ANNUAL REPORT NORTHWESTEL

Transcription

1 ANNUAL REPORT NORTHWESTEL Proudly connected to our communities

2 Northwestel provides complete telecommunications solutions for the 110,000 residents of the Northwest Territories, Nunavut, Yukon and northern British Columbia. The company s operations span nearly 4 million square kilometres of the most remote and rugged areas of Canada. All of the company s nearly 600 employees are northern residents. Established nearly 60 years ago, Northwestel is a wholly-owned subsidiary of Bell Canada. Management Discussion Consolidated Result Operating revenues increased by $6.3 million (4.2%) from Revenues from long distance and local telephone services remained at approximately the same levels as 2004 while private network, cable and other revenues increased by $6.5 million (12.4%). The central fund administrator provided supplemental funding in the amount of $9.1 million. Total operating expenses increased by $3.7 million (3.2%) from Of this increase, depreciation and amortization charges were $0.3 million less than prior year while general operational costs excluding pension increased by $3.0 million and pension expense increased by $1.0 million. Net income increased by $0.8 million (4.8%) while operating cash flow increased by $1.3 million (2.4%). Free cash flow after dividends and capital expenditures was positive $2.4 million for the year. Capital expenditures totaled $42.2 million, $5.3 million less than the previous year. Regulated telecommunication operations As a result of Decision CRTC released in 2000, the Company continues to be regulated on a rate of return basis for its telecommunications operations, under which it is allowed to earn an ROE of between 10% to 11%. Decision CRTC announced that the current regulatory framework would remain in place until the end of The actual return for the regulated operations was 11% in In Decision CRTC , supplemental funding in the amount of $9.1 million was approved for Consolidated Operating Expense Categories 2005 Total of $81,927,000 Consolidated Revenue Mix (in millions of dollars) * Northwestel Mobility Inc., was sold on January 1, 2003, and is therefore not included in the 2003, 2004 and 2005 results ANNUAL REPORT NORTHWESTEL

3 Our Mission To be the preferred supplier of high-value communications solutions to Northern customers for their advantage and enjoyment. Our Values Customer loyalty Innovation Teamwork Excellence Employee fulfillment Integrity Community commitment Northwestel Inc. Selected Financial and Other Data (Consolidated) * Results prior to 2003 include the consolidation of Northwestel Mobility Inc., which was sold on January 1, Selected Financial Results (in $000 s) * 2001* 2000* 1999* Operating revenues 158, , , , , , ,697 Net income 17,686 16,870 16,036 18,236 16,697 13,902 13,105 Operating cash flow 56,371 55,032 50,175 50,286 53,017 50,601 44,741 Capital expenditures 42,248 47,521 45,569 44,519 44,276 29,841 30,539 Regular Dividend a 16,711 11,190 49,441 7,693 7,693 7,693 7,693 Special Dividend ,015 Free cash flow 2,430 (6,911) 9,735 2,860 7,419 13,045 4,823 Financial Ratios Earnings per share $ $ $ $ $ $ $ Regular dividend per share $ $ $ $ 8.80 $ 8.80 $ 8.80 $ 8.80 Return on equity for regulatory purposes b 11.0% 10.9% 11.0% 10.6% 10.9% 11.1% 12.6% Interest coverage ratio Balance Sheet Data (in $000 s) Total investment in telecommunications property 601, , , , , , ,618 Investment in telecommunications property less accumulated depreciation 295, , , , , , ,660 Debt as a % of invested capital 42.9% 47.3% 42.9% 47.2% 49.4% 51.9% 54.9% Other Statistics Network Access Services (NAS) 75,807 75,564 75,342 75,194 74,738 74,490 72,337 Average full-time equivalent employees Notes: (a) 2005 regular dividend includes a one-time $5.5 million distribution related to Part VI.1 tax, and 2003, regular dividend includes a one-time $40.0 million distribution related to the sale of Northwestel Mobility Inc., all to a related company. (b) For , the allowable return on average common equity for regulatory purposes, as established by the CRTC, is between 10.0% and 11.0% for telephone operations (i.e. excluding operations of subsidiaries) ANNUAL REPORT NORTHWESTEL

4 Message from the President and Chief Executive Officer 2005 was a year marked by tremendous accomplishments both for Northwestel and its subsidiaries. These achievements are rooted in the emphasis that we have placed in two widely divergent but yet closely related approaches. We have made great strides in terms of bringing leading-edge state-of-the-art technologies to all regions of our operating area. At the same time, we have continued to build upon the simplest of foundations - our people and the personal commitment they bring to everything they do. One of our greatest achievements in 2005 was something that most other telecommunications companies are still striving for: we linked our customer order and service delivery systems. As a result we are now able to offer services such as calling features in as few as four minutes. This was a significant accomplishment that has resulted in much faster and more flexible provision of services. In the month of November we had the highest level of customer satisfaction in the Residential Call Centre since we began measuring this result. We are extremely proud of this success, and extend sincere thanks and congratulations to the team of employees who worked diligently for over a year on the project. This year we also successfully completed our $85 million Service Improvement Plan (SIP), one of the most significant such plans in the country and which represented a replacement of 20 per cent of our total assets. This five-year program has extended and expanded services and improved network quality in communities across our operating area. The financial and human resources that were dedicated to SIP have brought service to a level that would otherwise not have been possible. Again, we thank the dedicated employees who worked on SIP projects for their commitment and efforts. In the Northwest Territories, in conjunction with our aboriginal partners in Ardicom, we completed a new state-of-the-art Internet Protocol network and secured the business of the Government of the Northwest Territories for the next five years. Paul Flaherty As well in 2005, we introduced significant changes to our High Speed Internet products and further expanded their availability. We also launched several new Internet-based services that will assist small businesses in the North to be more effective. Northwestel Cable has become the fastest growing part of our business. In 2005, this subsidiary acquired two companies, launched the NetKaster Satellite High Speed Internet service and re-launched digital Cable TV in Yellowknife and Fort Nelson. In late December, Northwestel also received the very good news that we were successful in winning the contract to provide the cellular portion of the Yukon Government s new Mobile Communications Solution (MoCS). Together with our partner, the Dakwakada Development Corporation, we will bring enhanced cellular coverage to seventeen Yukon communities, beginning in A key to our future success will be to engage employees further in addressing the needs of our customers and of our business. Our team leaders in Operations have worked with employees to develop and prioritize local improvement opportunities and they are proud of the fact that the top priorities on each list have been completed. It is also important to recognize how our employees have reached out to the broader community throughout It began last January with the employees and the company contributing more than $23,000 to tsunami and earthquake relief. The year has finished with record employee contributions to programs such as Adopt-a-Family and Share the Spirit. We have a staff and a business that we can take great pride in, as we look back to review the accomplishments of 2005 and ahead to the possibilities for Paul Flaherty President and Chief Executive Officer ANNUAL REPORT NORTHWESTEL

5 2005 Year in Review January Launch of improved corporate website to enhance accessibility, functionality and ease of use Northwestel, Northwestel Cable and employees donate more than $23,000 to Canadian Red Cross Asia Earthquake and Tsunami Relief Fund February Dialup Accelerator service introduced in Yukon and northern British Columbia to provide faster speeds for Sympatico Dialup Internet customers Northwestel is the first corporate partner to become a Major Sponsor of the Whitehorse 2007 Jeux du Canada Winter Games Launch of 2005/2006 Nunavut telephone directory in Rankin Inlet, featuring artwork by Rankin Inlet artist Veronique Nirlungayuk New access to High Speed Internet in Yukon communities of Tagish and Old Constabulary, through partnership between Northwestel, Industry Canada, Yukon Government and YukonNet Operating Society Northwestel Cable launches new digital cable television with 25 channels and pay per view services March Launch of 2005/2006 Northwest Territories telephone directory in Deline, featuring artwork by Deline artist Dennis Kenny CRTC approval of proposal to introduce local calling between Marsh Lake and Whitehorse Northwestel Cable finalizes agreement to purchase Fort Nelson Cablevision April Northwestel becomes title sponsor of Western Canadian Cross Country Ski Championships to be held in Whitehorse in March 2006 Northwestel donates $100,000 in cash and in-kind services to support Nunavut Telehealth network Working with Aboriginal Communities Representatives from the Government of Yukon, Dakwakada Development Corporation and Northwestel following the awarding of the cellular service contract Working effectively with and in support of aboriginal communities has been a key priority for Northwestel over the years. Northwestel employees from across our operating area meet on a monthly basis to explore better ways to conduct business with aboriginal groups and to encourage greater participation of aboriginal and First Nations people in the company. One key Committee initiative is to increase knowledge and sensitivity to how aboriginal and First Nations governments and businesses operate. In Nunavut, through the Nunavut Economic Development Forum, we are positioned through the Chambers to work with all the formal aboriginal groups in Nunavut. We sit on two committees dedicated to the development of partnerships between members to enhance education through technology ANNUAL REPORT NORTHWESTEL 3

6 2005 Year in Review (continued) Launch of 2005/2006 Yukon & northern British Columbia telephone directory in Whitehorse, featuring artwork by Whitehorse artist Shirlee Frost Local calling implemented between Marsh Lake and Whitehorse Yellowknife students participate in Northwestel s 4th annual directory recycling program, collecting 4200 outdated phone directories New access to High Speed Internet in Yukon communities of Burwash Landing, Faro, Ross River and Swift River through partnership between Northwestel, Industry Canada, Yukon Government and YukonNet Operating Society May Northwestel Cable signs agreement with Telesat Canada to provide satellite High Speed Internet service to remote communities in northern and western Canada beginning in the Northwest Territories and Nunavut Information meetings in Haines Junction and Silver City to update residents on plans to extend basic telephone service along Haines Road and in Silver City Yukon students participate in Northwestel s 4th annual directory recycling program, collecting 7800 outdated phone directories Partnership with Yukon Government to display tollfree forest fire reporting number on payphones throughout the territory June Rates are lowered for residential and business High Speed Internet customers in Inuvik & service expanded to airport area Northwestel and Infosat enter partnership to bring advanced communications solutions to remote businesses in the North Upgrade of Sympatico Dial-Up Accelerator service in Nunavut Working with Aboriginal Communities (continued) Through a partnership formed in late 2005 with the Dakwakada Development Corporation, the business arm of the Champagne and Aishihik First Nations, we were successful in winning a major cellular communications contract issued by the Yukon Government. The project is to provide cellular telephone service to 17 Yukon communities through 2006 and We have developed an E-health strategy and will work further with northern governments on its refinement and implementation during In 2005, we partnered with the Government of Nunavut to support the development of Telehealth in Nunavut. We contributed $100,000 in cash and in-kind services Paul Flaherty participates in the official opening of the Whale Cove telehealth centre to establish the Telehealth Centre in Whale Cove and to complete the wiring of buildings at ten sites in the network. Six rural Yukon communities received High Speed Internet service during 2005 as a result of our continued participation in Industry Canada s Broadband for Rural and Northern Development Pilot Project. In addition to Industry Canada, our partners were the YukonNet Operating Society and the Yukon Government. With the completion of this project, the vast majority of Yukon households now have access to High Speed Internet. Northwestel also developed a successful cost-sharing arrangement with the Smith Landing First Nation to bring new basic telephone service to their community in northern Alberta. Training opportunities for aboriginal northerners has also been a priority during In March, we held another successful twoday telecommunications training workshop for First Nations, this year in Fort Nelson, B.C. Fifteen students attended the workshop, which is geared toward leveraging existing ANNUAL REPORT NORTHWESTEL

7 2005 Year in Review (continued) July Northwestel Cable purchases InterNorth Launch of residential and business High Speed Internet in Fort Smith New calling features introduced in Fort Good Hope August High Speed Internet service launched in Lower Post and in additional areas of Watson Lake Official opening of telecommunications exhibit at Fort Nelson Historical Society Museum, with artifact donations from Northwestel September Northwestel Cable completes major upgrade to cable television network in Fort Nelson and launches high speed Internet service Launch of new Internet services and packages in Yukon and select areas of Northwest Territories October Northwestel Cable expands NetKaster satellite High Speed Internet services to the Sahtu, South Slave and Deh Cho regions of Northwest Territories Improved Voice Mail service launched in Iqaluit Basic telephone service extended to Fort Fitzgerald and the Smith Landing subdivision, both in northern Alberta, along with access to Dial-Up and High Speed Internet, and calling features November Eleven post-secondary students from across the North are awarded Northwestel Northern Futures scholarships worth $2500 each Northwestel announces 5-year, $450,000 donation to Yukon Hospital Foundation s Under Our Wing campaign, the single largest donation in the history of the company Working with Aboriginal Communities (continued) skills to enhance telephone etiquette and call management skills. In November, a number of Northwestel representatives participated in Career Week activities in Iqaluit. This included an Information Booth at the Career Fair at Inuksuk High School. More than twenty students requested additional information about careers at Northwestel. One student spent a day visiting various work areas at Northwestel as part of Take Your Kids to Work Day. A topic of some interest during Career Week was the Northwestel Northern Futures Scholarship Program, which includes the objective of providing future employment for its recipients. This year eleven scholarships were awarded to students all across the North, five of them to aboriginal students. This is a key component of Northwestel s efforts to increase aboriginal representation in our workforce. Sponsorship of First Nations activities and events was an important activity for Northwestel during We sponsored a number of annual general assemblies, including the Assembly of First Nations National Assembly in Yellowknife, the Dene National Assembly in Deline, the Nihtat Gwich in Council General Assembly in Inuvik and the Treaty 8 Petitot Gathering in Fort Nelson. We also sponsored the Gathering of Traditions Potlatch summer solstice Northwestel representatives pose with delegates at the Assembly of First Nations National Assembly event in Whitehorse and the Fish Fry at the National Aboriginal Day celebrations in Yellowknife. Northwestel representatives attended and where possible assisted at all these events ANNUAL REPORT NORTHWESTEL 5

8 2005 Year in Review (continued) The Northwestel Festival of Trees fundraising events for the Stanton Territorial Hospital in Yellowknife and Whitehorse General Hospital raise over $149,000 in Yellowknife and $195,000 in Whitehorse Launch of shared Web Hosting service Four finalists announced in fifth annual Holiday Greeting Card Children s Art Contest, one finalist for each of the four regions in Northwestel s operating area December Northwestel and partners announce the CA* net 4, a new Internet link to the south for research, health and educational institutions in the North High Speed Internet introduced in Fort Simpson Launch of new Northwestel Microsoft Hosted Exchange Service Yukon Government awards contract to Northwestel and Dakwakada Development Corporation for cellular component of new Mobile Communications Solution Strengthening Customer Service Northwestel made strong efforts during 2005 to increase and improve the ways in which we provide better customer service. Early in 2005 we launched our improved corporate website. A number of new features were added to make the site more accessible, functional and easier to use. This included new sections and improved website search functions. Customers can use the site to order services online, view their E-bill or check their webmail. Nunavut Customer Care Centre representatives celebrate the improved service order system Beginning in mid-year, we made improvements to our customer order and service delivery systems, which resulted in much faster turn-around times when customers ordered services and more flexibility in scheduling changes. We also engaged front line employees in identifying and implementing process improvement initiatives and in participating in monthly quality of service meetings to address customer feedback. As a result of these and other measures, we are pleased to report significant growth in total revenues and improvements in delivering service to customers. In the fall, Northwestel launched enhanced Internet offerings for customers in B.C., Yukon and the Northwest Territories. New residential and business High Speed Internet packages now offer varying speeds, usage caps and pricing to allow customers to choose the option that best suits them. In addition, a do-ityourself installation kit was introduced for High Speed Internet customers. A Managed Firewall service for residential customers was also launched, along with a new Help and Support website and reduced prices for Fixed IP addresses. The availability of HSI was also expanded to numerous communities throughout our operating area. We also expanded availability across our operating area and upgraded the level of service of our free Dialup Accelerator, which provides faster speeds for Sympatico Dialup Internet customers. We have also expanded our suite of Internet-based services and the ways in which we provide these services. For example, we launched a web hosting service to assist residential and business customers to create and manage their own websites. We launched the Northwestel Microsoft Hosted Exchange Service, which offers businesses and groups a secure server environment and managed communications. Together with its partners, Northwestel launched in November the CA*net 4 Broadband project, which will provide a high performance, high speed Internet link from the Yukon to southern Canada to support Yukon-based research, health, and educational institutions ANNUAL REPORT NORTHWESTEL

9 Subsidiary Activities ARDICOM ARDICOM Digital Communications is a joint venture of northern companies formed to provide the advantages of digital communications to the Northwest Territories, Nunavut and parts of the Yukon. The company uses a unique frame relay over satellite solution to provide an end-to-end data network for business. ARDICOM shareholders are Arctic Cooperatives Ltd., Northern Aboriginal Services Company and Northwestel was a very good year for ARDICOM. The highlight of the year was the implementation of a new digital communications network for one of ARDICOM s largest customers, the Government of the Northwest Territories. Through a five-year agreement, ARDICOM is delivering increased value to this customer, including a five-fold increase in available bandwidth and a significant reduction in the price of videoconferencing. ARDICOM s activities for 2005 also included a decision to make structural changes within the company. Beginning in January 2006, a new subsidiary company will be formed to service customers in the Eastern Arctic region. To support the increase in activity expected from this move, ARDICOM hired two new staff members during ARDICOM also took several opportunities to demonstrate the value of its videoconferencing services by donating them to worthy projects. In one instance, a classroom discussion of the possibility of life on Mars was facilitated by a donated videoconferencing link between Grade 8 students in Weledeh and representatives of the Canadian Space Agency. Service Improvement Plan (SIP) Northwestel s five-year $85.4 million Service Improvement Plan was completed in SIP has extended basic telephone service and improved network quality throughout Northwestel s operating area through a comprehensive construction program. The program includes switching equipment replacements, analog transport radio system upgrades, installation of facilities to extend service to unserved and underserved customers, as well as dial-up Internet service and Call Management Services for some communities. Throughout the course of the program, we were able to extend service to more than 2,800 unserved and underserved households throughout the North. One SIP project of special interest was completed in the fall of 2005, when we delivered new basic telephone services to Fort Fitzgerald and Smith Landing in northern Alberta, along with High Speed and Dial-up Internet and the same suite of calling features available in Fort Smith, Northwest Territories. The new service results from a CRTC decision to adjust the serving boundaries of Northwestel and Telus. In CRTC Decision , the Canadian Radio-television and Telecommunications Commission (CRTC) agreed that long distance competition is proceeding in the North in a unique way, with most of the competitive offerings being posed by prepaid calling cards. The Commission also noted that it would initiate a new proceeding in 2006 to review Northwestel s regulatory framework. Our regular capital spending program, outside of our SIP projects, was also significant this year. The company s 2005 capital investment was $33 million. This included projects to extend fibre optic cable to the south to provide additional bandwidth, to expand core data network routers in Yellowknife and Whitehorse to ensure we meet growing data requirements, and to upgrade or replace power systems at various microwave sites. The Service Improvement Plan upgraded power systems at a number of remote microwave sites 2005 ANNUAL REPORT NORTHWESTEL 7

10 Subsidiary Activities (continued) Northwestel Cable Northwestel Cable Inc. is a whollyowned subsidiary of Northwestel, providing cable television, digital cable and High Speed Internet services to residential and business customers. The company completed a number of successful initiatives during In February, Northwestel Cable implemented a new digital cable system in Yellowknife, providing customers with an improved programming guide, simplified packaging and twenty-five pay-per-view channels. Several system enhancements were planned for launch in In March, Northwestel Cable successfully completed the acquisition of Fort Nelson Cablevision. It is now a whollyowned subsidiary of Northwestel Cable, providing cable, digital cable and High Speed Internet to residents of northern British Columbia. In September, Northwestel Cable completed a major upgrade to the Fort Nelson cable television network, to improve picture and sound quality, increase channel capacity and enable the launch of new two-way interactive services, such as High Speed Internet. In May, Northwestel Cable signed a contract with Telesat Canada to provide NetKaster satellite Internet service to remote rural communities in the Northwest Territories and Nunavut, as well as northern parts of British Columbia, Alberta, Saskatchewan and Manitoba. The NetKaster service is powered by Telesat Canada s Anik F2 satellite. In July, Northwestel Cable purchased Internorth, an Internet Service Provider with operations in Edmonton, Whitehorse and Yellowknife. Community Investment In 2005, Northwestel contributed more than $370,000 in cash and in-kind donations to a variety of northern community groups. The year began with an outpouring of generosity from Northwestel and Northwestel became Official Telecommunications Supplier to the 2007 Canada Winter Games its employees after a natural disaster had devastating effects in south Asia. Employees raised almost $12,000, which was matched by the company, resulting in approximately $24,000 donated to the Canadian Red Cross Asia Earthquake and Tsunami Relief Fund. In February, Northwestel proudly became the first corporation to sign on as a Major Sponsor of the Canada Winter Games, which will be held in Whitehorse, Yukon from February 24 to March 10, As the Official Telecommunications Supplier to the Games, Northwestel has committed to providing essential communications services required to stage the Games, including local service and equipment, video and teleconferencing services, Internet and web hosting services. The company s total contribution of cash and in-kind gifts is valued at over $400,000. In recognition of our sponsorship role in the Games, we invited artists to focus on the theme of Northern Sport when they submitted artworks for the covers of our 2006 directories. Northwestel again played a key role in successful fundraising campaigns for hospitals in Yellowknife and Whitehorse, largely through its sponsorship of the Northwestel Festival of Trees held in both cities in the month of November. In addition to the sponsorship of both Festivals, Northwestel also announced a commitment to the Whitehorse General Hospital s Under Our Wing campaign worth $450, over five years. These major sponsorships were in addition to a myriad of other sponsorships and donations that were provided throughout 2005 to many deserving groups and projects. Northwestel is proud to play an active role in supporting these community efforts ANNUAL REPORT NORTHWESTEL

11 Consolidated Fianancial Statements of Northwestel Inc. December 31, 2005 Table of Contents Consolidated Statement of Income...11 Consolidated Statement of Retained Earnings...11 Consolidated Statement of Contributed Surplus...11 Consolidated Balance Sheet Consolidated Statement of Cash Flow Notes to the Consolidated Financial Statements ANNUAL REPORT NORTHWESTEL 9

12 Management Responsibility for Financial Statements The accompanying financial statements of Northwestel Inc. and all information in this annual report are the responsibility of management, and have been approved by the Board of Directors. The financial statements have been prepared by management in accordance with regulatory accounting principles. The financial statements include some amounts that are based on best estimates and judgments. Financial information used elsewhere in the annual report is consistent with that of the financial statements. The management of the Corporation in furtherance of the integrity and objectivity of data in the financial statements, has developed and maintains a system of internal accounting controls and supports a program of internal audits. Management believes the internal accounting controls provide reasonable assurance that financial records are reliable and form a proper basis for preparation of financial statements, and that assets are properly accounted for and safeguarded. The Board of Directors carries out its responsibility for the financial statements in this annual report principally through its audit committee. The audit committee reviews the corporation s annual financial statements and recommends their approval by the Board of Directors. The shareholder s auditors have free and independent access to the audit committee. These financial statements have been examined by the shareholder s auditors, Deloitte & Touche, Chartered Accountants, and their report is presented below. Raymond G. Hamelin Comptroller, Treasurer & Chief Financial Officer Auditors Report To the Shareholder of Northwestel Inc. We have audited the consolidated balance sheet of Northwestel Inc. (a wholly owned subsidiary of Canada Inc.) as at December 31, 2005, and the consolidated statements of income, retained earnings, contributed surplus and cash flow for the year then ended. These financial statements have been prepared to comply with the regulatory accounting principles outlined by the Canadian Radio-Television and Telecommunications Commission ( CRTC ). These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 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 consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2005, and the results of its operations and its cash flows for the year then ended in accordance with the basis of accounting described in Note 1 to the financial statements. These financial statements, which have not been and were not intended to be, prepared in accordance with Canadian generally accepted accounting principles, are solely for the information and use of the Shareholder of Northwestel Inc. and the CRTC to comply with regulatory directives. The financial statements are not intended to be and should not be used by anyone other than the specified users or for any other purpose. Chartered Accountants January 27, ANNUAL REPORT NORTHWESTEL

13 Consolidated Statement of Income Year ended December 31, 2005 (thousands of dollars) Operating Revenues Long distance telephone services $ 47,221 $ 47,236 Local telephone service 43,773 43,670 Private network, directory, cable television and other services 58,312 51,859 Supplemental funding (Note 1) 9,100 9,300 Total Operating Revenues 158, ,065 Operating Expenses Depreciation, amortization and accretion 38,634 38,968 Operating 81,927 77,851 Total Operating Expenses 120, ,819 Net Operating Revenues 37,845 35,246 Other Income 811 1,226 Income before Financing Costs and Income Taxes 38,656 36,472 Financing Costs Amortization of deferred foreign exchange gains (80) (147 ) Interest and bank charges Interest on long-term debt 9,802 10,490 Total Financing Costs 10,175 10,514 Income Before Income Taxes 28,481 25,958 Income Taxes (Note 12) 10,795 9,088 Net Income $ 17,686 $ 16,870 Consolidated Statement of Retained Earnings Year ended December 31, 2005 (thousands of dollars) Balance, Beginning of Year $ 51,746 $ 46,481 Deferred Income Tax Adjustment (Note 12) - (415 ) Net Income 17,686 16,870 Transfer From Contributed Surplus (Note 4) ,894 63,450 Dividends Common shares - regular (16,711 ) (11,190 ) Common shares - special (462) (514 ) Balance, End of Year $ 52,721 $ 51,746 Consolidated Statement of Contributed Surplus Year ended December 31, 2005 (thousands of dollars) Balance, Beginning of Year $ 56,033 $ 55,931 (Deductions) Additions During Year (Note 4) (349) 616 Transfer to Retained Earnings (Note 4) (462) (514 ) Balance, End of Year $ 55,222 $ 56, ANNUAL REPORT NORTHWESTEL 11

14 Consolidated Balance Sheet December 31, 2005 (thousands of dollars) Assets Current Accounts receivable $ 17,984 $ 18,139 Contracts receivable - 36 Income tax recoverable - 27,671 Materials and supplies 4,493 3,520 Other ,399 50,249 Telecommunications Property Buildings, plant and equipment (Note 2) 586, ,908 Less accumulated depreciation (Note 2) 305, , , ,297 Land 2,347 2,322 Plant under construction 13,198 13,243 Asset retirement obligation (Note 3) 5,266 2, , ,942 Other Deferred charges (Note 5) 3,306 3,914 Deferred income taxes (Note 4) 5,379 5,840 Deferred pension cost (Note 6) 6,587 7,642 Goodwill (Note 8) 1,500 - Unamortized foreign exchange gains (157 ) (187 ) 16,615 17,209 $ 341,151 $ 357,400 Approved by the board Director Director ANNUAL REPORT NORTHWESTEL

15 Consolidated Balance Sheet (continued) December 31, 2005 (thousands of dollars) Liabilities Current Bank indebtedness (Note 9) $ 9,003 $ 18,233 Accounts payable 18,394 17,917 Current portion of long-term debt (Note 11) 21,260 8,038 Customers deposits 1,909 1,565 Dividends payable 2,912 2,926 Deferred revenue 1, Income tax payable Related party loan payable (Note 18) - 21,200 Current portion of asset retirement obligation (Note 10) ,843 70,948 Asset Retirement Obligation (Note 10) 6,511 2,491 Long-term Debt (Note 11) 93,400 99,740 Deferred Income Taxes (Note 12) 17,731 16,801 Deferred Recovery (Note 13) Other Benefit Plans (Note 6) 3,042 2, , ,121 Commitments (Note 16) Common Shareholder s Equity Stated capital of common shares (Note 14) 56,500 56,500 Contributed surplus (Note 4) 55,222 56,033 Retained earnings 52,721 51, , ,279 $ 341,151 $ 357, ANNUAL REPORT NORTHWESTEL 13

16 Consolidated Statement of Cash Flow Year ended December 31, 2005 (thousands of dollars) Net Inflow (Outflow) Of Cash Related to the Following Activities Operating Net income $ 17,686 $ 16,870 Items not affecting cash Allowance for funds used during construction (475 ) (681 ) Amortization of deferred foreign exchange gains (80) (147 ) Amortization of early retirement incentive plan costs - 51 Amortization of employee termination incentive costs Amortization of federal tax rate reduction (529) (868) Amortization of interest recovered - (272 ) Amortization of R&D tax recovery - (222 ) Deferred income taxes 668 1,217 Depreciation, amortization and accretion 38,620 38,915 Asset retirement obligation expenditures Loss on sale of property (60) (74 ) Operating cash inflow 56,371 55,032 Net change in non-cash balances relating to operations (Note 15) 29,080 (21,976 ) Increase in post-retirement benefits 1, Cash inflow from operations 87,117 33,688 Investing (Repayments to) advances from related party (21,200) 21,200 Capital expenditures (Note 19) (42,248) (47,521 ) Deferred charges Dismantling costs (2,960) (3,218 ) Goodwill (1,500) - Salvage proceeds (67,514) (28,895 ) Dividends Common shares - regular (16,711) (11,190 ) Common shares - special (462) (514 ) (17,173) (11,704 ) Net Cash Inflow (Outflow) 2,430 (6,911 ) Financing Issuance of long-term debt 15,000 - Repayment of capital leases (200) (48) Repayment of long-term debt (8,000) (5,718 ) 6,800 (5,766 ) Cash Increase (Decrease) During the Year 9,230 (12,677 ) Bank Indebtedness, Beginning of Year (18,233 ) (5,556 ) Bank Indebtedness, End of Year $ (9,003) $ (18,233 ) Supplemental Information to the Consolidated Statement of Cash Flow (Note 19) ANNUAL REPORT NORTHWESTEL

17 Notes to the Consolidated Fianancial Statements Year ended December 31, 2005 (thousands of dollars) 1. Accounting Policies The financial statements have been prepared in accordance with the regulatory decisions and directives issued by the Canadian Radio-Television and Telecommunications Commission ( CRTC ). The basis of accounting used in these financial statements materially differs from Canadian generally accepted accounting principles in the following areas: a) Northwestel Inc. (the Company ) does not recognize gains or losses on the disposition of capital assets to earnings when assets are sold or retired. The Company records the gain or loss in a separate account within capital assets and amortizes the amount over time based on rates that are established and regularly reviewed by the CRTC. b) The Company records a return on total capital invested in telecommunications plant while under construction by including an allowance for funds used during construction, based on the Company s return on capital, as an increase to earnings and the cost of capital assets. c) The Company recognizes toll, settlement and Carrier Access Tariff revenue as a prescribed amount and records any excess or shortfall in actual revenues received from third parties in a deferred revenue account. The deferred revenue is recognized as earned throughout the year. d) As part of the CRTC Decision , Long Distance Competition and Improved Service for Northwestel Inc. s Customers, the Company receives supplemental funding as approved by the CRTC from the central fund administrator. Supplemental funding is recognized as earned throughout the year. e) The Company records foreign currency gains and losses in earnings for the year except for unrealized gains and losses on long-term debt, which are reported as a deferred item and amortized over the remaining life of the debt on a straight-line basis. f) The Company follows the modified liability method of income tax allocation that results in temporary differences between the tax basis of an asset or liability not being recognized in the accounts. The accumulated deferred income tax recovery or payable balance is adjusted to reflect changes in tax rates in the period in which the rate change occurs, except for the impact of federal tax rate reductions that are deferred and amortized over a period of three years, commencing the year the tax rate change becomes effective. g) Amounts received from the Government of Canada in excess of costs incurred by the Company in prior years relating to scientific research and experimental development ( R&D ) and related interest are deferred and recognized as directed by the CRTC. h) Employee termination incentive costs are deferred and amortized over a five-year period. Such amortization commences in the month employment ceases. i) The Company issues both audited consolidated and non-consolidated financial statements, although only consolidated financial statements are made publicly available. The CRTC is an agency of the Canadian government and has jurisdiction over most aspects of the Company s operations including rates, costing and accounting practices. During the last decade, the CRTC put more emphasis on increasing competition within the industry and on streamlining the regulatory process. In the case of the Company, the CRTC has released Decision CRTC , Long Distance Competition and Improved Service for Northwestel Inc. s Customers. Effective January 1, 2001, the decision approved a plan to extend and improve the telecommunications network, implement similar long distance rate plans to southern Canada, implement long distance competition, address the associated funding implications via supplementary funding through the CRTC and outline a regulatory framework appropriate to the Company s operating and competitive circumstances. Pursuant to CRTC , the CRTC will continue to regulate the Company on a rate of return basis until December 31, A rate of return on equity ( ROE ) between 10% and 11% was approved by the CRTC, and the rates set in the Decision are designed to achieve an ROE of 10.5% on a basis determined by the CRTC ANNUAL REPORT NORTHWESTEL 15

18 Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Northwestel Cable Inc. All significant intercompany balances and transactions have been eliminated. Materials and Supplies Materials and supplies have been valued at the lower of cost or estimated utility or sales value for obsolete and scrap material. Telecommunications Property Telecommunications property is carried at cost. Depreciation is computed by the straight-line method based on the estimated useful lives of the assets. The depreciation rates are reviewed and approved annually by the CRTC as part of the rate-setting process. In 2005, the effective depreciation rate was 7%. Plant under construction is depreciated at the time the asset is available for productive use. Leases Property and equipment taken on leases, which transfer substantially all of the benefits and risks of ownership to the Company, are recorded as capital leases as though assets had been purchased and liabilities incurred. All other equipment on lease is accounted for as operating leases. Deferred Charges A mortgage assistance plan has been established for the benefit of employees who are relocated within the Company s operating territory. Advances under this plan are forgivable in certain circumstances; accordingly, the portion of the deferred charge that is estimated to be ultimately forgivable is expensed. Income Taxes As directed by the CRTC in July 1989, the Company uses the modified liability method of income tax allocation in relation to its telecommunications operations. The Company s subsidiary uses future income taxes as its accounting is not regulated by the CRTC. Under this method, future income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes, computed based on rates and provisions of enacted and substantially enacted law. Pensions and other Benefit Plans The Company maintains contributory defined benefit pension plans that provide for pension, other retirement and postemployment benefits for substantially all of its employees based on length of service and rate of pay. The Company accrues its obligations under employee benefit plans and the related costs, net of plan assets. The Company has adopted the following policies: a) The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method pro-rated on service and management s best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. b) For the purpose of calculating the expected return on plan assets, those assets are valued at fair value. c) Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment. d) The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active employees. e) Amortization of the transitional asset is on a straight-line basis over the average remaining service period of active employees. f) As directed by the CRTC, amortization of prior service costs arising from early retirement incentive plans accepted by employees is on a straight-line basis over a period of five years. Such amortization commences in the month employment ceases ANNUAL REPORT NORTHWESTEL

19 Goodwill Goodwill is assessed annually for impairment and when events or changes in circumstances indicate that goodwill might be impaired. Any potential impairment is identified by comparing the carrying value of the goodwill to its fair value calculated using estimates of future cash flows or other valuation methods. Any excess is deducted from earnings. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Major areas of management estimates included in these financial statements are provisions for bad debts, obsolete inventory, depreciation rates, asset retirement obligations, deferred income taxes, pension and long-term benefits and fair value of long-term debt. Actual results could differ from these estimates. Statement of Cash Flow The statement of cash flow is prepared using the indirect method. Revenue Recognition Revenue is recognized when services are provided or products are delivered to customers. Asset Retirement Obligations Effective January 1, 2004, the Company adopted Section 3110 of the CICA Handbook, Asset Retirement Obligations. This section is effective for years beginning on or after January 1, This standard deals with the recognition and measurement of liabilities ensuing from any legal obligations of retiring property, plant and equipment. These obligations are initially measured at fair value and are adjusted for any changes resulting from the passage of time and any changes to the timing or the amount of the original estimate of undiscounted cash flows. The asset retirement cost is capitalized as part of telecommunications property and is amortized into expense on a systematic and rational basis over time. Derivative Financial Instruments The Company entered into a series of U.S. dollar forward exchange contracts to hedge its foreign currency exposure on principal and interest payments related to its U.S. dollar denominated debentures. The Company s policy is not to use derivative financial instruments for trading or speculative purposes. The Company adopted the requirements of Accounting Guideline 13, Hedging Relationships, including formally documenting all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking these transactions. The process includes linking forward contracts to specific debenture payments and a formal assessment of the effectiveness of the hedging transactions to offset changes in cash flows of hedged items. 2. Telecommunication Property Original Accumulated Net Book Net Book Cost Depreciation Value Value Buildings and towers $ 83,885 $ 37,213 $ 46,672 $ 47,413 Cables and outside plant 111,488 46,300 65,188 58,256 Radio and satellite 98,075 61,437 36,638 36,506 Switches 98,121 58,721 39,400 39,922 Other plant 194, ,135 92,428 90,200 $ 586,132 $ 305,806 $ 280,326 $ 272,297 Depreciation expense for the year amounted to $38,620 ( $38,915) ANNUAL REPORT NORTHWESTEL 17

20 3. Asset Retirement Obligation (see Note 10) Balance, beginning of year $ 2,080 $ 3,494 Revision of estimates 3,788 - Depreciation expenses 602 1,414 Balance, end of year $ 5,266 $ 2, Deferred Income Taxes/Contributed Surplus On December 1, 1988, BCE Inc. purchased from Canadian National Railway Company all outstanding common shares of the Company. Pursuant to the terms of the purchase, the capital cost allowances taken for purposes of computing the tax remittances to Canadian National Railway Company have reverted back to the Company. In recognition of this, the Company recorded $42,210 as a deferred tax debit with a corresponding amount as contributed surplus. As and when these tax benefits are realized, the Company will transfer a like amount from contributed surplus to retained earnings and then declare a special dividend. In the year, tax benefits of $462 ( $514) were realized by claiming additional capital cost allowance and reducing income taxes payable. As at December 31, 2005, the Company has unrealized tax benefits of $5,379 ( $5,840). During the previous year, the Company s parent transferred Part VI.I income tax benefit to the Company. The benefit of $616 was added to contributed surplus in An adjustment to this amount of $349 was deducted from contributed surplus in the current year. 5. Deferred Charges Employee termination incentive costs $ 4,231 $ 4,231 Less accumulated amortization 4,231 4, Advances under mortgage assistance plan 2,607 2,658 Other 699 1,242 $ 3,306 $ 3, Pension and Other Benefit Plans The Company maintains a contributory defined benefit plan that provides for pensions for most of its employees based on length of service and rate of pay, as well as other retirement benefits. The other retirement benefit plans include certain health care and life insurance benefits on retirement and various disability plans and medical benefits to former or inactive employees, their beneficiaries and covered dependants after employment but before retirement, under specified circumstances. Information about the Company s defined benefit plans and plans that are not fully funded as at December 31, 2005, is as follows: ANNUAL REPORT NORTHWESTEL

21 Pension Benefits Plan Other Benefit Plans Fair value of plan assets $ 108,090 $ 100,671 $ - $ - Accrued benefit obligation 121, ,622 3,042 2,431 Funded status - plan deficit $ (13,077) $ (2,951 ) $ (3,042 ) $ (2,431 ) Accrued pension asset (other benefit plans obligation) $ 6,587 $ 7,642 $ (3,042) $ (2,431 ) During the year, the Company realized an expense of $1,081 ( $90) for pension plans, an expense of nil ( $51) for early retirement incentive plan costs and an expense for other benefit plans of $764 ( $580). During the year, the Company recorded nil ( $131) in costs associated with early retirements granted. The significant actuarial assumptions adopted in measuring the Company s accrued benefit obligations are as follows (weightedaverage assumptions as of December 31): Pension Other Benefits Plan Benefit Plans Discount rate 5.2% 6.0% 5.2% 6.0% Expected long-term rate of return on plan assets 7.5% 7.50% 7.5% 7.50% Rate of compensation increase 3.5% 3.5% 3.5% 3.5% Average remaining service life of employees For measurement purposes, an average annual rate of increase of 10.5% in the per capita cost of covered medication and 4.5% in the per capita cost of other health care benefits was assumed for The rate for covered medication was assumed to decline gradually to 4.5% over six years and remain stable thereafter. The Company s funding policy is to make contributions to its pension fund based on actuarial cost methods as permitted by pension regulatory bodies. The Company is responsible for adequately funding the plans. Contributions reflect actuarial assumptions concerning future investment returns, salary projections and future service benefits. In the current year, the Company was not permitted to make contributions to either the pension or other benefit plans. Contributions made by the employees of the Company and its subsidiaries to the pension benefits plan were $1,774 ( $2,119) and nil to the other benefit plans. In the current year, consolidated benefits of $3,591 ( $3,489) to retirees and $2,171 ( $1,061) to terminating employees of the Company and its subsidiaries were paid by the pension benefits plan and other benefit plans ANNUAL REPORT NORTHWESTEL 19

22 7. Acquisition During the year Northwestel Cable Inc. made the following acquisitions: 100% of the outstanding common shares of Fort Nelson Cablevision Ltd. The Internet operations of Internet North. The following table provides a summary of these acquisitions. The purchase price allocation for all 2005 acquisitions is based on estimates. The final purchase price allocation for each business acquisition is expected to be completed within 12 months of the acquisition date. Fort Nelson Cablevision Internet Ltd. North Total Consideration received: Capital assets $ 103 $ 320 $ 423 Other assets Goodwill 1,500-1,500 Accounts payable (54) - (54) $ 1,600 $ 364 $ 1,964 Consideration given: Cash $ 1,600 $ 364 $ 1, Goodwill Balance, December 31, 2004 $ - Acquisitions 1,500 Balance, December 31, 2005 $1, Bank Indebtness Overdraft $ 9,003 $ 2,233 Bankers acceptance bearing interest between 2.57% and 2.66%, unsecured and due with various maturity dates - 16,000 $ 9,003 $ 18, ANNUAL REPORT NORTHWESTEL

23 10. Asset Retirement Obligation Effective January 1, 2004, the Company adopted CICA Handbook Section 3110, Asset Retirement Obligations. Under this new standard, a capital asset and corresponding long-term liability, equal to the fair value of the legal obligation for the asset retirement, determined at the date of adoption, is recorded. The capital asset, with depreciation expense of $602 ( $1,415), is being depreciated and charged to earnings. Interest on the obligation is being accreted with a corresponding charge to earnings of $527 ( $190). The following is a reconciliation of the opening and closing asset retirement obligation balances: Balance, beginning of year $ 3,484 $ 3,494 Revisions of estimates 3,788 - Liabilities settled (768) (200 ) Accretion expenses Balance, end of year 7,031 3,484 Less current portion $ 6,511 $ 2,491 The Company estimates that the undiscounted cash flow required to settle the asset retirement obligation is approximately $14,862 ( $15,062). Expenditures will be made on an ongoing basis over several decades and are expected to be funded by cash generated from operations. Credit adjusted discount rates from 4.0% to 7.3% were applied to expected future cash flows to determine the carrying value of the asset retirement obligation. In view of uncertainties concerning asset retirement obligations, the ultimate costs could be materially different from the amounts estimated. The estimate of the future liability is subject to change based on amendments to applicable laws and legislation. Future changes, if any, could have a significant impact and would be reflected prospectively as a change in accounting estimate. During the year the Company revised its estimates relating to the timing of certain asset retirement obligation expenditures. The net impact of the change was an increase in the asset retirement obligations of $3, ANNUAL REPORT NORTHWESTEL 21

24 11. Long-term Debt Debentures Series Interest Rate Currency Maturity Date April 17, 2005 O 8.45% Can. $ - $ 8,000 December 31, 2007 D 10.50% Can. 5,600 5,600 April 17, 2008 P 8.45% Can. 4,000 4,000 November 9, 2009 L 10.55% Can. 6,000 6,000 September 12, 2012 Q 7.07% Can. 5,000 5,000 June 29, 2015 C2 4.77% Can. 15,000 - September 12, 2017 R 7.27% Can. 15,000 15,000 August 14, 2018 A2 6.55% Can. 17,500 17,500 October 16, 2023 B2 6.74% Can. 20,000 20,000 88,100 81,100 January 15, 2006 H 14.31% US 11,041 11,041 June 1, 2006 I 15.20% US 3,660 3,660 July 1, 2007 J 15.60% US 1,844 1,844 March 15, 2013 K 12.48% US ,512 17,512 Adjustment to current exchange rate 7,286 7,338 24,798 24,850 Total debentures 112, ,950 Obligations under capital leases (Note 16) 1,762 1, , ,778 Less current portion 21,260 8,038 $ 93,400 $ 99,740 The debentures are unsecured and subject to the following redemption terms: Series D and H to K Not redeemable by the Company prior to maturity Series A2, B2, C2 and L to R Redeemable at the Company s option at the higher of the Canada Yield Price (as defined below) and the principal amount plus accrued interest The Canada Yield Price is calculated to provide a yield to maturity equal to the Government of Canada Yield in effect at the date of redemption, plus 0.5% in the case of Series L to N debentures, 0.4% in the case of Series O and P debentures, 0.2% in the case of Series Q, R, A2 and C2 debentures, and 0.35% in the case of Series B2 debentures. Principal payments required in each of the next five years are approximately as follows: 2006 $ 21, , , , ANNUAL REPORT NORTHWESTEL

25 12. Income Taxes A reconciliation of the combined statutory federal and provincial income tax rate in Canada to the effective income tax rate is as follows: Combined statutory income tax rate 36.1 % 37.4 % Tax on large corporations 1.3 % 1.2 % Allowance for funds on construction (0.6)% (1.0)% Other 1.1 % (2.6)% Effective income tax rate 37.9 % 35.0 % Details of the Company s provision for income taxes are as follows: Income taxes Current $ 10,656 $ 8,570 Deferred $ 10,795 $ 9,088 Deferred income taxes of $17,731 ( $16,801) result principally from deductions for tax purposes in respect of buildings, plant and equipment in excess of amounts charged to operations. The Company has non-capital losses carried forward of nil ( $828) that are available to reduce taxable income in future years. The Company has capital losses carried forward of $312 that are available to reduce taxable capital gains in future years. These amounts have not been recognized in the financial statements. During the prior year, the Company identified an adjustment of $415 to its deferred income tax account related to previous years that was adjusted to opening retained earnings. As a result of the Company accounting for income taxes following the modified liability method, the Company has over recognized net future income tax liabilities amounting to $1,489 and has over recognized a current future income tax recovery of $415, all of which were calculated under the liability method and under the method described in Note 13. In addition, opening retained earnings are understated by $1, ANNUAL REPORT NORTHWESTEL 23

26 13. Deferred Recovery The first component of the deferred recovery results from amounts received from the Government of Canada in excess of costs incurred by the Company in prior years relating to R&D and related interest received. The second component represents the impact of the federal rate reduction on deferred taxes and has been removed from deferred taxes payable and recorded as deferred recovery. There is no cash involved in this transaction and, as such, it is not reflected in the statement of cash flow. Both amounts will be amortized over a three-year period as directed by the CRTC. The details of these amounts are as follows: R&D tax recovery and interest $ 1,481 $ 1,481 Less accumulated amortization 1,481 1, Federal rate reduction 2,600 2,598 Less accumulated amortization 2,419 1, $ 181 $ 710 During the year, nil ( $494) in amortization of the R&D recovery and interest was recorded, of which nil ( $222) was reflected as a deferred income tax recovery and nil ( $272) was reflected as interest income. The federal rate reductions were effective as of January 1, 2002, 2003 and 2004, and $529 ( $868) in amortization of the impact of the federal rate reduction has been recorded as an income tax recovery. 14. Common Shares Authorized Unlimited number of common shares without par value Issued 874,232 common shares ( ,232) $ 56,500 $ 56, Net Change in Non-cash Balances Relating to Operations Accounts receivable and contracts receivable $ 185 $ 1,734 Income tax recoverable 27,852 (18,327 ) Materials and supplies (973) 333 Other current assets (39) 693 Accounts payable 477 (6,761 ) Customers deposits Dividends payable (14 ) (18 ) Deferred revenue 1,248 - $ 29,080 $ (21,976 ) ANNUAL REPORT NORTHWESTEL

27 16. Commitments Future minimum lease payments under non-cancellable operating and capital leases as at December 31, 2005, are as follows: Operating Leases Capital Leases 2006 $ 8,846 $ , , , , Thereafter 28, Total future minimum lease payments $ 63,897 1,965 Less amount representing interest at rates ranging from 5% to 9% 203 Present value of obligations under capital leases 1,762 Less current portion of obligations under capital leases 222 Long-term obligations under capital leases $ 1, Financial Instruments Financial instruments consist of recorded amounts of receivables and other like amounts that will result in future cash receipts, as well as accounts payable, short-term borrowings and any other amounts that will result in future cash outlays. Risk Management The financial risk is the risk to the Company s earnings that arises from fluctuations in interest rates and foreign exchange rates and the degree of volatility of these rates. The Company does not use derivative instruments to reduce its exposure to interest and foreign currency risk. Credit Risk Credit risk arises from the potential that a counterparty will fail to perform its obligations. The Company is exposed to credit risk from customers. However, the Company has a large number of diverse customers, which minimizes concentration of credit risk. Fair Value The estimated fair values approximate amounts at which these instruments could be exchanged in a current transaction between willing parties. Therefore, fair values are based on estimates using present value and other valuation techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk. Therefore, due to the use of subjective judgment and uncertainties, the aggregate fair value amount should not be interpreted as being realizable in an immediate settlement of the instruments. As at December 31, 2005, the carrying value of financial instruments of the Company was not materially different than the estimated fair value at that date, with the exception of the item summarized below. Carrying Fair Value Value Long-term debt $ 114,660 $ 126, ANNUAL REPORT NORTHWESTEL 25

28 18. Related Party Transactions In the normal course of business and under terms similar to transactions with unrelated parties, the Company has transactions with the parent company and its significantly controlled affiliates. Details of transactions conducted during the year are as follows: a) Purchased plant and equipment, satellite services, materials, directory services and supplies for approximately $11,361 ( $8,958); b) Incurred treasury, training and other administrative support services at a cost of approximately $493 ( $921); c) Sold plant and equipment and services and supplies for approximately $22,922 ( $24,489); d) Included in other assets is nil ( $750) of prepayment to these companies; e) Included in accounts receivable is $1,216 ( $1,066) due from these companies; f) Included in accounts payable is $334 ( $(501)) owing to these companies. g) The Company owes its parent company nil as at December 31, The loan is interest bearing at a rate of 3.5% and repayable once the Company s taxation refund is received from taxation authorities. h) Received interest on prepayments of $180 (2004 nil). 19. Supplemental Information to the Consolidated Statement of Cash Flow Cash Flow Arising from Interest, Dividends and Income Taxes Paid Interest paid $ 9,827 $ 10,625 Dividends paid 17,207 11,721 Net income taxes paid (18,012 ) 26,374 Capital Expenditures During the year, capital expenditures were made at an aggregate cost of $42,592 ( $47,551) of which $344 ( $35) was by means of capital leases. Cash payments of $42,248 ( $47,521) were made to acquire capital assets. 20. Comparative Figures Certain figures in the prior year s financial statements have been reclassified to conform to the current year s presentation ANNUAL REPORT NORTHWESTEL

29 Directors Left to right: Mary O Hara, Toronto, Ontario; Peter Dilworth, Mississauga, Ontario; Louise Vertes, Yellowknife, Northwest Territories; Rob Hunt, Calgary, Alberta; Frank Hansen, Inuvik, Northwest Territories; David Searle, C.M., Q.C., Vancouver, British Columbia; Bea Firth, Whitehorse, Yukon; Terry Mosey, Toronto, Ontario. CHRISTIAN KUNTZ Officers Terry Mosey Chairman Toronto, Ontario Paul Flaherty President and Chief Executive Officer Whitehorse, Yukon Mike Dittrich Vice President, Network Services Yellowknife, Northwest Territories Ray Hamelin Chief Financial Officer Whitehorse, Yukon Mark Walker Vice President, Customer Solutions and Services Yellowknife, Northwest Territories Ray Wells Vice President, Corporate Whitehorse, Yukon Missing: Leslie McRae, Corporate Secretary to the Board 2005 ANNUAL REPORT NORTHWESTEL 27

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