CAPITAL STRUCTURE

Our net debt to capitalization ratio was 44.3% at the end of Q3 2006, compared to 41.8% at the end of 2005. This was a result of a decrease in total shareholders’ equity and a decrease in non-controlling interest partly offset by a decrease in net debt.
     Net debt decreased $486 million to $12,181 million in the first nine months of 2006 mainly due to:

• free cash flow of $502 million
• cash provided from discontinued operations of $2,095 million mainly relating to:
  • $665 million net proceeds from the sale of our investment in Bell Globemedia offset by the deconsolidation of Bell Globemedia’s cash on hand of $35 million
  • Bell Globemedia’s return of capital of $607 million as part of the recapitalization of Bell Globemedia
  • $849 million net proceeds from the sale of CGI offset by the deconsolidation of CGI’s cash on hand of $81 million
  • BCI’s return of capital of $156 million offset by BCE’s contribution to BCI of $61 million in satisfaction of its obligation arising from last year’s tax loss monetization
  • $23 million of cash generated from Bell  Globemedia’s operations
• 
  partly offset by
  
  
  • $21 million incurred for the exercise of CGI warrants.

This was partly offset by:

• BCE’s repurchase and cancellation of 40 million of its outstanding common shares for $1,108 million
• Bell Aliant’s redemption of preferred shares for $175 million
• Bell Nordiq’s redemption of preferred shares for $60 million
• obligations of $247 million for additional capital leases
• an increase in investments of $280 million
• $225 million of costs relating to the formation of Bell Aliant.

Non-controlling interest decreased by $676 million in the first nine months of 2006 due mainly to:

• $279 million relating to the return of capital as part of the recapitalization of Bell Globemedia
• $552 million relating to the deconsolidation of Bell Globemedia
• Bell Aliant’s redemption of preferred shares for $175 million
• Bell Nordiq’s redemption of preferred shares for $60 million

partly offset by a $456 million increase in non-controlling interest at Bell Aliant as a result of our decreased ownership after the formation of the trust.
     Total shareholders’ equity decreased $1,650 million to $13,071 million in the first nine months of 2006. This was mainly due to BCE  Inc.’s repurchase of 40 million of its outstanding common shares for cancellation through  NCIB and the reduction of 75.8 million outstanding common shares by BCE Inc. in conjunction with a distribution of Bell Aliant trust units, by way of a return of capital, to holders of BCE Inc. common shares.

CASH FLOWS

The following table is a summary of the flow of cash into and out of BCE.

Cash from Operating Activities

Cash from operating activities increased 2.1% or $33 million to $1,602 million in Q3 2006, compared to Q3 2005 due mainly to an increase in receipts from the securitization of accounts receivable of $48 million and improvements in working capital partly offset by payments of $62 million in relation to the pay equity settlement announced in Q2 2006 and an increase in income taxes paid resulting from a refund received in Q3 2005.
     Cash from operating activities increased by 2.2%, or $84 million, to $3,862 million in the first nine months of 2006 due mainly to:

• improvements in working capital
• an improvement in EBITDA of $61 million.

This was partly offset by:

• compensation payments of $67 million made to executives and other key employees further to the vesting of all restricted share units (RSUs) granted for a two-year performance period ending at the end of 2005, based on the achievement of specific operating objectives established at the outset of the program two years ago
• a decrease of approximately $90 million in receipts from the securitization of accounts receivable.

Free Cash Flow

Our free cash flow this quarter was $449 million, an improvement of $207 million over free cash flow of $242 million in Q3 2005. This was mainly due to:

• an increase in receipts from the securitization of accounts receivable of $48 million
• decrease of $198 million in capital expenditures
• an improvement in working capital.

This was partly offset by payments of $62 million in relation to the pay equity settlement announced in Q2 2006 and an increase in income taxes paid in comparison to Q3 2005 which included a refund received in the third quarter.
     Free cash flow for the first nine months of 2006 was $502 million, an improvement of $382 million over free cash flow of $120 million for the same period last year. This was mainly due to a decrease of $367 million in capital expenditures and an increase in cash from operating activities, as described above partly offset by an increase in dividends paid of $12 million to BCE Inc. common shareholders resulting from the $0.03 quarterly increase in dividend per common share implemented in 2005.

Capital Expenditures

Capital expenditures for BCE were $760 million in Q3 2006 and $2,198 million in the first nine months of 2006, reflecting decreases of 21% and 14.3% respectively, compared with the same periods last year. As a percentage of revenues, capital expenditures decreased to 17.2% from 22% and to 16.7% from 19.6% for the same respective periods. Similarly, Bell Canada’s capital expenditures decreased 18.1% this quarter to $715 million and by 15.3% to $2,020 million for the first nine months of 2006. As a result, Bell Canada’s capital intensity declined 3.7 and 3.0 percentage points, respectively, to 16.5% and 15.7% compared with the same periods last year. The majority of capital spending this year has been focused on key strategic priorities within the growth areas of our business. The year-over-year decreases in spending at both BCE and Bell Canada reflected reduced expenditures on IT infrastructure and systems to support both our cost reduction program initiatives as well as customer contracts in the Business segment, the timing of spending associated with various strategic initiatives, reduced spending at Bell Aliant, lower expenditures related to wireless growth and capacity expansion, and the completion in the fourth quarter of 2005 of the Alberta SuperNet. The difference in capital expenditures between BCE and Bell Canada can be explained primarily by spending on satellite builds at Telesat.

Cash Dividends Paid on Common Shares

In the third quarter of 2006, we paid a dividend of $0.33 per common share which was equal to the dividend paid in Q3 2005. The decrease in total cash dividend paid of $12 million in Q3 2006 is a direct result of a decrease in the number of BCE Inc. common shares issued and outstanding as at the dividend declaration date as a result of our NCIB announced on February 1, 2006 and the reduction in the number of shares on July 10, 2006 made in conjunction with the distribution of Bell Aliant trust units to BCE Inc. shareholders.
     In the first nine months of 2006, the total cash dividends paid increased by $12 million over the comparable period for 2005. The previously described positive impact of the decrease in the number of BCE Inc. common shares issued and outstanding on cash dividends paid was offset by the decision in December 2004 by the board of directors of BCE Inc. to increase by 10% or $0.12 per common share the annual dividend on BCE Inc.’s common shares. The new dividend policy began with the quarterly dividends paid on April 15, 2005.

Business Acquisitions

We invested $27 million and $66 million, in Q3 2006 and the first nine months of 2006 respectively, in various business acquisitions.
     We invested $55 million in business acquisitions in Q3 2005 and $177 million in the first nine months of 2005. This consisted mainly of Bell Canada’s acquisition of Nexxlink Technologies Inc. (Nexxlink) for $74 million and a number of other businesses.

Bell Aliant

Cash used for the payment of costs for the formation of Bell Aliant was $152 million in Q3 2006 and $225 million on a year-to-date basis. This included $60 million for Q3 2006 and $103 million on a year-to-date basis of transactions costs which relate mainly to investment banking, professional and consulting fees and $92 million for Q3 2006 and $122 million on a year-to-date basis of premium costs paid on the redemption, prior to maturity, of Bell Aliant debt.

Increase in Investments

Cash flows used for investments in Q3 2006 of $161 million increased $86 million from $75 million in Q3 2005. The activity in Q3 2006 relates mainly to our additional investment of US$84 million in Clearwire Corporation (Clearwire), a privately-held company that offers advanced IP-based wireless broadband communications services, in order to maintain our 12% interest in the company. The activity in Q3 2005 relates mainly to Telesat’s increase in short-term investments of $63 million.
     In the first nine months of 2006, cash flows used for investments of $280 million increased $64 million from $216 million for the comparable period in 2005. The year-to-date activity was further impacted by Telesat’s increase in short-term investments of $15 million. In Q1 2005, Bell Canada invested US$100 million to acquire an approximate 12% interest in Clearwire.

Decrease in Investments

Cash flows provided by investments decreased by $1 million in Q3 2006. On a year-to-date basis, there was an increase of $59 million mainly due to the sale of short-term investments of $64 million at Telesat on a year-to-date basis.

Repurchase of Common Shares

During the quarter, BCE Inc. purchased an additional 4.4 million common shares for a total cost of $114 million under its NCIB program. This brought the total number of common shares repurchased and cancelled as at September 30, 2006 to 40 million, representing approximately 90% of the total common shares targeted for repurchase, for a total cash outlay of $1,108 million. BCE Inc. commenced the NCIB program on February 1, 2006 with the intention to purchase and cancel approximately 5%, or 45 million, of its outstanding common shares over a twelve-month period.

Debt Instruments

We issued $1,574 million of debt, net of repayments, in Q3 2006. The increase in debt instruments consisted mainly of Bell Aliant’s increased borrowings from its credit facilities of $955 million and net issuances of medium-term notes of $850 million. In addition, there were increased borrowings in notes payable and bank advances of $80 million, mainly at Bell Canada.
     This was partly offset by repayments which included $260 million in redemption of bonds and debentures at Bell Aliant.
     On a year-to-date basis in 2006, we issued $1,211 million of debt, net of repayments. Bell Aliant drew down $1,235 million on its credit facilities and issued $1,250 million in medium-term notes and there were increased borrowings in notes payable and bank advances of $245 million, mainly at Bell Canada.
     We had the following repayments in the first nine months of 2006:

• Bell Canada repaid $463 million of debt
• Bell Aliant redeemed $400 million of medium-term notes
• Bell Aliant redeemed $385 million of bonds and debentures
• Telesat repaid $150 million in notes payable
• we made other repayments that included capital leases.

In Q3 2005, we repaid $40 million of debt, net of issuances. The repayments included $150 million in debentures at Bell Canada and decreased borrowings in notes payable and bank advances of $55 million. The issuances consisted of $200 million in debentures at Bell Canada.
     On a year-to-date basis in 2005, we issued $328 million of debt, net of repayments. The issuances included $900 million in debentures at Bell Canada and $150 million in medium-term notes at Bell Aliant. The repayments included $750 million in debentures at Bell Canada.

Cash Relating to Discontinued Operations

Cash provided by discontinued operations was $688 million in Q3 2006. This consisted mainly of:

• net cash proceeds of $665 million from the sale of our investment in Bell Globemedia
• $59 million of cash generated from Bell Globemedia’s operations.

This was partly offset by the deconsolidation of Bell Globemedia’s cash on hand of $35 million.
     On a year-to-date basis, cash provided by discontinued operations was $2,095 million. Cash provided by discontinued operations was further impacted by:

• Bell Globemedia’s return of capital of $607 million as part of the recapitalization of Bell Globemedia
• net cash proceeds of $849 million from the sale of our investment in CGI, which was offset by the deconsolidation of CGI’s cash on hand of $81 million
• BCI’s return of capital of $156 million offset by BCE’s contribution to BCI of $61 million in satisfaction of its obligation arising from last year’s tax loss monetization.

This was partly offset by $36 million of losses from Bell Globemedia’s operations and $21 million incurred for the exercise of CGI warrants.

CREDIT RATINGS

The table below lists BCE Inc.’s and Bell Canada’s key credit ratings at October 31, 2006. On October 11, 2006, following the announcement of our intention to convert into an income trust, S&P⁽¹⁾ placed the ratings of BCE  Inc. and Bell Canada on CreditWatch with negative implications; DBRS⁽²⁾ placed the long-term debt and preferred shares ratings of BCE Inc. and Bell Canada under review with developing implications; Moody’s⁽³⁾ affirmed Bell  Canada’s ratings, but revised its outlook to negative from stable and placed BCE Inc.’s ratings under review for possible upgrade; and Fitch⁽⁴⁾ affirmed the ratings of BCE Inc. and Bell Canada.

(1) Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.
(2) Dominion Bond Rating Services Limited
(3) Moody’s Investors Service, Inc.
(4) Fitch Ratings Ltd.

LIQUIDITY

Our sources of liquidity and cash requirements remain substantially unchanged from those described in the BCE 2005 MD&A other than as described in the following section entitled Pension Funding.

Pension Funding

Further to the completion of new actuarial valuations, we now expect to contribute approximately $430 million to our defined benefit pension plans in 2006.
     The actuarial valuation for the Bell Canada pension plan for December 31, 2005 was completed in June 2006 and resulted in a solvency deficit of $827 million, which we are required to fund over the next five years starting in 2006. This is in addition to the annual funding of the current service cost of $180 million.
     The actuarial valuations for the Aliant pension plans for December 31, 2005 were completed in June 2006 and resulted in a solvency deficit of $210 million, which we are required to fund over the next five years, and a going concern deficit of $166 million, which we are required to fund over the next fifteen years. This is in addition to the funding of solvency deficits identified in previous years and the annual funding of the current service cost of $36 million.
     One-time pension funding relief measures introduced in the May 2006 Federal Budget would increase the funding period of solvency deficits from five to ten years if the proposed pension regulations are enacted. This would reduce the required contributions in 2006. However, there can be no assurance that such pension regulations will be enacted as proposed.
     On July 28, 2006, the Bell Canada pension fund acquired from us 14.9 million Nortel shares and 25 million CGI shares, which had an aggregate market value of $201 million. On October 23, 2006, the Bell Canada pension fund acquired from us our remaining 6.4 million CGI shares and other marketable securities, which had an aggregate market value of $83 million. The acquisitions reduce our cash contributions in 2006.

Commitment under the CRTC Deferral Account Mechanism

Based on recent proposals filed with the CRTC, our commitment under the deferral account mechanism has changed from that described in BCE Inc.’s 2006 second quarter MD&A dated August 1, 2006.
     On September 1, 2006, Bell Canada and Bell Aliant filed their proposals for clearing the accumulated balances in their deferral accounts. Bell Canada proposed allocating 5% of its estimated accumulated balance for accessibility initiatives with the remaining 95% of funds used to expand broadband services to unserved areas in rural and remote communities over a five-year period. Bell Aliant proposed allocating 5% of its accumulated balance to fund accessibility initiatives and referred to its proposal filed May 15, 2006 for clearing the remaining 95% of its accumulated balance. On September 11, 2006, the CRTC issued a letter indicating that it would establish a process to assess the Incumbent Local Exchange Carriers (ILEC) proposals. On September 28, 2006, the CRTC issued Telecom Decision 2006-64, in which it approved Bell Aliant’s application to increase its annual Service Improvement Plan draw-down, further reducing its deferral account commitment.
     Bell Canada’s accumulated deferral account balance at September 30, 2006 is estimated to be $479.3 million with an estimated future annualized commitment of $23.9 million. Bell Aliant’s accumulated deferral account balance at September 30, 2006 is estimated to be $8 million with no estimated annualized commitment.

Recent Developments in Legal Proceedings

Lawsuits related to Teleglobe

BNP Paribas (Canada) lawsuit

On August 16, 2006, the Court dismissed the defendants’ motion challenging the Court’s jurisdiction. An appeal has been filed by the defendants with the Ontario Court of Appeal regarding that decision.