -115.0 dBW/m /MHz Worst case, for 17.7 to 17.8 GHz only Corresponding Maximum Peak Carrier EIRP (at COB) 65.5 dBW COB to location rolloff 2.0 dB Equivalent Maximum EIRP per carrier at EOC 63.5 dBW PFD margin 9.5 dB

5) Uplink Budget Atmospheric Absorption 0.5 dB Pointing Loss 0.5 dB Uplink Thermal C/No 95.2 dB-Hz Adjacent Channel 1000.0 dB-Hz Adjacent Satellite 111.8 dB-Hz Cross Polarization 107.0 dB-Hz Net Uplink Interference 105.7 dB-Hz Net Uplink C/No (per carrier) 94.9 dB-Hz

6) Downlink Budget Downlink Thermal C/No (per carrier, with losses) 87.9 dB-Hz Adjacent Channel 1000.0 dB-Hz Adjacent Satellite 93.6 dB-Hz Cross Polarization, C/Io 107.0 dB-Hz Net Downlink Interference 93.4 dB-Hz Net Downlink C/No (per Carrier) 86.8 dB-Hz

7) Link Performance MODCOD (DVB-S2) QPSK R1/2 QPSK R3/4 Total C/No (per Carrier) 86.2 86.2 dB-Hz Carrier Info rate 49.7 74.7 Mbps Threshold C/No 78.8 81.8 dB-Hz Uplink Fade Margin (with UPC/ALC, D/L clear) 12.0 7.3 db Uplink Availability 99.90% 99.85% Downlink Fade Margin 8.6 4.6 dB Downlink Availability 99.90% 99.75% Total Availability 99.80% 99.60%

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3.3.3 LLITE DESIGN

3.3.3.1 oad Overview

The spacecraft will consist of two separate payloads; a complex Ka-band payload with North-America coverage and a 17 GHz BSS payload offering 6 active channels. It is estimated that the total spacecraft power at the End-of-Life (EOL), including a 7.5% margin as required by satellite insurers, will be approximately 14.2kW, and the total mass will be 3,960 kg. The spacecraft will be designed for a service life of 15 years. The program is expected to take 42 to 45 months from signing the procurement contract to in-orbit delivery.

3.3.3.2 ional Description of Payloads

3.3.3.2.1 -band Payload

The Ka-band payload consists of 124 User/Gateway transmit and receive beams covering North-America and Hawaii, as shown earlier in Figure 3.3.2-1.

In order to match the population density, three (3) sizes of circular beams are used; 0.4° for Canada, 0.5° for the USA and elliptical beams of 2° by 1° for the Northern regions of Canada and Alaska, where the population density is very low. In addition, different bandwidths are assigned to each beam to improve the capacity-to-population density matching factor.

Discussions with manufacturers have indicated that this type of coverage can be obtained with the use of four (4) transmit/receive reflectors of 2.2m with a single feed per beam concept, similar to Anik F2. Two (2) reflectors would be mounted on each side of the platform. The six (6) larger beams require a separate shaped aperture antenna of 1.2m mounted on the earth deck.

A functional block diagram is shown as Figure 3.3.3-1. Twenty (20) of the 124 transmit/ receive feeds will be dual-polarized and receive two (2) 500 MHz bandwidths, one for each polarization, from each of the 20 gateways as the forward link. The same 20 feeds will also receive one uplink from a user beam as the return link.

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The other 104 feeds will have a single polarization and receive a single uplink from a user beam. Each user beam will be assigned spectrum varying between 62.5, 125 and 250 MHz, depending on the population density in that beam. A total of 288 Low Noise Amplifiers (LNAs) will be required, including redundancy, along with approximately 200 downconverters and 248 input multiplexers to process the inputs of the forward and return links.

LNAs 2 for 1 Camp Lin TWTA Cir

Forward 124 Down- Converters 1 OMT Forward Link 124 Return 25 for 20 Downlink Redundancy Amplification Forward 20 Gateway Links 110 W 22 Uplinks Forward Down- 21 Converters 50 for 41

25 for 20 20 OMT Redundancy

Camp Lin TWTA Cir

OMT 20 21

Return Down- Return Link 22 Converters

Amplification 20 Gateway Downlinks 150 for 124 35 W Return 124 Return Link Links Uplinks Redundancy 50 for 40

OMT 1

124

Figure 3.3.3-1 KA/BSS2 Ka-band Functional Block Diagram

In order to reduce the total DC power and the number of TWTAs, individual channels will be combined in 500 MHz bandwidth chunks before amplification. Following amplification, the return link output will remain combined, filtered through output multiplexers, and transmitted down to gateways. As for the output of the forward link, the 124 individual channels will be filtered and directed to their respective downlink beams.

The Ka-band payload will require 9.5kW of DC power and weigh a total of 1690kg.

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3.3.3.2.2 GHz BSS Payload

A functional block diagram of the 17 GHz BSS payload is shown as Figure 3.3.3-2. New development work will be required on the receive side - since to date no 17 GHz BSS payloads have been deployed. The LNAs will have to be flight qualified, along with downconverters. The payload configuration is a very simple bentpipe type, using the same antenna aperture for transmit and receive to reduce the number of reflectors. Similarly, to reduce the TWTA count, there will be no redundancy within the amplification chain. Overall the payload will require approximately 1.3kW of DC power and will have a mass of 75kg.

Input Channel LTWTAs Output Muxes Amplifiers Muxes s s

3 for 3 120W

Receivers 4 for 2 3 Channels 3 Channels Re dundancy S witche Re dundancy S witche

OMT

3 for 3 120W Tx/Rx 1 m Antenna 3 Channels 3 Channels Redundancy Switches Redundancy Switches

Figure 3.3.3-2 KA/BSS2 17 GHz BSS Payload Functional Block Diagram

3.3.3.3 s and Launch Vehicle Compatibilit

A summary of the mass and direct current (DC) power budgets of the spacecraft is shown as Table 3.3.3-1.

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Table 3.3.3-1 Spacecraft Mass and Power Budget

Payloads Summary Mass Power (kg) (kW) Ka-Band 1690 9.5 17 GHz BSS 75 1.3 Total P/L 1765 10.8 Spacecraft 3960 14.2

With a mass of 3960kg and an overall power consumption of 14.2kW, this spacecraft is considered to be large but still within limits of the five (5) major manufacturers’ platform capabilities, as shown in Figure 3.3.3-4 and Figure 3.3.3-5. For this particular spacecraft configuration, having 124 beams, one of the limiting factors is the number of active TWTAs. The total number of TWTAs will be 87, which is very near the limit for some of the manufacturers.

Spacecraft EOL Power

EOL Power (kW) Power EOL 10

0 Star II SB4000 FS1300 E3000 BSS702 A2100AX Ka Band Spacecraft Platform

Figure 3.3.3-4 Spacecraft DC Power Capability Comparison

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Accommodation of Active Transponders

160 150 140 130 120 110 100 90 80 70 60 50 40 30 Number of Active Transponders Active of Number 20 10 0 Star II SB4000 FS1300 E3000 BSS702 A2100AX Ka Band Spacecraft Platform

Figure 3.3.3-5 Active Transponders Accommodation Comparison

Table 3.3.3-2 shows the compatibility of the proposed satellite with existing launch vehicles. Telesat always requires that the spacecraft be compatible with all launch vehicles within its class. In addition, the selected manufacturer must ensure that the spacecraft can be launched on a minimum of two (2) launchers in the event that a major delay occurs in the schedule of the selected launch vehicle. In the case of this spacecraft, a minimum of two (2) launch vehicles are available.

Table 3.3.3-2 Launch Vehicle Compatibility

Platform Compatible Launch Vehicle

A2100AX Ariane 5 and Proton

BSS702 Ariane 5 and Proton

Eurostar 3000 Ariane 5 and Proton

FS1300 Ariane 5 and Proton

Spacebus 4000 Ariane 5 and Proton

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3.3.4 ELLITE PROGRAM

3.3.4.1 verview

Telesat has a worldwide reputation for excellence in the way in which it manages a satellite program, as evidenced by the success of its own satellite programs and the considerable demand for its consulting expertise. Awarding the license to Telesat to develop the 91°WL orbital position will give Industry Canada the assurance of meeting the in-service date. No other satellite operator has such an enviable track record of satellite program performance. Further details of Telesat’s success and capabilities are provided in Section 3.4.

A satellite program typically starts with the preparation of a Request for Proposal (RFP) for the spacecraft and associated ground equipment, and continues through to the end-of-life of the satellite. The following sections deal specifically with the procurement cycle for the satellite proposed to be launched into 91°WL, up to hand-over for commercial operations.

3.3.4.2 reparation Stage

Telesat has a well-established procedure for preparing and releasing an RFP to the space industry for the procurement of a communications satellite. Typically, the process takes six to eight weeks to complete. The RFP consists of the following documents:

• Instructions to Bidders, which is generic and outlines guidelines regarding the bidding process;

• Attachment 1 – Statement of Work (SOW), also generic but tailored to the specific spacecraft design;

• Attachment 2 – Spacecraft Performance Requirements. This document outlines the spacecraft specification. Due to its complexity it is divided into three (3) parts; the Satellite Systems Performance Requirements, the Communications Subsystem Performance Requirements, and the Bus Performance Requirements. In addition, this document also defines the Space Environment in which the spacecraft must operate and the Launch Vehicle Interface Requirements;

• Attachment 3 – Spacecraft Performance Verification Requirements outlines guidelines that the manufacturer must apply in order to verify that the spacecraft meets the performance requirements of Attachment 2. The verification requirements are specified for the spacecraft system, the payload and the platform.

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• Attachment 4 – Spacecraft Product Assurance Requirements are generic in nature, ensuring that the manufacturer establishes and manages a Product Assurance Program to ensure the overall quality and reliability objectives of the hardware and software are achieved.

• Attachment 5 – Satellite Control and Operations Requirements, which define Telesat’s requirements for technical information, documentation and data, and satellite- specific equipment deliverables from the supplier needed for implementation of the satellite control facility and operation of the satellite.

• Attachment 6 – Satellite Control and Operations Product Assurance Requirements describe the guidelines to be implemented by the manufacturer to ensure that the quality and maintainability objectives of ground hardware and software are achieved.

• Attachment 7 – Pro Forma Contract Terms and Conditions. This document forms the basis for contract negotiations. It becomes the main contractual document after negotiations.

• Attachment 8 – Price Proposal Format describes how the financial information should be presented along with a breakdown of the information.

After negotiations, Attachment 7 becomes the formal contract and Attachments 1 to 6 become contractual documents. The Instructions to Bidders and Attachment 8 are discarded since they are used only for the pre-contract phase.

3.3.4.3 posal Evaluation and Negotiations Stage

3.3.4.3.1 eral Requirements

The Instructions to Bidder require that the proposal be submitted in a well defined format, made-up of five separate parts:

• Executive Summary

• Part A – Technical

• Part B – Program Management

• Part C – Price

• Part D – Compliance

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Telesat creates two evaluation teams; one technical and one commercial. The technical team does not have access to the price proposal, to ensure that the technical team is not influenced by commercial considerations.

Typically, the Bid Evaluation phase lasts three to four weeks, depending on the complexity of the spacecraft. During the first week, the teams will make a quick assessment of the proposals to determine the overall compliance, the major risk areas, and any omissions. A first round of questions to the bidders will follow, if necessary, along with an in-depth evaluation by each specialist. At the end of the evaluation phase, the number of bidders will be reduced to two and invited to Telesat’s premises to take part in a first round of negotiations. From these negotiations, one bidder will be selected for the final negotiations and contract signature.

This process has been used for in-house and consulting programs and has proven to be very successful.

3.3.4.3.2 Provisions to Enforce Schedule and Quality

To obtain a commitment from the satellite contractor on delivery, Telesat includes a liquidated-damages provision. Should the satellite be delivered later than the contractual delivery date, the contract price would be reduced by a pre-agreed amount. Telesat also has provisions in its satellite contracts allowing termination of the contract in the event that the contractor fails to meet pre-agreed defined events within a specific period. Payment milestone requirements of the contract also encourage adherence to the delivery schedule. Telesat will make milestone payments to the contractor only as program milestones are achieved, in accordance with the Statement of Work.

Telesat contracts specify monitoring by Telesat of all the key aspects of the spacecraft development, manufacture, integration and test. This enables early identification of potentially serious engineering or schedule problems and ensures that corrective actions are taken to minimize the impact on performance and schedule.

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3.3.4.4 age

3.3.4.4.1 edule

A typical schedule for a standard fixed satellite service (FSS) spacecraft is 28 to 30 months. The proposed KA/BSS2 spacecraft is considerably more complex than a standard FSS spacecraft, so the schedule to completion will be longer. In addition, very few Ka-band spacecraft have been built to date and schedules are typically 36 to 40 months in duration. Based on the Anik F2 program, Telesat will request a 42 to 45 month program for the on- orbit delivery. Telesat will allow for the launch to be three months after the projected spacecraft completion date for contingency. Following delivery to the launch site there is normally an additional month for the launch campaign and a further two months for the mission and in-orbit testing (IOT).

The top-level project milestone schedule for the Ka-band/ 17 GHz BSS satellite at 91°WL is shown in Figure 3.3.4-1. Telesat will take all necessary steps to ensure in-orbit deliver of the satellite as early as possible.

Figure 3.3.4-1 KA/BSS2 Project Milestones

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3.3.4.4.2 m Management

The Telesat Program Manager will be appointed following the completion of the proposal review and upon selection of a contractor for negotiations. The Program Manager is responsible for regular contact with the contractor's Program Manager, and also coordinates the activities of the Telesat team at the manufacturer's site and Telesat's headquarters.

In Telesat's experience, the most cost-effective approach to satellite monitoring is to have bus and payload experts permanently on-site at the manufacturer's facilities, supported by experts at headquarters, as required for key events. By being present to focus on areas of spacecraft design, manufacturing, assembly and test, performance, reliability, Product Assurance and schedule, these Resident Engineers can ensure that the contractor carries out its contractual obligations.

3.3.4.4.3 gn Assurance

Telesat will arrange for a Preliminary Design Review (PDR) to be held within the first six months of the program and a Critical Design Review (CDR) to be held within fourteen months of the start of the program. The Telesat engineering team will review the design data provided up to the PDR, as well as the PDR data packages, to ensure compliance with the performance requirements and to identify any risk areas. The progress of the design and procurement will be closely monitored up to the CDR and any issues identified will be added to the CDR agenda. Key specialists in each of the subsystem areas will participate in the design reviews, raising issues and action items as required.

3.3.4.4.4 embly, Integration and Test

Telesat will monitor and review all the pertinent fabrication, assembly and test operations at unit level for the antennas, transponders, batteries, solar panels, power electronics, telemetry and command electronics, thermal control system, attitude control system, propulsion system, structures and mechanisms. During the payload integration, Telesat will monitor and review all test data to ensure that the payload performance meets the contractual requirements. Telesat will also monitor the spacecraft-level integration and test program including pre-environmental system performance tests, environmental testing, post-environmental testing, and range testing.

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Telesat will also participate in all the contractor status reviews, test readiness reviews, test data reviews, and any technical reviews related to anomalies or problem resolution. This active participation allows early identification of performance issues and allows Telesat to work closely with the contractor in problem resolution.

3.3.4.5 nch and Mission Stage

3.3.4.5.1 Operations

Telesat will monitor the launch vehicle progress throughout the spacecraft build program and will participate in all interface meetings between the spacecraft contractor and launch agency up to the launch date. When the spacecraft is shipped to the launch site, a Telesat technical team will accompany it to a field office at the launch site.

The Telesat team will monitor the final spacecraft integration, fueling, mating to the launch vehicle, and all combined operations.

3.3.4.5.2 on Support

Telesat will participate in all mission planning activities and mission rehearsals. Telesat will also provide a team to monitor the transfer orbit mission between the time of separation from the launch vehicle to achieving the geostationary orbital location of 91°WL.

3.3.4.5.3 rbit Test (IOT)

Telesat defines the IOT requirements in the contract. Acceptance of the spacecraft by Telesat will occur upon successful completion of the IOT. The bus testing will be performed from the contractor's facility, whereas the payload testing will be performed from Telesat's Allan Park facility using Telesat equipment. The Telesat team monitors the contractor's preparations for IOT, reviews the IOT plan and procedures, and participates in the actual tests.

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3.4 TELESAT’S COMPETENCIES

3.4.1 Overview of Telesat’s Record – A History of Commitment and Achievements

The fourth stated criterion against which the Department will assess applications concerns the applicant’s ability to implement and sustain their proposed business and technical plans. To this end, applicants are required to demonstrate that they have “a proven track record in technical, operational and institutional competencies necessary for the proposed project, or provide a well developed plan to illustrate how they intend to acquire and maintain these competencies.” (Section 6.4.4 of the Call)

As demonstrated in this section, Telesat has a long and very distinguished track record in bringing state-of-the-art broadcast distribution and telecommunications services to all areas of Canada, the far North included.

With more than 35 years in satellite communications and systems management and a thriving domestic and international business, Telesat is both an early pioneer and an influential innovator operating at the forefront of the satellite communications industry. Few, if any, existing satellite operators – and certainly no new entrants or start-up ventures – come close to matching Telesat’s proven record and ability to excel in satellite service delivery and dependability. Nor do any offer the same range and depth of end-to-end satellite communications services or the wealth of experience and expertise that Telesat has acquired over the past three-plus decades in serving the unique and challenging requirements of Canadian satellite users across all areas of the country.

Telesat was created in 1969 by an Act of Parliament (“The Telesat Canada Act”) and given a mandate to provide satellite services to all parts of Canada, and especially to those areas where terrestrial alternatives were unavailable or prohibitively expensive. Telesat’s first order of business was to make it possible for Canadian broadcasters (e.g., the CBC) and other telecommunications carriers (e.g., Bell Canada/NWTel) to extend their television and telephony services to Canada’s North and other remote regions through satellite links to the rest of Canada. Telesat accomplished this task in short order with the launch of its first satellite, Anik A1, in 1972, and in the process gave Canada the twin distinctions of being the first country in the world to place a commercial domestic communications satellite into geostationary orbit and to have a national satellite television broadcasting system.

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Over the years Telesat has built on this Northern/remote area commitment. For example, Telesat’s northern service coverage has proven extremely beneficial to Canada in maintaining sovereignty over this vast, largely unpopulated region of the country, and to the overall defence of North America in supporting the North Warning System. With Telesat’s recently introduced Ka-band service, Canadians in northern and all other remote regions of Canada now have access to a direct-to-customer high-speed Internet service, with performance and prices comparable to what is available to their southern, urban-based counterparts through terrestrial technologies. This reach into remote areas also extends to marine vessels operating off Canada’s shores, who now can also enjoy reliable high-speed Internet access and other advanced communications services through Telesat satellite links and services.

1973 2006

¾ 37 communities provided CBC & telephone ¾ virtually all Canadian TV viewers watch service signals carried on Anik/NIMIQ satellites

¾ 2.6 million DTH subscribers

¾ advanced information & telephony services provided to business & government customers

¾ ubiquitous satellite high-speed Internet service

Figure 3.4.1-1 Telesat’s Service Expansion in Canada 1973-2006

Unique in the industry, Telesat also made an early commitment to be an end-to-end satellite solutions provider. As depicted below, this full range of satellite services extends from space segment capacity, to network management and gateway operation, to user terminals sales, installation and maintenance, applications development, and satellite consulting and procurement.

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With Telesat, customers have the benefit of one-stop shopping and, perhaps more importantly, the knowledge that they are dealing with an operator who understands all aspects of satellite communications and who can provide them with a satellite solution that will be comprehensive and optimally tailored to their unique requirements, based on the full range of space and ground segment technologies.

Satellite Network Gateways& Satellite User Capacity Management Teleports Applications Terminals Consulting

• Space Segment• Network Operations • RF uplinks • Sales • Integration • Feasibility Capacity • Systems Engineering • Digital Interfaces • Installation activities Studies • Efficient use of• T raffic Planning - Broadcast • Operations • Service • Procurement spectrum • Capacity Management - Enterprise • Maintenance development • Construction • Internet/ • Full period and• End-To - End visibility • Repair • R&D & Launch terrestrial access occasional use • Network availability • Customer operations and monitoring Figure 3.4.1-2 Scope of Telesat’s Business Operations

New technology development and innovative service design and delivery is another critical element of Telesat’s commitment to excel at meeting its customers’ unique requirements. To assist in this endeavour Telesat operates a leading-edge Research & Development Lab in Ottawa for the evaluation and demonstration of next-generation satellite services. Telesat has also partnered with a wide variety of private and public sector groups, including equipment manufacturers, software developers, other service providers and satellite service users, business and community groups, and government agencies and departments, in the development, test and trial of many new service applications.

Examples of recent joint R&D initiatives include the development and testing of the latest Ka-band technologies and systems for high-speed Internet access to consumers and enterprise, cutting-edge telemedicine services, multimedia communications to ships, remote security and surveillance systems, and broadband communications links through the world’s first digital, regenerative on-board processor.

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Telesat has also directed its research efforts towards the development and refinement of a wide range of leading-edge broadcast technologies and applications, including Internet protocol TV (“IPTV”) delivery to wireless fidelity (“WiFi”) hot spots and remote cable head ends, advanced compression systems for both high-definition television (“HDTV”) and standard digital television (“SDTV”), a unique HDTV evaluation facility, digital signage, electronic cinema, and the next-generation of digital video broadcasting (“DVB”) broadcast systems.

As depicted in Table 3.4.1-1 below, because of its heavy involvement in R&D initiatives of these types, Telesat continues to pioneer and develop new innovative satellite technologies and applications that break down the barriers of geography and distance experienced by Canadians living and working in remote areas of Canada to provide them with access to a wide variety of essential emergency, health and public safety, education and advanced business services that are generally taken for granted in urban centres across southern Canada.

Table 3.4.1-1 Application Development

Description of Related Experience Project Name Gained During The Project

Remote Communities In a project carried out with funding from the European Space Agency Services Telecentre and Canadian Space Agency, Telesat developed a Community (“RCST”) Aggregator Model for satellite broadband communications delivery to remote locations.

Shared community hub Local wireless links within the community High-speed satellite links to other communities High-speed links to urban hospitals & other facilities Telehealth, telelearning, videoconferencing High-speed Internet, government services, etc

SchoolNet This federal government program was designed to connect all Canadian schools to the Internet and relied heavily on satellite to develop and extend the reach to rural and remote communities.

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Table 3.4.1-1 Application Development

Description of Related Experience Project Name Gained During The Project

Integrated Emergency Built on the RCST project, IEMN is a satellite and terrestrial hybrid Medicine Network infrastructure that employs road and air ambulances for medical (“IEMN”) emergencies.

Marine Interactive Built on the IEMN project, MIST provides a satellite and terrestrial Satellite Technologies hybrid infrastructure to help deal with medical emergencies at sea and (MIST) to provide eCommerce applications in maritime regions.

Marine eCommerce The Marine e-Commerce project provides broadband satellite access to Applications (“MeCA”) ships off the east coast of Canada for eCommerce applications.

Real-time Emergency REMSAT is a current Telesat project to develop and demonstrate a Management via Satellite satellite communications system that simultaneously amalgamates (“REMSAT”) communications from four different types of satellites for disaster and emergency management applications. The four types of satellites: i) mobile communications using an L-band MSS satellite, ii) broadband voice and data communications using an FSS satellite, iii) navigation and positioning using the GPS system, and iv) near real-time Earth observation information via an earth observation satellite.

REMSAT – An Amalgamation of 4 Satellite Technologies 10

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Table 3.4.1-1 Application Development

Description of Related Experience Project Name Gained During The Project

Advanced SatCom Under this project, teachers and students are provided with broadband Tele-Learning Project interactive multimedia capability for learning at a distance.

CMAS TeleSurgery In this project, surgeons at McMaster University in Hamilton, Canada, Hamilton, Ontario have been developing techniques to perform remote arthroscopic surgery. Thus far, experimental procedures have been performed on cadavers via satellite communications. The eventual objective is to enable surgeons to perform remote telesurgery on live patients.

Remote Assertive This pilot project allowed health practitioners to treat people with Community Homecare mental illnesses using interactive, satellite-based systems. Under this (“REACH”) system, each patient’s home was outfitted with a computer, health- monitoring software, an interactive touch-screen monitor and a video conference link. The project therefore promises to reduce health care costs and increase the number of patients who can be treated.

High Definition This project has the objective of studying and understanding new Television (“HDTV”) developments in HDTV systems, and in developing new and Investigations innovative methods for incorporating these developments into the satellite environment.

Emerging Technologies Includes on-going projects to investigate the feasibility of integrating new terrestrial technologies with satellite networks, so as to extend the reach of these technologies to un-served or underserved areas – specific projects include digital signage, mobile TV and HD videoconferencing.

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Telesat’s commitment to top-notch service extends to the reliability and dependability of its satellites and networks. To date, Telesat has successfully launched 16 satellites, and never experienced a launch or full in-orbit failure. Indeed, all of Telesat’s retired satellites remained operational beyond the manufacturers’ service life expectations. Telesat’s network service availability performance has also consistently been above 99.9 percent, and in 2005 exceeded 99.99 percent.

This is not meant to suggest that Telesat has never experienced a serious in-orbit satellite malfunction. However, what Telesat’s industry-leading performance record demonstrates is that when such malfunctions have occurred Telesat has been diligent and resourceful in minimizing any adverse impact on its customers while the problem with the satellite is determined and appropriate action taken.

In fact, Telesat has received numerous industry honours and awards for the successes it has achieved through its satellite rescue and capacity loss minimization efforts, including the 1998 SSPI Industry Innovator Award (Society of Satellite Professionals International), the 1994 Laurels Award (Aviation Week & Space Technology), and the 1992 Space Mission Recovery Prize (La Réunion Spatiale).

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Table 3.4.1-2 Telesat Satellite Builds To Date

Satellite Series Transponders Launch Date Status

Anik A: A1 12 C-Band November 1972 Retired/July 1982

A2 12 C-Band April 1973 Retired/October 1982

A3 12 C-Band May 1975 Retired/November 1984

Anik B: B1 12 C-Band/6 Ku-Band December 1978 Retired/December 1986

Anik C: C1 16 Ku-Band April 1985 Retired/May 2003

C2 16 Ku-Band June 1983 Retired/January 1998

C3 16 Ku-Band November 1982 Retired/June 1997

Anik D: D1 24 C-Band August 1982 Retired/December 1991

D2 24 C-Band November 1984 Retired/January 1995

Anik E: E1 24 C-Band/16 Ku-Band September 1991 Retired/January 2005

E2 24 C-Band/16 Ku-Band April 1991 Retired/November 2005

Nimiq: N1 32 Ku-Band May 1999 Operational

N2 32 Ku-Band/2 Ka-Band December 2002 Operational

N4 32 Ku-Band/8 Ka-Band - Under Construction

Anik F: F1 36 C-Band/48 Ku-Band November 2000 Operational

F1R 24 C-Band/32 Ku-Band September 2005 Operational

F2 24 C/32 Ku/38 Ka-Band July 2004 Operational

F3 24 C/32 Ku/2 Ka-Band - Awaiting Launch

NOTE: Telesat also leases two additional BSS satellites for service in Canada (Nimiq-3 and 4i).

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Telesat’s many years of successful satellite procurement and operation and its reputation for service excellence in the delivery of its own satellite services has established Telesat as one of the leading satellite communication consultants in the world.

Telesat has a proven record and strong history of commitment to providing the full range of state-of-the-art satellite communications services to all areas of Canada and to ensuring that it remains at the forefront in developing innovative new services and applications for satellite users. As highlighted in the following chronological listing of major achievements, Telesat has excelled in the delivery of satellite communications solutions and is a recognized leader in the global satellite industry:

1972 Telesat launched Anik A1, the world’s first commercial domestic communications satellite placed into geostationary orbit.

1973 Commercial services commenced on Anik A1. The Canadian Broadcasting Corporation (“CBC”) is Telesat’s first customer and used Anik A1 to provide live television to the remote Canadian North for the first time, giving Canada the world’s first national satellite television system.

Anik A1’s coverage of northern Canada brought telephony service to many previously unserved rural and remote communities across northern Canada.

1976 Telesat established and implemented the world’s first commercial Time Division Multiple Access (“TDMA”) system.

1978 Telesat’s Anik B1 satellite was the world’s first domestic communications dual- band satellite, operating in both C- and Ku-bands.

1980 In August, the first transportable message terminal began service on an oil rig off Canada’s east coast. In September, the first commercial Ku-band service via satellite was provided by Anik B1.

1981 Telesat became the world’s first satellite operator to co-locate two satellites – Anik A2 and A3 – in a single orbital slot (within 0.1° of each other, at 114°WL).

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1982 Anik C3 was launched on the first commercial flight of NASA’s Space Shuttle Columbia. Anik C1 was subsequently launched on Space Shuttle Discovery and Anik C2 on Space Shuttle Challenger.

1986 The contract to construct Telesat’s Anik E satellites was signed. At the time, the Anik E satellites were the largest dual-band, three-axis commercial satellites ever built.

Telesat began experimental trials on Digital Video Compression (“DVC”). At the time, DVC was emerging as a new technology to significantly reduce the amount of bandwidth required to transmit broadcast quality television signals.

Telesat provided a new Telephony Earth Station (“TES”) service in Canada. This service provides high-quality, voice priority, digital networks with added data capability.

Telesat became the largest operator of interactive Very Small Aperture Terminal (“VSAT”) systems in Canada.

1989 Telesat constructed the world’s first mobile HDTV production facility to foster HDTV development among Canadian broadcasters.

1994 Telesat engineers earn international recognition for the dramatic recovery of the Anik E1 and E2 satellites after a severe electromagnetic solar storm caused system failures on both satellites. Anik E1 was back in full operation in just a few hours. The more challenging recovery of Anik E2 took Telesat engineers six months to develop and implement a sophisticated Ground Loop Attitude Control System (“GLACS”).

Motorola awarded Telesat a multi-year contract in 1994 to design and construct three telemetry, tracking and command facilities as part of the IRIDIUM communications system.

1995 Telesat introduced standard commercial DVC services in both C- and Ku-bands.

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1996 Telesat’s Special Assembly Earth Stations (“SAES”) product line received ISO9001 certification, and in 2002 became ISO 9001:2000 certified.

1997 Telesat was selected by CSA/CRC as the prime contractor for Canada’s Multimedia Satellite Technology Development and Trials Program thereby bringing a service provider’s perspective to the Advanced Satcom Program.

1998 Telesat was honoured with an Industry Innovators Award from the SSPI in recognition of its technological prowess in developing GLACS for the Anik E2 satellite.

1999 Telesat’s Nimiq-1 satellite, Canada’s first Direct Broadcast Satellite, was launched.

In September, Telesat strengthened its presence in the U.S. satellite services market by signing a three-year service contract with IBM. Under this contract, Telesat oversaw hardware maintenance and support for all components of the FORDSTAR Network – a VSAT satellite-based network that links 5,500 Ford dealerships in the United States. Subsequently, Telesat was awarded a contract directly with Ford Motor Company to re-point satellite antennas and manage facility upgrades at 6,000 Ford dealerships in Canada and the United States.

In December, Telesat’s Anik E1 and E2 satellites became the first non-U.S. satellites to be placed on the U.S. FCC’s Permitted Space Station list, thereby enabling U.S. customers to use Telesat satellites for services.

2002 Telesat received CSUA’s Outstanding Service Award at the organization’s annual conference. This was the first time the honour had been bestowed on an organization.

Telesat launched the first high-speed business Internet service that is available ubiquitously across the United States and Canada.

2004 Telesat received the 2004 Frost & Sullivan Regional Satellite operator award. Telesat earned this distinction for its strategy and product innovation and diversification, which has given Telesat a competitive advantage over both regional and global operators.

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Also in 2004, Telesat was named one of Canada’s Top 100 Employers in the prestigious annual survey published in MacLean’s magazine.

Telesat announced that it is pilot testing a breakthrough system that will enable a wide range of cost-effective e-commerce applications on marine vessels. The marine e-commerce applications (“MeCA”) project aims to provide marine operators with a suite of e-commerce applications that are flexible and easy to manage for vessels of various types and sizes. These applications include improved Internet access, distance education, banking services, remote data collection and tele-tourism.

Telesat launched its state-of-the-art Anik F2 satellite with the first North American Ka-Band payload designed for direct to home Internet service via satellite. At the time of launch, Anik F2 was the largest ever built commercial satellite to be put in geostationary orbit.

2005 In January, Telesat acquired SpaceConnection Inc., a major California-based reseller of full-time channel and occasional use satellite capacity in the U.S. Its clients include the major U.S. television networks, cable programmers, and services to the educational, religious, government, business and entertainment sectors.

Telesat was selected by the World Broadcasting Unions International Satellite Operations Group (“WBU-ISOG”) as the host site for critical tests to ensure the global interoperability of codecs, the technology used for the compression and decompression of high-definition television (“HDTV”) signals.

Telesat completed in-orbit testing of a next-generation digital broadband on- board signal processor. The experimental “SpaceMux” on-board processor (or “broadband switch in the sky”), designed and supplied by EMS Technologies, Inc. makes it possible to provide direct user-to-user broadband connectivity for spot-beam systems such as the one deployed at Ka-band on Telesat’s Anik F2 satellite.

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Telesat provided a large end-to-end Interactive Distance Learning (“IDL”) service to a large American automobile manufacturer in 2005. The IDL service involves approximately 8,000 dealer and corporate locations in the United States, Canada and Mexico with satellite uplink and broadcast operations served from Teleports in Detroit, Michigan and Toronto, Ontario.

Telesat became the world’s first company to fully commercialize Ka-band with its new two-way satellite broadband service operating on Anik F2. The new service delivers always-on, always-ready high-speed Internet connectivity, anywhere in Canada and the United States.

2006 Telesat was selected as the exclusive satellite provider for Auroras Entertainment, a U.S.-based, end-to-end provider of the infrastructure, services and content for Internet Protocol Television (“IPTV”).

In March, Telesat was selected by the Government of Canada to design, supply, commission and operate Vessel Satellite Communication System (“VSCS”), a satellite-based digital communications system that will provide e-mail applications, voice-over-Internet (“VoIP”) capability and Canadian satellite television for selected vessels in the Canadian Coast Guard fleet.

3.4.2 Technical Competency

The Call indicates that applicants are required to demonstrate competencies in the procurement, coordination, launch and control of satellites. As the world’s first domestic satellite operator, Telesat has considerable experience and expertise in each of these technical areas.

3.4.2.1 Satellite Procurement and Launch Services Expertise

One of Telesat’s great strengths is that it has always exercised complete control over all aspects of the design, construction, launch and operation of its own satellites, employing a staff of dedicated satellite engineering specialists. As indicated above, these successful satellite programs now number 16 FSS and BSS satellites over a span of approximately 35 years – roughly a new satellite every two years. In addition, Telesat has two other satellites under construction (Anik F3 and Nimiq-4), and another in the planning stages (Nimiq-5).

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Telesat’s in-house management of these programs includes the following types of activities:

• performing feasibility studies

• securing satellite system financing

• optimizing design concepts

• preparing RFPs

• selecting and negotiating contract and technical terms with satellite manufacturers

• monitoring spacecraft construction

• procuring launch services

• implementing ground segment facilities

• training operations personnel

• placing insurance

• operating the satellite

In addition to the experience and expertise gained from managing its own satellite programs, Telesat has a thriving international consulting business performing these same functions for other established and new satellite operators. Over the past 35 years, Telesat has consulted on more than 100 satellites for itself and for satellite operators in over 30 countries. In most cases, these monitoring programs involved evaluating proposals, optimizing the selected design, negotiating with short-listed bidders, and ultimately, negotiating a contract for the customer with the winning bidder.

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Figure 3.4.2-1 Consulting Experience

By participating extensively in the evaluation, design and construction of its own satellite systems and those of its international customers, Telesat personnel are completely up to date on state-of-the-art developments and concerns in the satellite industry. In fact, over the last several years no other satellite operator/consulting company has been involved in as many satellite procurement programs and/or construction monitoring programs as Telesat. As illustrated in Table 3.4.2-1, since 2000 Telesat has been involved in the procurement of more than 25 communications satellites (including 5 of its own).

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Table 3.4.2-1 Recent Telesat Procurement Projects (2000 to Present)

Timeframe Satellite Program Chosen Manufacturer Customer

2000 Anik F2 Boeing Telesat (Canada) 2001 Nimiq-2 Lockheed Martin Telesat (Canada) 2002 Measat 3 Boeing Measat (Malaysia) 2002 Telkom 2 Orbital Sciences PT Telkom (Indonesia) 2003 Anik F1R Astrium Telesat (Canada) 2003 Arabsat 4A & 4B Astrium Arabsat (Saudi Arabia) 2003 Vinasat 1 TBD VNPT (Vietnam) 2004 Anik F3 Astrium Telesat (Canada) 2004 Nigcomsat 1 China Great Wall NASRDA (Nigeria) 2004 Rainbow 1, 2, 3, 4, 5 Lockheed Martin Rainbow Cablevision (USA) 2004 Measat 4 TBD Measat (Malaysia) 2005 Thor IIR Orbital Sciences Telenor (Norway) 2005 Terrestar 1 Space Systems Loral Terrestar Networks (USA) 2005 Turksat 3A Orbital Sciences Turksat (Turkey) 2005 Nimiq-4 Astrium Telesat (Canada) 2006 MSV 1, 2, SA Boeing Mobile Satellite Ventures (USA) 2006 Arabsat 4AR EADS Astrium Arabsat (Saudi Arabia) 2006 Thor IIIR TBD Telenor (Norway) 2006 Vinasat 1 Lockheed Martin VNPT (Vietnam)

Telesat’s extensive satellite procurement experience also extends to direct involvement in the procurement of Ka-band satellites, both for itself and for customers. Specifically, Telesat’s Nimiq-2 satellite incorporated an experimental Ka-band payload, while Anik F2 has a full-up Ka-band payload. Anik F3 has also been built with a small Ka-band payload and Nimiq-4 has been designed to incorporate a significant Ka-band payload package. In addition, Telesat recently acted as a consultant for the U.S. service provider Rainbow Cablevision. Telesat helped Rainbow design, specify and negotiate the contract for their procurement of five Ka-band DBS satellites from Lockheed Martin.

Table 3.4.2-2 lists the various different spacecraft models on which Telesat has monitored construction over the same period. No other satellite company can compare to Telesat in terms of the overall number and variety of procurement/monitoring projects completed.

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This gives Telesat unsurpassed insight and knowledge of the performance capabilities and characteristics of the vast majority of spacecraft on the market today.

Table 3.4.2-2 Recent Telesat Construction Monitoring Projects (2000 to Present)

Satellite Timeframe Manufacturer Model Customer Program

2001 to 2003 Nimiq-2 Lockheed Martin A2100 Telesat (Canada) 2000 to 2004 Anik F2 Boeing 702 Telesat (Canada) 2003 to 2005 Anik F1R Astrium Eurostar 3000 Telesat (Canada) 2003 to 2005 Measat 3 Boeing 601HP Binariang (Malaysia) 2003 to 2004 Telkom 2 Orbital Sciences Starbus 2.2 PT Telkom (Indonesia) 2003 to 2006 Arabsat 4A & 4B Astrium Eurostar 2000 Arabsat (Saudi Arabia) 2003 to 2005 Rascomstar 1 Alcatel Spacebus 3000 Rascomstar (Africa-on-call consulting) 2003 to 2006 Koreasat 5 Alcatel Spacebus 3000 Korea Telecom/ADD (Korea) 2004 to 2006 Anik F3 Astrium Eurostar 3000 Telesat (Canada) 2005 to 2008 Nigcomsat 1 China Great Wall DFH 4 NASRDA (Nigeria) 2005 to 2007 Terrestar 1 Space Systems Loral FS 1300 Terrestar Networks (USA) 2005 to 2007 Thor IIR Orbital Sciences Starbus 2.3 Telenor (Norway) 2006 to 2008 Nimiq-4 Astrium Eurostar 3000 Telesat (Canada) 2006 to 2008 Turksat 3A Alcatel Spacebus 2000 Turksat (Turkey) 2006 to 2009 MSV 1, 2, SA Boeing 702 Mobile Satellite Ventures (USA)

As summarized in Table 3.4.2-3, Telesat’s extensive experience extends to include satellite launches using all major launch vehicles. Telesat employs a staff of launch system engineering specialists with extensive expertise in each of the prime launch support areas, including launch services procurement, launch systems engineering and launch campaign management. This group has successfully overseen all of Telesat’s satellite launches as well as those of numerous international customers. This experience has been a key factor in the management and mitigation of risk, which contributes to a record of successful launches and maximization of the life and performance of Telesat’s satellite fleet.

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Table 3.4.2-3 Recent Telesat Construction Monitoring Projects (2000 to Present)

Launch Vehicle Program

Ariane 44L Anik F1, MSAT (42P) Ariane 5G Anik F2 Ariane 5 ECA Telkom 2 Atlas HellasSat-1, Echostar 5, AMSC (IIA), Orion 1 (IIAS) Delta Anik D ILS Proton Nimiq-1 & 2 , Anik F1R & F3, Measat 3, Arabsat 4A/B Long March Asiasat 1 (1st commercial launch), Mabuhay 1; Nigcomsat-1 BLS Sea Launch Directed study of SL, commissioned by Sea Launch, Koreasat 5

Another indicator of Telesat’s in-depth knowledge of and experience in satellite construction and launch vehicle issues is demonstrated by the fact that insurers regularly approach Telesat to evaluate other operators’ satellite designs and launch vehicle choices prior to making a decision to provide launch and/or in-orbit insurance to these operators and under what terms. Telesat is also regularly approached to participate in launch failure and anomaly investigations.

3.4.2.2 Satellite Control Expertise

In terms of technical expertise in the operation of spacecraft, Telesat’s 35+ years experience in operating seven generations of its own FSS and BSS satellites places Telesat in a class of its own, well above other operators.

Currently, Telesat operates a fleet of three FSS satellites (Anik F1, F1R and F2) and four BSS satellites (Nimiq-1, 2, 3 and 4i) for use predominantly in Canada, and controls another FSS satellite (AMC-16) used on an interim basis for service in Canada and the United States. In addition, Telesat flies six other satellites (XM 1, 2 and 3, MSAT 1 and 2, and DTV 1) for other customers, with two more satellites (XM 4 and WB 1) to be added to this list by the end of 2006.

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FSS BSS

118.7 111.1 107.3 91 82 72.5

AMC-16 Anik F2 Anik F1 & F1R NIMIQ 1 & 4i NIMIQ 2 (with Ka- DVT1 (future Anik F3 (with Ka-band) band) & 3 (future NIMIQ 5) with Ka-band) (future NIMIQ 4)

Figure 3.4.2-2 Telesat’s Current Satellite Fleet

In addition to operating its own satellites and those of its customers, Telesat is a world leader in the provision of Transfer Orbit Services (“TOS”) required to bring a satellite to its final geosynchronous orbit after launch or to move it to another orbital location. Over the past 20 years, Telesat’s TOS team has supported more than 70 satellite missions for a number of international customers and spacecraft manufacturers, including Boeing, Space Systems/Loral, CNES, Astrium, Israel Aircraft Industries and Orbital Services. Telesat’s TOS service is provided to ISO 9001 quality standards.

Telesat developed its own advanced Flight Dynamics Software (“FDS”) to support all aspects of geosynchronous missions from transfer orbit injection to arrival on station, equatorial and inclined stationkeeping, orbit relocation and eventual satellite retirement. Since its introduction in 1976, Telesat’s FDS has undergone three major revisions to the current state-of-the art workstation system in use today. This software is currently being used to control satellites built by a variety of manufacturers, including Boeing, Lockheed Martin, SS/Loral and Alcatel, and has been sold internationally to a number of satellite operators and contractors, including Deutsche Telekom, ICO, Boeing, L3-Storm and MOD (UK).

Telesat’s ground systems infrastructure consists of its Satellite Control Centre (“SCC”) located at its headquarters in Ottawa and a worldwide Telemetry, Tracking and Control (“TT&C”) network. The SCC is state-of-the-art and is the hub for all of Telesat’s satellite-related activities.

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This centre is staffed 24 hours a day/365 days a year by Telesat satellite controllers, who operate the Company’s seven satellites, plus the six others operated on behalf of customers. Telesat’s satellite controllers are engineering technologists who have undergone extensive training by Telesat specialists. Several of these controllers have in excess of 20 years experience and exposure to Telesat’s satellites and methods of operation.

Telesat’s primary TT&C station is located north of Toronto in Allan Park, backed up by a facility in Edmonton. Allan Park is also the home of Telesat’s Satellite Network Operations Centre (“SNOC”). This facility is the focal point of the network management facilities, and monitors and manages the quality of service delivered to Telesat's North American customers. These operations are supported by technologists, engineers, and other professionals that are dedicated to operating, controlling and maintaining a current network of more than 22,000 telecommunications earth stations in Canada and the United States. These personnel are experienced and qualified in operating and maintaining complex integrated networks and trained to immediately react to all network issues. Their key driver is responsiveness to customer issues and problem resolution that meets or exceeds service level agreement objectives.

Telesat’s extensive ground infrastructure includes other offices and teleports throughout Canada, the U.S. and South America. These include seven teleports in Canada (Toronto, Montreal, Vancouver, Calgary, Edmonton, Winnipeg and Halifax), plus one in the United States and one in Brazil.

Telesat also owns and operates five VSAT (data) hubs spread throughout North America to provide back-up and diversity, and three Ka-band gateway hubs in Canada, located in Vancouver, Winnipeg and Toronto. Telesat also owns a major earth station facility in Perth, Australia for use with its TOS services.

Telesat is the only satellite operator to own hub facilities for both leading standards-based broadband satellite solutions, i.e., DVB-RCS and DOCSIS. It has been operating a DVB-RCS system, developed by EMS technologies, for many years on both Ku and Ka-band. The hub was one of the first North-American multimedia hubs capable of supporting links speeds for multimedia applications. Telesat operates three S-DOCSIS hubs for operation over the Anik F2 Ka-band payload. These hubs provide satellite broadband IP services directly to consumers. Telesat also has fully redundant DVB-RCS and DOCSIS hubs at its R&D lab facilities in Ottawa for development and testing in support of the production hubs. These facilities provide Telesat with an excellent opportunity to develop and test new applications before commencing the service.

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Telesat’s vast ground infrastructure in Canada is unmatched by any other operator. Telesat has approached the building of ground segment facilities as essential in developing and bringing new communications solutions to Canadians everywhere. For this reason, Telesat has taken the financial risk and invested aggressively in building its ground infrastructure across every region of Canada. It is noteworthy that since Canada’s satellite markets were liberalized in March 2000, no other satellite operator has made any investment in building a single major ground segment facility in Canada.

Telesat is therefore eminently qualified to control and operate FSS, BSS, MSS and DARS satellites and associated ground segment equipment. Telesat is also one of only a handful of operators worldwide that has significant practical experience in operating Ka-band satellites and gateways. Indeed, as the owner/operator of the world’s first full commercial Ka-band payload on Anik F2, Telesat is an acknowledged world leader in this field.

3.4.2.3 Frequency Coordination Expertise

Telesat has extensive experience in all aspects of frequency coordination. As the Department is aware, frequency coordination is a highly specialized activity that requires rigorous technical and strategic analyses and deft negotiation skills. As both a satellite operator and a leading international consultant in satellite procurement and operation, Telesat maintains an expert in-house frequency coordination team with detailed knowledge of, and familiarity with, International Telecommunications Union (“ITU”) procedures and filing requirements and the regulatory and technical provisions of the ITU Radio Regulations. These experts enable Telesat to coordinate frequencies successfully for its own satellite networks and those of its clients.

As part of this function, Telesat actively participates in the activities of the ITU Radiocommunication Sector (“ITU-R”) as a Sector Member, as part of the delegation of Canada, or as part of the delegation of other administrations upon request. Telesat stays current with the various frequency coordination provisions relevant to operators in each of the ITU-R Regions, and its experts participate in all key ITU-R satellite technical Working Parties such as WP4A (Fixed Satellite Service) and WP6S (Broadcast Satellite Service). Other meetings regularly attended include specialty ITU-R meetings such as the Special Committee on Regulatory and Procedural Matters (“SCRPM”) or the experts group dealing with Resolution 609 and the division of aggregate power density among L-band Radio Navigation Satellite Service (“RNSS”) operators. In addition, Telesat personnel attend all World Radio Conferences (“WRC”) and associated preparatory meetings.

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Telesat also has extensive experience in earth station coordination and licensing, and in coordinating space and earth station systems with terrestrial system operators.

Telesat is therefore extremely well qualified to manage any and all aspects of satellite procurement, launch, operation and coordination. As evidenced by its exemplary operation of seven generations of its own satellites, its many international honours and awards, and its thriving international consulting business, Telesat is a recognized world leader.

3.4.3 Operational Competency

The Call indicates that applicants should describe capabilities related to ongoing operational requirements, such as business management, marketing and sales, as well as details on the experience and abilities of management and staff.

3.4.3.1 Staff Resources & Qualifications

Another of Telesat’s great strengths is its dedicated workforce of over 500 employees, primarily comprised of professional engineering, sales and marketing staff, administrative staff and skilled technical workers. The majority of these employees are located at Telesat’s headquarters in Ottawa and at Allan Park, but marketing and technical staff is also located in offices spread across Canada, including the Territories. Approximately 24 full-time staff are located in the U.S. and South America.

Telesat employees are well trained and well educated – more than 80% have college diplomas or university degrees. The management team is also very experienced. Telesat’s newly appointed President and CEO, Daniel Goldberg, has been working in the communications sector for the past 15 years and in satellite operating companies since 1998, most recently as the CEO of SES New Skies. The rest of the Senior Executive team has an average of 23 years of service with Telesat, while other Management employees average close to 20 years’ service. Average employee service currently stands at 14 years for Telesat as a whole.

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Telesat also has a network of more than 700 local Field Service Representatives (“FSRs”) under contract spread across North America. These representatives, working closely with Telesat staff, allow for quick responses to any communications or service issues that may arise at customers’ remote locations.

Table 3.4.3-1 Select Telesat Work Force Statistics

Total Number of Employees: * 550 Employee Distribution by Country: Canada: USA: South America: Employee Location in Canada: Maritimes: Quebec: Ottawa HQ: Rest of Ontario: West: Territories: Academic Credentials (%): High School Diploma: Military: College Diploma: Undergraduate: Masters: PhD: Employees by Discipline: ** Engineers/Technical: Technologists/INST: Sales & Marketing: Finance, Legal, IT, HR, Adm: Average Length of Service (years): Executive: Management: Non-Management: All Employees:

* Note 1: Estimate includes permanent and term employees and full-time independent contractors. ** Note 2: Estimate excludes South American employees & all full-time independent contractors. *** Note 3: Estimate excludes Telesat’s recently appointed President & CEO Daniel Goldberg (who has 15 years experience in the telecommunications field).

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Table 3.4.3-2 Telesat’s Executive Officers

NAME POSITION & EXPERIENCE

Daniel S. Goldberg President & Chief Executive Officer

Daniel S. Goldberg, Ottawa, Ontario, joined Telesat in September 2006. Prior to that, Mr. Goldberg served as Chief Executive Officer of SES New Skies, a position he held since March 2006 following the purchase of New Skies by SES Global. During that time, Mr. Goldberg also served as a member of the SES Global Executive Committee. Before that, Mr. Goldberg served as the Chief Executive Officer of New Skies Satellites since January 2002 and was President and a member of the New Skies Satellites Holdings board of directors since its formation in January 2005. Mr. Goldberg was also a managing director and a member of the executive management committee formed by New Skies Satellites. Prior to becoming its Chief Executive Officer, he had served as Chief Operating Officer of New Skies since February 2000, and prior to that time, he had served as New Skies General Counsel since October 1998. Prior to joining New Skies, he worked at PanAmSat as the Associate General Counsel and Vice President of Government and Regulatory Affairs during 1998. From 1993 to 1997, Mr. Goldberg was an associate at Goldberg, Godles, Wiener & Wright, a law firm in Washington D.C. Mr. Goldberg earned an undergraduate degree from the University of Virginia, graduating with highest honours, and a law degree from Harvard Law School where he graduated cum laude.

Ted H. Ignacy Chief Financial Officer

Ted H. Ignacy, Ottawa, Ontario, joined Telesat in 1986, and held a number of management positions until his appointment as Vice- President, Finance and Treasurer in 1995, with a title change to Chief Financial Officer in 2005. Mr. Ignacy is a Board member of Infosat Communications Inc., The SpaceConnection, Inc., Mobile Satellite Ventures LP and BIMCOR Inc. Mr. Ignacy has also served as Vice- President, Finance and as a Board member of TMI Communications Inc. He holds a Masters degree in Business Administration from McMaster University in Hamilton, Ontario, and an Honours Bachelor of Commerce degree from Laurentian University in Sudbury, Ontario.

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Table 3.4.3-2 Telesat’s Executive Officers

NAME POSITION & EXPERIENCE

Patricia A. Olah Corporate Secretary

Patricia A. Olah, Montréal, Québec, was appointed Corporate Secretary of BCE, Bell Canada and Telesat in December 2004. Prior to this appointment, she held the position of Vice-President, Corporate Affairs of BCE Ventures (a wholly-owned subsidiary of BCE). Ms. Olah first joined the BCE group in April 1995 as Chief International Counsel and Assistant Corporate Secretary of Bell Canada International Inc., and has since held numerous positions in the BCE group. From 1985 until joining the BCE group, Ms. Olah was a senior associate in the Corporate Department of Weil, Gotshal & Manges, LLC, and was based in the New York office of this international law firm. Ms. Olah holds a Juris Doctor degree, granted “With Distinction”, from Hofstra University School of Law (Hempstead, New York, U.S.A.) and a Bachelor of Business Administration degree from Adelphi University (Garden City, New York, U.S.A.). She was admitted as a member of the New York State Bar in 1985, and is also a member of the International Bar Association and the American Bar Association.

Paul D. Bush Vice-President, Broadcasting & Corporate Development

Paul D. Bush, Ottawa, Ontario, joined Telesat in 1980, and since that time he has held a variety of positions in Administration, Engineering and Sales until being appointed Vice-President, Corporate Development in 1997, with a title change to Vice-President, Broadcasting and Corporate Development in 2004. Mr. Bush is a Board member of the Canadian Advanced Technology Association (CATA), The SpaceConnection, Inc., Auroras Entertainment LLC, and 2010 BCE Olympic Technology Board. He holds both a Bachelor of Health Science degree from the University of Ottawa, and a Bachelor of Education degree from Queen’s University in Kingston, Ontario.

Patrick M. Enright Vice-President, Network Services

Patrick M. Enright, West Grey, Ontario, joined Telesat in 1981, and held progressively responsible management positions until being appointed Vice-President, Network Services in 2003. Mr. Enright holds a diploma in Electronic Engineering Technology from Conestoga College of Applied Arts and Technology. He is a graduate of the Western Executive Program, University of Western Ontario, as well as a graduate of the Executive Management Development Program from the Banff Centre for Management.

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Table 3.4.3-2 Telesat’s Executive Officers

NAME POSITION & EXPERIENCE

David C. Lahey Vice-President, Business Development

David C. Lahey, Brockton, Ontario, joined Telesat in 1982, and held various positions until his appointment to Vice-President, Network Services in 2002. During 2002, Mr. Lahey was also appointed as President and Chief Operating Officer of Infosat Communications Inc., a wholly-owned subsidiary of ours, until the transition to new management for the company was established that same year. In 2003, he was appointed to Vice President, Business Development.

Jennifer E. Perkins Vice-President, Law & Assistant Corporate Secretary

Jennifer E. Perkins, Ottawa, Ontario, joined Telesat in 1987, and held the position of Legal Counsel until her appointment as General Counsel in 1993 with a title change to Vice-President, Law in 2000. Ms. Perkins was appointed Assistant Corporate Secretary in 2001. She is a Board member of Infosat Communications Inc. and The SpaceConnection, Inc. Ms. Perkins holds a Bachelor of Arts degree and a Bachelor of Law degree from Queen’s University in Kingston, Ontario.

Roger J. Tinley Vice-President, Space Systems

Roger J. Tinley, Ottawa, Ontario, joined Telesat in 1979 and held positions of increasing responsibility until his appointment to Vice- President, Space Systems in 2001. Before joining Telesat, Mr. Tinley was employed by Marconi Space and Defense Systems Ltd., and British Aerospace in England. Mr. Tinley holds an Honours Bachelor of Science Degree and a Master of Science Degree from London University. He is registered as a Professional Engineer with the Association of Professional Engineers of Ontario, and is a member of the Institute of Electrical Engineers.

Marilynn A. Wright Vice-President, Human Resources & Administration

Marilynn A. Wright, Ottawa, Ontario, joined Telesat in 1981, and since that time has held increasingly senior positions in finance, administration, and human resources. Ms. Wright was appointed Vice- President, Human Resources and Administration in 1995. She holds a Bachelor of Science degree from McGill University in Montréal, Québec.

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Telesat subsidiaries – Infosat Communications Inc., The SpaceConnection Inc., and Telesat Brasil Limitada – are also involved in the marketing or resale of Telesat services across North and South America and employ an additional 130 well-qualified individuals.

Telesat is therefore a major employer of a highly-skilled, very-experienced and strongly- motivated work force predominantly located in Canada. These workforce qualities and characteristics have contributed to making Telesat one of the best and most highly respected satellite operators in the world today, and position Telesat to continue in that role well into the future.

3.4.3.2 Business Management

Telesat operates in five reportable business segments, covering the full range of satellite communications services and with operations (including subsidiary operations) in both North and South America. This reporting structure reflects how Telesat’s business is organized and managed.

1. Broadcast Services These services consist of the distribution or collection of video and audio signals in the domestic and North American markets and include television transmit and receive services, occasional use, bundled DVC and radio services. Video distribution services include the full-time transmission of Canadian and U.S. television programming to major Canadian broadcasters, their network affiliates, cable television companies and other redistribution systems. In addition, bundled, value-added services that include satellite capacity, digital encoding of video channel and, if required, uplinking and downlinking services to and from the satellite and teleport facilities are offered. This business segment also includes the services provided to Canada’s two DTH service providers. The vast majority of broadcasting signals originating in Canada are distributed over Telesat’s satellites.

2. Carrier Services Telesat provides satellite capacity for voice and data transmission services to telecommunications carriers located in Canada, the U.S. and South America. Telephone companies typically utilize these services as part of their domestic telephone networks to provide telephone and data services to remote areas (such as Northern Canada).

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3. Business Network Services Telesat provides satellite-based data networks in Canada and the U.S. and the related ground segment and maintenance services supporting these networks which are used in a variety of business functions. Applications include point-of-sale, electronic banking, airline and travel reservations, retail inventory management, video conferencing, distance education, LAN-to-LAN connectivity, Internet and intranet requirements and private voice networks. Telesat is one of the largest operators of VSAT systems in the world, and provides a wide variety of VSAT services including satellite network operations, technical services, maintenance engineering, network administration, engineering documentation and design, and automated information systems. Also included in this business segment are Telesat’s Ka-band services.

4. Consulting and Other This segment represents all consulting services related to the space and earth segments, government studies, satellite control services provided to other companies and management services. With over 35 years of engineering and technical experience, Telesat is a leading consultant in the establishment, operation and upgrading of satellite systems worldwide, having provided consulting services to businesses and governments in more than 30 countries. Telesat has developed a wide range of specialized services designed to assist satellite operators, spacecraft manufacturers and companies involved in the field of satellite communications around the world, including satellite consulting services, satellite operations and tracking services and flight dynamics software development.

5. Telesat Canada Subsidiaries This segment includes the operations of Infosat Communications Inc. (“Infosat”), Telesat Brasil Limitada and The SpaceConnection Inc. (“SpaceConnection”). Headquartered in western Canada, Infosat is a provider of both mobile and fixed satellite services for voice, fax, paging, Internet access and broadband data applications across all of North America. Infosat sells hardware and resells services provided by Telesat and other carriers such as Mobile Satellite Ventures, Iridium and Inmarsat. SpaceConnection is a major reseller of full period and occasional use space to the major networks, other broadcasters and television entertainment industries in the U.S., purchasing both analog and digital capacity from most North America satellite operators. Telesat Brazil Limitada is a holding company which owns 100% of Telesat Serviços de Telecomunicação Limitada (“Telesat Brazil”).

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Telesat Brazil purchases capacity from Telesat through the Brazilian satellite operator StarOne, who also purchases capacity from Telesat for its own use. Telesat Brazil provides voice, data and Internet access services from its teleport in Belo Horizonte to customers within Brazil and throughout South America, along with hardware sales to Brazilian businesses.

As shown in Table 3.4.3-3 below, all of Telesat’s business segments posted healthy revenue increases last year, with only the Broadcasting segment not recording double digit gains. Indeed, with overall revenue growth of over 30 percent, Telesat is performing exceptionally well in what is becoming an increasingly competitive and concentrated global satellite marketplace. This performance indicates that Telesat is well managed and taking advantage of new satellite business opportunities, both domestically and internationally.

Table 3.4.3-3 Telesat Business Segment Revenues

2005 2004 Segmented revenue breakdown ($ M) ($ M) % Change Broadcast 207.1 200.0 3.6% Carrier 35.1 29.5 19.0% Business Networks 132.5 78.4 69.0% Consulting and Other 26.2 23.4 12.0% Telesat Canada 400.9 331.3 21.0% Telesat Canada Subsidiaries 89.4 41.8 113.9% Inter-segment Eliminations (15.6) (10.9) 43.1% Total operating revenues 474.7 362.2 31.1%

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3.4.3.3 Marketing and Sales

Telesat markets its services primarily through a direct sales force located at its headquarters in Ottawa and at regional offices in Montreal, Toronto and Calgary. Telesat also has a small dedicated sales force based in Brazil to capitalize on opportunities in South America. In addition to the direct sales approach, Telesat has taken advantage of business alliances and joint ventures to expand its revenue base in Canada and internationally.

As an integral part of its marketing and sales approach, Telesat uses a sales application engineering team to provide both pre-sale and post-sale technical consultation and support to customers. This helps ensure that customers get the service that meets their needs right from the start and mitigates any operational issues that may subsequently arise.

Telesat’s focus on mitigating operational issues experienced by the customer extends to the repair and maintenance of customer premises equipment. Specifically, Telesat’s Allan Park facility operates as a logistics and spares handling unit and a state-of-the-art repair facility. Maintenance and support services include:

• field repair

• depot repair

• spare equipment provision or management

• help desk services

• database management of site inventory, trouble reports, and trouble resolution reports

• guaranteed response and repair times

• trend analysis and continuous improvement programs

• project management

To further meet customer requirements, Telesat operates a number of full-service teleports in major centres across Canada, including Montreal, Toronto, Calgary and Vancouver. Telesat’s teleports allow broadcasters and business customers to share services and equipment housed in one central location. This sharing of facilities reduces expenses and capital investment.

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Telesat has direct experience in the marketing of Ka-band services in Canada and the U.S. Deploying Anik F2, the first satellite to fully commercialize the Ka frequency band, gave Telesat the ability to market its Ka-band capacity on Anik F2 in Canada based on a wholesale service model. Telesat has entered into resale distribution arrangements with five service providers, including one national service provider (Barrett Xplore), and four regional service providers (NorthwesTel Cable Inc., Infosat Communications Inc., Aliant, and Bell Nordiq). This marketing approach has proven very effective in serving the consumer broadband market in Canada, so much so that the bandwidth of a number of the spot beams on Anik F2 is nearing exhaustion.

It is this marketing success that is driving Telesat’s requirement for securing additional Ka- band spectrum resources, including the Ka-band frequencies at the 91°WL position.

3.4.4 Institutional Competency

The Call indicates that applicants should describe relationships and arrangements with other institutions, such as partners, investors, resellers and customers, necessary to ensure the success of, or enhance the ability of the applicant to implement, the proposed satellite projects.

In implementing its proposed plan for the development of the Ka-band and 17 GHz BSS frequencies at the 91°WL position, the cementing of solid relationships with four key groups is paramount for Telesat to succeed in developing this requested authorization to its full potential. These include Telesat’s relationship with its Ka-band satellite broadband partners as well as prospective customers for the Ka-band and 17 GHZ BSS capacity being made available, its relationship (or that of its service provider customers) with vendors supplying necessary network ground segment and terminal equipment, its relationship with partners in the demonstration and testing of commercially viable Ka-band and new 17 GHz BSS applications, and its relationship with financial institutions.

3.4.4.1 Customer Relationships

Telesat has very solid and long-standing relationships with its customers. Canadian broadcasters consider Telesat as their carrier of choice. With its Anik F2 Ka inauguration, Telesat has established strong partnerships with Canadian satellite broadband service providers in bringing their services to market; Telesat’s U.S. broadband partner WildBlue has experienced very impressive growth since its service launch on Anik F2.

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Telesat will be looking to these valued customer relationships to making the addition of the KA/BSS2 satellite another Canadian satellite success story. Given that the cost of procuring and launching the type of satellite contemplated in this application runs into the several hundreds of millions of dollars, it is of critical importance to Telesat and the overall viability of the satellite project, firm customer commitments are in place for substantial portions of the total capacity over the revenue-generating life of the satellite. Another important consideration, given the relatively small size of the Canadian marketplace, is that an anchor-tenant from outside of Canada also takes a significant portion of the satellite payload, thereby defraying the satellite costs to the benefit of Canadian satellite users.

As described in Appendix 2 - Telesat’s Canadian Satellite Capacity and Services Plan in this application, Telesat has consulted with Canadian broadcasters as well as Ka-band satellite broadband service providers in Canada and in the U.S. to ascertain their requirements for the Ka-band and 17 GHz BSS capacity on Telesat’s KA/BSS2 hybrid satellite. As a result, Telesat has received interest for significant portions of Ka-band capacity from its largest Canadian and American broadband partners. Telesat has also received interest from other customers in Telesat’s KA/BSS1 and KA/BSS2 satellite proposals at the 118.7°WL and 91°WL orbital locations.

3.4.4.2 Vendor Relationships

With its KA/BSS2 satellite Telesat will be building on its existing relationships with vendors involved in Ka-band technology and equipment and will work in co-operation with vendors to develop and manufacture equipment dedicated to delivering services in the new 17 GHz BSS frequency band.

These relationships are an important determinant in the ultimate success of the service in the marketplace. For example in the case of Ka-band, equipment costs, including the cost of gateway and terminal equipment, figure prominently in the overall price of end-user Ka-band service. An operator’s or service provider’s ability to control these costs will depend on its relationship with these vendors.

Telesat is well positioned here, because it is already providing commercial Ka-band services using Anik F2 and therefore has existing relationships with these vendors, and because of its other significant satellite activities which can be leveraged to control or mitigate vendor costs.

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More specifically, because it is already an established player in Ka-band markets and because of its size and standing in the satellite industry, Telesat can command MFN pricing, volume discounts or other favourable terms from equipment vendors for itself or on behalf of its partners.

An example is the arrangement Telesat and WildBlue have structured with Raven, the UK-based vendor of the Ka-band antenna used by the two companies. Under this existing arrangement, the price of these units decreases appreciably to Telesat and WildBlue based on the total number of terminals shipped to the two companies.

Increases in terminal production will drive these costs down. In this regard it should be noted that the S-DOCSIS protocol will become a standard in the industry once 80,000 terminals are deployed on Anik F2, thus enabling an open market for terminal manufacturers and providing competitive pricing for the end user's benefit. This is likely to occur in the 2008/9 timeframe. Other manufacturers have already produced test units, with competitively priced production units likely available in 2007.

In terms of the 17 GHz BSS band technology, this is a new band and will require the development and manufacture of new equipment, both on the satellite and on the ground, including customer premises equipment. Similar to the Ka-band experience, these development and manufacturing costs will likely figure prominently in the overall price of the end-user service. These costs and new equipment development times can be significantly influenced by the relationship the operator or service provider has with its vendors. Operators capable of participating in, or consulting on, the development of new equipment, or the testing of that equipment, may be able to help bring the product to market sooner, at a lower cost, with fewer flaws, and/or superior functionality in order to meet the demand.

Telesat is exceptionally well positioned here. It has detailed and intimate knowledge of all aspects of the industry and what must be done to successfully develop, test and market new satellite equipment and services. Telesat also has a state-of-the-art R&D facility at its headquarters in Ottawa and routinely works with equipment vendors in the development and testing of new equipment and applications. As a result of its size and standing in the satellite industry, Telesat may be in a position to command MFN pricing, volume discounts or other favourable terms from equipment vendors for itself or on behalf of its partners.

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Particularly in emerging new markets like Ka-band service and 17 GHz BSS, relationships between service suppliers and equipment vendors can take on characteristics of a partnership, where both parties must succeed if the relationship is to endure. By building close working relationships with equipment vendors in these new markets, Telesat has found that it can positively influence the design or functionality of the product to better suit its needs and/or those of its customers, or speed new product development, testing and commercial service introduction.

Building such strong relationships with equipment vendors has long been a Telesat priority and has been a major contributing factor to Telesat’s success in bringing affordable and innovative new services to Canadian satellite service users. Telesat is strongly motivated to continue this practice in the Ka and 17 GHz BSS frequency band.

3.4.4.3 R&D Partner Relationships

Telesat has made its world-class R&D lab available to equipment vendors and customers for demonstration and testing as they evolve their products and services to take advantage of emerging technologies.

In recent years much of this activity has focused on the demonstration and testing of the latest Ka-band technologies and systems. Starting with the experimental Ka-band payload Telesat included on the Nimiq-2 satellite, this work has had a space-segment focus (e.g., On Board Processor/SpaceMux trials). Other research activities have involved the testing of ground segment equipment (e.g., DVB-RCS trials, intelligent satellite services/robotics, integrated antennas, and transportable user terminals), the development of new satellite applications, and new broadband applications in particular (e.g., SchoolNet, tele-health, tele-learning, REACH, MeCA/MIST, digital signage, mobile TV and HD videoconferencing), as well as work on international standards (e.g., HDTV interoperability).

Most of the projects supported by the lab are partnerships with industry and research organizations. These groups include the CSA, European Space Agency, Industry Canada, CRC, TETRA, CANARIE, and the World Broadcasting Union International Satellite Operations Group, as well as many private company industry leaders such as EMS, ComDev, March Networks, ViaSat, iDirect, HNS, EION, and MacDonald Dettwiler.

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These joint development activities involving Telesat and its partners have helped build a strong foundation for long term cooperation within the industry, and have been instrumental in proving a variety of Ka-band technological advancements and new service concepts and applications now being introduced in the Canadian marketplace and abroad. Telesat has every intention of continuing to make its R&D lab and facilities available to its customers and partners and further strengthening its cooperative relationships with these important satellite industry participants, and expects that this will significantly enhance Telesat’s and its partners’ ability to make the most of new satellite orbital authorizations, the Ka-band authorization at 91°WL included.

Telesat has committed to working with its broadcasting customers in developing new technologies and applications to advance their businesses. As a recent example, a significant portion of Telesat’s R&D work over the past several years has focused on the demonstration and testing of new broadcasting technologies and applications, and on HDTV in particular. These studies have been undertaken with a host of partners, notably Communications Research Canada (“CRC”) and the CBC, as well as the Canadian Digital Television (“CDTV”) association which includes most of Canada’s major broadcasters. The World Broadcasting Union, which is comprised of many networks and programmers from around the world, also participated in these studies.

Telesat’s HDTV research activities have largely focused on video encoding and modulation over satellite. The results of these studies suggest that the use of these new techniques will increase the number of signals over an equivalent amount of bandwidth by a factor of two to six times. This increased efficiency would translate into significant cost reductions for broadcast distributors and programmers. Less satellite capacity for each signal would be required than would otherwise be the case, but Telesat’s experience has been that such enhancements stimulate the introduction of many new services, with an overall increase in satellite capacity demand (e.g., digital video compression), and improve the viability of these customers, which in turn has a positive long term effect on Telesat.

Telesat and its partners have also been investigating the delivery of video signals to platforms other than television. For example, signals can be transmitted in digital format over a 2 megabit-per-second Internet connection and yet maintain remarkable picture quality. This delivery method is not suitable for the broadcasting industry today because it requires one connection to each user, but indicates what future market opportunities may be made available to the industry with a concomitant increase in satellite capacity demand.

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Telesat has also been involved in the evaluation of video signal delivery for industries which are not directly related to broadcasting, but could have implications nonetheless. For example, satellite delivery of digital movies to theatres is an innovative way to increase the efficiency and minimize the cost of film delivery. Films are transmitted and then stored on a file server at the theatre, rather than the distributor having to physically transport a movie. Not only does this reduce costs, but it makes it faster and easier for the theatre to change the movies it offers in response to market demand. It also creates a new market opportunity for satellite.

In terms of the 17 GHz BSS technology proposed on the KA/BSS2 satellite, Telesat expects that once it is available, interest will evolve in this band’s potential and the new capacity it brings for use by Canadian broadcasters, telcos or other service providers. For example while Next Generation Networks (NGN) are being studied, emerging technologies such as Internet Protocol Television (IPTV) are delivering audio, video and control signals over enhanced existing networks to end users using a variety of receive devices. Telesat plans on working with future service providers to develop the technical means, protocols and applications needed to bring commercial services to the Canadian market. As a new and as yet untapped resource, the 17 GHz BSS frequency band will provide a unique opportunity to augment many existing broadcast and telecommunications service portfolios with service offerings that otherwise might not be possible due to the very limited availability of traditional Ku-band capacity.

In addition, with the award of licence for the KA/BSS2 satellite at the 91°WL orbital position, Telesat and its Canadian broadband partner Barrett Xplore would consider undertaking an R&D initiative to determine the commercialization opportunity of rich content delivery using the 17 GHz BSS frequency band.

These joint development activities involving Telesat and its partners have helped build a strong foundation for long term cooperation within the industry, and have been instrumental in proving a variety of broadband, broadcasting and other technological advancements and new service concepts now being introduced in the Canadian marketplace and abroad. Telesat has every intention of keeping its R&D lab and facilities available to its customers and partners and further strengthening its cooperative relationships with these important satellite industry participants, and expects that this will significantly enhance and maximize the use of the Ka-band and 17 GHz BSS spectrum requested in this application at the 91°WL position.

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3.4.4.4 Financial Community Relationships

With new satellites costing in the hundreds of millions of dollars to construct and launch, and this investment generally required prior to the generation of any customer revenue stream, the satellite operator must have a credible standing and strong working relationships with members of the financial community to move ahead with the development of any given orbital resource in a timely manner. Telesat has this standing in the financial community and has developed these strong working relationships over its 35+ years of satellite procurement and operation.

This standing that Telesat enjoys includes a BBB- corporate rating from Dominion Bond Rating Service Limited (“DBRS”) and Standard and Poor’s (“S&P”) Rating Group, a division of McGraw Hill Inc. A credit rating of BBB- qualifies Telesat as investment grade, and therefore benefits Telesat in terms of lower borrowing rates and greater market accessibility than non-investment-grade companies.

This standing also includes a bank line of several hundreds of millions of dollars with a syndicate of foreign and Canadian banks. Telesat has extensive experience in implementing substantial capital expenditure programs. Indeed, over the past three-plus decades Telesat has successfully financed the construction and launch of 16 of its own satellites, and currently has two other satellites under construction and a third in the planning stages. Telesat has also proven to be resourceful and creative in its approach to financing. By selling capacity on a condominium basis in appropriate circumstances, for example, Telesat has been able to decrease its overall financing requirements and reduce its exposure to business risk.

Telesat has also consistently demonstrated that it has the confidence of the insurance industry in obtaining adequate coverage of its satellite fleet at attractive rates. It also has extensive internal expertise and ready access to expert advice to support this key risk management function. For many years Telesat has provided technical advice, on a consulting basis, to a variety of satellite insurers.

Telesat has the demonstrated and key institutional relationships and arrangements in place, with customers, equipment vendors, R&D partners and the financial community that will be necessary for the optimal development of the Ka-band and 17 GHz BSS spectrum at the 91°WL orbital position.

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4.0 BUSINESS PLAN AND AGREEMENTS

With the KA/BSS2 satellite, Telesat proposes to develop a satellite broadband/ multi-media platform at the 91°WL position using the Ka-band and 17 GHz BSS payloads. This satellite will be co-located with Telesat’s Nimiq-1 BSS satellite and will augment those services with broadband capabilities.

The KA/BSS2 satellite is part of Telesat’s long term Ka-band capacity plan. That plan not only overlays broadband/multi-media capacity to Telesat’s existing orbital neighbourhoods but does so incrementally, to coincide with the growth of commercial Ka-band broadband and 17 GHz BSS broadcast/multi-media services in the marketplace.

The KA/BSS2 satellite is primarily a broadband vehicle and, depending on the service provider, the Ka-band and 17 GHz BSS spectrum could be combined or used separately to deliver Internet based applications. In the following section, Telesat’s KA/BSS2 business plan separately sets out (for the Ka-band and 17 GHz BSS), a description and assessment of the market, the competitive environment, and the market segments being targeted by the KA/BSS2 satellite program.

4.1 ROADBAND BUSINESS PLAN

Telesat is the only satellite operator in Canada with a comprehensive satellite broadband strategy. Since 1999 that strategy has moved from concept to actual satellite construction, launch and inauguration of commercial broadband services throughout Canada. Anik F2’s Ka-band payload is now anchoring satellite broadband service providers as their businesses grow. That growth is happening exponentially as broadband access becomes available for the first time to remote, underserved areas in Canada and in the U.S. To meet current service needs and forecasted demand in the near future, more Ka-band satellite capacity is needed.

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Beyond Anik F2 and the new Anik F3, Telesat proposes additional steps to bring much needed Ka-band to the Canadian and U.S. markets. The first step will be with the KA/BSS1 satellite to be located at the 118.7°WL position; the next step proposes to bring the KA/BSS2 satellite into service to continue the incremental expansion of the Ka-band capacity to the marketplace.

Telesat’s KA/BSS2 satellite and its Ka-band capacity plan are supported by Canada’s largest national broadband service provider, Barrett Xplore. See Appendix 3- Letters of Support. KA/BSS2 will provide the expansion, service continuity and backup to their business on Telesat’s KA/BSS1 satellite; in addition, Telesat’s Ka-band capacity plan will meet Barrett’s Ka-band requirements and in a manner that is sustainable by their growing business.

4.1.1 oadband Market Assessment

The following provides Telesat’s assessment of the broadband market in Canada and, generally in the United States.

The Internet has been instrumental in spawning broadband development worldwide. It has presented a model of an inexpensive and efficient platform for e-commerce, communications and entertainment to be used by anyone, anywhere and delivered over a variety of media.

In North America, Internet subscriptions have continued to grow unabated. Table 4.1.1-1 below shows the growth in total Internet subscribers since 2002, for Canada and the United States.

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Table 4.1.1-1 Total Internet Subscribers (millions)5

Country 2002 2005 CAGR

Canada 7.3 8.6 5.61%

United States 86.5 111.9 8.96%

With the growing availability of broadband technologies, the shift to high-speed broadband internet access is growing exponentially over traditional dial-up access. In the U.S. in 2004, broadband accounted for over 50% of subscribers that accessed the Internet.6 Today, broadband is dominated by digital subscriber line (DSL) and cable Internet service providers (ISPs). Table 4.1.1-2 below shows the breakdown of North American Internet subscribers by broadband access technology.

Table 4.1.1-2 Broadband Subscribers 2005 – Canada and U.S.

Country DSL Cable Other Total

Canada 3,225,603 3,449,160 31,936 6,706,699

United States 19,109,636 26,459,496 3,821,928 49,391,060

The potential Canadian broadband market can be divided into three principal sectors: consumer, small/ medium sized business/home office and large enterprise, with each sector emerging at its own pace.

4.1.1.1 sumer Sector

Since 2002, the estimated number of Canadian households not served by some form of broadband has trended downward: Table 4.1.1-3 below provides estimates determined annually from Industry Canada’s Broadband Community Service Status database of the number of communities and households without some form of broadband access.

5 Frost and Sullivan Decision Support Database – Internet Access Services March 1, 2006 6 Nielsen/NetRatings. U.S. Broadband Connections Reach Critical Mass, Crossing 50 Percent Mark for Web Surfers. August 18, 2004. http://www.nielsen-netratings.com/pr/pr_040818.pdf

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Table 4.1.1-3 Canadian Households Without Broadband

Year Issued Estimated Households w/out BB (000’s)

2002 2,040

2003 1,910

2004 1,800

2005 1,100 2006 698

In the U.S., Americans have taken the mission of ubiquitous broadband very seriously. Myriad studies have been published attesting to the disadvantages caused when service is not available in a community. The term Digital Divide was coined to differentiate between the broadband ‘haves’ and ‘have nots’. It is known that 20-25 million Americans are on the wrong side of the divide.7

4.1.1.2 edium Business (SME)/ Small Office Home Office (SOHO) Sector

According to Statistics Canada there are one million employer businesses in Canada (defined as businesses that maintain at least one person on payroll), of which approximately 75 percent (or 750,000) are small businesses with 1 – 9 employees. 8 Based on figures from Canada Post, approximately 208,000 9 of the total of all businesses are operating in Canada’s rural postal areas; accordingly, of the total rural businesses operating in Canada, it is estimated that 155,500 are SME’s. Using provincial distributions from Statistics Canada, Table 4.1.1-4 below breaks down their distribution by province:

7 ComLinks: Satellite Intelligence. WildBlue Formerly KaStar & iSKY. May 20, 2005. http://www.comlinks.com/satcom/wildblue.htm 8 Key Small Business Statistics. Industry Canada, January 2006 9 www.canadapost.ca, Householder counts

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Table 4.1.1-4 Rural SMEs

SMEs NL 2,531 PE 970 NS 4,513 NB 3,893 QC 35,390 ON 51,715 MB 5,267 SK 5,835 AB 21,057 BC 23,776 YT 235 NT 257 NU 93 TOTAL 155,532

In the U.S., the SME/SOHO market is also demanding low cost broadband access in all regions. Satellite is already playing an essential role in getting American businesses on the information superhighway, through satellite services provided by WildBlue on Anik F2 and Hughes Network System (HNS).

4.1.1.3 nterprise Sector

As the leading VSAT operator in Canada, Telesat has particular insights into the large enterprise market. Currently, VSAT networks operate primarily using the Ku frequency bands, Telesat anticipates that large enterprise networks may eventually migrate to Ka-Band. However before that happens, further development in technology and terminal capabilities will be needed, as well as an evolution of enterprise applications to meet the more demanding requirements of large enterprise customers. For these reasons, Telesat has excluded the large enterprise sector from its business plan.

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4.1.1.4 n Assessing Demand

To assist in its consultations with Canadian broadband service providers with respect to a proposed new Ka-band satellite at the 91°WL location, Telesat used a market ‘matching factor’ methodology. This methodology was welcomed by the service providers as it illustrated where their respective services were being furnished in Canada and what that meant in terms of their short, medium and long term Ka-band capacity requirements.

Simply stated, the ‘matching factor’ methodology proposes to match the new Canadian satellite capacity design of KA/BSS2 with the areas of greatest expected demand across Canada. To arrive at the matching factor for Telesat’s KA/BSS2 satellite, a “bandwidth grid” was created to identify the location of all existing Anik F2 Ka-band terminals within a defined latitude and longitude range. This grid was then used as a proxy for areas of future Ka-band demand.

Figures 4.1.1-1 and 4.1.1-2 below provide samples of the Canadian national and Canadian east coast terminal counts, respectively. The numbers on these figures are the number of terminals within ±0.5 degrees of the latitude/longitude data point. Telesat and its Canadian broadband partners believe this information, together with projected average demand per subscriber, can be used to reasonably estimate the amount of capacity that will be required in a geographic area. With these estimates of demand Telesat can then optimize beam coverage/capacity design for its proposed KA/BSS2 satellite. In addition, any final design of the proposed satellite and its ground infrastructure would also incorporate flexibility in bandwidth allocation to satisfactorily meet the changing market demands over the life of the satellite.

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Figure 4.1.1-1 Anik F2 Ka-band Terminal Distribution May 2006

(Normalized to Nearest Whole Latitude/Longitude Intersection)

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Figure 4.1.1-2 Anik F2 Ka-band Terminal Distribution May 2006 - Eastern Canada View

(Normalized to Nearest Whole Latitude/Longitude Intersection)

4.1.2 et Market – Ka-band

The following section outlines forecast demand by market for broadband services that will be targeted by Telesat’s KA/BSS2 satellite.

A significant portion of the information provided in this section is based on the first hand experience of Telesat and its broadband partners on Anik F2, the largest being Barrett Xplore in Canada and WildBlue in the U.S.

The astonishing success realized in the roll-out of broadband services in Canada and in the U.S. has been instructive. Simply put, what is needed is additional Ka-band capacity to allow expansion and back-up capability to the KA/BSS1 Ka-business platform at the 118.7°WL position.

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With the ‘on-ground’ experience of its broadband partners Telesat’s proposed satellite program is targeting the following sectors within the Canadian broadband market:

• the consumer sector, largely in rural-underserved areas, but also in urban and ‘near- urban’ households;

• the small enterprise (SME) and small office/home office (SOHO) sector

While each sector has high potential on its own, Telesat believes there is an inherent compatibility between them. Telesat expects that the supply of new Ka-band capacity aboard KA/BSS2 and the increasing consumer customer base will support the development of more content-rich applications and technology improvements. Telesat foresees the demand for Ka-band services then to move beyond the consumer market to include more business customers.

4.1.2.1 onsumer Sector

Telesat’s KA/BSS2 satellite will be targeting the Canadian consumer market as a direct result of the strong demand for current and projected Ka-band services in Canada. Table 4.1.2-1 below indicates the growth statistics for Telesat and WildBlue since their respective service launches in 2005.

Table 4.1.2-1 Anik F2 Ka-Band Service Statistics

Canada United States (WildBlue)

Launch Date June 2005 June 2005

Terminals Y/E 2005 5,261 25,000

Terminals October 2006 18,000 100,000

YTD 2006 Growth 290% p.a. 360% p.a.

Growth in Anik F2 Ka-band subscriber numbers has been strong in Canada and in the U.S.; Ka-band is seen as a last mile broadband access solution for consumers in rural and remote communities. It is clear that over the medium-term, demand will out strip the capacity available on Anik F2.

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Based on deployment trends, projected year-end nominal Canadian subscriber totals are as shown in Table 4.1.2-2. Both capacity and demand for Ka-band services are expressed in terms of “nominal subscribers”, a metric indicating the number of equivalent 512/128 kbps (down stream / up stream) network connections.

Table 4.1.2-2 Projected Canadian Ka-band Nominal Subscribers

2006 2007 2008

Subscribers 32,000 66,072 91,297

The overall capacity of Anik F2 is estimated at 150,414 nominal subscribers. However, Anik F2 capacity is more or less uniformly spread across the country, whereas the demand for satellite broadband services closely follows population densities. Hence, capacity shortages will occur in those Anik F2 beams that cover the most populated areas of the country.

It is expected that by the end of 2008, demand will exceed supply by 14,126 nominal subscribers in key markets and this imbalance will grow to 100,000 by 2011. Moreover, these estimates do not account for the increased amounts of bandwidth needed for the service offering being demanded by subscribers today.

According to the Industry Canada data issued in 2006, as many as 697,709 Canadian households did not have access to any kind of broadband service.10 Telesat believes this is a conservative measure as the Department’s data assumes that if broadband access is available in a community then all households are being served. This data does not address the many households that are classified as being located in towns and cities with broadband access but who in fact, live beyond the service’s reach. To reinforce this point, according to Anik F2’s existing Ka-band subscribers, 70 percent reside in towns and cities where Industry Canada’s data indicates broadband access is available.

Canadian national reseller Barrett is forecasting that increases in subscriber bandwidth requirements will drive DSL and cable to focus more on urban areas, leaving the urban fringe and rural territory for satellite.

10 Industry Canada: Information Management Team – Broadband National Office. Broadband Community Service Status. April 2006

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These views are echoed by Telesat’s smaller regional satellite broadband service resellers across Canada. By targeting these consumer households as well as potential subscribers in remote and rural areas that do not have a broadband solution, Telesat expects that the number of households without broadband access today is greater than estimated by the Department’s data.

As another reference, Bell Canada in its proposal to the CRTC to seek funding from the deferral account for the expansion of its DSL footprint states the following: 11

“Beyond 2003, the Company will continue to expand the DSL footprint into key target areas for residential and business markets. Under its commercial rollout plan, the Company expects to expand its DSL footprint to cover approximately 90% of homes and business lines passed within three to four years. The Company does not expect to undertake any further expansion of its footprint under its commercial rollout plan given that the remaining locations where broadband capability is not available are areas where the provision of DSL service is not expected to be profitable even over the long term”.

Bell’s estimate reinforces Telesat’s view of the size of its target market; using Bell’s figure and based on approximately 13 million Canadian households, this would leave 1.3 million households still unserved.

The forecast demand for satellite broadband services by the Canadian consumer market is summarized in Table 4.1.2-3 below.

4.1.2.2 Broadband Demand - SME / SOHO Sector

Broadband access is an essential tool for SME/ SOHO commercial operations. It enables e-commerce and telecommuting to be done effectively and cost-efficiently. Satellite broadband can be attractive to SME and SOHO markets because DSL, the usual alternative, is not always available or may be inadequate in performance due to limitations caused by the distance from the central office.

11 Bell Canada proposal to CRTC to seek funding from the deferral account for the expansion of Bell Canada’s Digital Subscriber Line footprint to certain areas. December 2003.

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Since the introduction of Ka-band service in Canada on Anik F2, Telesat’s Canadian reseller network has recorded solid SME subscriber growth. For example, Barrett had registered about 4,200 weighted SME subscribers by February 2006. This reflects 40% of the reseller’s total subscriber portfolio, making enterprise an important component to their business 12.

Telesat has developed a demand forecast for broadband services by SMEs / SOHOs based on several assumptions. First, Telesat decreased the overall SME/ SOHO demand to account for an overlap in households captured under both classifications. Second, it assumed that the take rate among SMEs/SOHOs would be 50 percent. This is due to the high-value that this market places on broadband access, as evidenced by early success in SME service adoption and the penetration of broadband services in Canada where broadband access is available.

4.1.2.3 Band Demand Projections

Telesat’s demand projections for the Canadian Consumer and SME/SOHO market opportunity are shown in Table 4.1.2-3 below. The combined Anik F2/F3 and KA/BSS1 Ka-band capacity will not satisfy this demand in its entirety.

Table 4.1.2-3 Demand Estimate of Consumer and SME/SOHO Market in Canada (Households)

Number of Households

Market Opportunity Consumer 1,500,000

SME/SOHO 150,000

Take Rate 50%

Business Opportunity Consumer 750,000

SME/SOHO 75,000

TOTAL 825,000

12 Monthly Meeting. Barrett Xplore, February 24, 2006

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Based on the demand forecast provided, Telesat estimates the business opportunity to represent 825,000 subscribers from the Consumer and SME/SOHO markets.

One important factor in order to meet this demand is an understanding of the location of this demand relative to the capacity of the Ka-band beams. Telesat has endeavoured to match the satellite beam capacity to the population demand as closely as possible. This ‘matching factor’ proposes to match the new Canadian satellite capacity design of KA/BSS1 with the areas of greatest expected demand across Canada.

Telesat estimates that the optimal satellite design and beam capacities will achieve an approximate matching factor of 80%. The capacity adjusted business opportunity then become 660,000 consumer and SME/SOHO subscribers. Each of these subscribers will subscribe to one of several service offerings with various throughput and bandwidth requirements. While the majority of consumers are expected to subscribe to a basic level service offering, some consumers and many of the SME/SOHO customers will subscribe to higher service offerings.

It is estimated that bandwidth requirements and performance expectations will continue to grow over time. Telesat therefore estimates that the weighted average bandwidth required will be 20 kbps per user (in the forward direction). In addition, as new applications develop that increase the bandwidth requirement, the weighted average bandwidth will increase to 30 kbps per user (in the forward direction). It is also estimated that the return bandwidth requirement will also increase to be much more symmetrical to the forward requirement. With a demand forecast of 660,000 subscribers and an estimated 30 kbps on average per user, this equates to a total of 20 Gbps of forward capacity and 10 Gpbs of return capacity. Telesat’s Ka-band Canadian capacity plan at 118.7°WL and 91°WL is designed to meet this demand.

In the U.S., Telesat’s partner, WildBlue has made inroads into the consumer and SME/SOHO market sectors over the last year with Anik F2 Ka-band services and expects continued growth in these markets. WildBlue’s demand for more Ka-band capacity is reflected in its interest in, and support of, Telesat’s KA/BSS1 and KA/BSS2 satellites.

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4.1.2.4 ering Ka-band Capacity and Services

a) Across Canada

The Ka-band payload of the KA/BSS2 satellite is designed with all Canada and U.S. coverage. The satellite will be equipped with 124 spot beams; 46 of those beams will serve Canada and the remaining 78 beams will be for U.S. coverage. Of the 46 Canadian beams on KA/BSS2: 28 will use high bandwidth (250 MHz), 14 beams will use medium bandwidth (125 MHz) and the last 4 beams will use low bandwidth (62.5 MHz). These user beams will be grouped based on their homing gateway. The Ka-band payload is designed to operate with a total of 20 gateways, 9 for Canadian user beams and 11 to serve U.S. user beams.

The Canadian portion of the Ka-band payload on KA/BSS2 will have 12.6 Gbps in the forward direction and 12.3 Gbps return.

Telesat anticipates the satellite procurement, construction, launch and in-orbit testing of KA/BSS2 will take approximately 42- 45 months from the time a satellite procurement contract is signed. However, Telesat believes that there are several factors that should be considered in determining the in-service date for the KA/BSS2 satellite. Key among them is ensuring Canada retains ITU priority for the Ka-band and 17 GHz BSS spectrum at the 91°WL position. Another important factor is bringing in Ka-band capacity at a pace that the emerging satellite broadband service providers can absorb and their businesses can sustain. The support Telesat has received from Barrett, WildBlue, Star Choice and Bell ExpressVu for Telesat’s long term Ka-band capacity plan reinforces the need for a phased-in, incremental approach to Ka-band capacity’s entry into the marketplace.

With the award of the Ka-band and 17 GHz BSS authorization at the 91°WL position, Telesat will use its fleet management to meet the ITU’s bring into use (BIU) dates to ensure Canada retains ITU priority for the Ka-band and 17 GHz BSS spectrum at 91°WL position. Having met this obligation, Telesat will have the flexibility to determine with its Ka-band service partners the optimal timing for bringing KA/BSS2’s capacity to market. It is expected that KA/BSS2’s in-service date will be in 2013 and before the expiry of the two year suspension for the network under the ITU Radio Regulations.

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As Canada’s largest satellite broadband service provider, Barrett supports Telesat’s Ka-band plans for both the 91°WL and 118.7°WL orbital position. Barrett has indicated its overall Ka-band requirements will be met with the addition of Anik F3, KA/BSS1 at 118.7°WL and with the KA/BSS2 satellite at 91°WL.

Telesat will offer Barrett capacity on a wholesale basis. Telesat will provide the satellite capacity and Barrett will use the capacity as required to furnish broadband services on a retail basis. Today Barrett has an established national dealer network that provides sales, marketing, support and customer care in distributing its services throughout all regions of Canada.

With KA/BSS2’s Ka-band capacity, Barrett will package, market, sell and distribute to the retail marketplace competitive broadband service offerings. Based on Barrett’s substantial successes today, Telesat has complete confidence in its partner’s commitment and ability to deliver today, and in the future, among the most advanced broadband satellite services to Canadians everywhere.

The Canadian Ka-band capacity on KA/BSS2 not contracted by Barrett will be made available on a wholesale basis to Telesat’s network of Canadian resellers and other new entrants.

Telesat’s role in the broadband services market will remain as a carrier providing the Ka-band satellite capacity as well as its operation and control. Telesat will also continue to own, maintain and operate the extensive broadband gateway and teleport infrastructure throughout Canada. Existing Canadian broadband service providers will be able to garner additional benefits by leveraging the existing national infrastructure to reduce their costs of bringing new capacity to market. Those costs savings could in turn make satellite broadband services even more affordable for all Canadians.

Finally, as it has done in the past and most recently with C and Ku-band Anik F3 capacity, Telesat will seek contractual commitments for the new satellite capacity on a wholesale basis from interested Canadian entities.

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b) Beyond Canada

Telesat will arrange for the wholesale lease of all the U.S. coverage Ka-band capacity on the KA/BSS2 satellite to WildBlue or another U.S. satellite broadband service provider. The U.S. Ka-band capacity will have approximately 11.5 Gbps in the forward direction and 13.3 Gbps for the return.

c) Human Resources and Customer Service

For over 35 years Telesat has relied on its in-house expertise to develop, manage and operate its existing 16 satellite programs. Refer to Section 3.4.2 for further details.

Telesat’s ranking as the fourth leading FSS satellite operator in the world is a strong attestation of its abilities to operate satellite systems, manage multi-facetted satellite businesses and remain committed to high quality customer service. Telesat will use all these skills, resources, expertise and experience in implementing its proposed long term Ka-band capacity plan, featuring the KA/BSS1 and KA/BSS2 satellites, to the North American market.

Telesat’s broadband partners in Canada and in the U.S. are equally impressive in their ability to deliver satellite broadband services to their respective markets as well as to manage their growing businesses.

4.1.2.4.1 ett Xplore

Barrett is currently the only Canadian national reseller of satellite broadband services using Telesat’s Anik F2 Ka-band. With its own unique approach to the Canadian broadband market, Barrett’s plan is to develop the underserved markets using satellite and fixed wireless technologies for their broadband solutions. Specific subscriber characteristics and geographic location dictate which technology is used. By year end 2006, Barrett expects 20,000 Ka-band subscribers.

The Barrett Xplore organization provides sales, marketing, support, customer care and distribution of services throughout all regions of Canada. They have an advanced national sales and distribution network that consists of over 600 independent dealers, including over 200 The Source corporate stores. Barrett anticipates that an additional 600 stores could be carrying its Ka-band service offerings in the near future.

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The company uses its established national dealer network as well as its own sales team of 100 employees to develop the market, manage service programs, retail points of presence (POP) marketing material and formulate dealer incentive programs to increase activations. Barrett also uses its existing supply-chain infrastructure to effectively manage the transport logistics of deploying Ka-band terminals as needed to any location in Canada. Barrett has a network of over 1,700 certified installers, of whom 1,200 specialize in Ka-band terminal installations. Barrett expects the number of its Ka-band installers to increase to over 1,600 by year end.

In order to provide the most effective customer service, Barrett Xplore recently opened a new call centre at its head office in New Brunswick. The call centre employs over 60 Canadian customer care agents. Barrett plans on launching another call centre in 2007.

Barrett’s success to date in identifying and meeting broadband service demand in Canada illustrates the depth of experience and resources it has available to exploit the Canadian satellite broadband market. Telesat is confident that Barrett is the optimal channel to market nationally for its new Ka-band capacity on the KA/BSS1 satellite and later on KA/BSS2.

4.1.2.4.2 Blue

WildBlue is Telesat’s customer providing high speed Internet services to U.S. subscribers. WildBlue introduced its service in 2005 utilizing the U.S. capacity on Telesat's Anik F2 satellite. WildBlue-1, WildBlue’s second satellite, is scheduled for launch by year end with capacity for approximately 450 thousand new subscribers. WildBlue-1 is estimated to reach full capacity within 3 or 4 years based on the current rate of deployment.

WildBlue service is accessible to virtually every home and small business in the contiguous U.S., including the estimated 20-25 million homes and small offices that are not wired for terrestrial (DSL or cable modem) service.

WildBlue has 200+ employees to develop the market, manage service programs, retail points of presence (POP) marketing material and formulate dealer incentive programs to increase activations. WildBlue has a large network of certified installers who specialize in Ka-band terminal installations. It is estimated that WildBlue currently installs approximately 10,000 terminals per month. WildBlue’s engineering and operations staff design and operate the numerous unmanned satellite gateways in the U.S.

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The WildBlue organization provides sales, marketing, support, customer care and distribution of services throughout the U.S. They have an advanced national sales and distribution network that consists of wholesale channels through NRTC, AT&T, DirecTV and EchoStar. WildBlue also has a master agreement with DSI Systems Inc. for sales across the continental U.S.

WildBlue has attracted blue chip strategic investors including Intelsat, the National Rural Telecommunications Cooperative (NRTC), Kleiner Perkins Caufield & Byers, Liberty Media, and Telesat. In addition, the company has a seasoned management team of executives with vast experience in the Internet, satellite and cable industries. WildBlue's management and technical team is composed of terrestrial and satellite data communications experts from top companies including EchoStar, Tele-Communications Inc., Time Warner Cable, Loral, and Pac Bell. All have been brought together to serve the single objective of accelerating consumer access to broadband in the U.S.

4.1.2.5 ice Offerings

Telesat’s Anik F2 introduced the first generation of satellite broadband services to the Canadian and U.S. markets. The addition of the KA/BSS1 and KA/BSS2 satellite capacity will enable Canadian service providers to retain their existing customer base and grow their businesses in an increasingly competitive broadband market. This new capacity will reduce their business risk by having back-up capacity available to restore services to consumers and business in the event of a satellite failure. Both Telesat and Barrett share the view that satellite gives potential for rural broadband to match urban market capabilities. Barrett’s growth strategy depends on the new capacity that Telesat’s KA/BSS1 and KA/BSS2 will deliver.

New satellite capacity will provide Barrett and other satellite broadband resellers not only the opportunity to increase the scale of the services they offer as more households and businesses across Canada are added, but also the scope of service offerings to meet the ever-changing demands of the marketplace. These service offerings require many times the bandwidth than what is available today in order to remain competitive with terrestrial services. Moreover success in the market will be determined by these service offerings which feature maximum capabilities at a low price.

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The KA/BSS1 and KA/BSS2 Ka-band capacity will allow Canadian broadband service providers to expand on their role as ‘access providers’ and become ‘applications providers’, giving Canadian consumers and businesses more options and the ability to use bandwidth- rich applications not available today due to capacity limitations. The additional capacity will also improve service performance by reducing congestion at the same time that more and more subscribers are added.

Barrett believes that the greatest growth potential for their business is in new applications, such as VOIP and other content rich applications. Barrett sees services moving beyond current voice and data communications to include entertainment, home management, remote health and distance learning. With Telesat’s new satellite capacity, Barrett is planning service offerings that will range from ‘lite’ packages that provide improved throughput to a dial-up alternative to, service packages with 8+ Mbps download speeds suitable for business requirements. Barrett expects that service packages in highest demand will be those with 1.0 Mbps to 3.0 Mbps download speeds.

Telesat is pleased with the understandings in principle it has regarding the Ka-band capacity with Barrett and WildBlue and the confidence and support Bell ExpressVu and Star Choice have expressed in Telesat as they develop their Ka-band requirements. This demonstrated support is an affirmation of their confidence that Telesat is the only satellite operator with a comprehensive Ka-band strategy and the means to execute it.

4.1.2.6 petition in the Broadband Market

a) Satellite Competition

The satellite broadband market is poised for growth throughout the world and specifically in North America. While Telesat has been a leader in the implementation of C, Ku and now Ka broadband applications in Canada, other major satellite operators are also preparing to offer satellite broadband to consumers, ISPs and enterprises in North America. Those preparations include bringing more raw capacity to the market through the construction and launch of new satellites.

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Table 4.1.2-4 below identifies the current Ka-band satellite plans of satellite operators and Ka-band spectrum resources over North America.

Table 4.1.2-4 Ka-Band Authorizations in North American Orbital Arc

Orbital Satellite Operator or Status Location Administration

67°WL USA Unassigned. 82°WL Bell ExpressVu Assigned (Nimiq-2) Assigned, however AMC16 temporarily 85°WL SES Americom located at 118.7°WL under Canadian authorization. 89°WL Intelsat Assigned 91°WL Canada Unassigned Assigned, Spaceway 3 95°WL Hughes (SkyTerra 1) launch pending. 97°WL Echostar Assigned, satellite launch pending. 99°WL DirecTV Assigned, DirecTV 11 launch pending 101°WL DirecTV Assigned, DirecTV 9S launch pending. 103°WL DirecTV Assigned, DirecTV 10 launch pending. 105°WL SES Americom Assigned. 107.3°WL Canada Unassigned. 109.2°WL Mexico/Canada Unassigned 111.1°WL Telesat Assigned (Anik F2) 113°WL Echostar Assigned 117°WL Echostar Assigned 118.7°WL Telesat Temporary; permanent assignment TBD 119°WL Northrop Grumman Assigned 121°WL Echostar Assigned (EchoStar 9)

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c) Terrestrial Competition

In North America, cable companies have led telco broadband ISPs in overall subscriber count, although expectations are that DSL subscriptions will overtake cable by 2010. As shown in Table 4.1.2.5, in Canada it is anticipated that the number of DSL subscribers will overtake cable subscribers by the end of 2006 and by 2009 telcos will have closed the gap in the U.S.

Table 4.1.2-5 DSL and Cable Broadband Penetration (% subscribers of total population)

2004 2005 2006 2007 2008 2009

Canada

DSL 8.1 10.2 12.4 14.6 16.8 19.1

Cable 9.1 10.7 12.3 13.9 15.6 17.3

DSL 4.7 6.7 8.6 10.5 12.4 14.4

Cable 7.3 8.8 10.3 11.8 13.2 14.7

As WiMAX becomes more cost-effective and mainstream it is expected to be used where DSL is not economic. Today, wireless access covers more than 2.8 million households in Canada.

4.2 GHZ BSS BUSINESS PLAN

The KA/BSS2 satellite will not only greatly expand available Ka-band capacity but will exploit the economies of scale to introduce for the first time in Canada, the use of a 17 GHz BSS payload at the 91°WL orbital position.

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4.2.1 et Assessment -17 GHz BSS

Telesat’s proposed KA/BSS2 satellite will include a 17 GHz BSS payload which is intended initially as a test-bed for Canadian content and service providers to investigate and develop the means to deliver the next generation of multimedia content to the Canadian marketplace. This frequency band is currently not in commercial use in Canada or in the U.S. – though the FCC has a proceeding under way to allocate this spectrum in the near future.

A true market assessment of the 17 GHz BSS use is not possible at this time. However, a plethora of innovation, application-development and new services is emerging involving Internet-driven, multi-media. Canadian broadcasters, ISPs, telecom carriers and other Canadian broadband service providers will be looking for the quickest and best means to deliver multimedia applications to their end users.

Among the key technologies which reflect this new market is Internet Protocol Television (IPTV). Telesat expects this emerging technology to become a ‘must-have’ offering for competing Canadian service providers.

The IPTV Interoperability Forum (IIF), under the Alliance of Telecommunications Industry Solutions (ATIS) defines IPTV as:

“the secure and reliable delivery to subscribers of entertainment video and related services. These services may include for example, Live TV, Video-on-Demand (VOD) and Interactive TV (iTV). These services are delivered across an access agnostic, packet switched network that employs the IP protocol to transport the audio, video and control signals.”13

The term Internet Protocol in IPTV refers only to the use of IP packets to transport the data across networks; it does not include broadcast video over the Internet. The following is a summary of key market data concerning IPTV:

13 ATIS IPTV Exploratory Group Report and Recommendation to the TOPS Council, Alliance for Telecommunciations Industry Solutions, July 2005, p.7.

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• Global IPTV market by 2010 is estimated to be US$17B.

• 2.1M IPTV customers with 240 IPTV service providers in early 2005.

• Number of IPTV households is expected to increase to 15M by the end of 2007; 20 M households by 2010.

• Surge in IPTV is expected to put strain on existing terrestrial networks; future average daily consumption of 14.4GB is expected, which is 240 times higher than average daily consumption of voice and internet data.

• Opportunity for satellite companies is for hybrid solutions with terrestrial companies to take the burden off the existing networks.

Source: IPTV via Satellite, Northern Sky Research, 2005

• Canada's largest IPTV provider is MTS Allstream which recently reported over 56,000 MTS TV television subscribers primarily in the Winnipeg area.

• The second largest provider is Sasktel with its offering called Max Interactive TV. Sasktel had 42,809 Max TV subscribers at the end of December 2005.

• Telus launched its IPTV services in late 2005 in Edmonton and Calgary. The company plans to expand availability to other areas of its service territory, to compete with local cable and satellite TV services.

• Aliant launched its IPTV service in parts of Nova Scotia, Newfoundland and Labrador in the spring of 2006.

Source: Digital Home Canada, 2006

This new multi-media wave requires large amounts of bandwidth to move all forms of content. Traditional FSS C and Ku-bands and planned BSS bands are not sufficient in capacity, nor particularly well suited, to accommodate the anticipated combination of multi-media applications and broadcast/multicast applications. Telesat believes that the 17 GHz BSS band, particularly in conjunction with Ka-band can deliver the needed capacity. By making the 17 GHz BSS spectrum available in Canada, Telesat hopes to broaden its business base as well as that of its customers, enabling them to compete more effectively in the new multi-media, broadband market. Indeed, Telesat continues its development work in designing antenna prototypes to access co-located satellites in the Ka-band, BSS and FSS frequency bands. In the near term, Telesat plans to do similar prototype development of antenna feeds to access Ka, 17 GHz BSS and FSS bands.

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4.2.2 et Market -17 GHz BSS

Telesat believes that IPTV will be among the most popular of the new technologies emerging today and ideally suited to use 17 GHz BSS spectrum. Closely related to IPTV are IP Multimedia subsystems which aim to provide all the services and benefits presently enjoyed with the Internet to any handheld device. Extensive bandwidth will be required to transmit the immense amount of content and data that will be sent through these specialized networks.

Telesat recognizes the need to participate in serving Canadian needs in this market. 17 GHz BSS capacity will be offered to telecom carriers, ISP’s and other service providers for their IPTV requirements. These companies will have to increase bandwidth and require all-Canada coverage. In addition, they will also need a scalable solution as their businesses grow. Multicasting via satellite is an affordable and efficient solution.

Telesat also plans to participate with Canadian broadcasters (including broadcast distribution undertakings) as they expand their service offerings to include enhanced video-on-demand services and other IPTV applications which will become essential components of broadcasters’ service packages in an increasingly competitive Canadian marketplace.

Telesat’s role in the IPTV market will be as the provider of transmission capacity and as partner working jointly with other Canadian companies to develop innovative multi-media applications which lead to new commercial services for the Canadian market.

4.2.2.1 g 17 GHz BSS Capacity and Services

a) In Canada

Telesat is proposing a 17 GHz BSS payload to piggyback on to the KA/BSS2 satellite. The 17 GHz BSS payload will consist of 6 channels, each having 72 MHz of bandwidth. The payload will have Canada coverage and an option of switchable U.S. coverage.

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Telesat’s role in this emerging 17 GHz BSS market will remain as a carrier providing the satellite capacity as well as its operation and control. Telesat will also continue to maintain and operate its extensive teleport infrastructure in place throughout Canada. Canadian 17 GHz BSS service providers will be able to garner additional benefits by leveraging and sharing this existing national infrastructure to reduce their costs.

Telesat expects that the 17 GHz BSS capacity will be procured largely on a wholesale basis. As done in the past and most recently with Anik F3 capacity, Telesat will seek contractual commitments for the new capacity on a wholesale basis from interested Canadian entities.

b) Human Resources and Customer Service

For over 35 years Telesat has relied on its in-house expertise to develop, manage and operate its 16 satellite programs as well as establish and run a highly successful satellite business. Refer to Section 3.4.2 for further details.

The development of the 17 GHz BSS spectrum at the 91°WL position will require co-operation and partnerships. Bringing new multi-media services to Canadians will involve Canadian broadcasters, telecom carriers, other service provider and technology partners. Based on its successful experiences of working with all of these groups in the past, Telesat is ideally positioned to deliver these new and innovative services to the Canadian market.

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4.2.2.2 Offerings -17 GHz BSS

With the extraordinary growth that is anticipated in the movement of IP data, Telesat believes that hybrid satellite/terrestrial models of delivery will be required.

The following Figure 4.2.2-1 illustrates the network topology, utilizing both satellite and terrestrial components:

Multicast( Encrypted) 1. 5 Mbps/ StreamingChannel

Telesat NarrowCasting Facility 0.75m Ku NAS Rx Only

Specialty Channel NRT A/V Content IPTV Station IP STB TVRO Telesat Ethernet Web Portal Firewall Switch Firewall Internet Reliable Delivery Engine Streaming Off- Air MPLS Servers NRT Encoders VPN Content IRDs RT NAS Content A/V Ethernet Switch

X Point A/V Switch Playlist Sample RT IP:Ports Studio NRT File Name Facility A/V NRT File Name RT IP:Ports RT IP:Ports NRT File Name Etc.

A/V A/V

Desktop Audio/Video Production/ Post Production Production Encoders Figure 4.2.2-1 IPTV Specialty Channel Subscription Service

Telesat’s major customer groups, Canadian broadcasters, telecom carriers and broadband service providers will be able to combine their existing services with the new 17 GHz BSS capacity to develop and deliver innovative, value-added services to their Canadian customers.

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4.2.3 Competitive Landscape

The 17 GHz BSS spectrum will be new to Canadian satellite users. The present competition in the delivery of IP content is primarily terrestrial-based with networks relying on the existing infrastructure from the main Canadian telecommunications organizations. However, given the extraordinary growth that is anticipated, the existing infrastructure will not be sufficient to meet demand. This growth will put immense strain on terrestrial IP traffic facilities and will require satellite infrastructure to accommodate market needs and demands.

4.3 ERSHIPS AND AGREEMENTS

Building on the existing partnership agreements Telesat has in place with Anik F2’s largest Ka-band service resellers, Telesat has understandings in principle with Barrett and WildBlue for additional Ka-band capacity on KA/BSS1 and KA/BSS2.

Pending the Department’s award of licences and contract negotiations with Barrett and WildBlue, no formal agreements have been signed with these companies. However, Telesat has received strong endorsements for its KA/BSS1 and KA/BSS2 satellite programs as letters of support from Barrett and WildBlue. These letters of support can be found in Appendix 3 of this application.

4.4 LLITE PROJECTED REVENUES & EXPENSES

Telesat’s projected revenues and expenses including assumptions, for the KA/BSS2 satellite program over the life of the satellite are provided in the following Table 4.4-1.

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Table 4.4-1 Projected Revenues and Expenses KA/BSS2 : 91º WL - $ Millions (CDN)

Year Year Year Year Year Year Year 1 2 3 4 5 6 15 Capital Cost Satellite 213.3 Launch Vehicle 65.7 Insurance Prem. 92.7 TT&C 11.5 Engineering 4.6 Capitalized Interest 49.7 Total 437.5

Beams Utilized 124 124 124 124 124 124 124

Revenues 97 102 109 115 122 128 128

Expenses Operations - Space 21 20 19 19 18 17 10 Operations – Earth 11 11 11 11 12 12 14 Operations – Gen. & Admin. 4 4 4 4 4 4 5 Taxes 3 (12) 3 15 23 30 43 Total Cash Flow (380) 79 72 67 64 64 57

Assumptions: • In-orbit insurance 3.5% annually • Space segment common costs + TT&C capital recovery $4.6 M/yr • Tax rate 38%, return on equity 20% • Revenues do not include recovery of gateway costs. • Revenue profile assumes fixed portion of 75% of cost structure and 25% variable portion ramping up over six years. • Space segment operations include 6 person-years plus direct administrative capital recovery. • Capital taxes are calculated at 0.3% of satellite costs.

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5.0 APPENDICES

Appendix 1 Declaration of Ownership and Control

Appendix 2 Canadian Satellite Capacity and Services Plan

Appendix 3 Letters of Support

Appendix 4 Financial Statements Telesat Canada 2003-2005.

Appendix 5 Financial Statements BCE Inc. 2003-2005.

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APPENDIX 2

Canadian Satellite Capacity and Services Plan

(IC Licence Nos. 8 and 9)

APPLICANT: Telesat Canada

Pursuant to Canada Gazette Notice DGRB-001-06, Telesat is pleased to provide the following Canadian Satellite Capacity and Services Plan for its proposed hybrid (Ka-band and 17 GHz BSS) satellite, KA/BSS2, at the 91°WL orbital location.

Consultations

Telesat has had consultations with members of both the Canadian broadband and broadcast industries to ascertain their interest in new Ka-band capacity and, given the new multi-media, Internet-driven market, whether their requirements might include 17 GHz BSS capacity. Discussions were held with all the Canadian satellite users registered with the Department for this Call, including members of the Canadian Satellite Users Association (CSUA) who had not registered individually on the Department’s list.

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• Satisfying Canadian Ka-band Capacity Requirements

• Satisfying Canadian 17 GHz BSS Capacity Requirements

A Satisfying Canadian Requirements for Ka-band Satellite Capacity & Services

In Telesat’s assessment the Canadian broadband market consists of two principal sectors: consumer and small/ medium sized business/home office (SME/SOHO).

A1 Consumer Sector and Ka-Band Demand

Since 2002, the estimated number of Canadian households not served by some form of broadband has trended downward yet remains significant; Table 2-A1 below provides estimates issued annually from Industry Canada’s Broadband Community Service Status database of the number of communities and households without some form of broadband access.

Table 2-A1 Canadian Households Without Broadband

Year Issued Estimated Households w/out BB (000’s) 2002 2,040 2003 1,910 2004 1,800 2005 1,100 2006 698

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This data does not address the many households that are classified as being located in towns and cities with broadband access but who in fact, live beyond the service’s reach. To reinforce this point, of Anik F2’s existing Ka-band subscribers, 70 percent reside in towns and cities where Industry Canada’s data indicates broadband access is available.

A2 SME / SOHO Sector and Ka-Band Demand

Broadband access is an essential tool for SME/ SOHO commercial operations.

According to Statistics Canada there are one million employer businesses in Canada (defined as businesses that maintain at least one person on payroll), of which approximately 75 percent (or 750,000) are small businesses with 1 – 9 employees. 1 Based on figures from Canada Post, approximately 208,000 2 of the total of all businesses are operating in Canada’s rural postal areas; accordingly, of the total rural businesses operating in Canada, we can estimate approximately 155,500 are SME’s. Using provincial distributions from Statistics Canada, Table 2-A2 below breaks down their distribution by province:

1 Key Small Business Statistics. Industry Canada, January 2006 2 www.canadapost.ca , Householder counts

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Table 2-A2 Rural SMEs

SMEs NL 2,531 PE 970 NS 4,513 NB 3,893 QC 35,390 ON 51,715 MB 5,267 SK 5,835 AB 21,057 BC 23,776 YT 235 NT 257 NU 93 TOTAL 155,532

A3 Other Ka-band Demand

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A4 Delivering Ka-band Capacity in Canada

A5 Description of Ka-band Payload

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However, the Ka-band payload is designed to operate with a total of 20 gateways, 9 of which are for Canadian user beams. The Canadian portion of the Ka-band payload on KA/BSS2 will have a throughput of 12.6 Gbps in the forward direction and 12.3 Gbps for the return direction.

Telesat anticipates the satellite procurement, construction, launch and in-orbit testing of KA/BSS2 will take approximately 42-45 months from the time a satellite procurement contract is signed.

Figure 2-A5 KA/BSS2 Ka-band Canadian and U.S. Coverage

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A6 Telesat’s Long Term Ka-Band Capacity Plan

Telesat’s Ka-band plan strives to bring to market new, affordable Ka-band capacity over time to optimally match the growing business requirements for capacity by Canadian service providers.

Expanding on the successful emergence of Anik F2 Ka-band broadband services, Telesat’s long term Ka-band capacity plan proposes the following Ka-band capacity additions:

• Anik F3 - small Ka-band, Canada-only payload at 118.7°WL

• KA/BSS1 – large North American Ka-band payload at 118.7°WL

• KA/ BSS2 – large North American Ka- band payload at 91°WL

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i. Anik F3

With KA/BSS2’s Ka-band design, capacity and coverage Telesat intends to meet the incremental Ka-band capacity requirements that Barrett has indicated it will have over the long term, beyond those that will be met using KA/BSS1 capacity. KA/BSS2 will also provide additional Ka-band capacity to Canadian broadcasters, Canadian satellite broadband resellers as well as to WildBlue, for the U.S. market.

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Table 2-A6 Canadian Ka-Band Capacity

Canadian Ka-band Capacity (Gbps) (Forward Direction) Anik F3 .090

KA/BSS1 12.6

KA/BSS2 12.6

Total > 25 Gbps

B Satisfying Canadian 17 GHz BSS Capacity Requirements

Telesat plans to augment its Ka-band payload at the 91°WL position by using KA/BSS2 to also bring 17 GHz BSS spectrum to the Canadian market.

B1 Canadian 17 GHz BSS Demand

From its discussions with Canadian broadcasters and Canadian satellite broadband service providers, Telesat received interest but no firm commitments at this early stage to using this new 17 GHz BSS spectrum at the 91°WL position. However as with its KA/BSS1 broadband/broadcast service platform at the 118.7°WL location, Telesat remains confident that the long term advantages of 500 MHz of dedicated spectrum to Canadian satellite users at the 91°WL position will stimulate demand. As demonstrated with Telesat’s introduction of commercial Ku-band in the early 1980’s and most recently with the introduction of Ka-band, it takes vision and strong leadership to ‘jump-start’ and open up new market opportunities. For Canada, it is important to bring into use the 17 GHz BSS spectrum in the relative near term, in order to establish ITU priority rights for Canadian use of this spectrum well into the future.

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Telesat anticipates over time that interest in the 17 GHz BSS spectrum will grow and be generated by Canadian broadcasters and Canadian broadband service providers. As the demand for new applications such as IPTV and other multimedia services increases, so too will the need for broadening underlying transmission capability. This is true particularly in the case where more traditional transmission spectrum, such as Ku capacity becomes more congested.

B2 Delivering 17 GHz BSS Capacity

B3 Description of 17 GHz BSS Payload

The 17 GHz BSS payload on the KA/BSS2 satellite will consist of 6 channels, each having 72 MHz of bandwidth. The payload will have Canada coverage with an option for switchable U.S. coverage.

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45 SATSOFT 9.00

51 50 52

8.00 45

52 51 51 54 50 7.00 45 52

Theta*sin(phi) in Degrees 45 6.00

5.00

4.00 -4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00 Theta*cos(phi) in Degrees

Figure 2-B3 KA/BSS2 17 GHz BSS PAYLOAD CANADIAN COVERAGE

Telesat is confident that the KA/BSS2 satellite platform will augment existing services and stimulate new applications because of the innovative combination of frequency payloads.

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COM DEV Ltd. 155 Sheldon Drive Cambridge Ontario N1R 7H6

Tel: 519 622-2300 X2289 Fax 519 622-3975 [email protected]

November 14, 2006

The Honorable Maxime Bernier, P.C., M.P. Minister of Industry 235 Queen Street Ottawa, On K1A 0H5

Dear Minister:

I have been following events surrounding Industry Canada’s Call for Applications to License Satellite Orbital Positions, Notice DGRB-001-06 (July 2006) with interest and concern. While COM DEV, as Canada’s largest designer/manufacturer of space hardware, does not use orbital slots; we are profoundly affected by government policy that determines how they are managed. We were extremely disappointed by Industry Canada’s decision to eliminate direction to bidders that expressed a clear preference for Canadian-made hardware on satellites that are to be launched into Canadian orbital slots. As I outlined in my letter to you on July 7, 2006, our concerns focused on the potential negative impact on our global competitive position; where we frequently face protective restrictions imposed by other governments. As a result, in Canada’s satellite sector, the only remaining competitive advantage that we still enjoy is the strong relationship among and between members of the Canadian space industry (Space Team Canada), including between manufacturers of hardware, such as ourselves, and buyers of satellite systems, the service providers, such as Telesat.

Over the past 30-years, Telesat Canada has developed a close working relationship with other members of Canada’s space team by working closely with the Canadian space hardware industry as follows:

• As a strong ally in the space telecommunications sector, Telesat has been a source of advice and guidance on the evolving needs of the international satellite services market, including intelligence on emerging specifications and performance standards required by next generation satellites, which have been particularly germane to our efforts to succeed against our international competitors;

• As a cooperative provider of “first-flight” opportunities for new Canadian space technologies, Telesat has frequently provided the critical flight heritage needed for new Canadian space products to achieve acceptance in global space markets; and

• As a strong advocate of Canadian space hardware for use on the satellites of other countries; particularly those where Telesat has been hired to provide consulting services in the systems design, architecture and performance specifications of new satellites.

Telesat has thus played a very direct role as a catalyst fostering the success of Canada’s space industry, and has contributed greatly to our success as the most export oriented space industry in the world.

As the government contemplates its options for the award of the 29 licenses in four frequency bands, spread over 16 orbital positions, it is my strong recommendation that the government carefully consider Telesat’s track record of working positively with Canadian industry before decisions to award selected orbital slots are made. From this perspective, it is my belief that:

• Telesat’s ability to grow and provide cost-efficient services to Canadians can only be achieved by retaining unfettered access to existing spectrum at the orbital slots it currently occupies and by retaining its ability to continue to build on that foundation with new spectrum that enables expansion and thus supports more efficient satellite designs; and

• That no new licenses should be granted that risk interference, degradation or otherwise compromises Telesat’s ability to fully utilize for future expansion, any of the orbital slots Telesat currently occupies.

Please be assured that I fully understand the government’s desire to introduce more competition into the satellite service market in Canada. However, I also strongly believe that Canada’s remaining orbit assets must be recognized as a limited resource and carefully allocated in such a way so as to foster Canadian service providers and in particular Telesat as Canada’s flagship satellite service provider.

In summary, Telesat continues to work closely with Canadian manufacturers to leverage our technologies into the highly competitive international satellite market. I strongly support Telesat’s efforts to broaden its service offerings from its current orbit allocations and wish to acknowledge the positive contributions that Telesat has made to Canada’s telecommunications infrastructure and our own success in international markets.

Yours truly,

John Keating Chief Executive Officer

Cc DM Richard Dicerni ADM Spectrum & Information Technology Michael Binder

Ms. Chantal Beaumier Director, Space and International Regulatory Activities Radiocommunications and Broadcasting Regulatory Branch Industry Canada Room 1564C-Jean Edmonds Tower North 300 Slater Street Ottawa ON K1A 0C8

Dear Ms. Beaumier:

Subject: Telesat Canada’s Applications for Ka-band Spectrum

Barrett Xplore Incorporated (BXI), based in Woodstock, New Brunswick, is Canada’s first and only national rural broadband service provider.

Our mission is “to provide a broadband Internet experience - unparalleled in value, capability, and reliability - to our customers who live, work, and play in Canada’s rural communities.”

Our vision is to bring more to rural Canada

… more broadband availability … more choice in broadband access, applications, accessories, and services … more competition for a market, historically served by a regulated, then a de facto monopoly for telecom services

Barrett is a Canadian company with a 30-year history of serving rural Canada. Our considerable legacy in serving rural markets can be evidenced by our central and pivotal role in acquiring more than 700,000 satellite TV customers for Star Choice from 1997 to 2004. The Barrett commitment to rural broadband is evidenced by a) $40 million in investments in our fixed wireless and satellite capabilities, as well as b) supply contracts valued at $240 million to enable us to fulfill our mission and vision.

In our first full year of operations, we have acquired tens of thousands of broadband customers in rural Canada. (see Appendix A). We have over 600 independent channel partners and 2,000 certified technical installers, with complete coverage of rural Canada, thus enabling BXI to bring the service to the breadth of unserved communities, and into some of the most remote areas of the country. Customer satisfaction ratings are high and a testament to the quantum improvement in Ka over legacy satellite broadband technology. 94% of customers are satisfied with the service. Further, 9 of 10 customers would either buy again or refer a friend, critical tests of customer satisfaction and loyalty.

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We view Ka band satellite broadband as integral to achieving our mission and vision, delivering first class, urban quality broadband to rural and remote areas of Canada. Our target market will be the most challenging to reach for a variety of reasons:

• First, the low population density, with less than 20 households per square kilometre, makes the economics of most terrestrial based broadband solutions terribly cost prohibitive; • Second, the distance from small or large urban centres, thus impacting backbone/backhaul availability and cost, and; • Third, the disparate location of these markets making ongoing sales and service support and demand creation and awareness efforts both costly and challenging.

The critical role of Ka satellite broadband in conquering the digital divide is supported by key players in the global telecom industry. As one example, Ka satellite broadband pioneer, WildBlue has recently joined forces with AT&T in targeting a satellite broadband offering to homes and businesses that are out of the reach of DSL and high-speed cable lines. WildBlue and AT&T plan to market the satellite-fed data service in AT&T’s 13- state local residential service area.

A critical element of BXI’s current strategy is its partnership with Telesat, using the Anik F2 satellite. We both share a strong belief in the critical role that satellite technology has played, and will continue to play, in bridging the digital gap in Canada. BXI and Telesat are bringing satellite broadband facilities and services together to deliver a sustainable broadband model to rural and underserved areas throughout all parts of Canada; the Government’s objectives of making broadband services accessible to all Canadians are being advanced each day through our collective vision and partnership.

It is because of this successful partnership and Telesat’s expertise and commitment to satellite broadband in Canada that BXI is pleased to offer its support to Telesat’s two applications for Ka-band spectrum licences at the 118.7°WL and 91°WL orbital locations.

Having access to additional Ka-band spectrum is essential to BXI’s business strategy and viability. Our broadband service growth is very robust and we anticipate demand in certain Anik F2 beams to exceed current capacity in the near term. Anik F3 will provide only short-term relief. This is far short of delivering broadband service to our target market. Further, substantial incremental capacity, we believe, is critical to enabling a satellite broadband value proposition comparable to urban DSL and Cable. The evolution of satellite broadband, we expect, will be much like the evolution we saw in satellite television – initially perceived as an inferior technology with limited service to today’s 300+ channel universe that first introduced HD programming to Canadians. Substantial additional Ka-band capacity will be essential for BXI’s business plans not only to expand its existing services but also for the provision of future voice, video, and other internet applications and, to have the ability to offer full redundancy of service in the event of a satellite failure.

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BXI is aware that Telesat has a long history of supporting technology and innovation, dating back to its earliest days when satellite communications revolutionized connectivity in Canada’s North. Today, through its activities in Canada, the United States and South America Telesat is at the forefront of developing and offering among the most advanced communications services – services that ultimately benefit companies such as BXI and support Canada’s goal of eliminating the digital divide. We applaud Telesat’s commitment to research and development, its cutting edge development laboratory, and its willingness to partner with Canadian companies such as BXI to bring new products and services to the rural Canadian market.

As its satellite broadband partner, BXI has been impressed with Telesat’s leadership and commitment to not only pioneer the development of satellite broadband technologies and applications, but also to assume a significant business risk in being the first satellite operator to provide satellite broadband capacity to the North American market. As a result, this has allowed BXI to be a groundbreaker with its service in Canada. We ask that Industry Canada both recognize and reward this leadership role. We believe that Telesat is best positioned to deliver much needed Ka-band capacity which will enable BXI to continue its satellite broadband service expansion seamlessly to all areas of Canada and thereby to the benefit of all Canadians. We therefore offer our support to Telesat’s two Ka-band applications in response to the Department’s recent Call for Applications (DGRB 001-06) to develop and operate Ka-band spectrum at the 118.7°WL and 91° WL orbital locations.

We are looking forward to the award process and providing input to the capacity, reliability, and other characteristics for deploying substantial Ka capacity to provide broadband services to rural Canada.

Yours sincerely,

John Maduri

Chief Executive Officer

Barrett Xplore Inc. cc: D. Lahey, Telesat Canada

APPENDIX A: BXI SUBSCRIBERS

November 14, 2006

Paul Bush Vice President Broadcasting and Corporate Development Telesat Canada 1601 Telesat Court Gloucester, Ontario K1B 5P4

Dear Mr. Bush:

Re: Telesat Canada's Applications for Orbital Positions (Gazette Notice DGRB-001-06)

Aboriginal Peoples Television Network Incorporated ("APTN") is pleased to offer this letter of support for Telesat Canada's applications to develop and operate satellite facilities in certain orbital locations. We understand that these applications will be made to Industry Canada pursuant to the above-referenced call for applications.

APTN, in its current form and under its former name, Television Northern Canada, has operated an extensive network to serve remote communities across Canada's North since 1992. This network has relied extensively on Telesat Canada's in-orbit and earth station facilities and services. Over the years, APTN has obtained services and facilities from Telesat Canada both directly and indirectly by means of resale arrangements.

Telesat Canada's long-standing commitment to provide service throughout Canada is critical to APTN. Without Telesat's commitments to provide coverage to remote, Northern and other underserved communities, which includes many Aboriginal communities, the delivery of traditional satellite broadcasting services, satellite telecommunications services and, more recently, newer satellite broadband services to these communities would not have been possible. Telesat's commitments have helped the North and remote communities elsewhere to become connected to the national broadcasting system in a way that would simply have been inconceivable otherwise.

Some high capacity alternatives to satellite telecommunications infrastructure are becoming increasingly available across the Southernmost part of Canada – to serve the most densely populated areas. It doesn't seem possible for this kind of terrestrial network to be replicated in the North and to serve many other remote Aboriginal communities in the near term. Satellite services will continue, we believe, to play a key role in connecting these communities to the national telecom network, and in promoting community and regional development. Telesat Canada's future plans, therefore, to offer Ka-band services must be viewed as providing significant potential benefits to Northern and remote communities.

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It is of course the case that Canada's two licensed DTH providers rely on Telesat Canada's facilities and services. APTN is exploring ways in which this existing satellite infrastructure can be leveraged to help APTN address an emerging problem. APTN uses a network of local terrestrial transmitters to provide a distinctive service to Northern communities. APTN feeds this Northern programming service to these transmitters using Telesat Canada's C-band capacity (which APTN purchases on a resale basis). Unfortunately, APTN's network of terrestrial transmitters employs analog rather than digital over-the-air technology and, in any event, is aging and nearing replacement age. APTN cannot afford on its own to replace its terrestrial network (which consists of 96 different transmitters). Instead, APTN hopes that the DTH platform can be used to provide replacement service to provide APTN's Northern programming service directly to residents in Northern and remote areas. APTN is pleased to report that Bell ExpressVu already offers APTN's Northern programming service on its DTH platform and is working with APTN to examine how DTH service could replace terrestrial transmission.

Telesat Canada's existing coverage of the Northern portions of Canada is a critical element of this transition plan. The DTH platform should be viewed as a key service platform to ensure that remote and Northern communities receive a full range of broadcasting services – including the service provided by APTN.

In addition, APTN understands that the additional facilities proposed as a part of this process by Telesat Canada at its existing orbital positions will be beneficial to the broadcasting industry as a whole (including APTN), which relies on Telesat Canada's existing facilities. APTN, together with other broadcasters, continues to explore its options for the ongoing transition to HD service. It seems apparent that additional capacity will be required to support the demands of the broadcasting industry for HD compatible services, and that it would be beneficial if these services were to be provided using technologies and orbital positions that are already in use by cable and satellite service providers. APTN understands that Telesat Canada appreciates the need to work collaboratively with the Canadian broadcasting industry to ensure that the roll out of HD service occurs as efficiently as possible, and that the benefits of HD technology are made available in all areas of Canada.

Telesat Canada's experience in providing satellite services to Northern and other remote communities is, we believe, unparalleled in Canada and maybe the world. APTN supports Telesat Canada in its applications to obtain additional orbital positions to build on the fruits of this long experience. We look forward to watching this application process as it unfolds.

Yours truly,

Jean LaRose Chief Executive Officer

Auditors Report Consolidated Financial Statements (in Canadian dollars)

The financial statements contain the results and financial history for the past two years. The notes are an important part of understanding the financial results. They explain how the numbers in the financial statements were arrived at, describe significant events or changes that affect the numbers, and explain certain items in the financial statements. They also include details about the financial results that do not appear in the financial statements.

Management’s Report The accompanying consolidated financial statements of Telesat Canada (Telesat or the Company) consist of the financial information of Telesat’s various holdings which are presented as one “consolidated” company. These financial statements form the basis for all financial information that appears in this annual report, are the responsibility of the management of Telesat and have been approved by the Board of Directors. The Board of Directors is responsible for ensuring that management fulfills its financial reporting responsibilities. Deloitte & Touche LLP, Chartered Accountants, the shareholders’ auditors, have audited the financial statements.

Management has prepared the financial statements according to Canadian generally accepted accounting principles. Under these principles, management has made certain estimates and assumptions that are reflected in the financial statements and notes. Management believes that these financial statements fairly present Telesat’s consolidated financial position, results of operations and cash flows.

To ensure the accuracy and completeness of the financial statements, management has a system of internal controls which includes communication to employees about policies for ethical business conduct. Management believes that the internal controls provide reasonable assurance that the financial records are reliable and form a proper basis for preparing the financial statements, and that the assets are properly accounted for and safeguarded.

The Board of Directors has appointed an Audit Committee, made up of unrelated and independent directors. The Audit Committee’s responsibilities include reviewing the financial statements and other information in this annual report, and recommending them to the Board of Directors for approval. The shareholders’ auditors have free and independent access to the Audit Committee.

Laurier J. Boisvert, President and Chief Executive Officer Ted H. Ignacy, Chief Financial Officer

Auditors’ Report to the Shareholders We have audited the consolidated balance sheets of Telesat Canada (Telesat or the Company) as at December 31, 2005 and 2004 and the consolidated statements of earnings, retained earnings and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Deloitte & Touche LLP Chartered Accountants January 31, 2006, except for note 24 which is as of February 1, 2006

21 Consolidated Statements of Earnings for the years ended December 31, 2005 and 2004 (in thousands of dollars, except per share amounts) Notes 2005 2004

Operating revenues (2) 474 741 362 166 Operating expenses Amortization (2) 111 809 84 301 Operations and administration 160 964 117 660 Cost of equipment sales 45 705 18 918 318 478 220 879 Earnings from operations (2) 156 263 141 287 Other expense (income) Interest expense 29 526 26 486 Other income (4) (14 739) (18 296) 14 787 8 190 Earnings before income taxes 141 476 133 097 Income taxes (5) 50 782 47 840 Net earnings 90 694 85 257 Dividends on preferred shares 1 780 1 840 Net earnings applicable to common shares 88 914 83 417

Basic and diluted net earnings per common share 12.99 12.19

Consolidated Statements of Retained Earnings for the years ended December 31, 2005 and 2004 (in thousands of dollars)

Balance at beginning of year, as previously reported 399 505 316 348 Adjustment for change in accounting policies (1) - ( 304) Balance at beginning of year, as restated 399 505 316 044 Net earnings 90 694 85 257 Dividends on preferred shares (1 780) (1 840) Other ( 110) 44 Balance at end of year 488 309 399 505

22 Consolidated Statements of Earnings Consolidated Balance Sheets for the years ended December 31, 2005 and 2004 as at December 31, 2005 and 2004 (in thousands of dollars, except per share amounts) Notes 2005 2004 (in thousands of dollars) Notes 2005 2004

Assets Operating revenues (2) 474 741 362 166 Current assets Operating expenses Cash and cash equivalents (18) 113 477 30 897 Amortization (2) 111 809 84 301 Short term investments 51 058 130 500 Operations and administration 160 964 117 660 Receivables (6) 59 380 83 180 Cost of equipment sales 45 705 18 918 Current future tax asset (5) 3 737 3 594 318 478 220 879 Other current assets (7) 36 177 15 005 Earnings from operations (2) 156 263 141 287 Total current assets 263 829 263 176 Other expense (income) Capital assets, net (8) 1 335 442 1 171 837 Interest expense 29 526 26 486 Investments (10) 15 537 15 628 Other income (4) (14 739) (18 296) Other assets (11) 17 063 34 756 14 787 8 190 Intangible assets (9) 8 843 527 Earnings before income taxes 141 476 133 097 Goodwill (1) 23 595 16 537 Income taxes (5) 50 782 47 840 1 664 309 1 502 461 Net earnings 90 694 85 257 Dividends on preferred shares 1 780 1 840 Liabilities Net earnings applicable to common shares 88 914 83 417 Current liabilities Basic and diluted net earnings per common share 12.99 12.19 Accounts payable and accrued liabilities 38 905 33 844 Other current liabilities (12) 111 244 111 838 Consolidated Statements of Retained Earnings Debt due within one year (14) 152 838 2 613 for the years ended December 31, 2005 and 2004 Total current liabilities 302 987 148 295 (in thousands of dollars) Debt financing (15) 132 202 284 636 Future tax liability (5) 193 742 145 083 Balance at beginning of year, as previously reported 399 505 316 348 Other long-term liabilities (16) 387 019 365 591 Adjustment for change in accounting policies (1) - ( 304) 1 015 950 943 605 Balance at beginning of year, as restated 399 505 316 044 Commitments and contingent liabilities (22) Net earnings 90 694 85 257 Dividends on preferred shares (1 780) (1 840) Shareholders’ equity Other ( 110) 44 Capital stock - common shares (17) 111 898 111 898 Balance at end of year 488 309 399 505 Contributed surplus 1 002 640 Retained earnings 488 309 399 505 Cumulative translation adjustment (2 850) (3 187) Total common equity 598 359 508 856 Capital stock - preferred shares (17) 50 000 50 000 Total shareholders’ equity 648 359 558 856 Total liabilities and shareholders’ equity 1 664 309 1 502 461

On behalf of the Board:

Director Richard J. Currie Director T. C. O’Neill

23 Consolidated Statements of Cash Flow for the years ended December 31, 2005 and 2004 (in thousands of dollars) Notes 2005 2004

Cash flows from operating activities Net earnings 90 694 85 257 Items not affecting cash: Amortization 111 809 84 301 Capitalized interest (14 974) (17 642) Future income taxes 36 756 28 789 Unrealized foreign exchange (1 315) (1 878) Deferred milestone interest 5 170 1 104 Other items 806 1 359 Net change in non-cash balance sheet accounts (18) (25 022) 4 025 203 924 185 315 Cash flows from investing activities Satellite programs (229 675) (210 534) Property additions (15 789) (21 121) Maturity (purchase) of short term investments 79 442 (130 500) Business acquisition (4 363) - Proceeds on disposal of assets 5 353 113 Insurance proceeds 30 407 179 427 Payments and deposits on transponders - 4 800 (134 625) (177 815) Cash flows from financing activities Repayment of debt financing and bank loans (2 209) (96 130) Promissory notes repayments 20 503 5 409 Capital lease payments (4 461) (12 279) Satellite performance incentive payments (5 351) (1 218) Customer prepayments on future satellite services 6 130 127 333 Preferred dividends paid (1 331) (1 840) 13 281 21 275

Increase (decrease) in cash and cash equivalents 82 580 28 775 Cash and cash equivalents, beginning of year 30 897 2 122 Cash and cash equivalents, end of year 113 477 30 897

Supplemental disclosures of cash flow information Interest paid 31 207 26 486 Income taxes paid 13 056 15 041 44 263 41 527

24 Consolidated Statements of Cash Flow Notes to Consolidated Financial Statements for the years ended December 31, 2005 and 2004 (all amounts in thousands of Canadian dollars, except where otherwise noted) December 31, 2005 and 2004 (in thousands of dollars) Notes 2005 2004 1. Summary of significant accounting policies Cash flows from operating activities Net earnings 90 694 85 257 Financial statement presentation The consolidated financial statementsof Telesat Canada (Telesat or the Company) have been prepared in accordance with Items not affecting cash: Canadian generally accepted accounting principles (GAAP). Telesat consolidates the financial statements of its wholly Amortization 111 809 84 301 owned subsidiaries Infosat Communications Inc. (Infosat), Telesat Brasil Limitada (Telesat Brazil), The SpaceConnection, Inc. (SpaceConnection) and 3484203 Canada Inc. All transactions and balances between these companies have been Capitalized interest (14 974) (17 642) eliminated on consolidation. Some of the figures for the comparative period have been reclassified in the consolidated Future income taxes 36 756 28 789 financial statements to make them consistent with the current period’s presentation. Certain 2004 short term liquid Unrealized foreign exchange (1 315) (1 878) investments with original maturities of more than 90 days have been reclassified from cash and cash equivalents into short term investments. Deferred milestone interest 5 170 1 104 Other items 806 1 359 Regulation Net change in non-cash balance sheet accounts (18) (25 022) 4 025 The Company operates Canada’s domestic fixed satellite telecommunication system and is subject to regulation by the Canadian Radio-television and Telecommunications Commission (CRTC). Under the current regulatory regime, Telesat 203 924 185 315 has pricing flexibility subject to a price ceiling on certain Full Period Fixed Satellite Services (FSS) offered in Canada Cash flows from investing activities under minimum five-year lease arrangements. Telesat’s Direct Broadcast Services offered within Canada are also subject Satellite programs (229 675) (210 534) to CRTC regulation, but have been treated as separate and distinct from Telesat’s FSS and facilities. The Commission has approved the specific customer agreements relating to the sale of the capacity on the Nimiq satellites, including the rates, Property additions (15 789) (21 121) terms and conditions of service set out therein. Telesat’s ground network services have been forborne from regulation Maturity (purchase) of short term investments 79 442 (130 500) since 1994. The Commission has the right of examination of the Company’s accounting policies. Business acquisition (4 363) - Use of estimates Proceeds on disposal of assets 5 353 113 When preparing financial statements according to GAAP, management makes estimates and assumptions relating to the Insurance proceeds 30 407 179 427 reported amounts of revenues and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. Payments and deposits on transponders - 4 800 Actual results could be different from these estimates. (134 625) (177 815) Revenue recognition Cash flows from financing activities Telesat recognizes operating revenues when earned, as services are rendered or as products are delivered to customers. There Repayment of debt financing and bank loans (2 209) (96 130) must be clear proof that an arrangement exists, the amount of revenue must be fixed or determinable and collectibility Promissory notes repayments 20 503 5 409 must be reasonably assured. In particular, broadcast, carrier and business networks revenues are generally pre-billed to the customers and recognized in the month for which the service is received. Equipment sales revenues are recognized when Capital lease payments (4 461) (12 279) the equipment is delivered to the customer and accepted. Consulting revenues for cost plus contracts are recognized after Satellite performance incentive payments (5 351) (1 218) the work has been completed and accepted by the customer. The percentage of completion method is used for fixed price contracts. Deferred revenues consist of remuneration received in advance of the provision of service and are brought into Customer prepayments on future satellite services 6 130 127 333 income over the period to which the prepayment applies. When a transaction involves more than one product or service, Preferred dividends paid (1 331) (1 840) revenue is allocated to each based on its relative fair value. 13 281 21 275 Cash and cash equivalents All highly liquid investments with an original maturity of 90 days or less are classified as cash and cash equivalents. For Increase (decrease) in cash and cash equivalents 82 580 28 775 the purposes of the cash flow statement, bank overdrafts are also classified as cash and cash equivalents. Cash and cash equivalents, beginning of year 30 897 2 122 Cash and cash equivalents, end of year 113 477 30 897 Capital assets Property, which is carried at cost less accumulated amortization, includes the contractual cost of equipment, capitalized engineering and, with respect to satellites, the cost of launch services, launch insurance and capitalized interest during construction. Capitalized interest provides a return on capital invested in new assets and is not currently realized in cash, Supplemental disclosures of cash flow information but is expected to be realized over the life of the asset. In the event of a satellite failure, any insurance proceeds received are netted against the cost of the satellite. Interest paid 31 207 26 486 Income taxes paid 13 056 15 041 Amortization is calculated using the straight line method over the respective estimated service lives of the assets based on equal life group procedures. The annualized composite rate of amortization was 7.5% in 2005 (8.11% in 2004). The 44 263 41 527 unrecovered cost of a satellite from a partial operational failure is amortized in accordance with the straight line method. The expected useful lives of satellites are 12 to 15 years, earth stations are 8 to 15 years, transponders under capital lease are 12 to 15 years, office buildings are 19 to 30 years and all others are 5 to 16 years. The estimate of useful lives are reviewed every year and adjusted if necessary. 25 The Company shares equally with a developer, the ownership, cost and debt of the Company’s headquarters land and building. The Company has leased the developer’s share of the building which is accounted for as a capital lease.

Capital assets are assessed for impairment when events or changes in circumstances indicate that the carrying value exceeds the total undiscounted cash flows expected from the use and disposition of the assets. An impairment loss is determined by deducting the asset’s fair value (based on discounted cash flows expected from its use and disposition) from its carrying value.

The investment in each satellite will be removed from the property accounts when the satellite has been fully amortized and is no longer in service. When other property is retired from operations at the end of its useful life, the amount of the investment and accumulated amortization are removed from the accounts. Earnings are credited with the amount of any net salvage and charged with any net cost of removal. When an item is sold prior to the end of its useful life, the gain or loss is recognized in earnings immediately.

Translation of foreign currencies Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates in effect as of the balance sheet dates. Operating revenues and expenses, and interest on debt transacted in foreign currencies are reflected in the financial statements using the average exchange rates during the year. The translation gains and losses are included in Other income in the statement of earnings.

Telesat Brazil and Space Connection (see note 10) are considered to be self-sustaining foreign operations as they are largely independent of Telesat. Assets and liabilities are translated at the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at average exchange rates during the year. The resulting unrealized gains or losses are reflected as a currency translation adjustment in shareholders’ equity.

Accounting for investments Telesat uses the equity method to account for investments that are not consolidated where it has significant influence on the operating, investing and financing activities. The cost method is used for all other non-consolidated investments.

Goodwill The goodwill was recorded on the acquisition of Infosat and SpaceConnection. An assessment for impairment is undertaken in the fourth quarter of every year and when events or changes in circumstances indicate that the carrying amount of goodwill exceeds the fair value of goodwill. To date, Telesat has not recognized any permanent impairment in value.

Derivative financial instruments The Company uses derivative financial instruments to hedge against foreign exchange rate risk. The use of derivatives is expected to generate enough cash flows and gains or incur losses to offset this risk. Telesat does not use derivative financial instruments for speculative or trading purposes. The Company documents all relationships between derivatives and the items they hedge, and the risk management objective and strategy for using various hedges. This process includes linking every derivative to a specific asset or liability on the balance sheet, or to a specific firm commitment or to an anticipated transaction.

The effectiveness of the derivative in managing risk is assessed when the hedge is put in place and on an ongoing basis. Hedge accounting is stopped when a hedge is no longer effective. When accounting for derivatives, Telesat follows these policies: deferred gains or losses relating to derivatives that qualify for hedge accounting are recognized in earnings when the hedged item is sold or the anticipated transaction is ended gains and losses related to hedges of anticipated transactions are recognized in earnings or are recorded as adjustments of carrying values when the transaction takes place any premiums paid for financial instrument contracts are deferred and expensed to earnings over the term of the contract

Telesat recognizes gains and losses on forward contracts the same way as the gains and losses on the hedged item. Unrealized gains or losses are included with the related assets or liabilities.

Employee benefit plans As of January 1, 2000, the costs of post-employment and post-retirement benefits other than pensions are accrued over the working lives of the employees, whereas previously the costs were generally charged to earnings as incurred. Telesat 26 has made this change on a prospective basis which provides for a gradual recognition of the fair value of the pension surplus while at the same time recognizing the liability for costs of non-pension employee future benefits. Telesat is amortizing the net transitional obligation on a straight-line basis over 14 years (regular plans) and 9 years (designated plans), which was the average remaining service period of employees expected to receive benefits under the benefit plan as of January 1, 2000.

Telesat maintains one contributory and three non-contributory defined benefit pension plans which provide benefits based on length of service and rate of pay. Telesat is responsible for adequately funding these defined benefit pension plans. Contributions are made based on various actuarial cost methods that are permitted by pension regulatory bodies and reflect actuarial assumptions about future investment returns, salary projections and future service benefits. Telesat also provides other post-employment and retirement benefits, including health care and life insurance benefits on retirement and various disability plans, workers compensation and medical benefits to former or inactive employees, their beneficiaries and covered dependents, after employment but before retirement, under certain circumstances. The Company accrues its obligations under employee benefit plans and the related costs, net of plan assets. Actuaries determine pension costs and other retirement benefits using the projected benefit method prorated on service and management’s best estimate of expected investment performance, salary escalation, retirement ages of employees and expected health care costs.

Pension plan assets are valued at fair value which is also the basis used for calculating the expected rate of return on plan assets. The discount rate is based on the market interest rate of high quality long-term bonds. Past service costs arising from plan amendments are amortized on a straight-line basis over the average remaining service period of the employees active at the date of amendment. The Company deducts 10% of the benefit obligation or the fair value of plan assets, whichever is greater, from the net actuarial gain or loss and amortizes the excess over the average remaining service period of active employees. The actuaries perform a valuation at least every three years to determine the actuarial present value of the accrued pension and other retirement benefits. The 2005 pension expense calculation is extrapolated from an actuarial valuation performed as of January 1, 2004. The accrued benefit obligation is extrapolated from an actuarial valuation as of January 1, 2004. The most recent actuarial valuation of the pension plans for funding purposes was as of January 1, 2004, and the next required valuation will be as of January 1, 2007.

Stock-based compensation plans The Company’s stock-based compensation plans consist primarily of an employees’ savings plan (ESP), long-term incentive programs which can include special compensation payments (SCP), deferred share units (DSU) and starting in 2005, a restricted share unit plan (RSU). Awards that are settled in BCE Inc. (BCE) stock are recorded as contributed surplus. Awards that are settled in cash are recorded as liabilities. Telesat recognizes a compensation expense or recovery relating to SCPs and a compensation expense for any contributions under the ESP.

For each RSU granted the Company records a compensation expense that equals the market value of a BCE common share at the date of grant prorated over the vesting period. The compensation expense is adjusted for future changes in the market value of BCE common shares until the vesting date and an assessment of the number of RSUs that will vest in the future. The cumulative effect of the change in value is recognized in the period of the change. Vested RSUs will be paid in BCE common shares purchased on the open market or in cash, as the holder chooses, as long as the minimum share ownership requirements are met.

For each DSU granted Telesat records a compensation expense that equals the market value of a BCE common share at the grant date. The compensation expense is adjusted for subsequent changes in the market value of BCE common shares with the effect of this change in value recognized in the period of the change. DSUs are paid in BCE common shares purchased on the open market following the cessation of the participant’s employment.

The Company has adopted the fair-value based method for measuring the compensation cost of employee stock options using the Black-Scholes pricing model. This method has been used for options granted on or after January 1, 2002.

Income taxes Current income tax expense is the estimated income taxes payable for the current year before any refunds or the use of losses incurred in previous years. The Company uses the asset and liability method to account for future income taxes. Future income taxes reflect: the temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts used for tax purposes, on an after-tax basis the benefit of losses and non-refundable tax credits that will more likely than not be realized and carried forward to future years to reduce income taxes.

The Company calculates future income taxes using the rates enacted by tax law and those substantively enacted. A tax law is substantively enacted when it has been tabled in the legislature but may not have been passed into law. The effect 27 of a change in tax rates on future income tax assets and liabilities is included in earnings in the period when the change is substantively enacted.

Recent changes to accounting standards Asset retirement obligations Effective January 1, 2004 Telesat implemented CICA Handbook section 3110, Asset retirement obligations (ARO). Liabilities related to the legal obligation of retiring property, plant and equipment are initially measured at fair value and are adjusted for any changes resulting from the passage of time or to the amount of the original estimate of the undiscounted cash flows. The cumulative amortization expense for the asset and accretion expense for the liability of $0.3 million for years prior to 2004 were recorded as an adjustment to the opening retained earnings for 2004, with offsets to the ARO liability, ARO asset and to the future tax liability. The impact of the current expense and liability on the consolidated financial statements for the years ended December 31, 2005 and 2004 was negligible.

2. Segmented information The Company operates in the five reportable business segments described below. This reporting structure reflects how the business is managed and how operations are classified for planning and measuring performance.

- Broadcast – distribution or collection of video and audio signals in the domestic and North American markets which include television transmit and receive services, occasional use, bundled Digital Video Compression and radio services. - Carrier – satellite voice and date transmission services sold to other carriers located in Canada, the United States or South America. - Business Networks – provision of satellite capacity and ground network services for voice, data, and image transmission and internet access in Canada, the United States and South America. - Consulting and Other – all consulting services related to space and earth segments, government studies, satellite control services, R&D projects as well as management services for TMI Communications and Company, Limited Partnership. - Telesat Canada Subsidiaries – includes the financial results of Infosat, SpaceConnection and Telesat Brazil.

Business segments 2005 2004

Operating revenues Broadcast - external 207 131 199 983 Broadcast - inter-segment 22 - Carrier - external 30 504 28 168 Carrier - inter-segment 4 580 1 280 Business Networks - external 121 555 68 749 Business Networks - inter-segment 10 965 9 645 Consulting and Other - external 26 171 23 439 Consulting and Other - inter-segment 30 - Total Telesat Canada 400 958 331 264 Telesat Canada Subsidiaries 89 380 41 827 Inter-segment eliminations ( 15 597 ) ( 10 925 ) 474 741 362 166

Amortization expense Broadcast 45 598 51 666 Carrier 11 454 14 030 Business Networks 40 580 14 826 Consulting and Other 2 417 1 902 Telesat Canada Subsidiaries 11 760 1 877 111 809 84 301

28 Earnings from operations 2005 2004 Broadcast 129 431 106 551 Carrier 12 910 4 142 Business Networks ( 5 835 ) 18 250 Consulting and Other 9 439 7 103 Total Telesat Canada 145 945 136 046 Telesat Canada Subsidiaries 10 318 5 241 Total earnings from operations 156 263 141 287 Other income 14 739 18 296 Interest expense ( 29 526 ) ( 26 486 ) Income taxes ( 50 782 ) ( 47 840 ) Net earnings 90 694 85 257

Total assets 50% of the Company’s capital assets are attributable to the Broadcast segment and 36% are attributable to the Business Networks segment. 2005 2004 Geographic information Revenues – Canada 299 228 287 245 Revenues – United States 138 824 52 925 Revenues – Brazil 17 683 9 160 Revenues – all others 19 006 12 836 474 741 362 166

Capital assets – Canada 1 268 570 1 169 011 Capital assets – United States 57 592 - Capital assets – Brazil 3 596 2 826 Capital assets – Other 5 684 - 1 335 442 1 171 837

Goodwill – Canada 16 537 16 537 Goodwill – United States 7 058 - 23 595 16 537

The point of origin of revenues (destination of billing invoice) and the location of capital assets determine the geographic areas. The Anik and Nimiq satellites have been classified as located in Canada for disclosure purposes.

Major customers For the year ended December 31, 2005, two customers from the Broadcast segment aggregated 34% of consolidated revenues. In 2004, two Broadcast segment customers aggregated 44% of consolidated revenues.

3. Business acquisition On January 4, 2005, Telesat acquired 100% of the outstanding common shares of The SpaceConnection, Inc. (SpaceConnection). SpaceConnection is a provider of programming-related satellite transmission services to all the major US television networks and cable programmers. The purchase price was determined based on the fair value of assets acquired and the liabilities assumed at the date of acquisition. As part of the purchase consideration, a contingent payment of US $2.25 million was due based on achieving certain performance criteria by December 2005. This condition was satisfied and an additional CAD $2.6 million was accrued in December 2005.

29 The acquisition has been accounted for using the purchase method of accounting and results from operations have been included in the consolidated financial statements from the date of acquisition.

The allocation of the purchase price consists of the following:

Contingent Acquisition date Total consideration Current assets 3 213 3 213 Capital assets 59 918 59 918 Intangible assets (Note 9) 11 777 11 777 Goodwill 4 427 2 631 7 058 Other assets 700 700 Total assets acquired 80 035 2 631 82 666 Current liabilities ( 2 838 ) ( 2 838 ) Long-term debt ( 59 538 ) ( 59 538 ) Future income tax liability ( 11 763 ) ( 11 763 ) Total liabilities assumed ( 74 139 ) ( 74 139 ) Net assets acquired 5 896 2 631 8 527

4. Other income 2005 2004 Capitalized interest 14 974 17 642 Foreign exchange gains (losses) 1 317 ( 2 669 ) Interest income 6 849 3 379 Gain (loss) on disposal of assets 123 ( 196 )

Performance incentive payments and milestone interest expense ( 8 529 ) ( 3 468 ) Other 5 3 608 14 739 18 296

Other in 2004 includes a $2.6 million recovery of a previously written off receivable.

5. Income taxes A reconciliation of the statutory income tax rate, which is a composite of federal and provincial rates, to the effective income tax rate is as follows: 2005 2004 Statutory income tax rate 35.3% 35.3% Large corporations tax 1.3% 1.3% Permanent differences ( 1.2% ) ( 0.9% ) Adjustment for substantively enacted tax rate changes 1.0% 0.0% Other ( 0.5% ) 0.2% Effective income tax rate 35.9% 35.9%

The components of the income tax expense are as follows:

Future 36 756 28 789 Current 14 026 19 051 Total income tax expense 50 782 47 840

30 The tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts used for tax purposes are presented below: 2005 2004 Future tax assets Investments 12 857 12 752 Loss carry forwards 6 202 61 Reserves 3 114 5 991 Lease obligations 2 001 2 765 Performance incentive payments 18 861 15 802 Other 3 811 607 Less: valuation allowance ( 2 669 ) ( 2 647 ) Total future tax assets 44 177 35 331

Future tax liabilities Capital assets 195 720 147 136 Capitalized interest 2 362 3 449 Insurance proceeds 14 774 15 532 Other 21 326 10 703 Total future tax liabilities 234 182 176 820

Total future income taxes 190 005 141 489

Total future income taxes are comprised of:

Net future income tax asset – current portion 3 737 3 594 Net future income tax liability – long-term portion 193 742 145 083 Total future income taxes 190 005 141 489

6. Receivables 2005 2004

Trade receivables - net of allowance for doubtful accounts 46 894 50 010 Less: long-term portion of trade receivables ( 568 ) ( 1 500 ) Promissory note receivable 13 054 19 331 Liquidated damages receivable - 15 339 59 380 83 180

The long-term portion of trade receivables includes items that will not be collected during the subsequent year and is included in other assets in note 11. The long-term portion of the promissory note receivable is included in other promissory notes receivable in note 11.

7. Other current assets 2005 2004

Inventories 19 180 7 291 Income taxes recoverable 7 373 - Investment tax credit benefits 231 440 Prepaid expenses and other 9 393 7 274 36 177 15 005 Inventories are valued at lower of cost or market.

31 8. Capital assets Accumulated Net book Cost amortization value 2005 Satellites 1 221 985 250 799 971 186 Earth stations 285 600 146 294 139 306 Transponders under capital lease 57 201 5 523 51 678 Office buildings and other 89 130 60 145 28 985 Construction in progress 144 287 - 144 287 1 798 203 462 761 1 335 442

2004 Satellites 1 491 584 671 823 819 761 Earth stations 266 676 139 125 127 551 Office buildings and other 90 592 60 890 29 702 Construction in progress 194 823 - 194 823 2 043 675 871 838 1 171 837

The cost of assets under capital lease, including satellite transponders, was $75.4 million at December 31, 2005 and $19.6 million at December 31, 2004. At December 31, 2005 the net book value of these assets was $55.0 million (2004 - $4.8 million). See note 22 for a description of the insurance proceeds received in 2005 and 2004 for Anik F1.

9. Intangible assets Accumulated Net book Cost amortization value 2005 Non-competition agreement (Note 3) 6 991 1 165 5 826 Long-term contracts and customer lists (Note 3) 5 710 2 693 3 017 12 701 3 858 8 843

2004 Customer lists 827 300 527 827 300 527

The non-competition agreement is being amortized on a straight-line basis over six years beginning January st1 , 2005. The long-term contracts are being amortized at variable rates based on the associated revenue until 2009. The customer lists are being amortized on a straight-line basis over 3 to 4 years.

10. Investments 2005 2004

WildBlue Communications, Inc. - at cost 14 526 14 526 Hellas-Sat Consortium Limited - at cost 315 315 TMI Communications and Company, Limited Partnership - at cost 696 787 15 537 15 628

Telesat has a portfolio interest in WildBlue Communications, Inc. (WildBlue), a US-based company offering high-speed satellite-based Internet services to the United States using the Anik F2 satellite. The initial investment in preferred shares was acquired in 2000 as partial consideration for the grant of an exclusive license to WildBlue for the use and access of the Ka-band payload on Anik F2.

32 In 2001, Telesat acquired a portfolio interest in Hellas-Sat Consortium Limited. The consortium has one satellite which provides regional coverage to Greece, Cyprus and the Balkans.

Telesat holds 100% of the shares of 3484203 Canada Inc. which in turn holds 100% of the limited partner units of TMI Communications and Company, Limited Partnership (TMI). The TMI general partner units are held indirectly by BCE. TMI holds an interest in the Mobile Satellite Ventures (MSV) group of companies, which operate satellite systems for the purpose of remote and mobile communication services in both Canada and the US.

Telesat holds 100% of the shares of Infosat Communications, Inc. and consolidates its results. Infosat is a full service provider of satellite-based voice, fax, paging, and data communications.

Telesat holds 100% of the shares of Telesat Brasil Limitada and consolidates their results. The holding company holds 100% of Telesat Serviços de Telecomunicação Limitada, which is being used to provide services in the Brazilian market using Anik F1.

Telesat holds 100% of the shares of The SpaceConnection Inc. and consolidates their results. Spaceconnection is a provider of C-Band and Ku-Band space segment for video, audio, data and internet services. See note 3 for details of the acquisition.

11. Other assets 2005 2004 Promissory notes receivable from TMI Communications and 3 840 3 840 Company, Limited Partnership (a) Other promissory notes receivable (b) - 14 227 Long term portion of trade receivables 568 1 500 Income taxes recoverable - 7 373 Accrued pension benefit (see note 21) 8 104 7 003 Deferred charges 3 834 678 Other 717 135 17 063 34 756

(a) During 1998 Telesat renegotiated the repayment terms of the TMI promissory notes (discounted at the time of the original transactions, gross value of $37.8 million) whereby $22.8 million was ranked prior to any indebtedness of the Partnership. TMI has made partial repayments of $10.0 million in 2001, $5.0 million in 2003 and $4.0 million in 2004.

(b) In October 2004, a new promissory note (Other promissory notes receivable) was issued bearing interest at 0.9968% per month and is payable in monthly installments with the final payment due August 1, 2006.

12. Other current liabilities 2005 2004 Deferred revenues and deposits (see note 16) 30 314 24 193 Deferred milestone payments (see note 16) 32 276 52 029 Capital lease liabilities (see note 16) 4 748 846 Income taxes payable 16 895 16 408 Satellite performance incentive payments (see note 16) 10 569 9 130 Dividends payable 449 - Other liabilities 15 993 9 232 111 244 111 838

33 13. Bank loans

The unused bank lines of credit available to Telesat at December 31, 2005 amounted to $164.3 million (2004 - $124.2 million). The unused bank line of credit available to Infosat at December 31, 2005 amounted to $8.5 million (2004 - $8.7 million).

14. Debt due within one year 2005 2004

7.4% Notes due June 28, 2006 150 000 - Other debt financing 2 838 2 613 152 838 2 613

15. Debt financing 2005 2004

7.4% Notes due June 28, 2006 - 150 000 8.2% Notes due November 7, 2008 125 000 125 000 Other debt financing 7 202 9 636 132 202 284 636

Other debt financing includes the financing for the Company’s headquarters building. With respect to the headquarters building, the Company shares equally with the developer, the ownership, cost and debt of the building. The Company has leased the developer’s share for twenty years beginning January 25, 1989 for an annual rent, excluding operating costs, of $1.8 million. Total headquarters financing of $9.5 million (2004 - $12.0 million) includes the amount owing under this capital lease of $4.6 million at December 31, 2005 (2004 - $5.9 million). The imputed interest rate for the capital lease is 10.69% per annum.

Mortgage financing for the Company’s share of the facility has been arranged by the developer for a twenty-year term coincident with the lease with interest at 11% per annum and with annual payments of principal and interest of $1.8 million.

The outstanding short and long term debt financing at December 31, 2005 of $285 million is repayable as follows:

2006 2007 2008 2009 152 838 3 378 128 528 296

16. Other long-term liabilities 2005 2004

Deferred revenues and deposits (a) 261 771 274 341 Deferred satellite performance incentive payments (b) 42 427 35 635 Deferred milestone payments (c) 21 678 50 755 Capital lease liabilities (d) 49 749 883 Other liabilities 11 394 3 977 387 019 365 591

(a) Deferred revenues represent the Company’s liability for the provision of future services. The prepaid amount is brought into income over the period of service to which the prepayment applies. The net amount outstanding at December 31, 2005 will be reflected in the Statements of Earnings as follows: $30.3 million in 2006, $30.7 million in 2007, $22.5 million in 2008, $21.6 in 2009, $21.3 in 2010 and $165.7 million thereafter.

(b) Deferred satellite performance incentive payments are payable over the lives of the Nimiq 1, Anik F1, Anik F2 and Anik F1R satellites. The present value of the payments is capitalized as part of the cost of the satellite, recorded as 34 a liability, and charged against operations as part of the normal amortization of the satellite. The amounts payable on the successful operation of the transponders are US $6.6 million in 2006, US $6.2 million in 2007, US $3.1 million in 2008, US $2.9 million in 2009, US $3.1 million in 2010, and US $20.9 million thereafter.

(c) Deferred milestone payments represent the present value of liabilities associated with the Anik F2 satellite. Payments of principal and interest over the next two years are US $27.6 million in 2006 and US $21.1 million in 2007.

(d) Future minimum lease payments payable under capital leases are $4.8 million in 2006, $4.7 million in 2007, $4.8 million in 2008, $5.3 million in 2009, $5.8 million in 2010 and $29.1 million thereafter.

17. Capital stock

The authorized capital of the Company is comprised of 10,000,000 common shares and 5,000,000 preferred shares. Ownership by non-residents in the common shares of the Company is limited to twenty percent.

At December 31, 2005 and 2004 there were 6,842,547 common shares outstanding with a stated value of $111.9 million. At December 31, 2005 and 2004 there were 5,000,000 non-voting preferred shares outstanding with a stated value of $50.0 million.

For the period March 31, 2002 to March 30, 2004 the cumulative preferred share dividend rate was fixed at an annual rate of 4.00%. For the period March 31, 2004 to March 30, 2007 the dividend rate has been fixed at an annual rate of 3.56%. The shares are redeemable at the option of the Company at $10 per share plus any accrued dividends payable. Telesat has agreed not to exercise its rights of redemption during the period terminating March 30, 2007.

18. Cash flow information 2005 2004

Cash and cash equivalents is comprised of: Cash - 10 352 Bank overdrafts ( 4 191 ) - Short term investments, original maturity 90 days or less 117 668 20 545 113 477 30 897

Net change in non-cash balance sheet accounts is comprised of: Receivables 6 406 ( 53 908 ) Other assets ( 18 294 ) 9 066 Accounts payable ( 747 ) 1 789 Income taxes payable 622 11 312 Other liabilities ( 13 370 ) 35 371 Contributed surplus 361 395 ( 25 022 ) 4 025

19. Financial instruments

Telesat uses derivative instruments to manage the exposure to foreign currency risk and does not use derivative instruments for speculative purposes. Since there is no active trading in derivative instruments, there is no exposure to any significant liquidity risks relating to them.

Credit risk Financial instruments that potentially subject the Company to a concentration of credit risk consists of cash and cash equivalents and short term investments. Investment of these funds is done with high quality financial institutions and is governed by the Company’s corporate investment policy, which aims to reduce credit risk by restricting investments to high-grade US dollar and Canadian dollar denominated investments.

Telesat is exposed to credit risk if counterparties to its derivative instruments are unable to meet their obligations. It is expected that these counterparties will be able to meet their obligations as they are institutions with strong credit ratings. Telesat regularly monitors the credit risk and credit exposure. There was no credit risk relating to derivative instruments at December 31, 2005. 35 Telesat has a number of diverse customers, which limits the concentration of credit risk. The Company has credit evaluation, approval and monitoring processes intended to mitigate potential credit risks. Anticipated bad debt losses have been provided for in the allowance for doubtful accounts.

Currency exposures Telesat uses forward contracts to hedge foreign currency risk on anticipated transactions. At December 31, 2005, the Company had $92.2 million (2004 - $164.2 million) of outstanding foreign exchange contracts which require the Company to pay Canadian dollars to receive US dollars for future capital expenditures. The fair value of these contracts is $83.6 million (2004 - $149.8 million). The forward contracts are due between March 2006 and May 2007.

Fair value Fair value is the amount that willing parties would accept to exchange a financial instrument based on the current market for instruments with the same risk, principal and remaining maturity. Fair values are based on estimates using present value and other valuation methods.

These estimates are affected significantly by the assumptions for the amount and timing of estimated future cash flows and discount rates, which all reflect varying degrees of risk. Potential income taxes and other expenses that would be incurred on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not necessarily the net amounts that would be realized if these instruments were actually settled.

The carrying amounts for cash and cash equivalents, short term investments, receivables, other current liabilities, accounts payable and accrued liabilities approximate fair market value due to the short maturity of these instruments. The carrying value of the debt financing is an approximation of the fair market value due to the Company’s intention to hold the debt and pay it out at maturity.

20. Stock-based compensation plans

Employee savings plans (ESPs) The ESP enables Telesat employees to acquire BCE common shares through payroll deductions of up to 10% of their annual base earnings and target bonus plus employer contributions of up to 2%. The trustee of the ESPs buys BCE common shares for the participants on the open market, by private purchase or from BCE (where shares are issued from Treasury). BCE chooses the method the trustee uses to buy the shares. Compensation expense for ESPs was $0.6 million in 2005 (2004 - $0.6 million).

Stock options Under the long-term incentive programs, options may be granted to key employees of Telesat to purchase BCE common shares. The subscription price is usually equal to the market value of the shares on the last trading day before the grant comes into effect. For options granted before January 1, 2004, the right to exercise the options generally vests or accrues by 25% a year for four years of continuous employment from the date of grant, except where a special vesting period applies. Options become exercisable when they vest and can be exercised for a period of up to 10 years from the date of grant.

For options granted after January 1, 2004, the right to exercise options vests after two to three years of continuous employment from the date of grant, if specific performance targets are met. Options become exercisable when they vest and can be exercised for a period of up to six years from the date of grant. Subject to achieving specific performance targets, 50% of the options will vest after two years and 100% after three years.

36 The following tables are a summary of the status of Telesat’s portion of the BCE stock option programs at December 31, 2005. Weighted- Weighted- average average Number exercise Number exercise of shares price ($) of shares price ($) 2005 2005 2004 2004

Outstanding, beginning of year 516 598 31 418 457 31 Granted 67 224 29 152 776 30 Exercised 33 050 16 ( 20 375 ) 16 Expired/forfeited 6 888 41 ( 34 260 ) 37 Outstanding, end of year 543 884 32 516 598 31 Exercisable, end of year 261 826 34 251 066 32

At December 31, 2005 Options outstanding Options exercisable Weighted- Weighted- Weighted- Number average average Number average remaining exercise exercise Range of exercise price life price ($) price ($)

Below $20 38 375 3.39 17 38 375 17 $20 to $29 344 115 5.39 29 62 057 28 $30 to $39 10 000 4.52 35 10 000 35 $40 and over 151 394 4.66 41 151 394 41 543 884 5.03 32 261 826 34

The assumptions used to determine the stock-based compensation expense under the Black-Scholes option pricing model were as follows:

2005 2004

Compensation cost 408 353 Number of stock options granted 67 224 152 776 Weighted-average fair value per option granted ($) 3.0 3.7 Assumptions: Dividend yield 4.6% 4.0% Expected volatility 24% 27% Risk-free interest rate 3.0% 3.1% Expected life (years) 3.5 3.5

During 2005, stock options were granted under the stock-based compensation plan and an expense of $0.4 million (2004 - $0.4 million) was charged to contributed surplus.

37 Restricted share units (RSUs) In 2005, RSUs were granted to Telesat executives. The value of an RSU is always equal to the value of one BCE common share. Dividends in the form of additional RSUs are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividend paid on BCE common shares. Each executive is granted a specific number of RSUs for a given performance period, based on his or her position and level of contribution. At the end of each given performance period, RSUs will vest if performance objectives are met or will be forfeited.

Vested RSUs will be paid in BCE common shares purchased on the open market, in cash or through a combination of both, as the holder chooses, as long as individual share ownership requirements are met.

The table below is a summary of the status of RSUs: Number of RSUs Outstanding, January 1, 2005 - Granted 73 777 Dividends credited 2 460 - Expired/forfeited

Outstanding, December 31, 2005 76 237 Vested, December 31, 2005 -

For the year ended December 31, 2005 a compensation expense for RSUs of $1.7 million was accrued as a liability.

Special compensation payments (SCPs) Before 2000, when options were granted to employees, related rights to SCPs were also often granted. SCPs are cash payments representing the amount that the market value of the shares on the date of exercise exceeds the exercise price of these options.

The number of SCPs for BCE common shares outstanding at December 31, 2005 was 38,375. All of the outstanding SCPs cover the same number of shares as the options to which they relate. It is Telesat’s responsibility to make the payments under the SCPs. The annual compensation expense for the SCP was an expense of $0.2 million in 2005 (2004 – recovery $0.1 million).

Deferred share units (DSUs) DSUs are granted to executives when they choose to receive their bonuses in the form of DSU units instead of cash. The value of a DSU is always equal to the value of one BCE common share. Dividends in the form of additional DSUs are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividend paid on BCE common shares. DSUs are paid in cash when the holder chooses to exercise their units.

The table below is a summary of the status of the DSUs:

2005 2004 Number of DSUs Outstanding, January 1 965 - Granted 3 283 934 Dividends credited 151 31 Exercised - - Outstanding, December 31 4 399 965

For the year ended December 31, 2005, the company recorded a compensation expense for DSUs of $0.1 million (2004 – negligible).

38 21. Employee benefit plans The Company’s funding policy is to make contributions to its pension funds based on various actuarial cost methods as permitted by pension regulatory bodies. Contributions reflect actuarial assumptions concerning future investment returns, salary projections and future service benefits. Plan assets are represented primarily by Canadian and foreign equity securities, fixed income instruments and short-term investments.

The changes in the benefit obligations and in the fair value of assets and the funded status of the defined benefit plans were as follows:

Pension Other Pension Other benefits benefits benefits benefits 2005 2005 2004 2004 Change in benefit obligations Benefit obligation, beginning of year 125 646 11 189 118 214 11 577 Current service cost 3 160 394 3 156 368 Interest cost 7 730 684 7 906 767 Actuarial (gains) losses 18 961 2 488 ( 1 605 ) ( 1 243 ) Benefit payments ( 3 594 ) ( 269 ) ( 3 886 ) ( 280 ) Employee contributions 1 707 - 1 861 - Benefit obligation, end of year 153 610 14 486 125 646 11 189

Change in fair value of plan assets Fair value of plan assets, beginning of year 136 165 - 127 666 - Return on plan assets 16 193 - 10 028 - Benefit payments ( 3 594 ) ( 269 ) ( 3 886 ) ( 280 ) Employee contributions 1 707 - 1 861 - Employer contributions 468 269 496 280 Fair value of plan assets, end of year 150 939 - 136 165 -

Funded status Plan surplus (deficit) ( 2 671 ) ( 14 486 ) 10 519 (11 189 ) Unamortized net actuarial (gain) loss 22 985 1 109 10 147 ( 1 401 ) Unamortized transitional (asset) obligation ( 12 209 ) 4 943 ( 13 663 ) 5 561

Accrued benefit asset (liability) 8 105 ( 8 434 ) 7 003 ( 7 029 )

The fair value of the plan assets consists of the following asset categories at December 31:

2005 2004

Equity securities 64% 63% Fixed income instruments 34% 35% Short-term investments 2% 2% Total 100% 100%

Plan assets are valued as at the measurement date of December 31 each year. Equity securities include common shares of a related party in the amounts of $1.1 million (1% of total plan assets) and $1.2 million (1% of total plan assets) at December 31, 2005 and 2004 respectively.

39 The significant weighted-average assumptions adopted in measuring Telesat’s pension and other benefit obligations were as follows: Pension Other Pension Other benefits benefits benefits benefits 2005 2005 2004 2004 Accrued benefit obligation as of December 31: Discount rate 5.2% 5.2% 6.0% 6.0% Rate of compensation increase 3.5% 3.5% 3.5% 3.5%

Benefit costs for years ended December 31: Discount rate 6.0% 6.0% 6.5% 6.5% Expected long-term rate of return on plan assets 7.5% 7.5% 7.5% 7.5% Rate of compensation increase 3.5% 3.5% 4.0% 4.0%

For measurement purposes, a 10.5% (drugs) / 4.5% (other) annual rate of increase in the per capita cost of covered health care benefits (the health care cost trend) was assumed for 2005. The drug rate is assumed to gradually decrease to 4.5% over 6 years and remain at that level thereafter.

The net benefit expense included the following components:

Pension Other Pension Other benefits benefits benefits benefits 2005 2005 2004 2004

Current service cost 3 160 394 3 156 368 Interest cost 7 730 684 7 906 767 Expected return on plan assets ( 10 165 ) - ( 9 548 ) - Amortization of net actuarial (gain)/loss 96 ( 22 ) - - Amortization of transitional obligation ( 1 454 ) 618 ( 1 454 ) 618

Net benefit expense ( 633 ) 1 674 60 1 753

22. Commitments and contingent liabilities

Minimum annual commitments under operating leases determined as at December 31, 2005 are $16.7 million in 2006, $9.9 million in 2007, $9.5 million in 2008, $4.9 million in 2009, $3.8 million in 2010 and $3.7 million thereafter.

Telesat has non-satellite purchase commitments of US $20.9 million (CAD $24.4 million) and CAD $0.5 million with various suppliers at December 31, 2005 (2004 - US $20.3 million or CAD $24.9).

During the first quarter of 2004, Telesat entered into contracts for the construction and launch of Anik F3, targeted for launch in 2006. The outstanding commitments at December 31, 2005 on these contracts are US $69.1 million (CAD $80.5 million).

Telesat has also entered into agreements with various customers for the sale and/or lease of a number of transponders and for prepaid revenues on the Anik F2, Anik F1R and Anik F3 satellites which take effect on final acceptance of the spacecraft. Telesat shall be responsible for operating and controlling these satellites. Deposits and accrued interest of $272.8 million (2004 - $287.4 million), refundable under certain circumstances, are reflected in other liabilities, both current and long-term.

In the normal course of business, Telesat has executed agreements that provide for indemnification and guarantees to counterparties in various transactions. These indemnification undertakings and guarantees may require Telesat to compensate the counterparties for costs and losses incurred as a result of certain events including, without limitation, loss or damage to property, change in the interpretation of laws and regulations (including tax legislation), claims that may arise while providing services, or as a result of litigation that may be suffered by the counterparties.

40 Certain indemnification undertakings can extend for an unlimited period and may not provide for any limit onthe maximum potential amount, although certain agreements do contain specified maximum potential exposure representing a cumulative amount of approximately $16.7 million. The nature of substantially all of the indemnification undertakings prevents the Company from making a reasonable estimate of the maximum potential amount Telesat could be required to pay counterparties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. To the best of management’s knowledge, Telesat has not made any payments under such indemnifications.

Telesat reached an agreement with one of its major customers concerning the dispute of the application of the Canadian Radio-television and Telecommunications Commission contribution levy. Levy payments owing to Telesat have been recovered.

In August 2001, Boeing, the manufacturer of the Anik F1 satellite, advised Telesat of a gradual decrease in available power on-board the satellite. Telesat filed an insurance claim with its insurers on December 19, 2002, and in March 2004 reached a final settlement agreement. The settlement calls for an initial payment in 2004 of US $136.2 million and an additional payment of US $49.1 million in 2007 if the power level on Anik F1 degrades as predicted by the manufacturer. In the event that the power level on Anik F1 is better than predicted, the amount of the payment(s) will be adjusted by applying a formula which is included in the settlement documentation and could result in either a pro-rated payment to Telesat of the additional US $49.1 million or a pro-rated repayment of up to a maximum of US $36.1 million to be made by Telesat to the insurers. The initial payment has been received. During December 2005, a number of insurers elected to pay a discounted amount of the proceeds due in 2007. A total of US $26.2 million was received in December (pre-discount value of US $29.1 million) leaving US $20.0 million to be paid in 2007. The degradation continues as predicted.

23. Related party transactions

Related parties include BCE, the sole common shareholder, together with its subsidiaries and affiliates, and Telesat investments.

The following transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 2005 2004

Operating revenues for services provided 131 880 133 795 Operating expenses for services received 9 273 6 811 Receivables at year end 3 566 6 071 Deferred revenues and deposits 159 821 156 411

24. Subsequent event

In January 2006, Telesat signed an agreement to build and launch Nimiq 4, a new direct broadcast satellite targeted for launch in 2008. The outstanding commitments on this contract at the time of signing were US $169.7 million (CAD $197.9 million) and CAD $14 million with various suppliers.

On February 1, 2006, Telesat’s parent company BCE announced its intention to implement a recapitalization of Telesat and launch an Initial Public Offering (IPO) of a minority stake for Telesat in the second half of 2006.

41 Telesat Canada Headquarters 1601 Telesat Court Gloucester, Ontario K1B 5P4 (613) 748-0123 www.telesat.com

Auditor Deloitte & Touche LLP

Bankers Bank of Montreal ING Bank N.V. Canadian Imperial Bank of Commerce Royal Bank of Canada United Overseas Bank Limited National Bank of Canada

Transfer Agent & Registrar 7.40% Series 99-B Notes BNY Trust Company of Canada 8.20% Series 2001 Notes BNY Trust Company of Canada

Registrar Preferred Shares Telesat Canada Attention: Secretary Sales Offices Canada

Montréal 1200, avenue Papineau, Bureau 140 Montréal (Québec) H2K 4R5 514-521-7862

Toronto 100 Sheppard Avenue East, Suite 800 North York, Ontario M2N 6N5 416-733-4032 Trademarks: “Telesat”, “Anik”, and “Nimiq” are among Calgary the trademarks owned by Telesat Canada 1780 Center Avenue N.E. and are protected by applicable laws. Calgary, Alberta T2E 0A6 The foregoing list of trade-marks is not 403-235-5751 necessarily exhaustive, and Telesat Canada may own other trade-marks not included South America here. Any other trademarks, corporate, trade or domain name used in this Annual Belo Horizonte Report are the property of their respective Av. Dep. Cristovan Chiaradia, 540 – Buritis owners. You may not use any trademark 30575-815 - Belo Horizonte – MG displayed in this Annual Report without Brazil the written permission of Telesat or the 011-55-31-3378-9060 relevant owner of the trademark.

42 BELL CANADA ENTERPRISES 2005 ANNUAL REPORT

MANAGEMENT’S DISCUSSION AND ANALYSIS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

About Forward-Looking Statements ...... 2 Note 1 Significant Accounting Policies ...... 64 Non-GAAP Financial Measures ...... 2 Note 2 Segmented Information ...... 71 About Our Business ...... 4 Note 3 Business Acquisitions ...... 73 The Year at a Glance ...... 11 Note 4 Restructuring and Other Items ...... 75 Selected Annual and Quarterly Information...... 16 Note 5 Other Income ...... 77 Financial Results Analysis ...... 20 Note 6 Interest Expense ...... 77 Financial and Capital Management ...... 34 Note 7 Income Taxes ...... 77 Evaluation of Disclosure Controls and Procedures ...... 41 Note 8 Discontinued Operations ...... 79 Assumptions Made in the Preparation of Note 9 Earnings per Share ...... 80 Forward-Looking Statements and Risks that Note 10 Accounts Receivable ...... 81 42 Could Affect Our Business and Results ...... Note 11 Other Current Assets ...... 81 56 Our Accounting Policies...... Note 12 Capital Assets ...... 82 Note 13 Other Long-Term Assets ...... 82 Note 14 Indefinite-Life Intangible Assets ...... 82 CONSOLIDATED FINANCIAL STATEMENTS Note 15 Goodwill...... 83 Note 16 Accounts Payable and Accrued Liabilities ...... 83 Management’s Report ...... 60 Note 17 Debt Due Within One Year...... 83 Auditors’ Report ...... 60 Note 18 Long-Term Debt ...... 84 Consolidated Statements of Operations ...... 61 Note 19 Other Long-Term Liabilities ...... 85 Consolidated Statements of Deficit...... 61 Note 20 Non-Controlling Interest ...... 85 Consolidated Balance Sheets ...... 62 Note 21 Financial Instruments ...... 85 Consolidated Statements of Cash Flow...... 63 Note 22 Share Capital...... 87 Note 23 Stock-Based Compensation Plans ...... 88 Note 24 Employee Benefit Plans...... 91 Note 25 Commitments and Contingencies ...... 95 Note 26 Guarantees ...... 97 Note 27 Supplemental Disclosure for Statements of Cash Flows ...... 98 Note 28 Reconciliation of Canadian GAAP to United States GAAP ...... 98

Board of Directors and Executives ...... 102 Shareholder Information...... 103 p. 2 MANAGEMENT’S DISCUSSION AND ANALYSIS

Please refer to the audited This management’s discussion and analysis of financial therefore cannot describe the expected impact in a consolidated financial state- condition and results of operations (MD&A) comments meaningful way or in the same way we present known ments when reading this on BCE’s operations, performance and financial condi- risks affecting our business. MD&A. You will find more tion for the years ended December 31, 2005 and 2004. • we disclaim any intention and assume no obligation information about BCE, to update any forward-looking statement even if new including BCE Inc.’s annual information becomes available as a result of future information form for the ABOUT FORWARD-LOOKING STATEMENTS events or for any other reason. year ended December 31, 2005 (BCE 2005 AIF) and Securities laws encourage companies to disclose forward- recent financial reports, looking information so that investors can get a better A number of assumptions were made by BCE in mak- on BCE Inc.’s website at understanding of the company’s future prospects and ing forward-looking statements in BCE’s 2005 annual www.bce.ca, on SEDAR make informed investment decisions. report, including in this MD&A, such as certain Cana- at www.sedar.com and on BCE’s 2005 annual report, including this MD&A, dian economic assumptions, market assumptions, EDGAR at www.sec.gov. contains forward-looking statements about BCE’s operational and financial assumptions, and assump- objectives, plans, strategies, financial condition, results tions about transactions. Certain factors that could In this MD&A, we, us, our of operations, cash flows and businesses. These state- cause results or events to differ materially from our and BCE mean BCE Inc., ments are forward-looking because they are based on current expectations include, among others, our abil- its subsidiaries and joint ity to implement our strategies and plans, our ability ventures. our current expectations, estimates and assumptions about the markets we operate in, the Canadian eco- to implement the changes required by our strategic All amounts in this nomic environment and our ability to attract and direction, the intensity of competitive activity and the MD&A are in millions of retain customers and to manage network assets and ability to achieve customer service improvement while Canadian dollars, except operating costs. All such forward-looking statements significantly reducing costs. Assumptions made in the where otherwise noted. are made pursuant to the ‘safe harbor’ provisions of preparation of foward-looking statements and risks the United States Private Securities Litigation Reform that could cause our actual results to differ materially A statement we make is Act of 1995 and of any applicable Canadian securities from our current expectations are discussed through- forward-looking when legislation, including the Securities Act of Ontario. It is out this MD&A and, in particular, in Assumptions it uses what we know and important to know that: Made in the Preparation of Forward-Looking Statements expect today to make a and Risks that Could Affect Our Business and Results. statement about the future. • unless otherwise indicated, forward-looking Forward-looking statements statements in BCE’s 2005 annual report, including in this MD&A, describe our expectations at may include words such NON-GAAP FINANCIAL MEASURES as anticipate, assumption, March 1, 2006 believe, could, expect, goal, • our actual results could differ materially from what EBITDA guidance, intend, may, we expect if known or unknown risks affect our busi- objective, outlook, plan, ness, or if our estimates or assumptions turn out to The term EBITDA does not have any standardized seek, should, strive, target be inaccurate. As a result, we cannot guarantee that meaning according to Canadian generally accepted and will. any forward-looking statement will materialize and, accounting principles (GAAP). It is therefore unlikely accordingly, you are cautioned not to place undue to be comparable to similar measures presented by Non-GAAP Financial EBITDA Measures reliance on these forward-looking statements. other companies. is presented on a consistent This section describes • except as otherwise indicated by BCE, forward-look- basis from period to period. the non-GAAP financial ing statements do not take into account the effect that We use EBITDA, among other measures, to assess measures we use in the transactions or non-recurring or other special items the operating performance of our ongoing businesses MD&A to explain our announced or occurring after the statements are made without the effects of amortization expense, net benefit financial results. It also may have on our business. Such statements do not, plans cost, and restructuring and other items. We provides reconciliations unless otherwise specified by BCE, reflect the impact exclude amortization expense and net benefit plans of the non-GAAP financial of dispositions, sales of assets, monetizations, mergers, cost because they largely depend on the accounting measures to the most acquisitions, other business combinations or transac- methods and assumptions a company uses, as well as comparable Canadian tions, asset write-downs or other charges announced or non-operating factors such as the historical cost of GAAP financial measures. occurring after forward-looking statements are made. capital assets and the fund performance of a company’s The financial impact of these transactions and non- pension plans. Excluding restructuring and other items recurring and other special items can be complex and does not imply they are necessarily non-recurring. depends on the facts particular to each of them. We

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 3

EBITDA allows us to compare our operating per- The most comparable Canadian GAAP financial EBITDA formance on a consistent basis. We believe that certain measure is operating income. The tables below are We define EBITDA (earnings investors and analysts use EBITDA to measure a reconciliations of operating income to operating income before interest, taxes, depre- company’s ability to service debt and to meet other before restructuring and other items on a consolidated ciation and amortization) payment obligations, or as a common measurement to basis for BCE and Bell Canada. as operating revenues less operating expenses, meaning value companies in the telecommunications industry. BCE 2005 2004 it represents operating The most comparable Canadian GAAP financial income before amortization measure is operating income. The tables below are Operating income 4,048 2,894 Restructuring and other items 55 1,224 expense, net benefit plans reconciliations of operating income to EBITDA on a Operating income before cost, and restructuring and consolidated basis for BCE and Bell Canada. restructuring and other items 4,103 4,118 other items.

BCE 2005 2004 Operating income 4,048 2,894 BELL CANADA 2005 2004 Amortization expense 3,114 3,056 Operating income 3,755 2,695 Net beneﬁt plans cost 380 256 Restructuring and other items 54 1,219 Restructuring and other items 55 1,224 Operating income before EBITDA 7,597 7,430 restructuring and other items 3,809 3,914

BELL CANADA 2005 2004 NET EARNINGS BEFORE Operating income 3,755 2,695 RESTRUCTURING AND OTHER ITEMS Amortization expense 2,989 2,962 AND NET GAINS ON INVESTMENTS Net benefit plans cost 389 235 Restructuring and other items 54 1,219 The term net earnings before restructuring and other EBITDA 7,187 7,111 items and net gains on investments does not have any standardized meaning according to Canadian GAAP. It is therefore unlikely to be comparable to similar meas- OPERATING INCOME BEFORE ures presented by other companies. RESTRUCTURING AND OTHER ITEMS We use net earnings before restructuring and other The term operating income before restructuring and items and net gains on investments, among other other items does not have any standardized meaning measures, to assess the operating performance of our according to Canadian GAAP. It is therefore unlikely ongoing businesses without the effects of after-tax to be comparable to similar measures presented by restructuring and other items and net gains on invest- other companies. ments. We exclude these items because they affect the We use operating income before restructuring and comparability of our financial results and could poten- other items, among other measures, to assess the oper- tially distort the analysis of trends in business perform- ating performance of our ongoing businesses without ance. Excluding these items does not imply they are the effects of restructuring and other items. We necessarily non-recurring. exclude these items because they affect the compara- The most comparable Canadian GAAP financial bility of our financial results and could potentially dis- measure is net earnings applicable to common shares. tort the analysis of trends in business performance. The following table is a reconciliation of net earnings Excluding these items does not imply they are neces- applicable to common shares to net earnings before sarily non-recurring. restructuring and other items and net gains on investments on a consolidated basis and per BCE Inc. common share.

2005 2004 TOTAL PER SHARE TOTAL PER SHARE Net earnings applicable to common shares 1,891 2.04 1,523 1.65 Restructuring and other items 38 0.04 772 0.83 Net gains on investments (28) (0.03) (423) (0.46) Net earnings before restructuring and other items and net gains on investments 1,901 2.05 1,872 2.02

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 4 MANAGEMENT’S DISCUSSION AND ANALYSIS

Free Cash Flow FREE CASH FLOW revenues for the year ended December 31, 2005. Some We define free cash flow of these revenues vary slightly by season. Business seg- The term free cash flow does not have any standard- as cash from operating ment revenues tend to be higher in the fourth quarter ized meaning according to Canadian GAAP. It is activities after capital expen- because of higher levels of voice and data equipment therefore unlikely to be comparable to similar mea- ditures, total dividends sales. Revenues for the Other BCE segment tend to be sures presented by other companies. Free cash flow is and other investing activities. highest in the fourth quarter and lowest in the third presented on a consistent basis from period to period. quarter because of seasonal patterns in advertising We consider free cash flow to be an important indi- spending in the fall and summer, respectively. Our cator of the financial strength and performance of our operating income can also vary by season. Residential business because it shows how much cash is available to segment operating income tends to be lower in the repay debt and reinvest in our company. We present fourth quarter due to the higher costs associated with free cash flow consistently from period to period, greater subscriber acquisition during the holiday season. which allows us to compare our financial performance on a consistent basis. OPERATING REVENUES We believe that certain investors and analysts use free cash flow to value a business and its underlying assets.

The most comparable Canadian GAAP financial 31% measure is cash from operating activities. The table 40% below is a reconciliation of cash from operating activities to free cash flow on a consolidated basis. 2005 10% 10% 2005 2004 9% Cash from operating activities 5,559 5,443 Capital expenditures (3,428) (3,319) Total dividends paid (1,473) (1,381) Other investing activities 4 127 40% Residential 31% Business 10% Aliant 10% Other BCE 9% Other Bell Canada Free cash flow 662 870

ABOUT OUR BUSINESS RESIDENTIAL SEGMENT BCE is Canada’s largest communications company. The Residential segment (formerly the Consumer Our primary focus is Bell Canada, which encompasses segment) provides local telephone, long distance, wire- our core business operations and represents the largest less, Internet access, video and other services to Bell component of our business. Bell Canada is the nation’s Canada’s residential customers, mainly in Ontario and leading provider of wireline and wireless communica- Québec. Wireless services are also offered in Western tions services, Internet access, data services and video Canada and video services are provided nationwide. services to residential and business customers. We Local telephone and long distance services are sold report Bell Canada’s results of operations in four under the Bell brand, wireless services through Bell segments. Each reflects a distinct customer group: Mobility Inc. (Bell Mobility), Internet access under Residential, Business, Aliant and Other Bell Canada. the Sympatico brand and video services through Bell All of our other activities are reported in the Other ExpressVu. BCE segment. Our reporting structure reflects how we manage our business and how we classify our oper- BUSINESS SEGMENT ations for planning and measuring performance. We discuss our consolidated operating results in this The Business segment provides local telephone, long MD&A, as well as the operating results of each seg- distance, wireless, data (including Internet access) ment. See Note 2 to the consolidated financial state- and other services to Bell Canada’s large enterprise ments for information about our segments. We also (Enterprise) customers and small and medium-sized discuss our results by product line to give further businesses (SMB) in Ontario and Québec, as well as to insight into these results. business customers in Western Canada through Bell The following chart shows the operating revenues West, our division offering competitive local exchange that each segment contributed to total operating carrier (CLEC) services in Alberta and British Columbia.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 5

In 2005, Bell Canada acquired a number of small, By combining these assets, we will create a new specialized service companies, allowing us to broaden regional telecommunications service provider of signi- our product suite of information and communications ficant scale and scope that brings a strong focus on technology (ICT) solutions (or value-added services customer service and regional needs. The new trust (VAS)) for both Enterprise and SMB customers. will be controlled by BCE and will remain integral The Business segment also reflects the retail por- to Bell Canada’s operations, ensuring that we retain tion of the operations of 360networks Corporation control of core assets in the most capital efficient way. (360networks) acquired in November 2004 and oper- The new trust, which will be headquartered in ating in Western Canada as the Group Telecom unit Atlantic Canada, is expected to own approximately within Bell Canada. 3.4 million local access lines, have approximately 400,000 high-speed Internet subscribers in six provinces, and manage the provision of all wireline, legacy data ALIANT SEGMENT and Internet products for all residential and business The Aliant segment provides local telephone, long customers located in its territory. The transition to the distance, wireless, data (including Internet access) and trust will be seamless for customers as products and other services to residential and business customers in services will continue to be sold under the Bell and Atlantic Canada, and represents the operations of our Sympatico brands within the trust’s operating terri- subsidiary, Aliant Inc. (Aliant). At December 31, 2005, tory in Ontario and Québec and under the Aliant and Bell Canada owned 53% of Aliant. The remaining 47% DownEast brands in Atlantic Canada. was publicly held. At the same time, in partial exchange for its contribution to a subsidiary of the trust, Bell Canada will acquire Aliant Mobility and Aliant’s DownEast OTHER BELL CANADA SEGMENT Communications retail outlets. Furthermore, approxi- The Other Bell Canada segment includes Bell Canada’s mately $1.25 billion of Bell Canada debt will effec- Wholesale business and the financial results of Télébec tively be transferred to the trust. Limited Partnership (Télébec), NorthernTel Limited Upon closing, BCE will hold a 73.5% indirect inter- Partnership (NorthernTel) and Northwestel Inc. est in the trust, which it expects to reduce to approx- (Northwestel). Our Wholesale business provides vari- imately 45% through a distribution of trust units to ous access and network services to other resale or holders of BCE Inc. common shares. At closing, Aliant’s facilities-based providers of local, long distance, wire- minority shareholders will exchange their common less, Internet, data and other telecommunications shares for trust units, retaining a 26.5% interest in the services. Télébec, NorthernTel and Northwestel provide new trust. Bell Nordiq Income Fund will continue to telecommunications services to less populated areas of trade and operate independently. Québec, Ontario and Canada’s northern territories. BCE plans to establish a governance structure for At December 31, 2005, Bell Canada owned 100% of the proposed income trust in line with comparable Northwestel and 63% of Télébec and NorthernTel, current income trust precedents, and will control and with the remaining 37% owned by the Bell Nordiq consolidate the financial results of the new trust. BCE Income Fund. will retain the ability to nominate a majority of the board of trustees of the trust and of the board of directors of the operating entities of the trust as long as it FORMATION OF REGIONAL owns a 30% or more interest in the trust. Also, BCE TELECOMMUNICATIONS SERVICE PROVIDER will have the ability to veto certain actions of the new On March 7, 2006, BCE Inc. and Aliant announced trust and its operating entities as long as it owns a their intention to create a new regional telecommuni- 20% or more interest in the new trust. At closing, Bell cations service provider in the form of an income trust Canada and the trust will enter into a number of out- which would combine Bell Canada’s regional wireline sourcing and commercial agreements pursuant to which operations with Aliant’s wireline operations. The new Bell Canada will support the operations of the trust. trust would also own Bell Canada’s 63.4% interest in Similar agreements will be entered into between the NorthernTel and Télébec indirectly held through Bell trust and Bell Canada to support Bell Canada’s wire- Nordiq Group Inc., an indirect wholly-owned sub- less operations in Atlantic Canada. The transaction is sidiary of Bell Canada. expected to close as early as the third quarter of 2006

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 6 MANAGEMENT’S DISCUSSION AND ANALYSIS

but only once all closing conditions are satisfied and Local and Access Services all necessary approvals and consents are obtained. Bell Canada operates an extensive local access network that provides local telephone services to business and OTHER BCE SEGMENT residential customers. The 12.6 million local telephone lines, or network access services (NAS), we pro- The Other BCE segment includes the financial results vide to our customers are key in establishing customer of our media and satellite businesses, as well as the relationships and are the foundation for the other costs incurred by our corporate office. This segment products and services we offer. includes Bell Globemedia Inc. (Bell Globemedia) and Local telephone service is the main source of local Telesat Canada (Telesat). and access revenues. Other sources of local and access Bell Globemedia provides information and enter- revenues include: tainment services to Canadian customer and access • VAS, such as call display, call waiting and voicemail to distinctive Canadian content. It includes CTV Inc. • services provided to competitors accessing our local (CTV), Canada’s leading private broadcaster, and The network Globe and Mail, Canada’s leading national news- • connections to and from our local telephone service paper. At December 31, 2005, BCE Inc. owned 68.5% customers for competing long distance companies of Bell Globemedia. The Woodbridge Company Limited • subsidies from the National Contribution Fund to (Woodbridge) and an affiliate owned the remaining support local service in high-cost areas. 31.5%. On December 2, 2005, BCE Inc. announced Rates for local telephone and VAS services in our a transaction in which it has agreed to sell 20% of incumbent territories are regulated by the CRTC. Bell Globemedia to Ontario Teachers Pension Plan The local telephone services market became increas- (Teachers), 20% to Torstar Corporation (Torstar) ingly competitive in 2005 as the major cable operators and an additional 8.5% to Woodbridge, increasing in our Québec and Ontario markets began to offer the stake of Woodbridge and its affiliate to 40%. low-priced cable telephony services. In 2005, we Following completion of the transaction, BCE will launched our own voice over Internet protocol (VoIP) retain a 20% interest in Bell Globemedia, which will service for residential customers under the name Bell be accounted for in our results using the equity Digital Voice. method of accounting. The transaction, which is subject to a number of approvals and closing conditions, including approval by the CRTC and the Competition Long Distance Services Bureau, as well as other closing conditions that are We supply long distance voice services to residential customary in this type of transaction, is expected to and business customers. We also receive settlement close in late 2006. payments from other carriers for completing their Telesat is a pioneer in satellite communications and customers’ long distance calls in our territory. systems management and is an experienced consultant Prices for long distance services have been declining in establishing, operating and upgrading satellite since this market was opened to competition. In 2005, systems worldwide. BCE Inc. owns 100% of Telesat. the long distance services market became more com- On February 1, 2006, BCE Inc. announced its inten- petitive with the emergence of cable telephony and tion to implement a recapitalization and launch a the continuing impact of non-traditional suppliers (i.e., public offering of a minority stake of Telesat in the prepaid card, dial-around and other VoIP providers). second half of 2006.

Wireless Services BELL CANADA PRODUCTS AND SERVICES We offer a full range of wireless communications serv- Bell Canada is our primary focus and the largest com- ices to residential and business customers, including ponent of our business. It has six major lines of business: cellular, personal communications services (PCS) and • local and access services paging. PCS customers can get wireless access to the • long distance services Internet through our Mobile Browser service or send • wireless services text messages. We also provide VAS, such as call dis- • data services play and voicemail, data applications including e-mail • video services and video streaming, and roaming services with other • terminal sales and other.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 7

wireless service providers. Customers can choose to 85% of businesses at the end of 2005, compared with pay for their cellular and PCS services through a 72% and 79%, respectively, at the end of 2004. monthly rate plan (postpaid) or in advance (prepaid). During 2005, we enhanced our suite of DSL services At the end of 2005, we had approximately 5.8 million by upgrading our Sympatico DSL Basic offering from cellular, PCS and paging customers. 256 Kbps to 512 Kbps and by launching a Basic Lite The wireless division of each of our incumbent tele- DSL service at 128 Kbps. In addition, we increased our phone companies provides wireless communications broadband access speed for ultra high-speed users to in its home territory, except for Bell Mobility, which 5 Mbps from 4 Mbps for residential customers and to provides these services in its home territory, as well as 6 Mbps from 4 Mbps for SMB customers. in Alberta and British Columbia. In 2005, we became a partner in the Inukshuk Joint Our wireless network provides voice services as Venture (Inukshuk). Inukshuk was launched in 2003 well as data services, at typical transmission speeds of to provide wireless high-speed Internet access across approximately 120 kilobits per second (Kbps) deliv- Canada using spectrum in the 2.5 GHz range. With ered over our existing single-carrier radio transmission Inukshuk, we expect to have the capability to provide technology (1xRTT) network. In 2005, we launched broadband connections to virtually all of our cus- Canada’s first Evolution, Data Optimized (EVDO) tomers, either through DSL or through a fixed wireless wireless data network in Toronto and Montréal. EVDO platform, once the network is fully deployed. technology is the third generation (3G) of wireless We offer a full range of data services to business networks delivering average data download speeds of customers, including Internet access, Internet proto- 400–700 Kbps with peaks of up to 2.4 megabits per col (IP) based services, ICT solutions and equipment second (Mbps). We expect to deploy EVDO in other sales. While we still offer legacy data services such as major urban centres across Canada in 2006. At the end frame relay and asynchronous transfer mode (ATM), of 2005, our wireless network covered: we continued the process of discontinuing the sale of • 95% of the population in Ontario and Québec legacy data services other than to current customers. • approximately 90% of the population in Atlantic Canada Video Services • the major cities in the provinces of Alberta and British Columbia. We are Canada’s largest digital television provider, In 2005, we introduced two new brands geared to- broadcasting nationally more than 400 all-digital wards the key youth market segment. In February, we video and audio channels and a wide range of domestic launched our joint venture with the Virgin Group to and international programming. We also offer hard- offer wireless services under the Virgin brand. In July, ware, including personal video recorders (PVRs), inter- Bell Mobility introduced Solo Mobile, a new brand active TV services and the most extensive line-up of featuring custom-built services and unique applica- high definition channels in Canada. We currently dis- tions such as a nationwide pay-per-use push-to-talk tribute our video services to more than 1.7 million (PTT) service and the choice of postpaid or prepaid customers through Bell ExpressVu and Bell Canada in options. We are the first Canadian wireless operator to one of three ways: actively market PTT to the consumer youth segment. • direct-to-home (DTH) satellite – we have been offering DTH video services nationally since 1997. We use four satellites: Nimiq 1, Nimiq 2, Nimiq 3 and Data Services Nimiq 4-Interim, which was added in the first quarter High-speed Internet access service provided through of 2006 to improve signal strength and reliability DSL technology for residential and business customers, while increasing capacity. Telesat, a wholly-owned particularly SMB, is a growth area for Bell Canada. At subsidiary of BCE Inc., operates or directs the opera- the end of 2005, we had approximately 2.2 million tion of these satellites. high-speed Internet customers. • very high bit rate DSL (VDSL) – this allows us to We expanded our DSL high-speed Internet foot- expand our reach to the multiple-dwelling unit (MDU) print in Ontario and Québec to 85% of homes and market. By the end of 2005, we had signed access business lines passed at the end of 2005, compared agreements with 757 buildings and had provisioned with 83% at the end of 2004. In Atlantic Canada, DSL 464 of them. high-speed Internet was available to 81% of homes and

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 8 MANAGEMENT’S DISCUSSION AND ANALYSIS

• hybrid fibre co-axial cable – on August 2, 2005, we DISCONTINUED OPERATIONS acquired the residential assets of Cable VDN Inc. In the past two years we have disposed of, or approved (Cable VDN), a Montréal-based cable company selling formal plans for disposing of, a number of our busi- residential analog and digital TV. Cable VDN has over nesses, including: 12,500 residential cable subscribers in the Montréal • our decision on December 16, 2005 to sell our invest- area, representing an approximate 40% penetration ment in CGI Group Inc. (CGI) within its current footprint. We believe that Cable • Emergis Inc.’s (Emergis) US Health operations, which VDN provides us with a more cost-effective way of were sold in March 2004 addressing the MDU market in Montréal, compared to • Emergis, which was sold in May 2004. VDSL, allowing for quicker access to smaller, harder to Our decision to sell our 29.8% stake in CGI was reach MDUs. made following a review of our investment, which In 2006, we intend to continue investing in our determined that it was no longer strategically essential IPTV (video over Internet protocol) platform that will for BCE to hold an equity interest in CGI. On the target urban households in markets within the Québec closing date of the transaction (January 12, 2006), we City to Windsor corridor. In 2004, we received CRTC sold 100 million Class A shares to CGI for cash pro- approval of our broadcast licence application to deliver ceeds of $859 million. We intend to dispose of our video services terrestrially to single family units (SFUs). remaining 28.3 million Class A shares (representing We started technical trials of our IPTV service in 2005 8.6% of the outstanding shares of CGI). and expect to begin customer trials in 2006. IPTV will All of these business dispositions were treated as offer unprecedented interactivity to experience a vari- discontinued operations. We therefore restated the ety of digital content on your television. financial results of all previous years to exclude the Signal piracy continues to be a major issue facing results of these businesses. They are presented sepa- all segments of the Canadian broadcasting industry. rately in the consolidated financial statements and are During 2005, we completed the deployment of a new discussed separately in this MD&A. conditional access system (our card swap program) commenced in the previous year. All new customers since August 2004 have been supplied with the new OUR STRATEGIC PRIORITIES system and, over the past year, we have been replacing We continued to experience profound changes in the old smart cards of all remaining customers. As our traditional telephone business in 2005. This was of July 2005, customers can only receive DTH video driven primarily by the ongoing shift to IP and wire- and audio services over the new conditional access less technologies and new competitive challenges due system. In addition to the card swap, we continued to the emergence of cable telephony. our ongoing efforts against television signal theft, Our strategy is to deliver unrivalled integrated including sophisticated set-top box (STB) tracking communication services to customers, efficiently and systems and specific point-of-sale practices such as cost-effectively. Over the past two years, we have laid obtaining customer photo identification and credit the operational foundations for the transformation card information, aggressive measures to investigate of the company by returning Bell Canada to its and initiate legal action against persons engaged in core communications business. We have also made the manufacture, sale and distribution of signal theft significant progress on our three key pillars that sup- technology, and enforcement of policies with author- port our strategy: ized retailers to combat piracy, including a zero toler- 1. Enhance the customer experience by providing supe- ance policy for activities related to signal theft. rior products and services that build loyalty 2. Provide abundant and reliable bandwidth to enable Terminal Sales and Other the delivery of next-generation services 3. Create next-generation services to drive ongoing This category includes revenues from a number of profitable growth. other sources, including: Advancing this strategy requires us to transform • renting, selling and maintaining business terminal our cost structure and the way that we serve our cus- equipment tomers. These are the guiding principles at the core of • wireless handset and video STB sales Galileo, our company-wide program designed to save • network installation for third parties costs by simplifying and enhancing the customer • IT services provided by Aliant.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 9

experience. Resetting the cost base should allow us to • Internet Care, an online and phone support service expand our growth services in the future and drive for popular Internet-related products. profitability as we face ongoing erosion of our tradi- We began the rollout of OrderMax, our order entry tional voice and data businesses. In transforming the tool that allows customers to order any Bell Canada cost structure, we are developing a new financial product from any channel, through our customer serv- foundation that aims to improve margins, increase ice agents. As at the end of 2005, over 50% of our profitability and generate higher levels of free cash customer service agents had access to the OrderMax flow, creating value for all our stakeholders. We have tool, with rollout continuing in 2006. outlined four operating priorities for 2006 to help us We launched the beta site of our new Bell.ca web- achieve this objective: site. The new website provides customers with: 1. Service – we are determined to ensure consistently • a simplified and consistent page layout high levels of service, which should lead to correspon- • one process for shopping for any or all of our products ding high levels of customer loyalty • an improved search engine 2. Customer retention – we are focusing our retention • easy access to online bills. efforts on high-value customers and households with We continued to make progress on moving our core multiple products traffic to a national IP multi-protocol label-switching 3. Growth – we are growing next-generation services (IP-MPLS) network. At the end of 2005, 78% of the revenue with the objective that they will represent the migratable traffic on our core network was IP-based, majority of Bell Canada’s revenues by the end of 2006 exceeding our year-end target of 75%. 4. Cost – we are effectively resetting the cost base and As part of our shift to IP, we continued the process developing new sourcing and process redesign initia- of rationalizing our legacy data services and stopped tives in order to achieve recurring cost savings. selling 28 of these services in 2005. We have discon- In 2005, we made significant progress in building tinued 47 legacy data services since we started this ini- each of our three key strategic pillars. tiative in 2004. The move to IP continued in 2005 with 57 Enterprise customers contracted to implement IP virtual private 1. Enhancing customer experience by providing networks (IP-VPN), bringing the total number of Enter- superior products and services that build loyalty prise customers implementing IP-VPN networks to 143. At the end of 2005, over 22% of the total households At the end of 2005, 656 Enterprise customers were in our Ontario and Québec footprint subscribed to enrolled in Service Promise, our commitment to pro- three or more products (a combination of local wire- vide customers with a clearly defined and consistent line, Internet, video and long distance services). We level of service for delivering connectivity services. believe our multi-product household strategy is effec- In 2006, we intend to continue improving service tive in fostering customer loyalty and minimizing and enhancing the customer experience. In particular, NAS losses to the competition. we plan to: We continued to migrate customers in our • ensure consistency of service to all of our customers Residential segment to our One Bill platform. At the by improving our service provisioning and assurance end of 2005, 2.3 million customers were enjoying the both in our call centres and in our field operations benefits of a single bill for their wireline, Internet and • offer the simplicity of a one-contact approach video services, representing a more than two-fold through initiatives such as One Bill and online self- increase since the end of 2004. Reducing the number serve tools that allow problems to be registered, tick- of bills not only improves the customer experience, eted and tracked but also lowers costs since we issue fewer invoices. At • deliver improved service commitments and service the end of the year, we started migrating Bell Mobility levels by significantly reducing the number of missed customers who already receive a single invoice for appointments because of process issues, and by short- their other Bell Canada services to One Bill. ening repair times We launched two initiatives to enhance customer • offer an end-to-end service desk for our Enterprise support for our Sympatico Internet customers: customers that includes both connectivity and ICT • Emily, an online virtual customer service agent who services. interacts with customers needing help

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 10 MANAGEMENT’S DISCUSSION AND ANALYSIS

2. Deliver abundant bandwidth to enable • True Tones, a monthly service that enables customers next-generation services to download actual songs and ringtones • Seek & Find, a wireless location-based system that We continued our rollout of fibre-to-the-node (FTTN) allows subscribers to locate multiple individuals away by deploying another 1,672 neighbourhood nodes in from their homes or offices 2005. This increased the total number to 2,048, exceed- • MobiTV, a video application that allows customers ing our objective to deploy more than 2,000 nodes by with specific mobile handsets to access a variety of the end of the year. video channels We launched Canada’s first EVDO wireless data • MSN Messenger, an instant messaging service that network with service available in Montréal, Toronto, allows customers to transmit in real-time text mes- Vancouver, Calgary and Edmonton. EVDO enables a sages to other mobile phones or to PCs on their con- new generation of sophisticated wireless data solutions, tact list over the Internet. and increases the speed and potential for current Bell Mobility also introduced its first handset tools such as e-mail, file downloads, instant messaging, compatible with Global System for Mobile Communi- streaming video and games. cations (GSM) and launched Canada’s first flat per- We announced an alliance with Rogers Communi- minute rate billing service for global roaming on GSM cations Inc. (Rogers) to jointly build and manage a networks in up to 150 countries. national wireless broadband network through Inukshuk. Bell ExpressVu introduced a number of new prod- Inukshuk will give subscribers wireless access to the ucts and services, including: Internet and enable a host of voice, video streaming and • a dual-tuner, high-definition personal video recorder data applications from wherever the service is avail- (HD-PVR) that allows customers to pause live televi- able. The network footprint is expected to reach more sion, as well as record, replay, stop, fast forward and fast than two-thirds of Canadians in less than three years, rewind HD and standard definition programming on covering over 40 cities and approximately 50 rural up to two TVs in the home through a single receiver. and remote communities that are not currently served. Our Residential Internet service was enhanced by the In 2006, we will continue to expand the reach and introduction of new services at Sympatico including: speed of DSL service through our FTTN rollout, which • Sympatico/MSN Video channel, a new service that will enable speeds of up to 26 Mbps. At the same allows customers to create customized playlists of time, work will proceed on Inukshuk to build a fixed streaming video clips wireless broadband access network and create a net- • Kidsmania, a new educational online service for work footprint within three years. We anticipate that children aged 3 to 12, offering more than 50 interac- by 2008, we will have the capability to provide broad- tive games and activities. band connections to virtually all of our customers, Our SMB unit launched: either through DSL or through our fixed wireless plat- • PC Care and Network Care, two virtual chief infor- form. We also plan to implement EVDO across most mation officer (VCIO) solutions that provide software of our wireless coverage areas. and technical support for customers • Business IP Voice, a service designed to provide 3. Create next-generation services to drive ongoing innovative Internet-based technology solutions that profitable growth deliver business advantages usually only available to large corporations, such as a dedicated, reservation-free Our Residential segment introduced Bell Digital Voice conferencing tool and the ability to forward a voice- in Toronto and Montréal. The new VoIP service, which mail message as an attachment to an e-mail account is the first of its kind in Canada, uses existing phone • GoTrax, a low-cost remote wireless tracking system lines to provide customers with advanced Internet- that allows assets to be tracked in places where tra- based calling features along with the reliability of Bell ditional Global Positioning System (GPS) signals do Canada’s phone network. not work. Bell Mobility launched a number of applications Our Enterprise unit sold 275,000 IP-enabled lines designed to drive growth, including: on customer premises equipment (CPE) by the end of • 10-4, a new service that allows customers to use their the year, which is a 90% increase over 2004. cell phones as walkie-talkies to communicate with up to five other users at the push of a button

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 11

Our Business segment launched Global VoIP solu- Galileo will also continue to address process trans- The Year at a Glance tion for Canadian multinationals, a managed IP service formation within the company to lower costs and This section reviews the key that can provide unlimited, international intra-company improve customer experience. Our process transforma- measures we use to assess our voice services at a flat rate by interconnecting geogra- tion initiatives will include: performance and how our results in 2005 compare to phically dispersed customer locations over a virtual • continuing to actively encourage customers to adopt our results in 2004. private IP network. new IP-based services In 2006, we plan to introduce EVDO-enabled data • developing end-to-end process improvements for applications and other services to our wireless cus- sales and ordering, installation, billing, collections, tomers, as well as expand our residential broadband and maintenance and repair, which will allow us to services to help customers manage information needs deliver our products and services more efficiently in their home using our Sympatico-MSN portal. We • optimizing management support to reduce costs in also plan to exploit our IP capability to achieve inter- our corporate and support functions. operability between wireless and wireline platforms. In our video unit, we intend to drive future growth THE YEAR AT A GLANCE through investing in new growth areas, such as IPTV and HD programming, in our goal to become the Our results demonstrate the solid progress we made leader in on-demand television. in 2005 towards achieving our strategic objectives. In the Business segment, our Enterprise unit will Although the pace of competition accelerated steadily continue its efforts to expand its ICT solutions by throughout the year, particularly as a result of the focusing on the financial services, health-care and gov- emergence of cable telephony, we continued to execute ernment sectors. We will also strengthen our capabil- on our plan to mitigate the impact of this new, more ities in network security. Our SMB unit will continue competitive telecommunications landscape. Accordingly, to focus on being the premium solutions provider we focused further on profitably growing our wireless, for VAS among small and medium-sized businesses in video and high-speed Internet businesses, which helps Canada with the objective of increasing customers’ lay an important foundation for the future growth of perception of Bell Canada as their VCIO. the company. We also continued to successfully execute our multi-product household consumer strategy. By the end of 2005, nearly 60% of the households in Transforming Our Cost Structure our Ontario and Québec footprint subscribed to two Overall, our various Galileo initiatives resulted in cost or more products, while over 22% subscribed to three reductions of $524 million in 2005, which was con- or more products. Our Business segment made steady sistent with our run-rate savings target of $500 to progress throughout the year on its IP strategy by $600 million. These cost savings were mainly from: leading Bell Canada in the shift towards new growth • the 2004 employee departure program services, helping to drive its transition towards becom- • lower procurement costs ing a leader in ICT. By the end of 2005, revenues from • call centre efficiencies and optimization initiatives growth services (consisting mainly of wireless, video • eliminating network elements and standardizing and data-related products such as high-speed Internet) core operating processes. accounted for 47% of Bell Canada’s total revenues for In 2006, we will continue to transform our cost the year, exceeding our target of 45%. Moreover, we structure to support our operations. Enhancements to also responded to the mounting competitive chal- the customer experience and cost structure will be lenges by proactively taking the lead to deliver gained primarily through a redesign of our processes unmatched features and reliability for our residential and increased controls over discretionary spending. and business customers with the launch of next-gener- Accordingly, we have broadened our Galileo pro- ation services such as Bell Digital Voice. gram for 2006 to address our annual procurement In order to alleviate the pressure on operating mar- spend of $8.5 billion. Our goal is to transform the gins from the expected erosion in our legacy wireline supply chain to reduce the amount we spend each year business, we made significant strides in transforming on delivering service to customers. our cost structure in 2005. Under Galileo, we continued to deliver significant cost savings by improving

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 12 MANAGEMENT’S DISCUSSION AND ANALYSIS

processes, reviewing procurement activities and elimi- Telesat also had a strong year, reﬂecting growth in Ka- nating work. Our various initiatives allowed us to reduce band revenues on its Anik F2 satellite, revenue gains costs by $524 million, which was consistent with our from the installation and maintenance of an Interactive run-rate savings target of $500 to $600 million. Distance Learning network, and the positive impact We also stepped up efforts to secure customer from its acquisition of The SpaceConnection, Inc. relationships and improve service. Although we faced (SpaceConnection) in January 2005. a number of customer service challenges brought about by some residual impacts from our wireless CUSTOMER CONNECTIONS billing system migration last year and a four-month labour dispute in Ontario with technicians of Bell 2005 DECEMBER 31, 2005 (in thousands) NET ACTIVATIONS CONNECTIONS Technical Solutions Inc. (formerly Entourage Technology NAS (324) 12,581 Solutions Inc. (Entourage)), we substantially resolved Digital equivalent access lines 699 5,034 these issues by the end of the third quarter, allowing High-speed Internet 387 2,195 us to clear the backlog of orders, improve efﬁciency Dial-up Internet (157) 586 and deal with customer issues more promptly. Wireless 516 5,441 In late 2005, we completed two important steps in Paging (80) 347 our ongoing efforts to reshape the company’s asset Video 224 1,727 portfolio and bring greater focus to our core busi- Total 1,265 27,911 nesses by establishing the framework for disposing of our entire interest in CGI and reducing our interest in GROWTH IN END OF PERIOD CONNECTIONS (% increase 2005 vs 2004) Bell Globemedia to 20%. In our Residential segment, revenue growth was HIGH-SPEED fuelled by the strength of our growth services as we 21.4% continued to execute on our strategy of securing multi- VIDEO product households to drive customer loyalty and 14.9%

generate higher revenue per household. This growth WIRELESS reﬂected increased subscriber acquisition in our 10.5%

growth services and higher average revenue per user NAS (ARPU), particularly for video, offset partly by an (2.5%) accelerated decline in legacy wireline revenues. In our Business segment, increased sales of IP-based connectivity and ICT solutions to our Enterprise and The total number of customer connections increased SMB customers and improved wireless results drove 4.7%,or1.3 million, to 27.9 million at December 31, revenue growth in 2005. This positive trend now has 2005, compared with December 31, 2004. contributed to six consecutive quarters of improved revenue growth, despite increased competitive pres- Network Access Services sures and lower demand for legacy wireline services. In our Aliant segment, continued strong growth in NAS in service declined by 324,000 in 2005,orby wireless and Internet services, as well as a recovery 2.5%, representing a higher rate of decline compared from the 2004 labour disruption, offset declines in with a decrease of 1.1% in 2004. The accelerated rate of other areas due to the impact of competition, wireless erosion reﬂects an increasingly competitive environ- and Internet substitution and regulatory restrictions. ment as the major cable operators in our Québec and Within the Other Bell Canada segment, despite a Ontario markets began to offer low-priced cable challenging market for our Wholesale business, rev- telephony services. This decline was partly offset enues grew as a result of the acquisition of the opera- by the introduction of our new Bell Digital Voice tions of 360networks in November 2004. service and higher demand for access lines from In the Other BCE segment, Bell Globemedia deliv- Shaw Communications to implement VoIP services in ered better revenue and operating performance com- Western Canada. pared with last year, which was driven largely by higher television advertising revenue, reﬂecting strong television ratings and improved subscription revenues.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 13

High-Speed Internet Our Residential segment delivered solid revenue Operating Income growth as a result of the performance of its video, and EBITDA We added 387,000 or 21% more net new high-speed wireless and Internet services, while Aliant revenues EBITDA margin Internet customers in 2005, increasing our customer also increased due in part to its recovery from a labour is EBITDA divided by base to 2,195,000 and exceeding our subscriber growth operating revenues. disruption in 2004. These results were achieved despite target of 15% to 20% for the year. This was 10.6% a continuing decline in revenues from our legacy wire- higher than the 350,000 net new activations in 2004, line business. mainly because of our Basic Lite product and higher The Other BCE segment also contributed to the net activations at Aliant. growth in revenue, mainly because of 9.5% growth at Bell Globemedia and 31% growth at Telesat. Wireless

Our total cellular and PCS subscriber base grew by OPERATING INCOME AND EBITDA 516,000 in 2005,orby10.5%, to 5,441,000, which was consistent with our guidance for the year. Gross acti- OPERATING INCOME AND EBITDA (in $ millions) vations were at a record high in 2005, resulting in net 04 activations that were similar to 2004 eventhoughthe 2,894 7,430 40.5% overall churn rate increased from 1.3% in 2004 to 1.6% 05 in 2005. 4,048 7,597 39.8%

Operating income EBITDA EBITDA margin (%) Video

We gained significant momentum in our video busi- Operating income at BCE for 2005 was $4,048 mil- ness in 2005, increasing the subscriber base by 14.9% lion, or $1,154 million higher than in 2004,dueto to 1,727,000 customers at the end of the year, which restructuring and other items of $1,224 million re- wasattheupperendofourguidancerangeof10% to corded in the previous year related mainly to the 15%. We activated service for 224,000 new subscribers, employee departure program in 2004. The results for almost doubling the growth we experienced in 2004. 2005 reflect restructuring and other items of $55 mil- Our churn rate also decreased to 0.9% from 1.0% in lion associated with new restructuring initiatives for 2004, because of our focus on customer retention, as involuntary employee departures, as well as the reloca- well as an increase in the percentage of customers on tion of employees and closing of real estate facilities long-term contracts. related to last year’s employee departure program. Operating income before restructuring and other items was $4,103 million, or $15 million lower than OPERATING REVENUES 2004. Despite an increase in revenues across all seg- OPERATING REVENUES (in $ millions) ments, cost savings from the Galileo program and recovery from the 2004 labour disruption at Aliant, 04 operating income was negatively affected by a variety 18,368 of factors, including: 05 • the higher cost of acquiring substantially more wire- 19,105 less subscribers • the CRTC’s decision on Competitor Digital Network We reached $19,105 million in revenues in 2005,an Services (CDN) increase of 4.0% over 2004. This reflects higher rev- • continued pressure on operating margins from the enues across all our segments and met our target of ongoing transformation of our product mix towards matching or exceeding GDP growth. growth services Revenues at Bell Canada grew by 2.8%.Thiswas • the cost of restoring customer service levels following driven primarily by the Business segment, where con- the settlement of the Entourage labour dispute in July tinued wireless strength, growth of ICT solutions • the impact of higher net benefit plans cost and from both business acquisitions and organic growth, higher amortization expense for the year. as well as focused execution of our VCIO strategy in SMB, led to improved top-line results.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 14 MANAGEMENT’S DISCUSSION AND ANALYSIS

Capital Expenditures Bell Canada’s operating income was $3,755 million, and other items and net gains on investments of Capital intensity is capital or $1,060 million higher than 2004, primarily because $1,901 million, or $2.05 per common share, were up expenditures divided by of the charges recognized last year for the employee $29 million, or $0.03 pershare.Thiswas1.5% higher operating revenues. It is a departure program. Operating income before restruc- than in 2004. The improvement in EPS before restruc- key financial measure turing and other items was $3,809 million, or $105 mil- turing and other items and net gains on investments that we use to assess our lion lower than 2004, for the same reasons referred can be attributed to higher EBITDA combined with performance and that of to above. our business units. the impact from the income tax loss monetization pro- EBITDA at BCE was $7,597 million in 2005,an gram between Bell Canada and Bell Canada Inter- increase of $167 million or 2.2% over 2004.Thisisthe national Inc. (BCI) and net income tax savings. These result of improved performance at Bell Canada, Bell factors more than offset the increase in net benefit Globemedia and Telesat. plans cost and amortization expense. EBITDA for Bell Canada was $7,187 million, or 1.1% higher than 2004, primarily due to increases in our CAPITAL EXPENDITURES Business segment and at Aliant, which were partly offset by decreases in our Residential and Other Bell CAPITAL EXPENDITURES (in $ millions) Canada segments. 04 EBITDA margins for 2005 were 39.8% at BCE and 3,319 18.1% 41.7% at Bell Canada, both 0.7 percentage points lower 05 than 2004. The year-over-year declines reflected operating cost pressures, including: 3,428 17.9% • higher costs for acquiring wireless subscribers Capital expenditures Capital intensity (%) • continued erosion of high-margin legacy voice and data services in all our segments Capital expenditures for BCE were $3,428 million in • the CRTC’s CDN decision 2005, which was $109 million, or 3.3%,higherthan • the costs to restore service levels once the labour dis- 2004. Capital spending as a percentage of revenues pute at Entourage was resolved. was 17.9% in 2005 compared with 18.1% in 2004. The impact of these elements on EBITDA mar- Bell Canada’s capital expenditures were $3,122 mil- gins was largely offset by the cost savings achieved lion, which was $96 million, or 3.2% higher than through Galileo. 2004. As a percentage of revenues, Bell Canada’s capital expenditures increased slightly to 18.1% in 2005 NET EARNINGS AND EARNINGS from 18.0% in the previous year. PER SHARE (EPS) Capital spending in 2005 reflected an increasing

EPS investment in the growth areas of the business and reduced spending in legacy areas. Our key strategic 04 investments this year included: ($0.37) $2.02 • expanding our FTTN footprint to deliver higher- 05 speed broadband access ($0.01) $2.05 • launching our Bell Digital Voice service Restructuring and other items and net gains on investments • implementing an EVDO wireless data network in Net earnings before restructuring and other items and net gains on investments certain markets • expanding our DSL footprint through the deployment of new high-density remotes In 2005, net earnings applicable to common shares • investing in our IPTV platform and IT efﬁciency were $1,891 million, or $2.04 per common share. This projects to achieve cost savings. was 24% higher than net earnings of $1,523 million, or Higher spending also resulted from capitalization of $1.65 percommonshare,in2004. Included in earnings STBs and installation costs associated with our new thisyearwasanetchargeof$10 million from restruc- rental program in video and a return to more normal turing and other items and net gains on investments, spending levels at Aliant after its labour disruption in comparedwithanetchargeof$349 million for 2004 and satellite builds at Telesat. the previous year. Net earnings before restructuring

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 15

CASH FROM OPERATING ACTIVITIES the pending sale of CGI. Free cash ﬂow of $662 mil- AND FREE CASH FLOW lion for 2005 was $208 million lower than 2004, mainly because of: CASH FROM OPERATING ACTIVITIES (in $ millions) • a decrease of $149 million in insurance proceeds 04 received by Telesat 5,443 • an increase of $109 million in capital expenditures 05 related to our investment in platforms for next-gener- 5,559 ation service platforms • an increase of $87 million in dividends paid on common shares, resulting from the quarterly dividend FREE CASH FLOW (in $ millions) increase of $0.03 per common share. 04 These items were offset in part by a $116 million 1,978 increase in cash from operating activities.

870 05 NEW LABOUR AGREEMENTS 1,857 During the year, we signed a number of new labour 662 agreements, including: After common dividends Before common dividends • a four-year collective agreement with approximately 10,000 clerical and associated employees represented by the Canadian Telecommunications Employees’ Cash from operating activities was $5,559 million in Association (CTEA) that expires in July 2009 2005,or2.1% higher than 2004. This was a result of: • a new four-year collective agreement between Bell • an improvement in cash earnings resulting from Technical Solutions (formerly Entourage) and the 1,000 higher EBITDA Québec technicians unionized with the Communica- • a significant improvement in accounts receivable tions, Energy and Paperworkers Union of Canada collections, mainly due to the resolution of issues (CEP) that expires in May 2009 associated with the implementation of our new wire- • a new four-year collective agreement between Bell less billing platform in 2004 Technical Solutions and the 1,400 Ontario technicians • an increase of $134 millioninproceedsfromthesale unionized with the CEP was also reached, ending a of accounts receivable four-month labour disruption. This agreement will • a decrease of $77 million in restructuring payments expire in August 2009. relating to restructuring initiatives in 2004 and 2005. With these new agreements and certain other major These improvements were partly offset by: agreements signed by Bell Canada and Aliant with • higher pension and other benefit plan payments, their respective employees in 2004, we now have the mainly at Aliant labour stability and a more competitive cost structure • an increase of $73 million in income taxes paid, pri- needed to deliver quality services and value to cus- marily related to the final instalment for 2004, which tomers over the next several years. wasmadein2005 as instalments were not required at Bell Canada in 2004 ENHANCING SHAREHOLDER RETURNS • a $75 million settlement payment received from Manitoba Telecom Services Inc. (MTS)in2004. On February 1, 2006, BCE Inc. announced its plan to We generated $662 million of free cash flow for 2005, repurchase 5% of its outstanding common shares meeting our target of $600 to $800 million for the through a normal course issuer bid (NCIB). In addi- year. On December 16, 2005, we adjusted our 2005 tion, on March 7, 2006 BCE Inc. announced its inten- guidance for free cash flow from the range of $700 tion to distribute an approximate 28.5% interest in a to $900 million to $600 to $800 million to reflect new income trust to all its common shareholders on a pro-rata basis and in exchange reduce approximately 8% of its common shares outstanding.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 16 MANAGEMENT’S DISCUSSION AND ANALYSIS

Selected Annual and SELECTED ANNUAL AND QUARTERLY INFORMATION Quarterly Information This section shows ANNUAL FINANCIAL INFORMATION selected ﬁnancial and operational data. The following tables show selected consolidated ﬁnancial data, prepared in accordance with Canadian GAAP, for each year from 2001 to 2005. We discuss the factors that caused our results to vary over the past two years EBITDA to interest ratio throughout this MD&A. is EBITDA divided by interest expense. 2005 2004 2003 2002 2001 Operations Operating margin Operating revenues 19,105 18,368 18,057 18,349 18,058 is operating income divided Operating expenses (11,508) (10,938) (10,776) (11,064) (11,285) by operating revenues. EBITDA 7,597 7,430 7,281 7,285 6,773

ROE (return on common Amortization expense (3,114) (3,056) (3,062) (2,999) (3,267) shareholders’ equity) is Net beneﬁt plans (cost) credit (380) (256) (175) 33 121 calculated as net earnings Restructuring and other items (55) (1,224) (14) (768) (977) applicable to common Operating income 4,048 2,894 4,030 3,551 2,650 shares as a percentage of Other income 8 407 177 2,413 3,891 average common Impairment charge – – – (765) – shareholders’ equity. Interest expense (981) (999) (1,100) (1,119) (966) Pre-tax earnings from continuing operations 3,075 2,302 3,107 4,080 5,575 Net debt to EBITDA Income taxes (893) (681) (1,086) (1,585) (1,648) is net debt divided Non-controlling interest (267) (174) (201) (663) (360) by EBITDA. Earnings from continuing operations 1,915 1,447 1,820 1,832 3,567 Discontinued operations 46 77 (5) 575 (3,131) Total debt to total assets Net earnings before extraordinary gain 1,961 1,524 1,815 2,407 436 is total long-term debt Extraordinary gain – 69––– (including debt due within Net earnings 1,961 1,593 1,815 2,407 436 one year) divided by Dividends on preferred shares (70) (70) (64) (59) (64) total assets. Premium on redemption of preferred shares – – (7) (6) – Long-term debt to equity Net earnings applicable to common shares 1,891 1,523 1,744 2,342 372 is long-term debt (including Included in net earnings: any portion due within one Net gains on investments year) divided by share- Continuing operations 29 389 84 1,341 3,184 holders’ equity. Discontinued operations (1) 34 (86) 607 (1,943) Restructuring and other items (38) (772) (3) (441) (462) Cash ﬂow per share Impairment charge – – – (527) – is calculated by dividing cash Goodwill amortization – – – – (971) from operating activities less Other – – – – (44) capital expenditures by the Net earnings per common share: average number of common Continuing operations – basic 1.99 1.49 1.91 2.08 4.34 shares outstanding. Continuing operations – diluted 1.99 1.49 1.90 2.05 4.28 Net earnings – basic 2.04 1.65 1.90 2.66 0.46 Net earnings – diluted 2.04 1.65 1.89 2.62 0.46 Ratios EBITDA margin (%) 39.8% 40.5% 40.3% 39.7% 37.5% EBITDA to interest ratio (times) 7.74 7.44 6.62 6.51 7.01 Operating margin (%) 21.2% 15.8% 22.3% 19.4% 14.7% ROE (%) 14.8% 12.5% 15.2% 17.8% 2.4%

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 17

2005 2004 2003 2002 2001 Cash flow yield Balance Sheet is cash from operating activi- Total assets 40,630 39,140 39,402 39,125 53,674 ties less capital expenditures, Long-term debt (including current portion) 13,405 12,802 13,802 14,673 11,793 other investing activities, dividends on preferred shares Net debt 13,129 12,644 13,274 15,178 12,905 and dividends paid by sub- Total capitalization 30,748 29,576 30,236 31,356 35,072 sidiaries to non-controlling Preferred shares 1,670 1,670 1,670 1,510 1,300 interest, divided by the Common shareholders’ equity 13,051 12,354 11,895 11,090 15,266 number of common shares Ratios outstanding at the end of Net debt to total capitalization (%) 42.7% 42.8% 43.9% 48.4% 36.8% the year and multiplied Net debt to EBITDA (times) 1.73 1.70 1.82 2.08 1.91 by the share price at the Total debt to total assets (times) 0.33 0.33 0.35 0.39 0.24 end of the year. Long-term debt to equity (times) 0.91 0.91 1.02 1.16 0.71 Cash Flows Market capitalization Cash flows from operating activities 5,559 5,443 5,890 4,409 4,024 is BCE Inc.’s share price at Cash flows from investing activities (3,866) (3,635) (2,875) (7,003) (698) the end of the year multi- Capital expenditures (3,428) (3,319) (3,101) (3,691) (4,885) plied by the number of com- Business acquisitions (228) (1,118) (54) (6,455) (307) mon shares outstanding. Business dispositions – 20 54 3,187 248 Other investing activities 4 127 62 10 (79) Book value per share Cash flows from financing activities (1,643) (2,300) (2,949) 3,370 (1,921) is common shareholders’ Net issuance (repayment) of equity instruments 25 32 172 2,819 (120) equity divided by number of Net issuance (repayment) of debt instruments (54) (820) (1,827) 2,014 (1,489) common shares outstanding. Financing activities of subsidiaries with third parties (77) (50) 24 92 1,010 Cash dividends paid on common shares (1,195) (1,108) (1,029) (999) (969) Common dividend yield Cash dividends paid on preferred shares (86) (85) (61) (43) (64) is dividends paid on com- Cash dividends paid by subsidiaries to non-controlling interest (192) (188) (184) (468) (357) mon shares divided by BCE Cash provided by (used in) discontinued operations 15 150 350 (1,039) (1,095) Inc.’s share price at the end of the year multiplied Ratios by the number of common Free cash flow 662 870 1,577 (782) (2,330) shares outstanding. Capital intensity (%) 17.9% 18.1% 17.2% 20.1% 27.1% Cash flow per share (dollars) 2.30 2.30 3.03 0.85 (1.07) Common dividend payout Cash flow yield (%) 7.2% 7.4% 9.8% 0.8% (4.7%) ratio is dividends paid on Share Information common shares divided Average number of common shares (millions) 926.8 924.6 920.3 847.9 807.9 by net earnings applicable Common shares outstanding at end of year (millions) 927.3 925.9 924.0 915.9 808.5 to common shares. Market capitalization 25,844 26,777 26,704 26,103 29,114 Dividends declared per common share (dollars) 1.32 1.20 1.20 1.20 1.20 Price to earnings ratio Book value per share (dollars) 14.07 13.34 12.87 12.11 18.88 is BCE Inc.’s share price at Total dividends declared on common shares (1,222) (1,110) (1,105) (1,031) (969) the end of the year divided Total dividends declared on preferred shares (70) (70) (64) (59) (64) by earnings per share. Market price per common share (dollars) High 32.95 30.00 32.35 36.87 43.50 Price to book ratio Low 26.60 25.75 26.60 23.00 32.75 is BCE Inc.’s share price Close 27.87 28.92 28.90 28.50 36.01 divided by the book value Ratios per share. Common dividend yield (%) 4.6% 4.1% 3.9% 3.8% 3.3% Common dividend payout ratio (%) 63.2% 72.8% 59.0% 42.7% 260.5% Price to cash flow ratio is BCE Inc.’s share price at Price to earnings ratio (times) 13.66 17.53 15.21 10.71 78.28 the end of the year divided Price to book ratio (times) 1.98 2.17 2.25 2.35 1.91 by cash flow per share. Price to cash flow ratio (times) 12.12 12.57 9.54 33.53 (33.65) Other Data Number of employees (thousands) (1) 60 62 64 64 73

(1) The number of employees for 2004 excludes virtually all employees who left under the voluntary departure program of 2004.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 18 MANAGEMENT’S DISCUSSION AND ANALYSIS

Digital equivalent access lines ANNUAL OPERATIONAL INFORMATION are derived by converting low capacity data lines The table below shows selected data on operations from 2003 to 2005. (DS-3 and lower) to the equivalent number of 2005 2004 2003 voice-grade access lines. Wireline Local network access services (thousands) 12,581 12,905 13,051 ARPU (average revenue per Long distance conversation minutes (millions) 18,306 18,070 19,132 unit) and ARPS (average rev- Long distance average revenue per minute (cents) 10.2 11.7 12.4 enue per subscriber) represent a Data measurement of the average Digital equivalent access lines (thousands) 5,034 4,335 3,867 revenue generated by each High-speed Internet net activations (thousands) 387 350 358 unit or subscriber, expressed High-speed Internet subscribers (thousands) 2,195 1,808 1,458 as a rate per month for Dial-up Internet subscribers (thousands) 586 743 869 the year. Wireless Churn is the rate at which Cellular and PCS net activations (thousands) 516 513 514 existing subscribers cancel Cellular and PCS subscribers (thousands) 5,441 4,925 4,412 their services. Churn is Average revenue per unit ($/month) 49 49 48 calculated as the number of Churn (%) (average per month) 1.6% 1.3% 1.4% subscribers disconnected Cost of acquisition ($/subscriber) 406 411 426 divided by the average Paging subscribers (thousands) 347 427 524 subscriber base. Video Video net activations (thousands) 224 116 83 Cost of acquisition (COA) Video subscribers (thousands) 1,727 1,503 1,387 is also referred to as Average revenue per subscriber ($/month) 50 49 46 subscriber acquisition costs. Churn (%) (average per month) 0.9% 1.0% 1.1% This measure is expressed Cost of acquisition ($/subscriber) (1) 375 571 532 per gross activation. It includes costs associated (1) The 34% decrease in COA over 2004 was impacted by the capitalization of STBs and installation costs associated with our new rental program. with acquiring a customer such as hardware subsidies, marketing and distribution costs.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 19

QUARTERLY FINANCIAL INFORMATION The table below shows selected consolidated ﬁnancial data by quarter for 2005 and 2004. This quarterly information is unaudited but has been prepared on the same basis as the annual consolidated ﬁnancial statements. We discuss the factors that caused our results to vary over the past eight quarters throughout this MD&A.

2005 2004 YEAR Q4 Q3 Q2 Q1 YEAR Q4 Q3 Q2 Q1 Operating revenues 19,105 4,986 4,732 4,757 4,630 18,368 4,769 4,556 4,577 4,466 EBITDA 7,597 1,858 1,864 1,972 1,903 7,430 1,794 1,901 1,920 1,815 Amortization expense (3,114) (791) (786) (776) (761) (3,056) (787) (754) (757) (758) Net beneﬁt plans cost (380) (65) (108) (104) (103) (256) (67) (61) (65) (63) Restructuring and other items (55) (23) (31) (5) 4 (1,224) (126) (1,081) (14) (3) Operating income 4,048 979 939 1,087 1,043 2,894 814 5 1,084 991 Earnings from continuing operations 1,915 418 448 570 479 1,447 354 90 529 474 Discontinued operations 46 12 11 11 12 77 11 10 42 14 Extraordinary gain – ––––69 69 – – – Net earnings 1,961 430 459 581 491 1,593 434 100 571 488 Net earnings applicable to common shares 1,891 413 441 563 474 1,523 417 82 554 470 Included in net earnings: Net gains on investments Continuing operations 29 – – 28 1 389 64 325 – – Discontinued operations (1) – – – (1) 34 (2) (2) 31 7 Restructuring and other items (38) (16) (21) (3) 2 (772) (62) (725) 16 (1) Net earnings per common share Continuing operations – basic 1.99 0.43 0.46 0.60 0.50 1.49 0.37 0.08 0.55 0.49 Continuing operations – diluted 1.99 0.43 0.46 0.60 0.50 1.49 0.37 0.08 0.55 0.49 Net earnings – basic 2.04 0.44 0.48 0.61 0.51 1.65 0.45 0.09 0.60 0.51 Net earnings – diluted 2.04 0.44 0.48 0.61 0.51 1.65 0.45 0.09 0.60 0.51 Average number of common shares outstanding (millions) 926.8 927.3 927.0 926.6 926.2 924.6 925.3 924.6 924.3 924.1

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 20 MANAGEMENT’S DISCUSSION AND ANALYSIS

Financial Results Analysis FINANCIAL RESULTS ANALYSIS at Telesat combined with the positive impact from its This section provides acquisition of SpaceConnection, further contributed to detailed information CONSOLIDATED ANALYSIS overall revenue growth. and analysis about our We expect continued revenue growth at Bell Canada 2005 2004 % CHANGE performance over the past in 2006, as anticipated increases in revenue from our Operating revenues 19,105 18,368 4.0% two years. It focuses on growth services should more than offset further erosion our consolidated operating Operating expenses (11,508) (10,938) (5.2%) of our legacy wireline business. We expect to reach an results and provides financial EBITDA 7,597 7,430 2.2% information for each of Amortization expense (3,114) (3,056) (1.9%) inflection point in 2006, where growth services should our operating segments. Net benefit plans cost (380) (256) (48.4%) represent the majority of Bell Canada revenues by the Restructuring and other items (55) (1,224) 95.5% end of the year. Revenue growth is expected to be Operating income 4,048 2,894 39.9% fuelled by continued solid increases in the number Other income 8 407 (98.0%) of subscribers in our wireless, video and high-speed Interest expense (981) (999) 1.8% Internet units in combination with higher average rev- Pre-tax earnings from enue per user (ARPU) for these services, and further continuing operations 3,075 2,302 33.6% traction of our ICT and VCIO strategies within the Income taxes (893) (681) (31.1%) Business segment. Non-controlling interest (267) (174) (53.4%) For local and access and long distance revenues, we Earnings from continuing operations 1,915 1,447 32.3% expect the negative trends experienced in the past few Discontinued operations 46 77 (40.3%) years to continue and the rate of NAS erosion to accel- Net earnings before erate in 2006 as cable operators capture a greater share extraordinary gain 1,961 1,524 28.7% of the local telephone market with their low-priced Extraordinary gain – 69 N/M bundled offers. We also expect the decline in revenue Net earnings 1,961 1,593 23.1% from legacy services in our Enterprise and Wholesale Dividends on preferred shares (70) (70) – business units to continue in 2006 because of ongoing Net earnings applicable pressures on competitive pricing and the migration to to common shares 1,891 1,523 24.2% IP networks and services. EPS 2.04 1.65 23.6% See Segmented Analysis for a discussion of operating revenues on a segmented basis, and Product Line N/M: Not meaningful Analysis for a discussion of operating revenues on a product line basis. Operating Revenues Our revenues increased to $19,105 million in 2005, Operating Income 4.0% higher than 2004. This reflected improved revenue performance across all our segments and sur- CONSOLIDATED OPERATING INCOME (in $ millions) passed our target of matching or exceeding gross 04 domestic product (GDP) growth. Revenues at Bell 2,894 15.8% Canada grew by 2.8%. This was driven primarily by the 05 Business segment, where continued wireless strength, 4,048 21.2%

growth of ICT solutions from both business acquisi- Operating income Operating income margin (%) tions and organic growth as well as focused execution of our VCIO strategy in SMB led to improved top-line results. Our Residential segment delivered solid rev- Operating income at BCE was $4,048 million in 2005, enue growth as a result of the performance of its video, an increase of $1,154 million over the previous year, Internet and wireless services, while Aliant revenues which included restructuring and other items of also increased due in part to its recovery from a labour $1,224 million related primarily to the employee depar- disruption in 2004. These results were achieved despite ture program in 2004. The results for 2005 include continued decreases in legacy wireline services. Higher restructuring and other items of $55 million associated revenues at our Other BCE segment, fuelled by stronger with new restructuring initiatives for involuntary advertising and subscriber revenues at Bell Globemedia employee departure, as well as relocation of employees and higher business networks and broadcast revenue and closing of real estate facilities related to last year’s

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 21

employee departure program. Operating income before Wireless EBITDA for 2005 increased by 10.1% to Amortization Expense restructuring and other items was $15 million, or 0.4% $1,307 million, reflecting wireless services revenue The amount of our lower than the previous year. Despite an increase in growth of 9.9%. The positive contribution from higher amortization expense in revenues across all segments, Galileo cost savings and revenue was offset partly by the cost of acquiring 20% any year is affected by: the recovery from the 2004 labour disruption at Aliant, more gross subscriber activations year-over-year, as • how much we invested operating income before restructuring and other items well as by higher bad debt expense and customer- in new capital assets in previous years decreased as it was negatively impacted by a number service related costs during the first half of 2005, • how many assets we of factors, including: which contributed to a slight 0.3 percentage-point retired during the year • the higher cost of acquiring substantially more wire- decline in EBITDA margin to 41.2%. • changes in accounting less subscribers Wireless cost of acquisition (COA) decreased 1.2% to rules and estimates. • the CRTC’s CDN decision $406 per gross activation in 2005 from $411 per gross • continued pressure on operating margins from activation in 2004 due to higher gross activations, Each year, we review our the ongoing transition of our product mix towards despite greater hardware subsidization of more expen- estimate of the useful life growth services sive handsets and promotional incentives to acquire of our capital assets. • the cost of restoring customer service levels following higher ARPU and longer-term contract customers. the settlement of the Entourage labour dispute in July Video EBITDA for 2005 increased to $45 million • higher net benefit plans cost and amortization expense. from negative $19 million in the previous year, reflecting strong double-digit revenue growth as well as Similarly, at Bell Canada, operating income for the lower subscriber acquisition costs due to the larger year was $3,755 million, or $1,060 million higher than number of customers choosing the STB rental option. 2004 because of charges recognized in the previous The improvement was offset somewhat by higher year for the employee departure program. Operating costs incurred to handle increased call volumes at our income before restructuring and other items declined contact centres. by $105 million, or 2.7%, to $3,809 million in 2005, The COA for video services was $375 per gross compared with $3,914 million in the previous year. activation in 2005, a decrease of 34% and a significant See Segmented Analysis for a discussion of operating improvement from $571 per gross activation in 2004. income on a segmented basis. This was mainly the result of the capitalization of STBs and installation costs associated with our new rental program and fewer promotional offers, which were EBITDA partly offset by a higher number of new customers EBITDA increased 2.2%, or $167 million, to $7,597 mil- purchasing additional STBs. lion in 2005 because of improved performance at Bell In 2006, the expected benefits of our Galileo cost Canada, Bell Globemedia and Telesat. EBITDA for savings initiatives combined with anticipated revenue Bell Canada was $7,187 million, representing a 1.1% increases from our growth services are expected to increase over 2004, driven primarily by increases in mitigate further declines in our legacy businesses. We our Business segment and at Aliant, which were partly are targeting significant cost savings as a result of offset by decreases in our Residential and Other Bell internal process redesign and supply transformation. Canada segments. EBITDA margins for 2005 were 39.8% at BCE and Amortization Expense 41.7% at Bell Canada, both down 0.7 percentage points compared with 2004. The year-over-year declines Amortization expense increased $58 million to reflected operating cost pressures, which included $3,114 million in 2005, representing a 1.9% increase higher wireless acquisition costs, continued erosion of from 2004. This was a result of an increase in our capi- high-margin legacy voice and data services in all our tal asset base from higher investment in the growth segments, the CRTC’s CDN decision, as well as the areas of the business, as well as overall capital spend- costs to restore service levels subsequent to the resolu- ing that continues to be higher than asset retirements. tion of the labour dispute with our technicians in Ontario. The impact of these elements on EBITDA margin was largely offset by the savings in operating costs achieved through Galileo.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 22 MANAGEMENT’S DISCUSSION AND ANALYSIS

Net Benefit Plans Cost Amortization expense is expected to increase in We recorded restructuring and other items of The amount of the net 2006 as a result of an increase in our capital base. This $1,224 million in 2004. These consisted mainly of: benefit plans cost in a year increase reflects the capitalization of STBs and installa- • a restructuring charge of $985 million related to mainly depends on: tion costs associated with the new rental program in approximately 5,000 employee departures under the • the return on pension our video business unit, the completion in 2005 of the employee departure program at Bell Canada plan assets that we expected Alberta SuperNet (a next-generation network bring- • a charge of $128 million recorded for cost overruns on to be generated during the ing high-speed Internet and broadband capabilities to a contract with the Government of Alberta (GOA), year – the lower the return, the higher the cost communities in Alberta) and Telesat’s new Anik F1R relating to the construction of the Alberta SuperNet • the present value of future and Anik F3 satellites. • a charge of $67 million relating to an employee pension benefit payments departure program at Aliant • other costs of $108 million, including future lease to employees – the lower the Net Benefit Plans Cost present value, the lower costs for facilities no longer needed, asset write-down the cost The net benefit plans cost increased $124 million to and other provisions, net of a reversal of previously • actuarial gain (loss) – the $380 million in 2005. This was 48% higher than the recorded restructuring charges that were no longer difference between the cost of $256 million in 2004, and resulted mainly from: necessary because of the introduction of a new actual funded status of our • a reduction in the discount rate from 6.5% to 6.2%, employee departure program. pension plans and the which increased the accrued benefit obligation of our This was partly offset by income of $75 million amount calculated using our accounting assumptions. pension plans recorded in the second quarter of 2004, relating to an We amortize this into earn- • a reduction in the plan asset base due to the amorti- agreement between BCE Inc. and MTS to settle lawsuits. ings over time. zation of investment losses in 2001 and 2002 • fully amortizing in 2004 the savings relating to the Net Earnings and Earnings per Share (EPS) Restructuring and Other Items transitional asset that arose when we adopted new This category includes vari- accounting rules in 1987 In 2005, net earnings applicable to common shares ous income and expenses • an increase in pension obligations from the early were $1,891 million, or $2.04 per common share, 24% that are not directly related retirement program implemented in 2004. higher than net earnings of $1,523 million, or $1.65 per to the operating revenues This was partly offset by a $44 million curtailment common share, for 2004. Included in earnings this generated during the year. gain associated with the phase-out, over the next three year was a net charge of $10 million from restructur- Examples are costs related to streamlining initiatives, years, of a discretionary allowance program. ing and other items and net gains on investments, asset write-downs and other Net benefit plans cost is expected to increase in compared with a net charge of $349 million for 2004. types of income or charges. 2006, mainly as a result of a further reduction in the Net earnings before restructuring and other items and discount rate from 6.2% to 5.2%. This will lead to an net gains on investments of $1,901 million, or $2.05 increase in the accrued benefit obligation of our pen- per common share, increased by $29 million, or $0.03 sion plans. per share, year-over-year. This represents an increase of 1.5% over the previous year. The improvement in EPS before restructuring and other items and gains Restructuring and Other Items on investments can be attributed to higher EBITDA We recorded restructuring and other items of $55 mil- combined with the impact from the income tax lion in 2005. These included: loss monetization program between Bell Canada • charges of $51 million related to new restructuring and BCI and net income tax savings. This more than initiatives for the involuntary departure of approxi- offset the increase in net benefit plans cost and amor- mately 950 employees tization expense. • charges of $49 million for relocating employees and In 2006, we anticipate that EPS will decrease, mainly closing real estate facilities that are no longer needed as a result of the negative impact of an increase in net because of the reduction in the workforce resulting benefit plans cost, resulting from a reduction in the from the 2004 employee departure program. discount rate from 6.2% to 5.2% and an increase in These charges were partly offset by reversals of amortization expense because of an increase in our restructuring provisions of $45 million that were no capital asset base. longer necessary because the actual payments made to employees were lower than estimated.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 23

SEGMENTED ANALYSIS Residential revenues grew 1.3%, or $97 million, to $7,599 million in 2005, compared with 2004. Video, OPERATING REVENUES data, wireless and terminal sales and other revenues contributed 1.7%, 1.2%, 1.3% and 0.5%, respectively, to overall Residential revenue growth in 2005, offset 31% largely by a negative contribution of 2.1% from long 40% distance and 1.3% from local and access services. The 2005 10% increase was the result of continued expansion of our 10% wireless, video and high-speed Internet subscriber 9% bases and an increase in video ARPU, offset almost entirely by lower wireline (local and access and long distance) revenues brought about by an acceleration in

40% Residential 31% Business 10% Aliant NAS losses and continued wireless long distance pre- 10% Other BCE 9% Other Bell Canada paid and VoIP substitution, as well as ongoing price competition. Although overall Residential revenue growth slowed somewhat in 2005, this result was 2005 2004 % CHANGE anticipated given increased competition from cable Operating revenues telephony and other alternative VoIP providers, which Residential 7,599 7,502 1.3% adversely affected wireline revenues. Business 6,120 5,851 4.6% Aliant 2,097 2,033 3.1% Other Bell Canada 1,958 1,939 1.0% Wireline Inter-segment eliminations (524) (538) 2.6% Local and access revenues, which represents the largest Bell Canada 17,250 16,787 2.8% Other BCE 2,093 1,842 13.6% proportion of our Residential segment revenues, Inter-segment eliminations (238) (261) 8.8% declined in 2005, due mainly to NAS erosion that Total operating revenues 19,105 18,368 4.0% resulted in lower basic service and related SmartTouch feature revenues, offset partly by an increase in wire- Operating income line maintenance plan revenues reﬂecting price increases Residential 2,001 2,119 (5.6%) implemented during the year. NAS decreased in 2005 Business 910 896 1.6% primarily as a result of losses to competitive local Aliant 396 268 47.8% exchange carriers (CLECs) and cable operators, as well Other Bell Canada 448 (588) N/M as to continued pressure from growth in high-speed Bell Canada 3,755 2,695 39.3% Internet access that reduces the need for second tele- Other BCE 293 199 47.2% phone lines, while the impact from other alternative Total operating income 4,048 2,894 39.9% VoIP providers and customers substituting wireline N/M: Not meaningful with wireless telephone service was minimal. The rate of year-over-year NAS losses increased in 2005 as several major cable operators operating in our territory began Residential Segment to aggressively market their low-priced local telephony RESIDENTIAL REVENUES (in $ millions) offerings in certain of our Ontario and Québec mar-

04 kets, where their footprints were established. 7,502 Long distance revenues decreased in 2005 compared with 2004 as a result of lower average revenue per 05 minute (ARPM). Lower ARPM reﬂected increased com- 7,599 petition from non-traditional long distance providers, the impact of our $5 Long Distance Bundle (which

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 24 MANAGEMENT’S DISCUSSION AND ANALYSIS

was discontinued in July 2005) and Block-of-Time that are tailored to the very price-sensitive segments of (BOT) minute plans, as well as a lower volume of the market, has expanded the overall high-speed mar- higher priced overseas minutes. Overall minutes also ket, stimulating high-speed service growth and accel- declined year-over-year, as usage gains stemming from erating the rate of erosion of dial-up Internet service. our bundle product were more than offset by losses For further information about our data business, of domestic and overseas minutes to alternative, non- please see Data within our Product Line Analysis. traditional long distance service providers. For further information about our wireline busi- Video ness, please see Local and Access and Long Distance within our Product Line Analysis. VIDEO REVENUES (in $ millions) 04 Wireless 850 05 Residential wireless revenues increased in 2005, com- 976 pared with 2004, as a result of a higher average number of customers compared with last year, price increases for certain services and features implemented earlier VIDEO SUBSCRIBERS (in thousands) in the year, and increased adoption of data and other 04 value-added feature services. Overall revenue growth 1,503 was dampened by the loss of high-value customers in 05 the early part of 2005 due to billing system conversion 1,727 issues and a higher proportion of customers choosing prepaid service or postpaid monthly packages that include a large number of in-plan minutes and free Our video revenues grew 14.8% in 2005 to $976 mil- unlimited local airtime usage for up to six months. In lion from $850 million in 2004, as a result of an addition, revenue growth was negatively impacted by increase in the average number of subscribers, higher the billing and retention credits issued in Q1 2005 to ARPU, reflecting the impact from price increases compensate customers for billing errors and delays implemented during the year, and the success of our that occurred following implementation of our new strategy to upsell customers to higher-priced pro- billing platform in 2004. The issuance of customer gramming packages. We had a strong year with the credits returned to normal levels in Q2 2005. addition of 224,000 new net video customers, a 93% For further information about our wireless business, increase compared with the 116,000 net activations please see Wireless within our Product Line Analysis. achieved in 2004. Our total video customer base reached 1,727,000 at December 31, 2005, representing an increase of 14.9% compared with the previous year. Data The significant growth in net activations for 2005 can Residential data revenues grew year-over-year, fuelled be attributed to the positive impact of our STB rental by growth of 21% in our high-speed Internet subscriber program, which accounted for nearly half of our new base and an almost two-fold increase in revenues from activations in the year, the attractiveness of our pro- our Sympatico.MSN.ca web portal and Bell Sympatico gramming packages, and the addition of 12,500 new VAS such as MSN Premium, Security Services and subscribers from our acquisition of Cable VDN in the Home Networking. The portal currently averages third quarter. In addition, several initiatives focused 17.2 million unique visitors per month, or 87% of on churn management contributed to overall subscriber online Canadians. growth. Churn for the year improved by 0.1 percentage Residential high-speed Internet subscriber growth points to 0.9% compared with 2004, reflecting the in 2005 was driven by the introduction of our Basic continued success of our multi-product household Lite service in the Ontario market, as well as by foot- strategy and the requirement that, as of August 1, print expansion, focused selling efforts and improved 2004, all new video customers have contracts. This retention strategies. The introduction of lower priced result was achieved despite implementation of a card high-speed services, such as our Basic Lite product, swap program completed in July 2005 and aggressive

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 25

price competition, particularly in the latter half of the benefit plans cost. These factors were partially offset year, from the cable operators’ strategy of bundling by higher revenues and cost savings associated with cable television service with other products. certain Galileo initiatives, including our One Bill Video ARPU increased to $50 per month in 2005 rollout, the launch of our new Bell.ca website and from $49 per month in the previous year. The improve- improved call centre efficiencies. ment was the result of price increases implemented By the end of 2005, we began to see a marked during the year and a shift in product mix towards decrease in contact centre costs driven by an improve- higher priced programming packages, offset partly by ment in the first-call resolution rate and outsourcing. bundle and retention discounts. In March 2005, we This, along with revenue growth from continued applied a $3 rate increase to our existing subscriber strength in our wireless, Internet access and video base and on October 1, 2005, we brought into effect businesses, is expected to mitigate the continued $2 and $3 increases, respectively, on our basic and erosion in our local and access and long distance serv- theme packages for all new customers. ices in 2006, which should experience heightened In 2006, growth in video revenues is expected to competition as cable operators intensify their market- continue, driven by ongoing expansion of the sub- ing efforts and further expand the footprint for scriber base and further improvement in ARPU their low-priced cable telephony offerings in our brought about by the price increases introduced dur- incumbent territories. ing 2005. We will leverage our video service as part of our Residential segment’s overall multi-product house- Business Segment hold strategy, allowing us to maximize the profitability of our traditional local voice services, while BUSINESS REVENUES (in $ millions) increasing penetration of our growth services, by 04 securing a loyal customer base that is less vulnerable 5,851 to cable telephony. We also intend to continue invest- 05 ing in our IPTV platform in preparation for launch of 6,120 service in the future and to further develop our high- definition capabilities, ensuring that we have the right services in the future to be the video provider of Business segment revenues increased by 4.6% in 2005 choice for consumers in both urban and rural markets. to reach $6,120 million, compared with $5,851 million in the previous year. Our SMB and Enterprise units contributed 2.7% and 1.8% of the total growth in Residential Operating Income Business segment revenues, respectively, while our RESIDENTIAL OPERATING INCOME (in $ millions) other business units (comprised of Bell West and

04 360networks) contributed 0.1%. From a product line 2,119 28.2% perspective, increases in data and wireless revenues at our Enterprise and SMB units were partially offset by 05 declines in long distance and local and access revenues, 2,001 26.3% resulting from further legacy erosion as competitive Operating income Operating income margin (%) pressures intensified and as customers continued to migrate their voice and data traffic to our IP-based Residential segment operating income decreased systems. In addition, lower data revenues at Bell West in 2005, due to revenues received in 2004 from the 5.6%, or $118 million, to $2,001 million in 2005, com- GOA for the construction of the Alberta SuperNet, pared with 2004. This decrease was due to a higher dampened the overall Business segment revenues for rate of decline in our high-margin residential NAS wireline customer base, higher expected acquisition the year. The results for 2005 also include the contri- costs from stronger year-over-year wireless subscriber bution to revenues from the acquisition of 360net- growth, higher marketing costs related to an increased works in November 2004, which increased our customer level of wireless advertising and sales activity, as base and gave us an extensive fibre network across well as higher amortization expense and increased net major cities in Western Canada.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 26 MANAGEMENT’S DISCUSSION AND ANALYSIS

Enterprise • RBC Financial Group, Canada’s largest financial institution, to implement a fully managed IP solution, Enterprise revenues increased in 2005, compared with converting approximately 8,400 of the bank’s phone 2004, mainly as a result of strong wireless performance lines at its head office in Toronto to VoIP. driven by solid growth in the number of higher-value wireless subscribers and higher data revenues. Data contributed significantly to the year-over-year revenue SMB improvement, due to solid growth in IP-based connec- The SMB unit delivered its best year since the launch tivity services and ICT solutions, as well as the proof its VCIO strategy in 2003, contributing significantly ceeds from the sale of customer contracts related to to the solid financial performance of our Business legacy point-of-sales systems. ICT revenues grew by segment in 2005. Revenues generated from SMB 36% in 2005 as a result of acquisitions, organic growth customers increased in 2005 as higher data and wire- and outsourcing contracts. Data revenue growth was less revenues more than compensated for the decreases more organic in 2005 than in 2004, as we have realized in long distance and local and access revenues. Despite the full-year benefit of acquisitions made in 2004, a highly competitive market environment, data rev- including Infostream Technologies Inc. and Elix Inc. enue growth in 2005 was driven by the continued Declines in long distance and local and access rev- strong adoption of our VCIO strategy and cross-selling enues partially offset the increases in data and wireless opportunities with companies acquired in 2005 (includ- revenues, due to erosion of our legacy voice and data ing Nexxlink Technologies Inc. and CSB Systems, business, the repricing of some of our existing wireline which form a part of Bell Business Solutions Inc.). business brought about by competitive market condi- This resulted in higher VAS and equipment sales year- tions, and the continued migration of our customers’ over-year, which grew organically by 48% in the year, voice and data traffic to IP-based systems. as well as an increase in the number of high-speed In 2005, we continued to broaden our ICT solutions Internet access service connections. Long distance rev- product suite through the acquisition of a number of enues decreased, due mainly to the combined impact small, specialized service companies, including: of lower volumes and competitive pricing pressures, • CDG, Inc., a Canadian provider of anti-virus and and a weakening of our pay-phone business that is anti-spam solutions, which should provide a strong directly attributable to wireless and Internet substitu- presence in Western Canada tion. Similarly, local and access revenues were also • PopWare Inc., a systems integrator providing inven- lower due to pressure from our declining pay-phone tory and asset management solutions, which expands business, NAS losses to alternative telephony providers our wireless solutions portfolio and lower wireline access installation fees resulting • The Createch Group, a Québec-based professional from reduced order activity. services firm specializing in business process optimization and IT integration, which consolidates our existing suite of wireless data solutions Bell West • end2end Software Corp., a developer of workflow Bell West continued to grow its Enterprise and SMB solutions for the capital markets sector. customer bases during 2005, leading to increases in revenues in most product categories. These increases Our Enterprise unit also had a number of significant were more than offset by a year-over-year decrease multi-year contract wins during the year, including: in data revenues. The results for 2004 reflected higher • National Bank of Canada, to provide integrated call data revenues earned from the construction of the centre solutions and telephone services Alberta SuperNet. • Aéroports de Montréal, to provide a fully-integrated During 2005, Bell West began to integrate the end-to-end communications services solution consist- operations of 360networks, which was acquired in ing of standard telecom services, IP telephony, WiFi November 2004. Through this acquisition, Bell West coverage and digital signage increased its customer base while gaining access to an • Canadian Imperial Bank of Commerce, to provide extensive fibre network with facilities across major and manage DSL and IP virtual private network cities in Western Canada. (IP-VPN) services for its remote automated bank machine (ABM) network

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 27

In June 2005, Bell Canada and the GOA entered Similarly, SMB operating income growth in 2005 into a new agreement that replaced the initial contract was driven by strong revenue performance and Galileo for construction and operation of the Alberta SuperNet savings, partly offset by higher operating expenses entered into in 2001. The Alberta SuperNet, which stemming from recent business acquisitions, margin provides high-speed Internet and broadband capabil- erosion related to the shift from legacy voice and data ities, is comprised of a Base Area Network (BAN), services to VCIO revenues, as well as by higher net covering 27 of Alberta’s largest communities, and the benefit plans cost and amortization expense. Extended Area Network (EAN), reaching 429 com- Bell West recorded lower operating income in 2005, munities in rural Alberta. Under the terms of the due primarily to higher revenues earned in 2004 for new agreement, Bell Canada assumed ownership of the construction of the Alberta SuperNet and higher the EAN and provides access to the GOA under amortization expense, offset partly by lower cost of indefeasible right-of-use agreements. In conjunction goods sold. with this agreement, Bell Canada also entered into a Our transformation strategy will continue in 2006 as new revenue-sharing agreement with the GOA and our core network evolves to enable new IP-based ser- Axia NetMedia Corporation, the access manager vices and as we transform operations and achieve greater for the Alberta SuperNet. Construction of the Alberta efficiencies to create a next-generation cost structure SuperNet was completed on September 30, 2005. for our business. Our Business segment growth strategy Following service acceptance by the GOA in the fourth will continue to be developed around the objectives of quarter, the Alberta SuperNet began generating rev- serving the Enterprise market in key ICT vertical mar- enues from the sale of telecom services. kets such as health care, government and financial services, and continuing to raise awareness among our SMB customers about the benefits of ICT solutions Business Operating Income delivered through a single point-of-contact. In 2006, BUSINESS OPERATING INCOME (in $ millions) we expect Business segment revenues will grow, driven

04 by organic growth in IP-based connectivity service ICT VCIO 896 15.3% and revenues, further traction of our strategy in SMB, the positive contribution of business 05 acquisitions made in 2005, continued solid wireless 910 14.9% performance, and increased sales of services from the Operating income Operating income margin (%) Alberta SuperNet. However, continued declines from our legacy voice and data services are expected to offset the growth in revenues. Business segment operating income grew 1.6%, or $14 million, to $910 million in 2005, compared with 2004, due mainly to a year-over-year increase in rev- Aliant enues and cost savings from our Galileo initiatives. These positive impacts were mitigated by continued ALIANT REVENUES (in $ millions) margin pressure due to a competitive market pricing 04 environment, the loss of higher-margin legacy voice 2,033 and data business, and the ongoing shift of voice and 05 data traffic to lower-margin IP-based growth services, 2,097 as well as higher net benefit plans cost and amortization expense. In the Enterprise unit, operating income increased Aliant segment revenues increased 3.1%, or $64 mil- in 2005 due to solid revenue growth and focused cost lion, to $2,097 million in 2005, compared with 2004. management, despite the negative margin impact from Strong growth in wireless and Internet services, as steady progress in transforming our product mix well as a recovery from the 2004 labour disruption, towards growth services as well as higher amortization offset declines in other areas due to the effects of com- expense and net benefit plans cost. petition, wireless and Internet substitution, and regulatory restrictions.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 28 MANAGEMENT’S DISCUSSION AND ANALYSIS

Aliant’s wireless revenue grew in 2005, driven by an Aliant Operating Income 11.9% increase in its wireless customer base and higher ALIANT OPERATING INCOME (in $ millions) ARPU. Subscriber results included a 23% increase in digital customers, reﬂecting Aliant’s expanded cover- 04 age area and digital wireless network, an enhanced 268 13.2% dealer network that improved market penetration, 05 and a broader product selection. In addition, ARPU 396 18.9%

increased in the year, reflecting the effects of a higher Operating income Operating income margin (%) percentage of customers subscribing to digital service and an increase in average minutes of use. Data revenues increased slightly in 2005, as higher Aliant’s operating income increased 48%, or $128 mil- Internet revenues and recovery from the 2004 labour lion, to $396 million in 2005, compared with 2004. disruption were offset almost entirely by other data The full impact of revenue growth and recovery from revenue declines from the continued rationalization of the 2004 labour disruption, as well as the non-recur- circuit networks by customers, and the $8 million rence in 2005 of a $67 million restructuring charge negative impact of the CRTC’s CDN decision. The related to the voluntary early retirement program in increase in Internet revenues was attributable mainly December 2004, was offset partly by the impact of to 42% growth in Aliant’s high-speed Internet cus- the CRTC’s CDN decision and an increase in net tomer base. The increased number of subscribers benefit plans cost. Operating expense increases reflected expansion of high-speed Internet service into required to drive revenue growth in 2005 were con- new areas, the migration of dial-up customers to tained by expense management and the cost savings higher-speed products, successful marketing programs from Aliant’s 2004 voluntary early retirement pro- and an emphasis on bundling Internet service with gram. Approximately $42 million of incremental costs other products. were incurred during the 2004 labour disruption to Long distance revenues declined in 2005, due to enable operations to continue with relatively few lower per-minute pricing and a decline in minutes of interruptions, ensure the safety of employees, perform use stemming from intense competition, substitution property repairs, provide training and equipment to of long distance calling with Internet and wireless employees and maintain basic customer service. options, and the use of contact centre management In 2006, Aliant expects revenue growth from its tools (such as integrated voice response systems) that high-speed Internet and digital wireless services, as reduce the duration of calls. well as increased ICT market penetration in Atlantic Local and access revenues continued to decrease Canada and adjacent areas to offset expected steady, in 2005, due mainly to a 1.5% decline in the NAS but slower, declines in local and access and long dis- customer base, which reflected losses to the compe- tance revenues. Aliant also anticipates higher operat- tition and technology substitution. In addition, the ing income in 2006 from continued revenue growth CRTC’s regulatory restrictions continue to place pres- and through productivity improvements. These positive sure on Aliant’s local and access business with respect to impacts are expected to be offset partly by increased bundling and packaging of local services with other non- costs associated with Aliant’s growth services and regulated services, and limitations imposed with respect higher net benefit plans cost. to customer win-back promotions. Enhanced service features revenue also declined as a higher number of Other Bell Canada Segment customers received bundling discounts. Terminal sales and other revenues increased in 2005, OTHER BELL CANADA REVENUES (in $ millions) as a result of higher product sales reflecting Aliant’s 04 recovery from its 2004 labour disruption. 1,939 05 1,958

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 29

Other Bell Canada segment revenues grew 1.0%, or Other BCE Segment $19 million, to $1,958 million in 2005, compared with 2005 2004 % CHANGE 2004. The year-over-year increase was due mainly to higher revenues at our Wholesale unit, resulting from Operating revenues Bell Globemedia 1,555 1,420 9.5% the acquisition of the wholesale business of 360net- Telesat 475 362 31.2% works in November 2004, fibre and access capacity Other 63 60 5.0% sales in the third quarter of 2005, the early termina- Other BCE revenues 2,093 1,842 13.6% tion of a cross-border facilities contract in the second quarter of 2005 and a favourable ruling by the CRTC with respect to subsidies for serving high-cost areas at OTHER BCE REVENUES (in $ millions) Télébec in the first quarter of 2005. A contract secured 04 in late 2005 to restore telecommunications service to 1,842 the areas affected in the United States by Hurricane 05 Katrina also contributed to the improvement in Other 2,093 Bell Canada revenues in 2005. These positive impacts were offset partly by the impact of the CRTC’s CDN decision, which reduced revenues by $55 million in Other BCE segment revenues grew 13.6%, or $251 mil- 2005, continued pressure on long distance revenues lion, to $2,093 million in 2005, compared with 2004, stemming from a decrease in switched minute vol- reflecting higher revenues mainly at Bell Globemedia umes and competitive pricing, and lower data revenues and Telesat. as customers migrated services onto their own net- Bell Globemedia’s revenues increased 9.5%, or work facilities. $135 million, to $1,555 million in 2005, compared with 2004. Total advertising revenues grew by 10.3% in 2005, reflecting the strength of CTV Television’s schedule, Other Bell Canada Operating Income which included the majority of the top 20 regularly

OTHER BELL CANADA OPERATING INCOME (in $ millions) scheduled programs in each season among all viewers, and higher employment and classified advertising sales 04 at The Globe and Mail. Strong growth in advertising (588) (30.3%) revenues in conventional and specialty television other 05 than sports helped to offset the loss of advertising 448 22.9% from hockey broadcasts (due to the NHL players’ lock- Operating income Operating income margin (%) out, which ended in the third quarter) on our sports specialty channels TSN and RDS for the first three quarters of the year. Bell Globemedia’s subscriber The Other Bell Canada segment generated operating revenues grew by 7.4% in 2005, due primarily to spe- income of $448 million in 2005, a $1,036 million in- cialty channel subscription growth, online subscription crease when compared to an operating loss of $588 mil- growth at The Globe and Mail, as well as a larger lion in 2004. The amount reported for 2004 included number of subscribers to The Globe and Mail in combi- restructuring and other items of $1,147 million, mainly nation with an increase in the home delivery rate for the associated with our employee departure program newspaper implemented at the beginning of the year. and the related relocation of employees and closure Telesat’s revenues increased 31%, or $113 million, of excess real estate facilities, whereas the amount to $475 million in 2005, compared with the previous reported in 2005 for restructuring and other charges year, primarily as a result of revenue gains from was $53 million. Excluding restructuring and other the installation and maintenance of an interactive items, operating income decreased 10.4% to $501 mil- distance learning network, growth in Ka-band rev- lion in 2005, reflecting the impact of the CRTC’s CDN enues on its Anik F2 satellite, the positive impact decision, higher operating costs from the acquisition from its acquisition of SpaceConnection, and higher of 360networks, and the repricing of long distance and overall broadcast revenues. data services in our Wholesale business. Higher revenues and lower bad debts expense partly offset the negative impacts on operating income.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 30 MANAGEMENT’S DISCUSSION AND ANALYSIS

SpaceConnection was acquired in January 2005 and Telesat’s operating income grew by 11.3%, or is a provider of programming-related satellite trans- $16 million, to $157 million in 2005, reﬂecting higher mission services to major U.S. television networks and revenues, offset partly by higher operating expenses cable programmers. from SpaceConnection, network equipment costs for Anik F2 began commercial service in October 2004 interactive distance learning services, as well as higher and was the world’s ﬁrst satellite to commercialize amortization expense stemming from its newest satel- the Ka frequency band, enabling two-way high-speed lites (Anik F2 and Anik F1R) and from the acquisition Internet access services to consumers and businesses of SpaceConnection. in Canada and the United States. In May 2005, Telesat launched its new two-way high-speed Internet access PRODUCT LINE ANALYSIS service using the Ka band of Anik F2. This service is available to consumers through multiple distributors BELL CANADA PRODUCT LINE REVENUES across Canada, including Barrett Xplore Inc., a wire-

less broadband service provider, Télébec, NorthernTel 23% and Infosat Communications Inc. 18% On October 1, 2005, Telesat’s new Anik F1R satel- 32% lite was placed into service and began providing 2005 capacity for broadcasters, home satellite television 12% services and telecommunications. 9% On January 17, 2006, Telesat announced plans to 6% build and launch Nimiq 4, a new direct broadcast satellite that will carry a wide range of digital television services and enable Bell ExpressVu to enhance advanced 32% Local and access 23% Data 18% Wireless 12% Long distance 9% Terminal sales and other 6% Video services such as HD television, specialty channels and foreign language programming. REVENUES 2005 2004 % CHANGE Other BCE Operating Income Local and access 5,446 5,572 (2.3%) Long distance 2,044 2,327 (12.2%) OTHER BCE OPERATING INCOME (in $ millions) Wireless 3,097 2,818 9.9% Data 4,015 3,640 10.3% 04 Video 976 850 14.8% 199 10.8% Terminal sales and other 1,672 1,580 5.8% 05 Total Bell Canada 17,250 16,787 2.8% 293 14.0%

Operating income Operating income margin (%) Local and Access

Operating income for the Other BCE segment grew LOCAL AND ACCESS REVENUES (in $ millions)

47%, or $94 million, to $293 million in 2005, due 04 mainly to higher operating income at both Bell 5,572 12,905 Globemedia and Telesat. 05 Bell Globemedia’s operating income increased 20%, 5,446 12,581 or $49 million, to $289 million in 2005, reﬂecting revenue gains and lower sports specialty programming Revenues NAS (thousands) costs due to the NHL lockout for most of the year. This was offset partly by higher conventional televi- Local and access revenues decreased 2.3%, or $126 mil- sion programming costs, increased sales and circula- lion, to $5,446 million, compared with 2004. The year- tion costs at The Globe and Mail and higher net over-year decline was a result of accelerating NAS beneﬁt plans cost. erosion and lower Smart-Touch feature revenues directly attributable to NAS losses, offset partly by gains from wireline insurance and maintenance plans.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 31

NAS in service declined by 324,000 in 2005 or 2.5%, subscriptions to the $5 Long Distance Bundle in our as a result of competition from cable operators for Residential segment (which we stopped offering in local telephone service, losses to CLECs and other July 2005). VoIP providers, wireline to wireless substitution, as We anticipate continued pressure on long distance well as continued pressure from growth in high-speed revenues in 2006, due to intensifying competition in Internet access that reduces the need for second tele- our Residential markets from cable companies that are phone lines. This decrease in 2005 reflected a higher offering VoIP residential telephone service, wireless level of NAS losses than the previous year, as several substitution and other factors including e-mail and major cable operators in our incumbent territories instant messaging substitution, as well as continuing increased their marketing efforts and expanded the competitive pricing conditions in the Enterprise and footprint of their low-priced local telephony offerings Wholesale markets. in certain of our Ontario and Québec markets. This was offset partly by customers subscribing to our new Wireless Bell Digital Voice service and higher demand for local access lines from Shaw Communications to offer VoIP WIRELESS REVENUES (in $ millions) services in Western Canada. 04 Moreover, the CRTC’s regulatory restrictions con- 2,818 tinue to place pressure on our local and access business 05 with respect to bundling and packaging of local ser- 3,097 vices with other non-regulated services, as well as limitations on customer win-back promotions. In 2006, we expect that wireline competition in WIRELESS SUBSCRIBERS (in thousands) both the Residential and Business markets will increase further, primarily as a result of cable telephony and 04 decreases in legacy services pricing. Accordingly, we 4,925 estimate that our overall NAS in service will continue 05 to decrease in 2006, reflecting a significantly higher 5,441 rate of decline in our Residential segment. Prepaid Postpaid

Long Distance Gross wireless activations increased by 20% in 2005 to LONG DISTANCE REVENUES (in $ millions) a record 1,470,000, up from 1,225,000 in the previous year. Although the percentage of total gross activa- 04 tions from postpaid rate plans decreased to 70% in 2,327 18,070 2005 from 75% in 2004, due primarily to the impact 05 of Solo Mobile and Virgin Mobile on prepaid sub- 2,044 18,306 scriber growth, the total number of gross postpaid Revenues Conversation minutes (millions) activations increased by 11.9 % to 1,024,000. Prepaid gross activations comprised the remaining 446,000 gross activations, representing a 44% increase com- Long distance revenues were $2,044 million in 2005, pared with 2004. Postpaid growth was stimulated by reflecting a year-over-year decrease of 12.2% compared our attractive line-up of leading-edge handsets and with 2004. Lower long distance revenues affected all devices, innovative services such as 10-4 and EVDO, Bell Canada segments, particularly our Residential and competitive rate-plan promotions, our growing pres- Business segments. Overall minute volumes increased ence in Western Canada, as well as our continued 1.3% in 2005 to 18,306 million conversation minutes, success with the business market segments. The sig- compared with 2004. However, ARPM decreased by nificantly higher number of prepaid activations was $0.015 during the year to reach $0.102, reflecting com- fuelled by the introduction of two new brands tailored petitive pricing pressures in our Residential, Business for the youth market, Solo Mobile and Virgin Mobile. and Wholesale markets and the pricing impact from

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 32 MANAGEMENT’S DISCUSSION AND ANALYSIS

Our postpaid churn rate increased to 1.4% in 2005 Blended ARPU remained unchanged in 2005 at $49 from 1.1% in 2004, due mainly to increased competi- per month, compared with 2004, despite a slight year- tive pressures, the reaction to price increases intro- over-year decrease in the percentage of total sub- duced during the year for certain services and features, scribers on postpaid rate plans. the enforcement of tighter policies on the application We continue to see considerable opportunities for of customer credits and discounts and to the granting growth in the wireless market for 2006, given that of hardware upgrades, as well as some residual im- Canadian wireless penetration is significantly lower pacts from our billing system migration that caused than the levels achieved in other countries, such as the dissatisfaction among certain of our customers who United States, where the penetration rate at the end of deferred service deactivation until expiry of their 2005 was approximately 65% compared to an esti- contracts. Prepaid churn for 2005 was unchanged at mated 52% in Canada. We expect our wireless rev- 1.9% year-over-year, reflecting the effectiveness of our enues to increase as a result of anticipated higher retention initiatives with respect to inactive cus- ARPU and the continued expansion of our subscriber tomers. Accordingly, as a result of higher postpaid base in 2006. We anticipate that attracting higher- churn, our blended churn rate for 2005 increased to value subscribers with innovative features and applica- 1.6%, compared with 1.3% in 2004. tions, increased take-up rates for data bundles, the As a result of a record number of gross activations introduction of new rate plans to stimulate usage and in 2005 and despite an increase in our overall churn encourage customer migration to higher-priced pack- rate for the year, we added 516,000 new net activa- ages, selective price increases for some value-added tions in 2005, representing a slightly higher number services, as well as increased usage of wireless data than the 513,000 achieved in 2004. At December 31, services such as text and picture messaging and Web 2005, our cellular and PCS subscriber base totalled browsing should stimulate ARPU growth. 5,441,000, representing a 10.5% increase. Postpaid rate plans accounted for 74% of our total subscriber base at Data the end of 2005, compared with 76% at the end of the previous year. DATA REVENUES (in $ millions) Wireless service revenues grew 9.9%, or $279 mil- 04 lion, to $3,097 million in 2005, compared with 2004, 3,640 reflecting a higher average number of customers in our 05 subscriber base and stable ARPU performance. 4,015 Postpaid ARPU remained stable year-over-year at $61 per month. The positive impact of higher value- added service and data revenues, increased penetration HIGH-SPEED INTERNET SUBSCRIBERS (in thousands) of Blackberry customers and other heavy users sub- 04 scribing to higher-priced rate plans, as well as price 1,808 increases implemented during the year for certain fea- 05 tures including 911, 411, outbound text messaging, and 2,195 out-of-bundle minutes were fully offset by lower out- of-bundle airtime usage, resulting from the popularity ResidentialBusiness Wholesale of price plans offering a large number of bundled minutes or an unlimited local usage option, and the appli- Data revenues increased 10.3%, or $375 million, to cation of customer billing and retention credits in the $4,015 million in 2005, compared with 2004. The early part of the year stemming from the residual improvement was a result of growth in high-speed impact of the billing system migration in 2004. Internet access services, increased penetration of IP- Prepaid ARPU increased to $14 per month in 2005, based connectivity and ICT solutions within our compared with $12 per month in 2004, due mainly to Enterprise and SMB business units, including rev- the addition of Solo and Virgin Mobile customers, enues related to business acquisitions in 2005, which who generate a higher than average ARPU, to our pre- more than offset the negative effects of a decrease in paid subscriber base and to higher overall usage. legacy data revenues due to competitive pricing, lower

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 33

demand and the continued rationalization of circuit Video Other Income networks by wholesale customers, lower construction Other income includes See discussion under Residential segment. revenues from the GOA contract and the CRTC’s CDN income that we receive from decision, which adversely affected data revenues by activities that are not part $63 million in 2005. Data revenues in 2005 also Terminal Sales and Other of our business operations, reflected the favourable impact of the sale of custo- such as: • net gains on investments, mer contracts and fibre and access capacity in our TERMINAL SALES AND OTHER REVENUES (in $ millions) including gains or losses 04 Enterprise and Wholesale units, as well as a one-time when we dispose of, write benefit from the early termination of a cross-border 1,580 down or reduce our owner- facilities contract. 05 ship in investments The number of high-speed Internet subscribers 1,672 • foreign currency gains increased by 387,000 in 2005, 10.6% higher than the (losses) 350,000 net new connections activated in 2004, bring- • interest income on cash Terminal sales and other revenues increased 5.8%, or ing the total subscriber count at the end of 2005 to and cash equivalents $92 million, to $1,672 million in 2005, compared 2,195,000. Subscriber growth in the year was driven • equity in net earnings largely by the introduction of our Basic Lite product with 2004. The year-over-year improvement reflected (losses) from companies over which we exert in the Ontario market, higher net additions at Aliant higher wireless equipment revenues resulting from an increased volume of devices sold, higher product sales significant influence and in our SMB unit, as well as by footprint expan- at Aliant reflecting its recovery from a labour disrup- • other miscellaneous sion, focused selling efforts and improved customer tion in 2004 income or expense. retention. The introduction of lower-priced high- , the favourable impact from several speed services such as Basic Lite that are tailored to acquisitions (including those of 360networks and the very price-sensitive segments of the market, has Entourage), as well as incremental revenue from a expanded the overall high-speed market, stimulating contract secured by Expertech Network Installation high-speed service growth and accelerating the rate of Inc. (a Bell Canada majority-owned provider of instal- erosion of dial-up Internet service. Total dial-up cus- lation and network infrastructure services) to help restore telecommunications service to the areas affected tomers decreased to 586,000 at the end of 2005 from in the United States by Hurricane Katrina. This was 743,000 at the end of 2004. Our high-speed Internet offset partly by lower legacy voice equipment sales to access footprint in Ontario and Québec reached 85% business customers. of homes and business lines passed at the end of 2005, compared with 83% at the end of the previous year. In 2006, we expect further revenue erosion in our OTHER ITEMS legacy data services from competitive pricing pressures and continued customer migration to IP-based Other Income networks, offset by anticipated high-speed Internet subscriber base growth, increased penetration of value- Other income decreased $399 million to $8 million added solutions, as well as the positive impact of in 2005, a decrease of 98% from 2004. This was acquisitions and select price increases for certain mainly from: Internet services. We also expect our Residential seg- • net gains on investments in 2004 of $217 million from ment to experience slower high-speed Internet sub- the sale of our 15.96% interest in MTS and $108 mil- scriber growth due to sustained aggressive price lion from the sale of Bell Canada’s remaining 3.24% competition in both our Ontario and Québec markets interest in YPG General Partner Inc. (YPG) arising from cable operators’ increased emphasis on • a charge of $33 million relating to the tax loss mone- selling multi-product bundles at discounted rates. tization program between Bell Canada and BCI (see Related Party Transaction) • a decrease of $35 million in income from cost and equity investments mainly due to the sale of our 15.96% interest in MTS • a $7 million write-down of Bell Globemedia’s investment in TQS Inc.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 34 MANAGEMENT’S DISCUSSION AND ANALYSIS

Non-Controlling Interest This decrease was partly offset by a dilution gain The net gain from discontinued operations of The non-controlling interest of $39 million in the second quarter in our interest $77 million in 2004 consisted of: in the statements of opera- in TerreStar Networks Inc., a mobile satellite services • a net gain of $23 million from discontinued operation reflects the percentage company. tions of Emergis of a subsidiary that we do • our proportionate share of CGI’s operating gains of not own multiplied by the $54 million. amount of the subsidiary’s Interest Expense after-tax earnings. Interest expense declined $18 million to $981 million Extraordinary Gain Financial and Capital in 2005, a decrease of 1.8% from 2004. This was a Management result of lower average interest rates from the refinanc- In the fourth quarter of 2004, we purchased the This section tells you ing of debt at lower rates. Canadian operations of 360networks for $293 million how we manage our cash in cash. The fair value of the net assets acquired and capital resources to exceeded the purchase price by approximately $227 mil- Income Taxes carry out our strategy and lion. For accounting purposes, the excess was elimi- deliver financial results. Income taxes increased $212 million to $893 million nated by: It provides an analysis of in 2005, an increase of 31% over 2004. This was • reducing the amounts assigned to the acquired non- our financial condition, cash mainly from: monetary assets (e.g., capital and intangible assets) flows and liquidity on a consolidated basis. • higher pre-tax earnings to zero • tax savings realized in 2004 on the $325 million of • recognizing the balance of $69 million as an extra- Capital Structure gains on the sale of our interests in MTS and YPG ordinary gain. Our capital structure because of the available capital loss carryforwards. shows how much of our net FINANCIAL AND CAPITAL MANAGEMENT assets are financed by debt This increase was partly offset by: and equity. • restructuring charges of $45 million that were not CAPITAL STRUCTURE tax-effected in 2004 Net debt to capitalization ratio • savings of $99 million resulting from the tax loss AT DECEMBER 31 2005 2004 is a key measure we use to monetization program between Bell Canada and BCI assess our financial condition. Debt due within one year 1,373 1,272 It shows how much net debt (see Related Party Transaction). Long-term debt 12,119 11,685 (debt due within one year Less: Cash and cash equivalents (363) (313) and long-term debt, net of As a result, the effective tax rate decreased slightly Total net debt 13,129 12,644 cash) we have in relation to from 29.6% in 2004 to 29.0% in 2005. Non-controlling interest 2,898 2,908 our capitalization (total net Total shareholders’ equity 14,721 14,024 debt, non-controlling inter- Total capitalization 30,748 29,576 Non-Controlling Interest est and shareholders’ equity). Net debt to capitalization ratio 42.7% 42.8% Non-controlling interest increased $93 million to Outstanding share data (in millions) $267 million in 2005, an increase of 53% over 2004. Common shares 927.3 925.9 This was from: Stock options 27.3 28.5 • higher net earnings at Aliant and Bell Globemedia • a higher net loss at Bell West in 2004, due to cost NET DEBT AND NET DEBT TO CAPITALIZATION RATIO (in $ millions) overruns on the GOA contract that were recorded in 2004, since MTS owned a 40% interest in Bell West 04 until August 2004. 12,644 42.8% 05 Discontinued Operations 13,129 42.7% Net debt Net debt to capitalization ratio (%) The net gain from discontinued operations of $46 million in 2005 relates to our proportionate share of CGI’s operating gains.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 35

Our net debt to capitalization ratio was 42.7% at the CASH FLOWS end of 2005, compared to 42.8% at the end of 2004. This was a result of an increase in total shareholders’ FREE CASH FLOW (in $ millions) equity, partly offset by higher net debt. 04 Net debt increased $485 million to $13,129 million 1,978 in 2005. This was mainly due to: 870 • obligations of $452 million for capital leases relating 05 to several lease financing arrangements 1,857 • cash of $461 million invested in business acquisitions and other investments 662 • redemption of common shares of $78 million from After common dividends Before common dividends non-controlling interest. This increase was partly offset by free cash flow of $662 million. The table below is a summary of the flow of cash into Total shareholders’ equity increased $697 million to and out of BCE in 2005 and 2004.

$14,721 million in 2005. This was mainly the result of 2005 2004 the net earnings remaining after the dividends we Cash flows from operating activities 5,559 5,443 declared on common and preferred shares in 2005. Capital expenditures (3,428) (3,319) Other investing activities 4 127 OUTSTANDING SHARE DATA Cash dividends paid on common shares (1,195) (1,108) Cash dividends paid on preferred shares (86) (85) We had 927.3 million common shares outstanding at the Cash dividends paid by subsidiaries end of 2005, an increase of 1.4 million over 2004 result- to non-controlling interest (192) (188) ing from stock options that were exercised in 2005. Free cash flow 662 870 The number of stock options outstanding at the Business acquisitions (228) (1,118) end of 2005 was 27.3 million, a decrease of 1.2 million Business dispositions – 20 from 2004. The weighted average exercise price of Increase in investments (233) (58) the stock options outstanding at December 31, 2005 Decrease in investments 19 713 was $32. Of the total outstanding stock options at Net issuance of equity instruments 25 32 December 31, 2005, 16.5 million were exercisable at a Net repayment of debt instruments (54) (820) Financing activities of subsidiaries weighted average exercise price of $34. In 2005: with third parties (77) (50) • 1.5 million stock options were granted Other financing activities (64) (81) • 1.4 million previously granted options were exercised Cash provided by discontinued operations 15 150 • 1.2 million previously granted options expired or Net increase (decrease) in were forfeited. cash and cash equivalents 65 (342)

Starting in 2004, most of the stock options granted contain speciﬁc performance targets that must be met Cash from Operating Activities before the option can be exercised. Cash from operating activities increased $116 million to $5,559 million in 2005, an increase of 2.1% from CHANGES TO CAPITAL STRUCTURE 2004. This was a result of: • an improvement in cash earnings resulting from On February 1, 2006, we announced the intended use higher EBITDA of our proceeds from the sale of our investments in • a signiﬁcant improvement in the collection of Bell Globemedia and CGI, which consists mainly of: accounts receivable once issues associated with the • $1.3 billion for the repurchase of 5% of BCE Inc.’s implementation of our new billing platform for wire- outstanding common shares through a NCIB less customers in 2004 were resolved • $1.0 billion for debt reduction. • an increase of $134 million in proceeds from the sale of accounts receivable • a decrease of $77 million in payments relating to the restructuring initiatives of 2004 and 2005.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 36 MANAGEMENT’S DISCUSSION AND ANALYSIS

This increase was partly offset by: Our capital spending in 2005 reflected an increasing • higher pension and other benefit plan payments, investment in the growth areas of the business and mainly at Aliant reduced spending in legacy areas. Our key strategic • an increase of $73 million in income taxes paid, investments this year included: primarily related to the final instalment for 2004 • expanding our FTTN footprint made in 2005 as instalments were not required at Bell • launching our Bell Digital Voice service Canada in 2004 • implementing an EVDO wireless data network • a $75 million settlement payment received from MTS • expanding our DSL footprint in 2004. • investing in our IPTV platform and IT efficiency projects to achieve cost savings. Free Cash Flow Our capital spending also was higher in 2005 because Our free cash flow was $662 million in 2005, down Aliant was able to return to more normal spending from $870 million in 2004. This was mainly due to: levels after the labour disruption in 2004, and because • a decrease of $149 million in insurance proceeds of Telesat’s investments in satellite construction. received by Telesat In 2006, we are targeting to reduce Bell Canada’s • an increase of $109 million in capital expenditures capital intensity ratio mainly because of lower spending related to our investment in platforms for next-gener- for maintenance of our wireline and DSL networks. ation services Although we anticipate a decrease in overall capital • an increase of $87 million for common dividends expenditures, we plan on increasing investment in paid resulting from the quarterly increase of $0.03 per our key strategic priorities, including FTTN, wireless common share. growth and network expansion, IP product devel- This decrease was partly offset by a $116 million opment and Galileo cost saving initiatives (see Our increase in cash from operating activities. Strategic Priorities). We are targeting positive free cash flow in 2006 to be generated mainly from recurring sources. Other Investing Activities Cash from other investing activities decreased by Capital Expenditures $123 million to $4 million in 2005, compared to 2004. We continue to make investments to expand and Cash from other investing activities included insur- update our networks and to meet customer demand ance proceeds that Telesat received for a malfunction for new services. Capital expenditures were $3,428 mil- on the Anik F1 satellite, amounting to $179 million in lion in 2005, which was 3.3% higher than 2004 capital 2004, compared to $30 million in 2005. expenditures of $3,319 million. Bell Canada’s capital expenditures were $3,122 million in 2005, which Cash Dividends Paid on Common Shares was 3.2% higher than 2004 capital expenditures of $3,026 million. As a percentage of revenues: In December 2004, the board of directors of BCE Inc. • our capital expenditures decreased slightly from approved an increase in the annual dividend on our 18.1% in 2004 to 17.9% in 2005 common shares of 10% or $0.12 per common share. We • Bell Canada’s capital expenditures increased slightly paid a dividend of $1.32 per common share in 2005. from 18.0% in 2004 to 18.1% in 2005.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 37

Business Acquisitions We had the following issues in 2005: Debt Instruments • Bell Canada issued $900 million in debentures We use a combination of We invested $228 million in business acquisitions in • Aliant issued $150 million in medium-term notes. short-term and long-term 2005. This consisted mainly of: debt to finance our opera- • Bell Canada’s acquisition of Nexxlink for $74 million In 2004, we repaid $820 million of debt, net of issues, tions. Our short-term debt • Bell Canada’s acquisition of NR Communications for including the following: consists mostly of bank $60 million facilities and notes payable • Bell Canada repaid $952 million in debentures • other business acquisitions, mainly at Bell Canada, under commercial paper • Aliant repaid $100 million in medium-term notes totalling $94 million. programs. We usually pay • we redeemed all of our outstanding Series P retractable fixed rates of interest on our preferred shares for $351 million. long-term debt and floating We invested $1,118 million in business acquisitions in rates on our short-term debt. 2004. This consisted of: Most of the issues in 2004 involved: • Bell Canada’s purchase of the Canadian operations of • Bell Canada, which issued $450 million in debentures 360networks in November 2004 for $293 million • Bell Globemedia, which issued $300 million of • our purchase of MTS’ 40% interest in Bell West in senior notes. August 2004 for $646 million, giving Bell Canada 100% ownership of Bell West • other business acquisitions, mainly at Bell Canada, Cash Relating to Discontinued Operations totalling $179 million. On December 16, 2005, we announced our decision to sell our investment in CGI, and on January 12, 2006, Increase in Investments the transaction was completed. CGI bought 100 million of the Class A shares held Cash flows used for investments increased $175 million by us, reducing our ownership in CGI from 29.8% to to $233 million in 2005. In the first quarter, Bell 8.6%. We received total proceeds of $859 million, gen- Canada invested US$100 million to acquire an approx- erating a gain of approximately $90 million, which imate 12% interest in Clearwire Corporation, a pri- will be recognized in the first quarter of 2006. vately-held company that offers advanced IP-based As at December 31, 2005, we have accounted for wireless broadband communications services. CGI as discontinued operations and no longer proportionately consolidate its financial results. Our remain- Decrease in Investments ing investment will be accounted for at cost. CGI was previously presented in the Other BCE segment. We did not have any significant decreases in invest- Cash provided by discontinued operations was ments in 2005. $150 million in 2004. This consisted mainly of: In 2004, we sold our remaining 3.24% interest in • net cash proceeds of $315 million from the sale of YPG for net cash proceeds of $123 million and Emergis our 15.96% interest in MTS for net cash proceeds of • $285 million from the sale of Emergis’ US Health $584 million. operations • $96 million of cash generated from Emergis’ Debt Instruments operations. This was partly offset by the deconsolidation of In 2005, we repaid $54 million of debt, net of issues, Emergis’ cash on hand of $512 million at December 31, including the following: 2003. • Bell Canada repaid $751 million in debentures • Aliant repaid $150 million in medium-term notes • we repaid $66 million in notes payable and bank advances • we made other repayments that included capital leases.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 38 MANAGEMENT’S DISCUSSION AND ANALYSIS

Credit Ratings CREDIT RATINGS The interest rates we pay are partly based on the The table below lists BCE Inc.’s and Bell Canada’s key credit ratings at March 1, 2006. quality of our credit ratings, which were all investment BCE INC. S&P(1) DBRS(2) MOODY’S(3) FITCH(4) grade at March 1, 2006. Investment grade ratings Commercial paper A-1 (low) R-1 (low) / stable P-2 – usually mean that when Long-term debt BBB+ / negative A (low) / stable Baa1 / negative BBB+ / stable we borrow money, we Preferred shares P-2 Pfd-2 (low) / stable – – qualify for lower interest rates than companies BELL CANADA that have ratings lower S&P(1) DBRS(2) MOODY’S(3) FITCH(4) than investment grade. Commercial paper A-1 (low) R-1 (low) / stable P-2 – Extendable commercial notes – R-1 (low) / stable – – Long-term debt A- / negative A / stable A3 / negative BBB+ / stable Subordinated long-term debt BBB+ / negative BBB (high) / stable Baa1 / negative BBB / stable Preferred shares P-2 Pfd-2 / stable – –

(1) Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.; maintains a negative outlook on our corporate rating (2) Dominion Bond Rating Service Limited (3) Moody’s Investors Service, Inc.; on February 1, 2006 ratings placed under review for possible downgrade (4) Fitch Ratings Ltd.

LIQUIDITY Capital Expenditures We expect, in 2006, to generate enough cash from our Capital expenditures were $3.4 billion in 2005, repre- operating activities to pay for capital expenditures and senting 17.9% of our revenues for the year. We are tar- dividends. In other words, we are targeting positive geting a decrease in Bell Canada’s capital intensity free cash flow in 2006. ratio in 2006. We expect to repay contractual obligations maturing in 2006 and in the long term from cash on hand, from Pension Funding cash generated from our operations or by issuing new debt. Contractual obligations include long-term debt. We expect to contribute approximately $470 million to our defined benefit pension plans in 2006, subject to actuarial valuations being completed. Cash Requirements In 2006, we will need cash mainly for capital expenditures, dividend payments, pension funding, the payment of contractual obligations and other cash requirements.

Contractual Obligations The table below is a summary of our contractual obligations at December 31, 2005 that are due in each of the next ﬁve years and after 2010. THERE- 2006 2007 2008 2009 2010 AFTER TOTAL Long-term debt (excluding capital leases) 1,160 1,686 1,043 1,624 1,013 5,955 12,481 Notes payable and bank advances 87 –––––87 Capital leases 126 110 63 47 45 533 924 Operating leases 231 204 181 158 134 679 1,587 Commitments for capital expenditures 184 52 8 2 16 – 262 Purchase obligations 1,413 1,001 716 287 205 530 4,152 Other long-term liabilities (including current portion) 143 119 79 80 4 25 450 Total 3,344 3,172 2,090 2,198 1,417 7,722 19,943

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 39

Long-term debt and notes payable and bank advances • future payments of income taxes depend on the include $58 million drawn under our committed credit amount of taxable earnings and on whether there are facilities. They do not include $455 million of letters tax loss carryforwards available to reduce income tax of credit. The total amount available under these liabilities. committed credit facilities and under our commercial paper programs, including the amount currently drawn, We did not include deferred revenue and gains on is $2.4 billion. assets in the table because they do not represent future The imputed interest to be paid on capital leases is cash payments. $649 million. Rental expense relating to operating leases was Other Cash Requirements $316 million in 2005, $358 million in 2004 and $327 million in 2003. Our cash requirements may also be affected by the Purchase obligations consist mainly of contractual liquidity risks related to our off-balance sheet arrange- obligations under service contracts. Our capital spend- ments, derivative instruments and contingencies. We ing commitments include investments to expand and may not be able to quantify all of these risks. update our networks, and to meet customer demand. Other long-term liabilities included in the table Off-Balance Sheet Arrangements relate to: • payments Bell Canada will make in the future to Guarantees Amdocs Canadian Managed Services, Inc. (formerly Certen Inc.) for the development of Bell Canada’s As a regular part of our business, we enter into agree- billing system. The total amount remaining in the ments that provide for indemnifications and guaran- contract was $254 million at December 31, 2005. tees to counterparties in transactions involving business • remaining obligations of Bell Globemedia relating dispositions, sales of assets, sales of services, purchases to CRTC benefits that were owed on previous business and development of assets, securitization agreements combinations. These obligations and other long-term and operating leases. liabilities totalled $85 million at December 31, 2005. We cannot reasonably estimate the maximum • deferred satellite performance incentive payments potential amount we could be required to pay coun- and milestone payments by Telesat, totalling $111 mil- terparties because of the nature of almost all of these lion at December 31, 2005. indemnifications. As a result, we cannot determine how they could affect our future liquidity, capital The table on the previous page does not include our resources or credit risk profile. We have not made any proportionate share of CGI’s operating leases and other significant payments under these indemnifications in contractual obligations. This information is disclosed the past. See Note 26 to the consolidated financial in Note 8 to the consolidated financial statements. statements for more information. At December 31, 2005, we had other long-term liabilities that are not included in the table, including Securitization of Accounts Receivable an accrued employee benefit liability, future income tax liabilities, deferred revenue and gains on assets and Bell Canada and Aliant have agreements in place to various other long-term liabilities. provide us with an inexpensive source of funds. We did not include the accrued employee benefit Under the agreements, Bell Canada and Aliant sold liability and future income tax liabilities in the table interests in pools of accounts receivable to securitiza- because we cannot accurately determine the timing and tion trusts for a total of $1,354 million. amount of cash needed for them. This is because: The total accounts receivable that were sold must • future contributions to the pension plans depend meet minimum performance targets. These are based largely on how well they are funded. This varies based on specific delinquency, default and receivable turnover on the results of actuarial valuations that are per- ratio calculations, as well as minimum credit ratings. formed periodically and on the investment perform- If these accounts receivable go into default, the full ance of the pension fund assets. purchase price will have to be returned to the buyers.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 40 MANAGEMENT’S DISCUSSION AND ANALYSIS

These agreements are an important part of our cap- Finally, the Decision notes that the extension of the ital structure and liquidity. If we did not have them, price cap regime to May 31, 2007 will result in an we would have had to finance approximately $1,354 mil- additional annual deferral account obligation. lion by issuing debt or equity. See Note 10 to the consolidated financial statements for more information. Derivative Instruments We use derivative instruments to manage our expo- Commitment under the CRTC Deferral Mechanism sure to interest rate risk, foreign currency risk and As at December 31, 2005, we had estimated Bell changes in the price of BCE Inc. common shares that Canada’s and Aliant’s current deferral account amounts, may be issued or purchased under our compensation expressed as a future annualized commitment, at plans (SCPs and DSUs). We do not use derivative instru- $95 million for Bell Canada and $12 million for Aliant. ments for speculative purposes. Since we do not trade On February 16, 2006, the CRTC issued Telecom actively in derivative instruments, we are not exposed Decision 2006-9, where it estimated Bell Canada’s and to any significant liquidity risks relating to them. Aliant’s deferral account amounts, on an accumulated The carrying value of the outstanding derivative balance and future annualized commitment, at May instruments was a net liability of $91 million at Decem- 31, 2006. Bell Canada’s estimated accumulated balance ber 31, 2005. Their fair values amounted to a net lia- at May 31, 2006 is $480.5 million with a future annu- bility of $138 million. See Note 21 to the consolidated alized commitment of $81.5 million. Aliant’s estimated financial statements for more information. accumulated balance at May 31, 2006 is $21.8 million with a future annualized commitment of $2.2 million. Litigation In the Decision, the CRTC concluded that incumbent telephone companies should clear the accumu- We become involved in various claims and litigation lated balances in their deferral accounts, to the greatest as part of our business. While we cannot predict extent possible, in the following ways: the final outcome of claims and litigation that were • by expanding broadband services to rural and remote pending at December 31, 2005, based on information areas that are currently unserved and would not other- currently available, management believes that the wise be served resolution of these claims and litigation will not have • by improving the accessibility to telecommunications a material and negative effect on our consolidated services for persons with disabilities, using a minimum financial position or results of operations. of 5.0% of incumbent telephone companies’ accumu- You will find a more detailed description of the lated deferral account balances material claims and litigation pending at December 31, • any amounts remaining in incumbent telephone 2005 in the BCE 2005 AIF, and in Note 25 to the con- companies’ deferral accounts after accounting for these solidated financial statements. two programs will be rebated to incumbent telephone companies’ residential local customers in non-high Sources of Liquidity cost serving areas. The timing and amount of the rebate, if any, is uncertain. While we do not expect a cash shortfall in the foreseeable future, any unplanned shortfall would be covered This Decision also indicates that incumbent telephone through the financing facilities we currently have companies’ future annual deferral account obligations in place. are to be eliminated by reducing monthly prices for These financing facilities, along with our strength- primary exchange service and optional local services ening balance sheet, give us flexibility in carrying out for residential customers in non-high cost serving our plans for future growth. If necessary, we can sup- areas. Bell Canada, Aliant and certain other incum- plement our liquidity sources by issuing additional bent telephone companies are directed to file their debt or equity. We might do this to help finance busi- rate proposals by May 15, 2006 and implement them ness acquisitions or for contingencies. on June 1, 2006.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 41

The table below is a summary of our outstanding This transaction was unwound on August 18, 2005 lines of credit, bank facilities and commercial paper and was part of a tax loss consolidation strategy that programs at December 31, 2005. followed the transaction steps laid out in an advance tax ruling granted by the Canada Revenue Agency NON- COMMITTED COMMITTED TOTAL to Bell Canada and BCI. The transaction also received Commercial paper the approval of the Ontario Superior Court of Justice, credit lines (1) 1,513 2,000 3,513 which is supervising BCI’s voluntary plan of arrange- (2) Other credit facilities 916 413 1,329 ment pursuant to which BCI is monetizing its assets Total 2,429 2,413 4,842 and resolving outstanding claims against it, with the Drawn (2) 513 – 513 ultimate objective of distributing the net proceeds to Undrawn 1,916 2,413 4,329 its shareholders and dissolving the company. 3787915 Canada Inc. had the legal right and inten- (1) Current commercial paper credit lines expire during August 2008 tion to offset the demand loan payable to BCI and (2) Includes $455 million in letters of credit the investment in preferred shares of 3787923 Canada Inc. As a result, these items and the related interest BCE Inc., Bell Canada and Aliant may issue notes under expense and dividend income were presented on a net their commercial paper programs up to the amount of basis. The tax savings of $99 million resulting from their supporting committed lines of credit. The total the interest expense were presented as a reduction of amount available under these supporting committed income tax expense. lines of credit was $1.5 billion at December 31, 2005. BCI will be compensated for the use of its losses BCE Inc., Bell Canada and Aliant had $45 million in by Bell Canada through a capital contribution to be commercial paper outstanding at December 31, 2005. made by BCE Inc. of 88% of the realized tax savings. Bell Canada can issue up to $400 million Class E BCE Inc.’s ownership interest in BCI remains at 62%. notes under its commercial paper programs. These notes As a result: are not supported by committed lines of credit and may • BCE Inc.’s carrying value of its investment in BCI was be extended in certain circumstances. Bell Canada had increased to reflect the increase in BCE Inc.’s share of no Class E notes outstanding at December 31, 2005. the expected proceeds upon BCI’s eventual liquidation • a charge to other income was recorded to reflect the RELATED PARTY TRANSACTION non-controlling interest’s portion of the capital contribution to be made by BCE Inc. BCI Loss Monetization Transaction On April 15, 2005, 3787915 Canada Inc., a wholly- EVALUATION OF DISCLOSURE CONTROLS owned subsidiary of Bell Canada, acquired $17 billion AND PROCEDURES in preferred shares from 3787923 Canada Inc., a An evaluation of the effectiveness of BCE Inc.’s disclo- wholly-owned subsidiary of BCI. 3787923 Canada Inc. sure controls and procedures (as defined in the rules of used the proceeds to advance $17 billion to BCI the U.S. Securities and Exchange Commission and of through a subordinated interest-free loan. BCI then the Canadian Securities Administrators) was carried advanced $17 billion to 3787915 Canada Inc. by way out as of December 31, 2005 by BCE Inc.’s management, of a subordinated interest-bearing demand loan, the under the supervision and with the participation of funds being used to repay a daylight loan granted to BCE Inc.’s President and Chief Executive Officer (CEO) 3787915 Canada Inc. to make the initial preferred share and Chief Financial Officer (CFO). Based on that investment. The dividend rate on the preferred shares evaluation, the CEO and CFO concluded that such was equal to 5.1%, which was essentially the same as disclosure controls and procedures were adequate and the interest rate on the loan. effective and designed to ensure that material information relating to BCE Inc. and its consolidated subsidiaries would be made known to them by others within those entities.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 42 MANAGEMENT’S DISCUSSION AND ANALYSIS

Assumptions Made in the ASSUMPTIONS MADE IN THE PREPARATION Operational and Financial Assumptions Preparation of Forward- OF FORWARD-LOOKING STATEMENTS AND Subscribers and Services Looking Statements and RISKS THAT COULD AFFECT OUR BUSI- Risks that Could Affect Our NESS AND RESULTS • growth in the number of our wireless, video and Business and Results high-speed Internet subscribers as well as higher ARPU This section describes for these services are targeted in 2006 assumptions made by BCE ASSUMPTIONS MADE IN THE PREPARATION in preparing forward-looking OF FORWARD-LOOKING STATEMENTS • continued decrease in our network access services is expected in 2006, with significantly higher declines statements and general Forward-looking statements for 2006 made in BCE’s risks that could affect all in our Residential segment. 2005 annual report, including in this MD&A, are based BCE group companies and specific risks that could on a number of assumptions that we believed were Financial affect BCE Inc. and certain reasonable on the day we made the forward-looking statements. This section outlines assumptions that we other BCE group companies. • significant cost savings are targeted in 2006 as a made in addition to those set out in other sections of result of our Galileo program, including from internal A risk is the possibility this MD&A. If our assumptions turn out to be inaccu- process redesign and supply transformation that an event might happen rate, our actual results could be materially different • restructuring costs are expected to result in 2006 in the future that could from what we expect. have a negative effect on the mainly from reductions in our workforce financial condition, results • amortization expense is expected to increase in of operations or business Assumptions about the Canadian Economy 2006 as a result of an increase in our capital base, of one or more BCE group reflecting mainly the capitalization of STB and instal- • Canadian GDP growth of approximately 3% in 2006, companies. Part of managing lation costs associated with the new rental program in our business is to understand which is consistent with estimates by the Conference our video business unit, the completion in 2005 of what these potential risks Board of Canada the Alberta SuperNet and Telesat’s new Anik F1R and could be and to minimize • the business prime rate in Canada to increase slightly Anik F3 satellites them where we can. from its 2005 year-end level • total net benefit plans cost is expected to increase in Because no one can accu- • the Consumer Price Index (estimated by Statistics 2006 mainly as a result of a further reduction in the rately predict whether an Canada) to increase slightly from its 2005 year-end level. event that is only possible discount rate from 6.2% in 2005 to 5.2% in 2006 will actually happen or • Bell Canada’s capital intensity is targeted to decrease what its consequences may Market Assumptions in 2006 mainly as a result of anticipated lower spend- be, the actual effect of any ing for maintenance of our wireline and DSL networks • growth in the overall Canadian telecommunications event on our business and which is expected to be partly offset by increased results could be materially market slightly higher than GDP in 2006 investment in our key strategic priorities. different from what we • continued decrease in the residential voice telecom- currently anticipate. In addi- munications market in 2006 because more consumers tion, this description of risks are expected to use wireless, e-mail and instant messag- Assumptions about Transactions does not include all possible ing instead • BCE Inc. plans to repurchase 5.0% of its common risks, and there may be other • increase in the wireline competition in both the busi- shares under its previously announced normal course risks that we are currently ness and residential telecommunications markets in issuer bid not aware of. 2006, mainly from cable companies • we expect to complete the disposition of our remain- • growth in revenues for the Canadian wireless indus- ing interest in CGI Group Inc. try in 2006 similar to the rate of growth in 2005 • we expect to reduce our equity interest in Bell • growth in revenues for the Canadian video market in Globemedia from 68.5% to 20% as announced on 2006 2005 slightly lower than the rate of growth in December 2, 2005. The expected closing of the Bell • growth in revenues for the Canadian Internet market Globemedia transaction is subject to a number of in 2006 also slightly lower than the rate of growth approvals and closing conditions, including approval 2005 in . by the CRTC and the Competition Bureau, and other closing conditions that are customary in this type of transaction. • we expect to complete the creation of a regional telecommunications service provider in the form of an income trust.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 43

RISKS THAT COULD AFFECT ALL Economic and Market Conditions Increasing Competition BCE GROUP COMPANIES Competition affects our Our business is affected by general economic condi- pricing strategies and Bell Canada is our most important subsidiary, which tions, consumer confidence and spending, and the could reduce our revenues means our financial performance depends in large part demand for, and prices of, our products and services. and lower our profitability. on how well Bell Canada performs financially. The risks When there is a decline in economic growth and in It could also affect our that could affect Bell Canada and its subsidiaries are retail and commercial activity, there tends to be a ability to retain existing more likely to have a significant impact on our financial lower demand for our products and services. During customers and attract new condition, results of operations and business than the these periods, customers may delay buying our prod- ones. We are under con- risks that could affect other BCE group companies. ucts and services, or reduce purchases or discontinue stant pressure to keep our using them. prices and service offerings competitive. We need to Weak economic conditions could lower our profi- Strategies and Plans be able to anticipate and tability and reduce cash flows from operations. They respond quickly to the We plan to achieve our business objectives through could also negatively affect the financial condition and constant changes in our various strategies and plans. creditworthiness of our customers, which could increase businesses and markets. In 2006, we plan to continue to implement our uncertainty about our ability to collect receivables and strategy to deliver unrivalled integrated communica- potentially increase our bad debt expenses. tion services to customers across Canada in the most efficient and cost-effective manner. This strategy is Increasing Competition founded on the three key pillars referred to earlier in this MD&A under Our Strategic Priorities and is sup- We face intense competition from traditional com- ported by our four operating priorities for 2006 con- petitors, as well as from new players entering our mar- cerning service, customer retention, growth services and kets. We compete with telecommunications, media, costs, also referred to under Our Strategic Priorities. television and satellite service providers. We also Our strategic direction requires us to transform our compete with other businesses and industries includ- cost structure and the way in which we serve customers. ing cable, software and Internet companies, a variety of This means we will need to: companies that offer network services, such as providers • be responsive in adapting to these changes and make of business information systems, systems integrators any necessary shifts in employee skills. If our manage- and other companies that deal with, or have access to, ment, processes or employees are not able to adapt to customers through various communications networks. these changes, our business and financial results could We already have several domestic and foreign com- be materially and negatively affected. petitors, but the number of well resourced foreign • invest capital to implement our strategies and oper- competitors with a presence in Canada could increase ating priorities. The actual amount of capital required in the future. In recent years, the Government of and the returns from these investments could, how- Canada has reviewed the foreign ownership restric- ever, differ materially from our current expectations. tions that apply to telecommunications carriers and In addition, we may not have access to capital on to broadcasting distribution undertakings (BDUs). attractive terms when we need it. Removing or easing the limits on foreign ownership could result in foreign companies entering the Canadian Not achieving our business objectives could have a market by making acquisitions or investments. This material and negative impact on our financial perform- could result in greater access to capital for our com- ance and growth prospects. petitors or the arrival of new competitors with global scale, which would increase competitive pressure. We cannot predict what action, if any, the federal government will take as a result of these reviews. We also cannot assess how any change in foreign ownership restrictions may affect us because the government continues to consider its position on these matters.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 44 MANAGEMENT’S DISCUSSION AND ANALYSIS

Wireline and Long Distance In addition, if a large portion of the customers who stop using our voice services also cease using our other We experience significant competition in the provision services, our financial performance could be negatively of long distance service from dial-around providers, and materially affected. prepaid card providers, VoIP service providers and others, and from traditional competitors such as interexchange carriers and resellers. We also face Internet Access increasing cross-platform competition as customers We compete with cable companies and ISPs to provide replace traditional services with new technologies. For broadband and Internet access and related services. In example, our wireline business competes with VoIP, particular, cable companies have focused on increased wireless and Internet services, including chat services, bandwidth and discounted pricing on bundles to com- instant messaging and e-mail. pete against us. We are also facing increasing competitive pressure Regional electrical utilities may continue to from cable companies as a result of their now offering develop and market services that compete directly voice services over their networks. Since cable com- with Bell Canada’s Internet access and broadband panies only recently started offering voice services, it services. Developments in wireless broadband services is difficult to predict the extent and timing of any may also lead to increased competition in certain geo- resulting loss in market share that we might suffer. It graphic areas. This could materially and negatively is also difficult to predict to what degree customers affect the financial performance of our Internet access who stop using our voice services will also stop using services business. our other services such as video and Internet access. Additional competitive pressure is also emerging from other competitors such as electrical utilities. These Wireless alternative technologies, products and services are now The Canadian wireless telecommunications industry is making significant inroads in our legacy services, which also highly competitive. We compete directly with other typically represent our higher-margin business. wireless service providers that aggressively introduce, Technology substitution, and VoIP in particular, price and market their products and services. We also have reduced barriers to entry in the industry. This compete with wireline service providers. We expect has allowed competitors with far lower investments competition to intensify as new technologies, prod- in financial, marketing, personnel and technological ucts and services are developed. resources to rapidly launch new products and services and gain market share. We expect this trend to accel- erate in the future, which could materially and nega- Video tively affect our financial performance. Bell ExpressVu competes directly with another DTH Competition for contracts to supply long distance satellite television provider and with cable companies services to large business customers is very intense. across Canada. These cable companies have upgraded Customers may choose to switch to competitors that their networks, operational systems and services, offer lower prices to gain market share and are less which could improve their competitiveness. This concerned about the quality of service or impact on could materially and negatively affect the financial their margins. performance of Bell ExpressVu and Bell Canada. These competitive factors suggest that our legacy wireline accesses and long distance volumes will continue to decline in the future. Continued decline will Transforming Our Cost Structure and lead to reduced economies of scale in those businesses Containing Capital Intensity and, in turn, lower margins. Our strategy is to miti- Our strategies and operating priorities require us to gate these declines by building the business for newer transform our cost structure. Accordingly, we are inten- growth services. The margins on newer services, how- sifying the implementation of several productivity ever, will likely be less than the margins on legacy improvements and initiatives to reduce costs while services. If the legacy services decline faster than the containing our capital expenditures. Our objectives rate of growth of our newer services, our financial per- for cost reduction under our new cost structure formance could be negatively and materially affected.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 45

are aggressive compared to what we achieved in the a significant risk that current regulation could be Anticipating Technological past, and there is no assurance that these initiatives expanded to apply to newer technologies. A regula- Change and Investing will be successful in reducing costs. There will be a tory change could delay our launch of new services in New Technologies, material and negative effect on our profitability if and restrict our ability to market these services if, Products and Services we do not successfully implement these cost reduction for example, new pricing rules or marketing or We operate in markets that initiatives and productivity improvements and manage bundling restrictions are introduced, or existing ones are affected by constant technological change, evolv- capital expenditures while maintaining the quality of are extended. ing industry standards, our service. The Bell Canada companies are in the process of changing client needs, Each year between 2002 and 2005, Bell Canada moving traffic on their core circuit-based infrastruc- frequent introductions of companies had to reduce the price of certain services ture to IP technology. As part of this move, the Bell new products and services, that are subject to regulatory price caps and may be Canada companies are in the process of discontinuing and short product life required to do so again in the future. They have also certain services that are based on circuit-based infra- cycles. The investment in reduced their prices for some business data services structure. This is a necessary component of improving new technologies, products that are not regulated in order to remain competitive, capital and operating efficiencies. In some cases, this and services and the ability and may have to continue doing so in the future. could be delayed or prevented by customers or regula- to launch, on a timely Their profits will decline if they cannot reduce their tory actions. If the Bell Canada companies cannot dis- basis, such technologies, products and services are expenses at the same rate. There would be a material continue these services as planned, they will not be critical to increasing the and negative effect on our profitability if market able to achieve the efficiencies as expected. number of our subscribers factors, such as increasing competition or regulatory There is no assurance that we will be successful in and achieving our targeted actions, result in lower revenues and we cannot reduce developing, implementing and marketing new tech- financial performance. our expenses at the same rate. nologies, products, services or enhancements in a rea- Many productivity improvements and cost reduction sonable time, or that they will have a market. There Liquidity initiatives require capital expenditures to implement is also no assurance that efficiencies will increase as Our ability to meet our systems that automate or enhance our operations. expected. New products or services that use new or financial obligations and There is no assurance that these investments will evolving technologies could make our existing ones provide for planned growth be effective in delivering the planned productivity unmarketable or cause prices to fall. depends on our sources of liquidity. improvements and cost reductions. Our cash requirements Improved customer service is critical to increasing Liquidity may be affected by the risks customer retention and average revenue per user. It associated with our contin- may, however, be difficult to improve customer service In general, we finance our capital needs in four ways: gencies, off-balance sheet while significantly reducing costs. If we are unable • from cash generated by our operations or investments arrangements, derivative to achieve either of these objectives, it could have a • by borrowing from commercial banks instruments and assumptions material and negative effect on our results of operations. • through debt and equity offerings in the capital built into our business plan. markets • by selling or otherwise disposing of assets. Anticipating Technological Change and Investing in New Technologies, Products and Services Financing through equity offerings would dilute the Our success will depend in large part on how well we holdings of existing equity investors. An increased can anticipate and respond to changes in industry level of debt financing could lower our credit ratings, standards and client needs, and how quickly and increase our borrowing costs and give us less flexibil- efficiently we can introduce new products, services ity to take advantage of business opportunities. and technologies, and upgrade existing ones. Our ability to raise financing depends on our ability We may face additional financial risks as we develop to access the capital markets and the syndicated com- new products, services and technologies, and update mercial loan market. The cost of funding depends our networks to stay competitive. Newer technologies, largely on market conditions, and the outlook for our for example, may quickly become obsolete or may business and credit ratings at the time capital is raised. need more capital than expected. Development could If our credit ratings are downgraded, our cost of fund- be delayed for reasons beyond our control. Substantial ing could significantly increase. In addition, partici- investments usually need to be made before new tech- pants in the capital and syndicated commercial loan nologies prove to be commercially viable. There is also markets have internal policies limiting their ability to

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 46 MANAGEMENT’S DISCUSSION AND ANALYSIS

Litigation, Regulatory Matters invest in, or extend credit to, any single borrower or Acquisitions and dispositions may be subject to and Changes in Laws group of borrowers or to a particular industry. various conditions, such as approvals by regulators For a description of the BCE Inc. and some of its subsidiaries have entered and holders of our securities and other closing condi- principal legal proceedings into renewable credit facilities with various financial tions, and there can be no assurance that, with respect involving us, please see institutions. They include credit facilities supporting to any specific acquisition or disposition, all such Legal Proceedings We Are commercial paper programs. There is no assurance conditions will be satisfied. Involved In, in the BCE that these facilities will be renewed on favourable terms. 2005 A1F. We need significant amounts of cash to implement For a description of Litigation, Regulatory Matters and Changes in Laws certain regulatory initiatives our business plan. This includes cash for capital and proceedings affecting expenditures to provide our services, dividend pay- Pending or future litigation, regulatory initiatives or the Bell Canada companies, ments and payment of our contractual obligations, regulatory proceedings (including the increase of class please see The Regulatory including repayment of our outstanding debt. action claims) could have a material and negative Environment We Operate In, Our plan in 2006 is to generate enough cash from effect on our businesses, operating results and finan- in the BCE 2005 A1F. our operating activities to pay for capital expenditures cial condition. and dividends. We expect to pay contractual obliga- Changes in laws or regulations or in how they are Funding and Control tions maturing in 2006 from cash on hand, from cash interpreted, and the adoption of new laws or regula- of Subsidiaries generated from our operations or by issuing debt. If tions, could also materially and negatively affect us. BCE Inc. and Bell Canada are currently funding, directly actual results are different from our business plan or if This includes changes in tax laws or the adoption of or indirectly, and may in the the assumptions in our business plan change, we may new tax laws that result in higher tax rates or new future continue to fund, have to raise more funds than expected by issuing taxes. It also includes the amendments to the Securities the operating losses of some debt or equity, borrowing from banks or selling or Act of Ontario that took effect December 31, 2005. of their subsidiaries, but otherwise disposing of assets. These amendments introduced statutory civil liabil- they are under no obligation If we cannot raise the capital we need upon accept- ity for misrepresentations in continuous disclosure to continue doing so. able terms, we may have to: and failure to disclose material changes on a timely • limit our ongoing capital expenditures basis, and could result in an increase in the number • limit our investment in new businesses of securities class action claims. BCE could have to • try to raise additional capital by selling or otherwise devote considerable management time and resources disposing of assets. to responding to such securities class action claims. Any of these could have a material and negative effect on our cash flow from operations and on our Funding and Control of Subsidiaries growth prospects. If BCE Inc. or Bell Canada decides to stop funding any of its subsidiaries and that subsidiary does not have Acquisitions and Dispositions other sources of funding, this would have a material Our growth strategy includes making strategic acqui- and negative effect on the subsidiary’s results of opera- sitions and entering into joint ventures. We also from tions and financial condition and on the value of its time to time dispose of assets or all or part of certain securities. It could also have, depending on factors businesses. There is no assurance that we will find such as the size or strategic importance of the subsidiary, suitable companies to acquire or to partner with, or a material and negative effect on the results of opera- that we will have the financial resources needed to tions and financial condition of BCE Inc. or Bell Canada. complete any acquisition or to enter into any joint In addition, BCE Inc. and Bell Canada do not have venture. There could also be difficulties in integrating to remain the majority holder of, or maintain their the operations of acquired companies with our exist- current level or nature of ownership in, any subsidiary, ing operations or in operating joint ventures. unless they have agreed otherwise. An announcement There is also no assurance that we will be able to of a decision by BCE Inc. or Bell Canada to change the complete any announced dispositions or that we will nature of its investment in a subsidiary, to dispose of use the funds received as a result of such dispositions for some or all of its interest in a subsidiary, or any other any specific purpose that may be publicly anticipated. similar decision could have a material and negative effect on the subsidiary’s results of operations and financial condition and on the value of its securities.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 47

If BCE Inc. or Bell Canada stops funding a sub- There can be no assurance that if a strike occurs, it Renegotiating Labour sidiary, changes the nature of its investment or dis- would not disrupt service to Bell Canada’s customers. Agreements poses of all or part of its interest in a subsidiary, In addition, work disruptions at our service providers, Approximately 47% of our stakeholders or creditors of the subsidiary might including work slowdowns and work stoppages due to employees are represented decide to take legal action against BCE Inc. or Bell strikes, could significantly hurt our business, including by unions and are covered Canada. For example, certain members of the lending our customer relationships and results of operations. by collective agreements. syndicate of Teleglobe, a former subsidiary of BCE Inc., and other creditors of Teleglobe have launched law- Events Affecting Our Networks suits against BCE Inc. following its decision to stop funding Teleglobe. You will find a description of these Network failures could materially hurt our business, lawsuits in the BCE 2005 AIF under Legal Proceedings including our customer relationships and our operat- We Are Involved In. While we believe that these kinds ing results. Our operations depend on how well we of claims have no legal foundation, they could nega- protect our networks, equipment, applications and the tively affect the market price of BCE Inc.’s or Bell information stored in our data centres against damage Canada’s securities. BCE Inc. and Bell Canada could from fire, natural disaster, power loss, hacking, com- also have to devote considerable management time puter viruses, disabling devices, acts of war or terror- and resources to respond to such a claim. ism and other events. Our operations also depend on timely replacement and maintenance of our networks and equipment. Any of these events could cause our Pension Fund Contributions operations to be shut down indefinitely. We have not had to make regular contributions to our Our networks are connected with the networks pension funds in recent years because most of our of other telecommunications carriers, and we rely pension plans have had pension fund surpluses. on them to deliver some of our services. Any of the However, historically low interest rates combined events mentioned in the previous paragraph, as well with new actuarial standards that came into effect in as strikes or other work disruptions, bankruptcies, February 2005 have eroded the pension fund sur- technical difficulties or other events affecting the pluses. This has negatively affected our net earnings networks of these other carriers, could also hurt our and liquidity. We expect to contribute approximately business, including our customer relationships and $470 million to our defined benefit pension plans in our operating results. 2006, subject to actuarial valuations being completed. The funding status of our pension plans resulting Software and System Upgrades from future valuations of our pension plan assets and liabilities depends on a number of factors, including: Many aspects of our business, such as providing telecom- • actual returns on pension plan assets munication services and customer billing, among others, • long-term interest rates. depend to a large extent on various IT systems and These factors could require us to increase contri- software, which must be improved and upgraded reg- butions to our defined benefit pension plans in the ularly and replaced from time to time. Implementing future and therefore could have a material and nega- system and software upgrades and conversions is a tive effect on our liquidity and results of operations. very complex process, which may have several adverse consequences including billing errors and delays in customer service. Any of these events could signifi- Renegotiating Labour Agreements cantly damage our customer relationships and busi- Renegotiating collective agreements could result in ness and have a material and negative effect on our higher labour costs and work disruptions, including results of operations. work stoppages or work slowdowns. Difficulties in renegotiations or other labour unrest could significantly hurt our business, operating results and financial condition.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 48 MANAGEMENT’S DISCUSSION AND ANALYSIS

Holding Company Structure Regional Telecommunications Service Provider • the trust’s ability to quickly and efficiently introduce BCE Inc. is a holding com- new products, services and technologies and upgrade We have proposed forming a new regional telecom- pany. That means it does existing ones in response to these changes munications service provider in the form of an income not carry on any significant • the impact of pending or future litigation or regula- trust which would combine Bell Canada’s regional operations and has no major tory proceedings or changes in laws. sources of income or assets wireline operations with Aliant’s wireline operations. of its own, other than the The new income trust would also own Bell Canada’s If the trust does not meet its targets for cash distribu- interests it has in its sub- 63.4% interest in NorthernTel and Télébec. Completion tions, the value of its units could decline substantially. sidiaries, joint ventures of this transaction is subject to a number of conditions Following the closing of the proposed transaction, and significantly influenced that include, among others: companies. BCE expects to reduce its indirect interest in the trust • receiving advance income tax rulings from the Canada through a distribution of trust units to holders of Revenue Agency Stock Market Volatility BCE Inc. common shares. The distribution of trust • receiving approval from the CRTC The stock markets have units by BCE is subject to various conditions includ- • receiving an advance ruling certificate from the experienced significant ing approval by BCE Inc.’s shareholders and necessary Competition Bureau volatility over the past few court approvals. years, which has affected • receiving approvals from the appropriate securities the market price and trading commissions, regulators and stock exchanges volumes of the shares of • receiving required third party consents on satisfac- Tele sat many telecommunications tory terms companies in particular. We expect the proposed recapitalization and public • receiving required approvals from Aliant’s shareholders offering of a minority stake in Telesat to take several • receiving necessary court approvals months to complete. During this time, the rapid pace • arranging satisfactory bank financing. of change in the industry and the potential for regulatory developments and/or changes in laws may make The proposed transaction involves the integration of the proposed recapitalization and public offering less various operations previously operated independently favourable, or other transactions and opportunities and there can be no assurance that the resulting com- may emerge that for business reasons BCE Inc. considers bined operation will realize the anticipated synergies to be more attractive. Business reasons could include or that other benefits expected from the transaction the availability of financing on acceptable terms and will be realized. the condition of relevant capital markets, among others. Although our goal is to complete the proposed There is no assurance that the proposed recapitaliza- transaction without affecting our customers or future tion and public offering for Telesat will be completed customers of the trust, there can be no assurance that in its current form or at all. the proposed transaction will not result in customer service disruptions. Customer service disruptions may have a negative effect on our operations and financial RISKS THAT COULD AFFECT BCE INC. results, and those of the trust in particular. Although we expect the trust to make regular cash Holding Company Structure distributions to unitholders, these are not assured and BCE Inc.’s cash flow and its ability to service its debt may be reduced or suspended. The ability of the trust and to pay dividends on its shares depend on dividends to maintain cash distributions will be subject to cer- or other distributions it receives from its subsidiaries, tain risks associated with its business and operations, joint ventures and significantly influenced companies including risks relating to: and, in particular, from Bell Canada. BCE Inc.’s sub- • general economic conditions sidiaries, joint ventures and significantly influenced • increasing competition companies are separate legal entities and they have no • changes in technology, industry standards and client legal obligation to pay dividends or make other distri- needs butions to BCE Inc.

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Stock Market Volatility Incumbent telephone companies have been directed to Decisions of file their proposals related to the above by June 30, Regulatory Agencies Differences between BCE Inc.’s actual or anticipated 2006. Any amounts remaining in incumbent tele- The business of the Bell financial results and the published expectations of phone companies’ deferral accounts after accounting Canada companies is affected financial analysts may also contribute to volatility in for these two programs will be rebated to incumbent by decisions made by various BCE Inc.’s common shares. A major decline in the telephone companies’ residential local customers in regulatory agencies, includ- capital markets in general, or an adjustment in the ing the CRTC. For example, non-high cost serving areas. market price or trading volumes of BCE Inc.’s com- many of the decisions of There is a risk that Bell Canada’s and Aliant’s pro- mon shares or other securities, may materially and the CRTC indicate that they posed implementation timeframes may be accelerated, negatively affect our ability to raise capital, issue debt, try to balance requests which could have a material and negative effect on retain employees, make strategic acquisitions or enter from competitors for access their results of operations. to facilities, such as the into joint ventures. telecommunications networks, switching and trans- Competitor Digital Network Service RISKS THAT COULD AFFECT CERTAIN mission facilities, and other BCE GROUP COMPANIES The CRTC determined that CDN services should network infrastructure of include not only digital network access components incumbent telephone companies, with the rights of the Bell Canada Companies but also intra-exchange facilities, inter-exchange facili- incumbent telephone com- ties in certain metropolitan areas, and channelization Changes to Wireline Regulation panies to compete reasonably and co-location links (expanded CDN services). This freely. There is a risk that Decisions of Regulatory Agencies decision affected Bell Canada and Aliant as providers decisions of the CRTC, and of CDN services in their own operating territories and in particular the decisions Second Price Cap Decision as purchasers of those services elsewhere in Canada. relating to prices at which we In May 2002, the CRTC issued decisions relating to new There are two important financial aspects to note in must provide such access, price cap rules that govern incumbent telephone com- this decision: may have a negative effect on our business and results of panies for the four-year period starting in June 2002. • the prices for all CDN services were applied on a operations. Decisions of, and The CRTC also established the deferral account, an going-forward basis, as of the date of the decision, and proceedings involving, Bell Canada will be compensated from the deferral obligation that changes as amounts are added to the regulatory agencies includ- account, or the CRTC approves initiatives that serve to account for the revenue losses from this decision ing the CRTC are described reduce the account. • Bell Canada will also be compensated through the in more detail in the section The accumulated deferral account balance in Bell deferral account for applying reduced rates retroac- entitled The Regulatory Canada’s and Aliant’s deferral accounts at the end of tively for the CDN access components that were tariffed Environment We Operate In of May 31, 2006 is estimated at $480.5 million for Bell at interim rates prior to the decision. the BCE 2005 AIF. Canada and $21.8 million for Aliant, while the future Competitor Digital annualized recurring deferral account obligation as of Retail Quality of Service Indicators the same date is estimated at $81.5 million for Bell Network Service On February 3, 2005, the Canada and $2.2 million for Aliant. On March 24, 2005, the CRTC released Telecom CRTC released Telecom On February 16, 2006, the CRTC issued Telecom Decision 2005-17 which, among other things, estab- Decision 2005-6 on CDN Decision 2006-9, where it concluded that incumbent lished the rate adjustment plan to be applied when services. This decision set telephone companies should clear the accumulated incumbent telephone companies do not meet man- the rates, terms and con- balances in their deferral accounts, to the greatest dated standards of quality of service provided to their ditions for the provision extent possible, in the following ways: retail customers. As a result of this decision, incum- of digital network services • by expanding broadband services to rural and remote bent telephone companies are subject to a penalty by Bell Canada and the other areas that are currently unserved and would not other- mechanism when they do not meet one or more incumbent telephone com- wise be served service standards for their retail services. For Bell panies to their competitors. • by improving the accessibility to telecommunica- Canada, this maximum potential penalty amount tions services for persons with disabilities, using a equates to approximately $245 million annually, based minimum of 5.0% of incumbent telephone companies’ on 2004 revenues. deferral account balances.

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In the current penalty period of January 1 to companies cannot attempt to directly contact a former December 31, 2005, the CRTC standard for several residential local service customer for a period of indicators was not met on an annual average basis 12 months from the time the customer decides to buy because of the strike in 2005 by the Communications, traditional local telephone service or VoIP service from Energy and Paperworkers’ Union of Canada at Bell a competitor. Other restrictions on promotions and Canada’s supplier of installation and repair services, bundling that apply to traditional local wireline serv- Bell Technical Solutions Inc. (formerly Entourage ices also apply to VoIP. These regulatory requirements Technology Solutions Inc.). Bell Canada has requested could reduce Bell Canada’s and Aliant’s flexibility to that the CRTC approve its December 5, 2005 applica- compete with both traditional and new competitors, tion for the purpose of excluding below-standard which could have a material and negative effect on our strike-related results as a force majeure type exclusion. business and results of operations. However, there is no assurance that the CRTC will Also as a result of Telecom Decision 2005-28, issue a favourable decision and Bell Canada may be incumbent telephone companies as well as competi- required to pay a penalty of up to $19 million. tive local exchange carriers will have to fulfill, in rela- The CRTC determined that Aliant did not meet tion to VoIP services, other requirements that apply to certain service standards during the period of January 1 traditional telephone services, such as: to December 31, 2004. Applying the rate adjustment • allowing customers to keep their local number when plan would result in an estimated penalty of $3 mil- they change service providers within the same local lion. Aliant has applied to the CRTC for an exclusion area (local number portability) from having to pay a penalty due to its labour disrup- • allowing customers to use any long distance provider tion in 2004, as allowed for in the decision. The CRTC of their choice has not yet ruled on this application. Regarding the • listing telephone numbers in the directory associated penalty period of January 1 to December 31, 2005, the with the local telephone number chosen by the customer CRTC standard for two indicators was missed on an • offering services for the hearing impaired annual average basis, resulting in a possible penalty of • implementing safeguards to protect customer privacy. approximately $2 million. These regulatory requirements could increase operational costs and reduce Bell Canada’s and Aliant’s Decision of VoIP Regulation flexibility to compete with resellers, and could there- On May 12, 2005, the CRTC released Telecom Decision fore have a negative effect on our business and results 2005-28, which determined the way the CRTC will reg- of operations. Bell Canada and several other parties ulate VoIP services. The CRTC determined that VoIP have petitioned the Governor in Council to overturn services (other than peer-to-peer services, defined in the CRTC’s decision. the decision as Internet Protocol communications In 2005, Bell Canada introduced three retail VoIP services between two computers) provided by Bell services in Québec and Ontario. These services are Canada and other incumbent telephone companies offered pursuant to tariffs that have received interim will be regulated in the same way as traditional tele- approval from the CRTC. CRTC public processes relat- phone services. ing to these filings were held in 2005 and decisions on As a result of this decision, VoIP services that use final approval of the tariffs are expected in March telephone numbers that conform to the North American 2006.The CRTC has, on an interim basis, permitted numbering plan, and that provide universal access to Bell Canada to file VoIP tariff notices for the CRTC’s and/or from the public switched telephone network approval, on a confidential basis, which provide for will, for incumbent telephone companies, be treated minimum and maximum rates associated with each as regulated local exchange services. Accordingly, tariffs proposed VoIP service plan. Once the minimum and have to be filed by incumbent telephone companies, maximum rates are approved, for all future price but not by their competitors, when they provide changes within that range, Bell Canada can issue new customers with local VoIP services using a telephone tariff pages on their effective date. No additional number associated with that incumbent telephone CRTC approvals are required for price changes within company’s territory. In addition, the winback rules the ranges. The CRTC has also, on an interim basis, will apply, which means that incumbent telephone permitted Bell Canada to price its Bell Digital Voice

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service differently on a province-wide basis in Ontario Bell Canada Proposals to Telecom Policy Review Panel Application to Change and Québec. A final decision from the CRTC regard- Bundling Rules On April 11, 2005, the Minister of Industry announced ing these tariff notices could result in a different out- CSAs are arrangements the creation of the Telecom Policy Review Panel (Panel) come, and could therefore have a negative effect on tailored to a particular to review Canada’s telecommunications policy and our business and results of operations. customer’s needs for the regulatory framework, and make recommendations. purpose of customizing The Government of Canada had asked the Panel to the offering in terms Forbearance from Regulation of Local Exchange Services deliver a final report by the end of 2005 but the report of rate structure and levels. has been delayed and it is not clear when it will be The CRTC conducted a public proceeding in 2005 on a released to the public. Access to Bell Canada framework for forbearance from the regulation of resi- Loops for Competitor Local On August 15, 2005, Bell Canada submitted its dential and business local exchange services offered by Exchange Carriers’ Customers recommendations to the Panel including a proposal the incumbent telephone companies. The CRTC plans Served Via Remotes for the adoption of a comprehensive ‘next generation’ to issue a decision with respect to this matter in Unbundled loops are trans- regulatory framework that relies on market forces to March 2006. Bell Canada’s and the other incumbent mission paths between the maximum extent possible to ensure the telecom- telephone companies’ flexibility to compete could be the users’ premises and munications industry’s continued role as a key enabler the central office that are adversely affected in the event that the CRTC, in its of Canada’s overall economic performance. provided separately from decision, establishes onerous conditions to be satisfied There can be no guarantee that the Panel will adopt other components. in order for the incumbent telephone companies to any or all of Bell Canada’s proposals, or that the obtain regulatory forbearance of residential and busi- Minister of Industry and Parliament would imple- ness local exchange services. ment the Panel’s recommendations regardless of its adoption of Bell Canada’s proposals. Price Floor Safeguards for Retail Services A number of groups have intervened to the Panel, opposing the regulatory reforms suggested by Bell On April 29, 2005, the CRTC issued its decision on Canada and advocating different reforms including price floor safeguards and related issues. A price floor significantly expanding the scope of wholesale regula- safeguard is the minimum price that an incumbent tion of Bell Canada’s and other incumbent telephone telephone company can charge for regulated services. companies’ facilities. There is a risk that the Panel In its decision, the CRTC made changes which, in could follow those recommendations and propose that some circumstances, may result in future higher price they be adopted by the Minister of Industry and floors for new services and bundles that could nega- Parliament. Implementation of the recommendations tively limit Bell Canada’s ability to compete. and proposals of opposing parties could have a material and negative effect on the Bell Canada companies. Application to Change Bundling Rules On September 2, 2005, Bell Canada applied to the Access to Bell Canada Loops for Competitor Local CRTC to modify the bundling rules that apply to Exchange Carriers’ Customers Served Via Remotes customer-specific arrangements (CSAs). On September 2, 2005, Rogers Telecom Inc. (Rogers) The CRTC currently requires any CSA that includes submitted an application requesting that the CRTC both tariffed and non-tariffed services (Mixed CSAs) to direct Bell Canada to make unbundled loops available be filed for approval with the CRTC before it can be to competitors in a timely manner in certain specified provided to customers. Bell Canada’s proposal would areas where Rogers is present. On October 3, 2005, exempt a Mixed CSA from the bundling rules and Bell Canada responded to Rogers’ application and associated tariff requirements if: explained the reasons why in some areas where com- • total revenue from the CSA is higher than the price petitors are present and the competitors’ potential end of the tariffed components of the CSA customer is served via a Bell Canada remote, unbun- • the CSA is not part of a practice designed to circum- dled loops should not have to be provided unless Bell vent tariffs. Canada is compensated by competitors for the costs it incurs on their behalf. Bell Canada’s flexibility to compete may continue to be encumbered if the proposal is not approved.

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Wireless Number Portability The cost to equip Bell Canada’s network in order resolve these concerns. It is not possible to predict at The Government of to provide unbundled loops to competitors in loca- this time if or when the final policy will be issued. If Canada in its 2005 Budget tions where a potential competitor’s end customer is the final policy requires more municipal or public announced that it intended currently served via a Bell Canada remote could be consultation in the approval process, there is a risk to ask the CRTC to imple- significant should the CRTC grant Rogers’ request. It that it could significantly slow the expansion of wire- ment wireless number is anticipated that the CRTC will institute a further less networks in Canada. This could have a material portability. Number portability enables customers to process to examine this matter prior to rendering and negative effect on the operations of the Bell retain the same phone a decision. Canada companies. number when changing service provider within the Wireless Number Portability Revenue from Major Customers same local serving area. On December 20, 2005, the CRTC released Telecom A significant amount of revenue earned by Bell Canada’s Licences and Changes to Decision 2005-72. Among other things, the decision Enterprise unit comes from a small number of major Wireless Regulation directed Bell Mobility, Rogers Wireless and TELUS customers. If we lose contracts with any of these major Companies must have a Mobility to implement wireless number portability in customers and cannot replace them, it could have a spectrum licence to operate Alberta, British Columbia, Ontario and Québec by material and negative effect on our financial results. cellular, PCS and other March 14, 2007. This accelerated timeframe will be radio-telecommunications challenging for Bell Mobility and the rest of the wire- systems in Canada. The Competition Bureau’s Investigation less industry to meet. On February 6, 2006, the CRTC Minister of Industry awards Concerning System Access Fees spectrum licences, through issued Telecom Public Notice 2006-3, Regulatory issues a variety of methods, at related to the implementation of wireless number portability, On December 9, 2004, Bell Canada was notified by his or her discretion under a proceeding that will address a wide range of issues the Competition Bureau that the Commissioner of the Radiocommunication Act. associated with the implementation. Competition had initiated an inquiry under the misleading advertising provisions of the Competition Act concerning Bell Mobility’s description or representa- Licences and Changes to Wireless Regulation tion of system access fees (SAFs) and was served with a While we expect that the licences under which the court order, under section 11 of the Competition Act, Bell Canada companies provide cellular and PCS services compelling Bell Mobility to produce certain records will be renewed at term, there is no assurance that this and other information that would be relevant to the will happen. Industry Canada can revoke a company’s Competition Bureau’s investigation. Bell Canada licence at any time if the company does not comply has complied with the court order and provided the with the licence’s conditions. While we believe that we requested information. comply with the conditions of our licences, there is no Bell Mobility charges monthly SAFs to its cellular assurance that Industry Canada will agree. Should subscribers to help it recover certain costs associated there be a disagreement, this could have a material with its mobile communications network. These costs and negative effect on the Bell Canada companies. include maintenance costs, the cost of installing new In February 2005, Industry Canada released a equipment and retrofitting new technologies, and report concerning its procedures for approving and fees for spectrum licences. These costs also include placing wireless and radio towers in Canada, including the recovery of the contribution tax the CRTC charges the role of municipal authorities in the approval to support telephone services in rural and remote areas process. Among other things, the report recommends of Canada. that the authority to regulate the siting of antennae Bell Mobility may be subject to financial penalties and supporting structures remain exclusively with the by way of fines, administrative monetary penalties Government of Canada. In August 2005, Industry and/or demands for restitution of a portion of the SAFs Canada presented a revised draft policy for comment. charged to cellular subscribers if it is found to have The wireless and broadcasting industries both have contravened the misleading advertising provisions of a number of concerns with the draft policy and are the Competition Act. now working with Industry Canada to attempt to

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Potential Legislation Restricting licence was renewed in March 2004 and expires on Bell ExpressVu In-Vehicle Use of Cellphones August 31, 2010. While we expect this licence will Bell ExpressVu currently be renewed at term, there is no assurance that this uses four satellites, Some studies suggest that using cellphones while will happen. Nimiq 1, Nimiq 2, Nimiq 3 driving may result in more motor vehicle collisions. It Bell ExpressVu continues to face competition from and Nimiq 4-Interim, for is possible that this could lead to new regulations or its video services. unregulated U.S. DTH satellite television services that legislation banning the use of handheld cellphones Nimiq 4-Interim became are sold illegally in Canada. In response, it is partici- while driving, as it has in Newfoundland and Labrador operational at the end of pating in legal actions that are challenging the sale of and in several U.S. states, or other restrictions on in- February 2006. Telesat, a U.S. DTH satellite television equipment in Canada. vehicle use of wireless devices. If any of these happen, wholly-owned subsidiary This competition could have a material and adverse of BCE Inc., operates or cellphone use in vehicles may decline, which may nega- impact on Bell ExpressVu’s business. directs the operation of tively affect the business of the Bell Canada companies. Bell ExpressVu faces a loss of revenue resulting these satellites. from the theft of its services. Bell ExpressVu intro- Please see Risks that Health Concerns About Radio Frequency Emissions duced a smart card swap for its authorized digital Could Affect Certain receivers that is designed to block unauthorized BCE Group Companies – It has been suggested that some radio frequency emis- Telesat for more information reception of Bell ExpressVu’s signals. As with any sions from cellphones may be linked to certain medical on the risks relating to technology-based security system, it is not possible to conditions. Interest groups have also requested inves- Telesat’s satellites. eliminate with absolute certainty a compromise of tigations into claims that digital transmissions from that security system. As is the case for all other pay handsets used with digital wireless technologies pose television providers, Bell ExpressVu has experienced, health concerns and cause interference with hearing and continues to experience, ongoing efforts to steal aids and other medical devices. This could lead to addi- its services by way of compromise of Bell ExpressVu’s tional government regulation, which could have a signal security systems. material and negative effect on the business of the Bell On October 28, 2004, the Court of Québec ruled in Canada companies. In addition, actual or perceived R. v. D’Argy and Theriault (D’Argy Case) that the health risks of wireless communications devices could provisions in the Radiocommunication Act making result in fewer new network subscribers, lower net- it a criminal offence to manufacture, offer for sale work usage per subscriber, higher churn rates, product or sell any device used to decode an encrypted sub- liability lawsuits or less outside financing being avail- scription signal relating to the unauthorized reception able to the wireless communications industry. Any of of satellite signals violate the freedom of expression these would have a negative effect on the business of rights enshrined in the Charter. On March 31, 2005, the Bell Canada companies. the Québec Superior Court overruled the Court of Québec’s decision in the D’Argy Case and upheld the Bell ExpressVu constitutional validity of those provisions in the Radiocommunication Act. The defendants in the D’Argy Satellites are subject to significant risks. Any loss, fail- Case have been granted leave to appeal the ruling ure, manufacturing defects, damage or destruction of of the Québec Superior Court to the Québec Court these satellites, of Bell ExpressVu’s terrestrial broad- of Appeal. It remains a criminal offence throughout casting infrastructure, or of Telesat’s tracking, teleme- Canada to manufacture, offer for sale or sell any device try and control facilities to operate the satellites, could used to engage in the unauthorized reception of satel- have a material and negative effect on Bell ExpressVu’s lite signals. If the ruling of the Québec Superior Court results of operations and financial condition. is overruled by the Québec Court of Appeal and Bell ExpressVu is subject to programming and car- Parliament does not enact new provisions criminaliz- riage requirements under CRTC regulations. Changes ing the unauthorized reception of satellite signals, Bell to the regulations that govern broadcasting could ExpressVu may face increasing loss of revenue from negatively affect Bell ExpressVu’s competitive position the unauthorized reception of satellite signals. or the cost of providing its services. Bell ExpressVu’s DTH satellite television distribution undertaking

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Operational Risks Due Bell Globemedia and Mail’s print operations. In addition, total circula- to Various Types of tion and readership of Canadian newspapers have Dependence on Advertising Potential Anomalies continued to decline. There is increasing pressure on Satellites utilize highly A large part of Bell Globemedia’s revenue from its tele- print profit margins resulting from more competition complex technology and vision and print businesses comes from advertising in print advertising rates and higher costs of operation. operate in the harsh revenues. Bell Globemedia’s advertising revenues are environment of space and affected by competitive pressures, including its ability therefore are subject to Broadcast Licences and CRTC Decisions significant operational to attract and retain viewers and readers. In addition, risks while in orbit. The the amount advertisers spend is directly related to eco- Each of CTV’s conventional and specialty services risks include in-orbit nomic growth. An economic downturn tends to make operates under licences issued by the CRTC for a fixed equipment failures, mal- it more difficult for Bell Globemedia to maintain or term of up to seven years. These licences are subject to functions and other kinds increase revenues. Advertisers have historically been the requirements of the Broadcasting Act, the policies of problems commonly sensitive to general economic cycles and, as a result, and decisions of the CRTC, and the conditions of each referred to as anomalies. Bell Globemedia’s business, financial condition and licensing or renewal decision, all of which may change. results of operations could be materially and nega- While these are expected to be renewed at the appro- tively affected by a downturn in the economy. In addi- priate times, there can be no assurance that any or tion, most of Bell Globemedia’s advertising contracts all of CTV’s licences will be renewed. Any renewals, are short-term and the advertiser can cancel them on changes or amendments to licences and any decisions short notice. by the CRTC from time to time that affect the industry as a whole or CTV in particular may have a material and negative effect on Bell Globemedia. Increasing Fragmentation in Television Markets

Television advertising revenue largely depends on Tele sat the number of viewers and the attractiveness of programming in a given market. The viewing market has Satellite Industry Risks become increasingly fragmented over the past decade Operational Risks Due to Various Types and this trend is expected to continue as new services of Potential Anomalies and technologies increase the choices available to consumers. As a result, there is no assurance that Bell Any single anomaly or series of anomalies could mate- Globemedia will be able to maintain or increase its rially and adversely affect Telesat’s operations, rev- advertising revenues or its ability to reach or retain enues, relationship with current customers and the viewers with attractive programming. ability to attract new customers for satellite services. The occurrence of anomalies may also adversely affect Telesat’s ability to insure the satellites at commercially Revenues from Distributing Television Services reasonable premiums, if at all. A significant portion of revenues from CTV’s specialty television operations comes from contractual arrange- Launch Failures ments with distributors who are mainly cable and DTH operators. Competition has increased in the specialty Satellites are subject to certain risks related to failed television market. As a result, there is no assurance launches. Launch failures result in significant delays in that contracts with distributors will be renewed on the deployment of satellites because of the need to equally favourable terms. construct replacement satellites and to obtain other launch opportunities. Such significant delays could materially and adversely affect operations and rev- Increased Competition for Fewer Print Customers enues. Should Telesat not be able to obtain launch Print advertising revenue largely depends on circula- insurance on reasonable terms and a launch failure tion and readership. The existence of a competing were to occur, Telesat would have to directly suffer the newspaper and commuter papers in Toronto and other loss of the cost of the satellite and related costs. major markets has increased competition for The Globe

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Construction and Launch Delays degrades as predicted by the manufacturer. In December Market for Satellite Insurance 2005, Telesat entered into early settlement agreements The price, terms and The construction and launch of satellites are subject to with certain insurance underwriters, and as a result availability of insurance certain delays which can adversely affect Telesat’s received US$26.2 million. A balance of US$20.1 million have fluctuated over time. operations. Delays in the commencement of service is expected to be received in 2007 if the power level on Insurance availability could enable customers who pre-purchased transpon- can be affected by recent Anik F1 degrades as predicted. In the event that the der capacity to terminate their contracts and could satellite failures and power level on Anik F1 is better than predicted, the affect plans to replace an in-orbit satellite prior to the general conditions in the amount of the payment(s) will be adjusted by apply- end of its useful life. The failure to implement a satel- insurance industry. ing a formula which is included in the settlement lite deployment plan on schedule could have a mate- documentation and could result in either a pro-rated rial and adverse effect on Telesat’s financial condition payment to Telesat of the additional US$20.1 million and results of operations. or a pro-rated repayment of up to a maximum of US$14.9 million to be made by Telesat to the insurers. Market for Satellite Insurance Currently, power levels are continuing to degrade as predicted. Launch and in-orbit policies on satellites may not In December 2005, Telesat placed launch and in- continue to be available on commercially reason- orbit insurance coverage, covering the launch and first able terms or at all. In addition to higher premiums, year of in-orbit life, for the approximate book value of insurance policies may provide for higher deduct- Anik F3. Anik F3 is expected to be available for ser- ibles, shorter coverage periods, higher loss percentages vice in the third quarter of 2006. required for constructive total loss claims and addi- Telesat has signed contracts with EADS Astrium, tional satellite health-related policy exclusions. SAS, a European satellite manufacturer, for construc- An uninsured failure of one or more satellites could tion of the Nimiq 4 satellite. As the construction con- have a material and adverse effect on Telesat’s financial tract for Nimiq 4 was recently signed and the satellite condition and results of operations. In addition, higher is not to be launched until 2008, Telesat has not initi- premiums on insurance policies increase costs, thereby ated discussions for the placement of insurance. reducing earnings from operations by the amount of such increased premiums. With respect to in-orbit satellites, Nimiq 1 is Ground Operations Infrastructure Failures insured until the second quarter of 2006 for approxi- Telesat operates primary and back-up satellite opera- mately its book value. Anik F1R is insured for approx- tions centres. Failures could be experienced in the imately its book value until the third quarter of 2006. necessary equipment at the primary centre, at the Anik F2 is insured for approximately two thirds of its back-up facility, or in the communication links book value until the third quarter of 2007. In the between these facilities and remote teleport facilities. event of a total failure of the Anik F2 satellite, the A failure or error affecting tracking, telemetry and after-tax accounting loss is estimated at $105 million control operations might lead to a breakdown in the to $110 million. ability to communicate with one or more satellites or In 2004, Telesat ceased to insure its interest in the cause the transmission of incorrect instructions to the residual value of Nimiq 2 following the arrival in affected satellite(s), which could lead to a temporary or orbit of the leased satellite Nimiq 3. permanent degradation in satellite performance or to In 2001, the manufacturer of the Anik F1 satellite the loss of one or more satellites. advised Telesat of a gradual decline in power on the satellite. Telesat had insurance in place to cover the power loss on Anik F1 and filed a claim with its insur- Business Risks and Competition ers. Telesat and its insurers reached a final settlement Telesat’s primary business activities (broadcast, busi- agreement which included an initial payment to Telesat ness networks and carrier services) have been largely of US$136.2 million, which has already been received, dedicated to the Canadian domestic market. This mar- and originally called for an additional payment of ket is characterized by increasing competition and US$49.1 million in 2007 if the power level on Anik F1

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 56 MANAGEMENT’S DISCUSSION AND ANALYSIS

Government Regulations rapid technological development. Telesat competes satellites. In addition, Telesat may not continue to Telesat is subject to the with U.S.-based operators who may have greater coordinate the satellites successfully under procedures regulatory authority of financial resources than Telesat and, together with Ciel of the International Telecommunications Union. the Canadian government, Satellite Group, who received provisional authority The CRTC regulates Telesat’s radio frequency chan- primarily the CRTC and from Industry Canada to operate a broadcast satellite, nel service rates based on certain price ceilings. While Industry Canada, and the could capture a larger market share than that cur- the price ceiling levels were established based on pre- national communications rently anticipated by Telesat. vailing market conditions and are above current rates authorities of the countries in which it operates. Provision of services into the United States and for certain of Telesat’s existing satellite services, there Latin American markets is subject to certain risks can be no assurance that these ceilings will be appro- Our Accounting Policies such as changes in foreign government regulations priate for services offered on any future satellites oper- This section discusses key and telecommunication standards, licencing require- ated by Telesat in Canada. estimates and assumptions ments, tariffs, taxes and other matters. Latin American In 1999, the U.S. State Department published amend- that management has operations are also subject to risks associated with eco- ments to the International Traffic in Arms Regulations made and how they affect nomic and social instability, regulatory and licencing which included satellites on the list of items requiring the amounts reported in restrictions, exchange controls and significant fluctua- export permits. These provisions have constrained the financial statements and tions in the value of foreign currencies. Telesat’s access to technical information and have notes. It also describes the Revenues from two customers represent approxi- had a negative impact on Telesat’s international con- key changes in accounting standards and our account- mately 34% of Telesat’s total revenues. Telesat may sulting revenues. ing policies, and how have difficulty in replacing these customers should their satellite usage decrease. they affect our financial OUR ACCOUNTING POLICIES statements. Finally, the sale or lease of Ka-band capacity, which We have prepared our permits Telesat to provide broadband Internet access CRITICAL ACCOUNTING ESTIMATES consolidated financial state- via satellite to markets that Telesat has not previously ments according to Canadian served, represents a new area of business and may or Under Canadian GAAP, we are required to make GAAP. See Note 1 to the may not be adopted as Telesat expects. estimates when we account for and report assets, consolidated financial state- liabilities, revenues and expenses, and to disclose con- ments for more information tingent assets and liabilities in our financial statements. about the accounting prin- Foreign Exchange Risk ciples we used to prepare We are also required to continually evaluate the esti- our financial statements. A substantial portion of Telesat’s capital expenditures mates that we use. and other expenses are in U.S. dollars. However, the We base our estimates on past experience and on currency of revenues and earnings that may be received other factors that we believe are reasonable under the from satellite infrastructure investments is subject to circumstances. Because this involves varying degrees individual customer contractual arrangements. As a of judgment and uncertainty, the amounts currently result Telesat may become exposed to foreign exchange reported in the financial statements could, in the differences between the infrastructure investments and future, prove to be inaccurate. the resulting revenues and earnings. We consider the estimates described in this section to be an important part of understanding our financial statements because they rely heavily on management’s Government Regulations judgment and are based on factors that are highly There could be material and adverse effects on Telesat’s uncertain. business should Telesat not obtain all of the required Our senior management has discussed the develop- regulatory approvals for the construction, the launch ment and selection of the critical accounting estimates and operation of any of its future satellites, or for the described in this section with the audit committee orbital slots planned for these satellites, or if the of the board of directors. The audit committee has licences obtained impose operational restrictions, or reviewed these critical accounting estimates. permit interference which could affect the use of its

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 57

Employee Benefit Plans Although there is no immediate impact on our Employee Benefit Plans balance sheet, a lower discount rate results in a higher We maintain defined benefit We perform a valuation at least every three years accrued benefit obligation and a lower pension sur- plans that provide pension, to determine the actuarial present value of the accrued plus. This means that we may have to increase any cash other retirement and post- pension and other retirement benefits. The valuation contributions to the plan. employment benefits for uses management’s assumptions for the discount some of our employees. rate, expected long-term rate of return on plan assets, The amounts reported in rate of compensation increase, health-care cost trends Expected Long-Term Rate of Return the financial statements and expected average remaining years of service relating to these benefits are The expected long-term rate of return is a weighted determined using actuarial of employees. average of our forward-looking view of long-term calculations that are based While we believe that these assumptions are rea- returns on each of the major plan asset categories in on several assumptions. sonable, differences in actual results or changes in our funds. assumptions could materially affect employee benefit We determine the appropriate expected long-term Discount Rate obligations and future net benefit plans cost. rate of return at the end of every year. We assumed an The discount rate is the We account for differences between actual and expected long-term rate of return on plan assets of interest rate used to determine the present value of assumed results by recognizing differences in benefit 7.5% in 2005, which is the same as in 2004. The table the future cash flows that obligations and plan performance over the working below shows the impact on the net benefit plans cost we expect will be needed lives of the employees who benefit from the plans. for 2006 and the accrued benefit asset at December 31, The two most significant assumptions used to to settle employee benefit 2006 of a 0.5% increase and a 0.5% decrease in the obligations. It is based on calculate the net employee benefit plans cost are the expected rate of return on plan assets. the yield on long-term high- discount rate and the expected long-term rate of return quality corporate fixed on plan assets. Each of our operating segments is af- IMPACT ON income investments, with ACCRUED fected by these assumptions. IMPACT ON BENEFIT maturities matching the NET BENEFIT ASSETS AT PLANS COST DECEMBER 31, estimated cash flows from FOR 2006 2006 the plan. Discount Rate Expected rate of return increased to 8.0% We determine the appropriate discount rate at the end Residential (22) 22 of every year. Our discount rate was 5.2% at Decem- Business (21) 21 ber 31, 2005, a decrease from 6.2% at December 31, Aliant (16) 16 2004. The table below shows the impact on the net Other Bell Canada (6) 6 benefit plans cost for 2006 and the accrued benefit Other BCE (3) 3 assets at December 31, 2006 of a 0.5% increase and a Total (68) 68 0.5% decrease in the discount rate. Expected rate of return decreased to 7.0% IMPACT ON ACCRUED Residential 22 (22) IMPACT ON BENEFIT NET BENEFIT ASSETS AT Business 21 (21) PLANS COST DECEMBER 31, FOR 2006 2006 Aliant 16 (16) Discount rate increased to 5.7% Other Bell Canada 6 (6) Residential (33) 33 Other BCE 3 (3) Business (33) 33 Total 68 (68) Aliant (24) 24 Other Bell Canada (10) 10 Although there is no immediate impact on our bal- Other BCE (6) 6 ance sheet, poor fund performance results in a lower Total (106) 106 fair value of plan assets and a lower pension surplus. This means that we may have to increase any cash Discount rate decreased to 4.7% contributions to the plan. Residential 33 (33) Business 33 (33) Aliant 24 (24) Other Bell Canada 10 (10) Other BCE 6 (6) Total 106 (106)

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 58 MANAGEMENT’S DISCUSSION AND ANALYSIS

Goodwill Impairment Goodwill Impairment None of our operating segments had any significant We assess the value of good- provisions relating to pending litigation, regulatory We generally measure for impairment using a pro- will of all reporting units initiatives or regulatory proceedings at December 31, jected discounted cash flow method and confirm within each of our operating 2005. We have not made any significant changes to our assessment using other valuation methods. If the segments every year and our estimates in the past two years. when events or changes in asset’s carrying value is more than its fair value, we circumstances indicate that record the difference as a reduction in the amount of it might be impaired. goodwill on the balance sheet and an impairment Income Taxes charge in the statement of operations. Management believes that it has adequately provided Contingencies We make a number of significant estimates when for income taxes based on all of the information that is We become involved in calculating fair value using a projected discounted various litigation and regu- currently available. The calculation of income taxes in cash flow method. These estimates include the assumed latory matters as part of many cases, however, requires significant judgment in growth rates for future cash flows, the number of years our business. Each of our interpreting tax rules and regulations, which are con- used in the cash flow model, the discount rate and operating segments may be stantly changing. Each of our operating segments may many others. affected. Pending litiga- be affected. We believe that all of our estimates are reasonable. tion, regulatory initiatives Our tax filings are also subject to audits, which or regulatory proceedings They are consistent with our internal planning and could materially change the amount of current and represent potential financial reflect our best estimates, but they have inherent uncer- future income tax assets and liabilities. Any change loss to our business. tainties that management may not be able to control. would be recorded as a charge or a credit to income Any changes in any of the estimates used could tax expense. Any cash payment or receipt would be have a material impact on the calculation of the fair included in cash from operating activities. value and resulting impairment charge. As a result, we There were no significant changes to the estimates are unable to reasonably quantify the changes in our we made in the past two years. overall financial performance if we had used different assumptions. We cannot predict whether an event that triggers RECENT CHANGES TO impairment will occur, when it will occur or how it ACCOUNTING STANDARDS will affect the asset values we have reported. The CICA issued revisions to section 3860 of the There were no impairment charges recorded in CICA Handbook, Financial Instruments – Disclosure and 2005 or 2004. Presentation. The revisions require financial instruments that meet specific criteria to be classified as Contingencies liabilities on the balance sheet instead of as equity. Adopting this revised section on January 1, 2005 We accrue a potential loss if we believe the loss is did not affect our consolidated financial statements probable and can be reasonably estimated. We base because we do not have any instruments that meet the our decision on information that is available at the time. specific criteria. We estimate the amount of the loss by consulting with Please see Note 1 to the consolidated financial the outside legal counsel that is handling our defence. statements for more information about the accounting This involves analyzing potential outcomes and assum- policies we adopted in 2005. ing various litigation and settlement strategies. If the final resolution of a legal or regulatory matter results in a judgment against us or requires us to pay a FUTURE CHANGES TO large settlement, it could have a material and negative ACCOUNTING STANDARDS effect on our results of operations, cash flows and financial position in the period in which the judgment Comprehensive Income or settlement occurs. Any accrual would be charged to The CICA issued section 1530 of the CICA Handbook, operating income and included in Accounts payable Comprehensive Income. The section is effective for fiscal and accrued liabilities or Other long-term liabilities. Any years beginning on or after October 1, 2006. It describes cash settlement would be included in Cash from oper- how to report and disclose comprehensive income and ating activities. its components.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 59

Comprehensive income is the change in a com- The CICA has also reissued section 3860 of the CICA pany’s net assets that results from transactions, events Handbook as section 3861, Financial Instruments – and circumstances from sources other than the com- Disclosure and Presentation, which establishes stan- pany’s shareholders. It includes items that would not dards for presentation of financial instruments and normally be included in net earnings, such as: non-financial derivatives, and identifies the infor- • changes in the currency translation adjustment mation that should be disclosed about them. These relating to self-sustaining foreign operations revisions come into effect for fiscal years beginning on • unrealized gains or losses on available-for-sale or after October 1, 2006. investments. These new accounting standards are not expected to have a significant effect on our financial results in 2007. The CICA also made changes to section 3250 of the CICA Handbook, Surplus, and reissued it as section Hedges 3251, Equity. The section is also effective for fiscal years beginning on or after October 1, 2006. The The CICA recently issued section 3865 of the CICA changes in how to report and disclose equity and Handbook, Hedges. The section is effective for fiscal changes in equity are consistent with the new years beginning on or after October 1, 2006, and requirements of section 1530, Comprehensive Income. describes when and how hedge accounting can be used. When we adopt these sections on January 1, 2007, Hedging is an activity used by a company to change we will report the following items in the consolidated an exposure to one or more risks by creating an offset financial statements: between: • comprehensive income and its components • changes in the fair value of a hedged item and a • accumulated other comprehensive income and its hedging item components. • changes in the cash flows attributable to a hedged item and a hedging item, or • changes resulting from a risk exposure relating to a Financial Instruments – Recognition hedged item and a hedging item. and Measurement The CICA issued section 3855 of the CICA Handbook, Hedge accounting makes sure that all gains, losses, Financial Instruments – Recognition and Measurement. revenues and expenses from the derivative and the The section is effective for fiscal years beginning on or item it hedges are recorded in the statement of opera- after October 1, 2006. It describes the standards for tions in the same period. recognizing and measuring financial assets, financial We do not expect the new standard to have a liabilities and non-financial derivatives. This section significant effect on our financial results in 2007. requires that: • all financial assets be measured at fair value, with Non-Monetary Transactions some exceptions such as loans and investments that are classified as held to maturity The CICA has reissued section 3830 of the CICA • all financial liabilities be measured at fair value if Handbook as section 3831, Non-Monetary Transactions, they are derivatives or classified as held for trading which establishes standards for the measurement and purposes. Other financial liabilities are measured at disclosure of non-monetary transactions. It also includes their carrying value criteria for defining ‘commercial substance’ which • all derivative financial instruments be measured replace the criteria for defining ‘culmination of the at fair value, even when they are part of a hedging earnings process’ in the former section. These changes relationship. come into effect for fiscal years beginning on or after January 1, 2006. Adopting this section on January 1, 2006 will not have a material effect on our future consolidated financial statements.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 60 CONSOLIDATED FINANCIAL STATEMENTS

This section of our annual MANAGEMENT’S REPORT form a proper basis for preparing the financial state- report contains the audited ments, and that our assets are properly accounted for consolidated financial state- These financial statements form the basis for all of the and safeguarded. ments of BCE and detailed financial information that appears in this annual report. The board of directors has appointed an audit com- notes with explanations and The financial statements and all of the information mittee, which is made up of unrelated and independ- additional information. in this annual report are the responsibility of the ent directors. The audit committee’s responsibilities management of BCE Inc. and have been reviewed and include reviewing the financial statements and other The financial statements contain our results and approved by the board of directors. The board of information in this annual report, and recommending financial history for the past directors is responsible for ensuring that management them to the board of directors for approval. You will three years. The notes are fulfills its financial reporting responsibilities. Deloitte find a description of the audit committee’s other respon- an important part of under- & Touche LLP, the shareholders’ auditors, have audited sibilities on page 102 of this annual report. The inter- standing our financial the financial statements. nal auditors and the shareholders’ auditors have free results. They explain how Management has prepared the financial statements and independent access to the audit committee. we arrived at the numbers in according to Canadian generally accepted account- the financial statements, ing principles. Under these principles, management describe significant events or has made certain estimates and assumptions that changes that affect the num- are reflected in the financial statements and notes. Michael J. Sabia bers, and explain certain items in the financial state- Management believes that these financial statements President and Chief Executive Officer ments. The notes also fairly present BCE’s consolidated financial position, include details about our results of operations and cash flows. results that do not appear in Management has a system of internal controls Siim A. Vanaselja the financial statements. designed to provide reasonable assurance that the Chief Financial Officer financial statements are accurate and complete in all BCE consists of many material respects. This is supported by an internal businesses, including sub- audit group that reports to the audit committee, sidiaries and joint ventures. and includes communication with employees about Karyn A. Brooks We present the financial policies for ethical business conduct. Management Vice-President and Controller information for all of our holdings as one believes that the internal controls provide reasonable consolidated company. assurance that our financial records are reliable and January 31, 2006

Except in the auditors’ report, we, us, our and BCE AUDITORS’ REPORT the accounting principles used and significant esti- mean BCE Inc., its sub- mates made by management, as well as evaluating the sidiaries and joint ventures. To the Shareholders of BCE Inc.: overall financial statement presentation. We have audited the consolidated balance sheets of BCE In our opinion, these consolidated financial state- Inc. as at December 31, 2005 and 2004, and the consol- ments present fairly, in all material respects, the finan- idated statements of operations, deficit and cash flows cial position of BCE Inc. as at December 31, 2005 and for each of the years in the three-year period ended 2004 and the results of its operations and its cash flows December 31, 2005. These consolidated financial state- for each of the years in the three-year period ended ments are the responsibility of BCE Inc.’s management. December 31, 2005, in accordance with Canadian Our responsibility is to express an opinion on these generally accepted accounting principles. consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial Deloitte & Touche LLP statements are free of material misstatement. An audit Chartered Accountants includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated Montréal, Canada financial statements. An audit also includes assessing January 31, 2006

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT CONSOLIDATED STATEMENTS OF OPERATIONS p. 61

FOR THE YEAR ENDED DECEMBER 31 (in $ millions, except share amounts) NOTE 2005 2004 2003 Operating revenues 19,105 18,368 18,057 Operating expenses (11,508) (10,938) (10,776) Amortization expense (3,114) (3,056) (3,062) Net beneﬁt plans cost 24 (380) (256) (175) Restructuring and other items 4 (55) (1,224) (14) Total operating expenses (15,057) (15,474) (14,027) Operating income 4,048 2,894 4,030 Other income 5 8 407 177 Interest expense 6 (981) (999) (1,100) Pre-tax earnings from continuing operations 3,075 2,302 3,107 Income taxes 7 (893) (681) (1,086) Non-controlling interest (267) (174) (201) Earnings from continuing operations 1,915 1,447 1,820 Discontinued operations 8 46 77 (5) Net earnings before extraordinary gain 1,961 1,524 1,815 Extraordinary gain 3 – 69 – Net earnings 1,961 1,593 1,815 Dividends on preferred shares (70) (70) (64) Premium on redemption of preferred shares – – (7) Net earnings applicable to common shares 1,891 1,523 1,744 Net earnings (loss) per common share – basic 9 Continuing operations 1.99 1.49 1.91 Discontinued operations 0.05 0.09 (0.01) Extraordinary gain – 0.07 – Net earnings 2.04 1.65 1.90 Net earnings (loss) per common share – diluted 9 Continuing operations 1.99 1.49 1.90 Discontinued operations 0.05 0.09 (0.01) Extraordinary gain – 0.07 – Net earnings 2.04 1.65 1.89 Dividends per common share 1.32 1.20 1.20 Average number of common shares outstanding – basic (millions) 926.8 924.6 920.3

CONSOLIDATED STATEMENTS OF DEFICIT

FOR THE YEAR ENDED DECEMBER 31 (in $ millions) NOTE 2005 2004 2003 Balance at beginning of year, as previously reported (5,424) (5,837) (6,442) Accounting policy change 1 (8) (8) (8) Balance at beginning of year, as restated (5,432) (5,845) (6,450) Consolidation of variable interest entity – – (25) Net earnings 1,961 1,593 1,815 Dividends declared on preferred shares (70) (70) (64) Dividends declared on common shares (1,222) (1,110) (1,105) Premium on redemption of preferred shares – – (7) Other – – (9) Balance at end of year (4,763) (5,432) (5,845)

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 62 CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31 (in $ millions) NOTE 2005 2004 Assets Current assets Cash and cash equivalents 363 313 Accounts receivable 10 1,766 1,951 Other current assets 11 1,142 1,061 Current assets of discontinued operations 8 402 383 Total current assets 3,673 3,708 Capital assets 12 22,062 21,104 Other long-term assets 13 2,914 2,628 Indeﬁnite-life intangible assets 14 3,031 2,916 Goodwill 15 7,887 7,756 Non-current assets of discontinued operations 8 1,063 1,028 Total assets 40,630 39,140 Liabilities Current liabilities Accounts payable and accrued liabilities 16 3,435 3,444 Interest payable 182 183 Dividends payable 343 297 Debt due within one year 17 1,373 1,272 Current liabilities of discontinued operations 8 281 271 Total current liabilities 5,614 5,467 Long-term debt 18 12,119 11,685 Other long-term liabilities 19 5,028 4,834 Non-current liabilities of discontinued operations 8 250 222 Total liabilities 23,011 22,208 Non-controlling interest 20 2,898 2,908 Commitments and contingencies 25 Shareholders’ Equity Preferred shares 22 1,670 1,670 Common shareholders’ equity Common shares 22 16,806 16,781 Contributed surplus 1,081 1,061 Deﬁcit (4,763) (5,432) Currency translation adjustment (73) (56) Total common shareholders’ equity 13,051 12,354 Total shareholders’ equity 14,721 14,024 Total liabilities and shareholders’ equity 40,630 39,140

On behalf of the board of directors:

Director Director

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOW p. 63

FOR THE YEAR ENDED DECEMBER 31 (in $ millions) NOTE 2005 2004 2003 Cash flows from operating activities Earnings from continuing operations 1,915 1,447 1,820 Adjustments to reconcile earnings from continuing operations to cash flows from operating activities: Amortization expense 3,114 3,056 3,062 Net benefit plans cost 24 380 256 175 Restructuring and other items 4 55 1,224 14 Net gains on investments 5 (33) (320) (76) Future income taxes 7 746 (35) 409 Non-controlling interest 267 174 201 Contributions to employee pension plans 24 (226) (112) (160) Other employee future benefit plan payments 24 (93) (81) (87) Payments of restructuring and other items (176) (253) (124) Operating assets and liabilities 27 (390) 87 656 Cash flows from operating activities 5,559 5,443 5,890 Cash flows from investing activities Capital expenditures (3,428) (3,319) (3,101) Business acquisitions 3 (228) (1,118) (54) Business dispositions – 20 54 Increase in investments (233) (58) (4) Decrease in investments 19 713 168 Other investing activities 4 127 62 Cash flows used in investing activities (3,866) (3,635) (2,875) Cash flows from financing activities Increase (decrease) in notes payable and bank advances (66) 130 (295) Issue of long-term debt 1,190 1,306 1,880 Repayment of long-term debt (1,178) (2,256) (3,412) Issue of common shares 22 25 32 19 Issue of preferred shares 22 – – 510 Redemption of preferred shares 22 – – (357) Issue of equity securities by subsidiaries to non-controlling interest 1 8 132 Redemption of equity securities by subsidiaries from non-controlling interest (78) (58) (108) Cash dividends paid on common shares (1,195) (1,108) (1,029) Cash dividends paid on preferred shares (86) (85) (61) Cash dividends paid by subsidiaries to non-controlling interest (192) (188) (184) Other financing activities (64) (81) (44) Cash flows used in financing activities (1,643) (2,300) (2,949) Cash provided by (used in) continuing operations 50 (492) 66 Cash provided by discontinued operations 15 150 350 Net increase (decrease) in cash and cash equivalents 65 (342) 416 Cash and cash equivalents at beginning of year 380 722 306 Cash and cash equivalents at end of year 445 380 722

Consists of: Cash and cash equivalents of continuing operations 363 313 556 Cash and cash equivalents of discontinued operations 82 67 166 Total 445 380 722

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

All amounts are in millions NOTE 1: taxes and goodwill impairment. We also use estimates of Canadian dollars, except SIGNIFICANT ACCOUNTING POLICIES when recording the fair values of assets acquired and where noted. liabilities assumed in a business combination.

See Note 28, Reconciliation BASIS OF PRESENTATION of Canadian GAAP to United RECOGNIZING REVENUE We have prepared the consolidated financial statements States GAAP, for a descrip- according to Canadian generally accepted accounting We recognize operating revenues when they are earned, tion and reconciliation of the significant differences principles (GAAP). specifically when all the following conditions are met: between Canadian GAAP We consolidate the financial statements of all of the • services are provided or products are delivered to and United States GAAP companies we control. We proportionately consolidate customers that affect our financial our share of the financial statements of our joint venture • there is clear evidence that an arrangement exists statements. interests. All transactions and balances between these • amounts are fixed or can be determined companies have been eliminated on consolidation. • our ability to collect is reasonably assured.

In particular, we recognize: COMPARATIVE FIGURES • fees for long distance and wireless services when we We have reclassified some of the figures for the compar- provide the services ative periods in the consolidated financial statements • other fees, such as network access fees, licence fees, to make them consistent with the presentation for the hosting fees, maintenance fees and standby fees, over current period. the term of the contract We have restated financial information for previous • subscriber revenues when customers receive the service periods to reflect: • advertising revenues when advertisements are aired, • the change in Aliant Inc.’s (Aliant) method of recog- or printed and distributed nizing revenues and expenses from its directory busi- • revenues from the sale of equipment when the ness effective January 2005, as described under Recent equipment is delivered to customers and accepted Changes to Accounting Policies and Standards • revenues on long-term contracts as services are pro- • the change in classification to discontinued operations vided, equipment is delivered and accepted, or contract for planned and completed business dispositions. milestones are met • rebates, allowances and payments to customers as a reduction of revenue when we do not receive an identi- USING ESTIMATES fiable and separate benefit. When preparing financial statements according to GAAP, management makes estimates and assumptions We enter into sales that may include a number of relating to: products and services. We separate each product or • reported amounts of revenues and expenses service in these sales and account for them separately • reported amounts of assets and liabilities according to the methods described above when the • disclosure of contingent assets and liabilities. following three conditions are met: • the product or service has value to our customer on a We base our estimates on a number of factors, includ- stand-alone basis ing historical experience, current events and actions • there is objective and reliable evidence of the fair that the company may undertake in the future, and value of the product or service other assumptions that we believe are reasonable under • a general right of return, delivery or performance of the circumstances. Actual results could differ from any undelivered product or service is probable and those estimates under different assumptions or condi- substantially in our control. tions. We use estimates when accounting for certain items such as revenues, allowance for doubtful accounts, If there is objective and reliable evidence of fair value useful lives of capital assets, asset impairments, inven- for all products and services in a sale, the total price to tory reserves, legal and tax contingencies, employee the customer is allocated to the separate products and compensation plans, employee benefit plans, evaluation services based on their relative fair value. Otherwise, of minimum lease terms for operating leases, income we first allocate the total price to any undelivered

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 65

products and services based on their fair value and the We continue to service the accounts receivable after remainder to any that have been delivered. If the con- the transfer. As a result, we: ditions to separate the product or service are not met, • recognize a servicing liability on the day accounts we generally recognize revenue pro-rata over the term receivable are transferred to the trust of the sale agreement. • amortize this liability to earnings over the expected We may enter into arrangements with subcontractors life of the transferred accounts receivable. who provide services to our customers. When we act as the principal in these arrangements, we recognize INVENTORIES revenue based on the amounts billed to customers. Otherwise, we recognize the net amount that we keep We value inventories at cost or market value, whichever as revenue. is lower, and determine market value using replace- We accrue an estimated amount for sales returns, ment cost. We maintain inventory valuation reserves based on our past experience, when revenue is for inventory that is slow moving or becomes obsolete, recognized. using an inventory aging analysis to calculate the We record payments we receive in advance, includ- amount of the reserves. ing upfront non-refundable payments, as deferred revenues until we provide the service or deliver the CAPITAL ASSETS product to customers. Deferred revenues are presented in Accounts payable and accrued liabilities or in Other We carry capital assets at cost, less accumulated amorti- long-term liabilities on the balance sheet. zation. Most of our telecommunications assets are amortized using the group depreciation method. When we retire assets in the ordinary course of business, we CASH AND CASH EQUIVALENTS charge their original cost to accumulated amortization. We classify highly liquid investments with a maturity In general, we amortize capital assets on a straight-line of three months or less from the date of purchase as basis over the estimated useful lives of the assets. We Cash and cash equivalents. Highly liquid investments review the estimates of the useful lives of the assets with a maturity of more than three months are every year and adjust them if needed. classified as short-term investments and reported in ESTIMATED USEFUL LIFE Other current assets. Telecommunications assets 10 to 25 years Machinery and equipment 2 to 20 years SECURITIZATION OF ACCOUNTS RECEIVABLE Buildings 10 to 40 years Satellites 10 to 15 years We consider a transfer of accounts receivable to be a Finite-life intangible assets: sale when we give up control of them in exchange for Software 3 to 7 years proceeds from a trust (other than our retained bene- Customer relationships 5 to 40 years ficial interest in the accounts receivable). We determine the fair value of the accounts receiv- We initially measure and record asset retirement obli- able transferred based on the present value of future gations at fair value using a present value methodology, expected cash flows, which we project using manage- adjusted subsequently for any changes to the timing ment’s best estimates of discount rates, the weighted or amount of the original estimate of cash flows. We average life of accounts receivable, credit loss ratios capitalize asset retirement costs as part of the related and other key assumptions. We recognize a loss on assets and amortize these into earnings over time, this kind of transaction, which we record in Other along with the increase in the recorded obligation to income. The loss partly depends on the carrying amount reflect the passage of time. of the accounts receivable that are transferred. We We capitalize construction costs, labour and over- allocate this amount to accounts receivable sold or to head (including interest, when the project cost is our retained interest, according to its relative fair significant) related to assets we build or develop. value on the day the transfer is made.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity Method We capitalize certain costs of developing or buying INDEFINITE-LIFE INTANGIBLE ASSETS The investment is initially software for internal use. We expense software mainte- Our indefinite-life intangible assets consist mainly of recorded at cost and adjust- nance and training costs when they are incurred. The the Bell brand name, spectrum licences and television ments are made to include expense is included in Operating expenses in the state- licences. We assess these assets for impairment in the our share of the investment’s ment of operations. fourth quarter of every year and when events or net earnings or losses. These We assess capital assets for impairment when events adjustments are included changes in circumstances indicate that an asset might or changes in circumstances indicate that we may not in our net earnings. The be impaired. We calculate impairment by deducting be able to recover their carrying value. We calculate amount of our investment the assets’ fair value, based on estimates of discounted impairment by deducting the assets’ fair value, based is reduced by any dividends future cash flows or other valuation methods, from their on discounted cash flows expected from their use and received or receivable from carrying value. Any excess is deducted from earnings. the investment. disposition, from their carrying value. Any excess is deducted from earnings. Cost Method We account for leases that transfer substantially all GOODWILL The investment is recorded of the benefits and risks of ownership of property to us We assess goodwill of individual reporting units for at cost. Dividends received as capital leases. We record an asset at the time a capital impairment in the fourth quarter of every year and or receivable from the lease is entered into together with a related long-term investment are included in when events or changes in circumstances indicate that obligation. Rental payments under operating leases our net earnings, with no goodwill might be impaired. We assess goodwill for are expensed as incurred. adjustment to the carrying impairment in two steps: amount of the investment. • we identify a potential impairment by comparing ACCOUNTING FOR INVESTMENTS the fair value of a reporting unit to its carrying value. Goodwill Fair value is based on estimates of discounted future Goodwill is created when We use the following methods to account for invest- cash flows or other valuation methods. When the fair we acquire a business. It is ments that are not consolidated or proportionately value of the reporting unit is less than its carrying calculated by deducting the consolidated in our financial statements: fair value of the net assets value, we allocate the fair value to all of its assets and • the equity method for our investments in companies liabilities, based on their fair values. The amount that acquired from the considera- where we have a significant influence over their oper- tion given and represents the fair value of the reporting unit exceeds the total of ating, investing and financing activities the value of factors that the amounts assigned to its assets and liabilities is the • the cost method for our investments in all other contribute to greater earning fair value of goodwill. companies. power, such as a good • we determine if there is an impairment by compar- reputation, customer loyalty ing the carrying value of goodwill to its fair value. or intellectual capital. We expense any decline in the fair value of our invest- Any excess is deducted from earnings. ments below their carrying value when management Translation of Foreign assesses the decline to be other than temporary. Currencies We include investments in Other long-term assets on TRANSLATION OF FOREIGN CURRENCIES The way we account for a the balance sheet. Earnings from investments and any foreign operation depends on declines in fair value are included in Other income in Self-Sustaining Foreign Operations whether it is self-sustaining the statement of operations. or integrated. A self-sustain- For self-sustaining foreign operations, we use: ing foreign operation is • the exchange rates on the date of the balance sheet largely independent of the COSTS OF ISSUING DEBT AND EQUITY for assets and liabilities parent company. An inte- • the average exchange rates during the year for rev- The costs of issuing debt are deferred in Other long- grated foreign operation enues and expenses. depends on the parent term assets. They are amortized on a straight-line basis company to finance or run over the term of the related debt and are included in Translation exchange gains and losses are reflected as a its operations. Interest expense in the statement of operations. The currency translation adjustment in shareholders’ equity. costs of issuing equity are reflected in the statement When we reduce our net investment in a self-sustaining of deficit. foreign operation, we recognize a portion of the currency translation adjustment in earnings.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 67

Integrated Foreign Operations We follow these policies when accounting for derivatives: For integrated foreign operations, we use: • unrealized gains or losses relating to derivatives that • the exchange rates on the date of the balance sheet qualify for hedge accounting are recognized in earnings for monetary assets and liabilities, such as cash, accounts when the hedged item is disposed of or when the receivable and payable, and long-term debt anticipated transaction is ended early • the historical exchange rates for non-monetary assets • gains and losses related to hedges of anticipated and liabilities, such as capital assets transactions are recognized in earnings or are recorded • the average exchange rates during the year for rev- as adjustments of carrying values when the transaction enues and expenses. takes place • derivatives that are economic hedges but do not Translation exchange gains and losses are included in qualify for hedge accounting are recognized at fair Other income in the statement of operations. value. We record the change in fair value in earnings. • any premiums paid for derivatives used in hedging Domestic Transactions and Balances in relationships are deferred and expensed to earnings Foreign Currencies over the term of the contract • any forward premiums or discounts on forward foreign For domestic transactions in foreign currencies, we use: exchange contracts that are used to hedge long-term • the exchange rates on the date of the balance sheet debt denominated in foreign currencies are amortized for monetary assets and liabilities as an adjustment to interest expense over the term of • the historical exchange rates for non-monetary assets the forward contract. and liabilities • the average exchange rates during the year for rev- The following describes our policies for specific kinds enues and expenses. of derivatives. Translation exchange gains and losses are included in Other income in the statement of operations. Interest Rate Swap Agreements We use interest rate swap agreements to help manage DERIVATIVE FINANCIAL INSTRUMENTS the fixed and floating interest rate mix of our debt portfolio. These agreements often involve exchanging We use various derivative financial instruments to interest payments without exchanging the notional manage: principal amount that the payments are based on. We • interest rate risk record the exchange of payments as an adjustment of • foreign exchange rate risk interest expense on the hedged debt. We include the • changes in the price of BCE Inc. common shares related amount receivable or payable from counterpar- relating to special compensation payments (SCPs) and ties in Accounts receivable or Interest payable. deferred share units (DSUs). We have interest rate swaption agreements which, if exercised, result in us entering into an interest We do not use derivative financial instruments for rate swap. speculative or trading purposes. We document all relationships between derivatives and the items they hedge, and our risk management Foreign Currency Swap Agreements objective and strategy for using various hedges. This We use foreign currency swap agreements to manage process includes linking every derivative to: the foreign exchange rate exposure of some of our debt • a specific asset or liability, or that is denominated in foreign currencies. We desig- • a specific firm commitment, or nate these agreements as hedges of firm commitments • an anticipated transaction. to pay interest and/or principal in the foreign currency. We recognize gains and losses on these contracts at the We assess how effective derivatives are in managing same time we recognize the gains and losses on the risk when the hedge is put in place, and on an ongoing hedged item. Unrealized gains or losses are included in basis. If a hedge becomes ineffective, we stop using Other long-term assets or Other long-term liabilities. hedge accounting.

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Curtailment Forward Contracts We accrue our obligations and related costs under A curtailment is a significant employee benefit plans, net of the fair value of plan We use forward foreign exchange contracts to manage: reduction in plan benefits assets. Pension and other retirement benefit costs are • interest and principal denominated in foreign cur- that can result when a DB determined using: pension plan is amended rencies. We designate these agreements as hedges • the projected benefit method, prorated on years of or restructured. Types of of firm commitments to pay the principal in the service, which takes into account future pay levels curtailments include foreign currency. • a discount rate based on market interest rates of a reduction in the expected • the exposure to anticipated transactions denom- high-quality corporate bonds with maturities that number of years of future inated in foreign currencies. We designate these agree- match the timing and benefits expected to be paid by service of active employees ments as hedges of future cash flows. or the elimination of the the plans right to earn defined benefits • management’s best estimate of the plans’ expected We use forward contracts to manage changes in for some or all of the future investment performance, pay increases, retirement the price of BCE Inc. common shares relating to SCPs service of employees. ages of employees and expected health-care costs. and DSUs. We recognize gains and losses on these contracts Settlement We value pension plan assets at fair value, which the same way we recognize the gains and losses on the A company makes a settle- is determined using current market values. We use ment when it substantially hedged item. Unrealized gains or losses are included in a market-related value to calculate the expected return settles all or part of an Other long-term assets or Other long-term liabilities. accrued benefit obligation. on plan assets. This value is based on a four-year An example is a lump-sum weighted average of the fair value of the pension cash payment to employees EMPLOYEE BENEFIT PLANS plan assets. in exchange for their rights We amortize past service costs from plan amend- to receive future benefits. (i) Defined Benefit Plans ments on a straight-line basis over the average remaining service period of employees who were active on We maintain defined benefit (DB) plans that provide the day of the amendment. This represents the period pension benefits for most of our employees. Benefits that we expect to realize economic benefits from are based on the employee’s length of service and aver- the amendments. age rate of pay during his or her last five years of service. Transitional assets and obligations that arose upon Most employees are not required to contribute to the implementation of new accounting standards for plans. The plans provide increasing pension benefits employee future benefits are amortized on a straight- to help protect a portion of the income of retired line basis over the average remaining service period of employees against inflation. employees expected to receive benefits under the plans. We are responsible for adequately funding our DB We use the corridor approach to recognize actuarial pension plans. We make contributions to them based gains and losses into earnings. First we deduct 10% of on various actuarial cost methods that are permitted the benefit obligation or the market-related value of by pension regulatory bodies. Contributions reflect plan assets, whichever is greater, from the unamortized actuarial assumptions about future investment returns, net actuarial gains or losses based on a market-related salary projections and future service. value basis. Then we amortize any excess over the We also provide other post-employment benefits average remaining service period of active employees. to some of our employees, including: At the end of 2005, this period ranged from approxi- • health-care and life insurance benefits during mately 9 to 18 years, with a weighted average period retirement of 13 years. • other benefits, including various disability plans, When the restructuring of a benefit plan results in workers’ compensation and medical benefits to former both a curtailment and a settlement of obligations, or inactive employees, their beneficiaries and depen- we account for the curtailment before we account for dants, from the time their employment ends until the settlement. their retirement starts, under certain circumstances. December 31 is the measurement date for most of our employee benefit plans. Our actuaries perform a We do not fund the other future benefit plans. valuation at least every three years to determine the

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 69

actuarial present value of the accrued pension and STOCK-BASED COMPENSATION PLANS Black-Scholes Option other retirement benefits. An actuarial valuation was Pricing Model BCE Inc.’s stock-based compensation plans include last performed on most of our pension plans on The Black-Scholes option employee savings plans (ESPs), restricted share units December 31, 2004. pricing model is a financial (RSUs), long-term incentive plans and DSUs. Before model we use to calculate the 2000, the long-term incentive plans often included SCPs. weighted average fair value (ii) Defined Contribution Plans Starting in 2004, we made a number of prospective of a stock option granted changes to the key features of our stock-based com- using four key assumptions: Some of our subsidiaries offer defined contribution pensation plans, including: stock dividend yield, expected (DC) plans that provide certain employees with pen- stock volatility, risk-free • the value of the long-term incentive plans under sion benefits. which stock options are granted was reduced to account interest rate and expected In January 2005, BCE Inc. and Bell Canada intro- life of the stock option. for the introduction of a new mid-term incentive plan duced a DC pension plan for its employees. Current that uses RSUs employees had the option of retaining their DB cover- • setting specific performance targets that must be age or changing over to the new DC coverage. Since met before the stock option can be exercised. 2005, new employees participate in the DC pension arrangements only. We credit to share capital any amount employees pay We recognize a pension cost for DC plans when when they exercise their stock options or buy shares. the employee provides service to the company, essen- We recognize the contributions BCE Inc. makes under tially coinciding with our cash contributions. The ESPs as compensation expense. We also recognize pension cost is based on a percentage of the partici- compensation expense or recovery relating to SCPs. pant’s salary.

Restricted Share Units INCOME TAXES For each RSU granted we record a compensation Current income tax expense is the estimated income expense that equals the market value of a BCE Inc. taxes payable for the current year before any refunds common share at the date of grant prorated over the or the use of losses incurred in previous years. vesting period. The compensation expense is adjusted We use the asset and liability method to account for for subsequent changes in the market value of BCE future income taxes. Future income taxes reflect: Inc. common shares until the vesting date and man- • the temporary differences between the carrying agement’s assessment of the number of RSUs that will amounts of assets and liabilities for accounting pur- vest in the future. The cumulative effect of the change poses and the amounts used for tax purposes, on an in value is recognized in the period of the change. after-tax basis Vested RSUs will be paid in BCE Inc. common shares • the benefit of losses that will more likely than not be purchased on the open market or in cash, as the holder realized and carried forward to future years to reduce chooses, as long as minimum share ownership require- income taxes. ments are met. We calculate future income taxes using the rates enacted by tax law and those substantively enacted. Stock Options The effect of a change in tax rates on future income We use the fair value-based method to account for tax assets and liabilities is included in earnings in the employee stock options and the Black-Scholes option period when the change is substantively enacted. pricing model to measure the compensation expense of options. This method is used for options granted on SUBSCRIBER ACQUISITION COSTS or after January 1, 2002. For options that contain specific performance-based targets, this is reflected in We expense all subscriber acquisition costs when serv- the calculation of the weighted average fair value per ices are activated. option granted.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred Share Units Financial Instruments For each DSU granted we record a compensation The CICA issued revisions to section 3860 of the CICA expense that equals the market value of a BCE Inc. Handbook, Financial Instruments – Disclosure and common share at the grant date. The compensation Presentation. The revisions require financial instruments expense is adjusted for subsequent changes in the that meet specific criteria to be classified as liabilities market value of BCE Inc. common shares, with the on the balance sheet instead of equity. Adopting this effect of this change in value recognized in the period revised section on January 1, 2005 did not affect our of the change. DSUs are paid in BCE Inc. common consolidated financial statements because we do not shares purchased on the open market following the have any instruments that meet the specific criteria. cessation of a participant’s employment or when a director leaves the board. FUTURE CHANGES TO ACCOUNTING STANDARDS REGULATION OF THE TELECOMMUNICATIONS INDUSTRY Comprehensive Income Our business is affected by Canadian Radio-Television The CICA issued section 1530 of the CICA Handbook, and Telecommunications Commission (CRTC) decisions Comprehensive Income, which describes how to report over the prices we charge for specific services, primarily and disclose comprehensive income and its compo- local telephone services and other operating require- nents. These changes come into effect for fiscal years ments. The CRTC ensures that Canadians have access beginning on or after October 1, 2006. to reliable telephone and other services at affordable Comprehensive income is the change in a company’s prices. Some of our subsidiaries, such as Bell Canada, net assets that results from transactions, events and Aliant, Télébec Limited Partnership (Télébec) and circumstances from sources other than the company’s NorthernTel Limited Partnership (NorthernTel), are shareholders. It includes items that would not normally regulated by the CRTC pursuant to the Telecommuni- be included in net earnings, such as: cations Act. • changes in the currency translation adjustment relating to self-sustaining foreign operations • unrealized gains or losses on available-for-sale RECENT CHANGES TO ACCOUNTING investments. POLICIES AND STANDARDS

Aliant’s Directory Business The CICA also made changes to section 3250 of the CICA Handbook, Surplus, and reissued it as section Effective January 1, 2005, we defer and amortize 3251, Equity. The section is also effective for fiscal revenues and expenses from Aliant’s directory business years beginning on or after October 1, 2006. The over the period of circulation, which is usually changes in how to report and disclose equity and 12 months. Prior to January 1, 2005, we recognized changes in equity are consistent with the new require- revenues and expenses from Aliant’s directory business ments of section 1530, Comprehensive Income. on the publication date. The impact on our consoli- When we adopt these sections on January 1, 2007, dated statements of operations for the year ended we will report the following items in the consolidated December 31, 2005 and the comparative periods is financial statements: negligible. We did not restate the statements of opera- • comprehensive income and its components tions for prior periods. At December 31, 2004, the • accumulated other comprehensive income and its restatement of the balance sheet resulted in: components. • a decrease of $23 million in accounts receivable • an increase of $1 million in other current assets • a decrease of $8 million in accounts payable and accrued liabilities • a decrease of $6 million in non-controlling interest • an increase of $8 million in the deficit.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 71

Financial Instruments Hedge accounting ensures that all gains, losses, revenues and expenses from the derivative and the item it The CICA issued section 3855 of the CICA Handbook, hedges are recorded in the statement of operations in Financial Instruments – Recognition and Measurement, the same period. which describes the standards for recognizing and We do not expect the new standard to have a measuring financial assets, financial liabilities and non- significant effect on our financial results in 2007. financial derivatives. These changes come into effect for fiscal years beginning on or after October 1, 2006. This section requires that: Non-Monetary Transactions • all financial assets be measured at fair value, with The CICA has reissued section 3830 of the CICA some exceptions for loans and investments that are Handbook as section 3831, Non-Monetary Transactions, classified as held to maturity which establishes standards for the measurement and • all financial liabilities be measured at fair value if disclosure of non-monetary transactions. It also includes they are derivatives or classified as held for trading criteria for defining ‘commercial substance’ that purposes. Other financial liabilities are measured at replace the criteria for defining ‘culmination of the their carrying value. earnings process’ in the former section. These changes • all derivative financial instruments be measured come into effect for fiscal years beginning on or after at fair value, even when they are part of a hedging January 1, 2006. Adopting this section on January 1, relationship. 2006 will not have a material effect on our future consolidated financial statements. The CICA has also reissued section 3860 of the CICA Handbook as section 3861, Financial Instruments – Disclosure and Presentation, which establishes stan- NOTE 2: SEGMENTED INFORMATION dards for presentation of financial instruments and We report our results of operations under five seg- non-financial derivatives, and identifies the infor- ments: Residential (formerly known as the Consumer mation that should be disclosed about them. These segment), Business, Aliant, Other Bell Canada and revisions come into effect for fiscal years beginning Other BCE. Our segments reflect how we manage our on or after October 1, 2006. These new accounting business and how we classify our operations for plan- standards are not expected to have a significant effect ning and measuring performance. on our financial results in 2007. The Residential segment provides local telephone, long distance, wireless, Internet access, video and Hedges other services to Bell Canada’s residential customers, mainly in Ontario and Québec. Wireless services are The CICA issued section 3865 of the CICA Handbook, also offered in Western Canada and video services are Hedges, which describes how and when hedge account- provided nationwide. ing can be used. These changes come into effect for The Business segment provides local telephone, long fiscal years beginning on or after October 1, 2006. distance, wireless, data (including Internet access) and Hedging is an activity used by a company to change other services to Bell Canada’s small and medium- an exposure to one or more risks by creating an offset sized businesses and large enterprise customers in between: Ontario and Québec, as well as business customers in • changes in the fair value of a hedged item and a Western Canada. hedging item, or The Aliant segment provides local telephone, long • changes in the cash flows attributable to a hedged distance, wireless, data (including Internet access) and item and a hedging item, or other services to residential and business customers in • changes resulting from a risk exposure related to a Atlantic Canada, and represents the operations of our hedged item and a hedging item. subsidiary, Aliant. At December 31, 2005, Bell Canada owned 53% of Aliant. The remaining 47% was publicly held.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accounting policies used The Other Bell Canada segment includes Bell to distinctive Canadian content. It includes CTV Inc. by the segments are the Canada’s Wholesale business and the financial results of (CTV), and The Globe and Mail. BCE Inc. owns 68.5% of same as those we describe in Télébec, NorthernTel and Northwestel. Our Wholesale Bell Globemedia. The Woodbridge Company Limited Note 1, Significant Accounting business provides local telephone, long distance, wire- and affiliates own the remaining 31.5%. On December 2, Policies. Segments negotiate less, data and other services to competitors who resell 2005, BCE Inc. announced its decision to reduce its sales with each other as if these services. Télébec, NorthernTel and Northwestel interest in Bell Globemedia to 20%, contingent on they were unrelated parties. provide telecommunications services to less populated regulatory approval. Since we will have a continuing We measure the profitability of each segment based areas of Québec, Ontario and Canada’s northern terri- interest in Bell Globemedia, it is not presented as on its operating income. tories. At December 31, 2005, Bell Canada owned a discontinued operation. Our operations, including 100% of Northwestel and 63% of Télébec and Telesat provides satellite communications and sys- most of our revenues, NorthernTel. The Bell Nordiq Income Fund owned tems management and is a consultant in establishing, capital assets and goodwill, the remaining 37%. operating and upgrading satellite systems worldwide. are located in Canada. The Other BCE segment includes the financial BCE Inc. owns 100% of Telesat. results of our media and satellite businesses as well as In classifying our operations for planning and meas- the costs incurred by our corporate office. This segment uring performance, all restructuring and other items includes Bell Globemedia Inc. (Bell Globemedia) and at Bell Canada and its subsidiaries except for Aliant Telesat Canada (Telesat). are included in the Other Bell Canada segment and Bell Globemedia provides information and enter- not allocated to the Residential or Business segments. tainment services to Canadian customers and access

The tables below are a summary of ﬁnancial information by segment for the last three years.

INTER- SEGMENT INTER- ELIMINA- SEGMENT OTHER TIONS ELIMINA- BELL – BELL BELL OTHER TIONS CONSOLI- RESIDENTIAL BUSINESS ALIANT CANADA CANADA CANADA BCE – OTHER DATED For the year ended December 31, 2005 Operating revenues External customers 7,527 5,965 1,958 1,768 – 17,218 1,887 – 19,105 Inter-segment 72 155 139 190 (524) 32 206 (238) – Total operating revenues 7,599 6,120 2,097 1,958 (524) 17,250 2,093 (238) 19,105 Operating income 2,001 910 396 448 – 3,755 293 – 4,048 Other income 8 Interest expense (981) Income taxes (893) Non-controlling interest (267) Earnings from continuing operations 1,915 Segment assets 14,405 12,319 3,681 3,785 – 34,190 6,440 – 40,630 Investments at equity ––––––89 –89 Capital expenditures (1,519) (897) (363) (343) – (3,122) (306) – (3,428)

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 73

INTER- SEGMENT INTER- ELIMINA- SEGMENT OTHER TIONS ELIMINA- . BELL – BELL BELL OTHER TIONS CONSOLI- RESIDENTIAL BUSINESS ALIANT CANADA CANADA CANADA BCE – OTHER DATED For the year ended December 31, 2004 Operating revenues External customers 7,440 5,652 1,894 1,736 – 16,722 1,646 – 18,368 Inter-segment 62 199 139 203 (538) 65 196 (261) – Total operating revenues 7,502 5,851 2,033 1,939 (538) 16,787 1,842 (261) 18,368 Operating income (loss) 2,119 896 268 (588) – 2,695 199 – 2,894 Other income 407 Interest expense (999) Income taxes (681) Non-controlling interest (174) Earnings from continuing operations 1,447 Segment assets 12,965 11,764 3,685 4,533 – 32,947 6,193 – 39,140 Investments at equity –––4 –4 106 – 110 Capital expenditures (1,371) (1,008) (295) (352) – (3,026) (293) – (3,319)

For the year ended December 31, 2003 Operating revenues External customers 7,142 5,564 1,909 1,868 – 16,483 1,574 – 18,057 Inter-segment 61 263 150 147 (490) 131 187 (318) – Total operating revenues 7,203 5,827 2,059 2,015 (490) 16,614 1,761 (318) 18,057 Operating income 2,019 781 415 621 – 3,836 194 – 4,030 Other income 177 Interest expense (1,100) Income taxes (1,086) Non-controlling interest (201) Earnings from continuing operations 1,820 Segment assets 13,321 11,648 3,840 4,698 – 33,507 5,895 – 39,402 Investments at equity – – – 398 – 398 98 – 496 Capital expenditures (1,287) (936) (333) (336) – (2,892) (209) – (3,101)

NOTE 3: BUSINESS ACQUISITIONS • Nexxlink Technologies Inc. (Nexxlink) – In February 2005, Bell Canada acquired 100% of the outstanding The consolidated statements of operations include shares of Nexxlink, a provider of integrated IT solutions. the results of acquired businesses from the date they were purchased. Of the goodwill acquired in 2005: We made a number of business acquisitions in • $90 million relates to the Business segment, $23 mil- 2005, including: lion relates to the Residential segment, $11 million • NR Communications Ltd. (NR Communications) – In relates to the Other Bell Canada segment and $7 million February and November 2005, Bell Canada acquired relates to the Other BCE segment 100% of the outstanding shares of NR Communications, • $43 million is deductible for tax purposes. which holds a 50% ownership in Inukshuk, a joint venture entered into with Rogers Communications Inc. to provide wireless broadband services.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Infostream is a systems and We made the following business acquisitions in 2004: • Infostream Technologies Inc. (Infostream) – In May storage technology ﬁrm that • Canadian operations of 360networks Corporation 2004, Bell Canada acquired 100% of the outstanding provides networking solu- (360networks) – In November 2004, Bell Canada shares of Infostream. tions for voice over Internet acquired the Canadian operations of 360networks, a • Charon Systems Inc. (Charon) – In May 2004, Bell protocol (VoIP), storage telecommunications service provider. The purchase Canada acquired 100% of the assets of Charon. area networks and network included the shares of 360networks’ subsidiary GT • Elix Inc. (Elix) – In March 2004, Bell Canada acquired management. Group Telecom Services Corporation and certain related 75.8% of the outstanding shares of Elix. Charon is a full-service interconnected U.S. network assets. Following the • Accutel Conferencing Systems Inc. (Canada) and Accutel IT solutions provider that purchase, Bell Canada sold the retail customer oper- Conferencing Systems Corp. (U.S.) (collectively Accutel) – specializes in server-based ations in Central and Eastern Canada to Call-Net In February 2004, Bell Canada acquired 100% of the computing, systems Enterprises Inc. (Call-Net). For a share of the revenues, outstanding shares of Accutel, which provides telecon- integration, IT security, Bell Canada now provides network facilities and other ferencing services. software development and operations and support services to Call-Net so it can IT consulting. service its new customer base. The fair value of the Of the goodwill acquired in 2004: net assets acquired exceeded the purchase price. For • $451 million relates to the Business segment, $4 mil- Elix offers technology con- accounting purposes, the excess was eliminated by: lion relates to the Residential segment, $31 million sulting, integration and – reducing the amounts assigned to the acquired $75 implementation of call relates to the Aliant segment, and million relates routing and management non-monetary assets to nil to the Other Bell Canada segment systems, IT application – recognizing the balance of $69 million as an • $18 million is deductible for tax purposes. integration, and design extraordinary gain in our consolidated statement and implementation of of operations. The following tables provide a summary of all busi- electronic voice-driven • DownEast Mobility Limited (DownEast) – In October ness acquisitions made in 2005 and 2004. The pur- response systems. 2004, Aliant acquired 100% of the outstanding shares chase price allocation for all 2005 acquisitions includes of DownEast, a communication solutions retailer. certain estimates. The ﬁnal purchase price allocation • Bell West – In August 2004, Bell Canada acquired for each business acquisition will be completed within Manitoba Telecom Services Inc.’s (MTS) 40% interest in 12 months of the acquisition date. Bell West. Bell Canada now owns 100% of Bell West.

2005 ALL OTHER NR NEXXLINK BUSINESS COMMUNI- TECHNOL- ACQUI- CATIONS LTD. OGIES INC. SITIONS TOTAL Consideration received: Non-cash working capital (16) 9 (12) (19) Capital assets 19 24 85 128 Other long-term assets – – 3 3 Indeﬁnite-life intangible assets 57 – 20 77 Goodwill –4784131 Long-term debt – – (61) (61) Other long-term liabilities – (6) (12) (18) 60 74 107 241 Cash and cash equivalents (bank indebtedness) at acquisition 10 (3) 13 20 Net assets acquired 70 71 120 261

Consideration given: (1) Cash 69 67 105 241 Acquisition costs 1427 Non-cash – – 13 13 70 71 120 261

(1) This does not include contingent payments of $8 million that may be paid if certain conditions speciﬁed in the purchase agreements are met. If the payments are made, the amounts will be allocated to goodwill.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 75

2004 CANADIAN 40% ALL OTHER OPERATIONS INTEREST BUSINESS OF IN BELL ACQUI- 360NETWORKS WEST SITIONS TOTAL Consideration received: Non-cash working capital (9) – 10 1 Capital assets – (15) 12 (3) Other long-term assets 429 5 10 444 Goodwill – 395 166 561 Other long-term liabilities (58) – – (58) Non-controlling interest – 261 – 261 362 646 198 1,206 Bank indebtedness at acquisition – – (4) (4) Net assets acquired 362 646 194 1,202

Extraordinary gain 69––69

Consideration given: Cash 283 645 174 1,102 Acquisition costs 101112 Future cash payment ––44 Issuance of 582,081 Alliant common shares – – 15 15 293 646 194 1,133

NOTE 4: RESTRUCTURING AND EMPLOYEE DEPARTURE PROGRAM – OTHER ITEMS BELL CANADA

2005 2004 2003 In 2005, we recorded pre-tax restructuring charges of Restructuring initiatives (55) (1,063) – $55 million consisting of: Loss on long-term contract – (128) – • charges of $51 million related to new restructuring Settlement with MTS – 75 – initiatives for the involuntary departure of approxi- Other charges – (108) (14) mately 950 employees Restructuring and • charges of $49 million for relocating employees and other items (55) (1,224) (14) closing real estate facilities that are no longer needed because of the reduction in the workforce from the The table below provides a summary of the restructur- 2004 employee departure program. ing costs recognized in 2005 as well as the correspon- These charges were partly offset by reversals of ding liability as at December 31, 2005. restructuring provisions of $45 million that were no

BELL CONSOLI- longer necessary since actual payments were lower CANADA ALIANT DATED than estimated. Balance in accounts payable The 2004 employee departure program is complete and accrued liabilities at December 31, 2004 120 67 187 and the remaining payments extend to 2007. In addi- 2005 restructuring initiatives 51 – 51 tion, we expect to spend approximately $25 million in Less: 2006 for relocating employees and closing real estate Cash payments (74) (54) (128) facilities that are no longer needed because of our Reversal of excess provision (45) – (45) restructuring initiatives. Balance in accounts payable and accrued liabilities at December 31, 2005 52 13 65

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2004, we recorded a pre-tax restructuring charge On June 30, 2004, BCE Inc. reached an agreement of $985 million related to approximately 5,000 employee with MTS to settle the lawsuits. The terms of the departures under the departure program that Bell settlement included: Canada announced in June 2004. The program consisted • a payment of $75 million by MTS to Bell Canada for of two phases: unwinding various commercial agreements. This settle- • an early retirement plan – 3,950 employees chose ment was recorded in the second quarter of 2004 and to receive a package that included a cash allowance, received on August 3, 2004. immediate pension benefits, an additional guaranteed • the removal of contractual competitive restrictions pension payable up to 65 years of age, career transition to allow Bell Canada and MTS to compete freely with services and post-employment benefits each other, effective June 30, 2004 • a departure plan – 1,050 employees chose to receive • the orderly disposition of our interest in MTS. Our a special cash allowance. voting rights in MTS were waived after receiving the $75 million payment. We sold our interest in MTS in We also recorded a pre-tax charge of $11 million for December 2004. See Note 5, Other Income, for more relocating employees and closing real estate facilities information. that were no longer needed because of the employee • a premium payment to us by MTS in the event there departure program. is a change in control of MTS before 2006. The payment will equal the appreciation in MTS’s share price from the time of our divestiture to the time of any EMPLOYEE DEPARTURE PROGRAM – ALIANT takeover transaction. In 2004, Aliant recorded a pre-tax restructuring charge of $67 million. Under the employee departure program, OTHER CHARGES 693 employees chose to receive a cash allowance. The program is complete and the remaining payments During 2004, we recorded other pre-tax charges extend to 2008. totalling $108 million. These costs consisted mostly of future lease costs for facilities that were no longer needed, asset write-downs and other provisions, net of LOSS ON LONG-TERM CONTRACT a reversal of previously recorded restructuring charges In 2001, we entered into a contract with the Govern- that were no longer necessary because of the introduc- ment of Alberta to build a next-generation network to tion of a new employee departure program. bring high-speed Internet and broadband capabilities In 2003, Bell Canada recorded other charges of to rural communities in Alberta. In 2004, we identified $65 million that related to various asset write-downs cost overruns on the contract and recorded a charge of and other provisions. These charges were offset by a $128 million. We obtained acceptance from the Govern- credit of $66 million relating to the reversal of the ment of Alberta during the fourth quarter of 2005. restructuring charges recorded in 2002, which were no longer necessary because fewer employees were termi- nated than expected. This resulted from an increase in SETTLEMENT WITH MTS the number of employees being transferred to other On May 20, 2004, Bell Canada filed a lawsuit against positions within Bell Canada. MTS after MTS announced it would purchase Allstream In 2003, Aliant recorded a pre-tax restructuring Inc. (Allstream). Bell Canada sought damages and an charge of $15 million. This was a result of a restructur- injunction that would prevent MTS from breaching ing plan at its subsidiary Xwave Solutions Inc. Costs the terms and conditions of the commercial agree- associated with the restructuring include severance ments it had with Bell Canada. On June 3, 2004, Bell and related benefits, technology lease cancellation Canada also filed a lawsuit against Allstream seeking penalties and real estate rationalization costs. The damages related to the same announcement. restructuring was completed in 2004.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 77

NOTE 5: OTHER INCOME

NOTE 2005 2004 2003 Net gains on investments 33 320 76 Interest income 19 30 67 Capitalized interest 12 15 19 24 Securitization losses 10 (34) (26) (33) Bell Canada International Inc. (BCI) loss monetization charge (33) – – Debt restructuring costs (14) – – Income (loss) from cost and equity investments (11) 24 35 Foreign currency gains (losses) (4) 333 Other 37 37 (25) Other income 8 407 177

NET GAINS ON INVESTMENTS NOTE 6: INTEREST EXPENSE Net gains on investments of $33 million in 2005 2005 2004 2003 included: Interest expense on long-term debt (939) (954) (1,030) • a $39 million dilution gain in our interest in TerreStar Interest expense on other debt (42) (45) (70) Networks Inc., a mobile satellite services company Total interest expense (981) (999) (1,100) • a $7 million write-down of Bell Globemedia’s investment in TQS Inc. • other net gains on investments of $1 million. NOTE 7: INCOME TAXES The table below reconciles the amount of reported Net gains on investments of $320 million in 2004 income tax expense in the statements of operations were from: with income tax expense at Canadian statutory rates of • a $108 million gain from the sale of Bell Canada’s 34.4% in 2005, 34.4% in 2004, and 35.4% in 2003. remaining 3.24% interest in YPG General Partner Inc. (YPG) for net cash proceeds of $123 million 2005 2004 2003 • a $217 million gain from the sale of BCE Inc.’s 15.96% Income taxes computed at statutory rates (1,057) (790) (1,100) interest in MTS for net cash proceeds of $584 million. Savings from BCI On August 1, 2004, the MTS shares were transferred monetization transaction 99 –– from Bell Canada to BCE Inc. as part of a corporate Net gains on investments – 120 28 reorganization. The purpose of this reorganization was Large corporations tax (34) (37) (46) to ensure that capital loss carryforwards at BCE Inc. Other 99 26 32 would be available to be utilized against the gain on Total income tax expense (893) (681) (1,086) the sale of the MTS shares. • other net losses on investments of $5 million. The table below shows the signiﬁcant components of income tax expense that related to earnings from Net gains on investments of $76 million in 2003 continuing operations. were from: • a $120 million gain from the sale of a 3.66% interest 2005 2004 2003 in YPG for net cash proceeds of $135 million Current income taxes (147) (716) (677) Future income taxes • a $44 million loss from the write-down of a number Utilization of loss of our cost-accounted investments. carryforwards (244) (38) (402) Change in statutory rate – (2) (21) Change in temporary differences and other (502) 75 14 Total income tax expense (893) (681) (1,086)

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below shows future income taxes resulting BCI LOSS MONETIZATION TRANSACTION from temporary differences between the carrying On April 15, 2005, 3787915 Canada Inc., a wholly- amounts of assets and liabilities for accounting pur- owned subsidiary of Bell Canada, acquired $17 billion poses and the amounts used for tax purposes, as well in preferred shares from 3787923 Canada Inc., a wholly- as tax loss carryforwards. owned subsidiary of BCI. 3787923 Canada Inc. used 2005 2004 the proceeds to advance $17 billion to BCI through Non-capital loss carryforwards 565 809 a subordinated interest-free loan. BCI then advanced Capital loss carryforwards 23 23 $17 billion to 3787915 Canada Inc. by way of a subor- Capital assets (508) (289) dinated interest-bearing demand loan, the funds being Indefinite-life intangible assets (339) (339) used to repay a daylight loan granted to 3787915 Employee benefit plans 82 91 Canada Inc. to make the initial preferred share invest- Investments 35 49 ment. The dividend rate on the preferred shares was Other (986) (756) equal to 5.1%, which was essentially the same as the Total future income taxes (1,128) (412) interest rate on the loan. Future income taxes are comprised of: This transaction was unwound on August 18, 2005, Future income tax asset – and was part of a tax loss consolidation strategy that current portion 474 485 followed the transaction steps laid out in an advance Future income tax asset – tax ruling granted by the Canada Revenue Agency to long-term portion 511 744 Future income tax liability – Bell Canada and BCI. The transaction also received the current portion (5) (8) approval of the Ontario Superior Court of Justice, Future income tax liability – which is supervising BCI’s voluntary plan of arrange- long-term portion (2,108) (1,633) ment pursuant to which BCI is monetizing its assets Total future income taxes (1,128) (412) and resolving outstanding claims against it, with the ultimate objective of distributing the net proceeds to At December 31, 2005, BCE had $1,770 million in its shareholders and dissolving the company. non-capital loss carryforwards. We: 3787915 Canada Inc. had the legal right and inten- • recognized a future tax asset of $565 million for finan- tion to offset the demand loan payable to BCI and the cial reporting purposes for approximately $1,686 million investment in preferred shares of 3787923 Canada Inc. of the non-capital loss carryforwards. Of the total, As a result, these items and the related interest $1,614 million expires in varying annual amounts until expense and dividend income were presented on a net the end of 2015. The balance expires in varying annual basis. The tax savings of $99 million resulting from amounts from 2016 to 2025. the interest expense were presented as a reduction of • did not recognize a future tax asset for financial income tax expense. reporting purposes for approximately $84 million of BCI will be compensated for the use of its losses by the non-capital loss carryforwards. Of the total, $12 mil- Bell Canada through a capital contribution to be made lion expires in varying annual amounts until the end by BCE Inc. of 88% of the realized tax savings. BCE of 2015. The balance expires in varying annual amounts Inc.’s ownership interest in BCI remains at 62%. As from 2016 to 2025. a result: • BCE Inc.’s carrying value of its investment in BCI was At December 31, 2005, BCE had $4,507 million in increased to reflect the increase in BCE Inc.’s share of capital loss carryforwards, which can be carried forward the expected proceeds upon BCI’s eventual liquidation indefinitely. We: • a charge to other income was recorded to reflect the • recognized a future tax asset of $23 million for finan- non-controlling interest’s portion of the capital contri- cial reporting purposes for approximately $102 million bution to be made by BCE Inc. of the capital loss carryforwards • did not recognize a future tax asset for financial reporting purposes on the balance.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 79

NOTE 8: DISCONTINUED OPERATIONS The transaction was ﬁnalized on January 12, 2006 Emergis provides e-business and we realized total proceeds of $859 million. The solutions to the ﬁnancial 2005 2004 2003 gain on disposition was approximately $90 million. As services industry in North CGI Group Inc. (CGI) 46 54 51 a result of the transaction, our ownership in CGI America and the health-care Emergis – 23 (154) industry in Canada. It auto- Teleglobe Inc. (Teleglobe) – –39decreased from 29.8% to 8.6%. Our remaining investment will be accounted for at cost. mates transactions between Aliant’s emerging companies and allows them business segment – – (4) Our current IS/IT outsourcing contract with CGI to interact and transact elec- Aliant’s emerging has been extended by four years until June 2016. communications segment – –63 tronically. Before Emergis Our proportionate share of CGI’s operating leases sold its Security business it Net gain (loss) from discontinued operations 46 77 (5) and other contractual obligations is $378 million also provided organizations ($72 million in 2006, $53 million in 2007, $39 million with the related security in 2008, $33 million in 2009, $28 million in 2010 and services. Before it sold its The table below is a summarized statement of opera- $153 million thereafter). US Health operations, tions for the discontinued operations. Emergis also operated cost containment networks that 2005 2004 2003 EMERGIS processed medical claims for Revenue 897 941 1,629 health-care payers, including In May 2004, our board of directors approved the Operating gain from discontinued insurance companies and operations, before tax 74 84 150 sale of our 63.9% interest in Emergis, and in June self-insured entities. Future income tax asset 2004 we completed the sale by way of a secondary impairment charge – (56) – public offering. Gain (loss) from discontinued operations, before tax (1) 70 (70) In June 2004, Bell Canada paid $49 million to Income tax expense on Emergis for: operating gain (27) (40) (62) • the purchase of Emergis’ Security business Income tax recovery (expense) • the early termination of the Bell Legacy Contract on on loss (gain) – (3) 17 Non-controlling interest – 22 (40) June 30, 2004 rather than December 31, 2004 Net gain (loss) from • the transfer of related intellectual property to discontinued operations 46 77 (5) Bell Canada.

The table below is a summary of cash provided by These transactions were recorded on a net basis. The discontinued operations. net proceeds from the sale of Emergis were $285 million (net of $22 million of selling costs and a $49 million 2005 2004 2003 consideration given to Emergis). The gain on the Cash flows from operating transaction was $58 million. activities 128 91 260 The operating loss includes a future income tax Cash flows (used in) from investing activities (19) (42) 150 asset impairment charge of $56 million ($36 million Cash flows (used in) from after non-controlling interest), which Emergis recorded financing activities (94) 101 (60) before the sale as a result of the unwinding of tax loss Cash provided by utilization strategies that had been in place between discontinued operations 15 150 350 Emergis, 4122780 Canada Inc. (a wholly-owned subsidiary of Emergis) and Bell Canada. CGI Emergis completed the sale of its US Health operations in March 2004 for US$223 million in cash. The On December 16, 2005, we announced our decision to loss on the transaction was $87 million ($160 million sell our investment in CGI and that CGI would pur- after non-controlling interest and BCE Inc.’s incremen- chase 100 million of the Class A shares held by us. As tal goodwill), which was recorded in December 2003. at December 31, 2005, we have accounted for CGI as a Emergis was presented previously as a separate segment. discontinued operation and no longer proportionately consolidate its financial results. CGI was previously presented in the Other BCE segment.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Teleglobe provided inter- TELEGLOBE ALIANT’S REMOTE COMMUNICATIONS national voice and data SEGMENT telecommunications services. Effective April 24, 2002, we started presenting the It also provided retail financial results of Teleglobe as a discontinued opera- Effective December 2003, we started presenting the telecommunications services tion. They were previously presented as a separate financial results of Aliant’s remote communications through its investment in segment. segment as a discontinued operation. They were previ- the Excel Communications The net gain of $39 million in 2003 related mainly to ously presented in the Bell Canada segment. group until the second the use of available loss carryforwards that were applied In December 2003, Aliant completed the sale quarter of 2002. These serv- against the taxes payable relating to Bell Canada’s sale of of Stratos after receiving the required regulatory ices included long distance, a 3.66% interest in the directories business and Aliant’s approvals. Aliant received $340 million ($320 million paging and Internet services sale of Stratos Global Corporation (Stratos). The tax net of selling costs) in cash for the sale. The trans- to residential and business benefit associated with the remaining unused capital action resulted in a gain on sale of $105 million customers in North America. losses has not been reflected in the financial statements. ($48 million after taxes and non-controlling interest). Aliant’s emerging business segment consisted mainly ALIANT’S EMERGING BUSINESS of Aliant’s investments in SEGMENT iMagicTV Inc., Prexar LLC and AMI Offshore Inc. Effective May 2003, we started presenting the financial iMagicTV Inc. is a software results of Aliant’s emerging business segment as a dis- development company that continued operation. They were previously presented provides broadband TV in the Bell Canada segment. software and solutions to Almost all of the assets of Aliant’s emerging busi- service providers around the ness segment were sold at December 31, 2003. world. Prexar LLC is an Internet services provider. AMI Offshore Inc. provides process and systems control NOTE 9: EARNINGS PER SHARE technical services, and The table below is a reconciliation of the numerator and the denominator used in the calculation of basic and contracts manufacturing diluted earnings per common share from continuing operations. solutions to offshore oil and gas and other industries. 2005 2004 2003 Aliant’s remote communica- Earnings from continuing operations (numerator) tions segment consisted of Earnings from continuing operations 1,915 1,447 1,820 Aliant’s 53.2% investment Dividends on preferred shares (70) (70) (64) in Stratos. Stratos offers Premium on redemption of preferred shares – – (7) Internet Protocol (IP), data Earnings from continuing operations – basic 1,845 1,377 1,749 and voice access services Weighted average number of common shares outstanding (denominator) (in millions) through a range of emerging Weighted average number of common shares outstanding – basic 926.8 924.6 920.3 and established technologies, (1) including satellite and Assumed exercise of stock options 0.3 0.6 1.6 microwave, to customers Weighted average number of common shares outstanding – diluted 927.1 925.2 921.9 in remote locations. (1) The calculation of the assumed exercise of stock options includes the effect of the average unrecognized future compensation cost of dilutive options. It does not include anti-dilutive options. These are options that would not be exercised because their exercise price is higher than the average market value of a BCE Inc. common share for each of the periods shown in the table. Including them would cause our diluted earnings per share to be overstated. The number of excluded options was 24,466,767 in 2005, 26,693,305 in 2004 and 22,176,302 in 2003.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 81

NOTE 10: ACCOUNTS RECEIVABLE In 2005, we recognized a pre-tax loss of $34 million on the revolving sale of accounts receivable for the 2005 2004 $26 Trade accounts receivable 1,842 2,100 combined securitizations, compared to million in Allowance for doubtful accounts (130) (144) 2004 and $33 million in 2003. Allowance for revenue adjustments (118) (102) The table below shows balances for the combined Income taxes receivable 48 1 securitizations at December 31, 2005 and the assump- Other accounts receivable 124 96 tions that were used in the model on the date of trans- 1,766 1,951 fer and at December 31, 2005. A 10% or 20% adverse change in each of these assumptions would have no signiﬁcant effect on the current fair value of the SECURITIZATION OF ACCOUNTS RECEIVABLE retained interest.

Bell Canada sold an interest in a pool of accounts RANGE 2005 2004 receivable to a securitization trust for a total of $1.2 bil- Securitized interest in lion in cash at December 31, 2005 ($1 billion at Decem- accounts receivable 1,354 1,125 Retained interest 172 176 ber 31, 2004), under a revolving sales agreement that Servicing liability 1.8 1.3 came into effect on December 12, 2001. The agreement Average accounts expires on December 12, 2006. Bell Canada had a receivable managed 1,972 1,513 retained interest of $133 million in the pool of accounts Assumptions: receivable at December 31, 2005 ($133 million at Cost of funds 2.54%–2.86% 2.86% 2.58% December 31, 2004), which equals the amount of over- Average collateralization in the receivables it sold. delinquency ratio 7.70%–12.32% 12.32% 7.20% Average net Aliant sold an interest in a pool of accounts receiv- credit loss ratio 0.55%–0.90% 0.56% 0.90% able to a securitization trust for a total of $120 million Weighted average in cash at December 31, 2005 ($125 million at Decem- life (days) 32–37 37 32 ber 31, 2004), under a revolving sales agreement that Servicing fee liability 2.00% 2.00% 2.00% came into effect on December 13, 2001. The agreement expires on December 13, 2006. Aliant had a retained The table below is a summary of certain cash ﬂows interest of $39 million in the pool at December 31, received from and paid to the trusts during the year. 2005 ($43 million at December 31, 2004). Bell Canada and Aliant continue to service these 2005 2004 accounts receivable. The buyers’ interest in the collec- Collections reinvested in revolving sales 17,724 14,360 Increase in sale proceeds 229 95 tion of these accounts receivable ranks ahead of the interests of Bell Canada and Aliant, which means that Bell Canada and Aliant are exposed to certain risks of NOTE 11: OTHER CURRENT ASSETS default on the amount securitized. They have provided various credit enhancements in the form of overcollater- NOTE 2005 2004 alization and subordination of their retained interests. Future income taxes 7 474 485 The buyers will reinvest the amounts collected by Inventory 338 295 buying additional interests in the Bell Canada and Prepaid expenses 205 232 Aliant accounts receivable until the agreements expire. Other 125 49 The buyers and their investors have no claim on Bell 1,142 1,061 Canada’s and Aliant’s other assets if customers do not pay amounts owed on time.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12: CAPITAL ASSETS

2005 2004 ACCUMULATED NET BOOK ACCUMULATED NET BOOK COST AMORTIZATION VALUE COST AMORTIZATION VALUE Telecommunications assets: Inside plant 19,246 13,358 5,888 18,011 12,452 5,559 Outside plant 14,433 9,475 4,958 14,303 9,107 5,196 Station equipment 2,655 1,311 1,344 3,167 1,910 1,257 Machinery and equipment 6,273 3,685 2,588 5,529 3,039 2,490 Buildings 3,157 1,340 1,817 2,681 1,384 1,297 Plant under construction 1,852 – 1,852 1,605 – 1,605 Satellites 1,552 404 1,148 1,769 758 1,011 Land 94 – 94 95 – 95 Other 200 66 134 215 71 144 Total property, plant and equipment 49,462 29,639 19,823 47,375 28,721 18,654 Finite-life intangible assets: Software 3,163 1,497 1,666 3,158 1,274 1,884 Customer relationships 623 64 559 603 42 561 Other 27 13 14 10 5 5 Total capital assets 53,275 31,213 22,062 51,146 30,042 21,104

The cost of assets under capital leases was $1,283 mil- Investments at equity include goodwill of $28 million at December 31, 2005, and $848 million at lion at December 31, 2005 and December 31, 2004. December 31, 2004. The net book value of these Amortization of deferred charges was $3 million in assets was $887 million at December 31, 2005, and 2005, $12 million in 2004, and $14 million in 2003. $530 million at December 31, 2004. Amortization of capital assets was $3,111 million NOTE 14: INDEFINITE-LIFE in 2005, $3,044 million in 2004, and $3,048 million INTANGIBLE ASSETS in 2003. We capitalized total interest costs of $15 million in 2005 2004 2005, $19 million in 2004, and $24 million in 2003. Brand name 1,986 1,986 Additions to ﬁnite-life intangible assets were Spectrum licences 895 778 $503 million in 2005 and $619 million in 2004. Television licences 132 134 Cable licences 18 18 3,031 2,916 NOTE 13: OTHER LONG-TERM ASSETS

NOTE 2005 2004 Accrued beneﬁt asset 24 1,164 1,128 Future income taxes 7 511 744 Investments at cost 465 261 Investment tax credits receivable 345 – Investments at equity 89 110 Deferred debt issuance costs 77 82 Long-term notes and other receivables 63 135 Deferred development costs 16 8 Other 184 160 2,914 2,628

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 83

NOTE 15: GOODWILL

OTHER BELL OTHER CONSOLI- NOTE RESIDENTIAL BUSINESS ALIANT CANADA BCE DATED Balance – December 31, 2004 3,062 1,833 562 289 2,010 7,756 Additions 3 23 90 – 11 7 131 Balance – December 31, 2005 3,085 1,923 562 300 2,017 7,887

NOTE 16: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

NOTE 2005 2004 Trade accounts payable and accruals 1,782 1,830 Compensation payable 548 506 Deferred revenues 441 385 Taxes payable 274 216 Restructuring charges payable 4 65 187 Future income taxes 7 5 8 Other current liabilities 320 312 3,435 3,444

NOTE 17: DEBT DUE WITHIN ONE YEAR

WEIGHTED WEIGHTED AVERAGE AVERAGE NOTE INTEREST RATE MATURITY 2005 2004 Bank advances 3.37% N/A 7 18 Notes payable 4.11% 30 days 80 137 Long-term debt due within one year 18 1,286 1,117 1,373 1,272

N/A: Not applicable.

Restrictions Some of the credit agreements: • require us to meet speciﬁc ﬁnancial ratios • restrict our acquisition of capital assets • restrict the payment of dividends.

We are in compliance with all conditions and restrictions.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18: LONG-TERM DEBT WEIGHTED AVERAGE NOTE INTEREST RATE MATURITY 2005 2004 BCE Inc. – Notes (a) 6.86% 2006–2009 2,000 2,000 Bell Canada Debentures and notes (b) 7.14% 2006–2054 8,380 8,246 Subordinated debentures 8.21% 2026–2031 275 275 Capital leases (c) 6.16% 2006–2047 854 400 Other 73 75 Total – Bell Canada 9,582 8,996

Aliant Debentures, notes and bonds (d) 7.65% 2007–2025 885 885 Other 19 11 Total – Aliant 904 896

Bell Globemedia (e) Revolving reducing term credit agreements 3.97% 2006 30 40 Notes 6.44% 2009–2014 450 450 Total – Bell Globemedia 480 490

Telesat – Notes and other 7.84% 2006–2009 340 289

Other – 18

Total debt 13,306 12,689 Unamortized premium (f) 99 113 Less: Amount due within one year 17 (1,286) (1,117) Long-term debt 12,119 11,685

(a) BCE Inc. lion. Some of the proceeds were invested in interest- bearing loans receivable. The capital lease obligations, All notes are unsecured. BCE Inc. has the option to net of loans, were originally issued for US$39 million redeem $1.7 billion in notes at any time. and have been swapped into Canadian dollars.

(b) Bell Canada (d) Aliant All debentures and notes are unsecured. They include: All debentures and notes are unsecured. The bonds • US$200 million maturing in 2006 and US$200 mil- ($185 million in 2005 and 2004) are secured by deeds lion maturing in 2010, both of which have been swapped of trust and mortgage, and by supplemental deeds. into Canadian dollars These instruments contain a first fixed and specific • $125 million of long-term debt, which includes a mortgage, a pledge and charge upon all real and tangi- call option that allows for early redemption of the ble property and equipment, which includes inven- debentures. tory and all capital investments except software, and all rights and licences related to that property of (c) Bell Canada Aliant Telecom Inc., based on province of issue. The bonds also provide, based on province of issue, a float- Capital leases include $353 million in 2005 and ing charge on all future real and tangible property of $364 million in 2004, netted by loans receivable of Aliant Telecom Inc. and all revenues and proceeds $267 million in 2005 and $284 million in 2004. These derived from that property. Aliant Telecom Inc. has obligations arose from agreements that Bell Canada swapped $100 million of debt from fixed to floating entered into in 1999 and 2001 to sell and lease back interest rates. telecommunications equipment for a total of $391 mil-

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 85

In addition, it has also issued swaptions related to NOTE 20: NON-CONTROLLING INTEREST two outstanding issues of long-term debt with a total 2005 2004 notional amount of $90 million. The swaptions will Non-controlling interest in subsidiaries: permit the counterparty to enter into interest rate Bell Globemedia 817 775 swap transactions. If exercised, these swaptions will Aliant 585 640 involve the payment of ﬁxed interest rates in exchange Bell Nordiq Group Inc. for the receipt of the three-month bankers’ acceptance (Bell Nordiq) 150 143 ﬂoating rate from 2006 until maturity in 2013. Other 24 28 1,576 1,586

(e) Bell Globemedia Preferred shares issued by subsidiaries: Bell Canada 1,100 1,100 Assets of CTV and one of its subsidiaries, CTV Specialty Aliant 172 172 Television Inc. (CTV Specialty), are collateral for these Telesat 50 50 agreements. $95 million of the short-term advances at 1,322 1,322 December 31, 2004 were repaid to BCE Inc. in January 2,898 2,908 2005. These were replaced with long-term debt under existing long-term facilities. CTV and CTV Specialty have ﬁxed interest rates through swap agreements on $95 million of bank debt. NOTE 21: FINANCIAL INSTRUMENTS

(f) Unamortized Premium DERIVATIVES This amount represents the unamortized purchase We use derivative instruments to manage our expo- price allocated to long-term debt resulting from BCE’s sure to interest rate risk, foreign currency risk and repurchase of SBC Communications Inc.’s 20% interest changes in the price of BCE Inc. common shares that in Bell Canada Holdings Inc. may be issued under our compensation plans (SCPs and DSUs). We do not use derivative instruments for speculative purposes. Since we do not trade actively in Restrictions derivative instruments, we are not exposed to any Some of the debt agreements: significant liquidity risks relating to them. • require us to meet specific financial ratios The following derivative instruments were out- • impose covenants, maintenance tests and new issue standing at December 31, 2005: tests • cross-currency swaps and forward contracts that • restrict the payment of dividends hedge foreign currency risk on a portion of our long- • restrict how we can dispose of Bell Canada voting term debt shares. • interest rate swaps that hedge interest rate risk on a portion of our long-term debt We are in compliance with all conditions and • forward contracts that hedge foreign currency risk restrictions. on anticipated transactions • forward contracts on BCE Inc. common shares that hedge the fair value exposure related to SCPs and DSUs. NOTE 19: OTHER LONG-TERM LIABILITIES

NOTE 2005 2004 CREDIT RISK Future income taxes 7 2,108 1,633 Accrued beneﬁt liability 24 1,606 1,519 We are exposed to credit risk if counterparties to our Deferred revenue on derivative instruments are unable to meet their obli- long-term contracts 389 446 gations. We expect that they will be able to meet their Deferred contract payments 199 254 obligations because we deal with institutions that Other 762 982 have strong credit ratings and we regularly monitor Total other long-term liabilities 5,028 4,834 our credit risk and credit exposure.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There was minimal credit risk relating to derivative • $75 million interest rate swap whereby we pay interest instruments at December 31, 2005. We are also exposed at a rate of 3.2%. We receive interest on the swap at a to credit risk from our customers, but the concentra- rate equal to the three-month bankers’ acceptance tion of this risk is minimized because we have a large floating rate. The swap matures in 2006. and diverse customer base. • $20 million interest rate swap whereby we pay interest at a rate of 4.7%. We receive interest on the swap at a rate equal to the three-month bankers’ acceptance CURRENCY EXPOSURES floating rate. The swap matures in 2006. We use cross-currency swaps and forward contracts to hedge debt that is denominated in foreign currencies. We have also issued swaptions to permit the counter- We also use forward contracts to hedge foreign cur- party to enter into interest rate swap transactions for a rency risk on anticipated transactions. Derivatives that notional amount of $90 million. If exercised, these qualify for hedge accounting, and the underlying swaptions will involve the payment of fixed interest hedged items, are marked-to-market at current rates. rates of 10.5% and 11.1% in exchange for the receipt of The principal amount to be received under currency the three-month bankers’ acceptance floating rate contracts was US$600 million at December 31, 2005. from 2006 until maturity in 2013. The principal amount to be paid under these contracts was $798 million at December 31, 2005. FAIR VALUE Fair value is the amount that willing parties would INTEREST RATE EXPOSURES accept to exchange a financial instrument based on We use interest rate swaps to manage the mix of fixed the current market for instruments with the same and floating interest rates on our debt. We have entered risk, principal and remaining maturity. We base fair into interest rate swaps with a notional amount of values on estimates using present value and other $895 million, as follows: valuation methods. • $700 million of interest rate swaps whereby we pay These estimates are affected significantly by assump- interest at a rate equal to the three-month bankers’ tions we make about the amount and timing of esti- acceptance floating interest rate plus 0.42%. We receive mated future cash flows and discount rates, which all interest on these swaps at a rate of 5.0%. The swaps reflect varying degrees of risk. Potential income taxes mature in 2017. and other expenses that would be incurred on disposi- • $100 million interest rate swap whereby we pay tion of these financial instruments are not reflected interest at a rate equal to the three-month bankers’ in the fair values. As a result, the fair values are not acceptance floating interest rate plus 2.1%. We receive necessarily the net amounts that would be realized if interest on the swap at a rate of 6.8%. The swap these instruments were actually settled. matures in 2011.

The carrying value of all ﬁnancial instruments approximates fair value, except for those noted in the table below.

2005 2004 CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE Investment in Nortel (1) 55 52 54 59 Long-term debt due within one year 1,286 1,304 1,117 1,130 Long-term debt 12,119 13,800 11,685 13,623 Derivative ﬁnancial instruments, net asset (liability) position: Forward contracts – BCE Inc. shares – (1) (37) (41) Currency contracts (2) (83) (120) (65) (97) Interest rate swaps and swaptions (8) (17) (10) (29)

(1) We have designated 4 million of our approximately 15 million Nortel common shares to manage our exposure to outstanding rights to SCPs. (2) Currency contracts include cross-currency interest rate swaps and foreign currency forward contracts. Some of the cross-currency interest rate swaps are economic hedges that do not qualify for hedge accounting. We carry these at fair value and all gains or losses are recorded in the statement of operations.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 87

NOTE 22: SHARE CAPITAL or more series and to set the number of shares and conditions for each series. The table below is a summary of the principal PREFERRED SHARES terms of BCE Inc.’s First Preferred Shares. There were BCE Inc.’s articles of amalgamation provide for an no Second Preferred Shares issued and outstanding at unlimited number of First Preferred Shares and Second December 31, 2005. BCE Inc.’s articles of amalgama- Preferred Shares. The terms set out in the articles tion describe the terms and conditions of these shares authorize BCE Inc.’s directors to issue the shares in one in detail.

STATED NUMBER OF SHARES CAPITAL AT ANNUAL REDEMP- ISSUED DECEMBER 31 DIVIDEND CONVERT- CONVERSION REDEMPTION TION AND OUT- SERIES RATE IBLE INTO DATE DATE PRICE AUTHORIZED STANDING 2005 2004 Q floating Series R December 1, 2015 At any time $25.50 8,000,000 – – – R 4.54% Series Q December 1, 2010 December 1, 2010 $25.00 8,000,000 8,000,000 200 200 S floating Series T November 1, 2006 At any time $25.50 8,000,000 8,000,000 200 200 T fixed Series S November 1, 2011 November 1, 2011 $25.00 8,000,000 – – – Y floating Series Z December 1, 2007 At any time $25.50 10,000,000 1,147,380 29 29 Z 5.319% Series Y December 1, 2007 December 1, 2007 $25.00 10,000,000 8,852,620 221 221 AA 5.45% Series AB September 1, 2007 September 1, 2007 $25.00 20,000,000 20,000,000 510 510 AB floating Series AA September 1, 2012 At any time $25.50 20,000,000 – – – AC 5.54% Series AD March 1, 2008 March 1, 2008 $25.00 20,000,000 20,000,000 510 510 AD floating Series AC March 1, 2013 At any time $25.50 20,000,000 – – – 1,670 1,670

Voting Rights Conversion Features All of the issued and outstanding preferred shares at All of the issued and outstanding preferred shares at December 31, 2005 were non-voting, except under December 31, 2005 are convertible at the holder’s special circumstances when the holders are entitled to option into another associated series of preferred one vote per share. shares on a one-for-one basis according to the terms set out in BCE Inc.’s articles of amalgamation. Entitlement to Dividends Redemption Features Holders of Series R, Z, AA and AC shares are entitled to fixed cumulative quarterly dividends. The dividend BCE Inc. may redeem Series R, Z, AA and AC shares rate on these shares is reset every five years, as set out on the redemption date and every five years after in BCE Inc.’s articles of amalgamation. that date. Holders of Series S and Y shares are entitled to If Series T shares are issued, BCE Inc. may redeem floating adjustable cumulative monthly dividends. them on the redemption date and every five years after If Series Q, AB and AD shares are issued, their that date. holders will be entitled to floating adjustable cumula- BCE Inc. may redeem Series S and Y shares at any tive monthly dividends. time at $25.50 per share (being a 2% premium to the If Series T shares are issued, their holders will be issue price). If Series Q, AB and AD shares are issued, entitled to fixed cumulative quarterly dividends. BCE Inc. may redeem them at any time at $25.50 per share.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMON SHARES AND CLASS B SHARES liquidated, dissolved or wound up, after payments due to the holders of preferred shares. BCE Inc.’s articles of amalgamation provide for an The table below provides details about the out- unlimited number of voting common shares and non- standing common shares of BCE Inc. No Class B shares voting Class B shares. The common shares and the were outstanding at December 31, 2005 and 2004. Class B shares rank equally in the payment of dividends and in the distribution of assets if BCE Inc. is

2005 2004 NUMBER STATED NUMBER STATED OF SHARES CAPITAL OF SHARES CAPITAL Outstanding, beginning of year 925,935,682 16,781 923,988,818 16,749 Shares issued under employee stock option plan 1,383,234 25 1,946,864 32 Outstanding, end of year 927,318,916 16,806 925,935,682 16,781

Dividend Reinvestment Plan The trustee of the ESPs buys BCE Inc. common shares for the participants on the open market, by pri- The dividend reinvestment plan allows eligible common vate purchase or from BCE Inc. (where the shares are shareholders to use their dividends to buy additional issued from Treasury). BCE Inc. chooses the method common shares. A trustee buys BCE Inc. common shares that the trustee uses to buy the shares. for the participants on the open market, by private There were 34,544 employees participating in the purchase or from BCE Inc. (where the shares are issued plans at December 31, 2005. The total number of from Treasury). BCE Inc. chooses the method the trustee common shares bought for employees was 6,222,262 uses to buy the shares. in 2005 and 6,818,079 in 2004. The compensation A total of 3,039,870 common shares were bought on expense related to ESPs was $38 million in 2005, 2004 the open market under this plan for $91 million in and 2003. At December 31, 2005, 13,513,812 common 2005. A total of 3,198,015 common shares were bought shares were reserved for issuance under the ESPs. on the open market under this plan for $89 million in 2004. STOCK OPTIONS NOTE 23: Under BCE Inc.’s long-term incentive programs, STOCK-BASED COMPENSATION PLANS BCE Inc. may grant options to key employees to buy BCE Inc. common shares. The subscription price is usually equal to the market value of the shares on the EMPLOYEE SAVINGS PLANS last trading day before the grant comes into effect. At ESPs are designed to encourage employees of BCE Inc. December 31, 2005, 25,255,113 common shares were and its participating subsidiaries to own shares of authorized for issuance under these programs. BCE Inc. Each year, employees who participate in the For options granted before January 1, 2004, the plans can choose to have up to a certain percentage of right to exercise options generally vests or accrues at their annual earnings withheld through regular payroll 25% a year for four years of continuous employment deductions in order to buy BCE Inc. common shares. from the date of grant, unless a special vesting period In some cases, the employer will also contribute up applies. Options become exercisable when they vest to a maximum percentage of the employee’s annual and can generally be exercised for a period of up to earnings to the plan. 10 years from the date of grant. Each participating company decides on its maxi- For most options granted after January 1, 2004, the mum percentages. For Bell Canada, employees can right to exercise options vests after two and three contribute up to 12% of their annual earnings. Bell years of continuous employment from the date of Canada contributes up to 2%. grant and if a speciﬁc company wide performance

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 89

target is met. Options become exercisable when they When the Nortel common shares were distributed in vest and can be exercised for a period of up to six May 2000, each outstanding BCE Inc. stock option years from the date of grant. Subject to achieving was cancelled and replaced by two new stock options. this speciﬁc performance target, 50% of the options The ﬁrst option gives the holder the right to buy one will vest after two years and the remaining 50% after BCE Inc. common share. The second option gives the three years. Special vesting provisions may apply if: holder the right to buy approximately 1.57 post-split • there is a change of control of BCE Inc. and the option common shares of Nortel (Nortel option) at exercise holder’s employment ends under certain circumstances prices that maintain the holder’s economic position. • the option holder is employed by a designated subsidiary of BCE Inc., and BCE Inc.’s ownership interest in that subsidiary falls below the percentage set out in the program.

The table below is a summary of the status of BCE Inc.’s stock option programs.

2005 2004 2003 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE ($) OF SHARES PRICE ($) OF SHARES PRICE ($) Outstanding, January 1 28,481,679 $32 25,750,720 $32 24,737,423 $34 Granted 1,481,924 $28 5,911,576 $30 6,008,051 $28 Exercised (1,383,234) $18 (1,946,864) $16 (552,681) $17 Forfeited (1,237,634) $34 (1,233,753) $34 (4,442,073) $35 Outstanding, December 31 27,342,735 $32 28,481,679 $32 25,750,720 $32 Exercisable, December 31 16,505,709 $34 14,633,433 $34 10,722,294 $33

The table below shows more about BCE Inc.’s stock option programs at December 31, 2005.

STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF REMAINING EXERCISE EXERCISE EXERCISE PRICES NUMBER LIFE PRICE ($) NUMBER PRICE ($) Below $20 749,254 2.36 years $15 749,254 $15 $20–$29 12,852,301 5.67 years $29 3,198,525 $28 $30–$39 7,750,392 5.68 years $34 6,567,142 $34 Over $40 5,990,788 4.78 years $41 5,990,788 $41 27,342,735 5.39 years $32 16,505,709 $34

ASSUMPTIONS USED IN STOCK OPTION 2005 2004 2003 PRICING MODEL Compensation expense ($ millions) 16 22 22 The following table shows the assumptions used to Number of stock determine the stock-based compensation expense options granted 1,481,924 5,911,576 6,008,051 using the Black-Scholes option pricing model. Weighted average fair value per option granted ($) 3 46 Weighted average assumptions: Dividend yield 4.4% 4.0% 3.6% Expected volatility 19% 27% 30% Risk-free interest rate 3.6% 3.1% 4.0% Expected life (years) 3.5 3.5 4.5

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Starting in 2004, most of the stock options granted When the distribution of Nortel common shares contain a specific performance target that must be met was made in 2000, the outstanding options were before the option can be exercised. This is reflected in cancelled and replaced with options to buy BCE Inc. the calculation of the weighted average fair value per common shares and options to buy Nortel common option granted. shares. The related SCPs were adjusted accordingly. For each right to an SCP held before the distribution, right holders now have rights related to both RESTRICTED SHARE UNITS BCE Inc. and Nortel common shares. In 2004, BCE Inc. granted RSUs to executives and The number of SCPs outstanding at December 31, other key employees. The value of an RSU is always 2005 was: equal to the value of one BCE Inc. common share. • 490,058 relating to BCE Inc. common shares Dividends in the form of additional RSUs are credited • 2,332,004 relating to Nortel common shares. to the participant’s account on each dividend payment date and are equivalent in value to the dividend paid All of the outstanding SCPs cover the same number of on BCE Inc. common shares. Each executive is granted shares as the options that they relate to. It is the a specific number of RSUs for a given performance employer’s responsibility to make the payments under period, based on his or her position and level of the SCPs. There was income related to SCPs of $3 mil- contribution. At the end of each given performance lion in 2005, $9 million in 2004, and $29 million in period, RSUs vest if performance objectives are met or 2003. These amounts included the recovery of SCP are forfeited. expense as a result of forfeitures in the amounts of Vested RSUs are paid in BCE Inc. common shares $3 million, $14 million and $50 million for the years purchased on the open market, in cash or through 2005, 2004 and 2003 respectively. a combination of both, as the holder chooses, as long as individual share ownership requirements are met. DEFERRED SHARE UNITS The table below is a summary of the status of RSUs. Eligible bonuses may be paid in the form of DSUs NUMBER OF RSUS when executives or other key employees elect or are 2005 2004 required to participate in the plan. For non-manage- Outstanding, January 1 1,996,522 – Granted 504,427 1,986,513 ment directors, their compensation is paid in DSUs Dividends credited 100,657 61,086 until the minimum share ownership requirement is Forfeited (80,825) (51,077) met or as elected by the directors thereafter. Outstanding, December 31 2,520,781 1,996,522 The value of a DSU is always equal to the value of one BCE Inc. common share. Dividends in the form of additional DSUs are credited to the participant’s For the year ended December 31, 2005, we recorded account on each dividend payment date and are a compensation expense for RSUs of $37 million equivalent in value to the dividends paid on BCE Inc. ($25 million in 2004). common shares. DSUs are paid in BCE Inc. common shares pur- SPECIAL COMPENSATION PAYMENTS chased on the open market following the cessation of a participant’s employment or when a director leaves Before 2000, when BCE Inc. granted options to execu- the board. tives and other key employees, related rights to SCPs were also often granted. SCPs are cash payments representing the amount that the market value of the shares on the date of exercise of the related options exceeds the exercise price of these options.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 91

The table below is a summary of the status of DSUs. NOTE 24: EMPLOYEE BENEFIT PLANS

NUMBER OF DSUS We provide pension, other retirement and post- 2005 2004 2003 employment benefits for almost all of our employees. Outstanding, January 1 886,714 703,995 890,834 These include DB pension plans, plans that provide Granted 173,158 306,225 154,417 other employee future benefits and DC pension plans. Dividends credited 40,668 37,226 31,472 Payments (115,892) (160,732) (372,728) 2005 2004 2003 Outstanding, December 31 984,648 886,714 703,995 Pension benefits: DB plans cost 236 85 13 DC plans cost 26 15 5 For the year ended December 31, 2005, we recorded Other future benefits costs 118 156 157 a compensation expense for DSUs of $4 million Net benefit plans cost 380 256 175 (expense of $5 million in 2004 and income of $5 million in 2003).

COMPONENTS OF DEFINED BENEFIT PLANS COST The table below shows the defined benefit plans cost before and after recognizing its long-term nature. The recognized net benefit plans cost reflects the amount reported in our statements of operations and is calculated according to our accounting policy.

PENSION BENEFITS OTHER BENEFITS 2005 2004 2003 2005 2004 2003 Current service cost 221 228 217 35 31 31 Interest cost on accrued benefit obligation 876 806 757 110 104 105 Actual (return) loss on plan assets (1,573) (1,074) (1,583) (12) (4) (8) Past service costs arising during period 3 77 4 (120) 14 2 Actuarial loss (gain) on accrued benefit obligation 1,803 772 513 499 102 (52) Elements of employee future benefit plans cost (credit), before recognizing its long-term nature 1,330 809 (92) 512 247 78 Excess (deficiency) of actual return over expected return (1) 628 121 648 2 (6) (1) Deferral of amounts arising during period: Past service costs (3) (77) (4) 120 (14) (2) Actuarial (loss) gain on accrued benefit obligation (1,803) (772) (513) (499) (102) 52 Amortization of previously deferred amounts: Past service costs 9 10 9 1 –– Net actuarial losses 97 33 23 – 1– Transitional (asset) obligation – (44) (44) 26 30 30 Curtailment gain (2) – ––(44) –– Adjustments to recognize long-term nature of employee future benefit plans cost (credit) (1,072) (729) 119 (394) (91) 79 Increase (decrease) in valuation allowance (24) 3 (12) – –– Other 2 2 (2) – –– DB plans cost, recognized 236 85 13 118 156 157

(1) The expected return on plan assets for a given year is calculated based on the market-related value of plan assets at the beginning of that year. The market-related value of pension plan assets was $12,928 million at January 1, 2005, $13,044 million at January 1, 2004, and $12,542 million at January 1, 2003. (2) 2005 includes a curtailment gain associated with the phase-out, over the next three years, of a discretionary allowance program.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMPONENTS OF ACCRUED BENEFIT ASSET (LIABILITY) The table below shows the change in beneﬁt obligations, change in fair value of plan assets and the funded status of the DB plans.

PENSION BENEFITS OTHER BENEFITS 2005 2004 2005 2004 Accrued benefit obligation, beginning of year 14,348 12,505 1,772 1,615 Current service cost 221 228 35 31 Interest cost on accrued benefit obligation 876 806 110 104 Actuarial losses 1,803 772 499 102 Benefit payments (897) (725) (93) (81) Employee contributions 11 8 – – Special termination costs (1) (17) 660 (21) (12) Plan amendment (2) 3 77 (120) 14 Transfers from DC pension plans 221 – – – Other – 17 (1) (1) Accrued benefit obligation, end of year 16,569 14,348 2,181 1,772

Fair value of plan assets, beginning of year 13,030 12,569 137 133 Actual return on plan assets 1,573 1,074 12 4 Beneﬁt payments (897) (725) (93) (81) Employer contributions 215 97 93 81 Employee contributions 11 8 – – Transfers from DC pension plans 221 – – – Other (15) 7 – – Fair value of plan assets, end of year 14,138 13,030 149 137

Plan deﬁcit (2,431) (1,318) (2,032) (1,635) Unamortized net actuarial losses 3,361 2,304 491 47 Unamortized past service costs 121 129 (1) 17 Unamortized transitional (asset) obligation (35) (35) 187 227 Valuation allowance (103) (127) – – Accrued beneﬁt asset (liability), end of year 913 953 (1,355) (1,344)

Accrued beneﬁt asset included in other long-term assets 1,164 1,128 – – Accrued beneﬁt liability included in other long-term liabilities (251) (175) (1,355) (1,344)

(1) Costs in 2004 relate to the employee departure programs announced at Bell Canada. See Note 4, Restructuring and Other Items, for more information. (2) 2005 includes a curtailment gain associated with the phase-out, over the next three years, of a discretionary allowance program. Costs in 2004 mainly relate to DB pension plan amendments at Aliant whereby certain bargaining unit employees and eligible management employees were awarded past service beneﬁts.

For DB pension plans with an accrued benefit obliga- For DB pension plans with an accrued benefit obligation that was more than plan assets: tion that was less than plan assets: • the accrued benefit obligation was $16,430 mil- • the accrued benefit obligation was $139 million lion at December 31, 2005, and $14,087 million at at December 31, 2005, and $261 million at Decem- December 31, 2004 ber 31, 2004 • the fair value of plan assets was $13,866 million • the fair value of plan assets was $272 million at at December 31, 2005, and $12,630 million at Decem- December 31, 2005, and $400 million at December 31, ber 31, 2004. 2004.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 93

SIGNIFICANT ASSUMPTIONS We used the following key assumptions to measure the accrued benefit obligation and the net benefit plans cost for the DB pension plans and plans that provide other employee future benefits. These assumptions are long-term, which is consistent with the nature of employee benefit plans.

PENSION BENEFITS OTHER BENEFITS 2005 2004 2003 2005 2004 2003 At December 31 Accrued beneﬁt obligation: Discount rate, end of year 5.2% 6.2% 6.5% 5.2% 6.2% 6.5% Rate of compensation increase, end of year 3.0% 3.5% 3.5% 3.0% 3.5% 3.5%

For the year ended December 31 Net beneﬁt plans cost: Discount rate, end of preceding year 6.2% 6.5% 6.5% 6.2% 6.5% 6.5% Expected return on plan assets, end of preceding year 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% Rate of compensation increase, end of preceding year 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

We assumed the following trend rates in health- PENSION PLAN ASSETS care costs: The investment strategy for the major benefit plans is • an annual rate of increase of 4.5% in the cost per to maintain a diversified portfolio of assets, invested in person of covered health-care benefits for 2005 and the a prudent manner to maintain the security of funds foreseeable future while maximizing returns within our guidelines. The • an annual rate of increase of 10.5% in the cost of expected rate of return assumption is based on our medication for 2005 and a gradual decline to 4.5% target asset allocation policy and the expected future over six years. rates of return on these assets. The table on the next page shows the allocation of our pension plan assets Assumed trend rates in health-care costs have a signi- at December 31, 2005 and 2004, target allocations for ficant effect on the amounts reported for the health-care 2005 and the expected long-term rate of return by plans. The table below, for example, shows the effect asset class. of a 1% change in the assumed trend rates in health- care costs.

1% INCREASE 1% DECREASE Effect on other beneﬁts – total service and interest cost 19 (18) Effect on other beneﬁts – accrued obligation 231 (217)

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

WEIGHTED WEIGHTED PERCENTAGE AVERAGE AVERAGE OF PLAN EXPECTED TARGET ASSETS AT LONG-TERM ALLOCATION DECEMBER 31 RATE OF RETURN ASSET CATEGORY 2005 2005 2004 2005 Equity securities 45%–65% 59% 57% 9.0% Debt securities 35%–55% 41% 43% 5.5% Total/average 100% 100% 7.5%

Equity securities included approximately $62 million CASH FLOWS of BCE Inc. common shares or 0.4% of total plan assets We are responsible for adequately funding our DB at December 31, 2005, and approximately $95 million pension plans. We make contributions to them based of BCE Inc. common shares or 0.7% of total plan assets on various actuarial cost methods that are permitted at December 31, 2004. by pension regulatory bodies. Contributions reflect Debt securities included approximately $14 million actuarial assumptions about future investment returns, of BCE Inc. and affiliates’ debentures or 0.1% of total salary projections and future service benefits. plan assets at December 31, 2005, and approximately We contribute to the DC pension plans as employees $8 million of BCE Inc. and affiliates’ debentures or 0.1% provide service. of total plan assets at December 31, 2004. The table below shows the amounts we contributed to the DB and DC pension plans and the payments ESTIMATED FUTURE BENEFIT PAYMENTS made to beneficiaries under other employee future benefit plans. The table below shows the estimated future defined benefit payments for the next 10 years as at Decem- ber 31, 2005.

PENSION OTHER BENEFITS BENEFITS 2006 907 97 2007 928 103 2008 950 108 2009 973 114 2010 995 121 2011–2015 5,284 698 Total estimated future beneﬁt payments 10,037 1,241

PENSION BENEFITS OTHER BENEFITS 2005 2004 2003 2005 2004 2003 Aliant 172 67 125 5 44 Bell Canada 27 20 17 88 77 83 Bell Globemedia 20 17 11 – – – BCE Inc. 7 8 7 – – – Total 226 112 160 93 81 87

Comprised of: Contributions to DB plans 215 97 155 93 81 87 Contributions to DC plans 11 15 5 – – –

We expect to contribute approximately $470 million employee beneﬁt plans in 2006. We expect to con- to the DB pension plans in 2006, subject to actuarial tribute approximately $30 million to the DC pension valuations being completed. We expect to pay appro- plans in 2006. ximately $100 million to beneﬁciaries under other

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 95

NOTE 25: COMMITMENTS AND CONTINGENCIES

CONTRACTUAL OBLIGATIONS The table below is a summary of our contractual obligations at December 31, 2005 that are due in each of the next ﬁve years and after 2010. THERE- 2006 2007 2008 2009 2010 AFTER TOTAL Long-term debt (excluding capital leases) 1,160 1,686 1,043 1,624 1,013 5,955 12,481 Notes payable and bank advances 87 –––––87 Capital leases 126 110 63 47 45 533 924 Operating leases 231 204 181 158 134 679 1,587 Commitments for capital expenditures 184 52 8 2 16 – 262 Purchase obligations 1,413 1,001 716 287 205 530 4,152 Other long-term liabilities (including current portion) 143 119 79 80 4 25 450 Total 3,344 3,172 2,090 2,198 1,417 7,722 19,943

Long-term debt and notes payable and bank advances Excluded from the table above is our proportionate include $58 million drawn under our committed credit share of CGI’s operating leases and other contractual facilities. They do not include $455 million of letters obligations, which are disclosed in Note 8, Discontinued of credit. The total amount available under these Operations. committed credit facilities and under our commercial At December 31, 2005, we had other long-term lia- paper programs, including the amount currently drawn, bilities that were not included in the table, including is $2.4 billion. Current commercial paper credit lines an accrued employee benefit liability, future income expire during August 2008. tax liabilities, deferred revenue and gains on assets and The imputed interest to be paid on capital leases is various other long-term liabilities. $649 million. We did not include the accrued employee benefit Rental expense relating to operating leases was liability and future income tax liabilities in the table $316 million in 2005, $358 million in 2004, and because we cannot accurately determine the timing $327 million in 2003. and amount of cash needed for them. This is because: Purchase obligations consist mainly of contractual • future contributions to the pension plans depend obligations under service contracts. Our commit- largely on how well they are funded. This varies based ments for capital expenditures include investments on the results of actuarial valuations that are performed to expand and update our networks, and to meet periodically and on the investment performance of the customer demand. pension fund assets. Other long-term liabilities included in the table • future payments of income taxes depend on the relate to: amount of taxable earnings and on whether there • Bell Canada’s future payments over the remaining are tax loss carryforwards available to reduce income life of its contract with Amdocs Canadian Managed tax liabilities. Services, Inc. (formerly Certen Inc.) for the development of Bell Canada’s billing system. The total We did not include deferred revenue and gains on amount was $254 million at December 31, 2005. assets in the table because they do not represent future • Bell Globemedia’s remaining obligations relating to cash payments. CRTC benefits owing on previous business combinations. These and other long-term liabilities were $85 million at December 31, 2005. • Telesat’s deferred satellite performance incentive payments and their deferred milestone payments. The total amount was $111 million at December 31, 2005.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COMMITMENT UNDER THE CRTC Kroll Restructuring Lawsuit DEFERRAL MECHANISM In February 2003, a lawsuit was filed in the Ontario The total balance of Bell Canada’s and Aliant’s deferral Superior Court of Justice by Kroll Restructuring Ltd., obligation at December 31, 2005 is estimated to be in its capacity as interim receiver of Teleglobe, against approximately $107 million. This amount represents five former directors of Teleglobe. This lawsuit was filed BCE’s estimated annual commitment under the deferral in connection with Teleglobe’s redemption of its third account mechanism, calculated in terms of permanent series preferred shares in April 2001 and the retraction rate reductions, from January 1, 2006 onwards. The of its fifth series preferred shares in March 2001. amount in the account can be cleared by means of The plaintiff is seeking a declaration that such permanent rate reductions or other initiatives, includ- redemption and retraction were prohibited under the ing capital initiatives as directed by the CRTC. The Canada Business Corporations Act and that the five deferral account obligation will change as amounts are former directors should be held jointly and severally added to the account or the CRTC approves initiatives liable to restore to Teleglobe all amounts paid or that serve to reduce the deferral account obligation, distributed on such redemption and retraction, being an and any amounts remaining in the deferral accounts aggregate of approximately $661 million, plus interest. will bear interest at the Incumbent Local Exchange While BCE Inc. is not a defendant in this lawsuit, Carrier’s (ILEC) short-term cost of debt each year Teleglobe was at the relevant time a subsidiary of until disposition. BCE Inc. Pursuant to standard policies and subject to applicable law, the five former Teleglobe directors are entitled to seek indemnification from BCE Inc. in LITIGATION connection with this lawsuit. While we cannot predict the outcome of any legal Teleglobe Lending Syndicate Lawsuit proceeding, based on information currently available, On July 12, 2002, some members of the Teleglobe and BCE Inc. believes that the defendants have strong Teleglobe Holdings (U.S.) Corporation lending syndi- defences and that the claims of the plaintiff will be cate filed a lawsuit against BCE Inc. in the Ontario vigorously defended against. Superior Court of Justice. The lawsuit includes several allegations, including that BCE Inc. and its manage- Teleglobe Unsecured Creditors Lawsuit ment, in effect, made a legal commitment to repay the advances the plaintiffs made as members of the lending On May 26, 2004, a lawsuit was filed in the United syndicate, and that the Court should disregard Teleglobe States Bankruptcy Court for the District of Delaware. as a corporate entity and hold BCE Inc. responsible to The United States District Court for the District repay the advances as Teleglobe’s alter ego. of Delaware subsequently withdrew the reference On November 2, 2004, Canadian Imperial Bank of from the Bankruptcy Court and the matter is now Commerce and Canadian Imperial Bank of Commerce, pending in the District Court for the District of N.Y. Agency withdrew from the lawsuit and on May 3, Delaware. The lawsuit is against BCE Inc. and 10 2005, BNP Paribas (Canada) also withdrew from this former directors and officers of Teleglobe and certain lawsuit. The remaining plaintiffs claim damages of of its subsidiaries. The plaintiffs are comprised of US$1.04 billion, plus interest and costs. This represents Teleglobe Communications Corporation, certain of approximately 83% of the US$1.25 billion that the its affiliated debtors and debtors in possession, and lending syndicate advanced to Teleglobe and Teleglobe the Official Committee of Unsecured Creditors of Holdings (U.S.) Corporation. these debtors. The lawsuit alleges breach of an alleged While we cannot predict the outcome of any legal funding commitment of BCE Inc. towards the debtors, proceeding, based on information currently available, promissory estoppel, misrepresentation by BCE Inc. BCE Inc. believes that it has strong defences, and it and breach and aiding and abetting breaches of fidu- intends to vigorously defend its position. ciary duty by the defendants. The plaintiffs seek an unspecified amount of damages against the defendants. While we cannot predict the outcome of any legal proceeding, based on information currently available, BCE Inc. believes that it and the other defendants have strong defences, and they intend to vigorously defend their position.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 97

Teleglobe Plan Administrator Lawsuit Other Litigation On November 16, 2005, Kathy Morgan, in her capacity We become involved in various other claims and liti- as Plan Administrator for Teleglobe, filed a lawsuit in gation as a part of our business. the Ontario Superior Court of Justice against BCE Inc. While we cannot predict the final outcome of claims and seven former directors of Teleglobe. The plaintiff and litigation that were pending at December 31, is seeking a declaration that Teleglobe and its credi- 2005, based on information currently available, man- tors have been oppressed by the former directors of agement believes that the resolution of these claims Teleglobe and by BCE Inc. within the meaning of and litigation will not have a material and negative the Canada Business Corporations Act. The plaintiff is effect on our consolidated financial position or results also seeking a declaration that the former directors of of operations. Teleglobe breached their fiduciary duty to Teleglobe and failed to act in accordance with the standard of care NOTE 26: GUARANTEES prescribed under the Canada Business Corporations Act. The plaintiff is seeking compensation for oppres- As a regular part of our business, we enter into agree- sion in the amount of $3 billion and damages for ments that provide for indemnifications and guarantees breach of fiduciary duty in the amount of $3 billion, to counterparties that may require us to pay for costs in each case plus interest and costs. and losses incurred in various types of transactions. We While we cannot predict the outcome of any legal cannot reasonably estimate the maximum potential proceeding, based on information currently available, amount we could be required to pay counterparties. BCE Inc. believes that it and the other defendants While some of the agreements specify a maximum have strong defences and they intend to vigorously potential exposure, many do not specify a maximum defend their position. amount or limited period. The amount also depends on the outcome of future events and conditions, which cannot be predicted. Historically, we have not made any significant payments under these indemnifications or guarantees.

The following table represents guarantees that BCE has entered into which have a ﬁxed maximum potential exposure, and their respective terms. INDEFI- 2006 2007 2008 2009 2010+ NITE TOTAL Sale of assets and businesses – 15 – – 1,502 134 1,651 Sale of services 10 15 10 91 55 – 181 Purchase and development of assets – – 11 1 – 10 22 Other – – – – – 12 12 Total guarantees 10 30 21 92 1,557 156 1,866

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BCE also has guarantees where no maximum potential OTHER TRANSACTIONS amount is specified. As part of other transactions, such as securitization agreements and operating leases, we may be required SALE OF ASSETS AND BUSINESSES to pay counterparties for costs and losses incurred as a result of breaches of representations and warranties, As part of transactions involving business dispositions loss or damages to property, or changes in or in the and sales of assets, we may be required to pay counter- interpretation of laws and regulations (including parties for costs and losses incurred as a result of tax legislation). breaches of representations and warranties, loss or No amount has been accrued in the consolidated damages to property, environmental liabilities, changes balance sheet relating to this type of indemnification in or in the interpretation of laws and regulations or guarantee at December 31, 2005. Historically, we (including tax legislation), valuation differences, earn- have not made any significant payments under such out guarantees if the disposed business does not meet indemnifications or guarantees. specific targets, contingent liabilities of a disposed business, or reassessments of previous tax filings of the corporation that carries on the business. NOTE 27: SUPPLEMENTAL DISCLOSURE FOR A total of $15 million has been accrued in the STATEMENTS OF CASH FLOWS

consolidated balance sheet relating to this type of 2005 2004 2003 indemnification or guarantee at December 31, 2005. Interest paid 960 981 1,105 Historically, we have not made any significant pay- Income taxes paid (net of refunds) 249 176 (47) ments under this type of indemnification or guarantee. Cash provided by (used in) non-cash operating assets and liabilities is as follows: SALE OF SERVICES Accounts receivable 371 (350) 217 In transactions involving sales of services, we may be Other current assets (41) (119) (25) required to pay counterparties for costs and losses Other long-term assets (94) (22) 17 incurred as a result of breaches of representations and Accounts payable and accrued liabilities (527) 601 559 warranties, or changes in or in the interpretation of Other long-term liabilities (138) 12 (105) laws and regulations (including tax legislation). Other 39 (35) (7) No amount has been accrued in the consolidated (390) 87 656 balance sheet relating to this type of indemnification or guarantee at December 31, 2005. Historically, we have not made any significant payments under such NOTE 28: RECONCILIATION OF CANADIAN indemnifications or guarantees. GAAP TO UNITED STATES GAAP We have prepared these consolidated financial state- PURCHASE AND DEVELOPMENT OF ASSETS ments according to Canadian GAAP. The following As part of transactions involving purchases and devel- tables are a reconciliation of significant differences opment of assets, we may be required to pay counter- relating to the statement of operations and total share- parties for costs and losses incurred as a result of holders’ equity reported according to Canadian GAAP breaches of representations and warranties, loss or and United States GAAP. damages to property, or changes in or in the interpretation of laws and regulations (including tax legislation). No amount has been accrued in the consolidated balance sheet relating to this type of indemnification or guarantee at December 31, 2005. Historically, we have not made any significant payments under such indemnifications or guarantees.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 99

RECONCILIATION OF NET EARNINGS

2005 2004 2003 Canadian GAAP – Earnings from continuing operations 1,915 1,447 1,820 Adjustments: Deferred costs (a) – 7 (1) Employee future beneﬁt costs (b) (65) (75) (132) Equity income (c) (e) 46 52 50 Derivative instruments (d) (2) – (12) Other 5 – (8) United States GAAP – Earnings from continuing operations 1,899 1,431 1,717 Discontinued operations – United States GAAP (e) (k) – 107 (56) Cumulative effect of change in accounting policy (f) – – (25) United States GAAP – Net earnings before extraordinary gain 1,899 1,538 1,636 Extraordinary gain – 69 – United States GAAP – Net earnings 1,899 1,607 1,636 Dividends on preferred shares (d) (85) (85) (70) Premium on redemption of preferred shares – – (7) United States GAAP – Net earnings applicable to common shares 1,814 1,522 1,559

Other comprehensive earnings items: Change in currency translation adjustment (17) (10) (56) Change in unrealized gain (loss) on investments and derivative instruments (d) (g) 131 (12) 17 Additional minimum liability for pension obligations (b) (1,112) (72) (40) Comprehensive earnings 816 1,428 1,480

Net earnings per common share – basic Continuing operations 1.96 1.46 1.78 Discontinued operations and change in accounting policy – 0.12 (0.09) Extraordinary gain – 0.07 – Net earnings 1.96 1.65 1.69 Net earnings per common share – diluted Continuing operations 1.95 1.45 1.78 Discontinued operations and change in accounting policy – 0.12 (0.09) Extraordinary gain – 0.07 – Net earnings 1.95 1.64 1.69 Dividends per common share 1.32 1.20 1.20 Average number of common shares outstanding (millions) 926.8 924.6 920.3

STATEMENTS OF ACCUMULATED OTHER RECONCILIATION OF TOTAL COMPREHENSIVE LOSS SHAREHOLDERS’ EQUITY (k)

2005 2004 2003 2005 2004 2003 Currency translation adjustment (73) (56) (46) Canadian GAAP 14,721 14,024 13,565 Unrealized gain on invest- Adjustments: ments and derivative Deferred costs (a) (37) (37) (44) instruments (d) (g) 135 416 Employee future beneﬁts (b) (1,460) (283) (136) Additional minimum liability (h) for pension obligations (b) (1,305) (193) (121) Goodwill 63 63 63 Other 21 33 47 Accumulated other comprehensive loss (1,243) (245) (151) Discontinued operations (e) – – (81) Unrealized gain on investments and derivative instruments (d) (g) 135 416 United States GAAP 13,443 13,804 13,430

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DESCRIPTION OF UNITED STATES (d) Accounting for Derivative Instruments GAAP ADJUSTMENTS and Hedging Activities Under United States GAAP, all derivatives must be (a) Deferred Costs recorded on the balance sheet at fair value. Changes Under Canadian GAAP, certain expenses, such as devel- in the fair value of derivatives designated as fair value opment and pre-operating costs, can be deferred and hedges are recorded in income and are generally offset amortized if they meet certain criteria. Under United by changes in the fair value of the hedged items States GAAP, these costs are expensed as incurred. attributable to the hedged risk. With respect to derivatives designated as cash flow hedges, the effective portion of the changes in fair value is recorded as (b) Employee Future Benefits a separate component of comprehensive earnings and The accounting for future benefits for employees is reclassified to net earnings in the period or periods under Canadian GAAP and United States GAAP is during which the hedged items are recognized in net essentially the same, except for the recognition of earnings. The ineffective portion of the changes in certain unrealized gains and losses. fair value of a hedging item is always recognized in Canadian GAAP requires companies to recognize a net earnings. pension valuation allowance for any excess of the In the third quarter of 2003, we elected to settle the accrued benefit asset over the expected future benefit. dividend rate swaps used to hedge $510 million of Changes in the pension valuation allowance are recog- BCE Inc. Series AA preferred shares and $510 million nized in the consolidated statement of operations. of BCE Inc. Series AC preferred shares. These dividend United States GAAP does not specifically address rate swaps in effect converted the fixed-rate dividends pension valuation allowances. United States regula- on these preferred shares to floating-rate dividends. tors have interpreted this to be a difference between They were to mature in 2007. As a result of the early Canadian and United States GAAP. settlement, we received total proceeds of $83 million Under United States GAAP, an additional mini- in cash. Since the settlement, all of our derivative con- mum liability is recorded for the excess of the unfunded tracts qualify for hedge accounting. Under Canadian accumulated benefit obligation over the recorded pen- GAAP, the proceeds are being deferred and amortized sion benefit liability. An offsetting intangible asset against the dividends on these preferred shares over equal to the unrecognized prior service costs is recorded. the remaining original terms of the swaps. Under Any difference is recorded as a reduction in accumulated United States GAAP, these dividend rate swaps did other comprehensive income. The accumulated benefit not qualify for hedge accounting and were recorded on obligation at December 31, 2005 was $15.5 billion. the balance sheet at fair value. As a result, the amortization of the deferred gain under Canadian GAAP is reversed for purposes of United States GAAP. (c) Equity Income Under Canadian GAAP, we account for our joint ven- (e) Discontinued Operations ture investments using the proportionate consolidation method. Under United States GAAP, we account for Differences between Canadian GAAP and United States our joint venture investments using the equity method. GAAP will cause the historical carrying values of the There is no impact on net earnings. net assets of discontinued operations to be different. In 2005, we reclassified the results of our interest in CGI as a discontinued operation under Canadian GAAP. Under United States GAAP, we must continue to account for our investment in CGI using the equity method until its disposal. An adjustment is made to reclassify the results of CGI from discontinued operations to continuing operations as equity income.

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT p. 101

(f) Impact of Adopting Recent Changes to disclosures of net earnings, and basic and diluted Accounting Standards earnings per share, assuming that the fair value-based method of accounting had been applied from the date Effective July 1, 2003, we adopted FASB Interpretation that SFAS No. 123 was adopted. (FIN) No. 46, Consolidation of Variable Interest Entities, The table below shows compensation expense for on a prospective basis. This interpretation clarifies how stock options and pro forma net earnings using the to apply ARB No. 51, Consolidated Financial Statements, Black-Scholes option pricing model. to variable interest entities when equity investors are not considered to have a controlling financial interest 2005 2004 2003 or they have not invested enough equity to allow the Net earnings as reported 1,899 1,607 1,636 entity to finance its activities without additional subor- Compensation cost included dinated financial support from other parties. in net earnings 22 29 29 Total compensation cost (23) (38) (51) We determined a transitional loss of $25 million net of tax in the third quarter of 2003. We recorded it Pro forma net earnings 1,898 1,598 1,614 Pro forma net earnings as a cumulative effect of a change in accounting policy per common share (basic) 1.96 1.64 1.67 as of July 1, 2003, as required by the transitional Pro forma net earnings provisions of FIN No. 46. Under Canadian GAAP, the per common share (diluted) 1.95 1.64 1.67 transitional loss is recorded as an adjustment to retained earnings. (j) Presentation and Disclosure of Guarantees (g) Change in Unrealized Gain (Loss) on Investments Under Canadian GAAP, guarantees do not include indemnifications against intellectual property right Our portfolio investments are recorded at cost under infringement, whereas under United States GAAP Canadian GAAP. They would be classified as available- they are included. At December 31, 2005, such indem- for-sale under United States GAAP and would be car- nifications amounted to $1.3 billion, of which $32 mil- ried at fair value, with any unrealized gains or losses lion expires in 2006, $100 million in 2007, $26 million included in other comprehensive earnings, net of tax. in 2008, $26 million in 2009, $173 million after 2009 and $914 million with an indefinite term. We also (h) Goodwill have guarantees where no maximum potential amount is specified. Under Canadian GAAP and United States GAAP, goodwill created on business acquisitions and the purchase of non-controlling interests of subsidiaries (k) Comparative Periods is calculated in a similar manner. Differences between We have reclassified some of the figures for the com- Canadian GAAP and United States GAAP, however, parative periods to make them consistent with the may cause the underlying carrying value of the net presentation for the current period. assets acquired or the fair value of the consideration We performed an extensive review of the historical given to be different. This will cause the resulting reconciling balances between Canadian GAAP and goodwill to be different. United States GAAP, which resulted in adjustments to prior periods mainly related to the elimination of (i) Accounting for Stock-Based Compensation differences arising from changes in accounting policies and large transactions. As a result, we increased United We adopted the fair value-based method of accounting States GAAP net earnings by $23 million in 2004 and on a prospective basis, effective January 1, 2002. decreased United States GAAP shareholders’ equity by Under Statement of Financial Accounting Standards $67 million in 2004 and $90 million in 2003. (SFAS) No. 123, we are required to make pro forma

BELL CANADA ENTERPRISES 2005 ANNUAL REPORT BOARD OF DIRECTORS EXECUTIVES* As at March 1, 2006 As at March 1, 2006

Richard J. Currie, O.C. Brian M. Levitt James A. Pattison, O.C., O.B.C. Michael J. Sabia Toronto, Ontario Montréal, Québec Vancouver, British Columbia President and Chief Executive Officer Chair of the Board, Partner and Co-Chair, Chairman and Chief Executive Officer, George A. Cope BCE Inc. and Bell Canada Osler, Hoskin & Harcourt LLP The Jim Pattison Group President and Chief Operating Officer, Director since May 1995 Director since May 1998 Director since February 2005 Bell Canada André Bérard, O.C. The Honourable Robert C. Pozen Stephen G. Wetmore Montréal, Québec Edward C. Lumley, P.C. Boston, Massachusetts Group President – Corporate Performance Corporate Director South Lancaster, Ontario Chairman of the Board, and National Markets, Bell Canada Director since January 2003 Vice-Chairman, MFS Investment Management Ronald A. Brenneman BMO Nesbitt Burns Inc. Director since February 2002 Laurier (Larry) J. Boisvert Director since January 2003 President and Chief Executive Officer, Calgary, Alberta Michael J. Sabia Telesat Canada President and Chief Executive Judith Maxwell, C.M. Montréal, Québec Officer and a director, Ottawa, Ontario President and Chief Executive Michael T. Boychuk Petro-Canada Research Fellow, Canadian Policy, Officer and a director, BCE Inc., Senior Vice-President and Treasurer Director since November 2003 Research Networks Inc. and Chief Executive Officer and Director since January 2000 a director, Bell Canada Mark R. Bruneau Anthony S. Fell, O.C. Director since October 2002 Executive Vice-President and Toronto, Ontario John H. McArthur Chief Strategy Officer Chairman of the Board, Wayland, Massachusetts Paul M. Tellier, P.C., C.C., Q.C. RBC Dominion Securities Limited Dean Emeritus, Harvard University, Montréal, Québec Isabelle Courville Director since January 2002 Graduate School of Corporate Director President – Enterprise, Bell Canada Donna Soble Kaufman Business Administration Director since April 1999 Kevin W. Crull Director since May 1995 Toronto, Ontario Victor L. Young, O.C. President – Residential Services, Corporate Director and Lawyer Thomas C. O’Neill, F.C.A. St. John’s, Newfoundland Bell Canada Director since June 1998 Don Mills, Ontario and Labrador William J. Fox Corporate Director and Corporate Director Executive Vice-President – Chartered Accountant Director since May 1995 Communications and Director since January 2003 Corporate Development Leo Houle Chief Talent Officer COMMITTEES OF THE BOARD Members of Committees of the Board Lawson A.W. Hunter Executive Vice-President and AUDIT COMMITTEE CORPORATE GOVERNANCE COMMITTEE Chief Corporate Officer T.C. O’Neill (Chair), A. Bérard, J. Maxwell, R.C. Pozen, D. Soble Kaufman (Chair), A. Bérard, A.S. Fell, V. L . Yo u ng The Honourable E.C. Lumley, J.H. McArthur Robert Odendaal The audit committee assists the board in the oversight of: The CGC assists the board in: President – Bell Mobility and • the integrity of BCE’s financial statements and • developing and implementing our corporate Bell Distribution Inc., Bell Canada related information governance guidelines Patricia A. Olah • BCE’s compliance with applicable legal and • identifying individuals qualified to become directors Corporate Secretary regulatory requirements • determining the composition of the board and its committees • the independence, qualifications and appointment of the • determining the directors’ remuneration for board and Patrick Pichette external auditor committee service President – Operations, Bell Canada • the performance of the internal and external auditors • developing and overseeing a process to assess the board • management’s responsibility for reporting on internal controls chair, the board committees, chairs of committees and Eugene Roman and risk management. individual directors Group President – Systems and Technology, • overseeing our policies concerning business conduct, ethics, Bell Canada PENSION FUND COMMITTEE public disclosure of material information and other matters. R.C. Pozen (Chair), B.M. Levitt, J.A. Pattison, P.M. Tellier Karen H. Sheriff The PFC assists the board in the oversight of: MANAGEMENT RESOURCES AND COMPENSATION COMMITTEE President – Small and Medium Business, • the administration, funding and investment of our pension R.J. Currie (Chair), R.A. Brenneman, A.S. Fell, Bell Canada plans and fund J.H. McArthur, V.L.Young • the unitized pooled fund sponsored by BCE for the The MRCC assists the board in the oversight of the: Martine Turcotte collective investment of the fund in which certain of BCE’s • compensation, nomination, evaluation and succession of Chief Legal Officer subsidiaries’ pension funds invest. officers and other management personnel Siim A. Vanaselja • BCE’s health and safety policies and practices. Chief Financial Officer * For a complete list of BCE Inc.’s and Bell Canada’s officers, please see BCE Inc.’s and Bell Canada’s respective Annual Information Forms for the year BELL CANADA ENTERPRISES 2005 ANNUAL REPORT ended December 31, 2005. 2006 SHAREHOLDER MEETING TAX INFORMATION SHAREHOLDER SERVICES The shareholder meeting will take place at Dividends and Capital Gains Dividend Reinvestment and 9:30 a.m. (Eastern time), Wednesday, June 7, on Your BCE Shares Stock Purchase Plan 2006, at Le Centre Sheraton Montréal, 1201 BCE common shareholders are required to pay This plan provides a convenient method for René-Lévesque Blvd. West, Montréal, Québec, tax on dividends as well as any capital gains eligible holders of BCE common shares to re- in the ballroom. they realize when they sell their shares or are invest their dividends and make optional cash The meeting will also be webcast live on deemed to have sold them. If you received contributions to purchase additional common our website, www.bce.ca. Nortel Networks common shares in May 2000, shares without brokerage costs. We offer various ways to vote your shares. you should contact the Investor Relations For more details, consult BCE’s proxy circular group to learn more on the tax implications Dividend Direct Deposit Service or visit our website. of the BCE/Nortel Plan of Arrangement or Avoid postal delays and trips to the bank by visit www.bce.ca. joining the dividend direct deposit service. 2006 QUARTERLY EARNINGS RELEASE DATES Foreign Investors E-Delivery Service First quarter ...... May 3, 2006 Dividends on BCE shares paid or credited to Enrol in our e-delivery service to receive the Second quarter ...... August 2, 2006 nonresidents of Canada are subject to a 25% proxy material, the annual report and/or quar- Third quarter ...... November 1, 2006 withholding tax unless reduced by treaty. Under terly documents by e-mail. By doing so, you Fourth quarter ...... February 7, 2007 current tax treaties, U.S. and U.K. residents will receive your documents faster and in are subject to a 15% withholding tax. Quarterly and annual reports as well as other an environmentally friendly manner while corporate documents can be found on our web- helping your company reduce printing and site. If you wish to be notified electronically U.S. Investors postage costs. when documents are posted, register online BCE is required to solicit taxpayer identi- at www.bce.ca for our service ‘News Alerts’. fication numbers (TIN) and Internal Revenue Duplicate Mailings Corporate documents can also be requested Service (IRS) Form W-9 certifications of resi- Help us control costs and eliminate duplicate from the Investor Relations group. dency from certain U.S. investors. Where these mailings by consolidating your accounts. have not been received, BCE may be required For more details on any of these services, reg- to deduct the IRS’ specified backup with- SHARE FACTS istered shareholders (holders of share certificates) holding tax. Symbol must contact the transfer agent. Non-regis- For additional information, please contact BCE tered shareholders must contact their brokers. BCE Investor Relations or the transfer agent, Listings Computershare Trust Company of Canada. TSX, NYSE, and the Zurich (SWX) stock CONTACT INFORMATION exchange Normal Course Issuer Bid Transfer Agent and Registrar You will find a summary of the differences On February 1, 2006, BCE received acceptance For information on shareholder services or any between our governance practices and the NYSE from the Toronto Stock Exchange (TSX) of its other inquiries regarding your account (includ- corporate governance rules in the governance Notice of Intention to Make a Normal Course ing stock transfer, address change, lost certifica- section of BCE’s website at www.bce.ca. Issuer Bid. The filing of this notice allows tes and tax forms), contact: BCE to purchase, from February 3, 2006 until Common Shares Outstanding February 2, 2007, up to 46,000,000 of its com- Computershare Trust Company of Canada 927,318,916 as at December 31, 2005 mon shares, representing approximately 5% of 9th Floor, 100 University Avenue Toronto, Ontario M5J 2Y1 Stock Splits BCE’s 927,321,825 common shares outstanding as of the close of market on January 16, 2006. As e-mail [email protected] Three-for-one on April 26, 1979 and tel (514) 982-7555 or 1 800 561-0934 two-for-one on May 15, 1997 a result of transactions that have recently been (toll free in Canada and the U.S.) completed, BCE has funds available for which fax (416) 263-9394 or 1 888 453-0330 Quarterly Dividend * the purchase of common shares represents an (toll free in Canada and the U.S.) $0.33 per common share appropriate use of corporate funds. Purchases or visit their website at www.computershare.com under the normal course issuer bid will be made 2006 Dividend Schedule* BCE Investor Relations at the discretion of BCE’s management on the Record Date Payment Date 1000 de La Gauchetière Street West, Suite 3700, open market through the facilities of the TSX March 15, 2006 April 15, 2006 Montréal, Québec H3B 4Y7 and/or the New York Stock Exchange (NYSE). June 15, 2006 July 15, 2006 e-mail [email protected] A copy of the Notice of Intention is available on tel 1 800 339-6353 September 15, 2006 October 15, 2006 SEDAR at www.sedar.com. You can also obtain fax (514) 786-3970 December 15, 2006 January 15, 2007 a copy on request without charge from BCE’s or visit the Investors section on our website at www.bce.ca * Subject to approval by the Board of Directors Investor Relations group.

Trademarks: The following is a list of all our trademarks referred to and used as such in this annual report. Aliant is a trademark of Aliant Inc. BCE is a trademark of BCE Inc. The Rings and Head Design, 10-4 & Design, Bell Canada Enterprises corporate logo, Bell, Bell Canada, Bell Globemedia, Bell Making It Simple, Bell Mobility, Bell Nordiq, Bell West, Bell World, Emily, GoTrax, Group Telecom, Kidsmania, Seek & Find, Sympatico, VDN & Design are trademarks of Bell Canada. ExpressVu is a trademark of Bell ExpressVu Limited Partnership. The Globe and Mail is a trademark of Bell Globemedia Publishing Inc. Mobile Browser is a trademark of Bell Mobility Inc. CTV is a trademark of CTV Inc. Expertech is a trademark of Expertech Network Installation Inc. Northwestel is a trademark of Northwestel Inc. Infostream is a trademark of Infostream Technologies Inc. Solo and Solo Mobile are trademarks of Solo Branding Inc. Télébec is a trademark of Telebec Limited Partnership. Anik, Nimiq and Telesat are trademarks of Telesat Canada. TSN and RDS are trademarks of The Sports Network Inc. Any other trademarks, or corporate, trade or domain names used in this report are the property of their owners. We believe that our trademarks and domain names are very important to our success. Our exclusive trademark rights are perpetual provided that their registrations are timely renewed and that the trademarks are used in commerce by us or our licensees. We take appropriate measures to protect, renew and defend our trademarks. We also spend considerable time and resources overseeing, registering, renewing, licensing and protecting our trademarks and domain names and prosecuting those who infringe on them. We take great care not to infringe on the intellectual property and trademarks of others. Cette publication est disponible en français. BCE’s Annual Report is printed with vegetable-based ink and is recyclable. Printed in Canada BCE’s website has extensive information about the company’s governance practices, community investment, and corporate responsibility.

Building The New Bell: 2006 Business Update is an in-depth presentation of our strategy and is available at www.bce.ca/businessupdate.

BCE Inc. 1000 de La Gauchetière Street West, Suite 3700, Montréal (Québec) h3b 4y7 www.bce.ca

Communications e-mail [email protected] tel 1888 932-6666 fax (514) 870-4385 Investor Relations e-mail [email protected] tel 1800 339-6353 fax (514) 786-3970