Bell Canada Enterprises 2006 Annual Report management’s discussion notes to consolidated financial and analysis statements About Forward-Looking Statements . 2 Note 1 Significant Accounting Policies . 68 About Our Business . 3 Note 2 Bell Aliant . 74 Operating Highlights . 9 Note 3 Segmented Information . 75 Enhancing Shareholder Returns . 11 Note 4 Business Acquisitions and Dispositions . 77 Selected Annual and Quarterly Information . 12 Note 5 Restructuring and Other Items . 80 Financial Results Analysis Note 6 Other (Expense) Income . 81 Consolidated Analysis . 16 Note 7 Interest Expense . 82 Segmented Analysis . 20 Note 8 Income Taxes . 82 Product Line Analysis . 27 Note 9 Discontinued Operations . 84 Financial and Capital Management . 32 Note 10 Earnings Per Share . 85 Competitive Environment . 39 Note 11 Accounts Receivable . 85 Regulatory Environment . 41 Note 12 Other Current Assets . 86 Assumptions and Risks Underlying Note 13 Capital Assets . 86 Our Forward-Looking Statements . 47 Note 14 Other Long-Term Assets . 87 Our Accounting Policies . 55 Note 15 Indefinite-Life Intangible Assets . 87 Controls and Procedures . 59 Note 16 Goodwill . 87 Non-GAAP Financial Measures . 59 Note 17 Accounts Payable and Accrued Liabilities . 88 Note 18 Debt Due Within One Year . 88 reports on internal control Note 19 Long-Term Debt . 88 Note 20 Other Long-Term Liabilities . 89 Management’s Report on Internal Control Note 21 Non-Controlling Interest . 90 over Financial Reporting . 62 Note 22 Financial Instruments . 90 Report of Independent Registered Note 23 Share Capital . 91 Chartered Accountants . 63 Note 24 Stock-Based Compensation Plans . 93 Note 25 Employee Benefit Plans . 96 consolidated financial statements Note 26 Commitments and Contingencies . 100 Management’s Responsibility Note 27 Guarantees . 104 for Financial Reporting . 64 Note 28 Supplemental Disclosure for Report of Independent Registered Statements of Cash Flows . 105 Chartered Accountants . 64 Glossary . 106 Consolidated Statements of Operations . 65 Board of Directors . 108 Consolidated Statements of Deficit . 65 Executives . 109 Consolidated Balance Sheets . 66 Tax Information . 110 Consolidated Statements of Cash Flows . 67 Shareholder Information . 111 Management’s Discussion and Analysis In this management’s discussion and analysis of financial provisions of the United States Private Securities Litigation condition and results of operations (MD&A), we, us, our Reform Act of 1995 and of any applicable Canadian securi- and BCE mean BCE Inc., its subsidiaries and joint ventures. ties legislation. It is important to know that: References to Bell Aliant include matters relating to, and • unless otherwise indicated, forward-looking state- actions taken by, both Aliant Inc. (Aliant) and its affiliated ments in BCE’s 2006 annual report, including in this entities prior to July 7, 2006, and Bell Aliant Regional MD&A, describe our expectations at March 7, 2007 Communications Income Fund and its affiliated entities on • our actual results could differ materially from what we and after such date. expect if known or unknown risks affect our business, or All amounts in this MD&A are in millions of Canadian if our estimates or assumptions turn out to be inaccu- dollars, except where otherwise noted. Please refer to our rate. As a result, we cannot guarantee that any forward- glossary on pages 106–107 for a list of defined terms. looking statement will materialize and, accordingly, you Please refer to BCE Inc.’s audited consolidated financial are cautioned not to place undue reliance on these statements for the year ended December 31, 2006 when read- forward-looking statements. ing this MD&A. Please also refer to “The Quarter at a • except as otherwise indicated by BCE, forward-looking Glance” section at pages 6 to 17 of BCE Inc.’s 2006 Fourth statements do not take into account the effect that trans- Quarter Investor Briefing dated February 6, 2007, which actions or non-recurring or other special items announced pages are incorporated herein by reference, for a more or occurring after the statements are made may have on detailed discussion of BCE’s operational and financial results our business. Such statements do not, unless otherwise for the fourth quarter of 2006. specified by BCE, reflect the impact of dispositions, sales You will find more information about BCE, including of assets, monetizations, mergers, acquisitions, other BCE Inc.’s audited consolidated financial statements and business combinations or transactions, asset write-downs annual information form dated March 7, 2007 (BCE 2006 or other charges announced or occurring after forward- AIF) for the year ended December 31, 2006 and recent finan- looking statements are made. The financial impact of cial reports, including BCE Inc.’s 2006 Fourth Quarter these transactions and non-recurring and other special Investor Briefing, on BCE Inc.’s website at www.bce.ca, on items can be complex and depends on the facts particu- SEDAR at www.sedar.com and on EDGAR at www.sec.gov. lar to each of them. We therefore cannot describe the This MD&A comments on BCE’s operations, per- expected impact in a meaningful way or in the same way formance and financial condition for the years ended we present known risks affecting our business. December 31, 2006 and 2005. • we disclaim any intention and assume no obligation to update or revise any forward-looking statement even if About Forward-Looking Statements new information becomes available, as a result of future events or for any other reason. Securities laws encourage companies to disclose for- ward-looking information so that investors can get a A number of assumptions were made by BCE in making better understanding of the company’s future prospects forward-looking statements in BCE’s 2006 annual and make informed investment decisions. report, including in this MD&A, such as certain Canadian BCE’s 2006 annual report, including this MD&A, con- economic and market assumptions, operational and tains forward-looking statements about BCE’s objec- financial assumptions, and assumptions about transac- tives, plans, strategies, financial condition, results of tions. Certain factors that could cause results or events operations, cash flows and businesses. A statement to differ materially from our current expectations include, we make is forward-looking when it uses what we know among others, our ability to implement our strategies and expect today to make a statement about the future. and plans, the intensity of competitive activity and the Forward-looking statements may include words such ability to achieve customer service improvement while as anticipate, assumption, believe, could, expect, goal, significantly reducing costs. Assumptions made in the guidance, intend, may, objective, outlook, plan, seek, should, preparation of forward-looking statements and risks strive, target and will. These statements are forward-look- that could cause our actual results to differ materially ing because they are based on our current expectations, from our current expectations are discussed throughout estimates and assumptions about the markets we oper- this MD&A and, in particular, in the section entitled ate in, the Canadian economic environment and our Assumptions and Risks Underlying Our Forward-Looking ability to attract and retain customers and to manage Statements. Important additional assumptions and risks network assets and operating costs. All such forward- are also discussed under the sections entitled Competitive looking statements are made pursuant to the ‘safe harbor’ Environment and Regulatory Environment. 2 Bell Canada Enterprises 2006 Annual Report Management’s Discussion and Analysis About Our Business Local telephone and long distance services are sold under the Bell brand, wireless services through Bell BCE is Canada’s largest communications company. Bell Mobility Inc. (Bell Mobility), Internet access under the Canada, which encompasses our core business Sympatico brand and video services through Bell operation, is the nation’s leading provider of wireline ExpressVu Limited Partnership (Bell ExpressVu). and wireless communications services, Internet access, data services and video services to residential and busi- ness customers. We report Bell Canada’s results of oper- business segment ations in four segments, each reflecting a distinct The Business segment provides local telephone, long customer group: Residential, Business, Bell Aliant and distance, wireless, data (including Internet access) and Other Bell Canada. All of our other activities are information and communications technology (ICT) reported in the Other BCE segment. Our reporting services to Bell Canada’s large enterprise (Enterprise) structure reflects how we manage our business and how customers and small and medium-sized businesses we classify our operations for planning and measuring (SMB) in Ontario and Québec, as well as to business performance. We discuss our consolidated operating customers in Western Canada through Bell West, our results in this MD&A, as well as the operating results of division offering competitive local exchange carrier each segment. See Note 3 to the consolidated financial (CLEC) services in Alberta and British Columbia. statements for additional information about our seg- ments. We also discuss our results by product line to provide further insight into these results. bell aliant segment The chart below shows the operating revenues that Formed on July 7, 2006, Bell Aliant is North America’s each segment contributed