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SECOND AND FINAL ADD - MO158 - Bell Canada Enterprises reports third quarter resultsCash Flows The table below is a summary of the flow of cash in to and out of BCE. << YTD YTD Q3 2005 Q3 2004 2005 2004 ------------------------------------------------------------------------- Cash flows from operating activities 1,686 1,828 4,075 4,212 Capital expenditures (968) (811) (2,619) (2,318) Other investing activities - (2) (26) 133 Cash dividends paid on common shares (306) (277) (889) (831) Cash dividends paid on preferred shares (21) (21) (64) (64) Cash dividends paid by subsidiaries to non-controlling interest (47) (44) (157) (139) ------------------------------------------------------------------------- Free cash flow 344 673 320 993 Business acquisitions (62) (646) (180) (952) Business dispositions - 4 - 20 Increase in investments (75) (12) (216) (20) Decrease in investments - 707 7 713 Net issuance of equity instruments 12 8 25 16 Net issuance (repayment) of debt instruments (76) 85 270 (217) Financing activities of subsidiaries with third parties (21) (4) (59) (51) Other financing activities (27) (18) (82) (34) Cash provided by discontinued operations - 12 10 196 ------------------------------------------------------------------------- Net increase in cash and cash equivalents 95 809 95 664 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >> Cash from operating activities Cash from operating activities decreased 7.8%, or $142 million, to $1,686 million in Q3 2005, compared to Q3 2004. This was mainly a result of: - a decrease in receipts from securitization of accounts receivable of $145 million - a $75 million settlement payment from MTS in Q3 2004 partly offset by: - a decrease in taxes paid of $107 million resulting from a refund received in Q3 2005. Cash from operating activities decreased 3.3%, or $137 million, to $4,075 million in the first nine months of 2005. Year-to-date cash from operating activities was further impacted by: - an increase of $106 million in payments relating to the employee departure programs at Bell Canada and Aliant - an increase of $83 million in pension and other benefit plan payments, due mainly to Aliant's voluntary contribution of $60 million in Q1 2005 - a net increase in income taxes paid of $61 million, primarily related to the final instalment for 2004 paid in Q1 2005 which were substantially offset by: - an improvement in cash earnings coming from higher EBITDA - an improvement in accounts receivable collections, partly due to 2004 being impacted negatively by the implementation of a new wireless billing platform. Free cash flow Our free cash flow this quarter was $344 million, down from free cash flow of $673 million in the third quarter of last year. The decrease is due mainly to: - a decrease of $142 million in cash from operating activities, as described above - an increase in capital expenditures of $157 million - an increase in dividends paid of $32 million. Year-to-date free cash flow of $320 million, down from free cash flow of $993 million, was impacted further by Telesat insurance proceeds of $179 million received in the first nine months of 2004. Capital expenditures Capital expenditures were $968 million in Q3 2005, or 20.0% of revenues. This was 19.4% higher than the capital expenditures of $811 million, or 17.0% of revenues, in Q3 2004. On a year-to-date basis, capital expenditures were $2,619 million in the first nine months of 2005, or 17.7% of revenues. This was 13.0% higher than the capital expenditures of $2,318 million, or 16.3% of revenues, in the same period last year. The increases reflect the strategic investments in the Consumer segment, which include the FTTN expansion, the initial deployment of EVDO in certain of our markets, information technology (IT) efficiency projects to deliver cost savings, growth-related spending to support higher customer demand, as well as a return to more normal spending levels at Aliant after its labour disruption in 2004. Cash from other investing activities increased by $2 million in Q3 2005, compared to Q3 2004, and decreased by $159 million in the first nine months of 2005, compared to the same period last year. In 2004, cash from other investing activities included insurance proceeds that Telesat received for a malfunction on the Anik F1 satellite, amounting to $136 million in Q2 2004 and $179 million in the first nine months of 2004. Cash dividends paid on common shares We paid a dividend of $0.33 per common share in Q3 2005, which is $0.03 more than the dividend we paid in Q3 2004. On a year-to-date basis, we paid $0.99 per common share in the first nine months of 2005, compared to $0.90 per common share in the same period in 2004. In December 2004, the board of directors of BCE Inc. approved an increase of 10% or $0.12 per common share in the annual dividend on BCE Inc.'s common shares. As a result, starting with the quarterly dividend paid on April 15, 2005, we expect to pay quarterly dividends on BCE Inc.'s common shares of approximately $306 million, based on the revised dividend policy. This assumes that there are no significant changes in the number of outstanding common shares. The total quarterly dividends equal $0.33 per common share, based on approximately 927 million common shares outstanding at September 30, 2005. Business acquisitions We invested $62 million in business acquisitions in Q3 2005 and $180 million in the first nine months of 2005. This consisted mainly of Bell Canada's acquisition of Nexxlink in the first half of the year for $68 million and a number of other businesses. We invested $646 million in business acquisitions in Q3 2004 and $952 million in the first nine months of 2004. This consisted of: - our purchase of MTS' 40% interest in Bell West in Q3 2004 for $646 million to give Bell Canada 100% ownership of Bell West - our 28.9% proportionate share of the cash paid for CGI's acquisition of American Management Systems Incorporated (AMS) for $168 million - Bell Canada's purchase of: - a 100% interest in Infostream Technologies Inc. - 100% of the assets required to carry on the business of Charon Systems Inc. - a 100% interest in Accutel Conferencing Systems Inc. (Canada) and certain branches of Accutel Conferencing Systems (U.S.) - a 75.8% interest in Elix Inc. Increase in investments Cash flows used for investments increased by $63 million to $75 million in Q3 2005, compared to the same period last year, due to an increase in highly liquid short-term investments. On a year-to-date basis, cash flows used for investments increased by $196 million to $216 million for the first nine months of 2005, compared to the same period last year. Year-to-date investment activity in 2005 reflects an investment by Bell Canada in Q1 2005 of US $100 million, for an approximate 12% interest, in Clearwire Corporation, a privately held company that offers advanced IP-based wireless broadband communications services. Debt instruments We repaid $76 million of debt, net of issues, in Q3 2005. The repayments included $150 million in debentures at Bell Canada, decreased borrowings in notes payable and bank advances of $65 million, and a $25 million reduction in Bell Globemedia's borrowings under its credit facilities. The issuances consisted of $200 million in debentures at Bell Canada. On a year-to-date basis in 2005, we issued $270 million of debt, net of repayments. The issuances included $900 million in debentures at Bell Canada and $150 million in medium-term notes at Aliant. The repayments included $750 million in debentures at Bell Canada. We issued $85 million of debt, net of repayments, in Q3 2004. The issues included a net increase of $173 million in notes payable and bank advances. The repayments included a $60 million reduction in Bell Globemedia's borrowings under its credit facilities. On a year-to-date basis in 2004, we repaid $217 million of debt, net of issues. The issuances were mainly at Bell Canada, which issued $450 million in debentures, and Bell Globemedia, which issued $300 million of senior notes and drew $50 million under its credit facilities. BCE Inc. repaid $351 million in retractable preferred shares and Bell Canada repaid $624 million in debentures and $114 million of bank debt. Cash relating to discontinued operations Cash provided by discontinued operations was $196 million in the first nine months of 2004. This consisted mainly of net cash proceeds of $315 million from the sale of Emergis and $285 million from the sale of Emergis' U.S. health operations and $96 million of cash generated from Emergis' operations. This was partly offset by the deconsolidation of Emergis' cash on hand of $512 million at December 31, 2003. Credit Ratings The table below lists our key credit ratings at November 1, 2005. On May 4, 2005, S&P(1) and DBRS(2) confirmed their ratings for BCE Inc. and Bell Canada, but revised their outlooks from stable to negative. On May 16, 2005, Moody's(3) confirmed its ratings for BCE Inc. and Bell Canada, but revised its outlook from stable to negative. << BELL BCE INC. CANADA S&P DBRS MOODY'S S&P DBRS MOODY'S ------------------------------------------------------------------------- Commercial A-1 R-1 P-2/ A-1 R-1 P-2/ paper (mid) (low)/ stable (mid) (mid)/ stable stable negative Extendable A-1 R-1 - A-1 R-1 - commercial (mid) (low)/ (mid) (mid)/ notes stable negative Long-term A-/ A/ Baa1/ A/ A (high)/ A3/ debt negative negative negative negative negative negative Preferred P-2 Pfd-2/ - P-2 Pfd-2 - shares (high) negative (high) (high)/ negative ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Standard & Poor's, a division of The McGraw Hill Companies, Inc. (2) Dominion Bond Rating Services Limited (3) Moody's Investors Service Inc. >> Related Party Transaction BCI loss utilization transaction On April 15, 2005, 3787915 Canada Inc., a wholly-owned subsidiary of Bell Canada, acquired $17 billion in preferred shares from 3787923 Canada Inc., a wholly-owned subsidiary of BCI. 3787923 Canada Inc. used the proceeds to advance $17 billion to BCI through a subordinated interest-free loan. BCI then advanced $17 billion to 3787915 Canada Inc. by way of a subordinated interest-bearing demand loan, the funds being used to repay a daylight loan granted to 3787915 Canada Inc. to make the initial preferred share investment. The dividend rate on the preferred shares was equal to 5.1%, which was essentially the same as the interest rate on the loan. 3787915 Canada Inc. had the legal right and intention to offset the demand loan payable to BCI and the investment in preferred shares of 3787923 Canada Inc. As a result, these items and the related interest expense and dividend income were presented on a net basis. The tax savings of $99 million, resulting from the interest expense, were presented as a reduction of income tax expense. This transaction was unwound on August 18, 2005, and was part of a tax loss consolidation strategy that followed the transaction steps laid out in an advance tax ruling granted by the Canada Revenue Agency to Bell Canada and BCI. The transaction also received the approval of the Ontario Superior Court of Justice, which is supervising BCI's voluntary plan of arrangement pursuant to which BCI is monetizing its assets and resolving outstanding claims against it, with the ultimate objective of distributing the net proceeds to its shareholders and dissolving the company. BCI will be compensated for the use of its losses by Bell Canada through a capital contribution of $87 million that will be made by BCE Inc. for 88% of the tax savings. BCE Inc.'s ownership interest in BCI remains at 62%. As a result: - BCE Inc.'s carrying value of its investment in BCI was increased to reflect the increase in BCE Inc.'s share of the expected proceeds upon BCI's eventual liquidation - a charge to other income was recorded to reflect the non-controlling interest's portion of the capital contribution to be made by BCE Inc. Liquidity Our sources of liquidity and cash requirements remain substantially unchanged from those described in the BCE 2004 MD&A. Commitment under the deferral account The deferral account resulted from the CRTC's second price cap decision of May 2002, which requires us to fund initiatives such as service improvements, reduced customer rates and/or customer rebates. We estimate our commitment under the deferral account to be approximately $148 million at September 30, 2005 and anticipate that it will be reduced to approximately $130 million by December 31, 2005, primarily due to the impact of the CDN decision. We expect to clear most of this amount in 2006 by implementing the initiatives that are approved by the CRTC for this purpose. ------------------------ Recent Developments in Legal Proceedings This section provides a description of recent developments in certain of the legal proceedings involving BCE described in the BCE 2004 AIF, filed by BCE Inc. with the Canadian securities commissions (available on BCE Inc.'s website at http://www.bce.ca/ and on SEDAR at http://www.sedar.com/ ) and with the U.S. Securities and Exchange Commission (SEC) under Form 40-F (available on EDGAR at http://www.sec.gov/ ), as subsequently updated in BCE Inc.'s 2005 First Quarter MD&A dated May 3, 2005 (BCE 2005 First Quarter MD&A) and BCE Inc.'s 2005 Second Quarter MD&A dated August 2, 2005 (BCE 2005 Second Quarter MD&A) also filed by BCE Inc. with the Canadian securities commissions (available on BCE Inc.'s website and on SEDAR) and with the SEC under Form 6-K (available on EDGAR). Lawsuits related to Bell Canada International Inc. (BCI) 6.75% and 6.50% Debenture holders lawsuit On September 1, 2005, BCE and BCI announced that the Ontario Superior Court of Justice (Court) had approved the agreement reached on August 18, 2005 dismissing a class action lawsuit by former holders of BCI's $250 million 6.75% convertible unsecured subordinated debentures against BCI, BCE and certain current and former directors of BCI. The Court approval provided for the dismissal of the action as against all defendants and completely disposed of the litigation without any payment by any such defendants in respect of damages. A similar action commenced by the Caisse de depot et placement du Quebec (Caisse) with respect to the Caisse's holdings of BCI's $150 million 6.50% convertible unsecured subordinated debentures has been disposed of on the same basis, pursuant to an agreement previously reached with the Caisse and approved by the Court. ------------------------ Risks That Could Affect Our Business This section describes general risks that could affect all BCE group companies and specific risks that could affect BCE Inc. and certain of the other BCE group companies. For a more complete description of the risks that could affect our business, please see the section entitled Risks That Could Affect Our Business set out on pages 32 to 41 of the BCE 2004 AIF, as updated in the section entitled Risks That Could Affect Our Business set out on pages 23 to 26 of the BCE 2005 First Quarter MD&A and on pages 30 to 34 of the BCE 2005 Second Quarter MD&A, as further updated in this MD&A. Please also refer to the BCE 2004 AIF 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, at pages 22 and 23 of the BCE 2005 First Quarter MD&A, at page 30 of the BCE 2005 Second Quarter MD&A and in this MD&A, for a description of recent developments, since the BCE 2004 AIF, in the principal legal proceedings involving us. In addition, please see Risks That Could Affect Certain BCE Group Companies - Bell Canada companies - Changes to Wireline Regulation in the section entitled Risks That Could Affect Our Business at pages 25 and 26 of the BCE 2005 First Quarter MD&A, at pages 32 to 34 of the BCE 2005 Second Quarter MD&A and in this MD&A, for a description of recent developments, since the BCE 2004 AIF, in the principal regulatory initiatives and proceedings concerning the Bell Canada companies. 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 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 what its consequences may be, 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 of which we are currently not aware. In the BCE 2004 AIF, we provided a detailed review of the risks that could affect our financial condition, results of operations or business and that could cause actual results to differ materially from those expressed in our forward-looking statements. This detailed description of risks, as updated in the BCE 2005 First Quarter MD&A and the BCE 2005 Second Quarter MD&A, is further updated in this MD&A. These risks include risks associated with: - our ability to implement our strategies and plans in order to produce the expected benefits and growth prospects, including meeting targets for revenue, Galileo program savings, earnings per share, free cash flow and capital intensity; - our ability to implement the significant changes in our processes, in how we approach our markets, and in how we develop and deliver products and services, required by our strategic direction; - 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 impact on our ability to retain existing, and attract new, customers, and on pricing strategies and financial results; - general economic and market conditions and the level of consumer confidence and spending, and the demand for, and prices of, our products and services; - our ability to improve productivity and contain capital intensity while maintaining quality of services; - our 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 business plan and fund capital and other expenditures; - 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; - the risk of litigation should BCE Inc. or Bell Canada 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; - our ability to effectively manage 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; - our ability to improve and upgrade, on a timely basis, our various IT systems and software on which many aspects of our businesses, including customer billing, depend; - stock market volatility; - the risk that licences on which we rely to provide services might be revoked or not renewed when they expire; - our ability to retain major customers; - the risk that the amount of the expected annual savings relating to Bell Canada's 2004 employee voluntary departure program will be lower than anticipated due to various factors including the incurrence of outsourcing, replacement and other costs; - health concerns about radio frequency emissions; and - launch and in-orbit risks and 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. 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 32 to 41 of the BCE 2004 AIF as updated at pages 23 to 26 in the BCE 2005 First Quarter MD&A and at pages 30 to 34 of the BCE 2005 Second Quarter MD&A. For ease of reference, the updates to the description of risks below 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 AIF. Risks that could affect certain BCE group companies Bell Canada companies Changes to Wireline Regulation Competitor Digital Network Service As indicated in the BCE 2004 AIF, the CRTC released Decision 2005-6 on February 3, 2005 concerning Competitor Digital Network (CDN) services. On May 10, 2005, the CRTC directed competitors to identify their CDN-eligible demand to the incumbent telephone companies by June 27, 2005 and for the incumbent telephone companies to file updates to their deferral account by July 25, 2005 to take into account the impact of Decision 2005-6. On July 25, 2005, Bell Canada provided an update to the March 29, 2005 draw-down estimates but advised the CRTC that, due to the amount of time needed to complete the assessment of the CDN-eligible demand information provided by competitors, Bell Canada would not be in a position to provide a final estimate of the deferral account draw-down amounts before September 23, 2005. In a letter dated September 1, 2005, the CRTC postponed the due date for the filing of updated estimates until certain outstanding issues related to CDN services currently before the CRTC are resolved. The CRTC also stated that it will provide direction to the incumbent telephone companies regarding the deadline to provide the updated deferral account estimates when it releases its decision regarding the issues being examined in Public Notice 2004-1: Review and disposition of deferral accounts for the second price cap period, which is expected before the end of the year. Application Seeking Consistent Regulation and Regulatory Framework for VoIP Pursuant to the CRTC Decision 2005-28 released on May 12, 2005, Bell Canada filed VoIP tariffs for the following services with the CRTC. Bell Canada offers an access-independent VoIP service for the small business market called Business IP Voice (access-independent service customers can use any high-speed internet access service to connect with the Bell service), and an access-dependent consumer service called Bell Digital Voice (access-dependent service customers must use Bell's wireline access service), in selected areas. Both of these services have received interim approval by the CRTC. Furthermore, on October 20, 2005, the CRTC provided interim approval of an application by Bell Canada to price Bell Digital Voice at different rates in the province of Quebec than in Ontario. Wireless Number Portability As indicated in the BCE 2004 AIF, the Government of Canada in its 2005 Budget announced that it intended to ask the CRTC to implement in Canada portability between wireless services and between wireless and wireline services. Number portability will enable customers to retain the same phone number when changing service provider within the same local serving area. On April 21, 2005, the Canadian Wireless Telecommunications Association (CWTA), of which Bell Mobility is a member, announced that the members of the CWTA agreed to implement such portability in Canada. On September 12, 2005, the CWTA released a comprehensive report, developed by independent consultant PricewaterhouseCoopers (PwC), which identified the many tasks and issues that need to be addressed. The PwC report suggests that the implementation of such portability, as defined by the Government of Canada, can be implemented on a national basis by September 2007. On September 16, 2005 the CRTC issued Telecom Public Notice CRTC 2005-14, Implementation of Wireless Number Portability, which deals with a number of preliminary regulatory issues that are required to enable portability to proceed. The Public Notice also invites comments on the PwC proposed implementation target of September 2007. Bell Canada filed its comments on October 6, 2005. Application to Change Bundling Rates On September 2, 2005, Bell Canada applied to the CRTC for a modification of the bundling rules applicable to customer-specific arrangements (CSAs), which are arrangements tailored to a particular customer's needs for the purpose of customizing the offering in terms of rate structure and levels. At present, the CRTC requires that a CSA involving both tariffed and non- tariffed services (Mixed CSAs) be filed for approval with the CRTC before it can be provided to customers. Bell Canada's proposal would exempt a Mixed CSA from the bundling rules and associated tariff requirements, provided that the revenues from a CSA exceed the price of the tariffed components of the CSA and provided that the CSA is not part of a practice designed to circumvent tariffs. Bell Canada Proposals to Telecom Policy Review Panel On April 11, 2005 the Minister of Industry announced the creation of the Telecom Policy Review Panel (Panel) to conduct a review of Canada's telecommunications policy and regulatory framework, and make recommendations. The Government of Canada has asked the Panel to deliver a final report by the end of 2005. The Panel itself called for submissions on all the issues within its mandate. On August 15, 2005, Bell Canada submitted its recommendations to the Panel including a proposal for the adoption of a comprehensive "next generation" regulatory framework that relies on market forces to the maximum extent possible as a means to ensure the telecommunications industry's continued role as a key enabler of Canada's overall economic performance. The proposal included detailed suggestions for significant changes to the Telecommunications Act and related statutes, and for the realignment of responsibilities for the CRTC, Industry Canada and the Competition Bureau. The proposal also recommended that the Minister of Industry issue a policy direction to the CRTC which would result in significant regulatory reform. There can be no guarantee that the Panel will adopt any or all of Bell Canada's proposals, and even if they were adopted, that the Minister of Industry and Parliament would implement the Panel's recommendations. Furthermore, a number of intervenors to the Panel have opposed the regulatory reforms suggested by Bell Canada and advocated different reforms including significantly expanding the extent of wholesale regulation of Bell Canada and other incumbent telephone companies' facilities. There is a risk that the Panel could follow those recommendations and propose that they be adopted by the Minister of Industry and Parliament. Licences for Broadcasting On August 2, 2005, Bell Canada acquired certain assets and the residential cable business of Cable VDN Inc. operating in Montreal. Bell Canada advised the CRTC that it was commencing operations in the Montreal service area under its Quebec licence and that under this licence it was continuing the cable operations of Cable VDN Inc. Licences and Changes to Wireless Regulation As indicated in the BCE 2004 AIF, companies must have a spectrum licence to operate cellular, PCS and other radio-telecommunications systems in Canada. In October 2001, the Minister of Industry announced plans for a national review of Industry Canada's procedures for approving and placing wireless and radio towers in Canada, including a review of the role of municipal authorities in the approval process. The final report from the National Antenna Tower Policy Review Committee was filed with Industry Canada in September 2004. Industry Canada released its report in February 2005. Among other things, the report recommends that the authority to regulate the siting of antennae and supporting structures remain exclusively with the Government of Canada. In August 2005, Industry Canada convened a meeting of the wireless carriers and broadcasters and presented a revised draft policy for comment. The wireless and broadcasting industries both have a number of concerns with the draft policy and are now working with Industry Canada to attempt to resolve these concerns. It is not possible to predict at this time if or when the final policy will be issued. If the final policy requires more municipal or public consultation in the approval process, there is a risk that it could significantly slow the expansion of wireless networks in Canada. This could have a material and negative effect on the operations of the Bell Canada companies. Access to Bell Canada Loops for CLEC's Customers Served Via Remotes On September 2, 2005, Rogers Telecom Inc. (Rogers) submitted an application pursuant to Part VII of the CRTC Telecommunications Rules of Procedure requesting that the CRTC direct Bell Canada to make unbundled loops, which are transmission paths between the users' premises and the central office that are provided separately from other components, available to competitors in a timely manner in certain specified areas where Rogers is present. On October 3, 2005, Bell Canada provided its response to the Rogers' application. In Bell Canada's response it explained the reasons why in some areas where competitors are present and the competitors' potential end customer is served via a Bell Canada remote, unbundled loops should not have to be provided unless Bell Canada is compensated by competitors for the costs it incurs on their behalf. The cost to equip Bell Canada's network in order to provide unbundled loops to competitors in locations where a potential competitor's end customer is currently served via a Bell Canada remote could be significant should the CRTC grant Rogers' request. It is anticipated that the CRTC will institute a further process to examine this matter prior to rendering a decision. Telesat During the third quarter of 2005, Telesat confirmed the insurance renewal on Nimiq 1. Nimiq 1 is now insured until the second quarter of 2006 for approximately its book value. As indicated in the BCE 2004 AIF, in August 2001, the manufacturer of the Anik F1 satellite advised Telesat of a gradual decline in power on the satellite. This power decline required Telesat to construct and launch another satellite to maintain continuity of service to its customers. Anik F1R was successfully launched in September 2005 in time to ensure that service to Anik F1's customers was not interrupted. Anik F1R is insured until the third quarter of 2006 for approximately its book value. 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 principles we used to prepare our financial statements. The key estimates and assumptions that management has made under these principles and their impact on the amounts reported in the financial statements and notes remain substantially unchanged from those described in the BCE 2004 MD&A. We have not had any significant changes in the accounting standards or our accounting policies other than those described in the BCE 2004 MD&A. Consolidated Statements of Operations << FOR THE PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS (in $ millions, except share amounts) (unaudited) 2005 2004 2005 2004 ------------------------------------------------------------------------- Operating revenues 4,951 4,778 14,790 14,195 ------------------------------------------------------------------------- Operating expenses (3,052) (2,842) (8,952) (8,462) Amortization expense (803) (769) (2,368) (2,305) Net benefit plans cost (Note 4) (108) (61) (315) (189) Restructuring and other items (Note 5) (31) (1,081) (32) (1,098) ------------------------------------------------------------------------- Total operating expenses (3,994) (4,753) (11,667) (12,054) ------------------------------------------------------------------------- Operating income 957 25 3,123 2,141 Other income (expense) (1) 333 30 393 Interest expense (247) (253) (741) (758) ------------------------------------------------------------------------- Pre-tax earnings from continuing operations 709 105 2,412 1,776 Income taxes (Note 6) (193) 44 (687) (511) Non-controlling interest (57) (47) (193) (134) ------------------------------------------------------------------------- Earnings from continuing operations 459 102 1,532 1,131 Discontinued operations - (2) (1) 28 ------------------------------------------------------------------------- Net earnings 459 100 1,531 1,159 Dividends on preferred shares (18) (18) (53) (53) ------------------------------------------------------------------------- Net earnings applicable to common shares 441 82 1,478 1,106 ------------------------------------------------------------------------- Net earnings per common share - basic Continuing operations 0.48 0.09 1.60 1.17 Discontinued operations - - - 0.03 Net earnings 0.48 0.09 1.60 1.20 Net earnings per common share - diluted Continuing operations 0.48 0.09 1.60 1.16 Discontinued operations - - - 0.03 Net earnings 0.48 0.09 1.60 1.19 Dividends per common share 0.33 0.30 0.99 0.90 Average number of common shares outstanding - basic (millions) 927.0 924.6 926.6 924.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Deficit FOR THE PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS (in $ millions) (unaudited) 2005 2004 2005 2004 ------------------------------------------------------------------------- Balance at beginning of period, as previously reported (5,005) (5,368) (5,424) (5,837) Accounting policy change (Note 1) - (8) (8) (8) ------------------------------------------------------------------------- Balance at beginning of period, as restated (5,005) (5,376) (5,432) (5,845) Net earnings 459 100 1,531 1,159 Dividends declared on preferred shares (18) (18) (53) (53) Dividends declared on common shares (306) (277) (918) (832) Other (1) - 1 - ------------------------------------------------------------------------- Balance at end of period (4,871) (5,571) (4,871) (5,571) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Balance Sheets SEPTEMBER DECEMBER 30, 31, (in $ millions) (unaudited) 2005 2004 ------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents 475 380 Accounts receivable 1,951 2,096 Other current assets 1,501 1,212 ------------------------------------------------------------------------- Total current assets 3,927 3,688 Capital assets 22,217 21,398 Other long-term assets 2,682 2,656 Indefinite-life intangible assets 2,973 2,916 Goodwill 8,577 8,413 Non-current assets of discontinued operations 104 50 ------------------------------------------------------------------------- Total assets 40,480 39,121 ------------------------------------------------------------------------- Liabilities Current liabilities Accounts payable and accrued liabilities 3,557 3,692 Interest payable 266 183 Dividends payable 325 297 Debt due within one year 1,263 1,276 ------------------------------------------------------------------------- Total current liabilities 5,411 5,448 Long-term debt 12,630 11,809 Other long-term liabilities 4,850 4,932 Non-current liabilities of discontinued operations 87 - ------------------------------------------------------------------------- Total liabilities 22,978 22,189 ------------------------------------------------------------------------- Non-controlling interest 2,892 2,908 ------------------------------------------------------------------------- Shareholders' equity Preferred shares 1,670 1,670 ------------------------------------------------------------------------- Common shareholders' equity Common shares 16,806 16,781 Contributed surplus 1,076 1,061 Deficit (4,871) (5,432) Currency translation adjustment (71) (56) ------------------------------------------------------------------------- Total common shareholders' equity 12,940 12,354 ------------------------------------------------------------------------- Total shareholders' equity 14,610 14,024 ------------------------------------------------------------------------- Total liabilities and shareholders' equity 40,480 39,121 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Cash Flows FOR THE PERIOD ENDED SEPTEMBER 30 THREE MONTHS NINE MONTHS (in $ millions) (unaudited) 2005 2004 2005 2004 ------------------------------------------------------------------------- Cash flows from operating activities Earnings from continuing operations 459 102 1,532 1,131 Adjustments to reconcile earnings from continuing operations to cash flows from operating activities: Amortization expense 803 769 2,368 2,305 Net benefit plans cost 108 61 315 189 Restructuring and other items 31 1,081 32 1,098 Net gains on investments - (325) (34) (331) Future income taxes 111 (183) 285 (96) Non-controlling interest 57 47 193 134 Contributions to employee pension plans (33) (32) (161) (88) Other employee future benefit plan payments (24) (13) (69) (59) Payments of restructuring and other items (24) (12) (153) (39) Operating assets and liabilities 198 333 (233) (32) ------------------------------------------------------------------------- Cash flows from operating activities 1,686 1,828 4,075 4,212 ------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures (968) (811) (2,619) (2,318) Business acquisitions (62) (646) (180) (952) Business dispositions - 4 - 20 Increase in investments (75) (12) (216) (20) Decrease in investments - 707 7 713 Other investing activities - (2) (26) 133 ------------------------------------------------------------------------- Cash flows used in investing activities (1,105) (760) (3,034) (2,424) ------------------------------------------------------------------------- Cash flows from financing activities Increase (decrease) in notes payable and bank advances (65) 173 121 123 Issue of long-term debt 200 10 1,191 1,410 Repayment of long-term debt (211) (98) (1,042) (1,750) Issue of common shares 12 8 25 16 Issue of equity securities by subsidiaries to non-controlling interest 1 - 1 7 Redemption of equity securities by subsidiaries from non-controlling interest (22) (4) (60) (58) Cash dividends paid on common shares (306) (277) (889) (831) Cash dividends paid on preferred shares (21) (21) (64) (64) Cash dividends paid by subsidiaries to non-controlling interest (47) (44) (157) (139) Other financing activities (27) (18) (82) (34) ------------------------------------------------------------------------- Cash flows used in financing activities (486) (271) (956) (1,320) ------------------------------------------------------------------------- Cash provided by continuing operations 95 797 85 468 Cash provided by discontinued operations - 12 10 196 ------------------------------------------------------------------------- Net increase in cash and cash equivalents 95 809 95 664 Cash and cash equivalents at beginning of period 380 577 380 722 ------------------------------------------------------------------------- Cash and cash equivalents at end of period 475 1,386 475 1,386 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >> ------------------------ Notes to Consolidated Financial Statements Note 1: Significant accounting policies The interim consolidated financial statements should be read in conjunction with BCE Inc.'s annual consolidated financial statements for the year ended December 31, 2004, on pages 82 to 121 of BCE Inc.'s 2004 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. 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, 2004, 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 presentation for the current period. We have restated financial information for previous periods to reflect: - the change in Aliant Inc.'s (Aliant) method of recognizing revenues and expenses from its directory business effective January 2005, as described below - the change in classification to discontinued operations for minor business dispositions. Change in accounting policy Effective January 1, 2005, we defer and amortize revenues and expenses from Aliant's directory business over the period of circulation, which is usually 12 months. Prior to January 1, 2005, we recognized revenues and expenses from Aliant's directory business on the publication date. The impact on our consolidated statements of operations for the three months and nine months ended September 30, 2005 and the comparative periods was negligible. We did not restate the statements of operations for prior periods. At December 31, 2004, the restatement of the balance sheet resulted in: - a decrease of $23 million in accounts receivable - an increase of $1 million in other current assets - a decrease of $8 million in accounts payable and accrued liabilities - a decrease of $6 million in non-controlling interest - an increase of $8 million in the deficit. Note 2: Segmented information The table below is a summary of financial information by segment. << FOR THE PERIOD ENDED THREE MONTHS NINE MONTHS SEPTEMBER 30 2005 2004 2005 2004 ------------------------------------------------------------------------- Operating revenues Consumer External 1,902 1,893 5,620 5,552 Inter-segment 27 15 55 39 ------------------------------------------------------------------------- 1,929 1,908 5,675 5,591 ------------------------------------------------------------------------- Business External 1,471 1,400 4,361 4,139 Inter-segment 45 40 132 177 ------------------------------------------------------------------------- 1,516 1,440 4,493 4,316 ------------------------------------------------------------------------- Aliant External 482 467 1,454 1,421 Inter-segment 38 30 108 106 ------------------------------------------------------------------------- 520 497 1,562 1,527 ------------------------------------------------------------------------- Other Bell Canada External 459 435 1,317 1,294 Inter-segment 41 51 147 134 ------------------------------------------------------------------------- 500 486 1,464 1,428 ------------------------------------------------------------------------- Inter-segment eliminations - Bell Canada (139) (125) (401) (378) ------------------------------------------------------------------------- Bell Canada 4,326 4,206 12,793 12,484 ------------------------------------------------------------------------- Other BCE External 638 583 2,039 1,789 Inter-segment 94 96 276 263 ------------------------------------------------------------------------- 732 679 2,315 2,052 ------------------------------------------------------------------------- Inter-segment eliminations - Other (107) (107) (318) (341) ------------------------------------------------------------------------- Total operating revenues 4,951 4,778 14,790 14,195 ------------------------------------------------------------------------- Operating income (loss) Consumer 479 569 1,557 1,655 Business 213 245 674 713 Aliant 105 71 291 245 Other Bell Canada 111 (898) 349 (649) ------------------------------------------------------------------------- Bell Canada 908 (13) 2,871 1,964 Other BCE 49 38 252 177 ------------------------------------------------------------------------- Total operating income 957 25 3,123 2,141 Other income (expense) (1) 333 30 393 Interest expense (247) (253) (741) (758) Income taxes (193) 44 (687) (511) Non-controlling interest (57) (47) (193) (134) ------------------------------------------------------------------------- Earnings from continuing operations 459 102 1,532 1,131 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------ Note 3: Business acquisitions The consolidated financial statements include the results of acquired businesses from the date they were acquired. During the first nine months of 2005, we made a number of business acquisitions which included 100% of the outstanding common shares of Nexxlink Technologies Inc., provider of integrated IT solutions, and several other providers of value-added and security services. The table below provides a summary of business acquisitions made during the first nine months of 2005. The purchase price allocation for all 2005 acquisitions is based on estimates. The final purchase price allocation for each business acquisition is expected to be complete within 12 months of the acquisition date. Of the goodwill acquired: - $99 million relates to the Business segment, $23 million relates to the Consumer segment, $17 million relates to the Other Bell Canada segment and $17 million relates to the Other BCE segment - $43 million is deductible for tax purposes. ------------------------------------------------------------------------- Consideration received: Non-cash working capital (14) Capital assets 104 Other long-term assets 3 Indefinite-life intangible assets 20 Goodwill 156 Long-term debt (61) Other long-term liabilities (16) ------------------------------------------------------------------------- 192 Cash and cash equivalents at acquisition 19 ------------------------------------------------------------------------- Net assets acquired 211 ------------------------------------------------------------------------- Consideration given(1): Cash 194 Acquisition costs 5 Non-cash 12 ------------------------------------------------------------------------- 211 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Contingent payments of $11 million that may be paid out should certain criteria specified in the agreements be met are not included in the consideration given. If the contingencies are realized, the amounts will be allocated to goodwill. Note 4: Employee benefit plans The table below shows the components of the net benefit plans cost. THREE MONTHS NINE MONTHS FOR THE PENSION OTHER PENSION OTHER PERIOD BENEFITS BENEFITS BENEFITS BENEFITS ENDED SEPTEMBER 30 2005 2004 2005 2004 2005 2004 2005 2004 ------------------------------------------------------------------------- Current service cost 64 58 9 7 185 182 26 23 Interest cost on accrued benefit obligation 219 201 27 26 657 604 82 78 Expected return on plan assets (235) (237) (3) (2) (709) (714) (8) (7) Amortization of past service costs 2 2 - - 7 7 1 - Amortization of net actuarial losses 26 8 - 1 77 24 - 1 Amortization of transitional (asset) obligation (2) (11) 6 7 (5) (33) 19 22 Increase (decrease) in valuation allowance (6) 1 - - (18) 2 - - Other 1 - - - 1 - - - ------------------------------------------------------------------------- Net benefit plans cost 69 22 39 39 195 72 120 117 ------------------------------------------------------------------------- Comprised of: Defined benefit plans cost 62 16 39 39 176 58 120 117 Defined contribution plans cost 7 6 - - 19 14 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- The table below shows the amounts we contributed to the defined benefit and defined contribution plans and the payments made to beneficiaries under other employee future benefit plans. THREE MONTHS NINE MONTHS FOR THE PENSION OTHER PENSION OTHER PERIOD BENEFITS BENEFITS BENEFITS BENEFITS ENDED SEPTEMBER 30 2005 2004 2005 2004 2005 2004 2005 2004 ------------------------------------------------------------------------- Aliant 20 16 1 1 121 54 4 3 Bell Canada 6 5 23 12 20 14 65 56 Bell Globemedia 5 8 - - 14 13 - - BCE Inc. 2 3 - - 6 7 - - ------------------------------------------------------------------------- Total 33 32 24 13 161 88 69 59 ------------------------------------------------------------------------- Comprised of: Contributions to defined benefit plans 31 26 24 13 152 74 69 59 Contributions to defined contribution plans 2 6 - - 9 14 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Note 5: Restructuring and other items THREE MONTHS NINE MONTHS 2005 2004 2005 2004 ------------------------------------------------------------------------- Employee departure programs (31) (985) (30) (985) Provision for contract loss - - - (110) Settlement with Manitoba Telecom Services Inc. - - - 75 Other charges - (96) (2) (78) ------------------------------------------------------------------------- Restructuring and other items (31) (1,081) (32) (1,098) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Employee departure programs The table below provides an update on the liability relating to the employee departure programs which were implemented in 2004. BELL CONSOL- CANADA ALIANT IDATED ------------------------------------------------------------------------- Balance in accounts payable and accrued liabilities at December 31, 2004 120 67 187 Less: Cash payments (53) (53) (106) Reversal of excess provision (25) - (25) ------------------------------------------------------------------------- Balance in accounts payable and accrued liabilities at September 30, 2005 42 14 56 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >> Restructuring and other items of $31 million in the third quarter of 2005 and $32 million on a year-to-date basis in 2005 consisted mainly of: - charges of $22 million in the third quarter of 2005 and $24 million on a year-to-date basis in 2005 related to new restructuring initiatives for the involuntary departure of approximately 300 employees - charges of $9 million in the third quarter of 2005 and $31 million on a year-to-date basis in 2005 for relocating employees and closing real estate facilities that are no longer needed because of the reduction in the workforce from the 2004 employee departure program. These charges were partly offset by a $25 million reversal of restructuring provisions in the first quarter of 2005 that were no longer necessary since the actual payments made to employees were lower than estimated. Note 6: Income taxes Bell Canada International Inc. (BCI) loss utilization transaction On April 15, 2005, 3787915 Canada Inc., a wholly-owned subsidiary of Bell Canada, acquired $17 billion in preferred shares from 3787923 Canada Inc., a wholly-owned subsidiary of BCI. 3787923 Canada Inc. used the proceeds to advance $17 billion to BCI through a subordinated interest-free loan. BCI then advanced $17 billion to 3787915 Canada Inc. by way of a subordinated interest- bearing demand loan, the funds being used to repay a daylight loan granted to 3787915 Canada Inc. to make the initial preferred share investment. The dividend rate on the preferred shares was equal to 5.1%, which was essentially the same as the interest rate on the loan. 3787915 Canada Inc. had the legal right and intention to offset the demand loan payable to BCI and the investment in preferred shares of 3787923 Canada Inc. As a result, these items and the related interest expense and dividend income were presented on a net basis. The tax savings of $99 million, resulting from the interest expense were presented as a reduction of income tax expense. This transaction was unwound on August 18, 2005, and was part of a tax loss consolidation strategy that followed the transaction steps laid out in an advance tax ruling granted by the Canada Revenue Agency to Bell Canada and BCI. The transaction also received the approval of the Ontario Superior Court of Justice, which is supervising BCI's voluntary plan of arrangement pursuant to which BCI is monetizing its assets and resolving outstanding claims against it, with the ultimate objective of distributing the net proceeds to its shareholders and dissolving the company. BCI will be compensated for the use of its losses by Bell Canada through a capital contribution of $87 million that will be made by BCE Inc. for 88% of the tax savings. BCE Inc.'s ownership interest in BCI remains at 62%. As a result: - BCE Inc.'s carrying value of its investment in BCI was increased to reflect the increase in BCE Inc.'s share of the expected proceeds upon BCI's eventual liquidation - a charge to other income was recorded to reflect the non-controlling interest's portion of the capital contribution to be made by BCE Inc. Note 7: Stock-based compensation plans Restricted share units (RSUs) The table below is a summary of the status of RSUs. << NUMBER OF RSUs ------------------------------------------------------------------------- Outstanding, January 1, 2005 1,996,522 Granted 490,927 Dividends credited 73,927 Expired/forfeited (79,472) ------------------------------------------------------------------------- Outstanding, September 30, 2005 2,481,904 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months and nine months ended September 30, 2005, we recorded compensation expense for RSUs of $19 million and $31 million, respectively. 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 AVERAGE NUMBER EXERCISE OF SHARES PRICE ------------------------------------------------------------------------- Outstanding, January 1, 2005 28,481,679 $32 Granted 773,824 $29 Exercised (1,348,062) $18 Expired/forfeited (990,769) $34 ------------------------------------------------------------------------- Outstanding, September 30, 2005 26,916,672 $33 ------------------------------------------------------------------------- Exercisable, September 30, 2005 16,561,534 $34 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Assumptions used in stock option pricing model The table below shows the assumptions used to determine the stock-based compensation expense using the Black-Scholes option pricing model. FOR THE PERIOD ENDED THREE MONTHS NINE MONTHS SEPTEMBER 30 2005 2004 2005 2004 ------------------------------------------------------------------------- Compensation expense ($ millions) 6 9 17 23 Number of stock options granted 60,600 139,700 773,824 5,589,476 Weighted average fair value per option granted ($) 2 3 3 3 Weighted average assumptions Dividend yield 4.3% 4.3% 4.5% 4.0% Expected volatility 16% 26% 22% 27% Risk-free interest rate 3.4% 3.7% 3.4% 3.1% Expected life (years) 3.7 3.5 3.5 3.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >> Note 8: Commitments and contingencies Teleglobe lending syndicate lawsuit As described in Note 24 to BCE's audited Consolidated Financial Statements for the year ended December 31, 2004, a lawsuit was filed in the Ontario Superior Court of Justice (Court) on July 12, 2002 against BCE Inc. by certain of the members of the Teleglobe and Teleglobe Holdings (U.S.) Corporation lending syndicate. BNP Paribas (Canada), which had advanced approximately US$50 million to Teleglobe, filed a notice of discontinuance with the Court on May 3, 2005 and is therefore no longer a plaintiff in this action. Following such discontinuance, the damages sought by the remaining plaintiffs amount to approximately US$1.04 billion (down from approximately US$1.09 billion), plus interest and costs, representing approximately 83% (down from approximately 87%) of the US$1.25 billion that the members of the lending syndicate advanced to Teleglobe and Teleglobe Holdings (U.S.) Corporation. END SECOND AND FINAL ADD BCE INC. CONTACT: PRNewswire -- Nov.2 |