Proximus SA — Management Reports 2013

Mar 15, 2013

Consolidated management report¹

Belgacom Group

• Group revenue grew 0.9%² in 2012 to EUR 6,462 million
• Group EBITDA of EUR 1,784 million, i.e. -6.7% 3 lower than for 2011
• Full-year EBITDA margin of 27.6%; 2.2 p.p. less than 2011
• Belgacom generated EUR 691 million Free Cash Flow in 2012

The Belgacom Group ended the year 2012 with total revenue of EUR 6,462 million. In contrast to some of its peers in the European Telecoms industry, Belgacom realized a positive revenue evolution of +0.9%, i.e. an increase of EUR 56 million over the previous year. Belgacom achieved this through the solid financial result of its Consumer segment, and the growth realized in the International Carrier segment, while the revenue erosion in the Business segment remained limited in spite of operating in an unfavorable economy. Excluding the net impact from acquired and disposed companies, the Belgacom Group revenue was up 0.5%. This includes a revenue loss due to regulatory⁴ measures for a total amount of EUR -90 million, or -1.4%. This excluded, the underlying revenue from the Belgacom Group was up 1.9% from 2011.

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Operating expenses

The Belgacom Group's total operating expenses for 2012 amounted to EUR 4,677 million before non-recurring items, which is 4% higher compared to the year before.

The Belgacom Group ended the year 2012 with a Cost of Sales of EUR 2,611 million, i.e. 3.7% higher than the previous year. This increase is mainly driven by: 1- the International Carrier Services (BICS), operating at lower margins; 2- an increase in Cost of Sales in the Consumer segment, partly driven by The Phone House ⁵ ; 3- a EUR 22 million accounting adjustment following the passing of the new Telecom law.

In the course of 2012, the Belgacom Group headcount increased, driven by the acquisition of The Phone House and business-critical hiring. This was partly offset by employees leaving under the "Tutorship" restructuring program. By end-2012, the Belgacom Group counted 15,859 full-time equivalents, or 71 FTEs more than the year before.

The 2012 HR-expenses of EUR 1,141 million were 2.2% higher versus 2011, mainly as a result of inflation-driven wage indexations, and a higher personnel base.

The 2012 non-HR expenses⁶ for the Belgacom Group were up by 7.6% to a total of EUR 925 million, including the costs related to The Phone House and some costs linked to Belgacom's efficiency project.

¹ Detailed financial results as from page XX

² Variance excluding non-recurring revenue. Including non-recurring revenue of 2011, the 2012 Group revenue was up 0.7%

³ Variance excluding non-recurring items. When including non-recurring items, EBITDA was down 6.9%.

⁴ Mainly related to Lower Mobile Termination Rates, lower Voice and Data Roaming rates

⁵ Following its acquisition by Belgacom, financials of The Phone House are consolidated as of January 2012

⁶ Other operating expenses

The Belgacom Group EBITDA, before non-recurring items remained under pressure in 2012, ending at EUR 1,784 million, 6.7% lower versus 2011. This led to a full-year EBITDA margin of 27.6%.

Regulatory measures had a negative impact for a total amount of EUR 55 million, or -2.9%. Excluding the regulation impact, the full-year EBITDA was 3.8 % or EUR -72 million lower than the previous year. In addition, the introduction of the new telecom law on 1 October 2012 triggered an accounting adjustment for EUR -34 million at the EBITDA level. The remaining decrease in EBITDA is mainly driven by higher HR and non-HR expenses, while direct margins are pressured by a changing product mix. ………………………………………………………………………………………………………………………………………

Tax Expense

The effective tax rate resulting from the application of the general principles of Belgian tax law was 19.5% for full-year 2012. The decrease compared to 25.3% ETR for 2011, resulted from: lower earnings before tax with rather stable adjustment of the tax base, (accelerated) use of tax deductions and relative higher ETR in 2011 due to taxation on 5% of intra-group dividends.

* Normalized effective tax rate, excluding the non-recurring non-taxable gain of EUR 436 million

The Belgacom Group invested a total of EUR 753 million in 2012, or 11.7% of its Group revenue. To support its convergence strategy, Belgacom continued to invest in its network, further increasing coverage and speed for both its fixed and its mobile network. In this regard, Belgacom further rolled out fiber to the curb and installed VDSL2, increasing its fiber coverage to over 84% by year-end.

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Free Cash Flow*

409 797 980 ^{788 691} 2008 2009 2010 2011 2012 Free Cash Flow (in mio €)

Belgacom ended the year 2012 with EUR 691 million of Free Cash Flow. This is EUR 97 million lower than for 2011, explained by the lower EBITDA (adjusted for non-cash one-off impacts following the new Telecom Law), the acquisition of Wireless Technologies BVBA for EUR 23 million, the payment of the 4G spectrum license for EUR 20 million and higher income tax payments for EUR 21 million.

(*) Cash flow before financing activities

Net financial position

Belgacom closed the year 2012 with a very sound net financial position. Its financial debt end of 2012 was EUR1,601 million, or 0.9 times EBITDA (before non-recurring items), one of the lowest net debt positions in the European telecom sector. The Net Debt increased by EUR 122 million as the cash returned to shareholders in the form of dividends exceeded the 2012 Free Cash Flow.

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The outstanding long-term gross financial debt amounted to EUR 1.9 billion (re-measured at fair value).

Consumer Business Unit - CBU

• Consumer segment generated EUR 2,321 million revenue in 2012, up 1.4% from 2011
• Revenue from Data, TV and The Phone House fully offset Voice revenue erosion
• Multi-play Packs supporting customer growth: TV +175,000; Internet +50,000⁷ ; while limiting Voice line erosion
• Full-year segment result of EUR 986 million, i.e. a 3.8% decline compared to 2011

CBU revenues

For the full-year 2012, CBU reported revenues of EUR 2,321 million or 1.4% more than for 2011. The year-over-year improvement is driven by the solid revenue contribution from Belgacom TV, Mobile Data and Fixed Internet as well as the revenue contribution from The Phone House. Excluding the net contribution from acquired and divested companies in addition to a one-off accounting adjustment triggered by the introduction of the new telecom law, lowering the Consumer revenue by EUR 10 million in the second quarter 2012, CBU's organic revenue was nearly flat (-0.3%) versus the prior year. This was mainly driven by regulatory measures which reduced the 2012 revenue by EUR 40 million (-1.8%). This entails the effect from a further decline of Voice roaming tariffs, lower Mobile Termination Rates and the resulting decline in fixed-to-mobile tariffs, as well as the regulated capping of Mobile Data Roaming pricing since 1 July 2012. The underlying revenue, i.e. excluding the above impacts, was up by 1.5% compared to 2011.

Belgacom's more traditional product lines such as Fixed Voice and Mobile Voice continued to be under pressure in 2012, in part due to regulation. The share of revenue from Voice in the total consumer revenue further decreased to 40% in 2012, whereas this was 45% in 2011.

The consumer segment generated EUR 425 million in revenue from Fixed Voice over the full-year 2012, showing sequential improvement over the quarters. The reduced revenue loss results from a maintained lower level of voice lines erosion following the success of multi-play Packs and Happy Time XL. The line erosion over 2012 further improved to a loss of 81,000 lines versus 115,000 in 2011. End-2012, CBU counted a total Fixed Voice customer base of 1,718,000⁸ . The Fixed line revenue felt pressure from some regulatory measures ⁹ , though, on the other hand benefitted from the price indexations of 1 January 2012.

The EUR 505 million revenue from Mobile Voice¹⁰ , was 10.5% lower than for 2011, including a significant impact from regulatory measures¹¹ . Compared to end-2011, the CBU mobile customer base shrunk by 152,000 customers to a total of 3,643,000. Whereas in the first half of 2012 CBU still grew its mobile customer base, the second half of 2012 showed a significant net customer loss. This was especially visible in the Prepaid segment (-192,000), while the Postpaid segment (+40,000) was protected by the growing success of data cards, driven by Packs including mobile and Internet Everywhere. As of

2012 2011 2010 2009 2008

Fixed

7 Excluding 11,000 Internet customers ('Internet for Employees') that were resegmented from EBU to CBU

8 Including Scarlet VoIP customers 9

21.6

21.7

20.7

19.9

19.9

16.6

Implementation of a financial collecting model and lower fixed-to-mobile tariffs following the cut in mobile termination rates

¹¹ Lower roaming tariffs, a double cut in mobile termination rates and the implementation of a collecting model for Premium Rate Services

¹⁰ As of 2011 the allocation of Mobile Access revenue to Voice and Data was adjusted to better reflect the price plans. The 2010 revenue from Mobile Voice and Data was restated accordingly; note however that the 2009 revenue has not been restated.

Fixed & mobile data revenue (in mio €)

Fixed internet customers (in '000)

segmentation exercise between the Business Units

October 2012, however, Postpaid too was under pressure, driven by aggressive competitor pricing and the new telecom law entering into force.

Both Fixed and Mobile data showed a positive revenue evolution compared to 2011, driving the share of Data in the total CBU revenue to 32% versus 31% in 2011.

Full-year Mobile data revenues of EUR 398 million were 7.8% higher than for the prior year. Mobile data includes revenue from both SMS and non-SMS data, i.e. 'Advanced Data'.

In contrast to the trend seen in other European countries, Belgacom's revenue from SMS continued to show growth in 2012, increasing to EUR 342 million, up 6.9% compared to the previous year. This trend is driven by the continued success of pricing plans including free SMS, boosting the total SMS volume by 12.5% to an average of 282 text messages/user/month. Revenue from Advanced Data showed strong growth over the first half of 2012, driven by the strong demand on Mobile Internet and Mobile Data roaming. As of July 2012 the revenue growth trend was subdued by the European Roaming regulation, lowering the rates for Mobile Data roaming significantly. Over the full-year 2012, Advanced Data revenue was up 14.3% to EUR 56 million.

Revenue from Fixed Internet increased by 2.1% from last year. In spite of a mature and competitive market, CBU continued to grow its Fixed Internet customer base in 2012, driven by the success of multiplay Packs. CBU grew its Fixed Internet customer base by 50,000 to a total of 1,193,000 customers. The Broadband ARPU for 2012 was EUR 26.5 compared to EUR 26.8 for 2011.

Benefitting from Belgacom's attractive and well-targeted Packs, Belgacom TV continued to be very successful in 2012, with its customer base growing by 175,000 customers to a total of 1,386,000 including 230,000 multi-set-top box users. The monthly average revenue per customer (ARPU) for TV was EUR 17.9 versus EUR 18.4 for 2011. With the free football offer annualising, Belgacom TV saw its revenue growth picking up again in the second half of 2012. Over the full-year 2012 Belgacom TV generated EUR 235 million revenue, up 13.5% compared to 2011. In 2012, TV revenues represented 10% of total CBU revenues.

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CBU operating expenses

CBU's total expenses were up 5.7% over the previous year. This is the result of higher Cost of Sales, which increased year-over-year by 6.8% to EUR 666 million. This increase was mainly driven by the costs from The Phone House, partly offset by a positive effect from regulatory measures¹² , capitalization of modems and initiatives to improve product profitability.

Additional headcount from The Phone House and inflation-based wage indexations (June 2011 and March 2012) drove the 5.5% year-over-year increase in HR costs to EUR 359 million.

Non-HR costs for 2012 totaled EUR 310 million or 3.7% higher compared to 2011, including non-HR expenses from The Phone House.

¹² Lower mobile termination rates

^{93 99 107 114} 259 260

For the full-year 2012, Tango, Belgacom's Luxembourgish mobile operator, continued to do well with reported revenues of 2009 2010 2011 2012 2009 2010 2011 2012

EUR 114 million or an increase of 6.5% compared to 2011. This growth is driven by strong sales in Luxembourg of smartphones and the iPhone. Along with the ongoing migration of prepaid towards postpaid offers and increased revenues from bundles, this resulted in a continued revenue increase. Furthermore, over the year 2012, Tango added 7,000 customers.

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Segment result (in mio €) & margin

Revenue (in mio €)

Tango

The CBU full-year segment result amounted to EUR 986 million which is EUR 39 million or 3.8% below that of 2011. This includes a negative impact from regulation for EUR 22 million (-2.1%) and a one-off accounting adjustment for EUR 26 million following the new telecom law. The 2012 full-year contribution margin¹³ decreased to 42.5% from 44.8% for 2011.

Tango Mobile customers (in '000)

264

271

Enterprise Business Unit - EBU

• Revenue 2.3% lower versus 2011 in competitive landscape and unfavorable economic context
• Regulatory price cuts significantly impacted revenue and segment result
• Underlying growth from ICT and mobile data offsetting Voice decline, ex-regulation
• 2012 segment result totals EUR 1,108 million

Over the year 2012 Belgacom's professional customer segment generated EUR 2,294 million in revenue, i.e. 2.3% lower than for 2011. This decline is partly explained by the divestment of Telindus Spain, partially compensated for by the acquisition of Eudasys by Telindus France. Organically, i.e. excluding the M&A impact, the revenue erosion was limited to -1.5%. This was mainly caused by regulatory¹⁴ measures, lowering EBU's 2012 revenue by EUR 46 million or -1.9%. Leaving aside the M&A and regulation impact, the underlying revenue from EBU was 0.4% up compared to 2011. The positive underlying revenue variance resulted from the volume growth in Mobile Data and higher ICT revenue, which offset the pressure on Fixed and Mobile Voice.

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The traditional voice products, both Fixed and Mobile, continued to feel pressure from regulatory measures¹⁶ , i.e. from the lowered Mobile Termination Rates, the resulting lower Fixed-to-Mobile rates and the cut in Roaming rates. In 2012, Fixed and Mobile Voice represented 40% of the total EBU revenue.

In 2012, EBU generated EUR 481 million in revenue from Fixed Voice, which is 3.1% lower than for 2011. This is in part due to the lowered Fixed-to-Mobile rates, and in part due to the continued erosion of Fixed Voice lines. In 2012 EBU's Fixed Voice line base eroded by 57,000 lines to a total of 1,356,000. The price indexation of 1 January 2012 gave some support to the 2012 Fixed Voice ARPU¹⁵ which remained fairly stable at EUR 28.5.

Revenue from Mobile Voice for the year 2012 amounted to EUR 403 million, 10% lower compared to 2011. Regulatory price decreases in Mobile Termination and Roaming rates further impacted the Mobile Voice revenue, along with continued price erosion as a result of the successful uptake of Mobile pricing plans including free Voice minutes and the fierce competition in the Corporate Mobile Market. The price pressure was, however, partly compensated for by a solid customer growth of 95,000 active Mobile customers¹⁶, ending 2012 with a total of 1,486,000 Mobile customers. Usage per customer was only slightly down from the previous year with an average usage of 315 minutes per month.

In 2012 EBU reported EUR 692 million revenue from ICT, compared to EUR 697 million in 2011. The variance was, however, impacted by the divestiture of Telindus Spain and the acquisition of Eudasys by Telindus France. Organically, the revenue from ICT was up by 2.8% over the previous year in spite of the unfavorable economic climate in 2012.

¹⁴ Lower Mobile Termination Rates and the flow-through to Fixed-to-Mobile rates, lower Roaming rates

¹⁵ Average revenue per user on a monthly basis

¹⁶ Including Mobile Voice, Mobile Data and M2M cards

EBU operating expenses

Mobile Data revenue continued to grow in 2012, up by 3.3% to EUR 223 milion. The revenue from Mobile Data includes both revenue from SMS and non-SMS Data (Advanced Mobile Data).

Revenue from SMS continued to grow solidly by 10.3% year-over-year to EUR 108 million for 2012. Usage per customer further increased to an average of 110 text messages per user per month, up by 24%.

Non-SMS Mobile Data revenue over the full year was 2.5% lower versus 2011, totalling EUR 115 million for 2012. Revenue from Advanced data grew solidly in the first half of 2012 as a result of a strongly increasing customer base for Mobile Internet and volume growth in Mobile Data Roaming. However, since mid-2012, there has been a reversal in this positive revenue trend as the revenue was significantly impacted by the regulation of Mobile Data roaming tarrifs, applicable since 1 July 2012.

For 2012, EBU reported Fixed Data revenue of EUR 388 million, which is nearly stable (-0.2%) compared to the previous year. In 2012 the migration from older technologies (ATM, Frame Relay, Leased Lines) to the Belgacom Explore platform continued, for which pricing is more favorable. In a highly competitive and saturated professional Internet market, EBU kept its Fixed Internet customer base fairly flat, ending the year 2012 with 443,000¹⁷ Internet customers, with an ARPU of EUR 39.1.

EBU ended the year 2012 with EUR 619 million Cost of Sales, i.e. 3.1% less than for 2011. The lowered Mobile Termination rates for all Belgian Mobile operators positively impacted EBU's costs for terminating mobile calls on alternative mobile networks. In addition, the divestment of Telindus Spain favorably impacted the first half-year variance. This more than offset the unfavorable underlying evolution of Cost of Sales due to the changing product mix.

Compared to 2011, EBU's HR expenses of EUR 407 million were 6.7% higher, mainly due to a change in internal cost allocation of customer installation and overhead costs. The remaining increase resulted from inflation-based wage indexations¹⁸ and additional hiring for business-critical jobs in the ICT area.

For 2012, EBU reported a total non-HR expense of EUR 160 million, i.e. 11.3% more than for the previous year. The non-HR costs included an unfavorable effect from a change in cost allocation, foreign currency and bad debt.

EBU segment result and contribution margin

The EBU segment result for full-year 2012 totals EUR 1,108 million, which is 6.5% or EUR 77 million less than for the previous year. This includes a EUR 30 million negative impact from Regulation, and a net negative impact from the divestment and acquisition within the ICT domain. The contribution margin¹⁹ decreased to 48.3% in 2012. ¹⁹ Belgacom does not apply a full cost allocation. Network and IT costs are therefore mainly centralized within SDE&W 1,266 1,231 1,212 1,185

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¹⁷ Including impact from resegmentation of 11,000 Broadband customers (Internet for Employees) to CBU

¹⁸ Salaries were indexed by 2% on 1 October 2010 and 1 June 2011 for Belgacom SA employees, and on 1 January 2011 for all other employees

Service Delivery Engine & Wholesale – SDE&W

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SDE&W revenues

Revenue (in mio €)

Revenue within the SDE&W segment relates mainly to wholesale activities from Belgacom. Over the full-year 2012 the SDE&W revenues amounted to EUR 304 million, or 4.4% below those of 2011. This includes the negative effect from some regulatory²⁰ measures, lowering the SDE&W revenue by EUR 3.6 million in 2012. The remaining decline is due to a lower volume of leased lines and decreased Roaming prices, which was only partly offset by higher roaming volumes.

SDE&W operating expenses

Total operating expenses for 2012 amounted to EUR 401 million, 2.1% lower versus 2011. Over 2012 the SDE&W cost of sales was slightly up by 3.3% to EUR 37 million.

The positive effect on HR expenses from both lower headcount and a Group neutral change in cost allocation fully offset the inflation-based salary indexations, leading to an 11% lower HR expense for 2012.

The non-HR expenses of EUR 187 million for the full-year 2012 were significantly higher compared to the previous year as in 2011 SDE&W benefitted from positive provision²¹ reversals exceeding the positive one-off recorded in 2012.

Staff & Support – S&S

S&S revenues

Revenue (in mio €)

Staff and Support reported EUR 34 million of revenues for the year 2012. The decrease over last year, however, is the result of the accounting of a one-off internal revenue in 2011, which was neutralized on a Group level.

S&S operating expenses

Total operating expenses remained fairly stable in relation to 2011. Non-HR expenses were somewhat up whereas HR expenses were 2.1% lower as the decline in headcount more than offset the inflation-based wage indexations.

²⁰ Regulatory impacts from Mobile Termination Rates and lowered Local Loop Unbundling and Bitstream prices

²¹ Related to provision reversals due to litigation settlements.

International Carrier Services - BICS

• Revenue increase of 5.3% over 2011
• Voice revenue up: solid volume growth, favorable destination mix and stronger dollar
• Strong uptake of Mobile data
• 2012 gross margin up by 9.3% from 2011

812 892 1,610 1,562 1,645 2008 2009 2010 2011 2012 Revenue (in mio €) Before non-recurring items

……………………………………………………………………………………………………………………………………… ICS gross margin

ICS revenues

In spite of an increasingly competitive market and revenue being pressured by the European-wide decrease of Mobile Termination Rates, BICS grew its revenue by 5.3% to EUR 1,645 million.

The revenue from Voice was up 3.6% to EUR 1,457 million, driven by higher volumes (up 3.4% to 28 billion minutes), reinforced by a better destination mix and a favorable effect from a strengthening average dollar rate year-over-year. This more than offset the negative MTR effect.

Non-Voice volume growth accelerated to 45.1%, resulting in 10.2% higher revenue compared to 2011.

ICS reported for full-year 2012 a gross margin of EUR 244 million, up by 9.3% year-on-year, a significant improvement to the 1.1% decline of 2011. This positive evolution was the result of both a growing Non-Voice gross margin (+10.2%) and a higher Voice gross margin (+8.4%).

ICS EBITDA and margin

The reported EBITDA of ICS for 2012 of EUR 129 million was 6.1% higher compared to the previous year as a result of the higher gross margin. The 2012 EBITDA margin of 7.8% remained stable in relation to last year's.

ICS Volumes

Volumes continued to grow in 2012 with Voice volumes up 3.4%, now exceeding 28 billion minutes, while Non-Voice volumes grew by 45% yearover-year.

Quarterly results as reported

Group – Financials

(EUR million)	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
Revenues (1)	1,583	1,612	1,596	1,616	6,406	1,588	1,611	1,620	1,644	6,462
Consumer Business Unit Enterprise business unit Service Delivery Engine & Wholesale Staff&Support International Carrier Services Intersegment eliminations	565 593 81 8 372 -36	579 593 80 7 388 -36	571 572 77 25 401 -51	572 591 80 8 401 -36	2,288 2,349 318 47 1,562 -159	577 579 78 9 382 -37	575 576 76 7 409 -34	587 560 75 7 424 -33	581 579 76 11 430 -33	2,321 2,294 304 34 1,645 -137
Costs of materials and charges to revenues	-609	-621	-633	-655	-2,517	-614	-667	-649	-680	-2,611
Personnel expenses and pensions	-274	-282	-278	-283	-1,117	-282	-285	-294	-282	-1,141
Other operating expenses	-220	-196	-213	-232	-860	-226	-224	-218	-257	-925
EBITDA (1)	480	512	472	446	1,912	466	434	460	425	1,784
Segment EBITDA margin (1)	30.3%	31.8%	29.6%	27.6%	29.8%	29.3%	27.0%	28.4%	25.9%	27.6%
Non recurring items	0	-18	0	4	-15	0	-10	- 3	- 4	-18
Ebitda after non-recurring items	480	494	472	450	1,897	466	424	456	421	1,766

(1) before non-recurring items

Group reported to underlying

	Q111	Q112	Var in %	Q211	Q212	Var in %	Q311	Q312	Var in %	Q411	Q412	Var en %
GROUP - REVENUE
Reported	1,583	1,588	0.3%	1,612	1,611	-0.1%	1,596	1,620	1.5%	1,616	1,644	1.7%
One-offs	0	0		0	12		0	0		0	0
M&A	-16	-19		-17	-16		- 2	-19		0	-17
Like-for-like	1,567	1,569	0.1%	1,595	1,607	0.8%	1,594	1,601	0.4%	1,616	1,627	0.7%
Regulation		14			16			36			23
Underlying	1,567	1,583	1.0%	1,595	1,623	1.8%	1,594	1,637	2.7%	1,616	1,650	2.1%
GROUP - EBITDA
Reported	480	466	-3.1%	512	434	-15.3%	472	460	-2.7%	446	425	-4.8%
One-offs	6	0		-17	34		6	- 2		3	4
M&A	1	4		- 1	3		- 1	3		0	2
Like-for-like	487	470	-3.6%	495	471	-4.7%	478	461	-3.5%	449	431	-4.0%
Regulation		6			7			27			14
Underlying	487	476	-2.3%	495	479	-3.2%	478	488	2.1%	449	445	-0.9%

M&A: acquisiton of The Phone House, divesture of Telindus Spain and Scarlet Curaçao Regulation: includes impact from lower Mobile Termination and Roaming rates, and other regulatory impacts

Revenue evolution in percentages

		Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
GROUP
	Reported YoY variance	-3.5%	-3.2%	-2.7%	-2.6%	-3.0%	0.3%	-0.1%	1.5%	1.7%	0.9%
	Like-for-like YoY variance	-3.5%	-3.3%	-2.0%	-1.6%	-2.6%	0.1%	0.8%	0.4%	0.7%	0.5%
	Underlying YoY variance	-0.4%	-1.3%	-0.9%	-1.0%	-0.9%	1.0%	1.8%	2.7%	2.1%	1.9%
CBU
	Reported YoY variance	-4.3%	-2.1%	-2.3%	-4.6%	-3.3%	2.1%	-0.7%	2.8%	1.5%	1.4%
	Like-for-like YoY variance	-4.3%	-2.1%	-2.3%	-4.0%	-3.2%	0.5%	-0.8%	0.3%	-1.0%	-0.3%
	Underlying YoY variance	-0.1%	0.4%	-0.8%	-3.2%	-0.9%	1.7%	0.7%	2.8%	0.7%	1.5%
EBU
	Reported YoY variance	-3.7%	-2.8%	-3.1%	-2.4%	-3.0%	-2.2%	-2.9%	-2.2%	-2.1%	-2.3%
	Like-for-like YoY variance	-3.7%	-3.1%	-1.1%	-0.2%	-2.1%	-1.0%	-0.3%	-2.5%	-2.4%	-1.5%
	Underlying YoY variance	-0.8%	-0.7%	0.3%	0.6%	-0.2%	0.1%	0.8%	1.3%	-0.3%	0.4%
SDE&W
	Reported YoY variance	-13.9%	-6.1%	-2.3%	-3.9%	-6.9%	-4.3%	-4.9%	-3.2%	-5.0%	-4.4%
	Like-for-like YoY variance	-13.9%	-6.1%	-2.3%	-3.9%	-6.9%	-5.1%	-6.1%	-4.5%	-6.3%	-5.5%
	Underlying YoY variance	-3.6%	-2.9%	-0.8%	-3.4%	-2.7%	-4.3%	-4.9%	-3.3%	-5.0%	-4.4%
BICS
	Reported YoY variance	-1.5%	-6.5%	-3.4%	-0.3%	-3.0%	2.6%	5.5%	5.7%	7.3%	5.3%

Group – Capex

(EUR million)	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
Group Capex	173	161	163	279	777	186	174	160	234	753
Consumer Business Unit	44	27	24	40	134	61	33	30	42	164
Enterprise business unit	4	4	3	8	18	4	4	3	5	15
Service Delivery Engine & Wholesale	115	119	125	193	552	116	126	114	158	514
Staff&Support	7	9	9	26	51	5	8	8	19	40
International Carrier Services	3	2	3	14	22	1	3	5	12	20

CBU – Financials

(EUR million)	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
Revenues	565	579	571	572	2,288	577	575	587	581	2,321
From Fixed	281	278	271	269	1,099	274	270	274	277	1,096
Voice Data T V Terminals (excl. TV) Scarlet	118 85 51 7 21	115 83 53 6 21	111 82 51 7 20	110 82 53 7 18	454 332 208 26 79	110 85 55 6 19	105 84 57 6 18	105 85 61 7 17	105 85 62 7 18	425 339 235 25 71
From Mobile	265	279	279	280	1,104	281	282	292	278	1,133
Voice Data Terminals (excl. TV) Tango Other	139 87 14 25 19	147 92 14 26 23	143 93 16 28 21	136 97 19 28 23	565 369 63 107 86	130 97 27 27 22	123 102 29 28 23	133 98 32 28 22	120 100 28 30 25	505 398 116 114 92
Costs of materials and charges to revenues	-149	-149	-158	-168	-624	-162	-182	-157	-166	-666
Personnel expenses and pensions	-83	-85	-86	-87	-340	-90	-88	-92	-88	-359
Other operating expenses	-70	-74	-71	-84	-299	-74	-73	-77	-86	-310
Segment result	264	271	257	233	1,025	251	232	261	241	986
Segment Contribution margin	46.7%	46.8%	45.0%	40.8%	44.8%	43.5%	40.4%	44.5%	41.6%	42.5%

CBU – Operationals

	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
FROM FIXED
Number of access channels (thousands)	3,028	3,006	2,977	2,974	2,974	2,938	2,926	2,918	2,912	2,912
Voice	1,896	1,870	1,839	1,818	1,818	1,780	1,758	1,737	1,718	1,718
Broadband	1,131	1,136	1,138	1,156	1,156	1,159	1,169	1,181	1,193	1,193
Traffic (millions of minutes)	1,061	977	936	1,036	4,011	1,086	1,027	965	1,060	4,138
National	875	795	765	821	3,256	828	754	703	768	3,053
Fixed to Mobile	95	96	89	123	402	164	179	170	187	701
International	91	87	82	92	352	94	93	92	104	383
TV (thousands)	1,029	1,087	1,139	1,211	1,211	1,254	1,301	1,340	1,386	1,386
TV - households	879	925	963	1,021	1,021	1,057	1,093	1,125	1,156	1,156
of which multiple settop boxes	149	162	176	190	190	196	209	216	230	230
ARPU (EUR)
ARPU Voice	20.2	20.0	19.7	19.8	19.9	20.2	19.7	19.7	20.0	19.9
ARPU broadband	27.6	27.0	26.7	26.1	26.8	26.9	26.4	26.5	26.1	26.5
ARPU Belgacom TV	19.4	19.2	17.8	17.5	18.4	17.6	17.6	18.1	18.2	17.9
FROM MOBILE
Number of active customers (thousands)	3,723	3,726	3,774	3,805	3,805	3,805	3,811	3,748	3,643	3,643
Prepaid (1)	2,117	2,096	2,111	2,116	2,116	2,116	2,071	1,992	1,923	1,923
Postpaid	1,606	1,630	1,663	1,690	1,690	1,690	1,739	1,756	1,720	1,720
Annualized churn rate (blended - variance in p.p.) (2)	21.3%	20.4%	20.4%	25.2%	21.8%	20.4%	19.9%	25.8%	36.0%	25.9%
Net ARPU (EUR)
Prepaid	14.1	15.3	14.4	14.9	14.7	14.0	14.2	13.6	14.4	14.0
Postpaid	29.2	30.0	30.0	28.6	29.5	27.9	27.3	28.9	26.6	27.7
Blended	20.5	21.6	21.1	20.7	21.0	20.1	20.1	20.8	20.1	20.3
Blended voice	12.7	13.4	12.9	12.2	12.8	11.6	11.1	12.0	11.1	11.5
Blended data	7.8	8.2	8.2	8.5	8.2	8.5	9.0	8.7	9.0	8.8
UoU (units)	338.0	357.5	335.4	373.3	351.6	377.9	391.7	357.5	389.9	379.1
MoU (min)	102.2	106.6	103.6	103.8	104.3	101.5	104.7	100.5	101.7	102.1
SMS (units)	238.7	254.1	235.1	273.0	250.5	279.8	291.3	262.1	294.2	281.7

(1) Prepaid includes Mobisud customers that were previously reported as MVNO customers

(2) Q4 2011 impacted by clean-up of inactive prepaid cards. This clean-up has no impact on the number of active customers & prepaid net adds.

EBU – Financials

(EUR million)	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
Revenue	593	593	572	591	2,349	579	576	560	579	2,294
From Fixed	420	417	398	420	1,655	408	409	398	418	1,633
Voice Data Terminals ICT	128 98 18 175	125 97 18 177	121 96 18 163	122 97 18 182	496 389 72 697	124 99 18 167	120 99 18 172	118 96 18 167	119 95 18 186	481 388 72 692
From Mobile	169	171	169	168	677	166	162	158	155	640
Voice Data Terminals	115 50 4	115 53 3	110 56 3	108 57 3	448 216 13	106 56 3	102 58 3	100 55 3	96 54 5	403 223 14
Other	4	5	5	4	17	5	5	4	6	21
Costs of materials and charges to revenues	-162	-160	-154	-164	-639	-149	-157	-150	-163	-619
Personnel expenses and pensions	-94	-98	-93	-96	-381	-100	-103	-103	-101	-407
Other operating expenses	-37	-37	-34	-36	-144	-40	-39	-39	-41	-160
Segment result	300	298	291	296	1,185	289	277	267	274	1,108
Segment Contribution margin	50.6%	50.3%	50.9%	50.0%	50.4%	50.0%	48.1%	47.8%	47.4%	48.3%

EBU- Operationals

	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
FROM FIXED
Number of access channels (thousands)	1,861	1,849	1,834	1,820	1,820	1,841	1,824	1,815	1,799	1,799
Voice	1,425	1,412	1,400	1,385	1,385	1,394	1,379	1,370	1,356	1,356
Broadband	436	436	434	434	434	446	445	444	443	443
Traffic (millions of minutes)	782	732	672	716	2,901	754	699	636	686	2,775
National	526	485	445	476	1,932	502	459	416	451	1,828
Fixed to Mobile	165	160	147	160	633	167	161	147	160	635
International	90	86	80	80	336	84	79	73	75	311
ARPU (EUR)
ARPU Voice	29.1	28.9	28.1	28.6	28.7	28.9	28.4	27.9	28.6	28.5
ARPU Broadband	39.6	39.3	39.1	38.9	39.2	39.5	39.0	39.1	38.8	39.1
FROM MOBILE
Number of active customers (thousands) Postpaid	1,327 1,327	1,357 1,357	1,380 1,380	1,408 1,408	1,408 1,408	1,413 1,413	1,449 1,449	1,470 1,470	1,486 1,486	1,486 1,486
	11.1%	10.8%	9.4%	10.2%	10.3%	11.7%	11.0%	10.8%	16.8%	12.7%
Annualized churn rate (blended - variance in p.p.)
Net ARPU (EUR)
Postpaid	41.8	41.9	40.6	39.5	41.0	38.7	37.2	35.5	33.9	36.3
Postpaid voice	29.2	28.7	26.9	25.9	27.6	25.3	23.7	22.9	21.6	23.3
Postpaid data	12.6	13.2	13.8	13.7	13.3	13.5	13.5	12.6	12.2	12.9
UoU (units)	356.5	369.6	343.3	363.4	358.8	375.8	377.0	339.9	366.8	364.7
MoU (min)	317.1	328.3	305.0	322.8	318.9	327.8	326.6	293.3	314.3	315.4
SMS (units)	83.7	90.1	87.3	95.6	89.4	106.6	111.7	104.7	118.1	110.3

SDE&W – Financials

(EUR million)	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
Revenues	81	80	77	80	318	78	76	75	76	304
Costs of materials and charges to revenues	- 9	- 9	- 9	- 9	-36	- 9	- 9	- 9	-10	-37
Personnel expenses and pensions	-49	-50	-50	-50	-199	-43	-44	-47	-43	-177
Other operating expenses	-52	-33	-48	-42	-175	-48	-50	-41	-48	-187
Segment result	-29	-12	-30	-21	-92	-23	-26	-21	-26	-97

SDE&W – Operatoinals

	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
FROM FIXED Number of access channels (thousands) Voice (1) Broadband (1)	- -	- -	- -	- -	12 1	12 1	11 1	11 1	11 1	11 1
FROM MOBILE Number of active Mobile customers (thousands) Retail (1) MVNO	- -	- -	- -	- -	8 -	8 5	9 7	8 8	8 8	8 8

(1) i.e. Belgacom retail products sold via SDE&W (OLO's own usage and reselling)

S&S – Financials

(EUR million)	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
Revenues	8	7	25	8	47	9	7	7	11	34
Costs of materials and charges to revenues	0	0	0	- 1	- 1	1	- 1	0	- 2	- 2
Personnel expenses and pensions	-39	-40	-40	-40	-160	-38	-39	-41	-39	-156
Other operating expenses	-47	-41	-66	-61	-215	-51	-50	-49	-67	-218
Segment result	-79	-74	-81	-95	-328	-79	-83	-82	-97	-341

ICS – Financials

(EUR million)	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
Revenues	372	388	401	401	1,562	382	409	424	430	1,645
Costs of materials and charges to revenues	-320	-333	-342	-342	-1,338	-326	-347	-361	-367	-1,400
Personnel expenses and pensions	-10	- 9	- 9	- 9	-37	-10	-10	-11	-11	-43
Other operating expenses	-18	-17	-15	-16	-65	-18	-17	-17	-20	-73
Segment result	24	29	35	33	122	28	34	35	32	129
Segment EBITDA margin	6.5%	7.5%	8.7%	8.3%	7.8%	7.3%	8.4%	8.3%	7.3%	7.8%

ICS – Operationals

Volumes (in million)	Q111	Q211	Q311	Q411	2011	Q112	Q212	Q312	Q412	2012
Voice	6,574	6,997	6,853	7,018	27,442	6,907	6,984	6,934	7,556	28,382
Non-Voice (SMS/MMS)	230	253	276	315	1,074	323	361	428	445	1,557

Risk management

This section presents an overview of the Group's Risk Management including a description of its major risks and uncertainties and its main mitigation efforts.

Belgacom believes that risk management is fundamental to corporate governance and the development of sustainable business. The Group has adopted a risk philosophy that is aimed at maximizing business success and shareholder value by effectively balancing risk and reward. The objective of risk management is not only to safeguard the Group's assets and financial strength but also to protect Belgacom's reputation. Financial risk management objectives and policies are reported in note 32 of the consolidated financial statements. Risks related to important ongoing claims and judicial procedures are reported in note 34 of these statements. The major other risks are the enterprise risks and financial reporting risks. These risks are detailed below, as are the related mitigating factors and control measures.

Enterprise risks

The Group's Enterprise Risk Management (ERM) covers the full spectrum of risks ("potential adverse events") and uncertainties that Belgacom could encounter. Belgacom ERM is a structured and consistent framework for assessing, responding to and reporting on risks that could affect the achievement of Belgacom's strategic development objectives. It seeks to maximize value for shareholders by aligning risk management with the corporate strategy, assessing the emerging risk from regulation, new technologies or the market, and developing risk tolerance and mitigating strategies. Belgacom ERM has been reviewed and updated every year since 2006. This risk assessment and evaluation takes place as an integral part of Belgacom's annual strategic planning cycle. The resulting report on major risks and uncertainties is then reviewed by the management committee, the CEO and the Audit committee. Among the risks identified in the ERM exercise of 2012, the following risk categories were prioritized: 1- competitive market dynamics, 2- business model evolution, 3-rightfully skilled and motivated personnel, 4-dependency on equipment and technology.

Principal risks	Description	Mitigation factors and control measures
Competitive market dynamics	New market entrant or disruptive competitor behaviour might reduce market value, pressure Belgacom's market share and negatively impact revenue and profit.	Rational pricing strategy Simplified and improved postpaid offering Focus on convergence strategy Keep leadership in mobile network quality Innovative products and services
Business model evolution	Alternative communications driven by new technology and customer demand requires rapid internal innovation while coming at lower margin, potentially impacting revenue and profit.	Belgacom pioneers new technologies and offers customers the emerging advantage of convergence. In the Enterprise business segment too, new business models have been developed. ICS proactively explores new territories, geographically and technologically.
Rightfully skilled and motivated personnel	Constant shifts in demand for skills could leave Belgacom with an inadequate pool of talent. Introducing a cap by law on executive remuneration would place Belgacom at a disadvantage against its competitors.	Belgacom has a good reputation as an employer, applies customized programs such as Strategic Workforce planning and continuously invests in professional education via internal training. Young employees are attracted through the 'Young Potential Program'.
Dependency on equipment and technology	Network systems could be impacted by damage, computer viruses, natural disasters and unauthorized access which could lead to loss of business and liability claims.	Technology spread across different locations. Ageing legacy copper cables have been gradually replaced by fibre technology since 2003. Legacy systems are being phased out and replaced by integrated systems. Strict monitoring of contractual SLA'S and liabilities terms & conditions with suppliers and vendors. Adequate insurances for damage caused by network failures, computer viruses, security breaches and the like.

Competitive market dynamics

Belgium is a small country with only a few large telecom players, among which Belgacom is the incumbent. In such circumstances, market value is vulnerable to disruptive behavior among competitors. Moreover, Belgacom's main competitors Mobistar, BASE and Telenet, are subsidiaries of large international operators, respectively France Telecom, KPN, and Liberty Global.

A new market entrant or radical price competition could cost Belgacom market share and negatively impact revenue and profit. For instance, the new Belgian telecom law applicable, since 1 October 2012, might result in a greater and longer-than-expected increase in customer churn. Continued aggressive competitor mobile pricing might cause additional customer churn and could lead to a further decrease of Belgacom's mobile market share. Furthermore, competition in the mobile market may become more intense in the South of Belgium if the respective cable competitors were to launch an aggressive mobile offer. In case of greatly reduced competitor prices, Belgacom could be forced to revise its mobile pricing plans accordingly, which might result in lower mobile revenue. Belgacom, however, has always adopted a rational pricing strategy and will continue to be as disciplined as possible in its customer offerings, vigilant as not to trigger further destruction of market value. Belgacom has reviewed and simplified its mobile postpaid offer, increasing value for its customers. Furthermore, Belgacom's convergence strategy gives the company a solid foundation to compete, providing attractive multi-play offers to its customers while reducing churn. Belgacom also continues to invest in its networks, to maintain its leadership in network quality and to be recognized as innovative operator. As such, Belgacom was the first Belgian operator to provide LTE-services to its customers.

As for other telecom providers, the value of Belgacom of mobile voice services might become increasingly challenged by OTT (Over-The-Top) players such as Skype on mobile. Belgacom is deliberately differentiating itself from the OTT competition, by leveraging its virtualized entertainment offers in the private market and its cloud computing services for professionals. At the same time,, Belgacom is continuing to develop its broadband coverage to give its customers the best internet experience. Belgacom has also drawn inspiration from OTT players, launching a content offer adapted to 'Connected TVs', which is available to non-Belgacom customers as well.

In the international carrier services market, voice margins per minute have been under significant pressure over the past few years as a result of price competition, consolidation of the competitors and the ease with which customers are able to change providers. If pressure on voice margins should continue and/or if the Group does not offset price decreases with increased volume, Belgacom's ICS growth rate, operating revenue and net profit could come under pressure. In addition, the pressure on the mobile data market might increase and therefore affect the growth profile of the International Carrier Services.

Changing business model

As a telecom company, Belgacom operates in a dynamic, rapidly changing environment driven by new technological developments and ever-changing customer demand. In response, Belgacom's business model is changing too. It is moving further away from its traditional business, dominated by voice services with high margins. Instead, it is increasingly embracing alternative communications such as Wi-Fi, Mobile Internet and VoIP. This development could potentially impact Belgacom's future revenue and profit from voice minutes or SMS. The International Carrier Services segment too is subject to this changing business model, and could see its revenue from Voice traffic come under pressure as IP technology makes inroads into traditional communications.

The rapid pace of the technological change requires internal innovation to be fast as well, which may be hampered by long internal development times, hence stalling the launch of new services.

To mitigate any negative effect on the Belgacom Group revenue and its business segments, Belgacom has chosen to pioneer new technologies and to offer customers the emerging advantage of convergence - for example by deploying a country-wide hotspot network in partnership with FON. Belgacom has introduced new pricing plans that match its customers' demand for these new ways of communicating – for example with packages including unlimited SMS together with voice and mobile data capacity. In the Enterprise business segment too, where Voice business is contracting, new business models have been developed to compensate for this, such as cloud computing. ICS is also proactively exploring new territories, geographically and technologically.

Dependency on rightfully skilled and motivated personnel

Belgacom depends heavily on the people who work for it: key management, technical employees with the right skills, and well-trained sales people with detailed knowledge of the Belgacom's products and services.

The introduction of a cap by law on executive remuneration applicable on new contracts, as set out in a draft proposal of the minister for Public Enterprises, would restrict Belgacom in attracting and retaining highly qualified top management. Reduced flexibility in executive remuneration would place Belgacom at a disadvantage compared to its main competitors in the Belgian market and could eventually lead to reduced business performance and, by extension, reduced income.

Rapid changes in technology and the unceasing evolution in products and services imply constant shifts in demand for skills, and without effective provisions being made, could leave Belgacom with an inadequate pool of talent. Within the Enterprise segment, for instance, the focus on delivering full end-to-end services and the increasing complexity of customer deals requires staff with specific skills and expertise. Lack of IT-skilled employees could hamper EBU in winning complex customer deals and slow EBU's growth strategy in solution centricity.

Belgacom's future success will be influenced by its overall ability to attract and retain highly qualified employees. Consequently, to tackle new needs in skills, the Human Resources department has developed customized programs, such as Strategic Workforce planning, and the program for young potentials. Furthermore, Belgacom continuously invests in the professional education of its employees via internal training. Overall, Belgacom enjoys a good reputation as an employer.

At Belgacom Group level, about one in three employees is statutory, benefitting from substantially higher protection against dismissal than private-sector employees. This may restrict Belgacom's ability to improve efficiency and increase flexibility to levels comparable to those of its competitors.

Dependence on equipment and technology

Belgacom's business is highly dependent on technical infrastructure such as telecommunication equipment and IT-platforms. Belgacom is only able to deliver services insofar as it can protect its network systems against damage from telecommunication failures, computer viruses, natural disasters and unauthorized access. Any system failure, incident, or security breach that causes interruptions in Belgacom's operations, or parts thereof, could impair Belgacom's ability to provide services to all or some of its customers and could potentially have financial consequences and a reputational impact. To mitigate the risks related to incidents affecting technical buildings (e.g. fire), Belgacom has spread its technology across different locations and buildings (e.g. 3 data centers, splitting corporate ICT services and customer ICT services), 10 network services nodes and hundreds of local exchanges.

Belgacom's service portfolio is becoming increasingly dependent on numerous IT platforms. To preserve the quality of service delivered to its customers, Belgacom needs to guarantee stability, processing time and agility. Any disruption or security breach resulting in loss or damage to customers' data or applications, or leading to inappropriate disclosure of confidential information, may result in Belgacom incurring liability. In addition, the Group may incur additional costs to remedy the damage caused by such disruptions or security breaches. Belgacom possesses errors and omissions insurance, business interruption insurance and insurance guarding specifically against certain losses resulting from, for instance, computer viruses and security breaches.

Nonetheless, in the event of network or IT interruptions Belgacom has multiple measures in place to remedy problems within the shortest time possible. Firstly, Belgacom has an extensive monitoring center in place allowing very fast detection and identification of any possible problem that could jeopardizes the proper functioning of its operations Secondly, Belgacom has elaborate and well-prepared procedures in place to deal with and remediate high-impact incidents as quickly as possible through Emergency Response Teams. These operate 24/7 and include the best experts in their fields.

Belgacom has a nation-wide access network, part of which part has been in place for a long time – the so-called legacy copper network. Ageing copper cables could increase fault rates and decrease performance. The Mobile network might be subject to technical failures, affecting the quality of service or causing temporary service interruptions, leading to customer dissatisfaction. Another priority is the network transformation program, which could be subject to delayed implementation and consequently delayed savings from the outphasing of technical buildings.

Belgacom heavily invests to further improve its network. Rolling out a fibre-to-the-curb network has been one of Belgacom's key priorities over the past few, while old copper cables are being replaced and new technologies are showing a promising evolutionary path for the last mile in copper. Belgacom continues to invest in stability improvements for both its fixed and mobile core network by putting new architectures into place that enable higher redundancy. In addition, elaborate network resilience programs have been set up to further boost the ability to keep the network in operation in the event of failures. A similar resilience plan will be put in place as from 1 January 2013 for some critical IT applications. Furthermore, to prevent problems in the supply chain, Belgacom strictly monitors contractual SLA'S and liabilities terms & conditions with its suppliers and vendors

Financial reporting risks

In the area of financial reporting, in addition to the general enterprise risks also impacting the financial reporting (e.g. personnel), the major risks identified include: new transactions and evolving accounting standards, changes in tax law and regulations, and the financial statement closing process.

New transactions and evolving accounting standards:

New transactions could have a significant impact on the financial statements, either directly in the financial statements or in the notes. An inappropriate accounting treatment could result in financial statements which do not provide a true and fair view any more. Changes in legislation (e.g. pension age, customer protection) could also significantly impact the financials. New accounting standards can require the gathering of new information and the adaption of complex (billing) systems. If not timely and adequately foreseen, the timeliness and reliability of the financial reporting could be put at risk.

It is the responsibility of the Corporate Accounting department to follow the evolution in the area of evolving standards (both local GAAP and IFRS). Changes are identified, and the impact on the Belgacom financial reporting is proactively analysed.

For every new type of transaction (e.g. new product, new employee benefit, business combination), an in depth analysis from a financial reporting, risk management, treasury and tax point of view is performed. In addition, the development requirements for the financial systems are timely defined and compliance with internal and external standards is systematically analysed. Emphasis is on the development of preventive controls and setting up reporting tools that enable posteriori controls.

On a regular base, the Audit and Compliance Committee (A&CC) is informed about new upcoming financial reporting standards and their potential impact on the Belgacom Group financials.

Changes in tax law and regulations:

Changes in tax laws and regulations (corporate income tax, VAT...) or in their application by the tax authorities could significantly impact the financial statements. To ensure compliance, it is often required to set up, in a short timeframe, additional administrative processes to collect relevant information or to implement updates to existing IT systems (e.g. billing systems).

The tax department continuously follows potential changes in tax law and regulations as well as interpretations of existing tax laws by the tax authorities. Based on laws, doctrine, case law and political statements as well as draft laws available etc., an impact analysis is made from a financial perspective as well as from an operational point of view.

Financial statement closing process:

The delivery of timely and reliable financial statements remains dependent from an adequate financial statement closing process.

Clear roles and responsibilities in the closing process of the group financial statements have been defined. During the monthly, quarterly, half-yearly and annual financial statement closing processes, there is a continuous monitoring on the different steps. In addition, different controls are performed to ensure quality and compliance with internal and external requirements and guidelines.

For Belgacom and its major affiliates, a very detailed closing calendar is established, which includes in detail cross-divisional preparatory meetings, deadlines for ending of specific processes, exact date and hours when IT sub-systems are locked, validation meetings and reporting deliverables.

For every process and sub-process, different controls are performed, including preventive controls, where information is tested before being processed, as well as detective controls, where the outcome of the processing is being analysed and confirmed. Specific attention is given to reasonableness tests, where financial information is being analysed by more underlying operational drivers, and coherence tests, where financial information from different areas is brought together to confirm results or trends, etc… Tests on individual accounting entries are performed for material or non-recurrent transactions and on a sample basis for others. The combination of all these tests provides sufficient assurance on the reliability of the financials.

Internal control system

The Belgacom Board of Directors is responsible for the assessment of the effectiveness of the systems for internal control and risk management.

Belgacom has set up an internal control system based on the COSO model, i.e. the integrated internal control and enterprise risk management framework published by the Committee of Sponsoring Organisation of the Treadway Commission ("COSO"). This COSO methodology is based on five areas: the control environment, risk analysis, control activities, information & communication and monitoring.

Belgacom's internal control system is characterized by an organization with a clear definition of responsibilities, next to sufficient resources and expertise, and also appropriate information systems, procedures and practices. Obviously, Belgacom cannot guarantee that this internal control will be sufficient in all circumstances as risks of misuse of assets or misstatements can never be totally eliminated. However, Belgacom organizes a continuous review and follow-up of all the components of its internal controls and risk management systems to ensure they remain adequate.

Belgacom considers the timely delivery to all its internal and external stakeholders of complete, reliable and relevant financial information in conformity with International Financial Reporting Standards (IFRS) and with other additional Belgian disclosure requirements as an essential element of management and governance. Therefore, Belgacom has organized its internal control and risk management systems over its financial reporting in order to ensure this objective is met.

1. Control environment

1.1 Organization of internal control

In accordance with the bylaws, Belgacom has an Audit and Compliance Committee (A&CC), which consists of five nonexecutive Directors, the majority of whom must be independent. In line with its charter, it is chaired by an independent Director.

The members of the A&CC have sufficient expertise in financial matters to discharge their functions. Its Chairman, Mr. Pierre-Alain De Smedt, is competent in accounting and auditing. He is a "licentiate" in commercial and financial sciences. He occupied during his career several functions as CFO, CEO and COO. Amongst his non-executive functions he is also member of the Audit Committee of Avis Europe.

The A&CC's role is to assist and advise the Board of Directors in its oversight on (i) the financial reporting process, (ii) the efficiency of the systems for internal control and risk management of Belgacom, (iii) the Belgacom's internal audit function and its efficiency, (iv) the quality, integrity and legal control of the statutory and the consolidated financial statements of Belgacom, including the follow up of questions and recommendations made by the auditors, (v) the relationship with the Group's auditors and the assessment and monitoring of the independence of the auditors, (vi) Belgacom's compliance with legal and regulatory requirements, (vii) the compliance within the organization with the Belgacom's Code of Conduct and the Dealing Code.

The A&CC meets at least once every quarter.

1.2 Ethics

The Board of Directors has approved a Corporate Governance Charter and a Code of Conduct "The way we do responsible business". All employees must perform their daily activities and their business objectives according to the strictest ethical standards and principles, using the Group values (Respect, Can do and Passion) as guiding principle.

The Code "The way we do responsible business", which is available on www.belgacom.com, sets out the above-mentioned principles, and aims to inspire each employee in his or her daily behaviour and attitudes. The ethical behaviour is not limited to the text of the Code. The Code is a summary of the main principles and is thus not exhaustive.

In addition, Belgacom in general and the Finance department in particular have a tradition of a high importance to compliance and a strict adherence to a timely and qualitatively reporting.

1.3 Policies and procedures

The principles and the rules in the Code "The way we do responsible business" are further elaborated in the different internal policies and procedures. These Group policies and procedures are available on the Belgacom intranet-sites. Every policy has an owner, who regularly reviews and updates if necessary. Periodically, and at moment of an update, an appropriate communication is organized.

In the financial reporting domain, general and more detailed accounting principles, guidelines and instructions are summarized in the accounting manuals and other reference material available on the Belgacom intranet-sites. In addition, the Corporate Accounting department regularly organizes internal accounting seminars to update finance and non-finance staff on accounting policies and procedures.

1.4 Roles & responsibilities

Belgacom's internal control system benefits from the fact that throughout the whole organization, roles and responsibilities are clearly defined. Every business unit, division and department has its vision, mission and responsibilities, while on individual level everybody has a clear job description and objectives.

The main role of the Finance Division is to support the divisions and affiliates by providing accurate, reliable and timely financial information for decision making, to monitor the business profitability and to manage effectively corporate financial services. The establishment of the external financial reporting falls under the responsibility of the Corporate Accounting department.

The team of the Corporate Accounting department assumes this accounting responsibility for the mother company Belgacom and the major Belgian companies. They also provide the support to the other affiliates. For this centralized support, the organization is structured according to the major (financial) processes. These major processes include capital expenditures and assets, inventories, contracts in progress & revenue recognition, financial accounting, operational expenditures, provisions & litigations, payroll, post-employment benefits and taxes. This centralized support organized around specific processes and IFRS standards allows for in depth accounting expertise and ensures compliance with group guidelines.

The consolidation of all different legal entities into the Consolidated Financial Statements of the Belgacom Group is realized centrally. The Consolidation department defines and distributes information relating to the implementation of accounting standards, procedures, principles and rules. It also monitors changes in regulations to ensure that the financial statements continue to be prepared in accordance with IFRS, as adopted by the European Union. The monthly instructions for consolidation set forth not only the schedules for preparing accounting information for reporting purposes, but also includes detailed deadlines and items requiring particular attention, such as complex issues or new internal guidelines.

1.5 Skills & expertise

Adequate staffing is a matter to which Belgacom pays careful attention. This requires not only sufficient headcount, but also the adequate skills and expertise. These requirements are taken into account in the hiring process, and subsequently in the coaching and formation activities, facilitated and organized by the Belgacom Corporate University.

For financial reporting purposes, a specific formation cycle was put in place, whereby junior as well as senior staff have to participate mandatory. These internally and externally organized accounting seminars cover not only IFRS but local accounting rules & regulations, Tax and Company law & regulations as well. In addition, the knowledge and expertise is also kept up to date and extended for more specific domains for which staff is responsible (revenue assurance, pension administration, financial products, etc.) through attendance to seminars and self-study. Furthermore, employees also attend general formations session on Belgacom new business products & services.

2. Risk analysis

Major risks and uncertainties are reported in the caption 'Risk Management'.

3. Risk mitigating factors and control measures

Belgacom mitigating response strategies depend on the nature of the risk and may often combine various actions, including insurance, increased vendors SLA'S/ liabilities, credit scoring, risk avoidance or active risk management through people, processes and systems.

The cost of risk mitigation is considered in determining response strategies. Certain risks are consciously accepted based on their potential limited impact on the Belgacom organization and/or their low level of materiality. Risks such as political, economic, regulatory are beyond Belgacom control and mitigation is limited to responsive actions to limit their impact. Mitigating factors and control measures are reported in the caption 'Risk Management'.

4. Information and communication

4.1 Financial reporting IT systems

The accounting records of Belgacom and most of its affiliates are kept on large integrated IT systems. Operational processes are often integrated in the same system (e.g. supply chain management, payroll). For the billing systems, which are not integrated, adequate interfaces and a monitoring system have been developed. For the consolidation purposes, a specific consolidation tool is used.

The organizational set-up and access management are designed to support an adequate segregation of duties, prevent unauthorized access to the sensitive information and prevent unauthorized changes. The set-up of the system is regularly subject to the review by the internal audit department or external auditors.

4.2 Effective Internal communication

Most of the accounting records today are kept under IFRS as well as local GAAP. In general, financial information delivered to management and used for budgeting, forecasting and controlling activities is established under IFRS. A common financial language used throughout the organization positively contributes to an effective and efficient communication.

4.3 Reporting and validation of the financial results

The financial results are internally reported and validated on different levels. On the level of processes, there are validation meetings with the business process owners. On the level of the major affiliates, a validation meeting is organized with the accounting and controlling responsible. On Belgacom group level, the consolidated results are split per segments. For every segment, the analysis and validation usually includes comparison with historical figures, as well as budget-actual and forecastactual analysis. Validation requires (absences of) variances to be analyzed and satisfactorily explained.

Afterwards, the financial information is reported and explained to the Belgacom Management Committee (monthly) and presented to the A&CC (quarterly).

5. Supervision and assessment of internal control

The effectiveness and efficiency of the internal control are regularly assessed in different ways and by different parties:

• Each owner is responsible for reviewing and improving its business activities on a regular basis: this includes a.o. the process documentation, reporting on indicators and monitoring of those.
• In order to have an objective review and evaluation of the activities of each organization department, Belgacom's Internal Audit department conducts regular audits across the Group's operations. The independence of Internal Audit is ensured via its direct reporting line to the Chairman of the A&CC. Audit assignments performed may have a specific financial processes scope but will also assess the effectiveness and efficiency of the operations and the compliance towards the applicable laws or rules.
• The A&CC reviews the quarterly interim reporting and the specific accounting methods. The main disputes and risks facing the Group are considered; the recommendations of internal audit are followed-up; the compliance within the Group with the Code of Conduct and Dealing Code is regularly discussed.
• Except for some very small foreign affiliates, all legal entities of the Belgacom Group are subject to an external audit. In general, this audit includes an assessment of the internal control, and leads to an opinion on the statutory financials and on the (half-yearly and annual) financials reported to Belgacom for consolidation. In case the external audit reveals a weakness or identifies opportunities to further improve the internal control, recommendations are made to management. These recommendations, the related action plan and implementation status are at least annually reported to the A&CC.

Other information

Rights, commitments and contingencies as of 31 December 2012

Disclosures related to rights, commitments and contingencies are reported in note 34 of the consolidated financial statements.

Use of financial instruments

Disclosures related to the use of financial instruments are reported in note 32 of the consolidated financial statements.

Circumstances which may considerably impact the development of the Group

Circumstances which may considerably impact the development of the Group are reported in the sections Risk Management and Internal Control of this management report.

Research and development activities

In general, the research and development activities cover 4 key steps in the adoption cycle of a technology or of a service based on technology:

• Study of the technology's potential: determination of the technological and commercial opportunities and its positioning in the technology portfolio;
• Introduction of the technology: as the technology is selected, an engineered solution is necessary for deployment, exploitation and day-to-day management;
• Evolution of the technology: once deployed, the technology will continue to evolve in accordance with its potential and market demand;
• The preparation of the introduction of new services.

In 2012, the research and development activities covered the following:

Study of the potential of new technologies:

• o Further detailed studies on solutions to phase out traditional technologies and to migrate to a fully IP based network. More specifically the solutions for replacing PSTN and ISDN (Access Gateway, ISDN Access Devices and alternatives) were investigated on their technical, economical and operational feasibility, and preparations continued for the future introduction of IPv6 in the data network.
• o Fibre to the Home (FTTH): technico-economic studies have been further conducted and preparations have started to deploy FTTH in green-field zonings.
• o Investigation on viable solutions to optimize the data traffic handling on fixed networks, in order to ensure the optimal Quality of Service.
• o Belgacom has a continuous focus on the "Green" aspect. With "green ICT" and "ICT for green", Belgacom actively participates in reducing our own environmental impact, as well as the impact of others. Several areas are being investigated (e-prescription, smart grids...)

Introduction of new technologies:

• o The mobile technology of the next generation LTE (Long Term Evolution)- was further tested during 2012 and commercially launched in November, providing customers the highest mobile download and upload speeds.
• o Belgacom and Alcatel-Lucent are developing in a partnership a next step in VDSL2 technology ('Vectoring'). This solution allows for cancelling out interference in a copper cable, and will allow to increase substantially the dataspeed that can be offered.

Evolution of the technology in terms of improvement and existing services extension:

• o Belgacom further improved and extended its portfolio on Cloud-based Services with IaaS (Infrastructure as a Service).
• o Services from the Belgacom network are now exposed to external customers through API's (Application Programming Interfaces). This allows developers to integrate network services –such as SMS- in their applications.
• o Belgacom TV services have been further enriched with personalisation features (personalised recommendations) and more advanced search functions.
• o Belgacom further improved its VDSL2 technology with DLM (Dynamic Line Management') for its broadband offering. With this solution, which was developed in-house , Belgacom can offer higher dataspeeds to its customers.

The preparation of the introduction of new services:

o Belgacom is one of the main participants in the fiber-based pilot network in Kortrijk, in which test users are provided with high-speed access. This "Living Lab" enables application developers to test new applications and services in a real-life environment with a representative number of test users. Also Belgacom has been testing out some advanced services.

Belgacom collaborates with universities, industrial partners and several other bodies, such as iMinds (independent research institute founded by the Flemish government, I.W.T. (Agentschap voor Innovatie door Wetenschap en Technologie) and the H.G.I. (Home Gateway Initiative Forum). Belgacom takes part in several User Committees for Strategic Research projects.

Treasury shares

Disclosures related to treasury shares are reported in note 16 of the consolidated financial statements.

Capital management

The purpose of the Group's capital management is to maintain net financial debt and equity ratios that allow for security of liquidity at all times via flexible access to capital markets, in order to be able to finance strategic projects and to offer an attractive remuneration to shareholders. The latter was last updated by the Belgacom Board of Directors on 25 February 2010. Since then Belgacom has committed to return, in principle, most of its annual consolidated cash flow before financing activities (or "Free Cash Flow"), to its shareholders. However, the return of such free cash flow either through dividends or share buybacks, is being reviewed on an annual basis, in order to keep strategic financial flexibility for future growth, organically or via selective merger and acquisition projects, with a clear focus on value creation. This also includes confirming appropriate levels of distributable reserves.

Over the two periods presented, the Group didn't issue new shares or any other dilutive instrument.

Post-balance sheet events

Disclosures related to post-balance sheet events are reported in notes 34 and 40 of the consolidated financial statements.

On behalf of the Board of Directors, Brussels, February 28, 2013

Didier Bellens M. Moll

President & CEO Chairman of the Board of Directors a.i.