CAPITAL RESOURCES AND LIQUIDITY

The Fund

Distributions to unitholders declared amounted to $272.9 million ($0.906 per unit) during the year ended December 31, 2004, and $45.3 million ($0.3530 per unit) for the period from commencement of operations, August 1, 2003 to December 31, 2003. On an annualized basis, the increase in distributions declared reflects the increase in unitholders' capital following the exchange of units by BCE and Teachers' as well as the June 11, 2004 offering, discussed previously. The December 31, 2004 distribution of $26.4 million ($0.0766 per unit) was paid on January 17, 2005. The current monthly distribution of $0.0766 per unit represents cash distributions of $0.92 per unit annually. Distributions in 2004 increased by 4.5% from $0.88 per unit to $0.92 per unit. Distributions by the Fund are entirely dependent on the distributions and the performance of YPG, a discussion of which follows.

Our distribution policy takes into account the current and prospective performance of YPG, including cash amounts to service debt obligations, maintenance capital expenditures, taxes and other factors considered to be prudent. We remain confident in our ability to grow the Fund's distributions by approximately 4% annually.

YPG

We finance our operations through cash generated from operating activities. Consistent with the directory publishing industry, we have minimal working capital requirements, which along with low costs for operations, resulted in significant levels of free cash flow.

Interest (including standby fees) paid during the year ended December 31, 2004 and 2003, amounted to $33.4 million and $133.7 million, respectively. Lower levels of borrowings resulting from the issuance of additional partnership units combined with reduced borrowing rates contributed to improve the cash generated from our operating activities during the year, compared to those of the preceding year. Cash generated from operating activities in 2003 was negatively impacted by restructuring and special charges amounting to $49.6 million.

Pre-Funded (transition)

Pursuant to the Acquisition and the IPO, $10 million was set aside as pre-funded capital for the purpose of transitioning the Company to a stand-alone entity. As a result of the termination of the transition service agreement with Bell Canada in November 2004, we incurred certain capital expenditures amounting to $9.6 million during the year compared to $3.2 million in 2003. In total, our transition capital assets totaled $12.7 million.

Maintenance

Maintenance capital expenditures are for ongoing operations to maintain the integrity of our infrastructure. Such expenditures are not expected to exceed $10 million per annum over the foreseeable future. In 2004 we incurred maintenance capital expenditures of $7.9 million.

New Initiatives (transformation)

As we optimize processes to reduce costs, we invest in selected new initiatives. During the year, we spent $4.1 million on such initiatives.

Leasehold Improvements

Following the move to our new headquarters in 2003, renovations in the form of leasehold improvements were made to our other offices in 2004. A substantial portion of these leasehold expenditures are reimbursed to us through tenant inducements and we expect that the level of expenses associated with these leasehold improvements will be significantly reduced as they are completed during the second half of 2005.

During the second quarter of 2004, we issued Medium Term Notes in the principal aggregate amount of $750 million followed by an additional $250 million issued during the last quarter of the year. Net proceeds of approximately $742 million and $247 million, respectively, were used to refinance bank borrowings, reduce drawings under our commercial paper program and for general corporate purposes.

During the year ended December 31, 2004, we reimbursed the remaining Term B loan of $10 million and Term A loan of $750 million. In addition, the commercial paper program was reduced by $106 million.

Commitments

The following table sets forth our contractual obligations, for the next five years and thereafter, as at December 31, 2004.

Long-term debt

Our debt funding sources are currently comprised of the following:

• A commercial paper program and associated standby lines of credit with an authorized limit of $300 million, maturing in October 2006. The program is rated R-1 (low) by DBRS. Commercial paper outstanding amounted to $184 million at December 31, 2004.
• A Medium Term Notes program with a potential total issuance during a period of 25 months following the final shelf short-form prospectus of $1 billion. The notes issued under the program are rated BBB (high) by DBRS and BBB- by Standard & Poor's. The program was fully utilized as at December 31, 2004. Medium Term Notes were issued in three series with different maturity dates. The $450 million Series 1 5-year Notes mature in April 2009, the $300 million Series 2 10-year Notes mature in April 2014 while the $250 million Series 315-year Notes mature in November 2019.
• A revolving bank credit facility consisting of a $100 million unsecured revolving term facility maturing August 1, 2007 (undrawn at December 31, 2004).

During the year ended December 31, 2004, we fully reimbursed the remaining Term B loan of $10 million and Term A loan of $750 million. In addition, the drawings under the commercial paper program were reduced to $184 million from $290 million as at December 31, 2003. Proceeds from the Medium Term Notes as well as cash and cash equivalents were used for the repayment of maturing Commercial Paper.

With the Term loans fully reimbursed and the Medium Term Notes program used to its maximum, YPG reached an important objective of diversifying its sources of funding and extending the maturity of its debt obligations. We expect our debt structure at December 31, 2004, to remain fairly stable, in the normal course of business. The interest expense going forward should reflect the debt instruments outstanding at December 31, 2004, and the derivative instruments described below.

The revolving term facility and the commercial paper program are subject to customary terms and conditions including limits on pledging assets without the consent of lenders. These facilities are also subject to the maintenance of a maximum ratio of funded debt to EBITDA and a minimum ratio of EBITDA to interest expense on total debt. YPG was in compliance with all debt covenants as of December 31, 2004.

Derivative instruments

We use various derivative financial instruments to manage our exposure to interest rates and foreign exchange risk on debt financing. YPG does not hold or use any derivative instruments for speculative trading purposes. We formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in our hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

We manage interest rate exposure by having a balanced schedule of debt maturities, as well as a combination of fixed and floating interest rate obligations and have entered into interest rate swap agreements to manage this exposure. We also hedge our exposure on foreign currency denominated long-term debt by entering into offsetting cross-currency interest rate swaps. There are no foreign currency derivatives outstanding, and all debt instruments are denominated in Canadian dollars.

The carrying value of all outstanding derivative instruments was $2.6 million at December 31, 2004, and their fair values amounted to $3.7 million. For the year ended December 31, 2004, we reported an unrealized gain on interest rate swaps of $1.1 million (2003—nil) and recorded a deferred gain on interest swaps of $0.3 million of which $10 thousand was amortized during the year.

Derivatives that are economic hedges, but do not qualify for hedge accounting are recorded on the balance sheet with changes in fair value recognized in earnings. Realized and unrealized gains or losses associated with derivative instruments, which have been terminated or have ceased to be effective prior to maturity, are deferred on the balance sheet and recognized in income during the period in which the underlying hedged transaction is recognized.

Taking into consideration the debt instruments outstanding, the cash and the above mentioned derivative instruments, our fixed-to-floating ratio of the net debt was 88% of fixed rate debt as of December 31, 2004. Excluding the impact of cash, this ratio is 74%.

While the counterparties of these agreements expose YPG to credit losses in the event of non performance, we believe that the possibility of incurring such a loss is remote due to the creditworthiness of the counterparties all of whom are highly-rated financial institutions that have strong credit ratings.

Obligations under capital leases

We entered into various capital lease agreements for office equipment and software. As of December 31, 2004, minimum payments under these capital leases over the next five years and thereafter totaled $7.7 million.

Operating leases

We rent our premises under various operating leases. As of December 31, 2004, minimum payments under these operating leases over the next five years and thereafter totaled $130.1 million. One of the leases stipulates that no lease payments are required before January 1, 2006.

Purchase obligations

We use the services of outside suppliers to print and bind all of our directories and have entered into long-term agreements with such suppliers. These agreements expire between 2007 and 2009. As at December 31, 2004, we have an obligation to purchase goods for $286.3 million over the next five years. Cash from operations will be used to satisfy these purchase obligations.

Off-balance sheet arrangements

We did not enter into any off-balance sheet arrangements other than the two interest rate swap agreements contracted in November 2004. These two agreements met the criteria for hedge accounting and as such, their total fair market value is not recorded on the balance sheet but is disclosed in the financial statements. As at December 31, 2004, the fair market value on these swap agreements was $1.1 million.

Distributable cash

Distributable cash is a non-GAAP measure generally used by Canadian open-ended trusts as an indicator of financial performance and it should not be seen as a measure of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. Distributable cash may differ from similar calculations as reported by other similar entities and accordingly may not be comparable to distributable cash as reported by such entities.

We believe that distributable cash calculated from Adjusted EBITDA is the most appropriate measure to help readers evaluate the performance of YPG on an ongoing basis considering the comparability of that measure from period to period. In addition, this measure is commonly used by investors, management and other stakeholders to evaluate the ongoing performance of the Fund.