Untitled Document



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934

 

For the month of: November 2004
Commission File Number: 1-8481

 

BCE Inc.
(Translation of Registrant’s name into English)

1000, rue de La Gauchetière Ouest, Bureau 3700, Montréal, Québec H3B 4Y7, (514) 397-7000
(Address of principal executive offices)

 

Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

  Form 20-F

Form 40-F
X

 

Indicate by check mark whether the Registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

  Yes

No
X

 

If "Yes" is marked, indicate below the file number assigned to the Registrant in connection with Rule 12g3-2(b):
82-_____.

 

Only the BCE Inc. Management's Discussion and Analysis for the quarter ended September 30, 2004 and the BCE Inc. unaudited interim consolidated financial statements for the quarter ended September 30, 2004, included on pages 2 to 30 and 31 to 41, respectively, of the BCE Inc. 2004 Third Quarter Shareholder Report filed with this Form 6-K, and the document entitled "Reconciliation of Canadian Generally Accepted Accounting Principles ("GAAP") to United States GAAP" filed with this Form 6-K as Appendix A, are incorporated by reference in the registration statements filed by BCE Inc. with the Securities and Exchange Commission on Form F-3 (Registration No. 333-12130), Form S-8 (Registration No. 333-12780), Form S-8 (Registration No. 333-12802) and Form S-8 (Registration No. 333-12804). Except for the foregoing, no other document or portion of document filed with this Form 6-K is incorporated by reference in BCE Inc.’s registration statements. Notwithstanding any reference to BCE’s Web site on the World Wide Web in the documents attached hereto, the information contained in BCE’s site or any other site on the World Wide Web referred to in BCE’s site is not a part of this Form 6-K and, therefore, is not filed with the Securities and Exchange Commission.

 


 

 

 

 

 

CONTENTS    
     
MD&A   2
     

    About Our Business

  3

 

   

    The Quarter at a Glance

  4

 

   

    Financial Results Analysis

  9

 

   

    Financial and Capital Management

  21

 

   

    Risks That Could Affect Our Business

  27

 

   

    Our Accounting Policies

  30
     
    Supplementary Financial Information   30
     
Consolidated Financial Statements   31
     
Notes to Consolidated Financial Statements   34

 


 


In this MD&A, we, us, our and BCE mean BCE Inc., its subsidiaries and joint ventures.

All amounts in this MD&A are in millions of Canadian dollars, except where otherwise noted.

Please refer to the unaudited consolidated financial statements for the third quarter of 2004 when reading this MD&A. We also encourage you to read BCE Inc.’s MD&A for the year ended December 31, 2003 dated March 10, 2004 (BCE 2003 MD&A).

You will find more information about BCE, including BCE Inc.’s Annual Information Form for the year ended December 31, 2003 (BCE 2003 AIF) and recent financial reports, on BCE Inc.’s website at www.bce.ca, on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.


A statement we make is forward-looking when it uses what we know and expect today to make a statement about the future.

Forward-looking statements may include words such as
anticipate, believe, could, expect, goal, intend, may, objective, outlook, plan, seek, strive, target and will.

Management’s Discussion and Analysis

This management’s discussion and analysis of financial condition and results of operations (MD&A) comments on BCE’s operations, financial condition and cash flows for the three months (Q3) and nine months (YTD) ended September 30, 2004 and 2003.

ABOUT FORWARD-LOOKING STATEMENTS

Securities laws encourage companies to disclose forward-looking information so that investors can get a better understanding of the company’s future prospects and make informed investment decisions.
     Unless otherwise mentioned in this MD&A, the outlooks provided in the BCE 2003 MD&A dated March 10, 2004 remain unchanged.
     This MD&A contains forward-looking statements about BCE’s objectives, strategies, financial condition, results of operations, cash flows and businesses. These statements are “forward-looking” because they are based on our current expectations, estimates and assumptions about the markets we operate in, the Canadian economic environment and our ability to attract and retain customers and to manage network assets and operating costs.
     It is important to know that:

  • forward-looking statements in this MD&A describe our expectations on November 2, 2004
  • our actual results could be materially different from what we expect if known or unknown risks affect our business, or if our estimates or assumptions turn out to be inaccurate. As a result, we cannot guarantee that any forward-looking statement will materialize and, accordingly, you are cautioned not to place undue reliance on these forward-looking statements.
  • forward-looking statements do not take into account the effect that transactions or special items announced or occurring after the statements are made may have on our business. For example, they do not include the effect of sales of assets, monetizations, mergers, acquisitions, other business combinations or transactions, asset write-downs or other charges announced or occurring after forward-looking statements are made.
  • we disclaim any intention and assume no obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.

     Risks that could cause our actual results to materially differ from our current expectations are discussed in this MD&A including, in particular, in Risks That Could Affect Our Business.

 

 


We define EBITDA as operating revenues less operating expenses, which means it represents operating income before amortization expense, net benefit plans cost, and restructuring and other items.

NON-GAAP FINANCIAL MEASURES

EBITDA

The term, EBITDA (earnings before interest, taxes, depreciation and amortization), does not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP). It is therefore unlikely to be comparable to similar measures presented by other companies. EBITDA is presented on a consistent basis from period to period.
     We use EBITDA, among other measures, to assess the operating performance of our ongoing businesses without the effects of amortization expense, net benefit plans cost, and restructuring and other items. We exclude amortization expense and net benefit plans cost because they largely depend on the accounting methods and assumptions a company uses, as well as non-operating factors, such as the historical cost of capital assets and the fund performance of a company’s pension plans. We exclude restructuring and other items because they are transitional in nature.
     EBITDA allows us to compare our operating performance on a consistent basis. We believe that certain investors and analysts use EBITDA to measure a company’s ability to service debt and to meet other payment obligations, or as a common valuation measurement in the telecommunications industry.

2    2004 Quarterly Report     Bell Canada Enterprises


 

     EBITDA should not be confused with net cash flows from operating activities. The most comparable Canadian GAAP financial measure is operating income which is discussed in the Financial Results Analysis section of this MD&A. The tables below are reconciliations of EBITDA to operating income on a consolidated basis for BCE and Bell Canada.

BCE 

Q3 2004   Q3 2003   YTD 2004   YTD 2003  

EBITDA 

1,936   1,895   5,733   5,563  

Amortization expense 

(769 (801 (2,305 (2,325

Net benefit plans cost 

(61 (44 (189 (129

Restructuring and other items 

(1,081 (1 (1,098 (1

Operating income 

25   1,049   2,141   3,108  

 


Bell Canada 

Q3 2004   Q3 2003   YTD 2004   YTD 2003  

EBITDA 

1,856   1,817   5,432   5,270  

Amortization expense 

(734 (758 (2,199 (2,228

Net benefit plans cost 

(55 (46 (173 (135

Restructuring and other items 

(1,080 (1 (1,096 (1

Operating income (loss) 

(13 )  1,012   1,964   2,906  


We define free cash flow as cash from operating activities after capital expenditures, total dividends and other investing activities.

FREE CASH FLOW

The term, free cash flow, does not have any standardized meaning prescribed by Canadian GAAP. It is therefore unlikely to be comparable to similar measures presented by other companies. Free cash flow is presented on a consistent basis from period to period.
     We consider free cash flow to be an important indicator of the financial strength and performance of our business because it shows how much cash is available to repay debt and to reinvest in our company. We believe that certain investors and analysts use free cash flow when valuing a business and its underlying assets.
     The most comparable Canadian GAAP financial measure is cash from operating activities. You will find a reconciliation of free cash flow to cash from operating activities on a consolidated basis in Financial and Capital Management.

 

 

 


Video services are television services provided to customers through our direct-to-home (DTH) satellites or by very high-speed digital subscriber line (VDSL) equipment.

About Our Business

BCE is Canada’s largest communications company. Starting in the first quarter of 2004, we report our results of operations under five segments: Consumer, Business, Aliant, Other Bell Canada and Other BCE.
     Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance. Therefore, in addition to discussing our consolidated operating results in this MD&A, we discuss the operating results of each of our segments. See Note 2 to the unaudited consolidated financial statements for information about our segments.
     The Consumer segment provides local telephone, long distance, wireless, Internet access, video and other services to Bell Canada’s residential customers mainly in Ontario and Québec. Wireless services are also offered in Western Canada and video services are provided nationwide.
     The Business segment provides local telephone, long distance, wireless, data, including Internet access, and other services to Bell Canada’s small and medium-sized businesses (SMB) and large enterprise customers in Ontario and Québec, as well as business customers in Western Canada through Bell West Inc. (Bell West).
     The Aliant segment provides local telephone, long distance, wireless, data, including Internet access, and other services to residential and business customers in Atlantic Canada and represents the operations of our subsidiary, Aliant Inc. (Aliant).

3    2004 Quarterly Report     Bell Canada Enterprises


 

     The Other Bell Canada segment includes Bell Canada’s wholesale business, and the financial results of Télébec Limited Partnership (Télébec), NorthernTel Limited Partnership (NorthernTel) and Northwestel Inc. (Northwestel). Our wholesale business provides local telephone, long distance, data and other services to competitors who resell these services. Télébec, NorthernTel and Northwestel provide telecommunications services to less populated areas in Québec, Ontario and Canada’s northern territories.
     The Other BCE segment includes the financial results of our media, satellite and information technology (IT) activities as well as the costs incurred by our corporate office. This segment includes Bell Globemedia Inc. (Bell Globemedia), Telesat Canada (Telesat) and CGI Group Inc. (CGI).
     In classifying our operations for planning and measuring performance, all restructuring and other items at Bell Canada and its subsidiaries (excluding Aliant) are included in the Other Bell Canada segment and not allocated to the Consumer and Business segments.
     In Q2 2004, we took another step forward in simplifying our operations by selling our 64% interest in BCE Emergis Inc. (Emergis) by way of a secondary public offering. Effective May 2004, we started presenting the financial results of Emergis as discontinued operations. Emergis was presented previously in the Other BCE segment.
     On August 3, 2004, we acquired full ownership of Bell West by completing the purchase of Manitoba Telecom Services Inc’s (MTS) 40% interest in Bell West.
     The products and services we provide and our objectives and strategy remain substantially unchanged from those described in the BCE 2003 MD&A.


This section reviews the key measures we use to assess our performance and how our results in Q3 2004 compare to our results in Q3 2003.

The Quarter at a Glance

Overall, this quarter we continued to build momentum on our strategic initiatives and on growing our business profitably. We improved our revenue growth rate for the third consecutive quarter reaching 3.3% at BCE and 1.2% at Bell Canada. At the same time we improved our operating income margins by 0.4 percentage points, excluding restructuring and other items. We achieved solid operating performance resulting in strong earnings contribution before restructuring and other items and substantial free cash flow. In addition, significant accomplishments in the quarter included Bell Canada’s negotiation of a new four-year labour agreement with its technicians represented by the Communications, Energy and Paperworker’s Union of Canada (CEP), the implementation of our employee departure program, where some five thousand employees will be leaving Bell Canada, and in September, Aliant Telecom Inc. negotiated a new collective agreement with its unionized employees, putting an end to a labour disruption that began in April. While these items help lay an important foundation for future success, the voluntary departure program and Aliant’s labour disruption had a significant negative impact on our earnings results this quarter, reflected through restructuring and other items and increased strike related costs.
     In our Consumer segment, we continued to execute on our strategy of winning the broadband home. We achieved another quarter of solid revenue growth driven by strong gains in wireless, high-speed Internet and video services. These gains were in part stimulated by our bundle strategy which reflected significantly improved gains compared to the previous quarter. Our focus on profitability translated into improved operating income, despite some additional acquisition costs incurred from the accelerated customer wins this quarter. Customer loyalty remained strong with year-over-year churn improvement across all our growth businesses.
     In our Business segment, we continued to grow our IP-based connectivity and Value-Added Solutions (VAS) within the SMB and Enterprise markets. These positive trends combined with a sharp focus on cost control led to strong operating income growth. Revenues remained flat this quarter reflecting the impact of our exit from the low margin cabling business and the completion of the Hydro-Québec outsourcing contract.

4    2004 Quarterly Report     Bell Canada Enterprises


 

     In the Other Bell Canada segment, while the market remains challenging for our wholesale business, the trend of a slowing rate of decline continued in Q3. In fact revenues from our wholesale business were essentially flat compared to last year and, before restructuring and other items, operating income increased in the quarter, departing from the declines experienced in the previous quarters of this year. 
     Bell Globemedia continues to perform well, driven by strengthening advertising revenues reflecting strong television ratings as CTV Television held 17 of the top 20 regularly scheduled programs (Adult age: 25 to 54) during the summer season and 15 of the top 20 programs in the first two weeks of the fall season. Our share of CGI’s revenues increased over last year, primarily as a result of CGI’s acquisition of American Management Systems Incorporated Inc. (AMS) in May 2004.

CUSTOMER CONNECTIONS
  • Wireless – We grew our wireless subscriber base by 109,000 net additions this quarter, a solid improvement from the 95,000 achieved in the second quarter of the year. Net additions were down from Q3 2003, largely as a result of less aggressive in-store promotional handset pricing offered during the third quarter compared to last year. With the introduction of our new wireless billing platform, our focus was to ensure that continuity of service levels and the orderly billing migration of our existing customer base rather than aggressively pursuing growth. In total, our subscriber base reached 4,708,000, an increase of 11.5% over last year. We achieved the lowest level of churn since the beginning of 1997 with blended churn of 1.2% and postpaid churn of 1.0%.
  • High-Speed Internet – Our digital subscriber line (DSL) high-speed Internet business added 96,000 subscribers this quarter growing our subscriber base by 27.0% over Q3 2003 to 1,766,000. DSL net activations this quarter were down 8,000 compared to Q3 2003. This related to lower activations at Aliant impacted by the labour disruption, as well as the impact of the “double-cohort” reflecting the change in the Ontario education system whereby two graduating classes entered university in the same year causing a lift in net additions in Q3 2003 which did not recur this year.
         Subscriptions to Sympatico’s value-added services increased by 20,000 to reach a total of 453,000 at the end of the quarter more than double the subscriptions at the end of Q3 2003.
  • Video Customer gains of 33,000 in our video business were almost double the net activations achieved in Q3 last year and significantly outpaced the growth in the second quarter this year. Total subscribers at the end of the quarter reached 1,460,000, 8% higher compared to the same period, making Bell ExpressVu the nation’s third largest television service provider.
  • Network Access Services (NAS) – Although our NAS in service increased 24,000 this quarter due to seasonal movement, NAS compared to Q3 2003 declined by 1%, a similar rate of decline as in previous quarters resulting mainly from losses to competition and substitution of wireline with wireless telephone service, as well as growth in Internet access subscribers which reduces the need for second telephone lines.

 

OPERATING REVENUES

Revenues reached $4,781 million for the third quarter of 2004 reflecting a year-over-year increase of 3.3% and a third consecutive quarter of improved rate of growth. At Bell Canada this was primarily driven by higher Consumer revenues resulting from strong wireless, Internet access and video services, partly offset by estimated revenue declines impacted by the labour disruption at Aliant, which began in April this year and ended in September. In addition, revenue growth also reflected an increase in the Other BCE segment, particularly higher revenues at CGI resulting from its acquisition of AMS. Excluding the estimated $17 million revenue decline resulting from the Aliant labour disruption, revenues for the quarter increased 3.7% over last year.

 

5    2004 Quarterly Report     Bell Canada Enterprises


 

 

 

 

 

OPERATING INCOME AND EBITDA

We realized operating income increases in the quarter of $17 million in our consumer segment and $52 million from our business segment. Total operating income for the quarter was $25 million, down $1,024 million from the third quarter last year as a result of the recognition of restructuring and other items in the amount of $1,081 million in the quarter. The restructuring and other items mainly related to the employee departure program which was announced in June of this year encompassing a total of 5,052 employees who will be leaving Bell Canada. In addition, the labour disruption at Aliant had an estimated negative impact of approximately $34 million on operating income for the quarter. Excluding the impacts of the restructuring and other items and the Aliant labour disruption, operating income increased $90 million or 8.6% reflecting revenue growth, productivity gains and lower amortization expense which more than offset higher costs associated with volume increases and a higher net benefit plans cost over last year. Operating income margin improved 1.1 percentage points to 23.8% reflecting the benefit of our cost containment focus.
     Our EBITDA for the third quarter of 2004 grew to $1,936 million or 2.2% higher than Q3 2003 EBITDA of $1,895 million. This increase was mainly driven by higher EBITDA in the Consumer, Business and Other Bell Canada segments partly offset by an EBITDA decline in the Aliant segment, reflecting the impact of its employee strike.
     Our EBITDA margin of 40.5% in the quarter was down 0.5 percentage points over Q3 2003 reflecting higher corporate expenses and a lower EBITDA margin at CGI which more than offset margin improvement at Bell Canada. Bell Canada achieved an EBITDA margin improvement of 0.4 percentage points to 44.1% this quarter from 43.7% in Q3 2003. The margin improvement was driven by better management of acquisition costs per gross activation, particularly in the wireless business, as well as a greater emphasis on more profitable contracts within the enterprise and wholesale markets, partly offset by the estimated negative impact of $37 million of Aliant’s labour disruption. The negative impact of the Aliant strike on Bell Canada’s EBITDA margin was 0.7 percentage points.

NET EARNINGS / EARNINGS PER SHARE

Net earnings applicable to common shares for Q3 2004 were $82 million, or $0.09 per common share. This compared to net earnings of $446 million, or $0.49 per common share in the third quarter last year. Included in this quarter’s net earnings were net losses of $402 million, or $0.43 per common share, resulting from the after tax restructuring and other items of $725 million or $0.78 per share relating mainly to the employee departure program announced in June of this year, partly offset by net gains of $325 million or $0.35 per share relating to net gains on the sale of our 16% investment in Manitoba Telecom Services Inc. (MTS) and our remaining 3.24% interest in YPG General Partner Inc. This compared to net gains on the sale of investments and restructuring and other items of $14 million in the third quarter of 2003.
     Excluding the impact of these items, net earnings of $484 million, or $0.52 per common share, were up $52 million or $0.04 per common share representing an increase of 8.3% over last year primarily as a result of the improvement in EBITDA, lower amortization expense and lower interest expense driven by lower average debt levels in Q3 2004, which were partly offset by the higher net benefit plans cost.

CAPITAL EXPENDITURES

Capital expenditures for the third quarter totalled $811 million slightly up from the same period last year, while remaining essentially stable at 17% as a percentage of revenues. The increase of $20 million in capital expenditures reflected a mix of higher spending towards growth areas of the business and reduced spending in the legacy areas. Approximately 40% of the year-to-date capital spending represented investments on our strategic initiatives such as the migration to one national IP-Multi-Protocol Label System

6    2004 Quarterly Report     Bell Canada Enterprises


 

(MPLS) network, our VDSL strategy, our DSL footprint expansion facilitated through the rollout of fibre-to-the-node and productivity initiatives.
      Capital expenditures for the Consumer segment increased over Q3 2003 to focus on growth projects such as the continued expansion of our DSL footprint, billing modernization and productivity initiatives, including additional contact centre tools aimed at improving customer service and reducing call times. Business segment capital expenditures decreased over Q3 2003 reflecting better contract management, while SMB capital spending increased due to higher investments in productivity initiatives and product development.

CASH FROM OPERATING ACTIVITIES AND FREE CASH FLOW

Cash from operating activities for Q3 2004 totalled $1,828 million, up $10 million compared to the same period last year. The increase in cash from operating activities resulted from higher cash earnings and the receipt of $75 million in the quarter resulting from the settlement of lawsuits against MTS and Allstream Inc. at the end of Q2 2004 which more than offset increased working capital requirements associated with the introduction of the new billing platform for our wireless customers in May of this year. As anticipated, a higher level of accounts receivable resulted from planned billing delays which arose during the billing migration process and continued throughout the third quarter. By mid October invoicing delays associated with the new billing platform were resolved and accounts receivable balances are expected to return to more normal levels by year-end. 

      Free cash flow of $673 million this quarter brought our year-to-date free cash flow to $999 million. Our net debt to total capitalization ratio improved to 42.1% at the end of the quarter from 44.0% at December 31, 2003, reflecting net debt reduction. The net debt improvement resulted primarily from year-to-date positive free cash flow of $999 million and net cash proceeds of $584 million from the sale of our 15.96% interest in MTS, $315 million from the sale of our 63.9% interest in Emergis and $123 million from the sale of our remaining 3.24% interest in YPG General Partner Inc. This was partly offset by business acquisitions totalling $952 million relating to the purchase of MTS’s 40% interest in Bell West and acquisitions at CGI and Bell Canada.

EXECUTING ON OUR PRIORITIES

Setting the Standard in Internet Protocol (IP)
At the end of September 2004, 60% of the traffic on our core network was IP-based, already meeting our 2004 year-end target and on track for our objective of having 100% of our core traffic moving on a pervasive national IP-MPLS network by the end of 2006. During the quarter, we expanded the list of legacy services that we have stopped selling to new customers to include Bell Electronic Business Network (BEBN), some business long distance services from the VNet portfolio and packet services from the Datapac portfolio services. New customers are now directed only to new IP-based solutions.
     We also made progress on our objective of having 90% of customers able to access a full suite of IP services by the end of 2006.

  • Our DSL footprint in Ontario and Québec reached 81% of homes and business lines passed by the end of the quarter compared to 79% at the end of the third quarter of 2003. This increase was in part due to the deployment of new high-density DSL remotes which began in April 2004. By the end of the quarter, we had deployed 139 of these new remotes, on track to meet our target of deploying 400 by the end of the year.
  • Bell Canada now has 100,000 IP enabled lines running off customer premises equipment (CPE).
  • On July 30, 2004, the Canadian Radio-television and Telecommunications Commission (CRTC) approved the tariff for Bell Canada’s Managed IP Telephony (MIPT) service for Enterprise business customers. This service offers innovative features, including access to a wide variety of applications such as point-to-point video, integration with e-mail, click-to-call, find-me-follow-me, instant messaging and the ability to use multi-media functions across the enterprise. Several customers in the finance and government sectors are trialing this new service and 2,600 of our own employees were using the service by the end of the quarter.

7    2004 Quarterly Report     Bell Canada Enterprises


 

  • On August 3, 2004, Bell Canada launched ProConnect, a fully managed service which enables small and medium businesses (SMBs) to share information easily, securely and affordably across the most extensive private IP-based network in Canada.

Simplicity and Service
During the quarter we made advancements towards our overall objective of delivering simple and innovative integrated communication services to our customers.
     In our Consumer segment, the number of customers subscribing to The Bell Bundle (a combination of wireless, Internet and video services in one simple offer for customers taking Bell Canada’s long distance services) increased significantly this quarter by over 114,000 almost 70% higher than the level of recent quarterly additions. Since the launch of The Bell Bundle last September, over 313,000 customers have subscribed. During the quarter, 43% of new Bundle activations included the sale of at least one new service. In addition, by the end of the quarter, approximately 115,000 customers had taken advantage of our $5 Long Distance bundle introduced on June 22, 2004.
     In Q3 2004, Bell Canada announced it was partnering with Aeroplan to deliver Aeroplan miles to Bell Bundle customers. Bundle customers will have the opportunity to accumulate 1 Aeroplan Mile for every $1 spent on high-speed Internet, wireless and video services starting early next year.
     On September 30, 2004, Bell ExpressVu announced a major overhaul of its service to stimulate growth and reinvigorate the business. Elements of this included new programming repackaging and All-in-One pricing principles that include system access fees and multiple receiver fees previously charged separately. In addition, the channel line-up was simplified by grouping channels by categories (sports, movies, etc) allowing customers to better navigate through Bell ExpressVu’s 400+ channel line-up. 
     Earlier in the quarter, Bell ExpressVu also initiated service on Nimiq 3, a high-powered direct broadcast satellite leased from DirecTV and operated by Telesat Canada, to boost capacity, further enhance signal quality solving the majority of rain fade issues, and to add more unique interactive television (iTV) services.
     Solid progress was made this quarter in Bell ExpressVu’s deployment of very high-speed DSL (VDSL) to multiple dwelling units (MDUs). By the end of the quarter, we had signed building access agreements with 220 buildings, on track to achieve our year-end goal of 300 buildings.
     On October 14, 2004, Bell Mobility Inc. (Bell Mobility) became the first Canadian wireless carrier to launch a phone-to-phone video messaging service available on the new Samsung SPH-a680 phone. This service enables customers to send up to 15 seconds of full motion video and sound to other Bell wireless customers with a video messaging phone or any e-mail address.
     On October 1, 2004, Telesat’s Anik F2 satellite began commercial service and became the world’s first satellite to commercialize the Ka frequency band. This frequency band delivers two-way broadband services enabling high-speed satellite Internet services to consumers and businesses in Canada and the U.S.

Olympic Partnership
On October 18, 2004, the Vancouver Organizing Committee for the 2010 Olympic and Paralympic Winter Games (VANOC) selected Bell Canada as its Premier National Partner for the 2010 Games renewing Bell Canada’s longstanding relationship with Canada’s Olympic Teams. The partnership secures for Bell Canada the Canadian Olympic Team sponsoring rights to Torino 2006, Beijing 2008, Vancouver 2010 and the 2012 Games, as well as the Pan American Games in 2007 and 2011. It provides us the opportunity to build our brand by associating with one of the world’s strongest and most recognized brands.

Sale of MTS
In late September of this year, we disposed of our 16% non-strategic interest in Manitoba Telecom Services Inc. (MTS) for $584 million realizing a gain of $217 million. Bell Canada and MTS will continue their commercial relationship, with Bell Canada being the preferred supplier of wholesale services to MTS/Allstream.

8    2004 Quarterly Report     Bell Canada Enterprises


 

Labour Agreements
On August 16, 2004, Bell Canada reached a new four-year agreement with approximately 7,100 technicians represented by the CEP. This agreement will expire in November 2007.
     On September 16, 2004, Aliant Telecom’s approximate 4,300 unionized employees, represented by the Council of Atlantic Telecommunication Workers (CATU), voted to accept a new collective agreement, ending a labour disruption that began in April. This agreement will expire in December 2007.

Employee departure program
In June 2004, Bell Canada announced a two-phase employee departure program. The first phase was an early retirement (ER) plan and the second phase was a departure plan (DP). Under the ER, eligible employees could receive a package that includes a cash severance, immediate pension, career transition services and post-retirement benefits. Under the DP, employees could elect to receive a cash severance. 3,965 employees of the 7,000 eligible have decided to take advantage of the ER and another 1,087 employees will be taking advantage of the DP. This brings the total of employees who will be leaving the company to 5,052, which represents approximately 11% of Bell Canada’s total employee base (excluding Aliant). Departures will take place beginning this fall. While the majority of employees will have departed by December 31, 2004, some employees will remain for a portion of 2005 in selected areas of our business to ensure an orderly transition. In addition, Bell Canada has put in place the necessary plans by business unit that will allow the transition to a new mode of operations in line with our IP migration initiative.
     Bell Canada has taken a restructuring charge of approximately $985 million this quarter ($647 million after taxes) relating to the departure program consisting of a cash component of $314 million and $671 million representing the enhanced pension and other post-employment benefits offered in the packages. An additional charge of approximately $75 million relating to the relocation of employees and closure of excess real estate facilities is expected to be recorded in future periods as incurred. Going forward, we expect annual savings of approximately $390 million from these employee reductions, reflecting an estimated cash pay back period of less than one year. These cost savings are a key part of our plan to maintain our leadership in an increasingly competitive industry.


This section provides detailed information and analysis about our performance in Q3 and YTD 2004 compared to Q3 and YTD 2003. It focuses on our consolidated operating results and provides financial information for each of our reportable operating segments.

Financial Results Analysis

OPERATING REVENUES


  Q3 2004   Q3 2003  

% change

YTD 2004   YTD 2003  

% change


Consumer 

1,908   1,838   3.8 % 5,591   5,335   4.8

Business 

1,440   1,440   % 4,316   4,311   0.1

Aliant 

497   514   (3.3 %)  1,527   1,532   (0.3 %) 

Other Bell Canada 

486   478   1.7 % 1,428   1,547   (7.7 %) 

Inter-segment eliminations 

(125 (115 (8.7 %) (378 (357 (5.9 %) 

Bell Canada 

4,206   4,155   1.2 % 12,484   12,368   0.9

Other BCE 

682   596   14.4 % 2,061   1,900   8.5

Inter-segment eliminations 

(107 (124 13.7 % (341 (349 2.3

Total operating revenues 

4,781   4,627   3.3 % 14,204   13,919   2.0 % 


BY SEGMENT

Consumer
Consumer revenues in the third quarter grew by 3.8% to $1,908 million and 4.8% to $5,591 million on a year-to-date basis reflecting the continued strength in our growth services, such as wireless, Internet access and video driven by solid gains in the respective subscriber bases of these services. Increases in these revenue streams more than offset steady rates of decline in long distance and local and access revenues. Although overall consumer revenue growth slowed somewhat from previous quarters, this was largely anticipated having fully benefited from the positive effect of a series of pricing initiatives, such as the Bell ExpressVu system access fee and the change in the First Rate My Province plan put in place

9    2004 Quarterly Report     Bell Canada Enterprises


 

a year ago. In addition, this quarter we did not see the benefit of the August 2003 power outage in Ontario which contributed to increased long distance minute usage and wireless usage in the third quarter last year.

Wireless
Consumer wireless revenues of $389 million this quarter and $1,104 million on a year-to-date basis increased 11.8% and 15.0%, respectively, compared to the same periods last year. This increase was achieved primarily from year-over-year growth in our subscriber base, including the strong sales programs initiated during the first quarter.
     To further strengthen our data services line-up, we recently launched phone video messaging, the first of its kind in Canada. This new service takes mobile communications to the next level and gives Canadians the power to capture and send digital video using Bell Mobility’s 1X digital network. Additional product innovations this quarter that further customize the mobile experience include enhancements to ringtone services, such as Make Your Own Tone and Caller Ring Tune services.


Video
Video service revenues for the third quarter of 2004 grew to $213 million and to $631 million on a year-to-date basis reflecting year over year increases of 10.9% and 12.9%, respectively, compared to the same periods last year driven by year over year growth in our subscriber base and average revenue per unit (ARPU). Our total video customer base reached 1,460,000, up 8.0% compared to 1,352,000 customers at the end of Q3 2003.
     Growth in video strengthened with net activations of 33,000 in the third quarter and 73,000 on a year-to-date basis, once again reflecting accelerated growth since the previous quarter and significantly higher than the 17,000 and 48,000 achieved for the respective periods in 2003. The growth in net additions was stimulated by the continued success of the two TV bundle and the positive response to the Bell Bundle, as well as initiatives focussed on churn containment which translated into improved churn for the quarter and on a year-to-date basis compared to the same periods last year. As of August 1, 2004, Bell ExpressVu moved to providing services to new customers strictly on a contract basis; all new video customers must opt for a one or two-year contract.
     ARPU per month for video services increased by $1 for the quarter and by $2 on a year-to-date basis to $48 for each respective period compared to the same periods last year. The higher ARPU for the quarter was mainly driven by lower programming discounts since the elimination of this promotional feature with the launch of term contracts in Q4 of 2003, as well as a higher number of customers paying the additional receiver charge fee for having more than one receiver. In addition, the increase in ARPU on a year-to-date basis was impacted by the $2 to $3 rate increase on specific programming packages introduced on February 1, 2003 and the introduction of the $2.99 system access charge for all customers effective April 28, 2003.
     We continued to see good churn improvement from our customer retention efforts both for the quarter and on a year-to-date basis compared to the same periods last year. While churn for the quarter was slightly up from the previous quarter, reflective of the seasonality impact of the July Québec move, churn of 1.1% in the third quarter showed a marked improvement compared to 1.4% in Q3 2003. On a year-to-date basis churn of 1.0% reflected a 0.2 percentage point improvement over the same period last year.

Data
Consumer data revenue growth of approximately 20% for both this quarter and on a year-to-date basis was driven by an approximate 26% increase in our High-Speed Internet customer base.

10    2004 Quarterly Report     Bell Canada Enterprises


 

     Consumer DSL net additions this quarter were lower than Q3 2003 due to the impact of the ‘‘double-cohort’’ reflecting the change in the Ontario education system whereby two graduating classes entered university in the same year causing a lift in net additions in Q3 2003 which did not recur this year. Bell Sympatico value-added services such as MSN Premium, Desktop Anti-Virus and Desktop Firewall added 20,000 subscriptions this quarter and 166,000 for the first nine months of 2004, for a total count of 453,000 as at September 30, 2004 more than double the end of period subscriptions of last year. Since August, Sympatico customers can receive free Parental control services to make the Internet safer for kids. Bell Sympatico VAS net additions reflected the reduction of paid parental control which was more than offset by the increase in the MSN Premium Service.

Wireline
Local and access revenues declined slightly for the quarter and on a year-to-date basis compared to the same periods last year mainly due to lower revenues from network access services and lower SmartTouch features revenues, partly offset by higher revenues from wireline insurance and maintenance plans. The NAS decline reflected the impacts of competition and continued substitution of wireline with wireless telephone service, as well as growth in high-speed Internet access subscribers which reduces the need for second telephone lines. The SmartTouch revenue decline was largely due to the lower in service NAS.
     Long distance revenues in Q3 2004 and year-to-date were down compared to the same periods in 2003 primarily as a result of volume declines in domestic, overseas and US minutes reflecting competition from non-traditional long distance providers, as well as pricing pressures in domestic long distance rates partially offset by strong sales of pre-paid cards. Third quarter 2004 volumes and revenues also decreased relative to Q3 2003 as the benefit from the increase in usage from the August 2003 power outage in Ontario was absent this quarter.
     Overall, the average revenue per minute (ARPM) diminished slightly in Q3 2004 but remained relatively stable on a year-to-date basis compared to the same periods last year.

Business
Business segment revenues were $1,440 million this quarter and $4,316 year-to-date, flat compared to the same periods in 2003. In each case, increases in wireless revenues and terminal sales and other revenues were offset by declines in long distance, data and local and access revenues.

Enterprise
Revenues from enterprise customers decreased this quarter as declines in local and access, long distance, data, and terminal sales and other revenues more than offset increases in wireless revenues. On a year-to-date basis, revenues declined as local and access, long distance and data revenue declines more than offset increases in wireless and terminal sales and other revenues. The data revenue decline in the quarter and on a year-to-date basis reflected the completion of the Hydro-Québec outsourcing contract and expected decreases from our exit from the low-margin cabling business.
     Despite the overall decline in data revenue from enterprise customers, our IP-based connectivity and VAS revenues continue to grow significantly. IP-based connectivity services grew by 35% this quarter. By the end of the quarter, almost two-thirds of our very large enterprise customers utilised some element of our VAS portfolio.
     Bell Canada recently signed a significant three-year service contract with Ontario-based Hydro One Networks Inc. Under the contract, Bell Canada will provide maintenance and management service for the electric utility’s telephone systems, data internetworking equipment and cabling infrastructure via a new Bell product, Enterprise Workflow Management. Hydro One Networks is our first customer adopting this product, which will allow Bell Canada customers a simpler and more efficient management of their complex network assets.

11    2004 Quarterly Report     Bell Canada Enterprises


 

     There were also two important contract wins with the Government of Québec. The first involves the renewal of a contract for the integration and operation of the province’s digital land records and registry documents platform and is worth $25 million over two years. In this contract, Bell’s role has grown from being just the connectivity provider to now including the systems integration and network management functions. Our work on this project earned us the first prize in the Government On-line category at the 2004 Awards of Excellence of the Québec Public Administration Institute. The second contract, worth $2.5 million, is for the implementation of an electronic authentication security system and reinforces Bell Canada’s position as a leading provider of VAS.

SMB
Revenues from SMB customers increased this quarter and year-to-date as increases in data, wireless and terminal sales and other revenues more than offset revenue declines in long distance and slightly negative growth in local and access revenues. Recent business acquisitions, such as Accutel Conferencing Systems Inc. and Charon Systems Inc., led mainly to growth in terminal sales and other revenue but also led to growth in data revenues. Continued growth primarily in DSL high-speed Internet access services and value-added services (VAS) sales also contributed to data revenue growth. Subscriptions to VAS increased by 23,000 in Q3, close to double the level achieved in all of 2003. Long distance revenues declined due to competitive pricing pressures and declines in our payphone business resulting from wireless and Internet substitution.

Bell West
Bell West continued to grow its customer base leading to increases in local and access and long distance revenues both this quarter and on a year-to-date basis. Data revenues increased this quarter reflecting its growing customer base compared to Q3 of 2003. Data revenues declined on a year-to-date basis as a result of lower GOA revenue in the amount of approximately $48 million as this contract nears completion.

Aliant
Aliant segment revenues of $497 million for the quarter and $1,527 million year-to-date, declined 3.3% and 0.3%, respectively, compared to the same periods last year. In addition, the labour disruption that commenced on April 23, 2004 and concluded on September 20, 2004, negatively impacted the quarter and year-to-date revenues by an estimated $17 million and $26 million, respectively. This represents estimated fewer new installations, fewer wireless and Internet activations, slower product sales, less data growth and promotional long distance rates. Strong wireless and Internet services growth for the quarter and on a year-to-date basis were more than offset by declines in other areas due to the on-going impact of regulatory restriction, competition and technological substitution.
     Strong wireless revenue growth of 14.6% in the quarter and 16.1% on a year-to-date basis over the same periods last year was driven by a 9% increase in Aliant’s wireless customer base, including a 30% increase in digital customers, reflecting the positive response to the extensive dealer supported network, pricing offers and the expansion of digital cellular service into new areas. In addition, ARPU was up $3 for both the quarter and on a year-to-date basis compared to the same periods last year, reflecting the impacts of a higher percentage of customers subscribing to digital service, higher usage and increased customer adoption of features.
     Intense long distance competition, Aliant’s inability to maintain win-back efforts during the labour disruption and substitution of long distance calling with Internet and wireless options by customers resulted in long distance revenue declines for the quarter and on a year-to-date basis. Consumer minute volumes were down due to customer losses to competition and the capping of minutes on certain long-distance plans in late 2003. Business long distance pricing declines continued to reflect the impact of competitive pressures, as did long distance volume declines, in addition to a reduction of contact centre activity.

12    2004 Quarterly Report     Bell Canada Enterprises


 

     Data revenues for the quarter and on a year-to-date basis declined slightly as higher Internet revenues were more than offset by other data revenue declines which were impacted by the scaleback of marketing and sales efforts during the labour disruption, as well as the continued rationalization of circuit networks by customers. The continued increase in Internet revenues stemmed from increased popularity of enhanced services and subscriber growth of 6%, reflecting 23% growth in Aliant’s high-speed Internet customer base. The higher subscriber base reflected the expansion of high-speed Internet service into new areas, attractive introductory offers, an emphasis on bundling with other products and services and a focus on dealer and on-line sales channels.
     Terminal sales and other revenues for the quarter and on a year-to-date basis declined as a result of slower product sales during the labour disruption and the divestiture of non-core assets in the second and third quarters, which resulted in a reduction in IT service revenue.

Other Bell Canada
The Other Bell Canada segment revenues of $486 million in the quarter were essentially flat compared to the same period last year driven primarily by the improvement in our wholesale business which achieved flat revenue growth in the quarter in contrast to the declines experienced in previous quarters this year.
     On a year-to-date basis, revenues were $1,428 million, down $119 million or 7.7% over the same period last year reflecting similar trends of slowing rates of decline in the wholesale business, as seen in the first half of the year. The wholesale revenue decline resulted mainly from lower long distance and data revenues reflecting the impacts of competitive pricing pressures, as well as customers migrating services to their own network facilities. Wholesale long distance revenues were also impacted by our decision last year to exit certain contracts and promotional offers for international switched minutes that had minimal margins.

Other BCE 

  Q3 2004    Q3 2003   

% change

YTD 2004    YTD 2003   

% change


Bell Globemedia  302    296    2.0 1,015    988    2.7
Telesat  91    84    8.3 260    246    5.7
CGI  277    203    36.5 745    630    18.3
Other  12    13    (7.7 %)  41    36    13.9

Other BCE revenues  682    596    14.4 %  2,061    1,900    8.5 % 

The Other BCE segment revenues grew by 14.4% this quarter to $682 million compared to Q3 2003. On a year-to-date basis, this segment’s revenues grew by 8.5% to $2,061 million compared to the same period last year. In each case, revenue growth was driven by CGI’s acquisition of AMS in May 2004 as well as higher revenues at Bell Globemedia and Telesat.
     Bell Globemedia had revenues of $302 million this quarter and $1,015 million on a year-to-date basis reflecting growth of 2.0% and 2.7% respectively compared to the same periods last year. Television advertising grew by 4.8% this quarter and by 8.0% on a year-to-date basis, while print advertising decreased slightly this quarter but increased 1.3% year-to-date offsetting lower production and sundry revenues as a result of the sale of 50% of Dome Productions Inc. in January 2004.
     Telesat’s revenues grew 8.3% to $91 million this quarter and by 5.7% to $260 million year-to-date mainly as a result of higher Infosat revenues and consulting fees. On October 1, Telesat’s Anik F2 began commercial service and became the world’s first satellite to commercialize the Ka frequency band, enabling two-way, high-speed Internet access services to consumers and businesses in Canada and the U.S.
     Our share of CGI’s revenues was $277 million this quarter and $745 million year-to-date, or 36.5% and 18.3% higher respectively driven mainly as a result of CGI’s acquisition of AMS in May 2004.

13    2004 Quarterly Report     Bell Canada Enterprises


 

BY BELL CANADA CONSOLIDATED PRODUCT LINES

  Q3 2004    Q3 2003   

% change

YTD 2004    YTD 2003   

% change


Local and access 

1,395    1,410    (1.1 %) 4,175    4,200    (0.6 %) 

Long distance 

589    641    (8.1 %) 1,767    1,942    (9.0 %)

Wireless 

727    645    12.7 % 2,076    1,803    15.1 %

Data 

915    906    1.0 % 2,677    2,762    (3.1 %)

Video 

213    192    10.9 % 631    559    12.9 %

Terminal sales and other

367    361    1.7 % 1,158    1,102    5.1 %

Total Bell Canada Consolidated

4,206    4,155    1.2 % 12,484    12,368    0.9 %



Local and Access
Local and access revenues of $1,395 million for the quarter and $4,175 year-to-date, declined slightly by 1.1% and 0.6% compared to the respective periods last year mainly as a result of lower network access services (NAS), lower SmartTouch feature revenues, and the impact of the Aliant labour disruption partly offset by gains from wireline insurance and maintenance plans and higher interconnection volumes.
     NAS in service declined by 126,000 or 1.0% over the third quarter of 2003 as a result of continued pressure from growth in high-speed Internet access which reduces the need for second telephone lines, losses resulting from competition and business downsizings, and customers substituting wireline with wireless telephone service.



Long Distance
Long distance revenues were $589 million for the quarter and $1,767 million year-to-date, reflecting year-over-year decreases of 8.1% and 9.0%, respectively, compared to the same periods in 2003. These declines stemmed from lower long distance revenues in our consumer and business markets. The consumer segment reflected lower minute volumes and lower domestic rates.The business segment was impacted by volume and pricing declines resulting from competitive pressures. In addition, third quarter 2004 volume and revenue declines also reflected the absence of the increased level of minute usage experienced in Q3 2003 as a result of the August 2003 power outage in Ontario. Overall, conversation minutes this quarter declined 4.9% to 4,435 million, and 6.5% to 13,511 million on a year-to-date basis compared to the same periods last year. The decline in conversation minutes this quarter was accompanied by a 6.3% lower ARPM to $0.12 compared to the third quarter 2003.
     Year-to-date in 2004, ARPM declined slightly by $0.005 compared to the same period last year.

Wireless
Wireless service revenues for the quarter were $727 million, up 12.7% from Q3 2003. On a year-to-date basis, revenues increased 15.1% to $2,076 million over the same period last year. In each case, the increase was driven by a rise in the subscriber base and higher average revenue per unit.
     Our total cellular and PCS subscriber base reached 4,708,000 at the end of this quarter, an increase of 11.5% over last year, reflecting solid quarterly gains in subscribers and our success in managing very low levels of churn. In fact, this quarter we achieved the lowest level of churn since the beginning of 1997 with blended churn of 1.2% and postpaid churn of 1.0%. On a year-to-date basis, blended churn of 1.3% and postpaid churn of 1.1% reflected improvements of 0.1 and 0.2 percentage points compared to the same period last year. This churn improvement was achieved while completing the migration of our wireless customers onto our new billing platform this May. Since the migration and throughout the quarter, significant efforts were made to handle increased call volumes and handling time related to customer growth and increased billing inquiries, including the hiring of some 600 additional customer service agents. Including paging subscribers, our total wireless customer base totalled 5,157,000.

14    2004 Quarterly Report     Bell Canada Enterprises1


 

     We gained 109,000 new customers for the quarter compared to net additions of 124,000 in Q3 2003. Net additions were down from Q3 2003, largely as a result of less aggressive in-store promotional handset pricing offered during the third quarter compared to last year. Net additions of 296,000 on a year-to-date basis were also lower than the 325,000 for the same period last year mainly due to our conscious decision to focus on ensuring service levels and the orderly billing migration of existing customers onto our new billing platform implemented this May rather than aggressively pursuing growth.
     With 87% of net activations for the quarter, and 82% on a year-to-date basis, coming from post-paid rate plans, we ended the quarter with 76% of our total cellular and PCS customer base consisting of post-paid subscribers.
     Blended ARPU of $50 for the quarter was stable compared to Q3 2004 as a $1 decline in prepaid ARPU offset a $1 increase in postpaid ARPU of $63. On a year-to-date basis blended ARPU of $49 was up from $47 compared to the same period last year driven by a $2 increase in postpaid ARPU. The increases in postpaid ARPU for each respective period stemmed from higher usage, increased revenues from data services stimulated by new services, including the 2004 Olympics and the launch of location-based services, higher value-added services and long distance revenues.



Data
Data revenue increased by 1.0% this quarter to $915 million but decreased by 3.1%, to $2,677 million, year-to-date. For the quarter, growth in high-speed Internet services, revenues related to acquisitions such as Infostream and revenues from the GOA contract more than offset declines from the completion of the Hydro-Québec outsourcing contract and our exit from the low margin cabling business starting in the fourth quarter of last year. Although legacy data services continue to decline, this was offset by growth in IP-based services. On a year-to-date basis, growth in high-speed Internet services and revenues related to acquisitions were more than offset by lower construction revenues related to the GOA contract, declines resulting from competitive pricing and volume pressures including wholesale customers migrating their traffic onto their own networks, the completion of the Hydro-Québec outsourcing contract and our exit from the low margin cabling business.
     The number of high-speed Internet subscribers increased by 96,000 this quarter and 284,000 on a year-to-date basis, for a total subscriber count of 1,766,000. Third quarter additions were slightly lower than the 104,000 achieved in Q3 2003, largely a result of the impact caused by the labour disruption at Aliant and the impact of the ‘‘double-cohort’’ reflecting the change in the Ontario education system whereby two graduating classes entered university in the same year causing a lift in net additions in Q3 2003 which did not recur this year. On a year-to-date basis, net additions amounted to 284,000, slightly up from the 281,000 achieved for the same period last year. Total dial-up customers amounted to 775,000 at the end of Q3 2004 compared to 892,000 at the end of Q3 2003.

Video
See discussion under Consumer Segment

Terminal Sales and Other
Terminal sales and other revenues were $367 million this quarter or 1.7% higher than Q3 2003, and $1,158 million year-to-date or 5.1% higher than the same period last year. These increases reflected higher consumer equipment sale revenues (wireless handsets, satellite dishes and receivers), partly offset by slower product sales at Aliant as a result of the labour disruption and the divestiture of non-core assets in the second and third quarters which resulted in a reduction in Aliant’s IT service revenue.

15    2004 Quarterly Report     Bell Canada Enterprises


 

OPERATING INCOME

  Q3 2004   Q3 2003   

% change

YTD 2004   YTD 2003   

% change


Consumer

569   552    3.1 1,655   1,548    6.9 %

Business

245   193    26.9 713   582    22.5 %

Aliant

71   104    (31.7 %)  245   307    (20.2 %)

Other Bell Canada

(898 163   

n.m.

(649 469   

n.m.


Bell Canada Consolidated

(13 1,012   

n.m.

1,964   2,906    (32.4 %)

Other BCE 

38   37    2.7 177   202    (12.4 %)

Total operating income

25   1,049    (97.6 %)  2,141   3,108    (31.1 %)

n.m.: not meaningful 

CONSOLIDATED OPERATING INCOME

Despite Consumer operating income increases in the quarter of $17 million and $107 million on a year-to-date basis and Business operating income increases of $52 million in the quarter and $131 million on a year-to-date basis, our total operating income of $25 million for the third quarter and $2,141 million on a year-to-date basis reflected declines of $1,024 million and $967 million, respectively, compared to the same periods last year. These decreases resulted mainly from the recognition of restructuring charges of $985 million related to our employee departure program and other charges of $96 million consisting primarily of closure costs for excess facilities, various asset write-downs and other provisions.
     Excluding the impact of the restructuring and other items operating income was up $56 million for the quarter and $130 million on a year-to-date basis compared to the same periods last year reflecting higher revenue growth and lower amortization expense, partly offset by higher operating expenses and a higher net benefits plans cost. Higher operating expenses were driven by higher costs of acquisition related to subscriber increases in our growth services, the negative impact from Aliant’s labour disruption which represented $20 million in the third quarter and $32 million on a year-to-date basis, as well as higher contact centre agent costs to support customer service levels and increased call handling time associated with the success of the Bell Bundle and the launch of the new billing platform for our wireless customers driving higher than usual call volumes, particularly in the third quarter. These increases were partly offset by lower settlement expenses resulting from lower overseas and domestic rates and volumes.
     Excluding the negative impact of the Aliant strike and the voluntary departure program restructuring and other items, operating income margin for the quarter and on a year-to-date basis increased by 1.1 and 0.8 percentage points respectively, to 23.8% and 23.1% respectively.
     Wireless cost of acquisition (COA) of $381 per gross activation, improved by $44 over Q3 2003 and reflected the lowest COA per gross activation since 2001, driven primarily from improved handset pricing and more cost effective marketing initiatives. On a year-to-date basis, COA of $415 per gross activation improved slightly as competitive pressure on handset pricing over the first half of the year was more than offset by more cost effective marketing initiatives.
     The COA for video services increased year over year by $41 to $548 per gross activation for the quarter and by $74 to $586 per gross activation on a year-to-date basis, reflecting higher hardware and marketing costs, partly offset by the purchasing power of a stronger Canadian dollar and lower distribution costs. Hardware costs increased as more customers purchased second receivers, driven by the success of our 2TV bundle, while higher marketing costs reflected the free installation promotion for contract term offers. These costs were somewhat offset by lower distribution costs that have resulted since the transfer of all distribution to Bell Canada’s Bell Distribution Inc. in the early part of the year.
     Amortization expense of $769 million for the quarter and $2,305 million on a year-to-date basis was down $32 million and $20 million, respectively, compared to the same periods last year. The year over year improvement reflected the impact of an increase in the useful life of Bell Canada’s internal use software from 3 to 4 years, effective October 1, 2003, and the recognition of a nine-month adjustment in Q3 2003

16    2004 Quarterly Report     Bell Canada Enterprises


 

 

 

 

 

relating to the completion of the purchase price allocation relating to the repurchase of SBC Communications Inc.’s (SBC) 20% interest in Bell Canada, resulting in an increase in capital assets. These impacts more than offset the increase in our capital asset base driven by prior year capital expenditures.
     Net benefit plans cost totalled $61 million for the quarter and $189 million year-to-date, reflecting year over year increases of $17 million and $60 million compared to the same periods last year. These increases resulted primarily from a higher accrued benefit obligation based on our most recent actuarial valuation as at December 31, 2003.

OPERATING INCOME BY SEGMENT

Consumer
The Consumer segment achieved operating income of $569 million in the quarter, or 3.1% higher and $1,655 million or 6.9% year-to-date higher compared to the same periods in 2003. This growth reflected the increase in revenues which was somewhat offset by increased operating expenses related to salaries, costs of goods sold and a higher net benefit plans cost compared to the same periods last year.
     Higher costs resulted from higher COA for growth services driven by higher sales, particularly in our video business and an increase in the number of contact centre agents engaged to support customer service levels in our growth businesses. This increase reflected the need to support increased customer handling time associated with the Bell Bundle sales efforts and increased call volumes associated with customer billing inquiries impacted by the implementation of the new billing platform for our wireless customers introduced in May of this year.
     These increases, however, were somewhat offset by lower settlement expenses resulting from lower overseas and domestic rates and lower billing rates.
     Operating income margin of 29.8% for the quarter was essentially flat compared to Q3 03 and on a year-to-date basis consumer operating income margin improved by 0.6 percentage points. This reflected the benefit from our focussed efforts in cost containment, particularly in the quarter where significantly higher growth in video was achieved and wireless COA per gross activation was reduced.

Business
The Business segment achieved operating income of $245 million this quarter and $713 million year-to-date, reflecting increases of 26.9%, and 22.5%, respectively compared to the same periods last year despite essentially flat revenue growth. Our focus on improving profitability in this segment and lower amortization expense more than offset an increase in net benefit plans cost and led to the increase in operating income. Once again our success in pursuing productivity efficiencies within this business resulted in an increase of 3.6 percentage points to 17.0% operating income margin and a 3.0 percentage point improvement to 16.5% on a year-to-date basis.
     In the enterprise unit, our focus on more profitable contracts, as well as overall productivity, led to reductions in cost of goods sold and more than offset salary expense increases related to business acquisitions (Infostream and Elix).
     Our SMB unit incurred higher salary expenses and cost of goods sold related to its business acquisitions (Accutel and Charon).
     Bell West incurred higher cost of goods sold related to the GOA contract this quarter but lower levels on a year-to-date basis.

Aliant
Aliant’s operating income for the third quarter was $71 million and $245 million on a year-to-date basis, reflecting year-over-year declines of $33 million or 31.7% and $62 million or 20.2%, respectively, compared to the same periods last year.

17    2004 Quarterly Report     Bell Canada Enterprises


 

     The estimated impact of the labour disruption on operating income during the third quarter and on a year-to-date basis was approximately $34 million and $55 million, respectively. This reflected an estimated negative impact on revenue for the third quarter of $17 million and $26 million on a year-to-date basis. As well, operating expenses were negatively impacted by an estimated $20 million in the quarter and $32 million year-to-date. Costs incurred in the second quarter of 2004 consisted primarily of security requirements and property repairs to enable operations to continue with relatively few interruptions and to ensure the safety of employees, as well as up-front costs to train and equip employees for their new roles. In the second quarter there was a minimal impact on salaries and benefits as overtime costs incurred were offset by unionized employee salary savings. However, in the third quarter of 2004, overtime wages exceeded unionized salary savings as Aliant stepped up to the challenge of increased customer demand during a traditionally busy period. The magnitude of security costs in the third quarter was similar to those incurred in the second quarter, although costs per day decreased as there were a larger number of days impacted by the labour disruption in the third quarter. Generally, costs were higher than anticipated in the third quarter as the labour disruption lasted over a longer period and continued over the back-to-school period.
     In addition, the year-over-year operating income declines reflected higher operating expenses from growth in wireless and Internet services relating to commissions, subsidies, cellular phone and accessories and to actions in support of increased customer service levels, an increase in net benefit plans cost, normal wage and annual salary adjustments and a higher amortization expense resulting from a higher proportion of capital spending in broadband and wireless assets in recent years with overall shorter depreciable lives. These increases were partly offset by lower operating costs stemming from the Xwave restructuring in 2003.

Other Bell Canada
The Bell Canada segment incurred operating losses of $898 million for the quarter and $649 million on a year-to-date basis due to the $1,079 million of restructuring and other items recorded in the quarter relating mainly to the departure program. Accordingly, results were significantly down from operating income of $163 million and $469 million, respectively, compared to the same periods last year. 
     The underlying operating performance, prior to the restructuring charge, reflected an operating income increase of 22.3% in the quarter and a decline of 2.4% on a year-to-date basis over the same periods last year. This improvement stemmed from a slowdown in the revenue rate of decline in our wholesale business and from lower operating expenses as a result of the exiting of non-profitable contracts within the wholesale market and our continued focus on productivity. As expected, prior to the restructuring and other items, operating income in the quarter and on a year-to-date basis reflected a marked improvement compared to the 4.2% decrease experienced in the second quarter and the 31.5% decrease in the first quarter of this year, as the impact of the exiting of these non-profitable contracts lessens during the year.

Other BCE
Operating income for the Other BCE segment increased this quarter by 2.7% to $38 million reflecting growth in operating income at Bell Globemedia, Telesat and CGI offsetting higher corporate expenses. On a year-to-date basis, operating income declined by $25 million to $177 million reflecting higher corporate expenses more than offsetting the higher operating income at Bell Globemedia, Telesat and CGI.
     Both Bell Globemedia and Telesat’s operating income grew reflecting revenue growth and cost controls. CGI’s operating income grew reflecting its acquisition of AMS. Corporate expenses increased, reflecting Sarbanes-Oxley compliance, higher net benefit plans cost and other corporate activities.

18    2004 Quarterly Report     Bell Canada Enterprises


 

OTHER ITEMS

 

Q3 2004   Q3 2003  

% change

YTD 2004   YTD 2003  

% change


Operating income 

25   1,049   (97.6 %)  2,141   3,108   (31.1 %) 

Other income 

333   1  

n.m.

393   48   718.8

Interest expense 

(253 (270 6.3 (758 (839 9.7

Pre-tax earnings from continuing operations

105   780   (86.5 %)  1,776   2,317   (23.3 %) 

Income taxes 

44   (282 115.6 (511 (788 35.2

Non-controlling interest 

(47 (45 (4.4 %)  (134 (144 6.9

Earnings from continuing operations

102   453   (77.5 %)  1,131   1,385   (18.3 %) 

Discontinued operations 

(2 11   (118.2 %)  28   30   (6.7 %) 

Net earnings 

100   464   (78.4 %)  1,159   1,415   (18.1 %) 

Dividends on preferred shares

(18 (18

(53 (50 (6.0 %) 

Premium on redemption of preferred shares 

   

n.m.

  (7 100.0

Net earnings applicable to common shares

82   446   (81.6 %)  1,106   1,358   (18.6 %) 

EPS 

0.09   0.49   (81.6 %)  1.20   1.49   (19.5 %) 

n.m.: not meaningful 

EPS decreased by $0.40 to $0.09 in Q3 2004, compared to Q3 2003, which reflects the restructuring and other items of $0.78, partly offset by improvements in EBITDA of $0.04, net gains on investments of $0.35 and a decline in interest expense of $0.01.
     On a year-to-date basis, EPS decreased by $0.29 to $1.20 over the same period last year, which reflects the restructuring and other items, an unfavourable foreign exchange variance of $0.03 and a decline in operating gains from discontinued operations of $0.03, partly offset by improvements in EBITDA of $0.13, net gains on investments of $0.36 and a decline in interest expense of $0.06.

OTHER INCOME

Other income of $333 million in Q3 2004 and $393 million on a year-to-date basis in 2004 represent significant increases of $332 million and $345 million, respectively, compared to the same periods last year. In Q3 2004, we recognized:

  • a gain of $108 million from the sale of Bell Canada’s remaining 3.24% interest in YPG General Partner Inc. for net cash proceeds of $123 million. Capital loss carryforwards were available to be utilized against the gain realized on this sale.
  • a gain of $217 million realized from the sale of BCE Inc.’s 15.96% interest in MTS for net cash proceeds of $584 million. On August 1, 2004, as a result of a corporate reorganization, the MTS shares were transferred from Bell Canada to BCE Inc. The purpose of this reorganization was to ensure that capital loss carryforwards at BCE Inc. would be available to be utilized against the gain on the sale of the MTS shares.

     On a year-to-date basis, we also had higher miscellaneous income, partly offset by foreign exchange gains in 2003. In April 2003, we entered into forward contracts to hedge U.S.$200 million of long-term debt at Bell Canada that had not been hedged previously. This removed the foreign currency risk on the principal amount of that debt, which has since minimized the effect of foreign exchange.

INTEREST EXPENSE

Interest expense of $253 million in Q3 2004 and $758 million on a year-to-date basis in 2004 represent a 6.3% and a 9.7% decline, respectively, compared to the same periods last year. This resulted from $1.8 billion of debt repayments (net of issues) year-over-year. The decline in average debt levels was driven mainly by positive free cash flows. The average interest rate in Q3 2004 was 7.2% and on a year-to-date basis in 2004 was 7.1%, which is comparable to the same periods last year.

19    2004 Quarterly Report     Bell Canada Enterprises


 

INCOME TAXES

In Q3 2004, we had pre-tax earnings from continuing operations of $105 million and an income tax recovery of $44 million. The income tax recovery resulted from:

  • $325 million of gains on the sale of MTS and YPG General Partner Inc. which were not tax effected since they were offset by available capital loss carryforwards for which the tax benefits had not been recorded previously
  • restructuring charges of $45 million related to future lease costs for excess facilities, the tax benefits of which were not recorded
  • the reduction in the statutory income tax rate to 34.3% in 2004 from 35.4% in 2003 also contributed to a reduction in the effective tax rate in the quarter.

     On a year-to-date basis, income taxes decreased $277 million to $511 million compared to the same period last year. The decrease was mainly from lower pre-tax earnings (excluding the gains on sale of MTS, YPG General Partner Inc. and the non-deductible restructuring charges) and the reduction in the statutory income tax rate to 34.3% in 2004 from 35.4% in 2003. As a result of these items, the effective tax rate was 28.8% on a year-to-date basis in 2004 compared to 34.0% in the same period last year.

NON-CONTROLLING INTEREST

Non-controlling interest of $47 million in Q3 2004 represents a 4.4% increase compared to the same period last year. The increase was mainly due to the purchase of Bell West and higher earnings at Bell Globemedia, partly offset by lower earnings at Aliant as a result of the strike. On August 3, 2004, we acquired full ownership of Bell West by completing the purchase of MTS’s 40% interest in Bell West.
     On a year-to-date basis, non-controlling interest of $134 million represents a 6.9% decline compared to the same period last year. The decrease resulted from a higher net loss at Bell West mainly due to the loss on the GOA SuperNet contract recognized in Q2 2004 and lower earnings at Aliant as a result of the strike, partly offset by higher earnings at Bell Globemedia.

DISCONTINUED OPERATIONS

In May 2004, our board of directors approved the sale of our 63.9% interest in Emergis. In June 2004, BCE completed the sale of its interest in Emergis by way of a secondary public offering.
     In June 2004, Bell Canada paid $49 million to Emergis for the purchase of Emergis’ Security business and the early termination of the Bell Legacy Contract on June 30, 2004 rather than December 31, 2004, as well as the transfer of related intellectual property to Bell Canada.
     These transactions were recorded on a net basis. The net proceeds from the sale of Emergis were $285 million (net of $22 million of selling costs and $49 million consideration given to Emergis). The gain on the transaction was $60 million.
     The operating loss includes a future income tax asset impairment charge of $56 million ($36 million after non-controlling interest), which Emergis recorded before the sale as a result of the unwinding of tax loss utilization strategies between Emergis, 4122780 Canada Inc. (a wholly-owned subsidiary of Emergis) and Bell Canada.

20    2004 Quarterly Report     Bell Canada Enterprises


 

This section tells you how we manage our cash and capital resources to carry out our strategy and deliver financial results. It provides an analysis of our financial condition, cash flows and liquidity on a consolidated basis.

Financial and Capital Management

CAPITAL STRUCTURE


  September 30,   December 31,  
  2004   2003  

Debt due within one year 

1,516   1,519  

Long-term debt 

12,076   12,381  

Less: Cash and cash equivalents 

(1,386 )  (585

Total net debt 

12,206   13,315  

Non-controlling interest 

2,904   3,403  

Total shareholders’ equity 

13,879   13,573  

Total capitalization 

28,989   30,291  

Net debt to capitalization 

42.1 %  44.0

Outstanding share data (in millions) 

   

Common shares at end of period 

924.9   924.0  

Stock options at end of period

29.5   25.8  


Our net debt to capitalization ratio was 42.1% at the end of Q3 2004, an improvement from 44.0% at the end of Q4 2003. This reflected lower net debt and higher total shareholders’ equity, partly offset by lower non-controlling interest.
     Net debt was reduced by $1.1 billion to $12,206 million in the first nine months of 2004. This was driven mainly by $999 million of free cash flow in the first nine months of 2004 and approximately $1 billion of net cash proceeds from the disposition of our 15.96% interest in MTS ($584 million), our 63.9% interest in Emergis ($315 million) and our remaining 3.24% interest in YPG General Partner Inc. ($123 million). These were partly offset by $952 million invested in business acquisitions, which included Bell Canada’s acquisition of MTS’s 40% interest in Bell West for $646 million and our proportionate share of the cash paid for CGI’s acquisition of AMS ($168 million).
     Total shareholders’ equity increased $306 million to $13,879 million in the first nine months of 2004. This was mainly a result of $274 million of net earnings in excess of the dividends declared on common and preferred shares in the first nine months of 2004.
     Non-controlling interest declined by $499 million driven by Bell Canada’s purchase of MTS’s 40% interest in Bell West and the sale of our investment in Emergis.

21    2004 Quarterly Report     Bell Canada Enterprises


 

SUMMARY OF CASH FLOWS

 

Q3 2004   Q3 2003   YTD 2004   YTD 2003  

Cash from operating activities 

1,828   1,818   4,212   4,370  

Capital expenditures 

(811 (791 (2,318 (2,088

Other investing activities 

(2 155   133   69  

Preferred dividends 

(21 (14 (64 (39

Dividends paid by subsidiaries to non-controlling interest 

(44 (38 (133 (137

Free cash flow from operations, before common dividends 

950   1,130   1,830   2,175  

Common dividends 

(277 (259 (831 (770

Free cash flow from operations, after common dividends 

673   871   999   1,405  

Business acquisitions 

(646 (3 (952 (73

Business dispositions 

4   55   20   55  

Change in investments accounted for under the cost and equity methods

695   1   693   7  

Net issuance of equity instruments 

8   5   16   167  

Net issuance (repayment) of debt instruments 

85   (179 (217 (301

Financing activities of subsidiaries with third parties 

(4 (15 (57 39  

Cash provided by discontinued operations 

12   30   196   17  

Other 

(18 56   (34 (5

Net increase in cash and cash equivalents 

809   821   664   1,311  

CASH FROM OPERATING ACTIVITIES

Cash from operating activities increased 0.6% or $10 million to $1,828 million in Q3 2004, compared to Q3 2003, with the receipt of a $75 million settlement payment from MTS being almost entirely offset by unfavourable changes in working capital. Working capital in Q3 2004 has been impacted by the new billing platform which resulted in anticipated delays in invoicing at quarter-end. Working capital is expected to return to a more normalized level by year end.
     In the first nine months of 2004, cash from operating activities decreased 3.6% or $158 million to $4,212 million, compared to 2003, as the settlement payment from MTS and improved operating performance were more than offset by less favourable changes in working capital.

CAPITAL EXPENDITURES

We continue to make investments to expand and update our networks and to meet customer demand for new services. Capital expenditures were $811 million in Q3 2004, or 17.0% of revenues. This was relatively stable compared with capital expenditures of $791 million, or 17.1% of revenues, for the same period last year. In the first nine months of 2004, capital expenditures were $2.3 billion, or 16.3% of revenues, up from $2.1 billion, or 15.0% of revenues, for the same period last year. The increase reflects a mix of higher spending in the growth businesses and reduced spending in the legacy areas. In addition, the increase in capital expenditures for the quarter reflected construction of Telesat’s new satellites, the main one being Anik F2. Declines in capital spending at Aliant resulted from the work disruption.
     Bell Canada’s consolidated capital intensity ratio increased to 17.5% in Q3 2004 (16.3% in the first nine months of 2004), compared to 17.0% in Q3 2003 (15.4% in the first nine months of 2003). Bell Canada’s consolidated capital expenditures accounted for over 85% of our consolidated capital expenditures in the first nine months of 2004 and over 90% of our consolidated capital expenditures in the first nine months of 2003.

22    2004 Quarterly Report     Bell Canada Enterprises


 

OTHER INVESTING ACTIVITIES

Cash from other investing activities of $133 million in the first nine months of 2004 included $179 million of insurance proceeds that Telesat received for a malfunction on the Anik F1 satellite.
     Cash from other investing activities of $155 million in Q3 2003 included:

  • $83 million of proceeds from the settlement of dividend rate swaps. These swaps hedged dividend payments on some of BCE Inc.’s preferred shares.
  • $62 million of insurance proceeds that Telesat and ExpressVu received for a malfunction on the Nimiq 2 satellite.
COMMON DIVIDENDS

We paid a dividend of $0.30 per common share in Q3 2004. This was the same as the dividend we paid in Q3 2003.
     We realized a cash benefit of $16 million in Q3 2003 ($55 million in the first nine months of 2003) because we issued treasury shares to fund BCE Inc.’s dividend reinvestment plan instead of buying shares on the open market. Effective Q1 2004, we started buying all of the shares needed for the dividend reinvestment plan on the open market to avoid dilution. This removed any further cash benefits related to issuing treasury shares. As a result, total dividends paid on common shares increased 6.9% or $18 million to $277 million in Q3 2004, compared to Q3 2003 and 7.9% or $61 million to $831 million in the first nine months of 2004, compared to 2003.

BUSINESS ACQUISITIONS

We invested $646 million in business acquisitions in Q3 2004. This consisted entirely of Bell Canada’s acquisition of MTS’s 40% interest in Bell West. Bell Canada now owns 100% of Bell West.
     Investments of $306 million in the first half of 2004 consisted of:

  • business acquisitions at Bell Canada of $138 million, which included purchases in the Enterprise and SMB business units
  • our 28.9% proportionate share of the cash paid for CGI’s acquisition of AMS of $168 million.

     We invested $73 million in business acquisitions during the first nine months of 2003. This consisted mainly of our proportionate share of the cash paid for CGI’s acquisition of Cognicase Inc.

BUSINESS DISPOSITIONS

We received $55 million for business dispositions during the first nine months of 2003 for Bell Canada’s sale of its 89.9% ownership interest in Certen Inc. (Certen). Bell Canada received $89 million in cash, which was reduced by $34 million of Certen’s cash and cash equivalents at the time of sale.

CHANGE IN INVESTMENTS ACCOUNTED FOR UNDER THE COST AND EQUITY METHODS

In Q3 2004, we sold our remaining 3.24% interest in YPG General Partner Inc. for net cash proceeds of $123 million and our 15.96% interest in MTS for net cash proceeds of $584 million.

EQUITY INSTRUMENTS

During the first nine months of 2003, BCE Inc. issued 20 million Series AC preferred shares for $510 million and redeemed 14 million Series U preferred shares for $357 million, which included a $7 million premium on redemption.

23    2004 Quarterly Report     Bell Canada Enterprises


 

DEBT INSTRUMENTS

We issued $85 million of debt (net of repayments) in Q3 2004. We made $217 million of debt repayments (net of issues) in the first nine months of 2004. The repayments were mainly at Bell Canada, BCE Inc. and Bell Globemedia. At Bell Canada, the repayments included the Series M-15 debentures for $500 million and the Series DU debentures for $126 million. In addition, in 2004, BCE Inc. redeemed all of its outstanding Series P retractable preferred shares for $351 million. The issuances were mainly at Bell Canada and Bell Globemedia. At Bell Canada, the issuances included the Series M-17 debentures for $450 million. At Bell Globemedia, the issuances included $300 million of senior notes.
     At September 30, 2004, BCE had approximately $1.4 billion of cash on hand. A portion of this cash will be used to repay $425 million of debt maturing at Bell Canada in Q4 2004, all of which was paid in October 2004. The remaining cash on hand will be used primarily for capital expenditures, dividend payments and the payment of contractual obligations in 2005.

CASH RELATING TO DISCONTINUED OPERATIONS

In the first nine months of 2004, cash provided by discontinued operations of $196 million consisted mainly of the net cash proceeds of $315 million from the sale of our investment in Emergis which were partly offset by the deconsolidation of Emergis’ cash on hand of $137 million at December 31, 2003.

CREDIT RATINGS

In June 2004 Standard & Poor’s (S&P) upgraded BCE Inc.’s preferred shares rating. The table below lists BCE Inc.’s and Bell Canada’s key credit ratings at November 2, 2004.


        BCE Inc.           Bell Canada    

    S&P   DBRS   Moody’s   S&P   DBRS   Moody’s

Commercial paper

  A-1 (mid) / stable    R-1 (low) / stable    P-2 / stable    A-1 (mid) / stable    R-1 (mid) / stable    P-2 / stable 

Extendable commercial notes

  A-1 (mid) / stable    R-1 (low) / stable    –    A-1 (mid) / stable    R-1 (mid) / stable    – 

Long-term debt

  A- / stable    A / stable    Baa-1 / stable    A / stable    A (high) / stable    A-3 / stable 

Preferred shares

  P-2 (high) / stable    Pfd-2 / stable    –    P-2 (high) / stable    Pfd-2 (high) / stable    – 

LIQUIDITY

Our ability to generate cash in the short term and in the long term, when needed, and to provide for planned growth and to fund development activities, depends on our sources of liquidity and on our cash requirements.
     Our sources of liquidity and cash requirements remain substantially unchanged from those described in the BCE 2003 MD&A, except for those listed below.

Commitment under deferral account
The deferral account is a new mechanism resulting from the CRTC's price cap decision of May 2002, which will be used to fund initiatives such as service improvements, reduced rates and/or rebates. We estimate our commitment relating to the deferral account to be approximately $195 million at September 30, 2004.

Employee departure program
Under both phases of the program, employees are entitled to receive a special cash allowance. This will result in total cash payments of approximately $314 million which we expect to pay in the coming months. The program will reduce Bell Canada’s pension plan surpluses, which may, subject to plan returns and the next periodic actuarial valuation, affect future funding requirements.

Provision for contract loss
In 2001, we entered into a contract with the Government of Alberta to build a next generation network to bring high-speed internet and broadband capabilities to rural communities in Alberta. This contract

24   2004 Quarterly Report     Bell Canada Enterprises


 

is accounted for using the percentage of completion method. During the second quarter of 2004, as part of our regular update of the estimated costs to complete construction of the network, potential cost overruns were identified. Construction is to be complete in late 2004. The costs of this last phase of construction are higher than previously estimated, due to changes necessitated in construction methods to connect individual government buildings to the network and higher average costs of construction. We recorded a provision of $110 million for this contract in the second quarter of 2004. Our estimated costs to complete are unchanged at September 30, 2004.

Agreement to purchase Canadian operations of 360networks Corporation
In May 2004, Bell Canada announced an agreement to purchase the Canadian operations of 360networks Corporation for $275 million in cash. The purchase includes the shares of 360networks’ subsidiary GT Group Telecom Services Corporation, and certain related U.S. interconnect assets. Bell Canada plans to retain all of 360networks’ business, facilities and customer base in western Canada, and has an agreement to sell the retail customer operations and certain assets in central and eastern Canada to Call-Net Enterprises Inc. while continuing to provide network and other services to the central and eastern customer base for a share of future revenues. All regulatory approvals have been obtained and we expect to close the transaction in November 2004, subject to usual closing conditions.

RECENT DEVELOPMENTS IN LEGAL PROCEEDINGS

This section provides a description of new legal proceedings involving BCE and of recent developments in certain of the legal proceedings involving BCE described in the BCE 2003 AIF as subsequently updated in BCE Inc.’s 2004 First Quarter MD&A dated May 4, 2004 (BCE 2004 First Quarter MD&A) and BCE Inc.’s 2004 Second Quarter MD&A dated August 3, 2004 (BCE 2004 Second Quarter MD&A).

LAWSUITS RELATED TO BELL CANADA

Potential Class Action Concerning Wireless Access Charges
On August 9, 2004, a statement of claim was filed under the Class Actions Act (Saskatchewan) in the Court of Queen’s Bench, Judicial Centre of Regina, Saskatchewan by certain alleged customers or former customers of Bell Canada and other Canadian telecommunications providers (“Canadian Telcos”) for wireless and cellular services. The lawsuit has not been certified as a class action and it is too early to determine whether it will qualify for certification.
     The statement of claim alleges breach of contract and duty to inform, breach of warranties and covenants, deceit, misrepresentation, negligence, wrongful acts and omissions, collusion, and breach of statutory duty or obligation under the Competition Act (Canada), in connection with certain “system access fees” and “system licensing charges” invoiced by Bell Canada and the other Canadian Telcos to their customers. The plaintiffs seek unspecified damages and punitive damages from Bell Canada and the other Canadian Telcos.
     While no one can predict the outcome of any legal proceeding, based on information currently available, we believe that we have strong defences and we intend to vigorously defend our position.

Potential class Action concerning Bell Mobility Billing system
On October 28, 2004, a motion seeking certification to proceed as a class action against Bell Mobility, a wholly-owned subsidiary of Bell Canada, was filed with the Québec Superior Court. The lawsuit has not been certified to proceed as a class action and it is too early to detemrine whether it will qualify for certifcation.
     The lawsuit was filed on behalf of all physical persons residing in the Province of Québec, who entered into a contract with Bell Mobility for the provision of wireless telephone services, and alleges that such persons have unjustly ihncurred expenses as a result of billing errors made by Bell Mobility or as a result of Bell Mobility wrongfully disconnecting service to such customers. In addition to the reimbursement of such expenses, the class action would, if authorized, also seek payment of damages by Bell Mobility in the amount of $100 per class member for inconvenience as well as punitive damages in the amount of $200 per class member.

 

25    2004 Quarterly Report     Bell Canada Enterprises


 

While no one can predict the outcome of any legal proceeding, based on information currently available, we believe that we have strong defences and we intend to vigorously defend our position.

Bell Distribution Inc. lawsuit
On September 1, 2004, Bell Distribution Inc.’s franchisees and Bell Canada entered into an agreement for the settlement of this action.

LAWSUITS RELATED TO TELEGLOBE INC. (TELEGLOBE)

Teleglobe lending syndicate lawsuit
As indicated in the BCE 2003 AIF, a lawsuit was filed in the Ontario Superior Court of Justice on July 12, 2002 against BCE Inc. by certain of the members of the Teleglobe and Teleglobe Holdings (U.S.) Corporation lending syndicate. On November 2, 2004, two of the plaintiffs, Canadian Imperial Bank of Commerce and Canadian Imperial Bank of Commerce, N.Y. Agency, which had advanced approximately U.S.$104 million to Teleglobe and Teleglobe Holdings (U.S.) Corporation, filed a notice of discontinuance with the Court and are therefore no longer plaintiffs in this action. The damages sought by the remaining plaintiffs now amount to approximately

U.S.$1.09 billion (down from approximately U.S.$1.19 billion), plus interest and costs, representing approximately 87% (down from approximately 95%) of the US$1.25 billion that the members of that lending syndicate advanced to Teleglobe and Teleglobe Holdings (U.S.) Corporation.

Teleglobe unsecured creditors lawsuit
As indicated in the BCE 2004 Second Quarter MD&A, a lawsuit was filed in the United States Bankruptcy Court for the District of Delaware against BCE Inc. and ten former directors and officers of Teleglobe and certain of its subsidiaries on May 26, 2004. The plaintiffs are comprised of Teleglobe Communications Corporation, certain of its affiliated debtors and debtors in possession, and the Official Committee of Unsecured Creditors of these debtors. The lawsuit alleges breach of an alleged funding commitment of BCE Inc. towards the debtors, promissory estoppel, misrepresentation by BCE Inc., and breach and aiding and abetting breaches of fiduciary duty by the defendants. By order dated September 8, 2004, the automatic reference of this action to the Bankruptcy Court was withdrawn and the action is now pending in the District Court for the District of Delaware. On September 15, 2004, BCE Inc. and the other defendants filed a motion to dismiss the action for lack of standing and for failure to state a claim. BCE Inc. and the other defendants also contend that plaintiffs should not be allowed to transform a contract claim into tort claims. On October 14, 2004, the Court denied defendants’ motion to stay discovery pending disposition of defendants’ motion to dismiss.

LAWSUITS RELATED TO BELL CANADA INTERNATIONAL INC. (BCI)

BCI common shareholders lawsuits
As indicated in the BCE 2003 AIF, an appeal to the Ontario Court of Appeal was filed in March 2004 by the plaintiffs in two lawsuits seeking damages from BCE Inc. and BCI in connection with the issue of BCI common shares under BCI’s recapitalization plan and the implementation of BCI’s plan of arrangement. These lawsuits had been dismissed on January 5, 2004 by the Ontario Superior Court of Justice as failing to disclose a reasonable cause of action against BCE Inc. or BCI, and abused the process of the court, and ordering that neither of the two plaintiffs may amend his statement of claim to bring these lawsuits before the court again. As indicated in the BCE 2004 Second Quarter MD&A, the appeal was heard on July 12, 2004, and on July 23, 2004 the Ontario Court of Appeal issued its decision and reasons, upholding the lower court’s decision and dismissing the lawsuits as failing to disclose a reasonable cause of action. On September 29, 2004, the plaintiffs filed an application with the Supreme Court of Canada seeking leave to appeal the decision of the Court of Appeal for Ontario, and indicated, in their application, that if the appeal court decision is reversed, they intend to proceed with only one of the actions. The defendants have filed joint responding materials.

 

26    2004 Quarterly Report     Bell Canada Enterprises


 

LAWSUITS RELATED TO BELL GLOBEMEDIA

As indicated in the BCE 2003 AIF, on February 5, 2001, Bell Globemedia Publishing Inc., a subsidiary of Bell Globemedia, was added as a defendant to a $100 million class action lawsuit relating to copyright infringement. The claim is that the defendants (which include The Globe and Mail newspaper and magazines it publishes) do not have the right to archive and publish certain freelanced and employee material from the newspaper or magazines in any format other than print. On October 3, 2001, the Ontario Superior Court of Justice rejected the plaintiff’s motion for partial summary judgment (including the rejection of a requested injunction at this stage) on certain proposed common issues. The plaintiff appealed this decision, and the defendants cross-appealed some issues. The Ontario Court of Appeal provided its majority decision on October 6, 2004, and affirmed the initial refusal of summary judgement. Both the plaintiff and the defendants have 60 days from October 6, 2004 to apply for leave to appeal to the Supreme Court of Canada.

Risks That Could Affect Our Business

A risk is the possibility that an event might happen in the future that could have a negative effect on the financial condition, results of operations, cash flows or business of one or more BCE group companies. Part of managing our business is to understand what these potential risks could be and to minimize them where we can.
     Because no one can predict whether an event will happen or its consequences, the actual effect of any event on our business could be materially different from what we currently anticipate. In addition, the risks described below and elsewhere in this MD&A do not include all possible risks, and there may be other risks that we are currently not aware of.
     In the BCE 2004 First Quarter MD&A, we provided a detailed review of the risks that could affect our financial condition, results of operations, cash flows or business and that could cause actual results to differ materially from those expressed in our forward-looking statements. This detailed description of risks was updated in the BCE 2004 Second Quarter MD&A and is further updated in this MD&A. These risks include risks associated with:

  • our ability to complete within our targeted timeframe, and the impact on our financial results of, the migration of our multiple service-specific networks to a single IP-based network;
  • our ability to implement our strategies and plans in order to produce the expected benefits and growth prospects, including meeting targets for revenue, earnings per share, free cash flow and capital intensity;
  • general economic and market conditions and the level of consumer confidence and spending, and the demand for, and prices of, our products and services;
  • the intensity of competitive activity from both traditional and new competitors, Canadian or foreign, including cross-platform competition, which is increasing following the introduction of new technologies such as Voice over Internet Protocol (VoIP) which have reduced barriers to entry that existed in the industry, and its resulting impact on the ability to retain existing, and attract new, customers, and on pricing strategies and financial results;
  • the ability to improve productivity and contain capital intensity while maintaining quality of services;
  • the ability to anticipate, and respond to, changes in technology, industry standards and client needs and migrate to and deploy new technologies, including VoIP, and offer new products and services rapidly and achieve market acceptance thereof;
  • the availability and cost of capital required to implement our financing plans and fund capital and other expenditures;
  • our ability to retain major customers;

27    2004 Quarterly Report     Bell Canada Enterprises


 

  • our ability to find suitable companies to acquire or to partner with;
  • the impact of pending or future litigation and of adverse changes in laws or regulations, including tax laws, or in how they are interpreted, or of adverse regulatory initiatives or proceedings, including decisions by the CRTC affecting our ability to compete effectively, including, more specifically, decisions concerning the regulation of VoIP services;
  • the risk of litigation should BCE stop funding a subsidiary or change the nature of its investment, or dispose of all or part of its interest, in a subsidiary;
  • the risk of increased pension plan contributions resulting from Bell Canada’s recent early retirement program and from the risk of low returns on pension plan assets;
  • our ability to manage effectively labour relations, negotiate satisfactory labour agreements, including new agreements replacing expired labour agreements, while avoiding work stoppages, and maintain service to customers and minimize disruptions during strikes and other work stoppages;
  • events affecting the functionality of our networks or of the networks of other telecommunications carriers on which we rely to provide our services;
  • stock market volatility;
  • our ability to increase the number of customers who buy multiple products;
  • our ability to implement the significant changes in processes, in how we approach our markets, and in products and services, required by our strategic direction;
  • Canadian government action in respect of the foreign ownership restrictions that apply to telecommunications carriers and to broadcasting distribution undertakings;
  • the risk that the amount of the expected annual savings relating to Bell Canada’s recent employee voluntary departure program will be lower than anticipated due to various factors including the incurrence of outsourcing, replacement and other costs; and
  • launch and in-orbit risks, including the ability to obtain appropriate insurance coverage at favourable rates, concerning Telesat’s satellites, certain of which are used by Bell ExpressVu to provide services.

     For a more complete description of the risks that could affect our business, please see the BCE 2004 First Quarter MD&A, as updated in the BCE 2004 Second Quarter MD&A and this MD&A, filed by BCE Inc. with the Canadian securities commissions (available on BCE Inc.’s site at www.bce.ca and on SEDAR at www.sedar.com) and with the U.S. Securities and Exchange Commission (SEC) under Form 6-K (available on EDGAR at www.sec.gov).
     Please refer to the BCE 2003 AIF filed by BCE Inc. with the Canadian securities commissions and with the SEC under Form 40-F for a detailed description of:

  • the principal legal proceedings involving BCE;
  • certain regulatory initiatives and proceedings concerning the Bell Canada companies.

     Please see Recent Developments in Legal Proceedings in this MD&A, in the BCE 2004 First Quarter MD&A and in the BCE 2004 Second Quarter MD&A for a description of new legal proceedings involving us and of recent developments, since the BCE 2003 AIF, in the principal legal proceedings involving us.
     In addition, please see Updates to the Description of Risks below, Updates to the Description of Risks in the BCE 2004 Second Quarter MD&A and Risks that could affect certain BCE group companies – Bell Canada companies – Changes to wireline regulations in the BCE 2004 First Quarter MD&A, for a description of recent developments, since the BCE 2003 AIF, in the principal regulatory initiatives and proceedings concerning the Bell Canada companies.

UPDATES TO THE DESCRIPTION OF RISKS
The following are updates to the description of risks contained in the section entitled Risks That Could Affect Our Business set out on pages 18 to 31 of the BCE 2004 First Quarter MD&A as updated in the BCE 2004 Second Quarter MD&A. For ease of reference, the updates to the description of risks below

28    2004 Quarterly Report     Bell Canada Enterprises


 

have been presented under the same headings and in the same order contained in the section entitled Risks That Could Affect Our Business set out in the BCE 2004 First Quarter MD&A.

RISKS THAT COULD AFFECT ALL BCE GROUP COMPANIES

RENEGOTIATING LABOUR AGREEMENTS

A new collective agreement between Bell Canada and the CEP, representing approximately 7,100 craft and services employees, was signed on August 19, 2004 and will expire in November 2007. As well, a collective agreement between Aliant Telecom Inc. (a wholly-owned subsidiary of Aliant) and the CATU, representing approximately 4,300 employees, was signed on September 16, 2004 and will expire on December 31, 2007. Accordingly, the actual or potential adverse effects of the events preceding the execution of these collective agreements have now ceased to exist.

RISKS THAT COULD AFFECT CERTAIN BCE GROUP COMPANIES

BELL CANADA COMPANIES


Contract with the Government of Alberta
In 2001, we entered into a contract with the Government of Alberta to build a next generation network to bring high-speed internet and broadband capabilities to rural communities in Alberta. Construction is to be compelte in late 2004. However, the final costs to complete the network will not be known until completion of the network and final acceptance by the Government of Alberta which is expected to occur during 2005.

Changes to Wireline Regulations
Decision on Incumbent Affiliates
On September 23, 2003, the CRTC issued a decision that requires Bell Canada and its carrier affiliates to include a detailed description of the bundled services they provide to customers when they file tariffs with the CRTC. Bell Canada’s appeal of this decision to the Federal Court of Canada was dismissed on September 14, 2004. As a result, Bell Canada is now re-filing tariffs for those contracts with bundles that have not yet expired in order to provide more detailed descriptions of the bundled services.

Application seeking consistent regulation
On November 6, 2003, Bell Canada filed an application requesting that the CRTC start a public hearing to review how similar services offered by cable companies and telephone companies are regulated. On April 7, 2004, the CRTC invited comments on its preliminary views regarding the regulation of VoIP services and invited interested parties to participate in a public consultation relating to the regulatory framework for VoIP. Bell Canada provided its comments to the CRTC on June 18, 2004. Between September 21 and September 23, 2004, the CRTC held the public consultation relating to the regulatory framework for VoIP. Bell Canada filed reply comments on October 13, 2004. A decision is expected in the first quarter of 2005. There is a risk that the CRTC might decide to regulate VoIP services provided by the Bell Canada companies and other Incumbent Local Exchange Carriers but not by certain other competitors. Accordingly, these proceedings could determine the rules for competition with other service providers, could affect the flexibility of the Bell Canada companies when competing in the future and could result in delays for launching new services as well as restrictions on our marketing flexibility (such as pricing rules, bundling restrictions, etc.) for such services.

Licences for Broadcasting
As indicated in the BCE 2004 Second Quarter MD&A, Bell Canada has applied to the CRTC for licences to operate broadcasting distribution undertakings, using its wireline facilities, to serve large cities in

 

29    2004 Quarterly Report     Bell Canada Enterprises


 

Southern Ontario and Québec. The CRTC held a public hearing, as required under the Broadcasting Act, in August 2004. Cable operators were seeking delays to the licensing and other conditions that would inhibit Bell Canada’s ability to compete with them. A decision is expected in November 2004.

TELESAT

Anik F2
As indicated in the BCE 2004 Second Quarter MD&A, on July 17, 2004, Telesat launched the Anik F2 satellite. It successfully entered commercial service, following commissioning and testing, in October 2004. Accordingly, the risks described in the BCE 2004 Second Quarter MD&A relating to Anik F2’s construction, launch and commissioning no longer apply.

Our Accounting Policies

We have prepared our consolidated financial statements according to Canadian GAAP. See Note 1 to the consolidated financial statements for more information about the accounting policies we used to prepare our financial statements.
     The key estimates and assumptions that management has made and their impact on the amounts reported in the financial statements and notes remain substantially unchanged from those described in the BCE 2003 MD&A.
     We have not changed our accounting policies other than those described in the BCE 2003 MD&A and in Note 1 to the consolidated financial statements.

Supplementary Financial Information

The table below shows selected consolidated financial data for the eight most recently completed quarters.


   

           2004

                       2003       2002  
  Q3   Q2   Q1   Q4   Q3   Q2   Q1   Q4  

Operating revenues 

4,781   4,782   4,641   4,818   4,627   4,673   4,619   4,974  

Operating income 

25   1,105   1,011   1,013   1,049   1,078   981   649  

Earnings from continuing operations 

102   544   485   486   453   466   466   790  

Discontinued operations 

(2 27   3   (86 11   12   7   922  

Net earnings 

100   571   488   400   464   478   473   1,712  

Net earnings applicable to common shares 

82   554   470   386   446   461   451   1,696  
 
Included in net earnings:                         
Net gains on investments                         

Continuing operations 

325       84         1,230  

Discontinued operations

(2 ) 31 7 (94 ) 8 911

Restructuring and other items 

(725 16   (1 (9 6       (251

Impairment charge 

              (527
 

Net earnings per common share:

                       

Continuing operations – basic

0.09 0.57 0.51 0.50 0.48 0.49 0.49 0.87

Continuing operations – diluted

0.08 0.57 0.51 0.50 0.47 0.49 0.49 0.86

Net earnings – basic 

0.09   0.60   0.51   0.41   0.49   0.50   0.50   1.88  

Net earnings – diluted 

0.08   0.60   0.51   0.41   0.48   0.50   0.50   1.85  

Average number of common shares outstanding (millions) 

924.6   924.3   924.1   923.4   921.5   919.3   917.1   909.1  

30    2004 Quarterly Report     Bell Canada Enterprises


 

Consolidated Financial Statements

Consolidated Statements of Operations


For the period ended September 30 

Three months

Nine months

(in $ millions, except share amounts) (unaudited)  2004   2003   2004   2003  

Operating revenues  4,781   4,627   14,204   13,919  

Operating expenses 

(2,845 )  (2,732 (8,471 )  (8,356

Amortization expense 

(769 )  (801 (2,305 )  (2,325

Net benefit plans cost (Note 4) 

(61 )  (44 (189 )  (129

Restructuring and other items (Note 5) 

(1,081 )  (1 (1,098 )  (1

Total operating expenses  (4,756 )  (3,578 

)

(12,063 )  (10,811

Operating income 

25   1,049   2,141   3,108  

Other income (Note 6) 

333   1   393   48  

Interest expense 

(253 )  (270 (758 )  (839

Pre-tax earnings from continuing operations 

105   780   1,776   2,317  

Income taxes 

44   (282 (511 )  (788

Non-controlling interest 

(47 )  (45 (134 )  (144

Earnings from continuing operations 

102   453   1,131   1,385  

Discontinued operations (Note 7) 

(2 )  11   28   30  

Net earnings 

100   464   1,159   1,415  

Dividends on preferred shares 

(18 )  (18 (53 )  (50

Premium on redemption of preferred shares 

      (7

Net earnings applicable to common shares 

82   446   1,106   1,358  

Net earnings per common share – basic 

       

Continuing operations 

0.09   0.48   1.17   1.46  

Discontinued operations 

  0.01   0.03   0.03  

Net earnings 

0.09   0.49   1.20   1.49  

Net earnings per common share – diluted 

       

Continuing operations 

0.08   0.47   1.16   1.45  

Discontinued operations 

  0.01   0.03   0.03  

Net earnings 

0.08   0.48   1.19   1.48  

Dividends per common share 

0.30   0.30   0.90   0.90  

Average number of common shares outstanding – basic (millions) 

924.6   921.5   924.4   919.3  

Consolidated Statements of Deficit

For the period ended September 30 

Three months

 

Nine months

(in $ millions) (unaudited)  2004   2003   2004   2003  

Balance at beginning of period, as previously reported

(5,368

)

(6,079

)

(5,830

)

(6,435

)
Accounting policy change for asset retirement obligations (Note 1)    (7 (7 )  (7

Balance at beginning of period, as restated  (5,368 )  (6,086 (5,837 )  (6,442

Consolidation of variable interest entity 

  (25   (25

Net earnings 

100   464   1,159   1,415  

Dividends declared on common shares 

(277 )  (277 (832 )  (828

Dividends declared on preferred shares 

(18 )  (18 (53 )  (50

Premium on redemption of preferred shares 

      (7

Other 

  (2   (7

Balance at end of period  (5,563 )  (5,944 (5,563 )  (5,944

31    2004 Quarterly Report     Bell Canada Enterprises


 

Consolidated Balance Sheets

September 30   December 31  
(in $ millions) (unaudited)  2004   2003  

ASSETS     
Current assets     

Cash and cash equivalents 

1,386   585  

Accounts receivable 

2,491   2,061  

Other current assets 

892   739  

Current assets of discontinued operations

280  

Total current assets  4,769   3,665  
Capital assets  21,111   21,114  
Other long-term assets  2,494   3,459  
Indefinite-life intangible assets  2,910   2,910  
Goodwill  8,368   7,761  
Non-current assets of discontinued operations  50   511  

Total assets  39,702   39,420  

LIABILITIES     
Current liabilities     

Accounts payable and accrued liabilities

4,537 3,534

Debt due within one year 

1,516   1,519  

Current liabilities of discontinued operations

285

Total current liabilities  6,053   5,338  
Long-term debt  12,076   12,381  
Other long-term liabilities  4,790   4,705  
Non-current liabilities of discontinued operations    20  

Total liabilities  22,919   22,444  

Non-controlling interest  2,904   3,403  

SHAREHOLDERS’ EQUITY     
Preferred shares  1,670   1,670  

Common shareholders’ equity     

Common shares 

16,765   16,749  

Contributed surplus 

1,052   1,037  

Deficit 

(5,563 )  (5,837

Currency translation adjustment 

(45 )  (46

Total common shareholders’ equity  12,209   11,903  

Total shareholders’ equity  13,879   13,573  

Total liabilities and shareholders’ equity  39,702   39,420  

32    2004 Quarterly Report     Bell Canada Enterprises


 

Consolidated Statements of Cash Flows

For the period ended September 30 

Three months

 

Nine months

 
(in $ millions) (unaudited)  2004   2003   2004   2003  

Cash flows from operating activities 

       

Earnings from continuing operations 

102   453   1,131   1,385  

Adjustments to reconcile earnings from continuing operations to cash flows from operating activities:

       

Amortization expense 

769   801   2,305   2,325  

Net benefit plans cost 

61   44   189   129  

Restructuring and other items (non-cash portion) 

1,149 (4 ) 1,164 (4 )

Net gains on investments 

(325 )    (331 )   

Future income taxes 

(183 )  134   (96 )  211  

Non-controlling interest 

47   45   134   144  

Contributions to employee pension plans 

(32 )  (46 (88 )  (73

Other employee future benefit plan payments 

(13 )  (22 (59 )  (64

Other 

(27 )  26   (3 )  (10

Changes in non-cash working capital 

280   387   (134 )  327  

Cash from operating activities 

1,828   1,818   4,212   4,370  

Cash flows from investing activities 

       

Capital expenditures 

(811 )  (791 (2,318 )  (2,088

Business acquisitions 

(646 )  (3 (952 )  (73

Business dispositions 

4   55   20   55  

Decrease in investments accounted for under the cost and equity methods 

695   1   693   7  

Other 

(2 )  155   133   69  

Cash used in investing activities 

(760 )  (583 (2,424 )  (2,030

Cash flows from financing activities 

       

Increase (decrease) in notes payable and bank advances 

173   (73 123   (242

Issue of long-term debt 

10   17   1,410   1,881  

Repayment of long-term debt 

(98 )  (123 (1,750 )  (1,940

Issue of common shares 

8   5   16   14  

Issue of preferred shares 

      510  

Redemption of preferred shares 

      (357

Issue of equity securities by subsidiaries to non-controlling interest

24 7 113

Redemption of equity securities by subsidiaries from non-controlling interest

(4 )  (39 (64 )  (74

Cash dividends paid on common shares 

(277 )  (259 (831 )  (770

Cash dividends paid on preferred shares 

(21 )  (14 (64 )  (39

Cash dividends paid by subsidiaries to non-controlling interest 

(44 )  (38 (133 )  (137

Other 

(18 )  56   (34 )  (5

Cash used in financing activities 

(271 )  (444 (1,320 )  (1,046

Cash provided by continuing operations 

797   791   468   1,294  

Cash provided by discontinued operations 

12   30   196   17  

Net increase in cash and cash equivalents 

809   821   664   1,311  

Cash and cash equivalents at beginning of period 

577   796   722   306  

Cash and cash equivalents at end of period 

1,386   1,617   1,386   1,617  

Consists of:         

Cash and cash equivalents of continuing operations 

1,386   1,476   1,386   1,476  

Cash and cash equivalents of discontinued operations 

  141     141  

     Total  1,386   1,617   1,386   1,617  

33    2004 Quarterly Report     Bell Canada Enterprises


 



The interim consolidated financial statements should be read in conjunction with BCE Inc.’s annual consolidated financial statements for the year ended December 31, 2003, on pages 64 to 101 of BCE Inc.’s 2003 annual report.

These notes are unaudited.

All amounts are in millions of Canadian dollars, except where noted.

We, us, our and BCE mean BCE Inc., its subsidiaries and joint ventures.

Notes to Consolidated Financial Statements

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

We have prepared the consolidated financial statements in accordance with Canadian generally accepted accounting principles (GAAP) using the same basis of presentation and accounting policies as outlined in Note 1 to the annual consolidated financial statements for the year ended December 31, 2003, except as noted below.

Comparative figures
We have reclassified some of the figures for the comparative periods in the consolidated financial statements to make them consistent with the current period’s presentation.
     We have restated financial information for previous periods to reflect:

  • the adoption of section 3110 of the CICA Handbook, Asset retirement obligations, effective January 2004, as described below
  • the change in classification to discontinued operations for BCE Emergis Inc. (Emergis) and other minor business dispositions.

Change in accounting policy
Effective January 1, 2004, we retroactively adopted section 3110 of the CICA Handbook, Asset retirement obligations. The impact on our consolidated statements of operations for the three months and nine months ended September 30, 2004 and the comparative periods was negligible. At December 31, 2003 and 2002, this resulted in:

  • an increase of $6 million in capital assets
  • an increase of $17 million in other long-term liabilities
  • a decrease of $4 million in future income tax liabilities
  • an increase of $7 million in the deficit.

Stock-based compensation plans
Starting in 2004, we made a number of prospective changes to the key features in our stock-based compensation plans, which included transferring approximately 50% of the value of the long-term incentive plan, under which stock options are granted, into a new mid-term plan which uses restricted share units (RSUs). We record compensation expense for each RSU granted equal to the market value of a BCE Inc. common share at the date of grant prorated over the vesting period. The compensation expense is adjusted for future changes in the market value of BCE Inc. common shares until the vesting date. The cumulative effect of the change in value is recognized in the period of the change. Subject to compliance with individual minimum share ownership requirements set out in BCE’s policies, vested RSUs will be paid in BCE Inc. common shares purchased on the open market or in cash at the option of the holder.

NOTE 2. SEGMENTED INFORMATION

Starting in the first quarter of 2004, we report our results of operations under five segments: Consumer, Business, Aliant, Other Bell Canada and Other BCE. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance.
     The Consumer segment provides local telephone, long distance, wireless, Internet access, video and other services to Bell Canada’s residential customers mainly in Ontario and Québec. Wireless services are also offered in Western Canada and video services are provided nationwide.
     The Business segment provides local telephone, long distance, wireless, data, including Internet access, and other services to Bell Canada’s small and medium-sized businesses (SMB) and large enterprise customers in Ontario and Québec, as well as business customers in Western Canada through Bell West Inc. (Bell West).
     The Aliant segment provides local telephone, long distance, wireless, data, including Internet access, and other services to residential and business customers in Atlantic Canada and represents the operations of our subsidiary, Aliant Inc. (Aliant).
     The Other Bell Canada segment includes Bell Canada’s wholesale business, and the financial results of Télébec Limited Partnership (Télébec), NorthernTel Limited Partnership (NorthernTel) and Northwestel Inc. (Northwestel). Our wholesale business provides local telephone, long distance, data and other services to competitors who resell these services. Télébec, NorthernTel and Northwestel provide telecommunications services to less populated areas in Québec, Ontario and Canada’s northern territories.
     The Other BCE segment includes the financial results of our media, satellite and information technology (IT) activities as well as the costs incurred by our corporate office. This segment includes Bell Globemedia Inc. (Bell Globemedia), Telesat Canada (Telesat) and CGI Group Inc. (CGI).
     In classifying our operations for planning and measuring performance, all restructuring and other items at Bell Canada and its subsidiaries (excluding Aliant) are included in the Other Bell Canada segment and not allocated to the Consumer and Business segments.

34    2004 Quarterly Report     Bell Canada Enterprises


 

NOTE 2. SEGMENTED INFORMATION (continued)

   

Three months

 

Nine months

 
For the period ended September 30  2004   2003   2004   2003  

Operating revenues         
Consumer  External  1,893   1,821   5,552   5,296  
  Inter-segment  15   17   39   39  

    1,908   1,838   5,591   5,335  

Business  External  1,400   1,373   4,139   4,099  
  Inter-segment  40   67   177   212  

    1,440   1,440   4,316   4,311  

Aliant  External  467   478   1,421   1,422  
  Inter-segment  30   36   106   110  

    497   514   1,527   1,532  

Other Bell Canada  External  435   442   1,294   1,439  
  Inter-segment  51   36   134   108  

    486   478   1,428   1,547  

Inter-segment eliminations – Bell Canada  (125 )  (115 (378 )  (357

Bell Canada    4,206   4,155   12,484   12,368  

Other BCE  External  586   513   1,798   1,663  
  Inter-segment  96   83   263   237  

    682   596   2,061   1,900  

Inter-segment eliminations – Other  (107 )  (124 (341 )  (349

Total operating revenues  4,781   4,627   14,204   13,919  

 
Operating income           
Consumer    569   552   1,655   1,548  
Business    245   193   713   582  
Aliant    71   104   245   307  
Other Bell Canada    (898 )  163   (649 )  469  

Bell Canada    (13 )  1,012   1,964   2,906  
Other BCE    38   37   177   202  

Total operating income  25   1,049   2,141   3,108  
Other income    333   1   393   48  
Interest expense    (253 )  (270 (758 )  (839
Income taxes    44   (282 (511 )  (788
Non-controlling interest  (47 )  (45 (134 )  (144

Earnings from continuing operations  102   453   1,131   1,385  

35    2004 Quarterly Report     Bell Canada Enterprises


 

 

The consolidated statements of operations include the results of acquired businesses from the date they were acquired.

 

NOTE 3. BUSINESS ACQUISITIONS

During the first nine months of 2004, we made a number of business acquisitions, which included:

  • Bell West – In August 2004, Bell Canada acquired Manitoba Telecom Services Inc.’s (MTS) 40% interest in Bell West. Bell Canada now owns 100% of Bell West.
  • Infostream Technologies Inc. (Infostream) – In May 2004, Bell Canada acquired 100% of the outstanding common shares of Infostream, a systems and storage technology firm providing networking solutions for Voice over Internet Protocol (VoIP), storage area networks and network management.
  • Charon Systems Inc. (Charon) – In May 2004, Bell Canada acquired 100% of the assets of Charon, a full-service information technology (IT) solutions provider specializing in server-based computing, systems integration, IT security, software development and IT consulting.
  • Our 28.9% proportionate share of CGI’s acquisition of American Management Systems Incorporated (AMS) – In May 2004, CGI acquired 100% of the outstanding common shares of AMS. AMS is a business and technology consulting firm to government, healthcare, financial services and telecommunications industries.
  • Elix Inc. (Elix) – In March 2004, Bell Canada acquired 75.8% of the outstanding shares of Elix which offers technology consulting, integration and implementation of call routing and management systems, IT application integration and design and implementation of electronic voice-driven response systems.
  • Accutel Conferencing Systems Inc. (Canada) and Accutel Conferencing Systems Corp (U.S.) (collectively Accutel) – In February 2004, Bell Canada acquired 100% of the outstanding common shares of Accutel, which provides teleconferencing services.

          The table below provides a summary of the consideration received and the consideration given for all business acquisitions. In all cases, the purchase price allocation is based on estimates. The final purchase price allocation for each business acquisition is expected to be complete within twelve months from the acquisition date. Of the goodwill acquired:

  • $511 million relates to the Business segment and $150 million relates to the Other BCE segment
  • $18 million is deductible for tax purposes.

40% interest in Bell West

BCE’s proportionate share of AMS

All other business acquisitions

Total


Consideration received: 

         

Non-cash working capital 

–    (70 5   (65

Capital assets 

–    101   13   114  

Goodwill 

385    150   126   661  

Long-term debt 

–      (2 (2

Other long-term liabilities 

–    (13   (13

Non-controlling interest 

261        261  

  646    168   142   956  

Cash and cash equivalents (bank indebtedness) at acquisition

–  20 (3 ) 17

Net assets acquired 

646    188   139   973  

 

Consideration given: 

         

Cash 

645    182   134   961  

Acquisition costs 

  6   1   8  

Future cash payment 

–      4   4  

  646    188   139   973  

36    2004 Quarterly Report     Bell Canada Enterprises


 

NOTE 4. EMPLOYEE BENEFIT PLANS

The table below shows the components of the net benefit plans cost.


   

Three months

     

Nine months

   
  Pension benefits   Other benefits   Pension benefits   Other benefits  

For the period ended September 30 

2004   2003   2004   2003   2004   2003   2004   2003  

Current service cost 

58   55   7   8   182   166   23   23  

Interest cost on accrued 

               

benefit obligation 

201   190   26   26   604   568   78   78  

Expected return on plan assets 

(237 )  (233 (2 )  (2 (714 )  (701 (7 )  (7

Amortization of past service costs 

2   2       7   7      

Amortization of net actuarial losses 

8   6   1     24   17   1    

Amortization of transitional (asset) obligation

(11 )  (11 7   7   (33 )  (33 22   22  

Increase (decrease) in valuation allowance

1   (3     2   (9    

Other 

  (1       (2    

Net benefit plans cost 

22   5   39   39   72   13   117   116  

The table below shows the amounts we contributed to the pension plans and the post-employment benefit payments made to beneficiaries.


     

Three months

         

Nine months

   
  Pension benefits   Other benefits   Pension benefits   Other benefits  

For the period ended September 30 

2004   2003   2004   2003   2004   2003   2004       2003   

Aliant 

16   34   1   1   54   51   3   3  

Bell Canada 

5   4   12   21   14   9   56   61  

Bell Globemedia 

8   6       13   8      
BCE Inc. 3 2 7 5

Total 

32   46   13   22   88   73   59   64  

NOTE 5. RESTRUCTURING AND OTHER ITEMS

  Three months   Nine months  

For the period ended September 30 

2004   2003   2004   2003  

Employee departure program 

(985 )    (985 )   

Settlement with MTS 

    75    

Provision for contract loss 

    (110 )   

Other charges 

(96 )  (1 (78 )  (1

Restructuring and other items 

(1,081 )  (1 (1,098 )  (1

Employee departure program
During the third quarter of 2004, we recorded a pre-tax charge of $985 million ($647 million after taxes) in the Other Bell Canada segment. The charge relates to the two-phase employee departure program, which was announced by Bell Canada in June 2004. The first phase was an early retirement plan and in the third quarter of 2004, 3,965 employees elected to receive a package that included a cash allowance, immediate pension benefits, an additional guaranteed pension payable up to 65 years of age, career transition services and post-employment benefits. The second phase was a departure plan and in the third quarter of 2004, 1,087 employees elected to receive a special cash allowance.
     An additional charge of approximately $75 million is expected to be incurred in the future for the relocation of employees and closure of excess real estate facilities. These costs are not eligible for recognition at September 30, 2004 and will be expensed as incurred.
     The employee departure program is expected to be substantially complete by the end of 2004.

37    2004 Quarterly Report     Bell Canada Enterprises


 

NOTE 5. RESTRUCTURING AND OTHER ITEMS (continued)

     The table below provides a summary of the costs recognized in the third quarter of 2004, as well as the corresponding liability at September 30, 2004.


Employee departure program costs 

985  

Less: 

 

Cash payments 

(5

Pension and other post-retirement benefits reclassified to: 

 

Other long-term assets 

(660

Other long-term liabilities 

(11

Balance in accounts payable and accrued liabilities at September 30, 2004 

309  

Settlement with MTS
On May 20, 2004, Bell Canada filed a lawsuit against MTS seeking damages from MTS and an injunction to prevent MTS from breaching the terms and conditions of the commercial agreements between the two companies as a result of the announcement by MTS to purchase Allstream Inc. (Allstream). On June 3, 2004, Bell Canada also filed a lawsuit against Allstream seeking damages in connection with the same announcement.
     On June 30, 2004, BCE Inc. reached an agreement with MTS to settle the lawsuits. The terms of the settlement included:

  • a payment of $75 million by MTS to Bell Canada, recorded in the second quarter of 2004 and received on August 3, 2004, for unwinding various commercial agreements
  • the removal of contractual competitive restrictions thereby allowing Bell Canada and MTS to compete freely with each other, effective June 30, 2004
  • the orderly disposition of our interest in MTS. Our voting rights in MTS were waived after the receipt of the $75 million payment. We sold our interest in MTS in September 2004. See Note 6, Other income, for more information.
  • a premium payment by MTS to us, in the event a change of control of MTS occurs before 2006, in an amount equal to the appreciation in MTS’s share price from the time of our divestiture to the time of any takeover transaction
  • the provision of wholesale services between Bell Canada and MTS on a preferred supplier basis.

Provision for contract loss
In 2001, we entered into a contract with the Government of Alberta to build a next generation network to bring high-speed internet and broadband capabilities to rural communities in Alberta. This contract is accounted for using the percentage of completion method. During the second quarter of 2004, as part of our regular update of the estimated costs to complete construction of the network, potential cost overruns were identified. Construction is to be complete in late 2004. The costs of this last phase of construction are higher than previously estimated, due to changes necessitated in construction methods to connect individual government buildings to the network and higher average costs of construction. We recorded a provision of $110 million for this contract in the second quarter of 2004. Our estimated costs to complete are unchanged at September 30, 2004.

Other charges
During the third quarter of 2004, we recorded other pre-tax charges totalling $96 million ($78 million after taxes), which consisted primarily of future lease costs for excess facilities, asset write-downs and other provisions. 
     Prior to the third quarter of 2004, we recorded a credit of $18 million which related primarily to the reversal of previously recorded restructuring charges, which were no longer necessary given the introduction of a new voluntary employee departure program.

38    2004 Quarterly Report     Bell Canada Enterprises


 

NOTE 6. OTHER INCOME

  Three months   Nine months  
For the period ended September 30 2004   2003   2004    2003  

Net gains on investments  325     331  
Foreign currency gains (losses)  (2 )  (6 (4 )   32  
Other  10   7   66    16 

Other income  333   1   393    48  

In the third quarter of 2004, net gains on investments of $325 million included:

  • a gain of $108 million from the sale of Bell Canada’s remaining 3.24% interest in YPG General Partner Inc. for net cash proceeds of $123 million
  • a gain of $217 million realized from the sale of BCE Inc.’s 15.96% interest in MTS for net cash proceeds of $584 million. On August 1, 2004, as a result of a corporate reorganization, the MTS shares were transferred from Bell Canada to BCE Inc. The purpose of this reorganization was to ensure that capital loss carryforwards at BCE Inc. would be available to be utilized against the gain on the sale of the MTS shares. 
    Capital loss carryforwards were available to be utilized against the gains realized on these sale.
NOTE 7. DISCONTINUED OPERATIONS

  Three months   Nine months

For the period ended September 30 

2004   2003    2004    2003 

Emergis 

(2 )  11    25    24 

Other 

  –    3   

Net gain (loss) from discontinued operations 

(2 )  11    28    30 

The table below provides a summarized statement of operations for the discontinued operations.

  Three months   Nine months  

For the period ended September 30 

2004   2003   2004   2003  

Revenue 

  244   128   765  

Operating gain (loss) from discontinued operations, before tax 

  33   (52 )  76  

Gain (loss) from discontinued operations, before tax 

(2 )  (1 72   10  

Income tax expense on operating gain (loss) 

  (12 (11 )  (23

Income tax recovery (expense) on gain (loss) 

  2   (3 )  (1

Non-controlling interest 

  (11 22   (32

Net gain (loss) from discontinued operations 

(2 )  11   28   30  


Emergis provides eBusiness solutions to the financial services industry in North America and the health industry in Canada. It automates transactions between companies and allows them to interact and transact electronically.

The Security business provides organizations with the security infrastructure for their electronic service delivery.

Sale of Emergis
In May 2004, our board of directors approved the sale of our 63.9% interest in Emergis. In June 2004, BCE completed the sale of its interest in Emergis by way of a secondary public offering.
     In June 2004, Bell Canada paid $49 million to Emergis for the purchase of Emergis’ Security business and the early termination of the Bell Legacy Contract on June 30, 2004 rather than December 31, 2004, as well as the transfer of related intellectual property to Bell Canada.
     These transactions were recorded on a net basis. The net proceeds from the sale of Emergis were $285 million (net of $22 million of selling costs and $49 million consideration given to Emergis). The gain on the transaction was $60 million.
     The operating loss includes a future income tax asset impairment charge of $56 million ($36 million after non-controlling interest), which Emergis recorded before the sale as a result of the unwinding of tax loss utilization strategies between Emergis, 4122780 Canada Inc. (a wholly-owned subsidiary of Emergis) and Bell Canada.
     Emergis was presented previously in the Other BCE segment.

39    2004 Quarterly Report     Bell Canada Enterprises


 

NOTE 8. STOCK-BASED COMPENSATION PLANS

Restricted share units (RSUs)


  Number of  
  RSUs  

Outstanding, January 1, 2004 

 

Granted 

1,944,735  

Expired/forfeited 

(30,437

Outstanding, September 30, 2004 

1,914,298  

For the three months and nine months ended September 30, 2004, we recorded compensation expense for RSUs of $7 million and $17 million, respectively.

BCE Inc. stock options
The table below is a summary of the status of BCE Inc.’s stock option programs.


     Weighted 
  Number   average 
  of shares exercise price

Outstanding, January 1, 2004 

24,795,545    $32  

Granted 

5,589,476    $30

Exercised 

(828,659  $17  

Expired/forfeited 

(918,373  $34  

Outstanding, September 30, 2004 

28,637,989   $32 

Exercisable, September 30, 2004 

14,404,039    $33  

Teleglobe stock options
The table below is a summary of the status of Teleglobe’s stock option programs.


  Number    Weighted
  of BCE Inc.    average
  shares    exercise price

Outstanding, January 1, 2004 

955,175    $21

Exercised 

(102,828  $18

Expired/forfeited 

(24,685  $43

Outstanding and exercisable, September 30, 2004 

827,662    $21


Assumptions used in stock option pricing model
The table below shows the assumptions used to determine stock-based compensation expense using the Black-Scholes option pricing model.


  Three months   Nine months   

For the period ended September 30 

2004   2003   2004   2003  

Compensation expense ($ millions) 

9   7   23   19  

Number of stock options granted 

139,700   410,000   5,589,476  5,928,051  

Weighted average fair value per option granted ($) 

3   7   3   6  

Weighted average assumptions 

       

Dividend yield 

4.3 %  3.7 4.0 %  3.6

Expected volatility 

26 %  30 27 %  30

Risk-free interest rate 

3.7 %  3.6 3.1 %  4.0

Expected life (years) 

3.5   4.5   3.5   4.5  

Starting in 2004, most of the stock options granted contain specific performance targets that must be met before the option can be exercised. This is reflected in the calculation of the weighted average fair value per option granted.

40    2004 Quarterly Report     Bell Canada Enterprises


 

NOTE 9. COMMITMENTS AND CONTINGENCIES

Agreement to purchase Canadian operations of 360networks Corporation
In May 2004, Bell Canada announced an agreement to purchase the Canadian operations of 360networks Corporation for $275 million in cash. The purchase includes the shares of 360networks’ subsidiary GT Group Telecom Services Corporation, and certain related U.S. interconnect assets. Bell Canada plans to retain all of 360networks’ business, facilities and customer base in western Canada, and has an agreement to sell the retail customer operations and certain assets in central and eastern Canada to Call-Net Enterprises Inc. while continuing to provide network and other services to the central and eastern customer base for a share of future revenues. All regulatory approvals have been obtained and we expect to close the transaction in November 2004, subject to usual closing conditions.

Litigation

Teleglobe unsecured creditors lawsuit
On May 26, 2004, a lawsuit was filed in the United States Bankruptcy Court for the District of Delaware. The United States District Court for the District of Delaware subsequently withdrew the reference from the Bankruptcy Court and the matter is now pending in the District Court for the District of Delaware. The lawsuit is against BCE Inc. and ten former directors and officers of Teleglobe Inc. and certain of its subsidiaries. The plaintiffs are comprised of Teleglobe Communications Corporation, certain of its affiliated debtors and debtors in possession, and the Official Committee of Unsecured Creditors of these debtors. The lawsuit alleges breach of an alleged funding commitment of BCE Inc. towards the debtors, promissory estoppel, misrepresentation by BCE Inc. and breach and aiding and abetting breaches of fiduciary duty by the defendants. The plaintiffs seek an unspecified amount of damages against the defendants. While no one can predict the outcome of any legal proceeding, based on information currently available, BCE Inc. believes that it has strong defences, and it intends to vigorously defend its position.

41     2004 Quarterly Report     Bell Canada Enterprises


 

BCE Inc.
1000, rue de La Gauchetière Ouest 
Bureau 3700 
Montréal (Québec) 
H3B 4Y7 
www.bce.ca

Communications
e-mail: bcecomms@bce.ca
tel:1 888 932-6666
fax: (514) 870-4385

This document has been filed by BCE Inc. with Canadian securities commissions and the U.S. Securities and Exchange Commission. It can be found on BCE Inc.’s Web site at www.bce.ca, on SEDAR at www.sedar.com and on EDGAR at www.sec.gov or is available upon request from:

Investor Relations
e-mail: investor.relations@bce.ca
tel: 1 800 339-6353
fax: (514) 786-3970
  For further information concerning the Dividend Reinvestment and Stock Purchase Plan (DRP), direct deposit of dividend payments, the elimination of multiple mailings or the receipt of quarterly reports, please contact:

Computershare Trust
Company of Canada

100 University Avenue, 9th Floor,
Toronto, Ontario M5J 2Y1
tel: (514) 982-7555
or 1 800 561-0934
fax: (416) 263-9394
or 1 888 453-0330
e-mail: bce@computershare.com

PRINTED IN CANADA 
04-10 BCE-3E


 

 

 

 

 

 


BCE Investor Relations

Sophie Argiriou
514-786-8145
sophie.argiriou@bell.ca
George Walker
514-870-2488
george.walker@bell.ca
Roland Ribotti
514-870-9034
roland.ribotti@bell.ca

 


 

BCE Consolidated(1)
Consolidated Operational Data

 
($ millions, except per share amounts)
Q3
2004
 
Q3
2003
 
$ change
 
% change
 
 
 
YTD
September
2004

 
YTD
September
2003
 
 
 
$ change
 
%change
 


 
 
  
 
 
Operating revenues
4,781
 
4,627
 
154
 
3.3%
 
 
14,204
 
13,919
 
 
 
285
 
2.0%
Operating expenses
(2,845
)
(2,732
)
(113
)
(4.1%
)
 
 
(8,471
)
(8,356
)
 
 
(115
)
(1.4%
)
 

 
 
EBITDA(2)
1,936
 
1,895
 
41
 
2.2%
 
 
 
5,733
 
5,563
 
 
 
170
 
3.1%
 
EBITDA margin(3)
40.5%
 
41.0%
(0.5 pts
)
 
40.4%
40.0%
 
0.4 pts
 
Amortization expense
 (769
)
  (801
)
32
 
4.0%
 
 
 
(2,305
)
  (2,325
)
 
 
 20
0.9%
 
Net benefit plans cost
 (61
)
 
  (44
)
 
 (17
)
  (38.6%
)  
 
 
 (189
)
 (129
)
 
 
 (60
)
(46.5%
)
Restructuring and other items
(1,081
)
 
 (1
)
 
 (1,080
)
  n.m.
 
 
 
 (1,098
)
(1
 
 
 (1,097
)
  n.m.
 
 

 
 
Operating income
 25
 
 1,049
 
(1,024
 (97.6%
)
 
 
 2,141
 
3,108
 
 
 
(967
 (31.1%
Other income
  333
 
1
 
 332
 
  n.m.
 
 
 
393
 
 48
 
 
 
  345
 
 n.m.
 
Interest expense
 (253
)
 
  (270
)
 
  17
 
  6.3%
 
 
 
  (758
)
 (839
)
 
 
  81
 
  9.7%
 
 

 
 
Pre-tax earnings from continuing operations
105
 
 780
 
  (675
(86.5%
 
 
 1,776
 
2,317
 
 
 
(541)
 
 (23.3%
Income taxes
 44
 
  (282
)
 
326
n.m.
 
 
 (511
)
 (788
)  
 
 
277
 35.2%
Non-controlling interest
 (47
)
 
 (45
)
 
 (2
  (4.4%
 
 
 (134
)
 (144
 
 
  10
 
6.9%
 
 

 
 
Earnings from continuing operations
102
 
453
 
(351
 (77.5%
 
 
 1,131
 
1,385
 
 
 
  (254)
 
 (18.3%
Discontinued operations
 (2
)
 
  11
 
  (13
 n.m.
 
 
 
 28
 
30
 
 
 
(2
  (6.7%
 

 
 
Net earnings
 100
 
 464
 
  (364
 (78.4%
 
 
 1,159
 
 1,415
 
 
 
 (256
 (18.1%
Dividends on preferred shares
 (18
)
 
 (18
)
 
  -
 
 0.0%
 
 
 
 (53
)
  (50
)
 
 
  (3
)
  (6.0%
)
Premium on redemption of preferred shares
 -
 
 -
 
 -
 
 n.m.
 
 
 
 -
 
 (7
)
 
 
  7
 
  n.m.
 
 

 
 
Net earnings applicable to common shares
 82
 
446
 
(364
(81.6%
 
 
 1,106
 
1,358
 
 
 
(252
(18.6%


 

 

Net earnings per common share - basic
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Continuing operations
$
0.09
$
0.48
$
(0.39
)
(81.3%
)
 
$
1.17
$
1.46
 
$
(0.29
)
(19.9%
)
  Discontinued operations
$
-
$
0.01
$
(0.01
)
n.m.
 
$
0.03
$
0.03
 
$
-
0.0%
  Net earnings
$
0.09
$
0.49
$
(0.40
)
(81.6%
)
 
$
1.20
 $
1.49
 
$
(0.29
)
(19.5%
)
Net earnings per common share - diluted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Continuing operations
$
0.08
$
0.47
$
(0.39
)
(83.0%
)
 
$
1.16
$
1.45
 
$
(0.29
)
(20.0%
)
  Discontinued operations
$
-
$
 0.01
$
(0.01
)
n.m.
 
$
0.03
$
0.03
 
$
-
0.0%
  Net earnings
$
0.08
$
0.48
$
(0.40
)
(83.3%
)
 
$
1.19
 $
1.48
 
$
(0.29
)
(19.6%
)
Dividends per common share
$
0.30
$
0.30
$
-
0.0% 
 
$
0.90
$
0.90
 
$
-
0.0%
Average number of common shares outstanding - basic (millions)
924.6
921.5
 
924.4
919.3
 



 

 


 
 
 
 
 
 

 
 
 
 
 
 
 
The following items are included in net earnings:
 
             
             
  Net gains on sale of investments and dilution gains
 
             
             
            Continuing operations  
325
-
325
-
             
            Discontinued operations
(2
8
             
36
8
             
  Restructuring and other items
(725
6
             
(710
)
6
             
 
 
           

             
Total
(402
14
             
(349
)
14
             
Impact on net earnings per share
$
(0.43
$
0.01
             
$
(0.37
)
$ 0.01
             

           

             

n.m. : not meaningful

 

 

BCE Inc.   Supplementary Financial Information - Third Quarter 2004   Page 2

 


 

BCE Consolidated(1)
Consolidated Operational Data — Historical Trend

 
YTD
 
 
 
 
Total
 
 
 
 
 
($ millions, except per share amounts)
2004
 
Q3 04
 
Q2 04
 
Q1 04
 
2003
 
Q4 03
 
Q3 03
 
Q2 03
 
Q1 03
 




 
 
 
 
 
 
 
 
 
 
Operating revenues
14,204
 
4,781
 
4,782
 
4,641
 
18,737
 
4,818
 
4,627
 
4,673
 
4,619
 
Operating expenses
(8,471
)
(2,845
)
(2,829
)
(2,797
)
(11,327
)
(2,971
)
(2,732
)
(2,778
)
(2,846
)
 




EBITDA(2)
5,733
 
1,936
 
1,953
 
1,844
 
7,410
 
1,847
 
1,895
 
1,895
 
1,773
 
EBITDA margin(3)
40.4%
 
40.5%
 
40.8%
 
39.7%
 
39.5%
 
38.3%
 
41.0%
 
40.6%
 
38.4%
 
Amortization expense
(2,305
)
(769
)
(769
)
(767
)
(3,100
)
(775
)
(801
)
(774
)
(750
)
Net benefit plans cost
(189
)
(61
)
(65
)
(63
)
(175
)
(46
)
(44
)
(43
)
(42
)
Restructuring and other items
(1,098
)
(1,081
)
(14
)
(3
)
(14
)
(13
)
(1
)
-
 
-
 
 




Operating income
2,141
 
25
 
1,105
 
1,011
 
4,121
 
1,013
 
1,049
 
1,078
 
981
 
Other income
393
 
333
 
24
 
36
 
175
 
127
 
1
 
2
 
45
 
Interest expense
(758
)
(253
)
(253
)
(252
)
(1,105
)
(266
)
(270
)
(289
)
(280
)
 




Pre-tax earnings from continuing operations
1,776
 
105
 
876
 
795
 
3,191
 
874
 
780
 
791
 
746
 
Income taxes
(511
)
44
 
(293
)
(262
)
(1,119
)
(331
)
(282
)
(268
)
(238
)
Non-controlling interest
(134
)
(47
)
(39
)
(48
)
(201
)
(57
)
(45
)
(57
)
(42
)
 




Earnings from continuing operations
1,131
 
102
 
544
 
485
 
1,871
 
486
 
453
 
466
 
466
 
Discontinued operations
28
 
(2)
 
27
 
3
 
(56
)
(86
)
11
 
12
 
7
 
 




Net earnings
1,159
 
100
 
571
 
488
 
1,815
 
400
 
464
 
478
 
473
 
Dividends on preferred shares
(53
)
(18
)
(17
)
(18
)
(64
)
(14
)
(18
)
(17
)
(15
)
Premium on redemption of preferred shares
-
 
-
 
-
 
-
 
(7
)
-
 
-
 
-
 
(7
)
 




Net earnings applicable to common shares
1,106
 
82
 
554
 
470
 
1,744
 
386
 
446
 
461
 
451
 




Net earnings per common share - basic
 
 
 
 
 
 
 
 
 
   Continuing operations
$
1.17
 
$
0.09
 
$
0.57
 
$
0.51
 
$
1.96
 
$
0.50
 
$
0.48
 
$
0.49
 
$
0.49
 
   Discontinued operations
$
0.03
 
$
-
 
$
0.03
 
$
-
 
$
(0.06
)
$
(0.09
)
$
0.01
 
$
0.01
 
$
0.01
 
   Net earnings
$
1.20
 
$
0.09
 
$
0.60
 
$
0.51
 
$
1.90
 
$
0.41
 
$
0.49
 
$
0.50
 
$
0.50
 
Net earnings per common share - diluted
 
 
 
 
 
 
 
 
 
   Continuing operations
$
1.16
 
$
0.08
 
$
0.57
 
$
0.51
 
$
1.95
 
$
0.50
 
$
0.47
 
$
0.49
 
$
0.49
 
   Discontinued operations
$
0.03
 
$
-
 
$
0.03
 
$
-
 
$
(0.06
)
$
(0.09
)
$
0.01
 
$
0.01
 
$
0.01
 
   Net earnings
$
1.19
 
$
0.08
 
$
0.60
 
$
0.51
 
$
1.89
 
$
0.41
 
$
0.48
 
$
0.50
 
$
0.50
 
Dividends per common share
$
0.90
 
$
0.30
 
$
0.30
 
$
0.30
 
$
1.20
 
$
0.30
 
$
0.30
 
$
0.30
 
$
0.30
 
Average number of common shares outstanding - basic (millions)
924.4
 
924.6
 
924.3
 
924.1
 
920.3
 
923.4
 
921.5
 
919.3
 
917.1
 




 





The following items are included in net earnings:
   Net gains on sale of
   investments and dilution gains
      Continuing operations
325
325
-
-
84
84
-
-
-
      Discontinued operations
36
(2
)
31
7
(86
)
(94
)
8
-
-
   Restructuring and other items
(710
)
(725
)
16
(1
)
(3
)
(9
)
6
-
-
 




Total
(349
)
(402
)
47
6
(5
)
(19
)
14
-
-
Impact on net earnings per share
$
(0.37
)
$
(0.43
)
$
0.05
$
0.01
$
-
$
(0.01
)
$
0.01
$
-
$
-




 

 

BCE Inc.   Supplementary Financial Information - Third Quarter 2004   Page 3

 


 

BCE Consolidated(1)
Segmented Data

 


($ millions, except where otherwise indicated)
Q3
2004
Q3
2003

$ change

% change
YTD
September
2004

YTD
September
2003


$ change

%change




   
Revenues
Consumer
1,908
1,838
70
3.8%
5,591
5,335
256
4.8%
Business
1,440
1,440
-
0.0%
4,316
4,311
5
0.1%
Aliant
497
514
(17
)
(3.3%
)
1,527
1,532
(5
)
(0.3%
)
Other Bell Canada
486
478
8
1.7%
1,428
1,547
(119
)
(7.7%
)
  Inter-segment eliminations
(125
)
(115
)
(10
)
(8.7%
)
(378
)
(357
)
(21
)
(5.9%
)
  Total Bell Canada
4,206
4,155
51
1.2%
12,484
12,368
116
0.9%
Other BCE
  Bell Globemedia
302
296
6
2.0%
1,015
988
27
2.7%
  Advertising
209
201
8
4.0%
735
695
40
5.8%
  Subscriber
73
73
-
0.0%
221
222
(1
)
(0.5%
)
  Production and Sundry
20
22
(2
)
(9.1%
)
59
71
(12
)
(16.9%
)
  Telesat
91
84
7
8.3%
260
246
14
5.7%
  CGI
277
203
74
36.5%
745
630
115
18.3%
  Other
12
13
(1
)
(7.7%
)
41
36
5
13.9%
  Total Other BCE
682
596
86
14.4%
2,061
1,900
161
8.5%
  Inter-segment eliminations
(107
)
(124
)
17
13.7%
(341
)
(349
)
8
2.3%
   




Total revenues
4,781
4,627
154
3.3%
14,204
13,919
285
2.0%
   




   




   
Operating income                              
Consumer
569
552
17
3.1%
1,655
1,548
107
6.9%
 
Business
245
193
52
26.9%
713
582
131
22.5%
Aliant
71
104
(33
)
(31.7%
)
245
307
(62
)
(20.2%
)
Other Bell Canada
(898
)
163
(1,061
)
n.m.
(649
)
469
(1,118
)
n.m.
  Total Bell Canada
(13
)
1,012
(1,025
)
n.m.
1,964
2,906
(942
)
(32.4%
)
Other BCE
  Bell Globemedia
23
20
2
10.0%
137
101
35
34.7%
  Telesat
39
28
11
39.3%
104
91
13
14.3%
  CGI
24
23
1
4.3%
70
69
1
1.4%
  Other
(48
)
(34
)
(13
)
(38.2%
)
(134
)
(59
)
(74
)
n.m.
  Total Other BCE
38
37
1
2.7%
177
202
(25
)
(12.4%
)
   




Total Operating income
25
1,049
(1,024
)
(97.6%
)
2,141
3,108
(967
)
(31.1%
)
   




   




   
Capital expenditures(4)
Consumer
406
307
(99
)
(32.2%
)
1,022
802
(220
)
(27.4%
)
Business
154
228
74
32.5%
609
650
41
6.3%
Aliant
51
92
41
44.6%
181
236
55
23.3%
Other Bell Canada
125
81
(44
)
(54.3%
)
229
213
(16
)
(7.5%
)
  Total Bell Canada
736
708
(28
)
(4.0%
)
2,041
1,901
(140
)
(7.4%
)
Other BCE
  Telesat
64
64
-
0.0%
217
116
(101
)
(87.1%
)
  Other
11
19
8
42.1%
60
71
11
15.5%
   




Total capital expenditures
811
791
(20
)
(2.5%
)
2,318
2,088
(230
)
(11.0%
)
   




   




 

 

BCE Inc. Supplementary Financial Information - Third Quarter 2004 Page 4

 


 

BCE Consolidated(1)
Segmented Data — Historical Trend

 
YTD
 
 
 
 
Total
 
 
 
 
 
($ millions, except per share amounts)
2004
 
Q3 04
 
Q2 04
 
Q1 04
 
2003
 
Q4 03
 
Q3 03
 
Q2 03
 
Q1 03
 




 
Revenues
Consumer
5,591
1,908
1,858
1,825
7,203
1,868
1,838
1,768
1,729
Business
4,316
1,440
1,441
1,435
5,827
1,516
1,440
1,452
1,419
Aliant
1,527
497
526
504
2,059
527
514
517
501
Other Bell Canada
1,428
486
468
474
2,015
468
478
517
552
   Inter-segment eliminations
(378)
(125)
(121)
(132)
(490)
(133)
(115)
(124)
(118)
   Total Bell Canada
12,484
4,206
4,172
4,106
16,614
4,246
4,155
4,130
4,083
Other BCE
   Bell Globemedia
1,015
302
371
342
1,363
375
296
357
335
   Advertising
735
209
277
249
978
283
201
259
235
   Subscriber
221
73
74
74
291
69
73
75
74
   Production and Sundry
59
20
20
19
94
23
22
23
26
   Telesat
260
91
85
84
345
99
84
83
79
   CGI
745
277
251
217
838
208
203
211
216
   Other
41
12
18
11
51
15
13
13
10
   Total Other BCE
2,061
682
725
654
2,597
697
596
664
640
   Inter-segment eliminations
(341)
(107)
(115)
(119)
(474)
(125)
(124)
(121)
(104)
 




Total revenues
14,204
4,781
4,782
4,641
18,737
4,818
4,627
4,673
4,619
 




 




 
 
Operating income
Consumer
1,655
569
560
526
2,019
471
552
503
493
Business
713
245
227
241
781
199
193
199
190
Aliant
245
71
92
82
415
108
104
122
81
Other Bell Canada
(649)
(898)
138
111
621
152
163
144
162
   Total Bell Canada
1,964
(13)
1,017
960
3,836
930
1,012
968
926
Other BCE
   Bell Globemedia
137
23
74
40
167
66
20
62
19
   Telesat
104
39
34
31
124
33
28
31
32
   CGI
70
24
25
21
91
22
23
24
22
   Other
(134)
(48)
(45)
(41)
(97)
(38)
(34)
(7)
(18)
   Total Other BCE
177
38
88
51
285
83
37
110
55
 




Total Operating Income
2,141
25
1,105
1,011
4,121
1,013
1,049
1,078
981
 




 




 
 
Capital expenditures(4)
Consumer
1,022
406
354
262
1,287
485
307
287
208
Business
609
154
258
197
936
286
228
229
193
Aliant
181
51
45
85
333
97
92
73
71
Other Bell Canada
229
125
58
46
336
123
81
70
62
   Total Bell Canada
2,041
736
715
590
2,892
991
708
659
534
Other BCE
   Telesat
217
64
88
65
159
43
64
16
36
   Other
60
11
23
26
116
45
19
31
21
 




Total capital expenditures
2,318
811
826
681
3,167
1,079
791
706
591
 




 




 

BCE Inc.   Supplementary Financial Information - Third Quarter 2004   Page 5

 


 

BCE Consolidated(1)
Consolidated Balance Sheet Data

 
September 30
June 30
March 31
December 31
($ millions, except where otherwise indicated)
2004
2004
2004
2003
 




 
 
 
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
   Cash and cash equivalents
1,386
577
1,135
585
 
   Accounts receivable
2,491
 
2,292
 
2,267
 
2,061
 
   Other current assets
892
 
900
 
869
 
739
 
   Current assets of discontinued operations
-
 
8
 
447
 
280
 
 




Total current assets
4,769
 
3,777
 
4,718
 
3,665
 
Capital assets
21,111
 
20,995
 
20,833
 
21,114
 
Other long-term assets
2,494
 
3,609
 
3,475
 
3,459
 
Indefinite-life intangible assets
2,910
 
2,910
 
2,910
 
2,910
 
Goodwill
8,368
 
7,987
 
7,803
 
7,761
 
Non-current assets of discontinued operations
50
 
50
 
310
 
511
 
 




Total assets
39,702
 
39,328
 
40,049
 
39,420
 

LIABILITIES
 
 
 
 
Current liabilities
 
 
 
 
   Accounts payable and accrued liabilities
4,537
 
3,648
 
3,602
 
3,534
 
   Debt due within one year
1,516
 
1,030
 
1,156
 
1,519
 
   Current liabilities of discontinued operations
-
 
-
 
214
 
285
 
 




Total current liabilities
6,053
 
4,678
 
4,972
 
5,338
 
Long-term debt
12,076
 
12,492
 
13,112
 
12,381
 
Other long-term liabilities
4,790
 
4,884
 
4,768
 
4,705
 
Non-current liabilities of discontinued operations
-
 
-
 
20
 
20
 
 




Total liabilities
22,919
 
22,054
 
22,872
 
22,444
 
 




Non-controlling interest
2,904
 
3,203
 
3,385
 
3,403
 
 




SHAREHOLDERS' EQUITY
 
 
 
 
Preferred shares
1,670
 
1,670
 
1,670
 
1,670
 
 




Common shareholders' equity
 
 
 
 
   Common shares
16,765
 
16,757
 
16,753
 
16,749
 
   Contributed surplus
1,052
 
1,043
 
1,045
 
1,037
 
   Deficit
(5,563)
 
(5,368)
 
(5,645)
 
(5,837)
 
   Currency translation adjustment
(45)
 
(31)
 
(31)
 
(46)
 
 



Total common shareholders' equity
12,209
 
12,401
 
12,122
 
11,903
 
 




Total shareholders' equity
13,879
 
14,071
 
13,792
 
13,573
 
 




Total liabilities and shareholders' equity
39,702
 
39,328
 
40,049
 
39,420
 




 
 
 
 
 
Number of common shares outstanding
924.9
924.5
924.2
924.0
 




 


Key ratios
 
Net debt : Total Capitalization
42.1%
42.8%
43.3%
44.0%
Net debt : Trailing 12 month EBITDA
1.61
1.72
1.76
1.80
EBITDA : Interest (trailing 12 month)
7.40
7.24
6.95
6.71

 

 

BCE Inc.   Supplementary Financial Information - Third Quarter 2004   Page 6

 


 

BCE Consolidated
Consolidated Cash Flow Data

 
 
YTD
YTD
 
Q3
Q3
 
September
September
($ millions, except where otherwise indicated)
2004
2003
$ change
 
2004
2003
$ change


 


 
 
Cash flows from operating activities
 
   Earnings from continuing operations
102
453
(351
)
 
1,131
1,385
(254
)
   Adjustments to reconcile earnings from continuing
 
      operations to cash flows from operating activities:
 
      Amortization expense
769
801
(32
)
 
2,305
2,325
(20
)
      Net benefit plans cost
61
44
17
 
189
129
60
      Restructuring and other items (non-cash portion)
1,149
(4
)
1,153
 
1,164
(4
)
1,168
      Net gains on investments
(325
)
-
(325
)
 
(331
)
-
(331
)
      Future income taxes
(183
)
134
(317
)
 
(96
)
211
(307
)
      Non-controlling interest
47
45
2
 
134
144
(10
)
      Contributions to employee pension plans
(32
)
(46
)
14
 
(88
)
(73
)
(15
)
      Other employee future benefit plan payments
(13
)
(22
)
9
 
(59
)
(64
)
5
      Other
(27
)
26
(53
)
 
(3
)
(10
)
7
      Change in non-cash working capital
280
387
(107
)
 
(134
)
327
(461
)
 


 


 
1,828
1,818
10
 
4,212
4,370
(158
)


 


 
 
   Capital expenditures
(811
)
(791
)
(20
)
 
(2,318
)
(2,088
)
(230
)
   Other investing items
(2
)
155
(157
)
 
133
69
64
   Cash preferred dividends
(21
)
(14
)
(7
)
 
(64
)
(39
)
(25
)
   Cash dividends paid by subsidiaries to non-controlling interest
(44
)
(38
)
(6
)
 
(133
)
(137
)
4


 


 
 
Free Cash Flow from operations, before common dividends(2)
950
1,130
(180
)
 
1,830
2,175
(345
)
   Cash common dividends
(277
)
(259
)
(18
)
 
(831
)
(770
)
(61
)
 


 


Free Cash Flow from operations, after common dividends(2)
673
871
(198
)
 
999
1,405
(406
)
   Business acquisitions
(646
)
(3
)
(643
)
 
(952
)
(73
)
(879
)
   Business dispositions
4
55
(51
)
 
20
55
(35
)
   Decrease in investments accounted for under the cost and
   equity methods
695
1
694
 
693
7
686
 


 


Free Cash Flow after investments and divestitures
726
924
(198
)
 
760
1,394
(634
) 
 


 


Other financing activities
 
   Increase (decrease) in notes payable and bank advances
173
(73
)
246
 
123
(242
)
365
   Issue of long-term debt
10
17
(7
)
 
1,410
1,881
(471
)
   Repayment of long-term debt
(98
)
(123
)
25
 
(1,750
)
(1,940
)
190
   Issue of common shares
8
5
3
 
16
14
2
   Issue of preferred shares
-
-
-
 
-
510
(510
)
   Redemption of preferred shares
-
-
-
 
-
(357
)
357
   Issue of equity securities by subsidiaries to non-controlling
   interest
-
24
(24)
 
7
113
(106
)
   Redemption of equity securities by subsidiaries from
   non-controlling interest
(4
)
(39
)
35
 
(64
)
(74
)
10
   Other
(18
)
56
(74
)
 
(34
)
(5
)
(29
)
 


 


 
71
(133
)
204
 
(292
)
(100
)
(192
)


 


Cash provided by (used in) continuing operations
797
791
6
 
468
1,294
(826
)
Cash provided by (used in) discontinued operations
12
30
(18
)
 
196
17
179
 


 


Net increase (decrease) in cash and cash equivalents
809
821
(12
)
 
664
1,311
(647
)
Cash and cash equivalents at beginning of period
577
796
(219
)
 
722
306
416
 


 


Cash and cash equivalents at end of period
1,386
1,617
(231
)
 
1,386
1,617
(231
)
 


 


   Consists of:
 
      Cash and cash equivalents of continuing operations
1,386
1,476
(90
)
 
1,386
1,476
(90
)
      Cash and cash equivalents of discontinued operations
-
141
(141
)
 
-
141
(141
)
 


 


Total
1,386
1,617
(231
)
 
1,386
1,617
(231
)


 



Other information
 
 
   
 
 
 
 
 
 
   
 
 
 
Capital expenditures as a percentage of revenues
17.0%
 
17.1%
 
0.1 pts
   
16.3%
 
15.0%
 
(1.3) pts
 
Cash flow per share(5)
$
1.10
 
$
1.11
 
$
(0.01)
   
$
2.05
 
$
2.48
 
$
(0.43)
 
Annualized cash flow yield(6)
15.1%
 
16.8%
 
(1.7) pts
   
9.7%
 
10.8%
 
(1.1) pts
 
Common dividend payout
337.8%
 
58.1%
 
279.7 pts
   
75.1%
 
56.7%
 
18.4 pts
 

 

 

BCE Inc.   Supplementary Financial Information - Third Quarter 2004   Page 7

 


 

BCE Consolidated
Consolidated Cash Flow Data — Historical Trend

 

($ millions, except where otherwise indicated)
YTD
2004
Q3 04
Q2 04
 
Q1 04
 
Total
2003
Q4 03
Q3 03
Q2 03
Q1 03

 

 


Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
 
 
 
     Earnings from continuing operations
1,131
102
544
485
1,871
486
453
466
466

     Adjustments to reconcile earnings from continuing operations to cash flows from operating activities:

          Amortization expense
2,305
769
769
767
3,100
775
801
774
750
          Net benefit plans cost
189
61
65
63
175
46
44
43
42
          Restructuring and other items (non-cash portion)
1,164
1,149
13
2
6
10
(4
)
-
-
          Net gains on investments
(331
)
(325
)
(1
)
(5
)
(68
)
(68
)
-
-
-
          Future income taxes
(96
)
(183
)
33
54
418
207
134
99
(22
)
          Non-controlling interest
134
47
39
48
201
57
45
57
42
          Contributions to employee pension plans
(88
)
(32
)
(27
)
(29
)
(160
)
(87
)
(46
)
(21
)
(6
)
          Other employee future benefit plan payments
 (59
)
(13
)
(22
)
(24
)
(87
)
(23
)
(22
)
(21
)
(21
)
          Other
(3
)
(27
)
(20
)
44
(60
)
(50
)
26
(85
)
49
          Change in non-cash working capital
(134
)
280
(269
)
(145
)
572
245
387
75
(135
)
 

 

 
 
 

 
4,212
1,828
1,124
1,260
5,968
1,598
1,818
1,387
1,165

 
 

 
 
 

     Capital expenditures
(2,318
)
(811
)
(826
)
(681
)
(3,167
)
(1,079
)
(791
)
(706
)
(591
)
     Other investing items
133
(2
)
116
19
62
(7
)
155
(44
)
(42
)
     Cash preferred dividends
(64
)
(21
)
(21
)
(22
)
(61
)
(22
)
(14
)
(14
)
(11
)
    Cash dividends paid by subsidiaries to non-controlling interest
(133
)
(44
)
(47
)
(42
)
(184
)
(47
)
(38
)
(55
)
(44
)




Free Cash Flow from operations, before common dividends(2)
1,830
950
346
534
2,618
443
1,130
568
477
     Cash common dividends
(831
)
(277
)
(277
)
(277
)
(1,029
)
(259
)
(259
)
(254
)
(257
)
 

 

 
 
 

Free Cash Flow from operations, after common dividends(2)
999
673
69
257
1,589
184
871
314
220
     Business acquisitions
(952
)
(646
)
(247
)
(59
)
(115
)
(42
)
(3
)
(7
)
(63
)
     Business dispositions
20
4
-
16
55
-
55
-
-
     Decrease (increase) in investments accounted for under the cost and equity methods
693
695
(8
)
6
163
156
1
(1
)
7
 


 
 

Free Cash Flow after investments and divestitures
760
726
(186
)
220
1,692
298
924
306
164
 




Other financing activities
     Increase (decrease) in notes payable and bank advances
123
173
(69
)
19
(295
)
(53
)
(73
)
(55
)
(114
)
     Issue of long-term debt
1,410
10
74
1,326
1,986
105
17
72
1,792
     Repayment of long-term debt
(1,750
)
(98
)
(718
)
(934
)
(3,472
)
(1,532
)
(123
)
(1,457
)
(360
)
     Issue of common shares
16
8
4
4
19
5
5
4
5
     Issue of preferred shares
-
-
-
-
510
-
-
-
510
     Redemption of preferred shares
-
-
-
-
(357
)
-
-
-
(357
)
     Issue of equity securities and convertible debentures by subsidiaries to non-controlling interest
7
-
-
7
132
19
24
16
73
     Redemption of equity securities by subsidiaries from non-controlling interest
(64
)
(4
)
(17
)
(43
)
(108
)
(34
)
(39
)
(16
)
(19
)
     Other
(34
)
(18
)
32
(48
)
(46
)
(41
)
56
(59
)
(2
)
 

 

 
 
 

 
(292
)
71
(694
)
331
(1,631
)
(1,531
)
(133
)
(1,495
)
1,528

 
 

 
 
 
Cash provided by (used in) continuing operations
468
797
(880
)
551
61
(1,233
)
791
(1,189
)
1,692
Cash provided by (used in) discontinued operations
196
12
(54
)
238
355
338
30
(3
)
(10
)
 

 

 
 
 

Net increase (decrease) in cash and cash equivalents
664
809
(934
)
789
416
(895
)
821
(1,192
)
1,682
Cash and cash equivalents at beginning of period
722
577
1,511
722
306
1,617
796
1,988
306
 

 

 
 
 

Cash and cash equivalents at end of period
1,386
1,386
577
1,511
722
722
1,617
796
1,988
 

 

 
 
 

     Consists of:
          Cash and cash equivalents of continuing operations
1,386
1,386
577
1,135
585
585
1,476
684
1,855
          Cash and cash equivalents of discontinued operations
-
-
-
376
137
137
141
112
133
 

 

 
 
 

     Total
1,386
1,386
577
1,511
722
722
1,617
796
1,988




 
Other information
 
Capital expenditures as a percentage of revenues
16.3%
17.0%
17.3%
14.7%
16.9%
22.4%
17.1%
15.1%
12.8%
Cash flow per share(5)
$
2.05
$
1.10
$
0.32
$
0.63
$
3.04
$
0.56
$
1.11
$
0.74
$
0.63
Annualized cash flow yield(6)
9.7%
15.1%
5.6%
8.4%
9.8%
6.8%
16.8%
8.0%
7.6%
Common dividend payout
75.1%
337.8%
50.0%
58.9%
59.0%
67.1%
58.1%
55.1%
57.0%
 

 

 

 

BCE Inc. Supplementary Financial Information - Third Quarter 2004 Page 8

 


 

 

Proportionate Net Debt, Preferreds and EBITDA

BCE Corporate and Bell Canada Net debt and preferreds
                             
At September 30, 2004


($ millions, except where otherwise indicated)
 
Bell Canada
(excl. Aliant)
Aliant
Bell
Canada
Statutory
Inter-company
eliminations
Total
Bell
Canada
BCE Inc.
Corporate


Bank indebtedness / (cash and cash equivalents)  
(92
)
(407
)
(499
)
-
(499
)
(684
)
Long-term debt  
8,473
889
9,362
(397
)
8,965
2,000
Debt due within one year  
1,556
102
1,658
(181
)
1,477
-
Long-term note receivable from BCH  
(498
)
-
(498
)
498
-
-
PPA fair value increment (7)  
-
-
-
-
124
-
   
 
Net debt  
9,439
584
10,023
(80
)
10,067
1,316
Preferred shares - Bell Canada (8)  
1,100
-
1,100
-
1,100
-
Preferred shares - Aliant (8)  
-
172
172
-
172
-
Perpetual Preferred shares - BCE  
-
-
-
-
-
1,670
Nortel common shares at market  
-
-
-
-
-
(60
)
   


Net debt and preferreds  
10,539
756
11,295
(80
)
11,339
2,926


 

Proportionate net debt and preferreds, Trailing EBITDA 
                                                         

For the quarter ended September 30, 2004

($ millions, except where otherwise indicated)

 
%
owned
by BCE
Propor-
tionate
net debt
and
preferreds
TOTAL EBITDA

PROPORTIONATE EBITDA
Q3 04   Q2 04   Q1 04   Q4 03   Trailing     Q3 04   Q2 04   Q1 04   Q4 03   Trailing  

 


   
 
Bell Canada (excluding Aliant)  
100%
10,583
*
   
1,669
1,612
1,549
1,514
6,344
1,669
1,612
1,549
1,514
6,344
Aliant  
53.5%
404
   
187
209
206
217
819
100
112
110
116
438
   

   


Total Bell Canada Consolidated
 
10,987
   
1,856
1,821
1,755
1,731
7,163
1,769
1,724
1,659
1,630
6,782
Other BCE  
   
Bell Globemedia  
68.5%
398
   
43
93
56
83
275
22
54
34
50
160
Telesat  
100%
195
   
60
54
54
55
223
60
54
54
55
223
CGI  
28.9%
83
   
38
37
31
32
138
38
37
31
32
138
Corporate and other  
100%
2,940
   
(35
)
(31
)
(32
)
(35
)
(133
)
(35
)
(31
)
(32
)
(35
)
(133
)
   

   




Total Other BCE  
100%
3,616
   
106
153
109
135
503
85
114
87
102
388
Inter-segment eliminations  
   
(26
)
(21
)
(20
)
(19
)
(86
)
(26
)
(21
)
(20
)
(19
)
(86
)
   

   


Total  
14,603
   
1,936
1,953
1,844
1,847
7,580
1,828
1,817
1,726
1,713
7,084



 

* Calculated the following way: Bell Canada (excl. Aliant) net debt and preferred of $10,539 million minus $80 million of inter-company eliminations plus $124 million PPA fair value increment.

 

 

BCE inc.    Supplementary Financial Information - Third Quarter 2004    Page 9


 

Bell Canada Consolidated (1)
Operational Data

($ millions, except where otherwise indicated)
Q3
2004
Q3
2003

$ change

% change
YTD
September
2004
YTD
September
2003
$ change
% change




 
Revenues
Local and access
1,395
1,410
(15
)
(1.1
%)
4,175
4,200
(25
)
(0.6
%)
Long distance
589
641
(52
)
(8.1
%)
1,767
1,942
(175
)
(9.0
%)
Wireless
727
645
82
12.7
%
2,076
1,803
273
15.1
%
Data
915
906
9
1.0
%
2,677
2,762
(85
)
(3.1
%)
Video
213
192
21
10.9
%
631
559
72
12.9
%
Terminal sales and other
367
361
6
1.7
%
1,158
1,102
56
5.1
%
 




Total operating revenues
4,206
4,155
51
1.2
%
12,484
12,368
116
0.9
%
Operating expenses
(2,350
)
(2,338
)
(12
)
(0.5
%)
(7,052
)
(7,098
)
46
0.6
%
 




EBITDA
1,856
1,817
39
2.1
%
5,432
5,270
162
3.1
%
 
EBITDA margin (%)
44.1
%
43.7
%
0.4 pts
43.5
%
42.6
%
0.9 pts
 
Amortization expense
(734
)
(758
)
24
3.2
%
(2,199
)
(2,228
)
29
1.3
%
Net benefit plans cost
(55
)
(46
)
(9
)
(19.6
%)
(173
)
(135
)
(38
)
(28.1
%)
Restructuring and other items
(1,080
)
(1
)
(1,079
)
n.m.
(1,096
)
(1
)
(1,095
)
n.m.
 




Operating income (loss)
(13
)
1,012
(1,025
)
n.m.
1,964
2,906
(942
)
(32.4
%)
Other income
114
3
111
n.m.
163
82
81
98.8
%
Interest expense
(215
)
(239
)
24
10.0
%
(651
)
(714
)
63
8.8
%
 




Pre-tax earnings (loss) from continuing operations
(114
)
776
(890
)
n.m.
1,476
2,274
(798
)
(35.1
%)
Income taxes
75
(196
)
271
n.m.
(366
)
(578
)
212
36.7
%
Non-controlling interest
2
(13
)
15
n.m.
1
(54
)
55
n.m.
 




Earnings (loss) from continuing operations
(37
)
567
(604
)
n.m.
1,111
1,642
(531
)
(32.3
%)
Discontinued operations
-
-
-
n.m.
-
6
(6
)
n.m.
 




Net earnings (loss)
(37
)
567
(604
)
n.m.
1,111
1,648
(537
)
(32.6
%)
Dividends on preferred shares
(16
)
(17
)
1
5.9
%
(49
)
(49
)
-
0.0
%
Interest on equity-settled notes
-
-
-
n.m.
-
(25
)
25
n.m.
 




Net earnings (loss) applicable to common shares
(53
)
550
(603
)
n.m.
1,062
1,574
(512
)
(32.5
%)
 




                       
Other information
                       
Cash flow information
 
Free Cash Flow (FCF)
  Cash from operating activities
1,756
1,728
28
1.6
%
4,040
3,819
221
5.8
%
  Capital expenditures
(736
)
(708
)
(28
)
(4.0
%)
(2,041
)
(1,901
)
(140
)
(7.4
%)
  Dividends and distributions
(445
)
(465
)
20
 
4.3
%
(1,385
)
(1,558
)
173
11.1
%
  Interest on equity-settled notes
-
 
-
 
-
 
n.m.
-
 
(47
)
47
n.m.
  Other investing items
1
52
 
(51
)
(98.1
%)
(7
)
44
 
(51
)
n.m.
   




Total
576
607
 
(31
)
(5.1
%)
607
 
357
 
250
(70.0
%)
 




 
Capital expenditures as a percentage of revenues (%)
17.5
%
17.0
%
 
(0.5)
pts
16.3
%
15.4
%
(0.9)
pts
 
Balance Sheet Information
September 30
December 31
   
     
 
2004
2003
   
     
 

Capital Structure

Net Debt

  Long-term debt
9,362
 
10,024
 
   
     
  Debt due within one year
1,658
 
1,165
 
   
     
  Less: Cash and cash equivalents
(499
)
(398
)
   
     
 

Total Net Debt
10,521
 
10,791
 
   
     
Non-controlling interest
1,230
 
1,627
 
   
     
Total shareholders' equity
9,150
 
9,520
 
   
     
 

Total Capitalization
20,901
 
21,938
 
   
     
 


 
Net Debt: Total Capitalization
50.3
%
49.2
%
   
     
Net Debt: Trailing 12 month EBITDA
1.47
 
1.54
 
   
     
EBITDA : Interest (trailing 12 month)
8.12
 
7.41
 
   
     
                       

 

BCE Inc.    Supplementary Financial Information - Third Quarter 2004    Page 10


 

Bell Canada Consolidated (1)
Operational Data - Historical Trend

($ millions, except where otherwise indicated)
YTD
2004
 
Q3 04
 
Q2 04
Q1 04
Total
2003
Q4 03
Q3 03
Q2 03
Q1 03
 
Revenues
Local and access
4,175
1,395
1,401
1,379
5,601
1,401
1,410
1,404
1,386
Long distance
1,767
589
572
606
2,544
602
641
615
686
Wireless
2,076
727
698
651
2,461
658
645
607
551
Data
2,677
915
870
892
3,717
955
906
936
920
Video
631
213
211
207
759
200
192
190
177
Terminal sales and other
1,158
367
420
371
1,532
430
361
378
363
 




Total operating revenues
12,484
4,206
4,172
4,106
16,614
4,246
4,155
4,130
4,083
Operating expenses
(7,052
)
(2,350
)
(2,351
)
(2,351
)
(9,613
)
(2,515
)
(2,338
)
(2,370
)
(2,390
)
 




EBITDA
5,432
1,856
1,821
1,755
7,001
1,731
1,817
1,760
1,693
 
EBITDA margin (%)
43.5
%
44.1
%
43.6
%
42.7
%
42.1
%
40.8
%
43.7
%
42.6
%
41.5
%
 
Amortization expense
(2,199
)
(734
)
(733
)
(732
)
(2,970
)
(742
)
(758
)
(747
)
(723
)
Net benefit plans cost
(173
)
(55
)
(58
)
(60
)
(181
)
(46
)
(46
)
(45
)
(44
)
Restructuring and other items
(1,096
)
(1,080
)
(13
)
(3
)
(14
)
(13
)
(1
)
-
-
 




Operating income (loss)
1,964
(13
)
1,017
960
3,836
930
1,012
968
926
Other income
163
114
19
30
217
135
3
35
44
Interest expense
(651
)
(215
)
(216
)
(220
)
(945
)
(231
)
(239
)
(232
)
(243
)
 




Pre-tax earnings (loss) from continuing operations
1,476
(114
)
820
770
3,108
834
776
771
727
Income taxes
(366
)
75
(245
)
(196
)
(787
)
(209
)
(196
)
(199
)
(183
)
Non-controlling interest
1
2
9
(10
)
(53
)
1
(13
)
(22
)
(19
)
 




Earnings (loss) from continuing operations
1,111
(37
)
584
564
2,268
626
567
550
525
Discontinued operations
-
-
-
-
59
53
-
5
1
 




Net earnings (loss)
1,111
(37
)
584
564
2,327
679
567
555
526
Dividends on preferred shares
(49
)
(16
)
(17
)
(16
)
(58
)
(9
)
(17
)
(16
)
(16
)
Interest on equity-settled notes
-
-
-
-
(25
)
-
-
(10
)
(15
)
 




Net earnings (loss) applicable to common shares
1,062
(53
)
567
548
2,244
670
550
529
495
 




 
Other information
 
Cash flow information
   
Free Cash Flow (FCF)
 
 
  Cash from operating activities
4,040
1,756
1,089
1,195
5,366
1,547
1,728
1,229
862
  Capital expenditures
(2,041
)
(736
)
(715
)
(590
)
(2,892
)
(991
)
(708
)
(659
)
(534
)
  Dividends and distributions
(1,385
)
(445
)
(437
)
(503
)
(2,081
)
(523
)
(465
)
(704
)
(389
)
  Interest on equity-settled notes
-
-
-
-
(47
)
-
-
(24
)
(23
)
  Other investing items
(7
)
1
(1
)
(7
)
47
3
52
(5
)
(3
)
 




Total
607
576
(64
)
95
393
36
607
(163
)
(87
)
 




 
Capital expenditures as a percentage of revenues (%)
16.3
%
17.5
%
17.1
%
14.4
%
17.4
%
23.3
%
17.0
%
16.0
%
13.1
%
 
 
Balance Sheet Information
September 30
June 30

March 31

December 31

Capital Structure
2004
2004
2004
2003
 


Net Debt
  Long-term debt
9,362
9,674
10,331
10,024
  Debt due within one year
1,658
1,269
1,111
1,165
  Less: Cash and cash equivalents
(499
)
(422
)
(1,112
)
(398
)
 


Total Net Debt
10,521
10,521
10,330
10,791
Non-controlling interest
1,230
1,559
1,608
1,627
Total shareholders' equity
9,150
9,851
9,682
9,520
 


Total Capitalization
20,901
21,931
21,620
21,938
 


 
Net Debt: Total Capitalization
50.3
%
48.0
%
47.8
%
49.2
%
Net Debt : Trailing 12 month EBITDA
1.47
1.48
1.46
1.54
EBITDA : Interest (trailing 12 month)
8.12
7.86
7.66
7.41

 

BCE Inc.    Supplementary Financial Information - Third Quarter 2004    Page 11


 

Bell Canada Consolidated (1)
Statistical Data

 

 
Q3 2004
Q3 2003
% change
YTD
September
2004
YTD
September
2003
% change




Wireline
 
 
 
 
 
 
 
 
 
 
 
Local
 
 
 
 
 
Network access services (k)
 
 
 
 
 
  Residential
 
 
 
8,427
 
8,539
 
(1.3
%)
  Business
 
 
 
4,535
 
4,549
 
(0.3
%)
 
 
 
 



  Total
 
 
 
12,962
 
13,088
 
(1.0
%)
                       
SmartTouch feature revenues ($M)
234
239
(2.1
%)
706
715
(1.3
%)
 
 
 
 
 
 
Long Distance (LD)
 
 
 
 
 
Conversation minutes (M)
4,435
 
4,664
 
(4.9
%)
13,511
 
14,447
 
(6.5
%)
Average revenue per minute ($)
0.120
 
0.128
 
(6.3
%)
0.119
 
0.124
 
(4.0
%)

Data
 
 
 
 
 
 
 
 
 
 
 
Equivalent access lines (9) (k) - Ontario and Quebec
 
 
 
 
 
  Digital equivalent access lines (k)
 
 
 
4,197
 
3,771
 
11.3
%
 
 
 
 
 
 
Internet subscribers (10) (k)
 
 
 
 
 
  DSL High Speed Internet net activations (k)
96
 
104
 
(7.7
%)
284
 
281
 
1.1
%
  DSL High Speed Internet subscribers (k)
 
 
 
1,766
 
1,391
 
27.0
%
  Dial-up Internet subscribers (k)
 
 
 
775
 
892
 
(13.1
%)
 
 
 
 

 


 
 
 
 
2,541
 
2,283
 
11.3
%
 
 
 
 
 
 
Wireless
 
 
 
 
 
Cellular & PCS Net activations (k)
 
 
 
 
 
  Pre-paid
14
 
23
 
(39.1
%)
54
 
68
 
(20.6
%)
  Post-paid
95
 
101
 
(5.9
%)
242
 
257
 
(5.8
%)
 




 
109
 
124
 
(12.1
%) 
296
 
325
 
(8.9
%)
 
 
 
 
 
 
Cellular & PCS subscribers (k)
 
 
 
 
 
  Pre-paid
 
 
 
1,113
 
1,026
 
8.5
%
  Post-paid
 
 
 
3,595
 
3,197
 
12.4
%
 
 
 
 
 
 
 
 
 
 
4,708
 
4,223
 
11.5
%
 
 
 
 
 
 
Average revenue per unit (ARPU) ($/month)
50
 
50
 
0.0
%
49
 
47
 
4.3
%
  Pre-paid
12
 
13
 
(7.7
%) 
12
 
12
 
0.0
%
  Post-paid
63
 
62
 
1.6
61
 
59
 
3.4
%
 
 
 
 
 
 
Churn (%) (average per month)
1.2
 %
1.4
%
0.2
pts 
1.3
%
1.4
%
0.1
pts
  Pre-paid
1.9
 %
1.8
%
(0.1)
pts
1.9
% 
1.8
(0.1)
pts
  Post-paid
1.0
 %
1.3
0.3
pts 
1.1
%
1.3
0.2
pts
 
 
 
 
 
 
Usage per subscriber (min/month)
n/a
 
231
 
n/a
 
n/a
 
224
 
n/a
 
Cost of acquisition (COA) (11) ($/sub)
381
 
425
 
10.4
%
415
 
418
 
0.7
%
Wireless EBITDA ($ millions)
334
 
251
 
33.1
913
 
689
 
32.5
%
Wireless EBITDA margin (12)
45.4
% 
38.0
%
7.4
pts 
43.4
%
37.2
6.2
pts
Wireless capital expenditures ($ millions)
95
 
88
 
(8.0
%)
237
 
239
 
0.8
%
 
 
 
 
 
 
Paging subscribers (k)
 
 
 
449
 
549
 
(18.2
%)
Paging average revenue per unit ($/month)
10
 
10
 
0.0
%
10
 
10
 
0.0
%

Video (DTH and VDSL)
 
 
 
 
 
 
 
 
 
 
 
Total subscribers (k)
 
 
 
1,460
 
1,352
 
8.0
%
Net subscriber activations (k)
33
 
17
 
94.1
%
73
 
48
 
52.1
%
ARPU ($/month)
48
 
47
 
2.1
48
 
46
 
4.3
%
COA ($/sub)
548
 
507
 
(8.1
%) 
586
 
512
 
(14.5
%)
Video EBITDA ($ millions)
(16
(9
(77.8
%) 
(15
(24
37.5
Churn (%) (average per month)
1.1
% 
1.4
0.3
pts 
1.0
% 
1.2
0.2
pts

 

BCE Inc    Supplementary Financial Information - Third Quarter 2004    Page 12


Bell Canada Consolidated (1)
Statistical Data — Historical Trend

 

 
YTD
2004
Q3 04
 
Q2 04
Q1 04
Total 2003
 
Q4 03
Q3 03
Q2 03
Q1 03



 

Wireline
 
Local
 
Network access services (k)
  Residential
8,427
8,390
8,476
8,511
8,539
8,504
8,566
  Business
4,535
4,548
4,541
4,540
4,549
4,564
4,577
 


  Total
12,962
12,938
13,017
13,051
13,088
13,068
13,143
 
SmartTouch feature revenues ($M)
706
234
235
237
955
240
239
239
237
 
                                     
Long Distance (LD)
Conversation minutes (M)
13,511
4,435
4,498
4,578
19,132
4,685
4,664
4,911
4,872
Average revenue per minute ($)
0.119
0.120
0.118
0.120
0.124
0.122
0.128
0.120
0.124
 
Data
 
Equivalent access lines (9) (k) - Ontario and Quebec
Digital equivalent access lines (k)
4,197
4,083
3,983
3,867
3,771
3,708
3,704
 
Internet subscribers (10) (k)
  DSL High Speed Internet net activations (k)
284
96
73
115
372
91
104
81
96
 
  DSL High Speed Internet subscribers (k)
1,766
1,670
1,597
1,482
1,391
1,287
1,206
  Dial-up Internet subscribers (k)
775
807
836
869
892
911
940
 


 
2,541
2,477
2,433
2,351
2,283
2,198
2,146
 
Wireless
 
Cellular & PCS Net activations (k)
  Pre-paid
54
14
17
23
101
33
23
27
18
  Post-paid
242
95
78
69
413
156
101
104
52
 


 

 
296
109
95
92
514
189
124
131
70
 
Cellular & PCS subscribers (k)
  Pre-paid
1,113
1,099
1,082
1,059
1,026
1,003
976
  Post-paid
3,595
3,500
3,422
3,353
3,197
3,096
2,992
 


 
4,708
4,599
4,504
4,412
4,223
4,099
3,968
 
Average revenue per unit (ARPU) ($/month)
49
50
50
47
48
50
50
48
45
  Pre-paid
12
12
11
11
12
12
13
12
11
  Post-paid
61
63
62
59
60
62
62
60
56
 
Churn (%) (average per month)
1.3
%
1.2
%
1.3
%
1.3
%
1.4
%
1.4
%
1.4
%
1.4
%
1.4
%
  Pre-paid
1.9
%
1.9
%
1.9
%
1.7
%
1.9
%
1.8
%
1.8
%
1.9
%
1.9
%
  Post-paid
1.1
%
1.0
%
1.1
%
1.1
%
1.3
%
1.2
%
1.3
%
1.3
%
1.3
%
 
Usage per subscriber (min/month)
n/a
n/a
n/a
223
228
240
231
237
203
Cost of acquisition (COA) (11) ($/sub)
415
381
413
455
426
445
425
435
387
Wireless EBITDA ($ millions)
913
334
317
262
918
229
251
219
219
Wireless EBITDA margin (12)
43.4
%
45.4
%
44.9
%
39.6
%
36.3
%
34.0
%
38.0
%
35.3
%
38.4
%
Wireless capital expenditures ($ millions)
237
95
77
65
408
169
88
81
70
 
Paging subscribers (k)
449
469
493
524
549
581
606
Paging average revenue per unit ($/month)
10
10
10
10
10
10
10
10
10

                                     
Video (DTH and VDSL)
 
Total subscribers (k)
1,460
1,427
1,403
1,387
1,352
1,335
1,317
Net subscriber activations (k)
73
33
24
16
83
35
17
18
13
ARPU ($/month)
48
48
49
48
46
48
47
47
44
COA ($/sub)
586
548
570
661
532
581
507
533
493
Video EBITDA ($ millions)
(15
)
(16
)
-
1
(45
)
(21
)
(9
)
(9
)
(6
)
Churn (%) (average per month)
1.0
%
1.1
%
1.0
%
0.9
%
1.1
%
1.0
%
1.4
%
1.1
%
1.0
%

                                     

 

BCE Inc.     Supplementary Financial Information - Third Quarter 2004    Page 13


Accompanying Notes

(1) We have reclassified some of the figures for the comparative period to make them consistent with the current period's presentation.
   
(2) Non-GAAP Financial Measures
   
  EBITDA
  The term, EBITDA (earnings before interest, taxes, depreciation and amortization), does not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP). It is therefore unlikely to be comparable to similar measures presented by other companies. EBITDA is presented on a consistent basis from period to period.
   
  We define EBITDA as operating revenues less operating expenses, which means it represents operating income before amortization expense, net benefit plans cost, and restructuring and other items.
   
  We use EBITDA, among other measures, to assess the operating performance of our ongoing businesses without the effects of amortization expense, net benefit plans cost, and restructuring and other items. We exclude amortization expense and net benefit plans cost because they largely depend on the accounting methods and assumptions a company uses, as well as non-operating factors, such as the historical cost of capital assets and the fund performance of a company’s pension plans. We exclude restructuring and other items because they are transitional in nature.
   
  EBITDA allows us to compare our operating performance on a consistent basis. We believe that certain investors and analysts use EBITDA to measure a company’s ability to service debt and to meet other payment obligations, or as a common valuation measurement in the telecommunications industry.
   
  EBITDA should not be confused with net cash flows from operating activities. The most comparable Canadian GAAP financial measure is operating income.
   
  FREE CASH FLOW
  The term, free cash flow, does not have any standardized meaning prescribed by Canadian GAAP. It is therefore unlikely to be comparable to similar measures presented by other companies. Free cash flow is presented on a consistent basis from period to period.
   
  We define free cash flow as cash from operating activities after capital expenditures, total dividends and other investing activities.
   
  We consider free cash flow to be an important indicator of the financial strength and performance of our business because it shows how much cash is available to repay debt and to reinvest in our company. We believe that certain investors and analysts use free cash flow when valuing a business and its underlying assets.
   
  The most comparable Canadian GAAP financial measure is cash from operating activities.
   
(3) EBITDA margin is calculated as follows:
   
  EBITDA
  Operating revenues
   
(4) Total Wireless capital expenditures are included in the Consumer segment.
   
(5) Cash flow per share is calculated as follows:
   
  Cash flow from operations less capital expenditures
  Average number of common shares outstanding during the period
   
(6) Annualized cash flow yield is calculated as follows:
   
  Free cash flow before common dividends
  Number of common shares outstanding at end of period multiplied by share price at end of period

 

 

      BCE Inc.     Supplementary Financial Information – Third Quarter 2004     Page 14

 


Accompanying Notes (continued)

 

(7)
Reflects an increase in the total Bell Canada debt as a result of the completion of the purchase price allocation (PPA) relating to the repurchase of SBC’s 20% interest in Bell Canada, which resulted in an increase in long-term debt of $165 million. This increase in long-term debt will be applied against interest expense ($4 million in Q3 2004) over the remaining terms of the related long-term debt.
 
(8)
At the BCE Consolidated level, 3rd Party Preferred Shares reflected in the financial statements of subsidiaries are included in non-controlling interest on the balance sheet.
 
(9)
Digital equivalent access lines are derived by converting low capacity data lines (DS-3 and lower) to the equivalent number of voice grade access lines. Broadband equivalent access lines are derived by converting high capacity data lines (higher than DS-3) to the equivalent number of voice grade access lines.

 

Conversion factors
DS-0
1
Basic ISDN
2
Primary ISDN
23
DS-1, DEA
24
DS-3
672
OC-3
2,016
OC-12
8,064
OC-48
32,256
OC-192
129,024
10 Base T
155
100 Base T
1,554
Gigabit E
15,554

 

(10)
DSL High Speed Internet subscribers include consumer, business and wholesale. Dial-up Internet subscribers include consumer and business.
 
(11)
Includes allocation of selling costs from Bell Canada and excludes costs of migrating from analog to digital. Cost of Acquisition (COA) per subscriber is reflected on a consolidated basis.
 
(12)
Wireless EBITDA margins are calculated based on total Wireless operating revenues (i.e. external revenues as shown on pages 10 and 11 plus inter-company revenues).

 

 

BCE Inc.     Supplementary Financial Information – Third Quarter 2004     Page 15

 


 

Appendix A — Reconciliation of Canadian Generally Accepted Accounting Principles
  (GAAP) to United States GAAP
 
We have prepared the interim consolidated financial statements according to Canadian GAAP. The tables that follow are a reconciliation of significant differences relating to the statement of operations and total shareholders’ equity reported according to Canadian GAAP and United States GAAP.
 
STATEMENTS OF OPERATIONS


For the period ended September 30
Three months
Nine months
 

($ million, except share amounts) (unaudited)
2004
2003
2004
2003

Canadian GAAP — Earnings from continuing operations
102
453
1,131
1,385
Adjustments
  Deferred costs (a)
5
1
11
2
  Employee future benefits (b)
(20
)
(32
)
(61
)
(95
)
  Derivative instruments (k)
-
(16
)
-
(12
)
  Other
-
(12
)
-
(11
)
   

United States GAAP — Earnings from continuing operations
87
394
1,081
1,269
  Discontinued operations — United States GAAP (h)
(2
)
11
86
31
  Cumulative effect of change in accounting policy (l)
-
(25
)
-
(25
)
   

United States GAAP — Net earnings
85
380
1,167
1,275
  Dividends on preferred shares (k)
(24
)
(20
)
(70
)
(52
)
  Premium on redemption of preferred shares
-
-
-
(7
)
 

United States GAAP- Net earnings applicable to common shares
61
360
1,097
1,216

Other comprehensive earnings items
  Change in currency translation adjustment
(14
)
(9
)
1
(80
)
  Change in unrealized gain on investments (i)
(224
)
15
(11
)
18
   

  Comprehensive earnings
(177
)
366
1,087
1,154

Net earnings per common share — basic
  Continuing operations
0.07
0.41
1.09
1.32
  Discontinued operations and change in accounting policy
(0.01
)
(0.02
)
0.10
-
  Net earnings
0.06
0.39
1.19
1.32
Net earnings per common share — diluted
  Continuing operations
0.07
0.41
1.09
1.32
  Discontinued operations and change in accounting policy
-
(0.02
)
0.09
-
  Net earnings
0.07
0.39
1.18
1.32
Dividends per common share
0.30
0.30
0.90
0.90
Average number of common shares
  outstanding (millions)
924.6
921.5
924.4
919.3

 

 


 

Appendix A — Reconciliation of Canadian Generally Accepted Accounting Principles
  (GAAP) to United States GAAP


STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS


September 30
 
December 31
 
($ millions) (unaudited)
2004
 
2003
 

Currency translation adjustment
(45
)
(46
)
Additional minimum pension liability (b)
(121
)
(121
)
Unrealized gain on investments (i)
5
 
16
 

Accumulated Other Comprehensive loss
(161
)
(151
)

 

RECONCILIATION OF TOTAL SHAREHOLDERS’ EQUITY


($ millions) (unaudited)
September 30
 
December 31
 
2004
 
2003

Canadian GAAP
13,879
13,573
Adjustments
  Deferred costs (a)
(60
)
(77
)
  Employee future benefits (b)
(371
)
(260
)
  Gain on disposal of investments and on reduction
     of ownership in subsidiary companies (c)
163
163
  Other
114
132
  Tax effect of the above adjustments (f)
23
(16
)
  Non-controlling interest effect of the above adjustments (g)
61
 
55
  Discontinued operations (h)
-
 
(58
)
  Unrealized gain on investments (i)
5
 
16

United States GAAP
13,814
 
13,528

(a) Deferred costs
Under Canadian GAAP, certain expenses can be deferred and amortized if they meet certain criteria. Under United States GAAP, these costs are expensed as incurred.

(b) Future benefits for employees
The accounting for future benefits for employees under Canadian GAAP and United States GAAP is essentially the same, except for the recognition of certain unrealized gains and losses.

Canadian GAAP requires companies to recognize a pension valuation allowance for any excess of the accrued benefit asset over the expected future benefit. Changes in the pension valuation allowance are recognized in the consolidated statement of operations. United States GAAP does not specifically address pension valuation allowances. The United States regulators have interpreted this to be a difference between Canadian and United States GAAP.

 

 

 

2

 


 

 

Appendix A — Reconciliation of Canadian Generally Accepted Accounting Principles
  (GAAP) to United States GAAP

The table below shows the components of the net benefit plans cost before taxes and non-controlling interest under United States GAAP:


 
 Three months
 Nine months
 


 
Pension benefits

Other benefits

Pension benefits
Other benefits
 




For the period ended September 30
 2004
 
 2003
 
 2004
 
 2003
 
 2004
 
 2003
 
 2004
 
 2003
 

 Current service cost
58
 
55
 
7
 
8
 
182
 
166
 
23
 
23
 
 Interest cost on accrued benefit obligation
201
 
190
 
 26
 
26
 
604
 
568
 
78
 
78
 
 Expected return on plan assets
(230
)
(218
)  
(2
) 
(2
)  
(688
) 
(654
 ) 
(7
 ) 
(7
)  
 Amortization of past service costs
2
 
2
 
 
 
7
 
7
 
 
 
 Amortization of net actuarial losses
39
 
 45
 
1
 
 
 
112
 
129
 
1
 
 
 
 Amortization of transitional (asset) obligation
(11
) 
(11
) 
7
 
7
 
(33
) 
(33
) 
22
 
22
 
 Other
 
 
 
 
 
(2
)  
 
 

 Net benefit plans cost
59
 
63
 
39
 
39
 
 184
 
  181
 
117
 
116
 

Under United States GAAP, an additional minimum liability is recorded for the excess of the unfunded accumulated benefit obligation over the recorded pension benefits liability. An offsetting intangible asset equal to the unrecognized prior service costs is recorded. Any difference is recorded as a reduction in accumulated other comprehensive income.

(c) Gains or losses on investments
Under Canadian GAAP and United States GAAP, gains or losses on investments are calculated in a similar manner. Differences in Canadian GAAP and United States GAAP, however, may cause the underlying carrying value of the investment to be different. This will cause the resulting gain or loss to be different.

(d) Equity income
Under Canadian GAAP, we account for our joint venture investment in CGI using the proportionate consolidation method. Effective July 2003, as a result of the new agreement with CGI, we present CGI as an equity investment under United States GAAP. Our proportionate share of CGI’s operating results for the three months and nine months ended September 30, 2004 were:

operating revenues of $277 million and $745 million, respectively, of which $47 million and $121 million, respectively was with subsidiaries of BCE Inc
operating expenses of $239 million and $639 million, respectively of which $5 million and $19 million, respectively was to subsidiaries of BCE Inc.
amortization expense of $14 million and $36 million, respectively
interest expense of $1 million and $3 million, respectively
other income of $1 million and $3 million, respectively
income tax expense of $9 million and $26 million, respectively
discontinued operations of nil and $3 million, respectively.


(e) Interest expense
Under Canadian GAAP, convertible debentures are separated into a debt component and an equity component. Over time, the debt component is increased to reach its original face value at maturity by recognizing an accretion expense as part of interest expense. Under United States GAAP, convertible debentures that do not have certain characteristics are recorded as long-term debt and no accretion expense is recognized.

(f) Income taxes
The income tax adjustment reflects the impact on income taxes of all of the United States GAAP adjustments that we describe above. The accounting for income taxes under Canadian GAAP and United States GAAP is essentially the same, except that:

income tax rates of enacted or substantively enacted tax law are used to calculate future income tax assets and liabilities under Canadian GAAP
only income tax rates of enacted tax law can be used under United States GAAP.

 

3

 


 

Appendix A — Reconciliation of Canadian Generally Accepted Accounting Principles
  (GAAP) to United States GAAP

(g) Non-controlling interest
The non-controlling interest adjustment represents the impact of all of the United States GAAP adjustments on non-controlling interest.

(h) Discontinued operations
Differences between Canadian GAAP and United States GAAP will cause the historical carrying values of the net assets of discontinued operations to be different.

(i) Change in unrealized gain on investments
Our portfolio investments are recorded at cost under Canadian GAAP. They would be classified as “available-for-sale” under United States GAAP and would be carried at fair value with any unrealized gains or losses included in other comprehensive loss, net of tax.

(j) Accounting for stock-based compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. It applies to fiscal years ending after December 15, 2002. It amends the transitional provisions of SFAS No. 123 for companies that choose to recognize stock-based compensation under the fair value-based method of SFAS No. 123, instead of choosing to continue following the intrinsic value method of Accounting Principles Board Opinion (APB) No. 25.

We adopted the fair value-based method of accounting on a prospective basis, effective January 1, 2002.

Under SFAS No. 123, however, we are required to make pro forma disclosures of net earnings, and basic and diluted earnings per share, assuming that the fair value-based method of accounting had been applied from the date that SFAS No. 123 was adopted.

The table below shows the stock-based compensation expense and pro forma net earnings using the Black-Scholes pricing model.


 
Three months
Nine months
 
For the period ended September 30 (unaudited)
2004
 
2003
 
2004
 
2003
 

                 
Net earnings, as reported
85
 
380
 
1,167
 
1,275
 
Compensation cost included in net earnings
16
 
8
 
40
 
22
 
Total compensation cost
(18
)
(13
)
(47
)
(38
)
 

Pro forma net earnings
83
 
375
 
1,160
 
1,259
 
 
 
 
 
 
Pro forma net earnings per common share — basic
0.07
 
0.39
 
1.18
 
1.30
 
Pro forma net earnings per common share — diluted
0.07
 
0.39
 
1.18
 
1.30
 

 

 

4

 


 

Appendix A — Reconciliation of Canadian Generally Accepted Accounting Principles
  (GAAP) to United States GAAP

 

(k) Accounting for derivative instruments and hedging activities (SFAS 133)
On January 1, 2001, we adopted SFAS 133, Accounting for Derivatives Instruments and Hedging Activities, as amended by SFAS 138. Under this standard, all derivatives must be recorded on the balance sheet at fair value under United States GAAP. In addition, certain economic hedging strategies, such as using dividend rate swaps to hedge preferred share dividends and hedging SCPs, no longer qualify for hedge accounting under United States GAAP.

The change in the fair value of derivative contracts that no longer qualify for hedge accounting under United States GAAP is reported in net earnings.

We elected to settle the dividend rate swaps used to hedge $510 million of BCE Inc. Series AA preferred shares and $510 million of BCE Inc. Series AC preferred shares in the third quarter of 2003. These dividend rate swaps, in effect, converted the fixed-rate dividends on these preferred shares to floating-rate dividends. They were to mature in 2007. As a result of the early settlement, we received total proceeds of $83 million in cash. After the settlement, all of our derivative contracts qualify for hedge accounting.

Under Canadian GAAP, the proceeds are being deferred and amortized against the dividends on these preferred shares over the remaining original terms of the swaps. Under United States GAAP, these dividend rate swaps did not qualify for hedge accounting and were recorded on the balance sheet at fair value. As a result, the amortization of the deferred gain under Canadian GAAP is reversed for United States GAAP purposes.

l) Impact of adopting new accounting standards

Consolidation of variable interest entities
Effective July 1, 2003, we adopted FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, on a prospective basis. This interpretation clarifies how to apply Accounting Research Bulletin No. 51, Consolidated Financial Statements, to variable interest entities when equity investors are not considered to have a controlling financial interest or they have not invested enough equity to allow the entity to finance its activities without additional subordinated financial support from other parties.

We determined a transitional loss of $25 million net of tax in the third quarter of 2003. We recorded it as a cumulative effect of a change in accounting policy as of July 1, 2003, as required by the transitional provisions of FIN No. 46. Under Canadian GAAP, the transitional loss is recorded as an adjustment to retained earnings. See Note 1, Significant accounting policies, in our 2003 annual report for a summary of how this affected our consolidated financial statements.

 

 

5

 


 

 

 

 

 

Certification of Interim Filings
during Transition Period

 

          I, Michael J. Sabia, President and Chief Executive Officer of BCE Inc., certify that:

1.
I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of BCE Inc. (the issuer) for the interim period ending September 30, 2004;
 
2.
Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; and
 
3.
Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the interim filings.

 

Dated: November 2, 2004
By:
(signed) Michael J. Sabia
   
    Michael J. Sabia
President and Chief Executive Officer
BCE Inc.


 

 

 

 

Certification of Interim Filings
during Transition Period

 

          I, Siim A. Vanaselja, Chief Financial Officer of BCE Inc., certify that:

1.
I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of BCE Inc. (the issuer) for the interim period ending September 30, 2004;
 
2.
Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; and
 
3.
Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the interim filings.

 

Dated: November 2, 2004
By:
(signed) Siim A. Vanaselja
   
    Siim A. Vanaselja
Chief Financial Officer
BCE Inc.

 

 


 

 

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BCE Inc.
   
   
   
  (signed) Michael T. Boychuk
 
  Michael T. Boychuk
  Senior Vice-President and Treasurer
   
   
  Date: November 3, 2004