5. LIQUIDITY AND CAPITAL RESOURCES

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OUTSTANDING UNIT DATA

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CONTRACTUAL OBLIGATIONS

Obligations under capital leases

We entered into various capital lease agreements for office equipment and software. As of December 31, 2005, minimum payments under these capital leases over the next five years and thereafter totaled $6.5 million.

Operating leases

We rent our premises under various operating leases. As of December 31, 2005, minimum payments under these operating leases over the next five years and thereafter totaled $150.9 million.

Purchase obligations

We use the services of outside suppliers to distribute our directories and have entered into long-term agreements with such suppliers. These agreements expire between 2007 and 2010. As at December 31, 2005, we have an obligation to purchase services for $42.4 million over the next five years. Cash from operations will be used to satisfy these purchase obligations.

SOURCES AND USES OF CASH

Consistent with the directory publishing industry, the Company has minimal capital spending requirements combined with low operating costs.

Cash flow from operating activities

Interest paid during the year ended December 31, 2005 and 2004 amounted to $69.5 million and $33.4 million, respectively. This increase was mainly due to the additional interest on the debt incurred for the Acquisition combined with the change in the timing of interest payments following the refinancing of our credit facilities through the issuance of Medium Term Notes in 2004 and 2005 as described above. The change in operating assets and liabilities of $38.9 million in 2005 resulted mainly from the collection of $24.5 million of accounts receivable balances of ADS during the second quarter due to the timing of the Acquisition.

The Company generates sufficient free cash flows from operations to fund distributions, working capital requirements and to service debt obligations.

Cash flow used in investing activities

Cash used in investing activities increased from $733 million in 2004 to $2,432 million in 2005, primarily due to the Acquisition which accounted for $2,624 million of the increase, partially offset by the acquisition of the non-controlling interest on June 11, 2004, which accounted for $535.2 million.

Transition Capital – Pursuant to the acquisition of the directories business from affiliates of Bell Canada and the initial public offering, $10 million was set aside as pre-funded capital for the purpose of the Company's transition to a stand-alone company. This transition period ended in the fourth quarter of 2004.

Pursuant to the ADS acquisition, approximately $15 million was set aside as pre-funded capital for purposes of integrating ADS operations into those of YPG. Capital spending associated with the integration of the ADS Acquisition amounted to $10.4 million during the year 2005.

Maintenance capital expenditures increased from $7.9 million in 2004 to $14.5 million in 2005 as a result of the acquisition of ADS. We expect maintenance capital expenditures of approximately $15 million per year.

Capital spending for new initiatives increased from $4.1 million in 2004 to $13 million in 2005 as a result of the timing of certain projects discussed in section 4 – Results, namely, client information automated tools, the content management system and the customer portal.

Leasehold improvements – Renovations to our Toronto office in the form of leasehold improvements began in 2004 and were completed in the third quarter of 2005. A substantial portion of these leasehold improvements were reimbursed to us through tenant inducements.

Cash flow (used in) / from financing activities

Net issuance of long-term debt increased from $132.4 million in 2004 to $594.7 million in 2005, and reflects the additional debt incurred for the ADS acquisition net of repayments arising from operating cash flow generation.

The issuance of additional units, combined with an increase in the level of cash distributions per unit, resulted in an increase in distributions to unitholders from $310.3 million in 2004 to $407.8 million in 2005.

OFF-BALANCE SHEET ARRANGEMENTS

(See note 21 of the Consolidated Financial Statements of the Company for the year ended December 31, 2005).

Operating leases

The Company has $150.9 million in outstanding commitments under various leases for premises and equipment over the next five years and thereafter.

Guarantees

YPG has entered into agreements which provide for indemnification provisions for its trustees and officers against expenses including legal fees, judgments, fines and any amount actually and reasonably incurred by them in connection with any action, suit or proceeding in which the trustees and/or officers are sued as a result of their service subject to certain provisions. YPG purchases directors' and officers' liability insurance. With respect to this indemnity, no amount was accrued in the audited consolidated balance sheet as at December 31, 2005.

Pursuant to the initial public offering and the two subsequent equity issues, the Company also entered into underwriting agreements and into Investor Liquidity Agreements with Kohlberg Kravis Roberts & Co (“KKR”), TMB Directories Inc. (

“Teachers”) and BCE Inc., whereby the Company may have to indemnify the parties relating to representations made at the time of the offerings. No amount has been accrued in the audited consolidated balance sheet as at December 31, 2005, with respect to these indemnities. The nature of these guarantees prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties, if any.

Pursuant to the acquisitions of ADS and TMC, the Fund has entered into agreements whereby the Fund agrees to indemnify the vendors and hold them harmless from and against any and all claims, liabilities, costs and expenses arising out of, based upon or related to (i) any breach by the Fund in the performance of its obligations under these agreements and (ii) any breach of a representation contained therein. Furthermore, agreements entered into by ADS prior to acquisition contain indemnifications similar to the ones just described. No amount was accrued in the consolidated balance sheet as at December 31, 2005 with respect to these indemnities. The nature of these guarantees prevents the Fund from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties, if any.

FINANCIAL AND OTHER INSTRUMENTS

(See note 21 of the Consolidated Financial Statements of the Company for the year ended December 31, 2005)

The Company's financial instruments consist of cash and short-term investments, accounts receivable, accounts payable, distributions payable, short-term debt, long-term debt and interest rate derivative agreements.

Derivative Instruments

The Company uses various derivative financial instruments to manage its exposure to interest rates 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 and other interest rate derivatives to manage this exposure.

Taking into consideration the debt instruments outstanding, the cash and the above-mentioned derivative instruments, our fixed-tofloating ratio of net debt was 92% fixed rate as at December 31, 2005.

In December 2005, we entered into swaption agreements for a notional amount of $200 million maturing on June 30, 2006. These swaptions grant an option to the counterparty to enter into an interest rate swap agreement with us. If exercised, we would enter into a swap to receive a fixed rate of 5.25% and pay a floating rate based on Banker's Acceptance plus a spread of 0.7%, maturing in February 2016. This would effectively convert a portion of our recently issued 10-year Series 4 Medium Term Notes to a floating rate. A premium of $2.1 million was received to enter into these agreements.

These agreements were the only derivative instruments outstanding as of December 31, 2005. Please refer to note 21 in the consolidated financial statements for a complete description of derivative instruments used during 2005.

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.

The carrying value of all outstanding derivative instruments was $1.7 million on December 31, 2005 and their fair values amounted to $1.7 million. The fair value is calculated as is customary in the industry using discounted cash flows with year-end market rates. For the year ended December 31, 2005, we reported an unrealized loss on interest rate swaps of $2.6 million (2004 – unrealized gain of $1.1 million).

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.

Short-term Investments

Credit risk associated with short-term investments is minimized substantially by ensuring that these financial assets are placed with creditworthy counterparties. An ongoing review is performed to evaluate changes in the status of counterparties.

Accounts receivable

YPG is exposed to credit risk with respect to accounts receivable from customers. Pursuant to the billing and collection services Agreement, Bell and Telus receive money from customers on behalf of YPG. There are no individual customers that account for 1% or more of revenues and there are no accounts receivable from any one party that exceed 1% of the total balance at any point in time during the year. Included in trade accounts receivable of $125.5 million at December 31, 2005 is $44.6 million (2004 - $42.7 million) to be remitted by Bell and $25.5 million (2004 – nil) to be remitted by Telus under the billing and collection services Agreement.